Integrated economy - energy - environment policy analysis : a case study for the People's Republic of China

This study is the first systematic and comprehensive attempt to deal with the economic implications of carbon abatement for the Chinese economy in the light of the economics of climate change, of which this dissertation is the results. It consists of nine chapters. After a brief introduction, Chapter 2 discusses some economic aspects of climate change. This in turn will serve as a good guide to pursuing the case study for CO _{<font size="-2">2</font>} emissions in China. Chapter 3 analyses the Chinese energy system in the CO _{<font size="-2">2</font>} context. Chapter 4 discusses alternative economic modelling approaches to cost estimates for limiting CO _{<font size="-2">2</font>} emissions. The purpose is to show the rationale for choosing a computable general equilibrium (CGE) approach for the macroeconomic analysis of CO _{<font size="-2">2</font>} emission limits and linking such a CGE model of the Chinese economy with a power planning model of China's electricity sector. Chapter 5 presents a time-recursive dynamic CGE model of the Chinese economy. Chapter 6 deals with some essential work done for empirical application of the CGE model. Chapter 7 analyses the economywide impacts of alternative carbon limits for China through counterfactual policy simulations, while Chapter 8 analyses the impacts of compliance with CO _{<font size="-2">2</font>} limits in China's power industry by means of a technology- oriented dynamic optimization model for power system expansion planning. Finally, Chapter 9 summarizes the conclusions of this study and points out some areas where there is a need for further methodological and empirical work to enrich the policy relevance of the study.<strong>Analysis of the Chinese energy system: implications for future CO _{<font size="-2">2</font>} emissions</strong>At present China contributes 11% of global CO _{<font size="-2">2</font>} emissions. This means that China ranks second if the Soviet emissions are distributed over the new independent republics. Given the global characteristics of climate change and China's potential importance as a source Of CO _{<font size="-2">2</font>} emissions, advocates of controlling CO _{<font size="-2">2</font>} emissions call for substantial efforts in China. However, the Chinese authorities have argued that China cannot be expected to make a significant contribution to the carbon emission problem unless China receives substantial international aid for this purpose. This contrasts sharply with the wishes of proponents of controlling CO _{<font size="-2">2</font>} emissions. Chapter 3 is devoted to explaining this difference in opinion by examining China's energy resources and their development, the Chinese energy consumption patterns, the achievements and remaining problems of electricity generation in China, China's energy conservation in an international perspective, historical CO _{<font size="-2">2</font>} emissions in China, and environmental challenges for the Chinese energy system. At the same time, it sheds light on the implications for China's future CO _{<font size="-2">2</font>} emissions.From examining these aspects, it has become clear that, driven by the threat of further degradation of the environment, great pressure on the severely congested railways, and the harmful economic effects of energy shortages, China is already determined to make great efforts towards energy conservation and enhanced energy efficiency in general, and towards using coal much more efficiently in particular. A number of policy measures, which have been and will continue to be implemented, have been outlined. They are the so-called 'noregrets' measures in the sense that they are taken without considering the greenhouse effect. These measures include increase in proportion of raw coal washed; retrofitting and replacement of small inefficient industrial boilers; substituting direct burning of coal by electricity through development of largesize, high-temperature and high-pressure efficient coal-fired power plants; speeding up hydropower exploitation; popularizing domestic use of coal briquette; increased penetration of town gas into urban households; expanding district heating systems; and relaxing restrictions on energy trade. Moreover, success in the implementation of these measures will largely depend on the extent to which a reform of China's energy pricing will be carried out. With respect to reducing CO _{<font size="-2">2</font>} emissions, because the 'regrets' policies are often costly, 'getting prices right' and implementing these 'no-regrets' actions above should have priority over the imposition of a carbon tax. This suggests that the implementation of these measures will be accelerated if curbing global CO _{<font size="-2">2</font>} emissions requires special action on China's part.While China makes such drastic efforts, fundamental reform of aid and loan practices also needs to be undertaken in the industrialized countries, so that bilateral and multilateral assistance be channelled less towards expanding energy supplies and more towards promoting energy efficiency improvements, thus reducing CO _{<font size="-2">2</font>} emissions. Related to this, <em>joint implementation</em> projects for increased energy efficiency should be encouraged.<strong>Macroeconomic analysis of CO _{<font size="-2">2</font>} emission limits for China</strong>Given that China is the world's most populous country and largest coal producer and consumer, its coal-dominated energy structure and carbon-intensive economy, and that carbon dioxide is the greatest contributor to global warming, its economic development and the resulting CO _{<font size="-2">2</font>} emissions are of great concern. Chapter 4 argues that a CGE approach is generally considered an appropriate tool for analysing the economic impacts of limiting CO _{<font size="-2">2</font>} emissions.For this purpose, a time-recursive dynamic CGE model of the Chinese economy has been developed. This model includes ten production sectors, distinguishes four energy inputs, and is made up of nine blocks. Moreover, the CGE model highlights the relationships between economic activity, energy consumption and CO _{<font size="-2">2</font>} emissions. Thus, the model makes it possible to analyse the Chinese economy-energy-environment system interactions simultaneously, at both sectoral and macroeconomic levels. The model is also able to calculate the welfare impacts of carbon abatement policies. Furthermore, the CGE model incorporates an explicit tax system. This makes it suitable for estimating the 'double dividend' from the imposition of a carbon tax that is incorporated as a cost-effective means of limiting CO _{<font size="-2">2</font>} emissions. Finally, the model is solved directly with a numerical solution technique included in GAMS.Using this CGE model, a baseline scenario for the Chinese economy has first been developed under a set of assumptions about the exogenous variables. Counterfactual policy simulations have then been carried out to compute the macroeconomic implications of two less restrictive scenarios, under which China's CO _{<font size="-2">2</font>} emissions in 2010 will be cut by 20% and 30% respectively relative to the baseline, and to determine the efficiency improvement of four indirect tax offset scenarios relative to the tax retention scenarios. Finally, a comparison with other studies for China has been made. The following conclusions can be drawn.First, a rapid growth of the Chinese economy will take place until the year 2010. Consequently, this will lead to increased energy consumption and hence CO _{<font size="-2">2</font>} emissions, despite substantial energy efficiency improvement. Second, large reductions in carbon emissions can only be achieved by ever-larger increases in carbon taxes and hence prices of fossil fuels. Third, the associated GNP and welfare losses tend to rise more sharply as the degree of the carbon emission reduction increases. Fourth, although aggregate gross production tends to decrease at an increasing rate as the carbon dioxide emission target becomes more stringent, changes in gross production vary significantly among sectors in both absolute and relative terms. This suggests that special attention should be paid to the sectoral implications when designing a domestic carbon tax. Fifth, although a change in level and structure of economic activity and a change in direct energy consumption by households play a role in reducing total energy consumption, lower energy input coefficients contribute to the bulk of energy reduction and hence CO _{<font size="-2">2</font>} emissions. Sixth, the negative impacts of carbon taxes on GNP and welfare would be reduced if the carbon tax revenues were used to offset reductions in indirect taxes. Moreover, it would become more worthwhile to lower indirect taxes as the target of CO _{<font size="-2">2</font>} emissions becomes more stringent. Seventh, our estimates of the reduction in GNP growth are higher than those by GLOBAL 2100 and GREEN in order to achieve the same reductions in CO _{<font size="-2">2</font>} emissions relative to the baseline. Moreover, the carbon taxes required in China are much lower than those for both the industrialized countries and the world average. This suggests that the <em>joint implementation</em> mechanism as a preliminary step towards a global regime of tradeable carbon permits should be considered a means of reducing global CO _{<font size="-2">2</font>} emissions effectively.<strong>Cost-effective analysis of carbon abatement options in China's electricity sector</strong>Chapter 8 attempts to shed light on technological aspects of carbon abatement in China's power industry and is thus devoted to satisfying electricity planning requirements. To that end, a technology-oriented optimization model for power system expansion planning has been developed. This model has been adapted from the MARKAL model. It chooses the minimization of discounted cost over the entire planning horizon as its objective function and incorporates a number of power- related constraints adopted by MARKAL. In the power planning model, 15 types of power plants are represented in terms of their technical, economic and environmental parameters. The model allows for substitution from highcarbon fossil fuels and technologies towards low-carbon and carbon-free counterparts and for interactions between periods to cope with carbon limits.Using the power planning model, a comparison of the 15 types of power plants considered has been made in terms of both the levelized cost of generation and the marginal Cost Of CO _{<font size="-2">2</font>} reduction at a 10% discount rate. Driven by the baseline electricity demands that are estimated by the CGE model, the model has then been used to develop a baseline scenario for China's electricity supply and to analyse the impacts of compliance with CO _{<font size="-2">2</font>} limits in the power industry. The main findings are as follows.First, large coal-fired plants and hydroelectric plants should be given priority in future electricity planning. Thus, efforts should be directed towards expanding domestic capacity for manufacturing large units, mobilizing the necessary large investment resources, and towards resolving the disappointing performance of domestically-produced large units.Second, a rapid growth of China's power industry will take place until the year 2010. Accordingly, capital investment in the industry as a share of GNP is calculated to go up from the current level. Given that coal-fired power plants still predominate, the amount of coal consumed for electricity generation accordingly grows rapidly, thus increasing its share in total coal consumption. This will lead to an increase in CO _{<font size="-2">2</font>} emissions within the power sector itself, although the decreasing direct use of coal will alleviate the environmental impacts of coal use as a whole. Moreover, it has been shown that more large units are expected to be put into operation during the period under consideration compared with the current composition of plants. This will bring the average gross coal consumption of coal- fired plants down. Besides, the calculations show that nuclear power begins to make a useful contribution to China's electricity supply, although there is little prospect of dramatic increases until the year 2010.Third, compliance with carbon limits in the electricity sector requires accelerated expansion of hydroelectric power and nuclear power. This finding is in line with the government investment priority, which has been set with aims to reduce pressure on transportation and air pollution, but without considering the greenhouse effect. This suggests that the development of hydroelectric power and nuclear power needs to be accelerated in China if curbing CO _{<font size="-2">2</font>} emissions is taken into account. This provides a precondition for developing <em>joint implementation</em> projects in China's electricity sector. In practice, however, to make these projects operational will depend on the far-reaching negotiations for <em>joint implementation</em> mechanism.