Environmental impacts of Phasing out Energy Subsidies: the Role of Pollutant Substitution D. Manzoor, Associate Professor, Imam Sadiq University, Tehran Iran I. Haqiqi, IEW2012, Cape Town, June

Outline Pollutant substitution: definition, causes and importance. How to model pollutant substitution. The case study and results. Conclusion and recommendations

Phasing out energy subsidies Policy makers expect that phasing out energy subsidies or increase in energy prices reduces the environmental pollutant emissions and results in net environmental gains. They expect that phasing out fossil fuel subsidies by 2020, will cut the expected growth in carbon-dioxide emissions by about 2 gigatonnes.

But… It does not always hold true for all pollutants emission. The emission of some pollutants may increase after the policy due to – technology change; – fuel switching and – pollutant substitution

What is pollutant substitution? Substitution between pollutants …increases in one pollutant emission combined with a reduction in emission of another; It may change the pollutants mix and cause new environmental problems co co2

How serious it is? It may neutralizes all the gains from a policy The total stock of all pollutants might not decrease as expected a serious problem when the environmental net loss occurs: – when environmental damages from rise in one emission are bigger than environmental gains from fall in another emission (overriding reverse pollutant effect)

Why it happens? There are several causes: e.g. – substituting away from unregulated to regulated pollutants – shifting from CO 2 intensive technology toward SO 2 intensive technology – in a catalytic convertor of a car, the exhaust components CO, NO x, CH are transformed to CO 2 – significant change in relative prices of energies and pollutants

HOW TO MODEL IT?

Partial Analysis All other things held constant, Rise in a fossil fuel price would reduce consumption and pollutant emission; Note that it is a ceteris paribus assumption for a partial equilibrium analysis. Reality is more complex. there are cases in which rise in nominal price is combined with rise in consumption! Because other things are not constant.

Complex reality Pollutant of emissions depends on: – Consumption level of fossil fuels – Emission factors Consumption level of a typical fossil fuel depends on: – Income of household / Activity level of sectors – Price and Own price elasticity – Other energy prices / cross price elasticities – Technology; etc.

More real analysis So a more real analysis is required. We need General Equilibrium analysis which considers: – Direct and indirect effects – Changes in sectors and markets – Income effects – Different Substitution effects including pollutant substitution

Production structure Sector s output Value added Composite Energy Composite intermediate Fossil Fuels Intermediate goods Capital Labor Sector specific capital Joint products Electricity SOx NOx CO etc SOx NOx CO etc SOx NOx CO etc gasolinegas oil …

Emission level in the model Z: emission level j: emissions ef: emission factor; θ, ω:share parameters; AL: activity level; D: benchmark demand; P: prices; KLEM: capital-labor-energy-material; EM: energy-material layer e: energy; ff: fossil fuels; s: sectors en: energy γ,ν, β: substitution elasticities h: households sub: subsidy rate * the prices are determined endogenously in the model

THE CASE STUDY AND RESULTS

The case study: Iran Iran is ranked 10th by annual CO2 emission in the world and 1st in the MENA. In early 2010, a law was enacted for subsidy reform in Iran and is started by 2010 December. The subsidy reform law calls for gradual implementation of market-based energy pricing and the replacement of subsidies by targeted assistance to lower income groups.

Price changes in Iran Price Change gasoline140% liquid gas2797% gas oil809% kerosene809% fuel oil784% electricity227% natural gas600%

The results FF: ηEL: νNoxSO2CO2SO3COCHSPM ff is inter-fossil fuel elasticity; and el is elasticity between electricity and ff.

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Conclusion pollutant substitution may happen after the Iranian policy of energy subsidy removal. As the relative energy prices change, the “pollutants substitution” is more likely to happen. We found that CO and CH emission would increase due to the energy price policy in Iran but other emissions decline.

To researchers and policymakers When the probability of pollutant substitution is high, the environmental economists should provide an analysis that is more accurate in measuring benefits and costs of the energy price policies. They should measure the net benefits of environmental policy: gains of reduction of some emissions and damages of increase in emission of others. Furthermore, the policymakers should consider this substitution in their decisions and regulate all the pollutants in a consistent package of policies.