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, 19-21 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
co2
co
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 CO2 intensive technology toward SO2
intensive technology
– in a catalytic convertor of a car, the exhaust
components CO, NOx, CH are transformed to CO2
– 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
Joint products
Sector s
output
Composite Energy
Composite intermediate
Value added
Fossil Fuels
Electricity
Capital
Labor
Intermediate goods
gasoline
CO
SOx
NOx
etc
gas oil
NOx SOx
CO
etc
…
NOx
CO SOx
etc
Sector specific capital
Emission level in the model
 PKLEM ,s
Z j   ef s ,en , j E ,s ff ,s en ,s ALs Den ,s 
 P
s en
 E ,s
 PEM ,h
  ef h ,en , j E ,h ff ,hen ,hWL h Den ,h 
 P
h en
 E ,h
•
•
•
•
•
•
•
•
•
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
•
•
•
•
•
•
•
•



h



s
 PE ,s

 PFF ,s
 PE ,h

 PFF ,h
h



s





PFF ,s


 pen 1  suben ,s  




PFF ,h


 pen 1  suben ,s  


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
h
s
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
gasoline
liquid gas
gas oil
kerosene
fuel oil
electricity
natural gas
Price Change
140%
2797%
809%
809%
784%
227%
600%
The results
FF: η
EL: ν
Nox
SO2
CO2
SO3
CO
CH
SPM
0.0
0.1
-10.05
-14.00
-8.90
-15.60
-3.85
-4.22
-7.45
0.1
0.1
-10.63
-15.05
-10.32
-16.52
-0.36
-1.98
-9.78
0.2
0.1
-11.22
-16.02
-11.55
-17.35
2.15
-0.42
-11.75
0.3
0.1
-11.79
-16.87
-12.61
-18.11
4.05
0.71
-13.41
0.4
0.1
-12.31
-17.63
-13.53
-18.80
5.54
1.58
-14.82
0.5
0.1
-12.78
-18.31
-14.32
-19.41
6.74
2.26
-16.03
0.2
0.0
-10.29
-14.94
-10.40
-16.32
3.10
0.41
-11.09
0.2
0.1
-11.22
-16.02
-11.55
-17.35
2.15
-0.42
-11.75
0.2
0.2
-12.14
-17.07
-12.68
-18.36
1.22
-1.25
-12.40
0.2
0.3
-13.04
-18.10
-13.79
-19.35
0.29
-2.07
-13.04
0.2
0.4
-13.92
-19.11
-14.88
-20.31
-0.62
-2.89
-13.67
0.2
0.5
-14.78
-20.09
-15.95
-21.25
-1.52
-3.69
-14.28
ff is inter-fossil fuel elasticity; and
el is elasticity between electricity and ff.
co2
el
ff
2.00
2.00
0.00
0.00
P0
P1
P2
P3
P4
P0
P5
-6.00
-8.00
-10.00
-12.00
P2
P3
P4
P5
-2.00
-2.00
-4.00
P1
E0.0
E0.1
E0.2
-4.00
-6.00
-8.00
E0.3
E0.4
-10.00
E0.5
-12.00
-14.00
-14.00
-16.00
-16.00
-18.00
-18.00
E0.0
E0.1
E0.2
E0.3
E0.4
E0.5
co
ff
el
8.00
8.00
6.00
6.00
4.00
4.00
E0.0
E0.1
2.00
E0.2
E0.3
0.00
P0
P1
P2
P3
P4
P5
E0.4
E0.0
E0.1
2.00
E0.2
E0.3
0.00
P0
E0.5
P1
P2
P3
P4
P5
E0.4
E0.5
-2.00
-2.00
-4.00
-4.00
-6.00
-6.00
ch
ff
el
3.00
3.00
2.00
2.00
1.00
1.00
E0.0
E0.0
0.00
P0
-1.00
-2.00
P1
P2
P3
P4
P5
E0.1
E0.2
E0.3
E0.4
0.00
P0
-1.00
-2.00
P1
P2
P3
P4
P5
E0.1
E0.2
E0.3
E0.4
E0.5
E0.5
-3.00
-3.00
-4.00
-4.00
-5.00
-5.00
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.