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Reconciling Carbon Pricing and Energy Policies in Developing Countries Public Disclosure Authorized Reconciling Carbon Pricing and Energy Policies in Developing Countries Public Disclosure Authorized Integrating Policies for a Clean Energy Transition Public Disclosure Authorized Public Disclosure Authorized Reconciling Carbon Pricing and Energy Policies in Developing Countries Integrating Policies for a Clean Energy Transition Christophe de Gouvello Senior Energy and Climate Specialist, The World Bank Dominique Finon Senior Energy Researcher, Consultant, CIRED, France Pierre Guigon Natural Resources Management Specialist, The World Bank © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions, including from the Partnership for Market Readiness. The Partnership for Market Readiness supports collective innovation and action by providing a platform for countries to share lessons and work together to shape the future of cost-effective greenhouse gas mitigation. It also funds capacity building to scale up climate change mitigation efforts. The findings, interpretations, and conclusions expressed by World Bank Staff or external contributors in this work do not reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: Ch. de Gouvello, D. Finon, P. Guigon, World Bank, 2019. Reconciling Carbon Pricing and Energy Policies in Developing Countries - Integrating Policies for a Clean Energy Transition. World Bank, Washington, DC. All queries on rights and licenses should be addressed to the Publishing and Knowledge Division, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected] Acknowledgments This book was written by a team led by Christophe de Gouvello (Senior Energy and Climate Specialist, World Bank) and composed of Dominique Finon (Senior Researcher, Center for International Research on Environment and Development) and Pierre Guigon (Natural Resources Management Specialist, World Bank). Valuable contributions were provided by Thomas Kansy, Paul Sammon, Luke Kemp, and John Ward (all Vivid Economics). Guidance was provided by the book’s peer reviewers. World Bank Group peer reviewers included Vivien Foster (Global Lead Energy Economics, Markets & Institutions), Stéphane Hallegatte (Lead Economist) and Govinda Timilsina (Senior Research Economist), Martina Bosi (Senior Energy Specialist). External advisors included Christina Hood (Head of Climate Change Unit, International Energy Agency) and Richard Baron (Project Coordinator: Aligning Policies for a Low-Carbon Transition, OECD). For valuable advice on drafts of this book, the team also thanks Antonio Barbalho (Energy Practice Manager), Grzegorz Pesko (Lead Economist), Pedro Antmann (Lead Energy Specialist), Sheoli Pargal (Lead Energy Economist) and Rachel Chi Kiu Mok (Analyst) from the World Bank Group, Aloisio Pereira de Melo (Climate Change coordinator, Ministry of Finance, Brazil) and Sergio Margulis (Senior Environment Economist, Consultant). The book also benefited from valuable inputs and feedback from experts and country representatives throughout its preparation and intermediary presentations. In particular, we wish to acknowledge the international experts who participated in the Technical Meetings organized by the Partnership for Market Readiness at the occasion of which intermediary findings were presented and discussed (PMR Santiago, Chile, Brasilia, Brazil, Beijing, China). These meetings gathered valuable insights and continuous guidance during the project. We wish to thank the PMR Secretariat, in particular Venkata Ramana Putti (Program Manager) for his support. Although not a publication from the Energy Sector Management Assistance Program (ESMAP), we also wish to thank the support received from ESMAP. We also wish to thank Fayre Makeig who skillfully edited the book (Consultant, World Bank). The book was sponsored by the Partnership for Market Readiness (PMR) of the World Bank’s Climate Change Group. IV CONTENTS Contents Introduction.................................................................................................................................................................................................................................................. 1 PART I: Adding Carbon Pricing to Energy Policy: Points of Convergence, Conflict, and Inefficiency ................. 5 Chapter 1. The Objectives and Instruments of Energy Policy ..................................................................................................................................... 6 Chapter 2. Energy Policy Objectives and Instruments: A Comparison Across the Climate-Energy Typology 25 Chapter 3. Climate and Energy Policy Objectives: Working in Harmony, or Not ..................................................................................51 PART II: Reconciling Carbon Pricing with Energy Policies in Developing Countries ...............................................................72 Chapter 4. Fossil-Fuel Subsidies: Exploring Ways to Reconcile the Policy Objectives with Climate Change Mitigation ....................................................................................................................................................................................................................73 Chapter 5. Affordable Energy and Consumer Protection: Correcting the Regressive Effects of Carbon Pricing via Recycling .............................................................................................................................................................................................................95 Chapter 6. The Specific Case of the Power Sector: Reconciling Customers Protection and Environmental Effectiveness of Carbon Pricing .............................................................................................................................................................................107 Chapter 7. Mitigating the Concerns of the Negative Impact of Carbon Pricing on Domestic Industries’ Competitiveness .....................................................................................................................................................................................................................123 PART III: Beyond Carbon Pricing: Integrated design of Carbon and Energy Policies and Instruments .......... 141 Chapter 8. Integrating Carbon and Energy Taxes ..............................................................................................................................................................143 Chapter 9. Integrating Carbon and Energy Market Instruments .........................................................................................................................160 Chapter 10. Balancing Pricing and Non-Pricing Instruments to Support an Effective Transition to Low-CarbonEnergy Sources .....................................................................................................................................................................................183 Conclusion and Practical Steps Forward ......................................................................................................................................................... 221 Annex 1 - Carbon Dioxide Emissions Coefficients by Fuel ....................................................................................................... 226 CONTENTS V Summary for Practitioners Context: A Pathway toward Decarbonization Adding Carbon Pricing to Energy Policy: Points of Convergence, Conflict, and Inefficiency The objectives and instruments of energy policy Energy Policy Objectives and Instruments: A Comparison of High-with Middle- and Low-Income Countries Climate and Energy Policy Objectives: Working in Harmony, or Not Reconciling Carbon Pricing with Energy Policies in Developing Countries Fossil-fuel subsidies: Exploring Ways to Reconcile the Policy Objectives with Climate Change Affordable Energy and Consumer Protection: Correcting the Regressive Effects of Carbon Pricing via Recycling Incorporating carbon pricing in different power sector models and preventing regressive impacts Mitigating the Concerns of Negative Impact of Carbon Pricing on Domestic Industries’ Competitiveness Beyond Carbon Pricing: Integrated design of Carbon and Energy Policies and Instruments Integrating Carbon and Energy Taxes Integrating Carbon and Energy Market Instruments Balancing Pricing and Non-Pricing Instruments to Support an Effective Transition to Low-Carbon Energy Sources Conclusion VI CONTENTS Context: A Pathway toward Decarbonization At the 21st Conference of the Parties, 193 countries recognized the urgency of addressing climate change and limiting the rise
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