Thursday, October 17, 2013

Carbon Co-benefits of Tighter SO2 and NOx Regulations in China

An in press paper by Nam et al. in Global Environmental Change uses a CGE model to estimate the co-benefits in terms of reduced CO2 emissions from the tougher new policies on SO2 and NOx emissions in the current Chinese 5 year plan. They find very large co-benefits with a reduction in CO2 emissions of 1.4 billion tonnes by 2015 alone. In later (post-plan) years these come to a large extent from switching to non-fossil energy. But in the short-run a large part of the reductions come from reducing energy use very significantly as shown in this figure from the paper:

The figure shows the reduction in energy use relative to business as usual in exajoules under an SO2 and NOx policy alone with no climate policy. For context, current Chinese energy use is in the rough ballpark of 100 exajoules a year. So the figure shows that by 2020 the reduction in energy use due to the policy relative to BAU is around this current level of Chinese energy use. This is simply huge. The policy also induces a complete shift away from using coal to generate electricity after 2040. The reason that the RHS figure above shows reduced coal use flattening out after 2035, is because China would already be using hardly any coal under this scenario.

Looking at historical analogs, when the US introduced tightened caps on SO2 emissions in the early 1990s there was some fuel switching in the long run to natural gas and other electric generation sources, but the main choice that electricity generators made was to switch to lower sulfur coal, to install scrubbers, and to use coal washing etc. I have less detailed knowledge of the reaction in Europe to similar policies but it involved these things in different proportions (more scrubbers and natural gas from what I understand). Presumably electricity use did fall a bit due to higher costs but not on a huge scale.

This model does not seem to have a low sulfur coal option though it does have a scrubber style abatement technology. Switching to natural gas can save some energy as it is a more efficient fuel for electricity generation and switching to renewables can save a lot of energy depending on how renewables are accounted for. But these things mostly happen after 2020 in this paper. So most of the reduced emissions are from reducing energy use on a large scale. Nothing like this happened in the US or Europe (or elsewhere) in reaction to such policies.

My thinking is that the large energy use reductions relative to BAU must be due to high elasticities of substitution between energy and other inputs (the model uses nested CES functions) or other model features that are not immediately apparent to me. The costs of the policy seem to be quite small in the first ten years, so the reduced energy use does not have a big economic impact in the short-run.

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