Economy wide emission impacts of carbon and energy tax in electricity supply industry: A case study on Sri Lanka

Abstract

This paper presents the results and analysis of a study conducted with the objective of investigating the impact on economy wide emissions due to carbon and energy taxes levied within the electricity generation sector of Sri Lanka. This exercise is mainly based on the input–output table developed by the national planning department. An input–output decomposition technique is used to analyze four types of effects that contribute to the overall reduction in equivalent carbon, NOx and SO2 emissions. These four effects are: fuel mix effect (i.e. the change in emissions due to variation I fuel mix), structural effect (i.e. change in emissions due to changes in technological coefficients with taxes compared to that without taxes), final demand effect (i.e. the change in emissions associated with changes in final demand) and joint effect (i.e. the interactive effect between or among the fuel mix, structural and final demand effects).

The polluting fuel sources and low energy efficiency generation technologies are less preferred under these tax regimes. Of the four effects, a change in fuel mix in thermal electricity generation and a change final demand for electricity were found to be the main contributors in achieving economy wide emission reductions. It was found in the analysis that a minimum of US$ 50/tC tax or US$ 1.0/MBtu of energy tax is required to have a significant impact on economy wide emissions in the Sri Lankan context. This translates into an overall increase in electricity generation cost of approximately USCts 0.9 kW−1 h−1 and USCts 0.6 kW−1 h−1 under the carbon and energy tax regimes, respectively. The reduction in emissions is also strongly coupled with the value of the price elasticity of electricity.