Allocation of carbon emission quotas for selected industries of Thailand to ally with economic efficiency of the market system for carbon emission permits

Abstract

Thailand Emission Trading Scheme (Thailand ETS) was established to prepare for Thailand’s emission trading in playing a part in the global movement for the reduction of CO2 emissions. The energy intensive sectors, including, petrochemicals, cement, iron and steel, electricity, and aviation industries, are selected to target industries to achieve the reduction of CO2 emission. The implementation of Thailand ETS can be expected to effect change in the Thailand economy. This study applied the concept of economic cost as the external cost is introduced as a supplement to market allocation of emission quota. The economic cost is computed in terms of the combined strength of forward and backward linkages relevant to industries measured by Leontief’s inverse produced by the input-output (I-O) model, using Thailand’s 2010 input-output table. The proposed of this study is examine the comparative of two allocation based on the equi-marginal and grandfathering method for carbon emission quotas in Thailand ETS to explore the optimal CO2 emission quota allocation to ensuring the minimizing the economic cost of allocation.

The Economic Impact – Emission Ratio (EIER) of industries in Thailand ETS is explained by their difference in the magnitude of the economic impact per additional unit of CO2 emission reduction. The electricity sector was the highest economic impact, followed by iron and steel industries, petrochemical industries, aviation and cement industries. Accordingly, the electricity is much more economic effect for Thailand economy, so the electricity will directly influence on other prices of commodities and services. The EIERs of five targeted industries under Thailand ETS in different vary considerably, for the sake of minimizing the economic cost, it is necessary to explore CO2 emission quota allocation among the industries according to their EIERs.

The equi-marginal allocation gives all industries in Thailand ETS are equalized economic impact (EI'), therefore the economic efficiency is automatically achieved. In contrast with the grandfathering allocation, EIj of industries in different vary considerably. The result of the equi-marginal allocation indicated that the electricity sector is the most carbon emission quotas allocation, the quotas of electricity will get the higher than proportion based on historical CO2 emissions percentage as a reference base year, while the quota allowances for other industries including petrochemical, cement, iron and steel, and aviation are allocated in lower than their proportion.

The optimal allocation of carbon emission quotas in Thailand ETS can be achieved by equi-marginal method, the shares of the computed optimal initial carbon emission quotas for petrochemicals, cement, iron and steel, electricity, and aviation industries are 10.4133%, 10.9711%, 0.7111%, 73.5798% and 4.3247%, respectively. In term of total economic cost of CO2 quota allocations according to the cap setting 2-5 % CO2 reduction target, the equi-marginal lower than grandfathering allocation method by 0.017, 0.0383, 0.0681 and 0.1063 respectively. The total economic cost of all industries in Thailand ETS approximately 10.78% can be saved by implementing the optimal emission quotas allocation.