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Effect of Carbon Tax on Power Generation and
Energy Security in Sri Lanka
Ram M. Shrestha and Chandrabhanu OpathellaSchool of Environment, Resources and Development, Asian Institute of Technology
P.O. Box 4, Klong Luang, Pathumthani 12120, ThailandEmail: [email protected]; [email protected]; Fax: +66 2 524 5439
Abstract- This paper analyzes the effects of carbon tax
on power generation system and energy security in the
case of Sri Lanka during 2005 to 2050 under the least cost
energy system planning based on the MARKAL
framework. Three different carbon tax cases are
considered in the present study. The paper discusses the
effects of carbon tax on energy mix and technology mix of
whole energy system and power generation system. It alsoanalyzes the effects of carbon tax on CO2 emission and
energy security of the country.
Keywords- power generation in Sri Lanka, effects of
carbon tax, energy security, MARKAL model
I. INTRODUCTION
The power sector is a major contributor to CO2emission inmany countries in the world. The level of CO2emission fromthe power sector is growing rapidly in many developingcountries. Yet, the long term prospects of greenhouse gases
(GHG) emission mitigation in the power sector have not beenassessed rigorously for most developing countries [12].Carbon tax is one of the economic policy instruments toreduce the CO2 emissions from various sectors of aneconomy.
This paper analyzes the effects of carbon tax on powersystem development (in particular, generation mix andtechnology mix in the power sector) as well as implicationsfor energy security and emissions of greenhouse gases fromthe energy system of Sri Lanka during a relatively longplanning horizon of 2005-2050. Implications of the carbontax on power system development as a part of overall effectsin the national energy system.
This paper is organized as follows: A brief overview of theSri Lankan energy system is given in Section 2. An outline ofthe methodology used in the study is presented in Section 3,followed by a description of the base case and carbon taxcases. Section 5 discusses the development of powergeneration system and CO2emissions from the power sectorduring the planning horizon in the base case. This is followedby discussions on effects of the carbon tax on power systemdevelopment in Section 6 and CO2 emission associated withpower generation in Section 7. Section 8 discusses the effectsof carbon tax on national energy security. Finally, a summaryof key findings is presented.
II. OVERVIEW OF SRI LANKAN ENERGY SECTOR
In 2005 the countrys total primary energy supply (TPES)was 9.6 Mtoe. Traditional biomass energy has the largestsharer (48%) in TPES followed by Oil import (43%) andhydropower (9%). Total final energy consumption was 8.0Mtoe in 2005 [1]. The level of electrification in the country
was 76.7% in 2005 [2].Sri Lanka is expected to continue growing rapidly during
the next decade. The economy is expected to grow at the rateof over 8% per annum during 2008-2011, and is expected togrow at a slower rate of 7.4% by 2017[6] and is assumed tocontinue to grow at that rate till 2050.
III. METHODOLOGY
A long term cost minimizing energy system model isdeveloped for Sri Lanka based on the framework ofMARKAL [14] for the purpose of the present study. Themodel reflects the full Reference Energy System (RES) of the
country including energy resource exploitation, conversion,transmission, distribution and end use for all sectors. Themodel considers not only the resources and technologies inuse currently but also the candidate resources andtechnologies that could be used to met the various types ofenergy service demands in future. Five economic sectorsnamely, residential, transport, industrial, commercial andagriculture are considered in the study. The residential sectoris disaggregated into rural and urban subsectors in the model.The future energy service demands are estimated using eitheran econometric method or a simpler approach that assumesthe service demand per unit of sectoral value-added to beconstant over time.
For the analysis of energy security implications of thecarbon tax, the following set of indicators is employed:
1. Net Energy Import Ratio(NEIR):
where,NEIis Net Energy Import,DSis Domestic Supplyof Energy.
2. Shannon-Weiner Index (SWI) [3,4]:
iii
SLnSSWI
NEIDS
NEINEIR
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where, Si is the share of primary energy sources i inprimary energy supply mix.
3. Vulnerability Index (VI) [7]
where, EEI is the expenditure on energy imports, andGDPis the Gross Domestic Product.
IV. DISCRIPTION OF CASES
The base case characterizes the technology options andenergy carriers in the power and other sectors during theplanning horizon without any environmental or climatepolicies. Specific power generation plants and projects ortechnology options that are committed by the relevantagencies for addition to the energy system in future yearsduring the planning horizon also form a part of the base case.
The base case also considers thelearning by doing effect(i.e., defined as the effect of the cumulative global salesvolume of a technology on the unit cost of the technology[14]) and autonomous energy efficiency improvement (AEEI)(i.e., non price induced technological change as it affectsenergy efficiency in long term energy projections [11]). Thelearning rates of new technologies that are estimated in [15,16] are used in this study. The rate of AEEI is assumed to be0.25% and 0.5% annually for demand side technologies andpower generation technologies. These rates are lower thanthat considered by Kainuma et al. [5] and Webster et al. [11].
Energy resource options considered in the study includecoal, petroleum products, Liquefied Natural Gas (LNG), aswell as renewable energy resources like biomass,hydropower, solar and wind. Sri Lanka has a wind powerpotential of 24,000 MW from excellent wind sites (sites withaverage wind speed 7.5-8.8 ms-1) [8]. Even though windenergy is an attractive primary energy resource, it has twomain technical aspects of wind based electricity generationthat needs to be considered: The first is the stability limit ofthe power system and the other is the contribution of windpower to meet the peak power demand of the system. Themaximum permissible share of wind power in total capacity isconsidered to be 30% in this study. Sri Lankas annualsustainable biomass potential is 672.5 PJ [9]. Clean coaltechnology options (such as IGCC and PFBC) are alsoconsidered in the study along with the options of carboncapture and storage (CCS) with coal and LNG generationtechnologies [10, 13]. Advanced demand side technologiessuch as hydrogen fuel cell vehicles, hybrid vehicles [5], andelectric transportation options are also considered in the basecase of the study.
Besides the base case, this study considers the followingthree different cases with carbon tax that correspond to three
different global GHG stabilization targets [17, 18]:
Carbon Tax Case 1: Using carbon tax of 0.7US$/tCO2 in2010 and increase up to 10.1US$/tCO2 by 2050. This is thecarbon tax level required to achieve the 650ppm stabilizationtarget (hereafter, this case is called CT650)Carbon Tax Case 2: Using carbon tax of 1.5US$/tCO2 in2010 and increase up to 20.7US$/tCO2by 2050. This is thecarbon tax level required to achieve the 550ppm stabilizationtarget. (hereafter, this case is called CT550)Carbon Tax Case 3: Using carbon tax of 8.3US$/tCO2 in2010 and increase up to 111.6US$/tCO2by 2050. This is thecarbon tax level required to achieve the 450ppm stabilizationtarget (hereafter the case is called CT450)
The variation of carbon tax used over the years under thethree carbon tax cases are presented in Figure 1.
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
2010 2015 2020 2025 2030 2035 2040 2045 2050
2005MillionUS$/ktC
Year
Case 3
Case 2
Case1
Figure (1): Three alternative carbon tax cases, 2005 MillionUS$/ktCO2
V. ELECTRICITY GENERATION IN BASE CASE
At present, electricity generation is based mainly on oil andhydropower. There is a small wind power plant and a smallbiomass plant in the present power system; however, theircapacities are negligible compared to the total generationcapacity. The total electricity generation was 33 PJ in 2005and was expected to grow at an average rate of 6.3% annuallyduring the period 2005-2030. During 2030-2050, the
generation is estimated to grow by 7.2% annually to reach thelevel of 618 PJ in 2050. Coal, wind and LNG basedgenerations would start as a major source of electricity supplyin 2010, 2020 and 2025 respectively. The generation capacityis estimated to grow at 5.3% during 2005-2040. This is a lowgrowth rate compared to that during 2040-2050, duringwhich, the electricity generation capacity is to grow at a rateof 9.5% annually. Accordingly, the total generation capacityof the system is estimated to grow to 36 GW by 2050.
Figure 2 shows the growth of total emission during theplanning period. The estimated total emission from all sectorsof the country is to grow from 11.8 MtCO2in 2005 to about242.5 MtCO2 in 2050. In terms of sectoral contributions to
total CO2emission, the transport sector accounted for 50% ofthe total emission in 2005. However, the share of the
GDP
EEIVI
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transport would decline during the planning horizon andreach to 30% in 2050. The energy conversion sector is thesecond largest contributor to the total CO2emission with itsshare being 30% on an average during 2005-2050. The shareof the industrial sector in CO2emissions would increase from8% in 2005 to 34% in 2050.
0
50000
100000
150000
200000
250000
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
ktCO2
Year
Residential
Transport
Industry
Conversion
Commercial
Agriculture
Figure (2): CO2Emission Profile during 2005-2050
VI. EFFECT OF CARBON TAX ON POWERGENERATION
The total share of renewable energy in cumulativeelectricity generation during the planning horizon is 19% inthe base case. With the carbon tax, the share is estimated toincrease to 21% under CT650 case mainly due to theincreased wind based electricity generation. In the higher taxcases of CT550 and CT450, sustainably produced biomass isalso found to be economically attractive for power generation.As a result, the shares of renewable energy based electricitygenerations are increased further to 23% and 37% underCT550 and CT450 cases.
Carbon tax is also expected to promote the use of moreefficient and cleaner thermal generation technologies ascleaner coal power plants would become relatively moreeconomical than conventional coal power plants. The presentanalysis shows that the share of coal based power plants(including conventional and super critical) in total electricitygeneration would drop from 36% in the base case to 34% inthe CT650 case. With the application of higher tax levels, itwould further decreased to 31% and 4% in CT550 and CT450cases. Besides, the share of the combined cycle power plantswould remain same at 43% in the base case and all threecarbon tax cases. Meanwhile, the share of cleaner coaltechnologies (integrated coal gasification combined cycleplants and pulverized coal plants with CCS) shows anincrease from 0% (both in base case and CT650 case) to 1%and 14% in CT550 and CT650 case.
VII. EFFECT OF CARBON TAX ON CO2EMISSIONS
Due to the reduced usage of coal under carbon tax, totalCO2 emission is expected to be reduced in all the tax cases as
compared with the base case. In the low carbon tax cases ofCT650 and CT550, significant emission reduction would takeplace only after 2015 while under the higher tax case ofCT450, significant reduction would start earlier (i.e., from2010). It is found that the cumulative CO2 emission duringthe planning horizon would be reduced by 2% under CT650as compared to the total base case emission, while thecorresponding figures under CT550, and CT450 cases wouldbe 7%, 41% respectively.
CT650 CT550 CT450
Agriculture 42 (4) (8) (7)
Commercial 338 0 0 0
Power Generation 1,213 47 102 682
Industry 1,342 27 175 1,058
Residential 12 (1) (2) (4)
Transport 1,305 25 25 26
Other 8 0 0 0
Total 4,252 94 292 1,755
Note : The figures in parenthesis denotes an increase in CO2emission from base case
Cumulative Emission Reduction from the base case
emission level under different carbon tax cases, MtCO2
Base case
cumulative CO2
emission, MtCO2
Sectors
Table 2: Sectoral Emission Reduction, MtCO2
Table 2 gives the estimated sectoral emission reductionunder different tax schemes. Power generation and industrysectors are the two largest contributors to CO2 emissionreduction under the carbon tax cases. Under CT450, these twosectors would account for over 99% of total CO2 emission
reduction in the country. Note that the power sector accountsfor the largest share in CO2 reduction at the low tax case(CT650), while the industry sector plays the most significantrole in emission reduction under the higher tax cases ofCT550 and CT450. The cumulative emission reduction fromthe transport sector remains almost unchanged with highercarbon tax. Although the transport sector accounts for 31% ofthe total CO2emission in the base case, its contribution in thetotal CO2 emission reduction decreases from 26.6% underCT650 to 8.5% under CT550 and to 1.5% under CT450.
VIII. EFFECT OF CARBON TAX ON ENERGYSECURITY
The effects of carbon tax on energy security of the countryare analyzed through the use of three indicators as was statedin Section III.
Import dependency
The temporal changes in net energy import ratio (NEIR)under the base and carbon tax cases are shown in Figure 3. Ascan be seen, net energy import dependency would grow overtime under both the base case and CT650; it would alsoincrease over time (except during 2010-2020) under CT550.Under CT450, the dependency would be significantly lowerthan that under the base case and lower carbon tax cases
throughout the planning horizon. Further, the dependency
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would remain almost unaffected over time till 2035 underCT450.
0
10
20
30
40
50
60
70
80
90
100
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
NetImportEnergyRatio(%
Year
Base Case
CT650
CT550
CT450
Figure (3): Net Energy Import Dependency under Carbon taxduring 2005-2050
Diversification of Energy Resources
Carbon tax is mostly found to have a positive effect ondiversification in the use of energy resources in the country.Figure 4 shows the Shannon-Wiener Index (SWI) fordiversification of primary energy use in the country under thedifferent cases considered in the present study. It is, however,interesting to note that a higher level of carbon tax does notnecessarily promotes the diversification of energy resources.For example, the SWI index under CT450 case is found to belower than that under the base and lower carbon tax case of
CT650 and CT550 during 2015-2040. The lower level ofdiversification during 2015-2040 under CT450 is a result ofmore uneven distribution in the use of energy resources inthat coal shares would get significantly reduced while that ofother resources would be increased. Near the end of theplanning horizon, the SWI values under the carbon tax casesare found to be higher than that under the base case as coalshares in the carbon tax cases would be decreased and energyresources are more evenly distributed than that under the basecase.
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Shannon-WienerIndex
Year
Base Case
CT650
CT550
CT450
Figure (4). Diversification of Energy Sources under CarbonTax during 2005-2050
Economic Vulnerability of Energy Imports
As shown in Figure 5, the vulnerability index (VI) (definedhere as net energy import as a percentage of GDP) wouldimprove with the application of carbon tax. In the base case,the annual vulnerability index ranges from 3.9% to 10.7%during 2010-2050. The index is not much different underCT650 and CT550 from that in the base case. The indexexhibits significant reduction only at the higher tax case ofCT450. There would be a sudden drop in VI during 2005-2010; it is mainly due to the introduction of coal in powergeneration and hence a reduction in the use (and import) ofoil.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
VulnerabilityIndex(%
Year
Base Case
CT650
CT550
CT450
.Figure (5). Economic Vulnerability Index under Carbon Tax
during 2005-2050
IX. CONCLUSIONS
The study shows that the carbon tax can affect the energyresource-mix and technology-mix significantly. In the case ofSri Lanka, a significant decrease in the use of coal firedpower generation is to take place under the carbon tax, whilethere would be an increase in biomass and wind based powergeneration. In addition, there would also be an increased useof cleaner coal technologies (with CCS) at higher carbontaxes. Significant reductions in net energy import dependencyand economic vulnerability to imported energy costs wouldalso result under the high carbon tax case (CT450), indicating
an increased energy security of the country over time. Thestudy also shows that carbon tax below certain levels wouldnot be so effective in reducing the CO2 emission nor inimproving the energy security.
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