Analysis of low carbon development strategies : role of transport sector electrification and carbon tax in Nepal

Abstract

The main objective of this study is to analyze the energy, environmental and economy-wide implications of selected low carbon development strategies in Nepal with huge untapped hydropower potential but still relying heavily on the imported fossil fuels. The study developed and used soft linked integrated energy-environment-economic modeling tools to examine the mid and long term effects of a sectoral low carbon strategy, i.e., transport sector electrification and an economy-wide carbon tax strategy. The bottom up energy system model (Nepal-ESM) was used to study the effects of selected low carbon strategies on the hydropower development, energy supply mix, energy system cost and global and local environmental emissions, while the overall macroeconomic and welfare implications of the low carbon strategies were assessed by hybrid top-down type Computable General Equilibrium (Nepal-CGE) model. In order to analyze implications of transport sector electrification, a base case scenario without any policy resulting transport electrification and five counterfactual scenarios with different levels of electrification of the transport system during 2015- 2050 were developed. The analysis based on the bottom up Nepal-ESM model shows that the transport sector electrification would promote development of indigenous hydropower resource in the country with additional hydropower capacity requirement for various transport electrification scenarios compared to the base case scenario. The hydropower capacity addition would increase by up to 538 MW under high (35%) transport electrification scenario EMT20+EV15 (20% modal shifts to electric mass transport (EMT) and 15% penetration of the electric vehicles (EV) by 2050). With the electrification of the transport system, there would be a noticeable improvement in the energy security of the country with decline in the cumulative imported energy (in the range of 6.3% to 14.6%) and improvement in diversification of the primary energy supply system. There would be a decrease in the discounted total energy system cost under the transport electrification scenarios (in the range of 1.0% to 2.0%) as compared to the base case. As a climate related co-benefit, there would be a reduction of 13% greenhouse gas (GHG) emissions in cumulative terms under the 35% transport sector electrification (EMT20+EV15). In addition, there would be a reduction in the emissions of local pollutants (CO, NOX, SO2, NMVOC and PM10). The study also shows that there would be additional employment generation during 2015-2050 associated purely with the additional hydropower development and recharging stations serving electric vehicles required under the transport electrification scenarios. The economy-wide effects of the transport sector electrification were studied using the Nepal-CGE model. The main finding of the study indicates that Nepal would benefit economically from the implementation of the transport sector electrification process in the long run with an increase in the cumulative undiscounted real GDP (in the range of 2.5% to 3.1%) and household welfare under all the transport electrification scenarios. Besides, transport electrification would promote energy efficiency improvement and green economy with a significant reduction in the average energy intensity (in the range of 2.7% to 4.1%) and average GHG emission intensity of GDP (in the range of 4.7% to 7.7%) under different transport electrification scenarios. This highlights the importance of the transport sector electrification as one of the desirable options for a low carbon development path in the country. It also indicates that the transport sector electrification would result in the appreciation of the national currency triggering reduction in the export of the other non-transport and non-electricity related commodities produced in the country in the long run (i.e., the presence of Dutch disease kind of effect). Introducing foreign direct investment would reduce such effects to some level. The effects of the carbon tax were studied by developing a base case scenario without any environmental policy and three counterfactual scenarios with introduction of carbon tax under different GHG stabilization targets of 450 ppmv (CT-HIG), 550 ppmv (CT-MED) and 650 ppmv (CT-LOW) during 2015-2050. The analysis using Nepal-ESM model reveals that there would be a need to install additional hydropower capacity of 614 MW in CT-MED to 945 MW in CT-HIG by 2050. It indicates an improvement in the efficiency of the cumulative total final energy consumption (in the range of 0.03% under CT-HIG to 0.5% under CT-MED) in all the carbon tax scenarios compared to the base case. The study also shows the co-benefits in terms of employment generation associated with additional hydropower development under the carbon tax scenarios and that through the establishment of more electric recharging stations under CT-MED and CT-HIG. It reveals that there would be a reduction in the emission of short-lived local pollutants. The adoption of the carbon tax would decrease the discounted net fuel import cost (in the range of 2.2% under CT-LOW to 5.5% under CT-HIG) but increases the discounted total energy system cost including carbon tax (in the range of 0.6% under CT-LOW to 4.7% under CT-HIG). However, if recycling of 100% of the carbon tax revenue back to the economy is considered, the discounted total energy system cost excluding carbon tax is expected to decrease under CT-HIG. Nepal-CGE model was also used to examine the economy-wide consequences of the carbon tax. It indicates that if the carbon tax is implemented in Nepal, there would be significant decrease in average energy intensity (in the range of 5.0% under CT-LOW to 2.4% under CT-HIG) and average GHG emission intensity of GDP (in the range of 6.2% under CT-LOW to 13.7% under CT-HIG) but at the cost of moderate loss in the cumulative undiscounted real GDP (in the range of 2.3% under CT-LOW to 8.1% under CT-HIG) and household welfare as compared to the base case. Under CT-HIG there would be a significant increase in the electricity consumption. However, carbon tax revenue recycling scheme would help to reduce GDP loss and improve household welfare. There would be an additional benefit related to the reduction in average energy intensity if carbon tax revenue is recycled above 50%.