Vietnam for the business-as-usual scenario and the sizable potential for efficiency improvements and emission mitigation in the industry and power sector, our results from the interviews for Chapter 3 imply that there may indeed be significant co-benefits to reap by combining economic restructuring and climate change mitigation efforts. From a climate perspective the question whether emission reductions are actually achieved is more important than what the underlying motivation for these were in the first place. In its INDCs submitted for the COP 21 in Paris, Vietnam pledges to unconditionally reduce GHG emissions by 8% compared to business-as-usual (BAU) by 2030 financed by domestic resources, while the emission intensity per unit of GDP is pledged to be reduced by 20% compared to the 2010 levels.
Conditional on the case that international support through bilateral and multilateral donors is received, Vietnam pledges to increase its reduction target for GHG emissions to 25% compared to BAU by 2030 and the emission intensity target per unit of GDP to a 30% reduction compared to 2010 (The Socialist Government of Vietnam 2015). The GHG reduction targets are still formulated as compared to a steeply increasing BAU projection1, indicating that emissions growth will continue in Vietnam. However, the change in the mindset of Vietnam’s policy makers as implied by our interviewees seems to be enduring, which can be considered a small step in the direction low-carbon development efforts that should not be taken for granted. It remains to be seen whether Vietnam will fulfil its targets and whether it is even willing to go beyond the low-hanging fruits and intensify ambitions more. So far, the implementation of concrete measures has mostly been lacking. While Vietnam is building the first offshore wind farm in Asia, the annual coal consumption in 2014 had increased by 21% compared to 2013 and the share of electricity generation capacities from coal are expected to increase from 36% in 2015 to 56% in 2030 (EIA 2015). However, in a statement of January 2016 on the government homepage, the Vietnamese Prime Minister Dung announced that the Vietnamese power sector “should protect the environment effectively, review development plans of all coal-fired power plants, build no more plants and gradually replace coal by gas while following strictly international commitments on cutting emission and promoting the development of renewable energy” (Socialist Republic of Vietnam 2016). Between 2010 and 2015, Vietnam added over 8,000 MW of capacity in coal fired power plant, adding another 39 Mio tons of CO2 annually. However, during the same period, almost 14,000 MW of coal power capacities were canceled in Vietnam, thereby potentially mitigating annual emissions of 61 Mio tons of CO2 (Endcoal.org 2016; Endcoal.org 2015). This may be interpreted as a silver lining for the hope that Vietnam’s climate policy will go beyond rhetoric.
5.1.3. From policies to emission reductions – The response of consumers to pricing policies
One important point made in Chapter 2 was that the success of policies in reducing emissions depends on the behavioral change of households and firms responding to these policies. In this light, Chapter 4 took a closer look at the response of consumers to pricing policies with a focus on the road transport sector in Europe. The transport sector is the only major sector which has exhibited increasing GHG emissions since 1990 making it the second largest GHG emitter in the EU after the power sector (EEA
1 The Vietnamese INDC projects BAU GHG emissions to increase from 246.8 million tCO2e in 2010 to 474.1 million tCO2e in 2020 and 787.4 million tCO2e in 2030 (The Socialist Government of Vietnam 2015).
2015b). Therefore, it is widely recognized that it will need to contribute a major share to reducing carbon emissions if Europe wants to comply with its pledges made in Paris (Creutzig et al. 2015).
Analyzing the demand response for diesel and gasoline2 consumption for road transportation in Europe, Chapter 4 addressed the following questions:
How do households and firms in Europe respond to fuel pricing policies in the short and in the long run and which are the underlying dynamics?
Which impact would fuel taxation reforms have on carbon emissions and on the exhaust of health-damaging air pollutants (fine particulate matter and nitrogen oxides) from road transport?
How would the fuel tax reform proposals of ending diesel tax breaks as compared to introducing a carbon tax of 50€/tCO2 perform with respect to reducing CO2 and local air pollutants?
How much could these fuel taxation reforms contribute to achieving European climate change mitigation targets for the transport sector?
Chapter 2 had named inertia and endowment restrictions to hamper immediate adjustments, thereby reducing the effectiveness of policies in achieving emission reductions in the short-run. Similarly, behavioral aspects such as accustomed consumption patterns may slow down behavioral changes as discussed in Chapter 2. In line with this, the analysis in Chapter 4 confirmed that consumers of transportation fuels do not adjust their consumption behavior immediately; instead they are subject to a dynamic adjustment process due to habit persistence and short-term inflexibilities in vehicle stock characteristics.
Although there is a considerable body of literature studying fuel price elasticities, reliable empirical estimates on recent European data, particularly with respect to diesel consumption, are comparably scarce. Yet, information on the expected demand response to envisaged climate policy measures and the process of the consumption changes over time is of major relevance to policy makers when designing climate policies and anticipating policy impacts on emissions especially with regard to complying with emission reduction targets. The dynamic econometric analysis in Chapter 4 revealed that - when the underlying dynamics, a potential fuel price endogeneity bias and the diesel shift observed in Europe are accounted for - the impact of fuel price changes on fuel consumption are found to be more pronounced in the short-run than previous literature suggests.
The results presented in Chapter 4 are especially interesting with respect to the consumption of diesel, as diesel has become the dominant road transportation fuel in many European countries within the last decades. Chapter 4 provides evidence that diesel demand in Europe tends to be more price elastic than gasoline demand, especially in the short run.
This finding on the diesel price elasticity is of special relevance in view of the recently rekindling debate around the health impacts of diesel vehicles. Despite some improvements in technology and catalytic
2 Chapter 4 used the term petrol as it was written in British English due to the European context.
converters, diesel cars have continuously been criticized for emitting more NOx and PM2.5 per liter combusted than gasoline vehicles as shown by the emission factors in Chapter 4. The recent fraud scandal, revealing the use of illegal software in diesel car test cycles in combination with the discovery that the majority of diesel vehicles fail to meet air pollution emission standards in real driving conditions has recently evoked strong political and public interest and criticism in the preferential tax treatment of diesel cars in many European countries. In view of the fact that air pollution concentration limits continue to be exceeded in many European cities, it seems that emission standards for road transportation vehicles have so far largely failed to deliver the expected reductions in health-damaging air pollution levels. Therefore, the objective of reducing exhaust of NOx and fine particulate matter constitutes a second motivation for addressing the transport sector with pricing policies next to climate change considerations.
The results from Chapter 4 imply that fuel pricing policies can be more effective than previously assumed in reducing fuel consumption and the associated emissions of carbon dioxide and health-damaging local air pollutants already in the short run. The presented fuel taxation reforms therefore seem to be a viable complement to reduce both air pollutant exhaust and carbon emissions from road transportation in the short run as well as in the long run, as they do not only foster fuel efficiency improvements but also reduce distances travelled. Countries exhibiting a large tax differential between diesel and gasoline could benefit from reducing exhaust emissions from road transport up to 17% for NOx and 22% for fine particulate matter in 2020 by ending diesel tax breaks. At the same time CO2 emissions from road transport could be reduced by up to almost 15% in 2020. The introduction of a carbon tax could reduce NOx exhaust by between 7 and 10 % and PM2.5 exhaust by between 8 and 11%
in 2020, while CO2 emissions would fall by between 7 and close to 10%. Both fuel tax reforms could make an important contribution to achieving the EU’s CO2 emission reduction targets for the transport sector. In many countries, abandoning the preferential tax treatment for diesel has nearly as strong an effect on carbon emissions as a 50€/tCO2 tax on fuel. Chapter 4 also estimates income elasticities for fuel consumption, suggesting that GDP growth will increase fuel consumption and thereby also CO2 emissions and air pollutant exhaust. If EU countries want to reconcile the policy objectives of steady GDP growth and climate change mitigation in the transport sector, the effects of income increases need to be counteracted by fuel pricing policies until the transition to a low-carbon transport system is achieved.
In contrast to emission standards, fuel taxation moreover raises revenues that can be used for reinvestment into pursuing other political or societal objectives such as building up ‘green’
infrastructure. Chapter 4 presented estimates on the potential for fiscal revenues associated with the policy scenarios for fuel tax reforms in Europe. We find that the presented fuel tax reforms could raise over 4 billion € in France and Germany and considerable amounts in other European countries already in the short run. These revenues could for example be re-invested in the build-up of infrastructure for electro-mobility, thereby overcoming the coordination failure barrier discussed in Chapter 2. Moreover, other studies have argued that ‘green’ taxation may be considered beneficial for pure fiscal reasons independent of climate or environmental considerations when facing tax competition (Franks, Edenhofer, and Lessmann 2015). As seen in Chapter 3, Vietnam has also made a first step in the
5.1 Better understanding the real-world context of climate policy 177
direction of ‘green fiscal reforms’ with the introduction of an Environment Protection Tax (EPT) in 2012, though tax rates currently do not reflect carbon contents. Interview partners, who had been involved in the formulation and implementation of the EPT, have emphasized the advantages of environmental tax reforms in steering behavior of consumers into more sustainable consumption patterns while at the same time providing a basis for fiscal revenues (see also Rodi, Schlegelmilch, and Mehling 2012). Initially starting with low tax rates, Vietnam has increased the EPT in 2015 tripling tax rates on certain fuel types.3