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1、Carbon Pricing in the Power Sector Role and design for transitioning toward net-zero carbon development 2024 The World Bank Group 1818 H Street NW,Washington,DC 20433 Telephone:202-473-1000;Internet:www.worldbank.org The findings,interpretations,and conclusions expressed in this work do not necessar
2、ily reflect the views of The World Bank,its Board of Executive Directors,or the governments they represent,or those of the IEAs individual member countries or funders.The World Bank,ICAP and the IEA do not guarantee the accuracy,completeness,or currency of the data included in this work and do not a
3、ssume responsibility for any errors,omissions,or discrepancies in the information or liability with respect to the use of or failure to use the information,methods,processes,or conclusions set forth.The boundaries,colors,denominations,and other information shown on any map in this work do not imply
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9、et NW,Washington,DC 20433,USA;e-mail:pubrightsworldbank.org.Carbon Pricing in the Power SectorForeword Electricity is the lifeline for a modern economy.At the same time,the power sector is the worlds main source of greenhouse gas emissions.Limiting the worst effects of a changing climate requires th
10、at the supply of clean electricity grows rapidly.This presents challenges as the power sector is technologically complex and requires costly infrastructure development.The sector is also highly regulated and dependent on domestic natural resources and fluctuating international commodity markets.For
11、policymakers,carbon pricing stands out as one of the most potent tools available to reduce emissions in the power sector.The EU and the UK are prime examples of how carbon taxes and cap-and-trade systems can help significantly advance the decarbonization of the power sector.However,the path to imple
12、menting carbon pricing in low-and middle-income countries is fraught with challenges,including financing obstacles,the urgent need to boost supply,and social priorities different from those of more advanced economies with more carbon pricing experience.This report,jointly developed between the World
13、 Bank,the International Energy Agency(IEA)and the International Carbon Action Partnership(ICAP),delves deep into the power sector value chain dynamics,demonstrating how well-designed carbon pricing instruments can be instrumental in helping low-and middle-income countries reach their decarbonization
14、 goals.Focusing on how decisions are made in diverse power sector models in several developing countries,our research establishes that the carbon pricing instrument must be carefully positioned at the right regulation point in the power sectors value chainrather than merely adding a burden for the s
15、ector.Getting it right can influence everything from power generation options to investment decisions and customers behaviors.Carbon pricing,which generated a record$104 billion worldwide in 2023 alone,can provide governments with new income sources.Several developing countries,such as China,Colombi
16、a,and South Africa,are in the early stages of managing distributional impacts on the poorest while facilitating the adaptation of energy-intensive industries.The report builds on these early experiences.Predictable carbon pricing can help attract private sector investment in cleaner technologies.In
17、capital-intensive sectors like the power sector,both investors and policymakers need long-term plans for decarbonization based on clear and credible communication on carbon price evolution.This report is a valuable resource to support policymakers in transforming their power sectors to be more relia
18、ble,green,and sustainable.The wealth of country experiences that it draws from can highlight the diversity of situations,national contexts,and carbon pricing implementations,empowering policymakers to make informed decisions and strengthening global knowledge on carbon pricing.Demetrios Papathanasio
19、u Global Director Energy and Extractives Global Practice The World Bank Jennifer Sara Global Director Climate Change Group The World Bank Foreword3ContentsForeword 3Acronym list 8Acknowledgments 9Executive summary 11Lessons and recommendations 18Three main questions to guide the choice and the desig
20、n of cpis for the power sector in lics and mics 211.Introduction 251.1 Impetus for this report 251.2 Scope of report and theory of change 281.2.1 Energy policy objectives for power sectors in low-and middle-income countries 281.2.2 The need for new policy instruments to achieve the new decarbonizati
21、on goals in the power sector 321.2.3 Development outcomes from effective power decarbonization 341.3 Methodology 341.3.1 Literature review 341.3.2 Case studies 352.Electric power and decarbonization in LICs and MICs 392.1 Power sector characteristics,value chain,and stakeholders 402.1.1 The power se
22、ctor value chain and stakeholders 402.1.2 Power sector structures 422.1.3 Dispatch procedures 492.2 Key challenges in LICs and MICs power sector decarbonization 492.2.1 Challenges regarding generation and storage 502.2.2 Challenges regarding dispatch,markets,and transmission 522.2.3 Challenges regar
23、ding distribution and retail 542.2.4 Challenges regarding consumption 542.2.5 Challenges regarding economics and governance 562.3 Policy instruments for decarbonizing power sector 572.4 An infographic visualizing the introduction of a CPI in the power sector in LICs and MICs 633.Roles of carbon pric
24、ing in the power sector 653.1 Key elements of CPI design in the power sector 653.1.1 Design elements relevant to both a carbon tax and an ETS when applied to the power sector 673.1.2 Design elements of a carbon tax when applied to the power sector 683.1.3 Design elements of an ETS when applied to th
25、e power sector 703.1.4 Use of dual carbon pricing mechanisms in the power sector 74Carbon Pricing in the Power Sector4Chapters1ContentsExecutive Summary3625473.2 Regulation points of CPI in the power sector 743.2.1 Upstream fuel distributors 763.2.2 Generation stage 773.2.3 Dispatch/transmission sta
26、ge 783.2.4 Distribution stage 803.2.5 Consumption stage 803.3 The potential role of carbon pricing in the power sector 813.3.1 A shift toward lower-carbon generation mixes 823.3.2 Influencing dispatch and wholesale purchases in favor of lower-carbon plants 883.3.3 A shift in consumption patterns 913
27、.3.4 An intake of new government revenues 944.Assessing the potential impacts of pricing carbon in different LICs and MICs power sector contexts 1014.1 The potential for a shift toward lower-carbon generation mixes 1024.1.1 Insufficiently high carbon price to shift investment decisions 1024.1.2 Secu
28、rity of supply challenges 1044.1.3 The influence of power sector structure on investment and retirement decisions 1054.2 The potential influence on dispatch and wholesale purchases in favor of lower-carbon plants in LICs and MICs 1064.2.1 Capacity,energy,or grid constraints 1074.2.2 The influence of
29、 power sector structure on how carbon pricing affects dispatch decisions 1094.2.3 Failures at the dispatch point 1104.2.4 The influence of power sector structure and regulation on how carbon pricing affects wholesale purchase decisions 1114.3 Potential shift in consumption patterns in LICs and MICs
30、1124.3.1 Insufficient pass-through of carbon costs to retail tariffs 1124.3.2 Time-of-use tariffs and smart metering 1144.3.3 Auto-generation and the risk of grid defection 1154.3.4 The distributional effects of carbon pricings impact on retail tariffs 1164.4 Potential intake of new government reven
31、ues in LICs and MICs 1184.5 Matrices to track CPI impacts and assess cpis in different power sector structures 1195.Lessons learned and recommendations 1355.1 The role of CPIs in the broader context of decarbonizing the power sector in LICs and MICs 1355.2 Different CPIs for different power sector s
32、tructures 1375.3 Designing CPIs to ensure effectiveness,minimize undesired impacts,and maximize co-benefits 1395.4 Political economy challenges and learning curve 1436.Conclusion 1477.Bibliography 153Contents5Chapters1ContentsExecutive Summary362547List of figuresFigure ES1 Degrees of market liberal
33、ization and unbundling of power sector 14Figure ES2 Regulation points along the value chain 15Figure ES3 Overview Matrix-Simplified assessment of CPIs options in three power sector models:fully liberalized market,single-buyer model and vertically integrated monopoly 16Figure ES4 Main lessons and rec
34、ommendations 19Figure 1.1 Theory of change on the role of carbon pricing in the power sector in low-and middle-income countries 29Figure 1.2 Number of countries that have announced commitments to net-zero/carbon neutrality 32Figure 2.1 Paradigm change in the power sector 41Figure 2.2 Simplified elec
35、tric power sector value chain and stakeholders 42Figure 2.3 Degrees of market liberalization and unbundling of power sector 43Figure 2.4 Schematic overview of key issues in LICs and MICs power sector structures for decarbonization 50Figure 2.5 Infographic synthesizing the introduction of CPIs in the
36、 power sector in LICs and MICs 63Figure 3.1 Map of carbon taxes and emissions trading schemes implemented or scheduled for implementation around the world 66Figure 3.2 Regulation points along the power sector value chain 77Figure 3.3 Illustration of change in merit order with addition of carbon pric
37、es(CPs)90Figure 3.4 Potential uses of carbon pricing revenue 95Figure 3.5 Carbon revenues by revenue use and jurisdiction,20222023 96Figure 4.1 Overview matrix:Simplified assessment of CPIs options in three power sector models:fully liberalized market,single-buyer model,and vertically integrated mon
38、opoly 121Figure 6.1 Infra-marginal rent and revenue collection from carbon tax in the case of hydro-dominated and coal dominated systems 152Carbon Pricing in the Power Sector6Chapters1ContentsExecutive Summary362547List of boxesBox ES1 How to read the overview matrix of CPI assessment in three diffe
39、rent power sector models 17Box 1.1 Partnership for Market Readiness and Partnership for Market Implementation 27Box 1.2 Gaps in the literature 35Box 2.1 South Africas vertically integrated utility,Eskom 44Box 2.2 Kazakhstans transition to a single-buyer model 46Box 2.3 Colombias wholesale market mod
40、el 47Box 2.4 Chinas hybrid electricity market model 48Box 3.1 South Africa carbon tax rates and exemptions 69Box 3.2 Chinas use of intensity-based caps and technology-specific benchmarks in its ETS 72Box 3.3 Development of carbon pricing in Chile 75Box 3.4 Environmental dispatch system used in South
41、 Korea 78Box 3.5 EU ETS allowance trading 85Box 3.6 Incentivizing CCS in the EU ETS 87Box 3.7 EU progress on decarbonizing the EU power sector 91Box 3.8 Changing consumption patterns in response to fluctuating retail tariffs 92Box 3.9 Use of revenues from the EU ETS 98Box 4.1 The impact of Kazakhsta
42、ns ETS on investment and retirement decisions 103Box 4.2 Issues with incentivizing lower-emission generation in Kazakhstan 104Box 4.3 Security of supply in South Africa 107Box 4.4 The impact of Colombias carbon tax on dispatch decisions 108List of tablesTable 1.1 Characteristics of selected case stu
43、dies 36Table 1.2 Rationale for smaller case studies 37Table 2.1 Policy instruments that can foster the development of low-carbon electricity(pathway 1)59Table 2.2 Policy instruments that can promote more efficient use of electricity(pathway 2)61Table 2.3 Policy instruments that can incentivize the p
44、hase out of carbon-intensive generation(pathway 3)62Table 3.1 Comparison of ETS to carbon tax on emissions and prices 83Contents7Chapters1ContentsExecutive Summary362547Acronym listCCSCarbon capture and storageCCUSCarbon capture,utilization,and storageCCfDCarbon contract for differenceCDMClean devel
45、opment mechanismCfDContract for differenceCO2Carbon dioxideCO2eCarbon dioxide equivalentCOP28 28th Conference of the PartiesCPICarbon pricing instrumentCPSCarbon price supportCPUCCalifornia Public Utilities CommissionDPVDistributed solar photovoltaicEEEnergy efficiencyETSEmissions trading systemEUEu
46、ropean UnionEU ETS European Union Emissions Trading SystemEUAsEU allowance unitsFiPFeed-in premiumFiTFeed-in tariffG20Group of 20GDPGross domestic productGHGGreenhouse gasGWGigawattHICHigh-income countryHzHertzICAPInternational Carbon Action PartnershipIEAInternational Energy AgencyIPPIndependent po
47、wer producerIRENAInternational Renewable Energy AgencyKEPCO Korea Electric Power CorporationkWhKilowatt hourLICLow-income countryLTCLong-term contractsMICMedium-income countryMRVMonitoring,reporting,and verificationMWMegawattMWhMegawatt hourNDCNationally Determined ContributionsNersaNational Energy
48、Regulator of South AfricaNOxNitrogen oxideNPVNet present valueOCGTOpen cycle gas turbinePM2.5Particulate matter 2.5PM10Particulate matter 10PMIPartnership for Market ImplementationPMRPartnership for Market ReadinessPPAPower Purchase AgreementPVPhotovoltaicRERenewable energyRECRenewable energy certif
49、icateSDGSustainable Development GoalSO2Sulfur dioxideSOEState-owned enterprisetTon(metric ton)tCO2Ton of carbon dioxidetCO2eTon of carbon dioxide equivalentToCTheory of ChangeToUTime-of-useUKUnited KingdomUSUnited StatesUSDUS dollarWACCWeighted average cost of capitalCarbon Pricing in the Power Sect
50、or8Chapters1ContentsExecutive Summary362547AcknowledgmentsThis work is a product of The World Bank Group,the International Carbon Action Partnership(ICAP),and the International Energy Agency(IEA)with Ricardo Energy&Environment as the main consultant.The World Bank team included Christophe de Gouvell
51、o(co-lead for the Energy Global Practice),Harikumar Gadde(co-lead for the Climate Change Group),Martin Laplane(technical coordinator),Alan Lee,Phillip Hannam,and Marissa Santikarn.The IEA team included Luca Lo Re(lead),Alana Rawlins Bilbao,Craig Hart,Isaac Portugal,Jacques Warichet,Gabriel Saive,Dav
52、id Fischer,and Ermi Miao.The ICAP team included Stefano De Clara(lead),Trevor Laroche-Theune,Dauren Zhalgabay,Andres Felipe Olarte Pena,and Zhibin Chen.Ricardo Energy&Environment experts led contributions to support this work:Jonathan Hedgecock,Ryan Hogarth,Micaela Zabalo,Osmund Berge Jenssen,Cather
53、ine Jones-Morris,Helena Li,Florianne de Boer.Case studies were supported by the World Bank country experts,including Mirlan Aldayarov,Marco Antonio Baquero,Perez Arroyo,Daniel Beasley,Manuel Berlengiero,Claudia Croce,Michael Davidson(consultant),Janina Franco,Marlen Goerner,Angela Gonzalez,Laura Hig
54、uera,Min Hou,Sandeep Kohli,Izak Leimecke,Manuel Luengo,Roberto Magnasco,Daniel Modise(consultant),Sarah Moyer,Vonjy Rakotondramanana,Giovanni Ruta,Kirtan Chandra Sahoo,Mariano Salto,Jookyung Seong,Daniyar Tanatarov,Jichong Wu,Yelena Yakovleva,Yevgen Yesyrkenov,Shuwei Zhang(consultant),Julian Zuluaga
55、.In addition,the members of the Kazakhstan energy association(Kazenergy),and ICAP members-Rachel Gold,Mark Sippola,Paulina Kolic(California Air Resources Board),Rufina Acheampong(Industrial Decarbonisation&Emissions Trading),William Space(Regional Greenhouse Gas Initiative),provided additional input
56、s.Vivien Foster(Imperial College),Carolyn Fischer(Development Economics,the World Bank),Benoit Peluchon,Florent Le Strat,Pierre Chambr(lectricit de France),Tatyana Kramskaya(Energy&Extractives Global Knowledge,the World Bank),Joseph Pryor(Climate Finance and Economics,the World Bank),and Kevin Carey
57、(Equitable Growth,Finance,and Institutions,the World Bank),contributed to the peer review process.This report benefited from the guidance of Hania Dawood(Practice Manager,Climate Finance and Economics,the World Bank),Ani Balabanyan(Practice Manager,Energy and Extractives Global Department,the World
58、Bank),Chandrasekar Govindarajalu(Practice Manager,ESMAP,the World Bank)and the Program managers of the Partnership for Market Implementation(Flavia Rosembuj and Venkat Ramana Putti).Acknowledgments9Chapters1ContentsExecutive Summary362547Executive summaryThe number of countries that have announced s
59、ome type of commitment to net zero emissions has increased very rapidly in recent years,from five in 2018 to over 145 in 2023.Many of these are middle-income countries(MICs)and low-income countries(LICs)(Net Zero Tracker,2023),whose greenhouse gas(GHG)emissions are concentrated in the power sector.A
60、s domestic electricity demand grows,these countries must increase power generation while reducing carbon emissions to meet socioeconomic needs and align with the Paris Agreements goal of limiting global temperature rise to 1.5C.Therefore,the power sector must increasingly rely on low-carbon energy s
61、ources.LICs and MICs are therefore considering introducing a range of policies to decarbonize their power sectors,and a growing number of them are considering carbon pricing instruments(CPIs),such as carbon taxes and/or emissions trading systems(ETSs)to transition to low-carbon electricity systems,a
62、s part of a broader policy mix.The international experience of applying CPIs across the world is substantial,and many lessons can be learned from it.However,while such initiatives commenced more than 15 years ago in advanced economies,the use of carbon pricing instruments is still very limited in LI
63、Cs and MICs.Power sectors in LICs and MICs vary substantially but share common acute challenges distinct from those faced by advanced economies.These include rapid growth in electricity demand,low levels of access and affordability,insufficient and insecure supply,and lack of affordable financing,am
64、ong others.Such challenges require a different set of public policy choices compared to advanced economies.Thus,while much can be learned from international experience in deploying CPIs in high-income countries(HICs),the policy landscapes are substantially different in LICs and MICs.A literature rev
65、iew confirms the gaps that exist in developing economies to introduce carbon pricing.This report aims to fill some of the identified knowledge gaps and assess the role that CPIs,specifically carbon taxes and ETSs,can play in supporting decarbonization of the power sector.The report also provides act
66、ionable recommendations for policy makers considering implementing a CPI in their countries.Executive summary11Chapters1ContentsExecutive Summary362547 Well-designed carbon pricing in the power sector could support 1.A shift toward lower-carbon generation capacities,including through decisions on in
67、vestments and retirements of power sector assets,and improved energy efficiency and fuel adjustments in existing power plants(medium-and long-term impact).2.A shift in dispatch toward lower-emissions power generation,including by changing merit order and accompanying flexibility resources(short-term
68、 impact).3.A shift toward less carbon-intensive wholesale electricity purchase,including distributors,retailers,and/or large customers contracting the purchase of electricity from renewable energy producers(short-and long-term impact).4.A shift toward less carbon-intensive con-sumption patterns,incl
69、uding by changing the time of consumption,investing in battery storage,reducing on-grid demand by improving efficiency,or adopting behind-the-meter renewables(short-and medium-term impact).5.Raising new fiscal revenues,facilitating the transition to a lower-carbon power sector.These insights are val
70、idated by 10 years experience of the Partnership for Market Readiness and emerging evidence from the Partnership for Market Implementation,as well as consultations with various power sector and carbon pricing experts and specific case studies.The selected case studies include China(ETS),Colombia(car
71、bon tax),Kazakhstan(ETS),and South Africa(carbon tax)and cover a series of characteristics and challenges frequently met in LICs and MICs(e.g.,state-owned monopoly power utility,high coal reliance,issues with affordability,insecurity of supply,etc.).The findings also shed light on the specific role
72、that carbon pricing can play within the wider energy transition happening in these countries.MULTIPLE CPI OPTIONS FOR MULTIPLE POWER SECTOR STRUCTURESThe entire value chain of the power sector,composed of five main stagesfuel supply,generation,wholesale transmission and dispatch,distribution and ret
73、ail,and consumptioncontributes to the sectors emissions.System and network operators must maintain the continuous and reliable operation of the power grid by balancing generation,demand,and power flows in real time to ensure grid stability.Despite technological advancements that support system and n
74、etwork operators,including allowing distributed resources like solar rooftops to inject power at any point in the network,the power sector in LICs and MICs is still structured around five main stages.All these stages contribute to shaping the emissions of the sector.Consumer demand dictates the volu
75、me of electricity distributors purchase,guiding the system operator to decide on the order of the dispatch of available generators,which ultimately impacts the level of emissions in the sector.Carbon Pricing in the Power Sector12Chapters1ContentsExecutive Summary362547Power sector reforms in develop
76、ing countries have led to varied and diverse structures,ranging from fully state-owned utilities to competitive markets.Since the 1980s,many LICs and MICs reformed their power sectors by liberalizing and unbundling to encourage private sector participation and introducing competition to increase eff
77、iciency,reducing political interference and subsidies,and attracting private capital.The outcomes of these reforms varied significantly among HICs,LICs,and MICs.For example,privatization and liberalization in developing countries were less successful than in Organisation for Economic Co-operation an
78、d Development countries,due to higher investment risks.In the 2000s,many developing countries reformed their market regimes again to create safer and more stable regulatory environments,such as through long-term contracts between new and existing producers and retailers(Roques&Finon,2017).As a resul
79、t,LICs and MICs now have diverse power sector structures,ranging from fully integrated state-owned public utilities to fully competitive markets,as shown in Figure ES1.The structure of a countrys power sector significantly influences the economic agents at each stage of the value chain and their dec
80、ision-making priorities,leading to variations in the policies and instruments,including carbon pricing,used to reduce emissions.1 In the case of the European Union ETS,if emissions are captured at the point source of emissions and permanently stored in a way that meets jurisdiction requirements for
81、sequestration or carbon capture and storage,then there is no need to redeem allowances or pay a carbon tax.2 A CPI could also be placed upstream of electricity generators,where the companies distributing fossil fuel must surrender allowances or pay a carbon tax according to the carbon content of the
82、 fuels they sell in a determined jurisdiction.The fossil fuel distribution companies then pass on the cost to the purchaser of the fuel.Generation companies will then purchase coal or gas where the carbon price is already factored into the fuel price.International experience shows that ETSs and carb
83、on taxes can be designed to target different groups of stakeholders at different points of regulation along the value chain.As outlined in Figure ES2,a CPI can apply at the supply,generation,dispatch,distribution,or consumption stage.When a CPI is applied at the generation stage,electricity generati
84、on companies either surrender emission allowances or pay a carbon tax based on their direct emissions.1 This leads to an additional operational cost for higher-emitting plants.Examples include the South African carbon tax and the ETSs in China and Kazakhstan.2 In contrast,the California Cap-and-Trad
85、e program applies a carbon price to both generators and importers of electricity.A CPI,at the dispatch stage,as seen in the South Korea ETS,includes the carbon price either as a separate cost or in the cost curve submitted by generators,affecting the merit order.At the distribution stage,distributio
86、n and/or retail companies pay a carbon price proportional to the carbon content of the electricity they procure,encouraging contracts with low-carbon sources,as seen in the California Cap-and-Trade program.This regulation incentivizes companies importing electricity to purchase from lower-carbon sou
87、rces.Lastly,at the consumption stage,a CPI is applied to the consumers electricity bill based on the consumption-weighted emission factor of the grid.This can be done through an ETS,with caps based on a consumers Scope 2 emissions Executive summary13Chapters1ContentsExecutive Summary362547(i.e.,thos
88、e that result from the purchase of electricity consumption)or through a carbon tax based on the carbon content of the electricity consumed,prompting consumers to alter their usage patterns or invest in energy-efficient appliances.3 If the carbon price applied to tariffs varies throughout the day bas
89、ed on the changing type of generation,consumers could also move part of their consumption to periods of the day when the generation of electricity is less carbon intensive.For the price signal to be efficient,it requires the installation of smart meters that can differentiate consumption periods acc
90、ordingly.Before its national ETS in 2021,several of Chinas regional ETS pilots included indirect emissions from electricity consumption(International Energy Agency,2020d).3 If the market structure allows,large consumers could also respond by signing bilateral power purchase agreement contracts with
91、low-carbon electricity producers.The effectiveness of a CPI also depends on its interaction with existing incentives and regulations at each value chain stage,influenced by other policy challenges.A CPI applied at one stage of the value chain can influence the decisions made either upstream or downs
92、tream of the regulation point,although the structure and regulation of the industry matters for the pass-through of incentives.A CPI applied at the point of electricity consumption,for instance,with a tax based on average carbon content,can influence consumption patterns.However,it does not directly
93、 impact dispatch or supply mix decisionsalthough it will eventually influence these by changing the shape and the size of the load FIGURE ES1Degrees of market liberalization and unbundling of power sectorSouth Africa(Eskom*)G T D IPPs SBMOLTAVerticallyintegrated utility(can include IPPs)Single buyer
94、modelHybrid modelFully liberalized wholesalemarketsKorea,KazakhstanBrazil,ChinaColombia,USA Eskom is in the process of unbundlingGenerationIndependentpower producersTransmissionDistributionSingle buyerMarket operatorEntity in charge of thecentralized long-termauctionsUnbundling and market liberaliza
95、tionG T D IPPs G IPPs SB DG IPPs MOLTA D DG IPPs MO D DFIGURE ES1Degrees of market liberalization and unbundling of power sectorCarbon Pricing in the Power Sector14Chapters1ContentsExecutive Summary362547FIGURE ES2Regulation points along the value chainPower sectorvalue chain(bidirectional)Power Sec
96、tor Value ChainStakeholdersCPIregulation pointExamplesFuel supply for the power sectorGeneration&storageDispatch,markets,and transmissionDistributionConsumptionFossil fuel producers,importers,or distributorsElectricity generation companiesPower exchanges,transmission companies,system operatorDistrib
97、ution and retailcompaniesRetail customers and large consumersThe sale or import of fossil fuels to electricity generatorsEmissions of fossil fuel generatorsCarbon content of generators bids or In-puts in the dispatchCarbon content of electricity purchased for distributionCarbon content of electricit
98、y consumedColombia carbon taxSouth Africa carbon tax,China national ETS,Kazakhstan ETSSouth Korea ETSElectricity importers in the California Cap-and-Trade ProgramChina ETS regional pilotscurve to be served and the marginal capacity to be dispatched.Conversely,applying the CPI at the fuel combustion
99、stage in power generation sends a clear signal for investment and dispatch decisions.Depending on the structure and the regulation of the sector,this may be passed through to consumers,potentially influencing their consumption patterns and investments in energy efficiency.4 These include regulated r
100、etail tariffs for end consumers to protect against natural monopoly abuse or to ensure social tariffs for low-income households;obligations of medium-term contracting of part of the demand for large customers or distributors,with prices that do not reflect short-term market variations;curtailment of
101、 least-cost intermittent generators when the system is not flexible enough or reciprocally mandates the purchase of a minimum share of renewables;regulation of dispatch that gives priority to security over least cost(for instance,to save water in reservoirs in hydro-dominated systems in anticipation
102、 of droughts);wholesale tariff caps on generators to protect distributors when fuel prices are too high and are not allowed to be passed through in tariffs(as seen in China);minimum off-taker obligations with guaranteed prices to attract independent power producer(IPP)investors or to prevent state-o
103、wned generation assets,etc.Finally,in certain cases,combining multiple CPIs along the value chain may be worth considering.Regulators often introduce regulations along the value chain to address market failures or to internalize specific public policy objectives,4 which can create rigidities and ham
104、per the pass-through of the carbon price signal to other stakeholders.As a result,multiple CPIs might be necessary at different points in the value chain to ensure adequate incentives to all agents involved.FIGURE ES2Regulation points along the value chainExecutive summary15Chapters1ContentsExecutiv
105、e Summary362547Revenue CollectionConsDispConsRevenue CollectionWhol PurchFIGURE ES3Overview Matrix-Simplifi ed assessment of CPIs options in three power sector models:fully liberalized market,single-buyer model and vertically integrated monopolyFully LiberalizedE.Consumtion stageGen InvInfl uence on
106、 generation investment decisionConsImpact on consumer behavior decisionWhol PurchDispInfl uence on dispatch decisionImpact on wholesale purchase decision infl uences decision towards low carbon infl uence on decision toward low carbon is negligible infl uence is limitedRevenue CollectionCollection b
107、y government of electricity price increase induced by CPI.Green:most collected by government;Red:small fraction collected by government;Yellow:expected revenue is minimaleasyeasy/not easy/diffi cultto implement Dotted:for relative comparison,more dotted,less infl uenceWhol PurchConsGen InvRevenue Co
108、llection?A.Upstream stage on fuelsWhol PurchDispA1.ETS Fuels suppliers redeem allowancesA2.CARB.TAX Carb tax on fuels used in the power sectorConsGen InvDispeasyRevenue CollectionWhol PurchB.Generation stageB1.ETSGenerators redeem allowancesB2.CARB.TAXGenerators pay carbon tax ConsGen InvDispnoteasy
109、Revenue CollectionConsGen InvWhol PurchDispeasyRevenue CollectionC.Dispatch stageWhol PurchRevenue CollectionC1.ETSSystem operator internalizes carb price in dispatchConsGen InvDispnoteasyC2.CARB.TAXSystem operator internalizes carb price in dispatchConsDispRevenue CollectionGen InvWhol Purch?Whol P
110、urchD.Distribution and retailer stageD1.ETSDistributors redeem allowancesD2.CARB.TAXDistribut pay tax on carbon contentConsGen InvWhol PurchDispRevenue CollectioneasyConsGen InvDispRevenue CollectioneasyE1.ETSCustom redeem allow for carb contentE2.CARB.TAXCustomers pay tax on carbon contentWhol Purc
111、hConsGen Invdiffi cDispRevenue CollectionWhol PurchGen InvDispRevenue CollectioneasyConsSingle BuyerA.Upstream stage on fuelsA1.ETSA2.CARB.TAXRevenue CollectionConsGen InvnoteasyWhol PurchDispGen InvDispeasyB.Generation stageB1.ETSB2.CARB.TAXConsGen InvnoteasyWhol PurchDispConsGen InvWhol PurchReven
112、ue CollectioneasyRevenue CollectionSingle-buyer stage(C.Dispatch+D.Distribution)C-D 1.ETSSingle-buyer redeems allowancesC-D 2.CARB.TAXSingle-buyer pays carbon taxRevenue CollectionConsGen InvDispnoteasyGen InvDispRevenue CollectioneasyWhol PurchE.Consumption stageConsGen InvRevenue CollectionWhol Pu
113、rchdiffi cWhol PurchDispConsRevenue CollectionWhol PurchDispGen InvE1.ETSE2.CARB.TAXVerticallyIntegratedA.Upstream stage on fuelsA1.ETSA2.CARB.TAXRevenue CollectionWhol PurchGen InvnoteasyDispConsRevenue CollectionWhol PurchGen InvDispConseasySOE Stage(B.Generation+C.Dispatch+D.Distribution)B-C-D 1.
114、ETSSOE redeem allowancesB-C-D 2.CARB.TAXSOE pays carbon taxGen InvDispWhol PurchRevenue CollectionWhol PurchGen InvDispConseasyE1.ETSE2.CARB.TAXE.Consumption stageWhol PurchGen InvDispConsdiffi cRevenue CollectionWhol PurchGen InvDispRevenue CollectionConseasyConseasynoteasyGen invInfluence on gener
115、ation investment decisionConsImpact on consumer behavior decisionWhol PurchDispInfluence on dispatch decisionImpact on wholesale purchase decision influences decision towards low carbon influence on decision towards low carbon is negligible influence is limitedRevenue CollectionCollection by governm
116、ent of electricity price increase induced by CPI.Green:most collected by government;Red:small fraction collected by government;Yellow:expected revenue is minimaleasyeasy/not easy/difficult to implement Dotted:for relative comparison,more dotted,less influenceFIGURE ES3Overview Matrix-Simplified asse
117、ssment of CPIs options in three power sector models:fully liberalized market,single-buyer model and vertically integrated monopolyCarbon Pricing in the Power Sector16Chapters1ContentsExecutive Summary362547How to read the overview matrix of CPI assessment in three different power sector modelsThe ov
118、erview matrix visually summarizes the four main impacts expected from a CPI along the value chain,depending on where it is applied,and for three typical power sector models:fully unbundled and liberalized,single buyer,or vertically integrated monopolistic state-owned enterprise.It distinguishes betw
119、een an ETS and a carbon tax.Readers can focus on the specific row relevant to their power sector model.For each power sector model,and for each of the five possible regulation points along the value chain,labeled from A to E,two small colored matrices are displayed,one for an ETS and one for a carbo
120、n tax.Each small colored matrix has Four petals corresponding to the first four intermediate outcomes(clockwise):generation investment(Gen Inv),dispatch(Disp),wholesale purchase(Whol Purch),and consumption(Cons)Green means that the CPI influences the decision toward low carbon Yellow means that the
121、CPI influence is limited Red means the CPI influence on a decision toward low carbon is negligible Dotted patterns introduce gradations for the sake of relative comparison:dotted green means less influence than solid green,etc.One underlying bar for fiscal revenue generation and collection(Revenue C
122、ollection),corresponding to the fifth intermediate outcome Green means that the entire electricity price increase induced by the CPI is collected by the government and can thus be reallocated as part of the design of the CPI Red means only a minimal part of the increase is captured by the government
123、(it mostly increases the infra-marginal rent received by the generators)Yellow means that additional revenues are expected to be minimal One central button for signaling the relative easiness of implementation Green means“technically easy to implement”Red means“difficult or impossible to implement”Y
124、ellow means“neither easy nor very difficult to implement”BOX ES1Executive summary17Chapters1ContentsExecutive Summary362547MAPPING OUT THE IMPACTS OF CPI OPTIONS ALONG THE VALUE CHAINThe effectiveness and implementation of an ETS or a carbon tax are influenced by the structure of the sector and exis
125、ting policies and regulations,which interact with the CPI.These factors result in varying impacts on decision-making processes throughout the value chain.Section 4.5 in Chapter4 systematically examines these impacts and side effects for both ETS and carbon tax in three typical power structure models
126、.The indicative findings of this analysis are synthetized in the general overview matrix that follows(Figure ES3;see also ES1).While this visual synthesis is mostly indicative and should be used carefully,taking into account specific national circumstances,it clearly tends toward more green in the“f
127、ully liberalized”row and more red in the“vertically integrated SOE(state-owned enterprise)”row.There is generally more influence(greener)on the intermediate outcome petal corresponding to the regulation point where the CPI is applied,and less for the ones observed upstream or downstream of that poin
128、t(except for the vertically integrated SOE where three potential regulation points are merged).Revenue collection is better(green)if the regulation point is downstream of the dispatch.Lessons and recommendationsThe role and impact of a CPI can vary significantly based on the national energy mix,the
129、development priorities guiding the sector policies,and current sector structure shaped by past and ongoing reforms.The regulation point along the value chain where the CPI is applied also influences these outcomes.The main findings of the analysis conducted in this report can be organized into a ser
130、ies of lessons and recommendations to help achieve the expected outcomes,in particular the ones related to(i)shifting toward a lower-carbon generation mix at the generation stage,(ii)prioritizing the dispatch of power generation plants with lower carbon emissions,(iii)shifting toward less carbon-int
131、ensive wholesale purchases of electricity,and(iv)shifting toward less carbon-intensive consumption patterns.These lessons and recommendations,detailed in Chapter 5,are summarized in Figure ES4.Carbon Pricing in the Power Sector18Chapters1ContentsExecutive Summary362547 FIGURE ES4Main lessons and rec
132、ommendationsI.The role of CPIs in the decarbonization of the power sector in LICs and MICsLesson 1:Challenges faced by power sectors in low-and middle-income countries diff er signifi cantly from those in high-income countries.Policy landscapes for deploying CPIs are therefore diff erent,infl uencin
133、g their role and design.Lesson 2:Governments have a wide variety of policy instruments and reforms at their disposal to drive decarbonization of their current and future power sector.The role of carbon pricing needs to be defi ned within this broader policy mix,taking into account overlapping polici
134、es.Recommendation 1:The specifi c challenges of LICs and MICs need to be identifi ed and acknowledged early to ensure that CPI role and design can take these into account,as a way of minimizing the risk of adding hurdles and maximizing opportunities to jointly address these challenges while mitigati
135、ng emissions.Recommendation 2:A CPI-based policy should not be designed in isolation but rather as part of a broader sector decarbonization policy package,supported by a thorough analysis of potential complementarities and/or redundancies with other power sector decarbonization policy instruments.II
136、.Diff erent CPIs for diff erent power sector structuresIII.Designing CPIs to ensure eff ectiveness,minimize undesired impacts,and maximize co-benefi tsLesson 4:The structure of power sectors will have a potentially strong and distinct incidence on the eff ectiveness of diff erent types of CPIs.Lesso
137、n 6:Carbon pricing may interact with other policies in the power sector and thus be designed accordingly to prevent reducing its eff ectiveness or generating negative consequences.Lesson 3:The power sector is a complex,highly regulated value chain,off ering a variety of potential regulation points a
138、nd design options for CPIs,delivering diff erent impacts on the decisions of the agents along the chain to decarbonize the sector.Lesson 5:For a CPI applied at a determined point of the value chain to have an impact on the emissions of the sector,it must provide a signal that is strong and predictab
139、le enough to infl uence the decision processes at that point and possibly beyond.Recommendation 4:When choosing the type of CPI,the structure and the size of the power sector are critical.In the case of a power sectors of limited size or dominated by an oligopoly,an ETS can only be considered if the
140、 sectoral scope is extended beyond the power sector to ensure that the number of participants is large enough to deliver the expected benefi t of trading.In systems run mostly by a vertically integrated SOE,a carbon price should be accompanied by strong regulatory oversight to ensure that it is refl
141、 ected eff ectively in the merit order dispatch.Recommendation 3:When considering adopting a CPI for the power sector,governments should consider diff erent potential regulation points and choose based on the assessment of which stage of the value chain the CPI can most eff ectively move the sector
142、toward a lower carbon intensity,considering the countrys specifi c circumstances.FIGURE ES4Main lessons and recommendationsExecutive summary19Chapters1ContentsExecutive Summary362547II.Diff erent CPIs for diff erent power sector structuresIII.Designing CPIs to ensure eff ectiveness,minimize undesire
143、d impacts,and maximize co-benefi tsLesson 4:The structure of power sectors will have a potentially strong and distinct incidence on the eff ectiveness of diff erent types of CPIs.Lesson 6:Carbon pricing may interact with other policies in the power sector and thus be designed accordingly to prevent
144、reducing its eff ectiveness or generating negative consequences.Lesson 3:The power sector is a complex,highly regulated value chain,off ering a variety of potential regulation points and design options for CPIs,delivering diff erent impacts on the decisions of the agents along the chain to decarboni
145、ze the sector.Lesson 5:For a CPI applied at a determined point of the value chain to have an impact on the emissions of the sector,it must provide a signal that is strong and predictable enough to infl uence the decision processes at that point and possibly beyond.Recommendation 4:When choosing the
146、type of CPI,the structure and the size of the power sector are critical.In the case of a power sectors of limited size or dominated by an oligopoly,an ETS can only be considered if the sectoral scope is extended beyond the power sector to ensure that the number of participants is large enough to del
147、iver the expected benefi t of trading.In systems run mostly by a vertically integrated SOE,a carbon price should be accompanied by strong regulatory oversight to ensure that it is refl ected eff ectively in the merit order dispatch.Recommendation 6:When designing a CPI,it is necessary to investigate
148、 and simulate potential interactions with other existing regulations that infl uence the formation of electricity prices in order to guarantee that the CPI will actually contribute to lowering emissions.It is equally important to embed in it features that address context-specifi c undesirable eff ec
149、ts or ineffi ciencies and help reconcile the prevailing development objectives with the new decarbonization goal,testing and adjusting as needed.Recommendation 5:Designing and calibrating the level of CPIs to achieve real reductions must be based on a solid diagnosis of the switching values that can
150、 change the outcome of the decisions made at the regulation point and beyond.Driving investments toward low-carbon technology requires decision makers to have an ability to anticipate the evolution of the carbon price over the medium term.IV.Political economy challenges and learning curveLesson 8:A
151、carbon price can be politically challenging to implement,but strategies exist to overcome political hurdles.The design of the recycling of the carbon revenue is an essential part of carbon pricing.Lesson 7:In systems that are constrained by a lack of generation capacity,a carbon price may lead to hi
152、gher electricity costs without achieving emission reductions.Recommendation 8:The generation and the recycling of carbon revenues should be part of the design from the early stages.Regular consultations with stakeholders at design,assessment,and successive adjustment stages are critical for correctl
153、y anticipating their response,facilitating access to alternatives,building political acceptance,and agreeing on measures to address undesired impacts and deliver development co-benefi ts.Recommendation 7:In capacity-constrained systems,decarbonization eff orts should focus on energy effi ciency and
154、future system development,in particular investment in renewable generation and transmission.When the power sector is centrally planned,a shadow carbon price can be introduced into least-cost optimization-based planning and/or caps based on top-down emission reduction targets can be used to constrain
155、 the models.Carbon Pricing in the Power Sector20Chapters1ContentsExecutive Summary362547Three main questions to guide the choice and the design of CPIs for the power sector in LICs and MICsAs this report indicates,optimal design of CPIs for LICs and MICs is still evolving.The diversity of contexts i
156、n which CPIs would be applied in these countries,along with limited experience in implementing an ETS or a carbon tax in their power sectors,complicates the creation of prescriptive guidelines for selecting and designing a CPI to support decarbonizing the electricity services crucial for social and
157、economic development.While some regulation points and design options have already been tested,others remain underexplored despite showing promise for addressing the specific needs and circumstances of these countries.Despite these unknowns,the report offers preliminary and simple guidance to help co
158、untries navigate the decision-making process around designing the carbon pricing instrument suitable for decarbonizing their power sector and addressing global GHG emissions.This guidance is framed around three broad questions,encouraging policy makers and practitioners in each LIC and MIC country t
159、o reflect on their unique circumstances and develop tailored responses to these questions.Question 1:When introduced in the power sector,would the carbon pricing instrument need to cover other sectors as well?The answer to this question has significant consequences,influencing the range of potential
160、 regulation points and determining where emission reductions occur and who bears the costs.If other sectors(besides the power sector)are included,then upstream(on fuels used in thermal plants)and downstream(on consumers)regulation points are natural candidates for a unified CPI that covers both the
161、power sector and other sectors.Conversely,if only the power sector is considered,applying a CPI upstream only on fuels consumed by the power sector offers no advantage over applying it at the generation stage.Additionally,applying a CPI only to electricity consumption,without covering other forms of
162、 energy consumed,could create perverse incentive to shift from electricity to more carbon-intensive fuels.Thus,in the latter case,“internal”points such as generation,dispatch,and distribution stages might be the preferred choices.Executive summary21Chapters1ContentsExecutive Summary362547In the case
163、 of an ETS,if an ETS covers multiple sectors,power entities in the ETS could buy allowances from other sectors with lower GHG abatement costs or sell allowances if emission reductions are cheaper within the power sector.This flexibility could lead to a different distribution of actual emissions redu
164、ctions,financial flows(in investment and in payments),and decommissioning of emitting facilities compared to an ETS applied solely to the power sector with a similar emissions target.Question 2:Considering the circumstances of the countrys power sector(such as energy mix,challenges,power sector stru
165、cture),who are the stakeholders along the value chain that can respond most effectively to a carbon pricing instrument?If the energy mix is diversified with various technologies,an ETS or a carbon tax applied at the generation stage can lead to significant emissions reductions,by influencing investm
166、ent decisions,improving plant efficiency,or altering the merit order.However,in a hydro-dominated system reliant on flexible thermal during the dry season,a CPI at the generation stage may only achieve modest efficiency gains and increase the cost of electricity without changing the merit order.5 Si
167、milarly,in a coal-dominated system experiencing load-shedding,a CPI at the generation stage might not lead to substantial quantity responses,but could encourage the purchase of offsets if allowed.Downstream responses may be limited by compensation mechanisms or rate regulations aimed at preventing p
168、olitically unacceptable price increases,especially when the quality of service is poor.Nonetheless,in such configurations,stakeholders at the distribution or consumption stages might have options to respond,especially in coal-dominated systems,such as signing bilateral contracts with renewable energ
169、y independent power producers,which can be crucial for project financing,or investing in energy efficiency,storage,or demand management.Addressing this question helps identify the most effective regulation points along the value chain for implementing an effective CPI.5 It might have a longer-term i
170、mpact on investment on pumped or battery storage,but only to the extent that the proper capacity mechanism allows.Carbon Pricing in the Power Sector22Chapters1ContentsExecutive Summary362547Question 3:What side effects can result from the interaction of an ETS or a carbon tax applied at a given stag
171、e of the value chain with the existing sector regulations and other policy instruments?How can these interactions be addressed to ensure consistency with other policies?Investigating this question is crucial as it allows policy makers to anticipate potential conflicts with other policies aimed at ad
172、dressing specific challenges faced by LICs and MICs,such as ensuring affordable access to electricity for low-income users.The significance of these side effects can vary greatly depending on the specific circumstances of the country.For example,in a coal-dominated system with a CPI at the generatio
173、n stage,the resulting electricity price increase would primarily generate revenue for the government,which could be used for compensatory measures.In contrast,in a hydro-dominated system,it would mostly boost the revenue of the hydropower plants.6Side effects may also arise from interactions with ot
174、her policy instruments,such as feed-in tariffs,renewable energy portfolios,green certificates,programs to decommission old polluting plants,energy efficiency certificates,and demand response mechanisms.If not properly considered,these interactions can diminish the CPIs effectiveness,such as by drivi
175、ng allowance prices close to zero in an ETS.The answer to this question is essential for deciding what kind of CPI to implement,as well as its design and calibration(i.e.,the level of carbon tax,the ambition of the caps,etc.).It also informs how to allocate carbon revenues and design the appropriate
176、 recycling mechanisms to align new decarbonization goals with existing policies addressing other development challenges.Elements to address this question are present in different parts of the report,in particular in the fifth section,on how to design a CPI to ensure effectiveness,minimize undesired
177、impacts,and maximize co-benefits.6 In a merit orderbased dispatch,all generators usually receive the clearing price defined by the cost of the marginal plant.When adding a carbon tax,the clearing price is increased when the marginal plan is a flexible thermal plant,which is frequently the case.In a
178、coal-dominated system,the increase of the revenue received by the coal plant corresponds roughly to the carbon tax,which is also paid by the coal plant thus collected by the government.In a hydro-dominated system,the increase of the revenue received by the hydropower plants resulting from the increa
179、se of the clearing price is not collected by the government because hydropower is zero carbon and thus does not pay any carbon tax.For a more detailed discussion,see“Impact on the inframarginal rent received by the dispatched generators in the spot market”in Section 3.3.2 and Figure 6.1,“Infra-margi
180、nal rent and revenue collection from carbon tax in the case of hydro-dominated and coal-dominated systems.”Executive summary23Chapters1ContentsExecutive Summary362547Introduction1.1.Introduction1.1 Impetus for this report7 Low-and middle-income countries(LICs and MICs)are defined by the World Bank a
181、s countries that have gross national income per capita below USD 13,845 per year(in Fiscal Year 24)(Hamadeh,Van Rompaey,&Metreau,2023).8 Renewable energy goal is to“triple the worlds installed renewable energy generation capacity to at least 11,000 GW by 2030.“Energy efficiency goal is to“double the
182、 global average annual rate of energy efficiency improvements from around 2%to over 4%every year until 2030”(COP28,2023).9 According to Fay et al.(2015),low-carbon development pathways require action on four pillars of a zero-carbon strategy:(i)decarbonization of electricity,(ii)massive electrificat
183、ion and a switch to cleaner fuels,(iii)improved efficiency and reduced waste in all sectors,and(iv)improved carbon sinks such as plants and soils.10 A more detailed indicative list of the range of possible decarbonization policy instruments can be found in the theory of change(Figure 1.1).There is a
184、n urgent need for action.Demand for electricity in low-and middle-income countries(LICs and MICs)is rapidly growing.If they are to meet the challenge of serving this demand and providing the electricity needed for socioeconomic development,they must increase power generation.7 If this is to occur wi
185、thout making it impossible for the world to meet its objective codified in the Paris Agreement on Climate Change,countries must rely on low-carbon power.Electricity is the lynchpin of meeting the Paris Agreement.The Paris Agreement is aimed at limiting the increase in the global average temperature
186、to well below 2C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5C above pre-industrial levels.In 2023,at the 28th Conference of the Parties(COP28),the world agreed to transition away from fossil fuels,the main driver of climate change.Moreover,130 countries
187、 endorsed a global pledge on renewables and energy efficiency,which set targets to triple installed global capacity of renewable electricity and double the rate of energy efficiency improvements by 2030 compared to 2023.8 Electricity generation is the largest source of energy-related greenhouse gas(
188、GHG)emissions worldwide(IEA,2021e).The global power sectors strong dependence on fossil fuels has made it the single largest source of CO2 emissions,contributing 42%of global emissions (IEA,2023g).As well,most projected low-carbon development pathways rely on electricity as the major source of power
189、.Several cost-competitive technologiesincluding hydropower,wind,solar photovalic(PV),nuclear power,electricity storage,and smart gridsnow offer alternatives to fossil fuel generation.As a result,low-carbon development pathways tend to include both the rapid decarbonization of electricity supply and
190、mass electrification of energy services,a step that would increase electricity demand even further(Fay et al.,2015).9LICs and MICs play an increasing role in emissions.Historically,high-income countries(HICs)produced most energy-related GHG emissions,but the landscape is rapidly changing.Following a
191、 model set by several HICs,LICs and MICs have built significant fossil fuel generation capacity to meet growing electricity demand,which has increased the absolute emissions of the power sector(World Bank,2022e).While some LICs and MICs rely primarily on hydropower and therefore their power sectors
192、make minimal contributions to GHGs,others are on the list of the worlds biggest emitters in absolute terms.A growing number of developing countries have announced commitments to carbon neutrality by mid-century.These countries are considering a range of policies to decarbonize their power sectors.Th
193、eir aim is to promote the uptake of low-carbon electricity,increase energy efficiency,and phase down fossil fuels.To achieve these goals,reform to existing policy instruments as well as new instruments,including standards,quotas,pricing,fiscal and subsidy instruments,as well as financing mechanisms
194、and public programs to support energy efficiency,technological innovation,and compensation for early retirement of carbon intensive assets may be necessary.10 1.Introduction25Chapters1ContentsExecutive Summary362547The number of LICs and MICs embracing carbon pricing instruments(CPIs)is also growing
195、.Part of a wider package of policies supporting a transition to a low-carbon electricity system,CPIs are in varying stages of being considered,designed,or implemented in these countries.CPIs such as carbon taxes and emissions trading systems(ETSs)are intended to create an economic disincentive to GH
196、G-emitting activities,in particular production and use of fossil fuelbased energy,making lower-carbon options more competitive than fossil fuel technologies(see the theory of change in Section 1.2).To date most CPIs have been implemented in HICs,which tend to have different types and severity of cha
197、llenges in adopting CPIs as well as having power systems that are structurally different from those in LICs and MICs.11 There is limited global experience and research examining the functioning and effectiveness of carbon pricing in LICs and MICs.11 For example,some challenges to low-emissions elect
198、ric power sector development in LICs and MICs include continuous growth in electricity demand and insufficient supply,lack of affordable financing,constraints in transmission and distribution,lack of cost-reflective tariffs,and historical cost-effectiveness of fossil fuel-based power generation.In m
199、any LICs and MICs,these challenges have contributed to a strong legacy of fossil fuel-based generation assets and thus a fossil fuel-dominant power mix.12 “Reconciling Carbon Pricing and Energy Policies in Developing Countries Integrating Policies for a Clean Energy Transition.”PMR report,The World
200、Bank,de Gouvello,C.,Finon,F.,Guigon,P.,226 p.This report offers needed information for policy makers,practitioners,and related stakeholders.It draws on the range of work related to carbon pricing in the power sector undertaken through the World Bank Partnership for Market Readiness(PMR)and Partnersh
201、ip for Market Implementation(PMI)programs,a previous report,12 existing literature,expert interviews,and case studies.Box 1.1 describes the PMR and PMI work.This report was written primarily for energy policy makers,practitioners,and related stakeholders in LICs and MICs.For this audience the report
202、 identifies lessons emerging from burgeoning experiences in low-to medium-income countries about the role a CPI can play in the electric power sector.At the same time,the report is relevant to policy makers working on wider climate and socioeconomic policies.Policy makers and practitioners should us
203、e this report to identify factors to consider when designing and implementing CPIs,particularly in relation to the objectives they aim to achieve by adopting a carbon tax or ETS,the specific decarbonization challenges they face,and structure of their domestic power sector.Carbon Pricing in the Power
204、 Sector26Chapters1ContentsExecutive Summary362547Partnership for Market Readiness and Partnership for Market Implementation12 Convened by the World Bank,the PMR supported emerging economies and developing countries with their readiness to assess and design CPIs to facilitate the reduction of emissio
205、ns from 2011 to 2021.The PMR provided funding and technical assistance to 23 countries.For example,work in China focused on the inclusion of the electricity sector of the national ETS.PMR work in Chile and South Africa focused on the design of a carbon tax.Argentina and Thailand country programs inc
206、luded work to support RE uptake through certificate schemes,while Trkiye piloted a monitoring,reporting,and verification(MRV)system in the electricity sector through PMR.The PMI,launched at COP25 Madrid,is the successor program of the PMR and aims to assist countries mainly to implement carbon prici
207、ng instruments aligned with their development priorities.The PMI participant countries are presently Bangladesh,Botswana,Chile,China,Colombia,Guinea,Indonesia,Kazakhstan,Malaysia,Mexico,Montenegro,Pakistan,Panama,Senegal,Trkiye,Ukraine,and Viet Nam(PMR,2021).Currently,the PMI implementation support
208、is provided for ETS implementation in Colombia,Mexico,and Trkiye.The program is helping in expansion of the ETS and just transition actions in Indonesia;implementation and sophistication of the CPI mix and articulation of just transition with carbon pricing instruments in Chile;strengthening and exp
209、ansion of the ETS in Kazakhstan;broadening and deepening of the ETSin China;and implementation of a pilot crediting programin Viet Nam.This report is structured as follows.This introductory chapter describes the scope of the study,which is framed around a theory of change,literature gaps that the re
210、port aims to address,and the methodology used.The rest of Chapter 1 presents the scope and methodology of the report.Chapter 2 provides an outline of the key features,priorities,and trends of power sectors in LICs and MICs and policy instruments that can be used for low-emissions electric power sect
211、or development.Next,Chapter 3 introduces CPIs as one category among several policy instruments that governments can mobilize to regulate GHG emissions.It explores the design of CPIs and their regulation point and potential roles in the power sector in LICs and MICs,building on the work done or under
212、way in PMI member countries to which this report intends to contribute.An assessment of the potential impacts of pricing carbon in different power sector contexts follows in Chapter 4,focusing on a shift toward lower-carbon supply mixes,influencing dispatch in favor of lower carbon plants,a shift to
213、ward less carbon-intensive wholesale electricity purchase,a shift in consumption patterns,and an intake of new government revenues.(All of these elements are mapped in the theory of change.)The report concludes,in Chapter 5,with a set of lessons learned and recommendations that LICs and MICs conside
214、ring or designing carbon prices can use to make their CPIs more successful.13 Partnership for Market Implementation website:https:/pmiclimate.org/BOX 1.11.Introduction27Chapters1ContentsExecutive Summary3625471.2 Scope of report and theory of change14 For example,governments can incorporate an estim
215、ate of the social cost of carbon into least-cost supply models that inform planning decisions.A shadow carbon price does not introduce a direct carbon cost to the sector;however,the effect may be that an option is chosen that is more costly in the absence of the carbon price.Companies can also apply
216、 a social cost of carbon to internal decisions,called internal carbon pricing.Carbon pricing lowers emissions by affecting the incentives of power sector agents.These agents are responsible for a series of investment and consumption decisions made along the value chain of the power sector that deter
217、mine GHG emissions of the power sector.In the absence of carbon pricing,these agents respond to a range of incentives that result from the market and fiscal regulations that apply at each of these stages of the value chain.There are two types of carbon prices,direct and indirect.Indirect carbon pric
218、ing instruments,such as fuel excise taxes,are not usually implemented to achieve climate outcomes and the incentives to reduce GHG emissions they create are not directly proportional to the relative emissions associated with the activities impacted by these policies (World Bank,2024b,p.52;see also W
219、orld Bank,2023f;World Bank,2022g).Direct carbon pricing instruments apply a price incentive proportional to the GHG emissions generated by a given product or activity.These include carbon taxes,ETSs,shadow carbon prices,and carbon crediting mechanisms.Shadow prices are applied to power system planni
220、ng and dispatch without directly adding cost to the sector.14 Relatedly,carbon crediting mechanisms can provide measurable and verifiable emission reductions from certified projects,for example by providing additional income to low-carbon electricity generators for their role in reducing GHG emissio
221、ns that would have been emitted in their absence.Carbon taxes and ETSs,which are the most common forms of direct CPIs implemented in the world today,are the focus of this report.This report offers insights about the potential impact of carbon taxes and ETS in LICs and MICs.Specifically,it examines t
222、he impacts of carbon taxes and ETSs along different parts of the power sector value chain in LICs and MICs and factors that policy makers should consider when designing such instruments.The complexity of power sector value chains,markets,and regulatory environments can generate confounding incentive
223、s,rules,and constraints that condition behaviors and investment decisions of stakeholders.These factors can make it difficult to determine the impact of an existing CPI or to forecast the impact of a future CPI.To address this need,this study disentangles the various factors,offering important consi
224、derations for LICs and MICs when adopting and designing a carbon tax or an ETS.The theory of change suggests how CPIs can drive GHG reduction.The theory of change constructed for this study is shown in Figure 1.1.The research reported here tests this theory of change across multiple LICs and MICs,th
225、ereby illuminating the role of carbon pricing in the wider transition to a more sustainable world.1.2.1 Energy policy objectives for power sectors in low-and middle-income countriesCPIs are implemented in the context of other,vital objectives.LICs and MICs pursue development priorities and objective
226、s in their power sectors as well as decarbonization.Decarbonizing the power sector in LICs and MICs therefore requires integrating other objectives and thus designing policy regulations and instruments,including CPIs,that can maximize synergies while mitigating potential conflicts(de Gouvello,Finon,
227、&Guigon,2020).The theory of change lists such objectives in the left-hand box.They are described in more detail in the following paragraphs.Carbon Pricing in the Power Sector28Chapters1ContentsExecutive Summary362547FIGURE 1.1Theory of change on the role of carbon pricing in the power sector in low-
228、and middle-income countriesEnergy policies objectives for LICs and MICsKey policy instruments to address corresponding challenges with implications for decarbonizationDevelopment outcomes from eff ective power decarbonization Global public good of avoided or reduced GHG emissions Delivery of aff ord
229、able and clean energy services Health benefi ts from less air pollution Fiscal revenue optimization Low-carbon power support decarbonizing economy through electrifi cation of transport,buildings,industry Potential energy security and balance of trade benefi ts(if reduced reliance on imported fuel)Te
230、chnology innovation Macroeconomic benefi ts Universal access:ensure universal access to effi cient and clean energy services(SDG7)Aff ordability and competitiveness:ensure that energy is aff ordable for low/middle income households and supports competitiveness of industry Energy security:ensure that
231、 energy supply is reliable(including resilience to climate change),matches the demand with anticipation and mitigates exposure to dependency and crisis Local environment and health protection:mitigate negative externalities of energy supply and consumption on local environment and health(via air pol
232、lution)Climate change mitigation:reduce contribution to increase of GHG concentrations in the atmosphereIntermediate outcomes from eff ective carbon pricing in power7Critical assumptions:1.Complementary actions selected are pursued in an appropriate sequence or in parallel to form a virtuous cycle t
233、hat increases political appetite for enhanced ambition over time(World Bank,2023c).2.Interactions of carbon pricing with other policies are well managed,and the carbon price is strong and predictable enough to infl uence decision-making.3.Carbon price is factored into the decisions around investment
234、s in new generation and retirement of existing power plants(explicit assumption for government agencies).4.Electricity system is designed so that a direct carbon price is fully refl ected in the“price off er”or“on-grid”tariff of a generator in the dispatch mechanism.Dispatch mechanism operates based
235、 on merit order.5.Carbon cost is passed through to retail prices.The elasticity of demand determines the responsiveness of consumers to price signals.6.Carbon pricing provides revenues to the government,which can be used to reduce more ineffi cient taxes.7.Energy security can be improved by relying
236、more on domestic sources of energy.8.Technological innovation,such as the adoption of new storage technologies,is required to operate a future net-zero electricity system with high shares of variable renewable energy sources.8Command&control instruments:includes energy effi ciency standards,emission
237、s standards,mandates and targets,power plant decommissioning programs,etc.Carbon Pricing:Fossil fuel subsidy reforms to reduce“negative”carbon price Indirect carbon price via fuel taxes(e.g.fuel excise duty)Carbon crediting mechanisms Direct carbon pricing(carbon tax or similar,emissions trading sys
238、tem)Shadow price or forecast direct carbon price in power sector system planning&operationsOther pricing instruments:incudes PPAs,Bilateral contracts,Feed in Tariff s,Auctions,trading mechanism for wholesale markets,price ceilings,bands and fl oors,tariff design including ToU,compensation for Demand
239、 Response,other beyond the meter resources,etc.Other fi scal instruments:includes taxes,subsidies,levies,and feebatesOther quantity instruments:includes Power Generation Rights,Energy Savings&Green Certifi cates,Renewable Energy Portfolio StandardsTargeted fi nancing instruments:fi nancing mechanism
240、s to develop the energy generation facilities and infrastructure,green funds and guarantee funds whenever relevant,etc.Public programs to support just transition:include public funded R&D programs and pilots,and other enabling components(i.e.,capacity building,MRV,.)as well as schemes to protect wor
241、kers vulnerable to job losses and support for transitioning out of fossil fuel for regions which local economy is highly dependent on the production and local use of such resources.1Response to carbon price incentive Shift toward lower-carbon generation mixes through decisions on investments and ret
242、irements of power sector assets,and improved energy effi ciency and fuel adjustments in existing power plants Shift of dispatch towards lower-emissions power generation sources by changing merit order and accompanying fl exibility resources Shift toward less carbon intensive wholesale electricity pu
243、rchases by ditributors,retailers and/or large customers Shift towards less carbon intensive electricity consumption patternsby changing time of consumption,improving effi ciency or behind the meter renewablesNew government revenue New revenue from tax or auctions of emissions allowances used for env
244、ironmental and social objectives,facilitate response to carbon price signal and/or reduce reliance on other(less effi cient)revenue sources34562FIGURE 1.1Theory of change on the role of carbon pricing in the power sector in low-and middle-income countries1.Introduction29Chapters1ContentsExecutive Su
245、mmary362547First,most LICs and MICs have not yet achieved universal and affordable access to electricity.The Sustainable Development Goals(SDGs)reflect this objective in that SDG#7 calls for“universal access to affordable,reliable,sustainable,and modern energy services”and SDG#1:eliminate poverty;SD
246、G#4:quality education;SDG#8:decent work and economic growth;SDG#9:industry,innovation,and infrastructure;and SDG#11:sustainable cities and communities all rely on an expansion of the electric power sector(IEA,IRENA,UNSD,World Bank,WHO,2022).LICs and MICs need to continue to invest in expanding the g
247、rid or providing off-grid solutions to serve populations and activities located in peri-urban and rural areas.For the power sector to provide a platform for economic and social inclusion,it must provide universal access to electricity that is affordable to all population tiers(Foster&Anshul,2020).In
248、 Sub-Saharan Africa,about 74%of the population15 could not afford an extended bundle of energy services(IEA,2022b),the level required for a refrigerator,16 which can make new investments into the power sector difficult to finance and operate sustainably.Second,many LICs and MICs struggle with securi
249、ty of supply.That is,electricity generation is not consistently adequate to cover system demand or delivered at the voltage and frequency(typically 50 or 60 hertz Hz)that will prevent damage to electrical equipment.Security of supply has three major components:Energy security:Countries must secure a
250、 long-term supply of primary energy.Those that do not may experience higher prices and volatility and may even have to ration electricity as a result.Some countries rely heavily on imported fuels,which represents a threat to security even if the suppliers are political allies(Glachant,Joskow,&Pollit
251、t,2021,pp.66-67).15 An essential bundle of energy services includes four lightbulbs operating for four hours per day,a television for two hours per day,and a fan for three hours per day.16 An extended bundle includes four lightbulbs operating for four hours per day,a fan for six hours per day,a radi
252、o or television for four hours per day,and a refrigerator.17 It is known whether there is sufficient capacity to meet demand,and rolling blackouts can therefore be planned ahead,with which end users will be affected agreed ex ante.Countries usually set an acceptable average number of hours of rollin
253、g blackouts(see Chapter 3 of Glachant,Joskow,&Pollitt,2021).Generation adequacy:Sufficient firm generation capacity must be installed to ensure peak demand can be met to sustain economic growth;blackouts,even planned and rolling ones,represent a threat to growth and well-being(Glachant,Joskow,&Polli
254、tt,2021,p.67).17 System reliability:The system operator must be able to act in real time to balance the system and ensure frequency stability in cases of a sudden increase or decrease in demand or a sudden loss of generation.Deviating from the acceptable frequency levels will automatically trigger a
255、n“uncontrolled blackout or system collapse”(Glachant,Joskow,&Pollitt,2021,pp.67-68).Natural and geopolitical shocks are imperiling energy security,generation adequacy,and system reliability.Examples of these disruptions are:natural threats such as storms,floods,droughts,etc.;technological threats su
256、ch as unpredicted equipment and infrastructure failures;human-caused threats such as accidents,but also terrorism,conflict,and cyberattacks;and disruptions to clean energy supply chains;for example,of critical minerals.Building electricity systems resilience to these risks is key to ensuring energy
257、security and reliable services.Power sector resilience can be defined by“the ability to anticipate,prepare for,and adapt to changing conditions and withstand,respond to and recover rapidly from disruptions to the power sector through adaptable and holistic planning and technical solutions”(National
258、Renewable Energy Laboratory,2019).Carbon Pricing in the Power Sector30Chapters1ContentsExecutive Summary362547Financial viability is a crucial foundation for such resilience.Yet failures of markets and governments can put such financial viability out of reach.Underlying these challenges,LICs and MIC
259、s power sectors frequently face failures of markets and governments.Political influence in tariff setting combined with inefficiencies in delivery and revenue collection has,in some cases,meant that power sector utilities did not recover their costs,which undermined the financial viability of LICs a
260、nd MICs power systems(Kapika&Eberhard,2013).Thus power sector agents had difficulty recovering their investment and operating costs,which means they may not be able to continue to operate and maintain their assets or ensure that any new assets they need are attractive to investors.To achieve financi
261、al viability of the sector,regulated wholesale and retail tariffs must be set such that tariffs are cost reflective,but this is not the case in some LICs and MICs(Trimble,Masami,Arroyo,&Mohammadzadeh,2016).This challenge is often exacerbated by high costs of capital in LICs and MICs,which can be bet
262、ween two and three times higher in emerging and developing economies than in advanced economies(IEA,2023).Certain utilities,as a result,run large deficits that limit their own balance sheets and creditworthiness as well as their service and security of supply.(Trimble,Masami,Arroyo,&Mohammadzadeh,20
263、16;Kapika&Eberhard,2013).They can also discourage new investments due to the risk that the asset will not receive the required return on investment over its operational life and can also increase the risk-adjusted rate of return required by investors.A lack of credible off-takers and counterparties
264、for power purchase agreements(PPAs)have weakened the investment climate for new infrastructure in many LICs and MICs(Eberhard,Gratwick,Morella,&Antmann,2016).Mitigating climate change while protecting the local environment and public health,principally by reducing air pollution and GHG emissions fro
265、m fossil fuel generation,represents an additional challenge.In general,the global power sector has a strong dependence on fossil fuels and thus has become the single largest source of CO2 emissions,contributing 42%of global emissions(IEA,2023).Historically,most energy-related GHG emissions have been
266、 produced in high-income nations,but the landscape is rapidly changing.Following a model set by several high-income countries,significant fossil fuel generation capacity has been built in LICs and MICs to meet growing electricity demand,which has increased the absolute emissions of the power sector(
267、World Bank,2022a).While some LICs and MICs contribute little to GHGs,in some cases because they rely primarily on hydropower generation,rapidly growing LICs and MICs have now joined the list of the worlds biggest emitters in absolute terms.While instruments designed to support decarbonization of the
268、 power sector are the focus of this report,the sector also has other non-GHG-related environmental impacts that contribute to overall environmental sustainability,and that may also be subject to national policies or political priorities.Beyond carbon emissions,the burning of fossil fuels also releas
269、es non-GHG pollutants such as NOx,SO2,PM2.5,and PM10.These pollutants can cause damage to human health(a particular issue in rapidly urbanizing LICs and MICs)and harm to the environment and ecosystems.Non-fossil fuel generation technologies have their own challenges.For example,the building and oper
270、ation of hydropower plants can have impacts on the ecosystem and biodiversity around the hydropower plant,including fish and other species living and depending on the water source.Meanwhile,nuclear power plants must store the radioactive residue to protect humans and wildlife from radioactive exposu
271、re and damage.1.Introduction31Chapters1ContentsExecutive Summary3625472017201820192020202120221501209060300125863453146Source:Data sourced from Net Zero Tracker(2023).Note:Sum of the countries for which the announced targets are defi ned as climate neutral(ity),climate positive,GHG neutral(ity),net
272、zero,zero carbon,zero emissions,carbon negative.Status dates that were blank have been counted in 2022.1.2.2 The need for new policy instruments to achieve the new decarbonization goals in the power sector Most governments of LICs and MICs have now acknowledged the need to move toward carbon neutral
273、ity.Most governments endorsed the global pledge to triple installed global capacity of renewable electricity by 2030.As illustrated in Figure 1.2,between mid-2019 and 2022,the number of countries that had announced some type of commitment to carbon neutrality by 2070 increased from five to over 140,
274、and the portion of the global economy covered by net zero targets has expanded almost sixfold to 91%(Net Zero Tracker,2023).These new commitments translate into adding decarbonization as a new policy objective besides the former ones that have driven the energy policies in LICs and MICs to date.Many
275、 governments are taking action in line with their commitments.Most have also developed long-term mitigation strategies and submitted Nationally Determined Contributions to the United Nations Framework Convention on Climate Change with political commitments to deploy RE.They are incorporating these c
276、ommitments and targets into power sector plans and the underlying policies to extend finance and procure low-carbon generation capacity,mandate energy efficiency improvements,etc.Some governments,in particular in fossil fuelproducing countries,are also implementing“just transition”measures that aim
277、to protect businesses and workers vulnerable to job losses caused by the green energy transition.Carbon pricing policies can make a valuable contribution to a broad package of green energy policies.Section 2.3 describes this broader package in more detail,and other components are acknowledged in var
278、ious places in this report.CPIs are no silver bullet.The theory of change lists,in the second box from the left,common policies that affect the emissions of the power sector,situating carbon pricing within a broader package of policy instruments that can be implemented by LICs and MICs to transition
279、 to a low-carbon electricity system.The mix of policies governments implement should be tailored to domestic circumstances,priorities,and needs.FIGURE 1.2Number of countries that have announced commitments to net-zero/carbon neutralityCarbon Pricing in the Power Sector32Chapters1ContentsExecutive Su
280、mmary362547Increasing the cost of electricity generated from fossil fuels is designed to impact the value chain of the power sector.Putting a price on GHG emissions in the power sector through a carbon tax or ETS increases the marginal cost of generating electricity from fossil fuels and/or the cost
281、 of using it.The hypothesized impact of this change is illustrated in the center of the theory of change in light blue.In theory,the increased cost both acts as an incentive for energy conservation and low-carbon consumption and makes zero-and lower-carbon technologies more profitable to invest in a
282、nd operate than fossil fuel technologies.This report focuses on the decision processes that impact emissions along the value chain of the power sector and hypothesizes that a CPI may have four intermediate outcomes directly affecting specific stages of the value chain:A shift toward lower-carbon gen
283、eration mixes because it creates price signals that increase investment in lower-carbon generation capacity,retirement of carbon-intensive power plants,and investment in energy efficiency or fuel switching18 within existing power plants.This outcome is mostly a medium/long-term impact on future emis
284、sions.A shift of dispatch toward lower-emissions power generation sources by increasing the marginal cost of carbon-intensive generation,making it less competitive and shifting the merit order used to ensure that the lowest-cost power plants to meet demand are also less carbon intensive.This outcome
285、 has a short-term impact on current emissions and can also influence longer-term investment and retirement decisions.A shift toward less carbon-intensive wholesale electricity purchased by distributers,retailers,and in certain cases by large final customers,by signing medium-to long-term PPAs and/or
286、 signing bilateral contracts directly between wholesale 18 Such as using biomass at coal generators.purchasers and electricity producers.This outcome can lead to a short-to long-term impact by increasing market shares of renewable energy and removing some low-carbon capacities from markets and reduc
287、ing availabilities of fossil fuel generation.A shift toward less carbon-intensive consumption patterns,in terms of either the quantity or the timing of electricity consumed,in response to price signals.This outcome can lead to both a short-term impact on current emissions by shifting to less carbon-
288、intensive generation hours as well as a longer-term impact by influencing consumers investment decisions in energy efficiency or behind-the-meter distributed renewable energy and storage.While not directly affecting the decision processes that impact emissions,a fifth intermediate outcome is also in
289、fluential enough to be a subject of this report:An intake of new government revenues,through either carbon tax yields or the proceeds of emission allowance auctions.The outcome in terms of decarbonization of the power sector depends on how these new carbon revenues are recycled in the economy.Such r
290、evenues can be used to generate complementary incentives or to enable change to short-term behaviors or long-term investment.The rationale behind each of these outcomes is discussed in detail in Section 3.Whether these outcomes are realized in practice will depend on a range of factors.These include
291、 market design and regulation of the power sector and the design of the CPI itself.The point of regulation along the value chain and the degree to which costs are passed through that value chain are important.The power sector value chain involves a wide range of stakeholders who are already exposed
292、to a variety of incentives,1.Introduction33Chapters1ContentsExecutive Summary362547including existing regulatory mandates or restrictions.Moreover,LICs and MICs power sectors vary considerably in terms of regulation,structure,private sector participation,and degree of competition(Foster&Anshul,2020)
293、.How a CPI is designed and its interaction with the existing market incentives and regulatory structures in a jurisdiction will have a direct influence on its impact.Section 4 assesses the potential impacts of pricing carbon in different power sector contexts.1.2.3 Development outcomes from effectiv
294、e power decarbonizationHypothesized development outcomes of a transition to a low-carbon electricity system are both positive and negative.These outcomes are outlined in the furthest right-hand box of the theory of change.On the one hand,the avoided GHG emissions will contribute to mitigating climat
295、e change,the effects of which are disproportionately felt in LICs and MICs.As well,a lower-carbon electricity supply will generate less air pollution,leading to significant health benefits(Hamilton et al.,2021).If the transition leads to an increased reliance on domestic RE resources,rather than imp
296、orted fuels,it may have energy security and macroeconomic benefits(IRENA,2016).Furthermore,the increased revenue intake from carbon taxes and ETS auctions could improve optimization of government revenues.On the other hand,pursuing the decarbonization of the power sector may also make the achievemen
297、t of other development objectives more difficult.Electricity could become more expensive,hindering affordability.Renewable energy is intermittent while fossil-fuel based energy is dispatchable,and low-carbon systems may involve reducing the use of domestic fossil fuels resources and associated econo
298、mic activities,negatively affecting energy security.Whether these positive and negative development outcomes emerge will be highly context specific and will depend on the ability to design policy instruments,in particular CPIs,that can accommodate policy objectives that are not climate related(de Go
299、uvello,Finon,&Guigon,2020).CPIs must be designed to maximize positive outcomes.Given the wide range of confounding factors,it can be difficult to isolate the causal role that a CPI will have in these broader development outcomes.To support this exercise,the theory of change lists a series of assumpt
300、ions to be fulfilled for the expected intermediate outcomes of carbon pricing to be realized at the bottom.In shedding light on the theory of change and its assumptions,this report provides insights into the enabling conditions required for countries to achieve their desired outcomes from carbon pri
301、cing.1.3 MethodologyThis report uses a two-part methodology.Key literature pertaining to different contexts of PMI countries was reviewed,and case studies of select countries across different income levels and contexts were conducted.The case studies are based on a desk review of literature and cons
302、ultation with various power sector and carbon pricing experts in governments,regulatory bodies and utilities.Details for each of these approaches and how they have informed this report are outlined in the following sections.The overarching goal is to answer the central question,designed to test the
303、hypothesis provided in the theory of change:What role can direct CPIs,specifically carbon taxes and ETSs,play in supporting decarbonization along the different parts of the power sector value chain in LICs and MICs?1.3.1 Literature reviewThe documents reviewed were selected based on their relevance
304、to three key topics:pricing issues in the power sector,low-emissions development in the power sector,and carbon pricing in general and as relevant to power sector in both planning and dispatch.Annex A includes a short summary Carbon Pricing in the Power Sector34Chapters1ContentsExecutive Summary3625
305、47and description of the main sources.Based on the literature review undertaken,gaps in the literature were identified with respect to carbon pricing in the power sector in LICs and MICs,presented in Box 1.2.This report aims to shed light on these gaps with particular emphasis on four topics.The mec
306、hanisms through which carbon pricing shifts incentives along the value chain in the context of different power sector structures.The key preconditions for carbon pricing to have the desired effect in the power sector and how this aligns with the current power sector contexts in LICs and MICs.Potenti
307、al trade-offs with wider power sector objectives,associated policies,and power sector characteristics in LICs and MICs that can constrain the key role literature indicates CPIs can play in driving cost-effective decarbonization.How carbon pricing can be designed to fit within a package of instrument
308、s that together can contribute to energy sector development objectives(per the theory of change),with trade-offs managed through complementary measures.1.3.2 Case studiesThe four main case studies,China,Colombia,Kazakhstan,and South Africa,capture a range of lessons learned from carbon pricing imple
309、mentation in the power sector in LICs and MICs.These countries cover a broad range of power sector characteristics common in other LICs and MICs(e.g.,state-owned monopoly power utility,high coal reliance,and issues with affordability and security).Two of the countries have carbon taxes and two have
310、ETSs and Colombia has plans to adopt an ETS.(See Table 1.1 for the range of characteristics represented.)These differences allow us to scrutinize the elements that make a CPI successful or not in delivering the five targeted intermediate outcomes in LICs and MICs as well as the interrelation between
311、 CPIs and other development goals and other decarbonization policy instruments.Gaps in the literatureThere are gaps in the literature regarding carbon pricing in the power sector in LICs and MICs.The initial literature review analysis suggests that additional research is needed on how carbon pricing
312、 specifically can fit into the wider power sector policy landscape in LICs and MICs and how it will impact the wider energy policy objectives of these countries,including security and reliability of supply,affordability,access,and resilience in addition to decarbonization.There is also limited resea
313、rch on carbon pricings potential role and its impact on different stages of the value chain in the context of“regulated”or hybrid power sector structures.Literature is limited around how tariff setting can be reformed in LICs and MICs to allow for the carbon pricing signal to pass through to consume
314、rs without negatively impacting on wider power sector development objectives(e.g.,affordability)and how carbon pricing can help shift the investment landscape in LICs and MICs.The role of carbon pricing in incentivizing demand-side efficiency or shifts in the timing of consumption is also not well e
315、xplored in the literature.Beyond carbon pricing in LICs and MICs,discussions around the broader energy transition in the context of regulated markets is also still quite limited.BOX 1.21.Introduction35Chapters1ContentsExecutive Summary362547TABLE 1.1 Characteristics of selected case studiesJurisdict
316、ionCarbon pricing instrumentElements for which lessons learned from case study are availableChinaImplemented ETS with intensity-based caps and technology-specific benchmarks Hybrid market model that is still undergoing active reform.Power sector dominated by coal that is highly linked with national
317、industrial and economic activity.Power sector capacity overbuilding.ETS based on intensity caps and technology-specific benchmarks for the power sector.ColombiaImplemented carbon tax/planned ETS Power sector already dominated by a high share of renewable hydropower(74%in 2021),with smaller shares of
318、 gas(15%)and coal(5%).However,the reliance on hydro shifts in drought years,when fossil fuel energy generation increases.Reflecting pressure from associated industries,coal and natural gas are exempt from the carbon tax(only until 2025 for coal).Temporary presidential oversight of tariff setting,fol
319、lowing a sustained period of increasing tariff prices and inflation.Considering implementing a dual instrument carbon price with the introduction of the ETS.KazakhstanImplemented ETS Coal and gas dominated electricity system.History of high fossil fuel subsidization.Wholesale electricity has mostly(
320、90%)been traded through bilateral contracts,which circumvents dispatch decisions based on price signals.A single-buyer model was introduced in 2023.History of low tariffs in the power sector,which are not cost reflective.Regulated tariffs that do not allow for carbon cost pass-through in previous ph
321、ases of the ETS.South AfricaImplemented carbon tax The adoption of a carbon tax in a context of high stakeholder opposition.Lack of sufficient generation capacity.High reliance on coal,favored by corporations and associated powerful interest groups.History of subsidized energy.Impact of an indebted
322、state-owned monopoly power utility,which is set to be unbundled.High concerns of the distributional impacts of the carbon tax,with high share of the population living under the line of poverty.Carbon Pricing in the Power Sector36Chapters1ContentsExecutive Summary362547The methodology for the four in
323、-depth case studies(China,Colombia,Kazakhstan,South Africa)included literature and document review as well as interviews.Interviews with local power sector and carbon pricing experts were conducted using semi-structured questionnaires,with questions designed to shed light on the different power sect
324、or structures and challenges in the focal countries and interrogate the impact that carbon pricing has had or is expected to have along the power sector value chain.The project team also interviewed World Bank experts and government and industry practitioners in each country.A full description of th
325、e methods appears in Annex B.Additional smaller case studies complement the four in-depth case studies.These were conducted to provide broader insights into different jurisdictions experiences with carbon pricing.They were based on reviews of secondary literature and served to inform and validate th
326、e theory of change(see Table 1.2).TABLE 1.2 Rationale for smaller case studiesJurisdictionCarbon pricing instrumentElements studiedState of CaliforniaImplemented ETS A CPI applied to both generators and importers of electricity.A mechanism for mitigating the impact of carbon pricing on households,es
327、pecially low-income households.A method to improve the political acceptance of increasing household electricity bills while still preserving the carbon price.ChileImplemented Carbon tax The implementation of an ETS alongside a carbon tax as a means to improve the policy effectiveness.European UnionI
328、mplemented ETS Interface between carbon market and power market.The evolution of free allocation to auctioning of emission allowance allocations for the power sector.The impact that the EU ETS has had on the power sector across member states.Republic of KoreaImplemented ETS The introduction of envir
329、onmental dispatch to prioritize low-carbon generation.The observed limited impact of environmental dispatch due to the low cost of carbon seen by carbon-intensive generators.1.Introduction37Chapters1ContentsExecutive Summary362547Electric power and decarbonization in LICs and MICs 2.2.Electric power
330、 and decarbonization in LICs and MICsThe overall purpose of the power sector in any country is supplying reliable electricity at a fair price to consumers to run electrical appliances and machinery.It thus consists of complex infrastructure that actually delivers the electricity:consumers and multip
331、le organizations,each with different sets of interests,policies,markets,and institutional arrangements.The characteristics of these different elements,and their relationships with one another,strongly influence how different kinds of policy instruments including carbon prices can(or cannot)be implem
332、ented in the power sector and the impact that they have.Carbon pricing,if appropriately designed,can alter the price signal of electricity through the power sector value chain.Price signals can determine the incentives and cash flows between agents in the sector,and thus influence investment,dispatc
333、h,and consumption decisions.This section introduces the specifics of LICs and MICs power sectors and the policy instruments that can be used to decarbonize them.It begins by setting out the core elements of the power sector value chain and its main stakeholders as well as the highly heterogenous power sector structures that have emerged in LICs and MICs.It then presents the high-level challenges a
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