WT93o& ___T. lq9l WORLD BANK TECHNICAL PAPER NUMBER 308 ENERGY SERIES Energy Use, Air Pollution, and Environmental Policy in Krakow Can Economic Incentives Really Help? Seabron Adamson, Robin Bates, Robert Laslett, and Alberto Pototschnig C S g~~~oiler |i L r <3 ~~~~~~~~SteedXworks City Clenter¢°e Pc wer k r ~~~~~~~Boiler ey * Boil~0er ' Huse iHouse Location and Coal Consumption of Largest Sources of Sulfur Dioxide and Particulate Matter, Krakow * 10,000 - 100,000 ton/year * 100,000- 1,000,000 ton/year A >1,000,000 ton/year Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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WT93o&___T. lq9l
WORLD BANK TECHNICAL PAPER NUMBER 308
ENERGY SERIES
Energy Use, Air Pollution, and EnvironmentalPolicy in KrakowCan Economic Incentives Really Help?
Seabron Adamson, Robin Bates, Robert Laslett,and Alberto Pototschnig
C S g~~~oiler |i
L r <3 ~~~~~~~~SteedXworks
City Clenter¢°e Pc wer
k r ~~~~~~~Boiler
ey * Boil~0er ' Huse
iHouse
Location and Coal Consumption of Largest Sources ofSulfur Dioxide and Particulate Matter, Krakow
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(List continues on the inside back cover)
WORLD BANK TECHNICAL PAPER NUMBER 308
ENERGY SERIES
Energy Use, Air Pollution,and Environmental Policy in Krakow
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ISSN: 0253-7494
Cover: In the study, emissions estimates were prepared using the grid shown, covering an area of 540 km2 aroundKrakow. The grid extends further to the east than the west because the prevailing wind blows in that direction.Long-distance background concentrations of pollutants were also estimated.
Seabron Adamson is a consultant with London Economics, London, United Kingdom. At the time work was ini-tiated on this paper, Robin Bates was principal economist in the Pollution and Environmental Economics Division ofthe World Bank's Environment Department. He is currently principal energy economist in the Power Development,Efficiency and Household Fquels Division of the Bank's Industry and Energy Department. Robert Laslett andAlberto Pototschnig are consultants with London Economics.
Library of Congress Cataloging-in-Publication Data
Energy use, air pollution, and environmental policy in Krakow : caneconomic incentives really help? / Seabron Adamson ... [et al.].
p. cm.-(World Bank technical paper, ISSN 0253-7494;308. Energy series)
Includes bibliographica l references.ISBN 0-8213-3494-81. Environmental policy-Economic aspects-Poland-Krak6w.
2. Energy policy-Environmental aspects-Poland-Krak6w. 3. Energypolicy-Economic aspects-Poland-Krak6w. 4. Air pollution-Poland-Krak6w-Taxation. I. Adamson, Seabron, 1964- . II. Series:World Bank technical paper ; no. 308. III. Series: World Banktechnical paper. Energy series.HC340.3.Z9E523 1995333.7'09438'6-dc2O 95-46378
CIP
ENERGY SERIES
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Contents
Foreword ...................... ix
Abstract ...................... xi
Acknowledgments ...................... xii
Abbreviations and Acronyms ...................... : xiii
1. M otivation for the W ork .................................................................. I
Annex 2: The Costs of Emissions Reduction .......................................................... 63
2.1 The Cost of Sulfur Abatement Equipment ................................................................ 63
2.2 The Cost of Switching to Gas ................................................................ 64
2.3 The Sensitivity of Abatement Costs to Discount Rate and Economic Life ..................... 66
Tables
2.1 Ambient Air Quality Standards for General Areas (Micrograms per m3) .................... ...................... 12
3.1 Scenario Key ................................................................ 214.1 Own-Price Elasticities in Model ................................................................ 385.1 Resource Costs of Selected Policy Scenarios (US$ millions per year) ....................... ....................... 465.2 Revenues from Pollution Charges (2010) ................................................................ 48Al.l PolishStandardsforSO 2 Emissions ................................................................ 53A 1.2 Polish Standards for Particulate Matter Emissions ........................................... 53A 1.3 Polish Standards for NO. Emissions ................................................................ 54A 1.4 Maximum Pollutant Content of Fuels and Abatement Efficiency Consistent with Polish
Emission Standards ................................................................ 55Al.5 Emissions in the Base Case ................................................................ 56
vi
A 1.6 Main Characteristics of the Scenarios ............................................................................ 57A 1.7 Fuel Consumption in 1990 and Fuel Consumption Indices in Base Case 1995-2015
(1990=1.00) by User Category ............................................................................ 58A 1.8 S0 2 Emissions in the C&C Scenario ........................... ................................................. 59Al .9 Particulate Matter Emissions in the C&C Scenario ......................................................................... 59A1.10 SO2 Emissions in the Emission Tax Scenario: ETI ...................................................................... 60Al.1 1 Particulate Matter Emissions in the Emission Tax Scenario: ETI ................. ................................ 60
A1.12 Particulate Matter Emissions in the Emission Tax Scenario: ET2 ................................................. 61Al.13 SO2 Emissions in the Fuel Tax Scenario: FT2 ............................................................................ 61
A 1.14 Particulate Matter Emissions in the Fuel Tax Scenario: FT2 ....................... ................................. 62Al.15 Resource Costs of Various Policies ............................................................................ 62
A2.1 Capital and Operating Costs Assumptions ............................................................................ 64A2.2 Capital and Operating Costs Assumptions ............................................................................ 65
A2.4 Total Net Costs of Emission Reduction ............................................................................ 67
Figures
2.1 Location and Coal Consumption of Largest Sources, Krakow Area .................................................. 14
2.2 SO2 Concentration, Krakow Area 1990 ............................................................................ 16
2.3 PM Concentration, Krakow Area 1990 ............................................................................ 17
3.1 S02 Concentration, Krakow Area 2010 (Base) ............................................................................ 24
3.2 PM Concentration, Krakow Area 2010 (Base) ............................................................................ 25
3.3 SO2 Concentration, Krakow Area 2010 (C&C) ............................................................................ 26
3.4 PM Concentration, Krakow Area 2010 (C&C) ............................................................................ 273.5 SO2 Concentration, Krakow Area 2010 (C&CI) ............................................................................ 283.6 PM Concentration, Krakow Area 2010 (C&CI) ............................................................................ 28
3.7 SO2 Concentration, Krakow Area 2010 (C&C2) ............................................................................ 29
3.8 PM Concentration, Krakow Area 2010 (C&C2) ............................................................................ 29
4.1 SO2 Concentration, Krakow Area 2010 (ETI) ............................................................................ 34
4.2 PM Concentration, Krakow Area 2010 (ETI) ............................................................................ 354.3 PM Concentration, Krakow Area 2010 (ET2) ............................................................................ 364.4 SO2 Concentration, Krakow Area 2010 (FTI) ............................................................................ 39
4.5 PM Concentration, Krakow Area 2010 (FT ) ............................................................................ 39
4.6 SO2 Concentration, Krakow Area 2010 (FT2) ............................................................................ 404.7 PM Concentration, Krakow Area 2010 (FT2) ............................................................................ 41
vii
ForewordLinkages between energy and the environment are evident in all phases of energy
production, transformation, and end-use. They extend from highly localized effects-forexample, at the level of the household-to the global level. On the local level indeveloping countries, the most serious energy-environment problems are the effects ofemissions of particulate matter (dust and smoke), sulfur dioxide, indoor air pollutionarising from the use of biomass fuels, and the use of leaded gasoline. In addition, theregional and transnational problem of acid rain, caused by sulfur dioxide, is severe.Worldwide energy-related problems include the potential for global warming, caused bythe increased atmospheric accumulation of greenhouse gases such as carbon dioxide andmethane; stratospheric ozone depletion. much of it caused by the release ofchlorofluorocarbons; and the pollution of oceans. Transport, industry, and domesticenergy use are prime sources of these environmental problems, which impose seriouscosts for health and productivity.
To address the linkages between energy and the environment more effectively, athematic group has been established within the Power Development, Efficiency, andHousehold Energy Division of the Industry and Energy Department. The group isfocusing on the environmental issues in energy production, conversion, and use,including the relationship with energy efficiency. These linkages can be addressed in partthrough policies based on a mix of "command-and-control" and market-basedinstruments that help internalize the environmental costs of supply and use. The group isalso exploring the scope for new, more efficient and environmentally friendlytechnologies, which need to be introduced in both the developing and industrializedcountries.
This paper attempts to show how appropriate economic incentives in the economyat large, and the use of specific economic instruments targeted at local air quality andemissions, can make an important practical contribution to mitigating the adverseenvironmental effects of energy supply and use. The paper argues that although free-market forces alone may not achieve desirable environmental objectives, they can help tomake substantial progress in that direction through better resource management.Furthermore, the analysis and simulations presented in the paper suggest that interveningin markets, especially energy markets, to allow for externalities can help harness marketforces to produce further environmental improvements. Aside from other interventions,the paper considers systems of taxes and trading in properihts,
Richard SternDirectorIndustry and Energy Department
ix
AbstractThis paper examines the impacts of alternative policy instruments on certain
aspects of local air pollution in the Krakow region of Poland, in terms of sulfur dioxideand particulate emissions, energy use, the resource costs of pollution control, andgovernment revenues. Pollution by oxides of nitrogen, which is mainly caused by thetransport sector, has not been included in this study. The report concludes that althougheconomic restructuring alone can be expected to improve air quality, at least for a while,strictly enforced "command-and-control" should lead to further improvements; that clearcost savings can be achieved through incentive-based instruments; that a tax on a singlefuel, such as coal, is not sufficiently broadly based to be an effective policy instrumentfor pollution control; and that although implementation of any policy to improve airquality in the Krakow area will raise the costs of energy supply, the effect on energyprices should be minor in relation to the consequences of economic restructuring inPoland as a whole.
The analysis yields some interesting insights into differences between pollutioncontrol policies that focus on air quality rather than on emissions. In the Krakow area,the study shows, market-based instruments (both taxes and tradable permits) targetingemissions are much less appropriate for problems of local air pollution; and thecomparison between the resource costs of the various policies considered indicates thateconomic instruments by themselves may not be able to deliver an efficient solution. Thehousehold sector has a disproportionate effect on air quality and has high abatementcosts. Apart from the complexity of implementing and monitoring economic instrumentsat the household level, it may be more efficient to impose a ban on coal use (possiblylimited to the town center) and leave economic instruments to allocate pollution controlresponsibilities among the other sources. As far as tradable permits are concerned, thereport argues that a simple emission permit trading system extended to all sources wouldnot be appropriate to tackle the air quality problem in Krakow. At the same time, anemission trading system confined to large sources would yield a result that is similar tothat of the emission tax scenario.
For these reasons, the report suggests that environmental policy may have to relyon a mixed strategy of applying "command-and-control" measures to households andeconomic instruments to larger sources. Economic incentives, such as emission taxes andemission permit trading, can help reduce the costs of abating emissions from largepollution sources. Nevertheless, it makes sense to treat small pollution sourcesdifferently, because they exhibit different abatement costs and markedly different effectson the local environment.
xi
AcknowledgmentsThe Krakow study was conducted as part of a broader World Bank research
project exploring the use of alternative policy instruments for the control of air pollutionin Poland in three separate stages. Stage 1, covering Poland as a whole, was part of theWorld Bank's assistance in the preparation of an Environmental Action Program forCentral and Eastern Europe, submitted to ministers and senior officials at a conference inLucerne, Switzerland, April 28-30, 1993. The Polish consultants for Stage I (principallyfrom the Polish Academy of Sciences) were financed by the World Bank and thegovernment of Netherlands; the international consultants (from Resources for the Future)were financed by the U.S. Environmental Protection Agency. The results of Stage 1 werepublished as a World Bank Environment Paper (Bates, Cofala, and Toman 1994).
Stage 2, the subject of the present report. extended the analysis to the specificregional framework of Krakow and was a collaboration between the World Bank and thePolish Ministry of Environmental Protection. Natural Resources and Forestry, whichjointly funded Polish consultants, UNICO Services Ltd., for the data collection, and theWarsaw University of Technology, for the air dispersion modeling. The consultants fromLondon Economics were financed by the U.K. Environmental Know-How Fund.
Finally, Stage 3 built on the first two stages and looked at the broader economicreform process that should underlie the use of alternative policy instruments for thecontrol of air pollution. The Polish consultants for Stage 3, from the Wroclaw Academyof Economics, were funded by the Norwegian government. The results of Stage 3 werepublished as an Environment Working Paper (Bates, Gupta, and Fiedor 1994).
The authors gratefully acknowledge a special debt to many officials and experts inPoland, notably Jerzy Kwiatkowski, Rafal Milaszewski, Wojciech Jaworski, JerzyJanota-Bzowski, and Wanda Barc (Ministry of Environmental Protection, NaturalResources and Forestry); Jerzy Wertz (Environmental Protection Department in theGovernor's Office of the Krakow Voivodship); Krzysztof Bolek (VoivodshipInspectorate of Environmental Protection in Krakow); Stanislaw Sitnicki; Tomasz Zylicz(Warsaw University); Zbigniew Kulczynski; Andrzej Glinski (UNICO Services Ltd.);Karol Budzinski (Warsaw University of Technology); Janusz Bardel and Jan Bieda(Krakow Development Office); and Krzysztof Goerlich. We also benefited greatly fromcomments on an earlier version of the paper, presented at a Workshop on AlternativePolicy Instruments for the Control of Air Pollution in Poland, held in Warsaw on October25-26, 1993. The Workshop was funded by the U.K. Environmental Know-How Fund.Finally, thanks are due to numerous World Bank staff, particularly Mohan Munasinghe,for his indispensable support, counsel, and comments throughout all three phases of theproject; Dennis Anderson; Joseph Gilling; Bernard Montfort; Helmut Schreiber; HenkBusz; Rachid Benmessaoud; Stephen Lintner; Christian Duvigneau; Richard Ackermann;and Luca Barbone; and to Michael Toman, of Resources for the Future.
xii
Abbreviations and AcronymsPgIm 3 micrograms per cubic meter
BC base case (benign neglect or "laissez-faire")
C&C command-and-control (current Polish emissionsstandards plus a total household coal ban)
C&C1 command-and-control (current Polish emissionsstandards with no household coal ban)
C&C2 command-and-control (current Polish emissionsstandards plus a partial household coal ban)
CEE Central and Eastern Europe
CO2 carbon dioxide
EAP Environmental Action Programme
EBRP Enterprise and Bank Restructuring Program
ET1 emission tax (tax on emissions to meet emission targetsof C&C, including a total household coal ban)
ET2 emission tax (tax on emissions to meet Polish air qualitystandards plus a total household coal ban)
ETP Economic Transformation Program
FT1 fuel tax (tax on solid fuels to meet emission targets ofC&C)
FT2 fuel tax (tax on solid fuels to meet Polish air qualitystandards)
FGD flue-gas desulfurization
GJ gigajoule
IEA International Energy Agency
kg kilogram
km kilometer
kW kilowatt
MOSZNil Polish Ministry of Environmental Protection, NaturalResources and Forestry
MPEC Krakow municipal district heating organization
MW megawatt
MWh megawatt hour
NO, oxides of nitrogen
OECD Organisation for Economic Co-operation andDevelopment
Motivation for the WorkIn Poland, as elsewhere, a lively discussion has taken place over emissions
standards and the role of alternative instruments for the control of air pollution. Forexample, comparisons have been drawn between existing Polish standards and thoseapproved by the European Community (EC), and debate has centered on attainingstandards through the application of strict regulations, or "command-and-control" (C&C)measures, or through economic incentives. Underlying this debate is the recognition thatthe cost of meeting reasonable air quality objectives in Poland-as in other countries-would be high-possibly amounting to billions of dollars with the conventionaltechnological (or "end-of-pipe") solutions typical of C&C approaches. At the same time,air pollution poses serious threats to human health and property in many parts of Poland,although the precise extent of the hazards remains controversial. In that context, Polishexperts have sound reasons to look closely at alternative policy instruments that offersome possibility of reducing these high costs.
Economic instruments give polluters financial incentives to reduce the amount ofpollution that they cause (Eskeland and Jimenez 1991; Tietenberg 1992; Pearce andTurner 1990). Economic measures can help societies achieve given environmentalobjectives at lower total cost than regulatory approaches by permitting polluters greaterflexibility in their responses and by providing impetus for technological changes. Suchmeasures include emission taxes, fuel taxes, and emission trading.
The World Bank had also been exploring, in its member countries, the design ofcost-effective policy interventions to protect the environment from excessive pollution.One of these was a cooperative effort between the Bank and the Polish Ministry ofEnvironmental Protection, Natural Resources and Forestry (MOSZNiL) in conducting acase study on alternative policy instruments for air pollution control in Poland. Thecooperation between the two built successfully on earlier work carried out by the WorldBank on environmental problems in Poland, notably in connection with a loan to Poland,for an environment management project, approved in 1990, and in connection with anenvironmental strategy study for Poland, prepared in 1991.
1
2 Energy Use, Air Pollution, and Environmental Policy in Krakow
In practice, Polish environmental policy has moved toward reliance on both C&Cand economic instruments. Like other countries of Central and Eastern Europe (CEE),Poland has an extensive system of emission taxes, known as pollution fees and fines. Theschedule of fees, of course, changes from time to time, in nominal terms, and tends to beeroded by inflation in real terms. As of April 1, 1993, fees for three important airpollutants were equivalent to US$75/tonne, for both sulfur dioxide (SO2 ) and oxides ofnitrogen (NOJ); and US$38/tonne for particulate matter (PM). In addition to the systemof fees, MOSZNiL introduced regulations to govern emissions from new and existinglarge stationary sources through an Ordinance, dated February 12, 1990 (Annex 1, TablesAl to A3). Large stationary sources were defined as combustion processes with acapacity exceeding 200 kW. These regulations were issued in conjunction with ambientair quality standards (see Box 2. 1, chapter 2). Also, as in other parts of the world, fueltaxes have been levied, albeit for fiscal rather than environmental reasons.
The Polish case study was enhanced by the participation of lucal experts in Polandwho had a strong interest in and commitment to the search for cost-effective means toimplement environmental policy. Like many other countries in CEE, Poland has highlevels of air pollution and thus also represented a rich source of evidence on the potentialrole of alternative policy instruments. Poland's emissions of S02, NO,, and PM per unitof GNP in 1989, measured in kg/US$1,000, exceeded the average for all OECD countriesby factors of 8.3, 4.5, and 2.3, respectively. In per capita terms, Poland's emissions ofSO2 and PM were, respectively, 4.3 and 2.3 times the average OECD level, whereas percapita emissions of NO, were roughly comparable, despite Poland's much lower percap ta income (Nowicki 1993). Emissions of S02. NO,, and PM are predominantlycaused by energy production and use by large stationary sources, essentially for electricpower generation and heat production, which are estimated to account for 70 to 80percent of the emissions of PM and SO2 and nearly 50 percent of the emissions of NOX in1990 (Bates, Cofala, and Toman 1994: 4).
An important underlying cause of energy's role in air pollution is the fact thatPoland has one of the most energy-intensive economies in the world (Bates and Moore1992, Box 7), with heavy dependence on indigenous coal and lignite. Poland's totalprimary energy requirement per unit of GDP is about twice the average for WesternEurope (International Energy Agency 1990: 11); and comparisons with selecteddeveloped countries are even less favorable (Bates, Cofala, and Toman 1994: 5).Furthermore, Polish coal and lignite, which have a high ash content and a low calorificvalue, met 78 percent of total primary energy requirements in 1991 (Central StatisticalOffice 1992). In consequence, within the energy sector, coal contributes 82 percent ofPM, 90 percent of SO2, 46 percent of NO,, and 75 percent of CO2 (Bates, Cofala, andToman 1994, Table 1.3).
Another feature of air pollution in Poland is its heavy concentration in theindustrial south of the country. Upper Silesia, which contains the Katowice region, withonly 10 percent of the nation's population and 2 percent of its land area, is responsible for
Motivation for the Work 3
about one-third of all SO2 and PM emissions and one-fifth of NO, emissions (Nowicki1992: 12). Not surprisingly, Katowice is home to 22 of the 80 most polluting enterprisesin Poland.
At present, vehicles (mobile sources) contribute less to total emissions than docoal burning and industrial processes, probably because vehicle ownership is stillrelatively low in Poland. Even so, vehicles contribute more than 30 percent of NO,emissions, 37 percent of carbon monoxide, 24 percent of hydrocarbons, and 35 percent oflead (Nowicki 1992: 22; Wasikiewicz 1991: 111). Moreover, vehicles tend to beconcentrated in cities such as Krakow, where the high population densities and theconfines of the old city seriously constrain traffic planning. Emissions from mobilesources are likely to increase, as the growth rate of passenger vehicle ownership is high.The number of private cars in Poland could grow from 5.3 million in 1990 to 6.8 millionby 2000 (Bates, Cofala, and Toman 1994: 7).
Implementation
The case study was implemented in three stages. Stage I concentrated on theapplication of economic incentives for the control of national emissions (i.e., for Polandas a whole) from SO2 , NO,. and PM (Bates, Cofala, and Toman 1994). Stage 2, thesubject of the present report, extended the analysis to include problems of local airpollution and policy variations. Finally, Stage 3 looked at some key aspects of thebroader economic reform process, which is necessary to change the whole structure ofeconomic incentives in Poland (Bates, Gupta, and Fiedor 1994).
Stage 1: All-Poland EmissionsStage I was part of the Bank's assistance in the preparation of an Environmental
Action Programme (EAP) for Central and Eastern Europe, submitted to ministers andsenior officials at a conference in Lucerne, Switzerland, April 28-30, 1993 (EAP 1993).The Polish consultants for Stage I (principally from the Polish Academy of Sciences)were financed by the World Bank and the government of the Netherlands. Theinternational consultants (from Resources for the Future) were financed by the U.S.Environmental Protection Agency.
A central element of the Stage I analysis was a dynamic linear programmingmodel of least-cost energy supply in Poland, which was used to examine, at a nationallevel, different policy scenarios to attain specified standards over the next 25 years.Throughout the analysis, the standards were taken as given, and no attempt was made tojudge the relative merits of different standards. Compliance costs of meeting four sets ofemissions standards were calculated, using C&C policies. The standards correspondedbasically to those in effect or proposed in Germany, the EC, and Poland; and to ahypothetical case, in which emissions were reduced pro rata from all sources.
4 Energy Use, Air Pollution, and Environmental Policy in Krakow
Furthermore, the model estimated the extent to which the costs of meeting the Polishstandards could be reduced with economic incentives rather than by C&C.
Three types of economic instruments were analyzed: emission taxes, sulfurtrading, and a coal tax. Within the model, final energy demands were obtained fromprojections of population, household formation, and underlying economic activitiesinvolving energy use, by sector (e.g.. steel, sulfur. and cement), along with the sectoralmix in GDP and the energy intensity of alternative technologies applied in theseactivities. Because many of these final energy demanids can be satisfied in several ways,the model also included an optimization component both for primary energy productionand supply and for energy conversion. At the same time, the model tracked emissionsfrom energy conversion, from final energy consumptioin, and from processes. The resultsprovided considerable disaggregation by type of fuel and sector.
Stage I reached the following main conclusion0s (Bates. Cofala, and Toman 1994:chapter 7):
* Although economic restructuring should lead to a significant decline in air pollutionin Poland, tighter emissions standards, as envisaged under current Polish policy, arelikely to generate further decreases in pollution, provided that those standards areenforced more effectively.
* Despite some important differences betweeni the Polish and EC standards, the costs ofmeeting the two alternative sets of standards in Poland do not appear to be widelydifferent, however, the costs of meeting the (Jerman standards would be significantlyhigher.
* Clear cost savings would derive from usinig incentive-based policy instruments suchas emission taxes and sulfur trading.
* Further savings may be possible by extending incentive-based policies to moredecentralized emissions sources in place of costly C&C, as in the transport sector.
* An indirect incentive-based policy instrumenit, such as a coal tax-even one ofsubstantial magnitude--is unlikely to meet Polish environmental policy objectiveswithout support from other measures.
* Although C&C and incentive-based instruments will both require considerableexpenditures to achieve specified standards, the impacts on energy prices are likely tobe dwarfed by the larger forces of the economic restructuring and energy price reformunder way in Poland.
* In light of the sharp increase that would be necessary in pollution fees, to reachoptimum levels, and the current institutional context, a dynamic and mixed strategy iscalled for in the choice of policy instruments for air pollution control, blending C&C,higher pollution fees, and limited emission trading. C&C might be employed for
Motivation for the Work 5
households and transport sources, but increased reliance would be placed olieconomic instruments for larger sources.
Stage 2: Regional "Hot Spots"-The Case of KrakowThe Stage I model deals only with categories of emitters and generic categories of
emission standards, rather than specifying the size, spatial location, and emissionstandards of specific sources. Consequently, the model cannot be used to analyze the costof different means for achieving specified ambient standards. In the terminology ofemission trading, Poland was effectively treated as one "bubble." The findings of Stage1, therefore, indicate the general characteristics of the alternative scenarios and policyframeworks: they do not offer guidelines for solving air pollution problems in heavilypolluted areas, "hot spots." For this reason, Stage 2 extended the analysis to trace theeffect of emissions on air quality in a specific regional framework, Krakow (Bates 1993).In Stage 2, the World Bank and MOSZNiL jointly funded Polish consultants. UNICOServices Ltd., for the data collection effort. and the Warsaw University of Techmology,for the air dispersion modeling. The international consultants (London Economics) werefinanced by the U.K. Environmental Know-How Fund.
Although Stage 2 analyzes the same basic policy instruments as in Stage 1, thedetailed specifications differed in several respects. First, only one C&C scenario ismodeled, reflecting the measures embodied in the Polish emissions regulations of 1990.However, these emissions regulations are implemented in conjunction with the ambientair quality standards that were included in those same regulations. Second, Stage 2 doesnot include pollution by NO,, because of problems of data availability for mobile sources.Hence, emission taxes are modeled only for S02 and PM. Third, although a coal tax isformally modeled, emission trading is not. Instead, the analysis takes advantage of thedualistic nature of emission taxes and emission trading (Tietenberg 1 990) to discuss thepotential role of tradable permits for both SO2 and PM.
As in Stage 1, the emissions standards are taken as given, and no attempt is madeto assess their appropriateness. Also, Stage 2 again emphasizes the activities of energyproduction and use, given their prime role in air pollution in Krakow, as in Poland as awhole, although other "process" uses of fuels are also included, notably in the steel andcement industries. '['he scenarios show the effect, at the regional level, of each ol' thepolicy instruments analyzed, in terms of their economic costs and their impact on theproduction and use of each form of energy.
The Krakow region was selected for Stage 2 for three reasons. First, theavailability of data on emissions and ambient air quality is relatively good, thanks toactivities funded by the U.S. Agency for International Development (USAID, under thedirection of the U.S. Department Energy); the U.S. Environmental Protection Agency(EPA); and the World Bank. Second, the local authorities have displayed an active andprogressive attitude toward environmnental protection. Third, Krakow has been regardedl
6 Energy Use, Air Pollution, and Environmental Policy in Krakow
as one of the most polluted regions in Poland, rated second only to Silesia as late as 1992by the Polish Central Statistical Office. In the past, Krakow experienced smog incidentsmore often than any other city in Poland, and the city's historical monuments areespecially vulnerable to erosion by SO2 emissions (Nowicki 1992). In 1987, the averageambient concentration of SO2 in Krakow was about 105 ltg/m3, more than three times thenational standard of 32 jig/m3; and the average concentration of PM (about 90 jIg/mi3)was close to twice the national standard (50 jig/m3; Bolek and Wertz 1992). However, itshould be noted that emissions from the main polluters in Krakow have dropped since1987-in no small part because of the restructuring of the local industrial base-andaverage concentrations of SO2 and PM in 1991 fell to 67 jig/lm3 and 54 jig/m3 ,respectively (Bolek and Wertz 1992). Of course, these averages conceal wide variationsacross the city, and the annual average concentrations found in the center of the old townare estimated to be substantially higher (see chapter 2).
As we show later in this report, Stage 2 reinforced the following main conclusionsfrom Stage 1:
* Although economic restructuring can be expected to decrease emissions of S02 andPM in Krakow, at least until 2005, strictly enforced C&C should lead to considerableadditional decreases in emissions.
* Clear cost savings can be achieved from using incentive-based instruments. C&Cpolicies, which impose emissions targets on all large sources, may force them to incurunnecessary costs in attaining air quality objectives.
* A tax on a single fuel is not sufficiently broadly based to be an effective policyinstrument for pollution control.
* The implementation of any policy to reduce emissions and improve air quality in theKrakow area will raise the costs of energy supply. However, the possible effect onenergy prices is likely to be relatively minor next to the consequences of economicrestructuring in Poland as a whole.
In addition, Stage 2 yielded a number of interesting insights into differencesbetween pollution control policies that focus on air quality rather than emissions:
* An approach based purely on economic instruments faces difficulties in delivering anefficient solution. Emission taxes cannot be applied to small pollution sourcesbecause of the complexity of implementing and monitoring them. It is therefore moreefficient to impose a ban on coal use in households and leave emission taxes toallocate pollution control responsibilities among the other sources. As far as tradablepermits are concerned, a simple emission permit trading system extended to allsources would not be appropriate in Krakow. More complex systems may be devisedin which "exchange rates" are introduced between permits from different sources, butthey would still have to induce the conversion to gas of the household sector. Such asolution can be achieved more easily and more economically by introducing an
Motivation for the Work 7
administrative control on the use of coal by households. Finally, although a tax onsolid fuels may be relatively easy to administer, a swingeing tax rate would benecessary to cut household emissions enough to meet ambient air quality targets, andresource costs using a fuel tax are higher than the combination of emission taxes andC&C.
Environmental policy may have to rely on a mixed strategy, based on applying C&Cmeasures to households and economic instruments to larger sources. Economicincentives, such as emission taxes and emission permit trading, can help to reduce thecosts of furtlhering emissions and air quality objectives in the case of large pollutionsources. Nevertheless, it makes sense to treat small pollution sources differently,because they exhibit different abatement costs and markedly different effects on thelocal environment.
Stage 3: The Impact of Economywide Reforms-"Win-Win" PoliciesClearly. the scenarios considered in Stages I and 2 at best indicate the potential
gains from relying upoIn incentive-based policies in place of C&C. Even in advancedindustrial economies, not all this potential will be reached because of imperfections inmarkets and policies. Furthermore, environmental policies may depart from the ideal toaclhieve compromises with equity or other social goals. Such problems are multiplied intransitional economies like Poland's, in which market institutions are immature, theunderlying behavioral patterns are evolving, and the state retains a substantial role in theeconiomiiy. Building on the results of the first two stages, Stage 3 in the case studyidentified the nature and likely quantitative impact of the economywide reforms that are aconditioi tfor the effective use of alternative economic instruments for the control of airpollution. Thle Polish consultants for Stage 3, from the Wroclaw Academy of Economics,and an internlational consultant, were funded by the Norwegian government and theWorld Bfank.
Following Kornai (1980), Stage 3 argues that the basic material and energyintensity of the CEE countries, including Poland, was caused by soft budgets and tautproduction plans in the state-owned enterprises (SOEs), which led to outputmaximizationi rather than cost minimization. The softening of budget constraintsprofoundly altered the system of managerial incentives, in that profit-seeking behaviorwas no longer rewarded. Hence, in the CEE economies, an excess demand developed forall inpuits, includinig energy. As a corollary, the notion of autarkic development wasimplicit in the socialist system, not because the ideology of autarky spurred the use ofdomestic resources, as some have argued, but rather the other way around: Theperformance logic of a socialist economy, with soft budgets and taut plans, necessitatedinward-looking development. Soft budgets are not readily converted into importedinlputs, arid in Poland that meant a heavy reliance on indigenous coal and lignite.
8 Energy Use, Air Pollution, and Environmental Policv in Krakow
Poland also pursued a macroeconomic strategy that emphasized rapidindustrialization in general, and the development of heavy industry in particular. Fourenergy-intensive sectors-energy production. metallurgy, chemicals, and minerals-tended to dominate industrial output. As a result, and being based on coal and lignite,they were also the most polluting sectors in industry and made heavy demands on othernatural resources, such as water. Although an industrialization strategy based on heavyindustry is common to most centrally planned economics, in the case of Poland thisexacerbated the consequences of energy intensity. Finally, it was not only the type ofeconomywide policies pursued in Poland that historically promoted high levels of energyuse: Rather, environmental policy was not used effectively to offset the adverse impacton the environment. To some extent, this again was due to the lack of priceresponsiveness on the part of state-owned firms and to soft budgets, which gave Poland'sapparently sophisticated system of pollution taxes little or no chance to succeed. Inaddition, environmental inspection and audit capabilities were wea'., and environmnentalstatutes were not stringently enforced, partly because the economies of local communitieswere often dominated by a few large industrial enterprises. which were also majorsources of emissions (Hughes 1990; Wilczynski 1990(; Zylicz 1993). For example, by theend of the 1980s. only a third of the plants emitting air pollutants had emission permits.
Stage 3 then proceeded to examine the changes now taking place in Poland, withrespect to enterprise restructuring and price reform, to show how these can be expected toresult in major improvements in the environmental situation. Notably, Poland initiated anEconomic Transformation lProgram (ETP) in 1990, which led to the rapid privatization ofmary small enterprises. Subsequently, to provide f'urther momenitum to the restructuringeffort, the government developed the Enterprise and Bank Restructuring Program(EBRP), to address the interrelated problems of the SOEs that are not servicing theirdebts and of the commercial bariks. A crucial outcome of the EBRP will be furthermovement from soft to hard budgets in both the enterprise and banking sectors.However, for strategic and other reasons, the government has elected to retain ownershipin the energy, mining, steel, and defense sectors in the medium term and to decide onprivatization on a case-by-case basis. Thus. energy sector restructuring efforts have so farfocused more on commercialization of SOEs and the creation of an institutional, legal,and economic framework that will facilitate competition and greater private sectorparticipation in the longer term. At the same time, the government has pursuedaggressive energy pricing reform.
Although these profound changes in economic policy are already in train, andbeneficial results discernible, the timing and speed of further change are matters ofconsiderable uncertainty. Stage 3 therefore analyzed several scenarios that quantify thepossible impact of economic policy change on the environment, and reached thefollowing main conclusions:
* Based on projections of energy production and consumption, and of emissions, whichwere presented for alternative models, clear environmental gains can be attained from
Motivation for the Work 9
restructuring, combined with energy pricing reform, even if no new environmentalpolicies are put in place.
* Nevertheless, price and enterprise reform in themselves are not enough to meet theenvironmental goals of the Polish governrment. Particularly there is scope for a betteruse of economic instruments, a more determined application and enforcement ofenvironmental legislation, and better compliance monitoring.
* The costs of the policy changes needed to meet environmental goals are likely to behigh.
2The Analytical Framework and Model
Stage 2 of the Poland case study extended the analysis of Stage 1 to assess thecost-effectiveness of alternative policy instruments to meet air quality and emissionsstandards. The region of Krakow was selected for the analytical work. In Stage 2, incontrast with Stage 1, only S02 and PM were modeled, as data on NO, were insufficient.In addition, the main comparison was between C&C, as embodied in the Polishregulations, and economic incentives. This chapter describes the basic structure of theStage 2 analysis in terms of the specific air quality and emissions objectives incorporatedin the model; the model's data base and methodology for calculating emissions and airquality; the results of employing the data base to obtain estimates of actual emissions andair quality for Krakow in 1990; and the abatement options and costs assumed in themodel.
Air Quality and Emissions Standards
The air quality standards relevant to Krakow are in Table 2.1, which shows thepermitted concentrations of SO2 and PM, in gig/m3, for general areas (more stringentstandards apply to "special protection areas"). Under Polish legislation, all emissionsources are subject to air quality standards and require an authorization to emit. Theapplication for authorization should contain evidence, based on environmental modeling,that the proposed emissions would not raise pollutant concentrations beyond thepermitted standards, taking into account a level of background concentration that isprovided by the Sanitary and Epidemiological Institute (SEI) on the basis of localmonitoring of air quality. The air quality monitoring system in Krakow has been greatlyenhanced since 1991, when a new monitoring system was introduced that allows forcontinuous monitoring of air quality. It is operated by the Regional Center forEnvironmental Investigation and Inspection, an agency of the voivodship authorities, andis based on eight automatic monitoring stations, one of which is mobile.
11
12 Energy Use, Air Pollution, and Environmental Policy in Krakow
Table 2.1 Ambient Air Quality Standards for General Areas (Micrograms per m3)
30 minutes maximum 24 hour maximum Annual average
Sulfur dioxideUntil 1999 600 200 32
After 1999 400 150 32
Oxides of nitrogen 500 150 50
Particulate matter - 120 50
The authorization for a source to emit will contain an indication of the allowedlevel of emissions of each pollutant, for the individual source in terms of a maximum(grams/second), an average (kilograms/hour), and a total (tonnes/year). For areas wherestandards are not yet attained, applicants are automatically allowed emissions equal to 20percent of those that would meet the air quality standards. This provision, of course, maybe inconsistent with the other standards. Fees are paid on all authorized emissions.Sources whose emissions rates are above the maximum levels incur a fine, which isgenerally 10 times higher than the corresponding fee. Such a fine is payable from themoment at which noncompliance is detected until the time when it is possible to provethat the source is again within the allowed limits. No fine is payable if the total annuallevel is exceeded.
For large power plants (capacity greater than 200 kW), the allowed level ofemissions must meet both emissions and air quality standards. All other plants need onlyconform with air quality standards. The emissions standards for S02 are in Table AL.1,and those for PM are in Table A1.2. Table AI.4 presents the maximum permissible SO2
and PM content of fuels consistent with these standards, for existing plants, and therequired efficiency abatement for typical fuels. Since the sulfur content is only half theimplied SO2 content (the molecular weight of sulfur is 32, whereas that of SO2 is 64), thestandards translate into a sulfur content of 0.75 percent to 1.00 percent for coal, and of 0.3percent to 0.55 percent for coke. These values imply that an efficiency of abatement(sulfur removal) of about 33 to 50 percent is required for 1.5 percent sulfur coal, typicalof fuel used in the Krakow area, and an efficiency of 50 to 70 percent is required for 1percent sulfur coke. Similarly, without abatement measures, the proportion of the ash infuel that is emitted as PM is about 90 to 95 percent. Given an ash content of about 2.4percent for coal used in the Krakow area, the required abatement efficiency is about 90percent for coal (pulverized fuel) and 75 percent for coke.
Data Base
For the analysis of pollution sources, we have defined sectors in terms of "high"and "low" stacks. The former refer to large industrial pollution sources, notably twopower plants (Leg and Skawina), a cement plant, a number of large boiler houses, and the
The Analytical Framework and Model 13
Nova Huta steel works, with chimneys of 40 meters and above in height, and running upto as much as 260 meters. The latter refer to small-scale combustion sources, notablysmall businesses, boiler houses, and households. The city of Krakow has more than1,300 boiler houses and about 200,000 home stoves (Gyorke, Blinn, and Butcher1992: 2).
The data base for Stage 2 was assembled mainly by UNICO Services Ltd., aconsulting firm based in Krakow. It covered roughly 95,000 households (representing263,000 persons), 369 small businesses, 894 boiler houses, and 60 high-stack sources.The data identify the characteristics of individual sources; their 1990 consumption ofcoal, coke, oil, gas and electricity; the calorific, sulfur, and ash content of the fuels;emissions of SO, and PM; and the costs of fuel switching (i.e., from coal to gas). Thefuel use of small businesses (which will provide an increasing share of GDP) isdifferentiated from that of boiler houses (which will be linked to local demand for districtheating) in the data base, because the fuel use of these emissions sources can be expectedto grow at different rates. UNICO relied on two data banks. The first provided all theinformation on households in the Stage 2 analysis and was the outcome of a USAID-financed effort, the Krakow Clean Fossil Fuels and Energy Efficiency Project. Theproject was implemented in conjunction witlh the U.S. Department of Energy (Office ofConservation and Renewable Eqnergy and Office of Fossil Energy; Gyorke, Blinn, andButcher 1992).
Data on small businesses and boiler houses and on high-stack sources weresupplemented by a second data bank, known as SOZAT. It was compiled as part of aneffort to catalog provincial emissions sources, sponsored by MOSZNil, and supported bythe World Bank. Finally, Stage '2 collected data on the Skawina power plant for inclusionin the analysis. Although Skawina lies outside the immediate Krakow area, it is a majorsource of SO2 and PM emissions that influence air quality in Krakow.
Calculating Emissions and Air Quality
The model first calculates SO2 and PM emissions from each source (or set ofsources) in the data base from fuel consumption and the known pollution content of thefuels. Coal used in the Krakow area has an average SO2 and ash content of 1.5 percentand 12.0 percent, respectively; for coke, the figures are 1.0 percent and 8.0 percent,respectively; fuel oil was taken with a sulfur content of 2.2 percent.
Depositions of SO, and PM are then calculated from emissions through atransport-of-air-pollution (TOAP) matrix. For the purposes of the model, all of the dataon emissions were consolidated into a grid, covering an area of 540 km2 around Krakow.It ranges from 7.5 km north to 10.5 km south of the city center, and from 10.5 km west to19.5 km east. The grid extends far enough from the city center to capture the mostsignificant depositions caused by emissions from local low-stack sources; it extendsfurther to the east than to the west, as the prevailing wind blows in that direction. The
14 Energy Use, Air Pollution, and Environmental Policy in Krakow
grid is divided into 60 squares, each 3 x 3 km in size. Deposition levels are calculated atthe midpoint of each cell in the grid. These midpoints correspond to the 60 vertices ofthe grid, which are shown in Figure 2.1, along with the position of the Vistula river, themain thoroughfares, and the principal emission sources (sources with the largestconsumption of coal).
The TOAP matrix is generated from an air dispersion model. The relationshipbetween emissions of pollutants and the quality of the air in specific locations depends onthe characteristics of the emitting sources and the meteorological and geographicalconditions in which these emissions take place. A conventional air dispersion model (ofGaussian form) was used to calculate the transmission coefficients (unit dilution factors)for the TOAP matrix, from basic meteorological data (wind velocity and direction,mixing height, etc.), and the characteristics of the emissions sources (stack height anddiameter, flue gas temperature, and velocity, etc.).
Figure 2.1 Location and Coal Consumption of Largest Sources, Krakow Area
~BHI
10,000 - 100,000 ton/year
* 100,000 - 1,000,000 ton/year
A >1,000,000 ton/year
Note that these transmission coefficients link annual emissions estimates andannual average concentrations of pollutants in each cell. It can be argued that it wouldhave been more appropriate to have considered average pollutant concentrations over theshorter time intervals shown in Table 2.1 (30 minutes or 24 hours). as these may have agreater impact on human health. For obvious reasons, the data base would not havesupported such a level of refinement.
The Analytical Framework and Model 15
Taking cells of 3 x 3 km across the Krakow region, the transmission coefficient tiifor cell i specifies the proportion of total emissions Ei from cell i deposited in cell j. Airquality in cell j is associated with the sum of emissions ZitiiEi from all the i. The modelselected is the Pollution Risk Integrated Model Assessment (PRIMA), developed at theWarsaw University of Technology, under the World Bank's environment managementproject (Juda, Budzinski, and Dobija 1992). As applied to the Krakow region, there is noreason to believe that PRIMA yields atypical or biased results in terms of the localmeteorology or geography.
Although the TOAP matrix enables us to calculate the effect of emissions by eachindividual source on air quality, it does not provide data on the concentration ofpollutants caused by sources outside the Krakow area (the so-called backgroundconcentration). This background can be usefully divided into two components:
* The local background concentration, which comes from sources just outside the gridboundaries. These sources have a localized impact on the concentrations of SO2 andPM in the Krakow area. Their effect will be greatest near the boundary, particularlyin suburban locations. The local background could be an issue for both pollutants.
* The long-distance background concentration, which comes from sources distant fromKrakow that nonetheless affect air quality in the area. These are high-stack sources,many of them in the Katowice area, and their effect is more-or-less uniform across thewhole grid area. The long-distance background is only an issue for SO2, as PMemissions do not travel or spread far enough to cause a serious problem.
The long-distance background concentration of SO2 has been estimated at 25jg/m . No information is available on the local background. In comparing our resultswith actual pollutant concentrations in the Krakow area, it is important to remember thatwe only model the results of emissions originating in the area of our grid and add a long-distance background figure for S02. In the forward projections, as explained later, thechange over time is based on the results of Stage 1.
Emissions and Air Quality in the Krakow Region, 1990
The model was applied to the data base to analyze emissions and air quality in thegrid area in 1990. In the results, total SO2 emissions amounted to 105,500 tonnes; PMtotaled 84,400 tonnes (Table Al.5). High-stack sources contributed 94 percent of theemissions of both pollutants, boiler houses 2.6 percent, households 2.4 percent, and smallbusinesses only 1 percent. However, in terms of air quality, the results reveal someinteresting and significant differences.
Even though high-stack sources are responsible for more than 90 percent of totalemissions of SO2, air quality is most heavily affected by emissions from households,small businesses. and boiler houses. That is because the emissions from high-stacksources are dispersed over such a large area that they affect concentration in each specific
16 Energy Use, Air Pollution, and Environmental Policy in Krakow
location much less than do emissions from local low-stack sources. The peak annualaverage concentration of SO2 is found in the center of the old town, and the modelestimates that it reached 114 1tg/m3 in 1990 (Figure 2.2). Of this total, nearly half (53jig/m3) is caused by energy use in households; a substantial fraction (33 ,ug/mi3) comesfrom small businesses and boiler houses; and only a slightly smaller proportion (25jig/m3 ) is due to the long-range background (imports). Very little (4 jig/m3) of the peakconcentration comes from high-stack sources; their maximum effect on air quality is inareas to the east of the town center, downwind of Leg power station and the Nova Hutasteel works.
Figure 2.2 SO2 Concentration, Krakow Area 1990
100~~~~4
Maximum concentration = 114 microgram/m3
It is instructive to compare the results of our model with Polish standards andWorld Health Organization (WHO) guidelines. The peak concentration of SO2 is morethan three times higher than the limit of 32 jig/m3 set out in the current Polish legislation(see Table 2.1); and compares unfavorably with the WHO guidelines of 40 jig/mi3
(marginal) and 60 jig/mi3 (unacceptable). The SO2 concentration estimates from Stage 2can also be compared with the results of a 1991 study, generated by the Krakow areamonitoring system (Bolek and Wertz 1992). The position of the measured concentrationpeak (in the city center) and its level (111 IIg/m 3) are very similar to the Stage 2 results,although the S02 concentration was estimated to have increased by 15 percent between1990 and 1991.
The Analytical Framework and Model 17
Although the patterns of emissions for S02 and PM are similar, the resultingconcentrations are somewhat different because of their different dispersion characteristics(Figure 2.3). Most types of PM are heavier than SO2. The relationship betweenemissions and concentrations in the vicinity of the source is thus less affected by theheight of the stack. As a result, high-stack sources make a much larger contribution tolocal pollution in the case of PM than they do for SO,. Nevertheless, the low-stack sectorstill contributes a disproportionate amount to air pollution, compared with emissions.
Figure 2.3 PM Concentration, Krakow Area 1990
Maximum concentration = 110 microgram/m3
According to our model, the annual average PM concentration level in 1990reached a maximum level of 110 ~.g/m' in the town center. Households, small businessesand boiler houses, and high-stack sources each contribute about a third to this peak.These levels compare unfavorably with a standard of 50 atg/ri3 set in Poland's legislation(Table 2.1), and of 60 (marginal) to 90 ptg/m3 (unacceptable) suggested by WHO. Thepeak concentration from high-stack sources is located to the southeast of the town center,
3where the total concentration has a secondary peak of about 60 AIg/m . This peak seemsto be caused by several large boiler houses located slightly upwind.
Fewer measurements are available of the actual level of PM in Krakow than ofSO2, to serve as a check on our model. The average level in the monitored area wasabout 55 pg/mr3 in 1990 (Bolek and Wertz 1992). which lies within the range of the peakand outlying concentrations; and background sources add no significant complications.This confirms that the model figures are of the right order of magnitude.
18 Energy Use, Air Pollution, and Environmental Policy in Krakow
Abatement Options and Costs
The model incorporates three alternatives for reducing S02 and PM emissionsfrom any given source:
* Implementing end-of-pipe solutions, by installing flue-gas desulfurization equipment(FGD), electrostatic precipitators (ESP), or baghouse (fabric) filters at the source,which remove SO2 and PM from the flue gases.
* Switching the type of fuel used in the source's boilers by burning fuels with a lowersulfur and ash content, such as certain types of low-sulfur coals that are also low inash, or, more effectively, by burning natural gas.
* Closing down pollution-generating burners at the source and connecting the facility to adistrict heating system.
Each alternative involves both capital and operating costs.
End-of-Pipe SolutionsThe installation or retrofitting of FGD and ESP is appropriate only for large
emissions sources (i.e., capacity greater than 200 kW): it was not therefore considered atall for households or for small businesses and boiler houses with capacity less than 200kW. Several FGD technologies are available, but only a few seem appropriate to Poland.The report concentrates on the Limestone/Gypsum (or Lime/Limestone Wet Scrubbing)technology, which is well tried and can achieve a 90 percent abatement level. The cost ofretrofitting FGD equipment varies widely, depending on the specific characteristics of thesites, which are difficult to ascertain. The model therefore uses estimates of FGD costsfor greenfield sites; this may underestimate the true costs of abatement.
FGD costs exhibit economies of scale with respect to both the sulfur content ofthe flue gases and the capacity of the plant. Least-cost emission abatement is thereforeachieved by applying FGD to large plants and those burning high-sulfur fuels. Our costestimates are derived from U.K. Department of the Environment (1992). The equationsand assumptions for capital and operating costs are in Annex 2, section 2.1. The capitalcosts are a function of plant capacity (Annex 2, equation 1). Operating costs (Annex 2,equation 2) are divided into the following categories:
* Energy costs, which account for the energy consumed by the FGD equipment itselfand the resulting reduction in the net output from the plant (I percent).
* Water costs, to supply the equipment with the required amount of water (0.2 tonnesper MWh).
* Sorbent costs, depending on the degree of abatement required, the sulfur content ofthe fuel, the fuel consumption, and the sorbent cost per tonne.
The Analytical Framework and Model 19
Equations 1 and 2 in Annex 2 are both linear and simplify the relationshipbetween the level of sulfur removal, on the one hand, and capital and operating costs, onthe other. Nevertheless, because we have specified capital and operating costs separately,total costs exhibit a desirable feature, which plays an important role in our later analysis.The total costs of sulfur abatement are not proportional to the degree of sulfur removed:capital costs are linear in plant capacity but independent of the level of sulfur abatement(Annex 2, equation 1), and operating costs do not increase in proportion to the level ofsulfur removal (Annex 2, equation 2). Average costs, therefore, tend to decrease with thelevel of sulfur removal, all other things being equal.
For the installation of ESP, no comparable data were available for the analysis.However, it is generally recognized that FGD equipment would require dust and ashcollection at a cost that is approximately 10 percent of the total overall investment.Accordingly, ESP costs have been assumed to add 1/9 to ESP-exclusive FGD costs.Furthermore, it has been assumed that it would cost twice as much to install ESP alonerather than as part of FGD retrofitting. The costs for the three possible alternatives-FGD, FGD with ESP, and ESP alone-are therefore based on the detailed cost estimatesfor FGD equipment presented above, applying factors of 1, 10/9, and 2/9, respectively.
Fuel SwitchingConversion of coal-fired boilers to gas is an important option available to large
emissions sources. In the case of the primary fuel consumption of households and smallbusinesses, with capacity lower than 200 kW, switching from coal to gas for spaceheating is, for all practical purposes, the only way to reduce sulfur and particulateemissions. From the UNICO data base. it was estimated that the capital cost ofconverting coal-fired boilers to burn gas would be US$30,187 per MW of capacity.Direct observations were available in the data base on the required capacity for smallbusinesses, boiler houses, and high-stack sources. Such information was lacking forhouseholds, but it was derived from existing annual coal consumption, using equation 3in Annex 2, section 2.2.
At given delivered prices for coal and gas at each source, the net operating costinvolved in converting from coal to natural gas, in a given year, is the difference betweenthe estimated total cost of consuming coal in that year and the total cost of an equivalentamount of gas. The price forecasts for gas and coal are taken from Stage I (Bates,Cofala, and Toman 1994: Table AI.4), and reproduced in Annex 2, section 2.2. Therequired quantity of gas that is equivalent to the current level of coal consumption on anet energy basis is determined from equation 4 and its related assumptions regardingcalorific value and thermal efficiency in Annex 2, section 2.2.
20 Energy Use, Air Pollution, and Environmental Policy in Krakow
Connection to District Heating SystemFor small boiler houses (capacity less than 200 kW), the study assumes that the
only feasible approach to pollution abatement is to close them down and connect thehouseholds formerly served by them to a district heating system. The cost of such aconnection comprises the borne investment costs for the connection and an operating costelement. The investment cost is based on the average capital cost of approximatelyUS$86/kW reported by MPEC, the Krakow municipal district heating organization. Theoperating cost is the difference between the distribution cost of thermal energy throughthe district heating system, which is approximately US$4.7 to 5.2/GJ (MPEC data), andthe cost of the coal currently burned in the small boiler houses. The difference isapproximately US$1.5/GJ. We assume no increase in fuel consumption by the powerstations supplying the district heating system. since heat is a by-product of electricitygeneration, and there is currently excess capacity for the production of low-grade heat(e.g., at Skawina power station).
Estimated Abatement CostsThe estimated total net costs of the above abatement options to each category of
emissions source are summarized as follows:
* FGD and ESP retrofitting (industrial sector only), US$49
- Conversion to gas, industrial sector, US$37
* Conversion to gas, residential sector, US$90
* Conversion to gas, small businesses, US$90
* Connection to district heating system, small boiler houses only, US$85
These figures refer to the total annualized costs of FGD and ESP retrofitting, gasconversion, and connection to a district heating system for a I kW coal-fired boileroperating at a 80 percent load factor, using a 15 percent discount factor, and assuming aneconomic life of 10 years. The sensitivity of emission reduction costs to alternativehypotheses on the economic life of equipment and on the discount rate is shown in Annex2, section 2.3.
The relatively high cost of gas conversion in the residential and small businesssectors is mainly because of the large difference between the delivered prices of gas andcoal for those sectors. The additional operating cost for gas, compared with coal, comesto about US$9 per gigajoule of energy consumed, based on a gas price to households thatis more than double the price of coal, in calorific terms. However, the analysis does notreflect the convenience of gas heating; to that extent, the opportunity costs of switching togas may be overestimated.
3Policy Scenarios 1: Base Case and C&C
Three classes of policy scenario have been developed for the Stage 2 analysis.The first is one of "benign neglect," embodied in a single base-case (BC) scenario. Inthis option, although no specific environmental policy is pursued, widespread economicreform takes place that is expected to result in important environmental benefits. Second,a set of command-and-control (C&C) scenarios reduces emissions and improves airquality through strict regulations. The additional costs of achieving the C&C scenariosprovide an estimate of the cost of pursuing environmental objectives through regulations.Third, we consider scenarios in which environmental policy is implemented by relying oneconomic incentives and interpret the change in costs (from the C&C scenarios) as areflection of the potential gains from economic instruments. The BC and C&C policyscenarios are discussed in detail in the present chapter, economic incentives are coveredin chapter 4. The main characteristics of the scenarios are summarized Table 3.1 anddescribed in detail in Table A1.6.
Table 3.1 Scenario Key
Abbreviation Description
BC Base case: benign neglect or "laissez-faire"C&C Command-and-control: current Polish emnissions standards (Tables A I. I
and A 1.2) plus a total household coal banC&CI Command-and-control: current Polish emissions standards (Tables Al.l
and A 1.2), with no household coal banC&C2 Command-and-control: current Polish emissions standards (Tables Al. I
and A 1.2) plus a partial household coal banETI Emission tax: tax on emissions to meet emission targets of C&C,
including a total household coal banET2 Emission tax: tax on emissions to meet Polish air quality standards (Table
2.1 ) plus a total household coal banFTI Fuel tax: tax on solid fuels to meet emission targets of C&CFT2 Fuel tax: tax on solid fuels to meet Polish air quality standards (Table 2.1)
21
22 Energy Use, Air Pollution, and Environmental Policy in Krakow
Base Case
CharacteristicsThe BC scenario uses the same assumptions as in Stage I (Bates, Cofala, and
Toman 1994, chapter 4). Principally, no new environmental policies are employed, butsome policies are continued in nonenergy industries that reflect better resourcemanagement and result in lower emissions (e.g., in metallurgy and cementmanufacturing). GNP grows at about 4.5 percent per year until 2000, a figure consistentwith World Bank projections; a 4 percent annual growth rate is assumed after 2000.Substantial changes occur in the structure of the economy, with a marked decline in theshare of industry and the production of energy-intensive products and services.Regarding energy prices, international prices for crude oil, coal, and natural gas areassumed to increase by factors of 50 percent, 20 percent, and 40 percent, respectively,over 1990-2000, in real terms, broadly in line with World Bank piojections. The priceforecasts for sales of gas and coal to industry and households are in Annex 2, section 2.2.Furthermore, it is assumed that full economic pricing of all final energy sources will be inplace in Poland by 1995 and that excise taxes are applied at Western European norms.
Projecting EmissionsThe results of the Stage I BC scenario give fuel consumption for all of Poland
from 1990 to 2015, in five-year intervals, disaggregated by consuming sector, subsector,and type of fuel. For Stage 2, these sectoral trends in national fuel usage were convertedinto indexes of fuel consumption by user category and assumed to apply to the specificsectors, subsectors, and fuels in our data base for the Krakow region. The initial year(1990) estimated fuel consumption for Krakow and the indexes derived from Stage 1 areshown in Table Al.7. To calculate fuel consumption for each source in Krakow over thestudy period, at five-year intervals up to the year 2015, we simply multiply the fuelconsumption of the initial year (1990) by the appropriate indexes for that source. Thisgeneral rule was only abandoned for sources for which specific information wasavailable, such as the tobacco plant (where the index is set to zero from 1995).
As described in chapter 2, the emissions trajectories corresponding to these fuelconsumption paths for each source are calculated from our knowledge of the specificsulfur and ash content of the fuels. The results, shown in Table Al.5. indicate thatemissions of both S02 and PM in the Krakow region are likely to fall initially and remainbelow their 1990 levels until 2005, even if no explicit environmental measures are takento control pollution. After 2005, emissions are expected to increase above the 1990levels; by 2010, they would be 8 percent above their 1990 levels for both pollutants.
The main cause of the decline in emissions in Krakow to 2005 is the drop in thelevel of activity that large-scale industry has recently experienced throughout Poland,which will probably persist as many sectors undergo a restructuring (especially heavy
Policy Scenarios 1: Base Case and C&C 23
industry). The reduction in residential coal consumption (Table A1.7) would also help tokeep down total emissions: As the per capita income of households increases, they moveaway from solid fuels toward gas, electricity, and district heating. After 2005, theincreases in total emissions above the 1990 levels would stem primarily from theexpected recovery in large-scale industrial output; by 2010, increased industrial activitymore than outweighs better fuel efficiency in industry, changes in the structure ofproduction, and further declines in residential use of solid fuels. A contributing factor isthe steadily expanding use of district heating by households and small businesses, whichis reflected in a projected increase in emissions from boiler houses.
Projecting Air QualityIn the transition from emissions to air quality projections, a difficulty is that the
long-range background concentration of S02 is likely to change through time as a resultof events outside the Krakow area. Because the exact nature of these events cannot bequantified-for example, they may reflect economic restructuring and the adoption ofemission control measures in upwind areas-we assumed that the long-range backgroundwould change in proportion to the change in Poland's overall emissions, as foreseen inthe Stage I results. The assumption is not strictly accurate, in that some of the long-rangebackground comes from sources in other countries. However, changes in transboundarypollution were unknown; some countries may abate more than Poland, but others mightabate less. In the Stage I base case, Poland's total emissions are predicted to rise byabout 25 percent by the year 2010. Accordingly, we assume that the long-rangebackground in Krakow, in the base case, increases from 25 Ig/m3 to about 32 [Lg/m3 .
Combining our projections on emissions from the different sources in Krakow,our assumptions about the trend in the long-range background, and our TOAP matrix, wederive the implied concentrations of SO2 and PM. For illustrative purposes, the resultsfor the year 2010 are shown in Figure 3.1 (SO2) and Figure 3.2 (PM).
From Figure 3.1, it emerges that the environmental benefits of the base case areeven more pronounced in terms of peak SO2 concentration: in 2010, it will be 99 ±g/m3 ,down 13 percent on the 1990 level. The gain is caused by the fall in householdemissions, which is magnified in terms of SO2 concentration. Nevertheless, it must berecognized that the built-up area still faces concentrations of three times the limit set bythe current Polish legislation.
Although the peak average concentration of PM in the Krakow area is notexpected to change by 2010-remaining constant at 110 ~Ig/m3 (Figure 3.2)-it must berecalled that emissions of PM are actually 10 percent higher in that year, compared with1990. The explanation is that high-stack sources and boiler houses have a larger impactin the case of PM, offsetting the decline in residential coal use. By 2010, the peakconcentration of PM caused by households is only 14 1tg/m . In fact, high-stack sourcescreate an increasingly important secondary peak in concentration to the southeast of the
24 Energy Use, Air Pollution, and Environmental Policy in Krakow
town center: PM levels increase from about 60 [Lg/m3 in 1990 to more than 80 Ag/m 3 in2010 in that location, of which more than 70 pVg/m will be from high-stack sources. Ofcourse, these PM concentrations are all unacceptably high according to Polish standards.
Figure 3.1 SO2 Concentration, Krakow Area 2010 (Base)
Maximum concentration = 99 microgram/M3
Command-and-Control
CharacteristicsThe C&C scenario supposes that existing emissions standards for SO2 and PM
(Tables Al.l and Al.2) will be met by the year 2000, both by high-stack sources and bysmall businesses and boiler houses with a capacity exceeding 200 kW. To meet thesestandards, the existing large sources adopt FGD units and ESP to remove sulfur and PMfrom flue gases. The furnaces of boiler houses with a capacity below 200 kW are closeddown progressively, as their customers are connected to the district heating network. Theheat provided by this network is currently surplus to requirements at power stations, andno increase in power station usage will be required. We assume that half the existingsmall boiler houses will be connected by the year 2000 and the other half during thefollowing five years.
Policy Scenarios 1: Base Case and C&C 25
Figure 3.2 PM Concentration, Krakow Area 2010 (Base)
X.~~~~~~8
40 20
Maximum concentration = 110 microgram/m3
In addition to the regulations of 1990, the main C&C scenario imposes a completeban on coal usage in households and small businesses with a boiler capacity below 200kW. The ban is consistent with the assumptions adopted for households in the PolishC&C scenario of Stage 1, although in Stage 2 we have extended the ban to smallbusinesses (capacity less than 200 kW). Although such a ban is plausible, it has not yetbeen incorporated in Polish environmental policy. The coal ban is implementedprogressively, after 1995, and is fully effective by 2005. The affected consumers switchto gas. Meanwhile, because of the adoption of similar measures elsewhere, thebackground concentration of SO2 falls from 25 ALg/m3 to 18 pIg/m3, reflecting the fall ofabout 30 percent in Poland's overall emissions, calculated in the Stage I C&C case.
Projecting EmissionsThe projected emissions corresponding to the C&C scenario, detailed in Table
Al.8 (SO2 ) and Table Al.9 (PM), demonstrate the dramatic reductions in emissionspossible with regulations, if they are strictly enforced. Total emissions of SO2 and PMfall sharply from 1990 to 2000; and although they increase again thereafter, they are 34percent below the 1990 level in 2010. Compared with the base-case scenario, thereductions are progressive throughout the period, reaching 40 percent by 2010. Thebiggest percentage reductions, compared with the base case, occur in households, smallbusinesses, and boiler houses that convert to gas or district heating. In absolute terms, themost important factor is the impact of emissions regulations on large stationary sources.
26 Energy Use, Air Pollution, and Environmental Policy in Krakow
Projecting Air QualityFigures 3.3 and 3.4 are contour maps of the concentrations of SO2 and PM,
respectively, in the Krakow area, in the year 2010. They are based on the emissions datain Tables Al.8 and Al.9. Again, the beneficial consequences of the regulations arestriking. In the heart of Krakow, concentration levels for SO2 decline from the base-caselevel of about 99 ptg/m3 to about 26 jig/mr3 by 2010, mostly from the importedbackground. The main credit is to be given to the gasification program for householdsand small businesses. Despite some uncertainty about the effect of the local backgroundconcentrations, we conclude that SO2 would be within the required air quality standard of32 tg/im3 .
Figure 3.3 SO2 Concentration, Krakow Area 2010 (C&C)
Maximum concentration = 26 microgram/M3
The outcome for PM concentrations is more complex. Peak concentrations fall,from about 110 jtg/mr3 in the base case to 41 jig/M3 by 2010; and the C&C measureswould, therefore, again result in compliance with Poland's air quality standard (50 ,ug/m 3)by 2010. However, the location of the peak migrates to the southeast of Krakow, and thepeak concentration of PM in the city center falls to 34 jtg/m3. Most of the improvementin PM concentrations in the city center comes from converting small businesses to gasand connecting small boiler houses to the district heating network. The new peak in thesoutheast is primarily the product of several boiler houses, which have stacks in the rangeof 45 to 75 meters in height, which means that their emissions of PM are depositedmainly over their local area. The smaller percentage improvement in the southeast peakis caused by the relative importance of high-stack sources, which are not required to abate
Policy Scenarios 1: Base Case and C&C 27
to the same degree. The same is true of the outlying areas, where PM pollution is mainlyfrom high-stack sources.
Figure 3.4 PM Concentration, Krakow Area 2010 (C&C)
Maximum concentration = 41 microgram/m3
Alternative C&C scenarios
As both air quality standards are achieved with some room to spare, it is worthanalyzing the effects of easing the ban on coal usage in the household sector in the modelfor two reasons: first, because it is not part of current Polish legislation, and, second, itmay not be feasible to run gas distribution lines to all residential areas. We consider twosupplementary C&C scenarios, referred to as C&C I and C&C2.
C&C I removes the ban on coal usage completely, with the resulting concentrationof pollutants presented in Figures 3.5 and 3.6. Concentrations of SO2 and PM reachpeaks of 44 ,ug/m3 and 46 [ig/m3, respectively: both peaks are now located in the towncenter (the secondary concentration of PM, in the southeast, hardly changes). Lifting theban on coal usage by households would therefore still achieve PM standards, but SO2standards would be exceeded in a small part of the city center.
C&C2 imposes a selective ban on coal usage, implemented only for households inthe central 9 km of Krakow, with the resulting concentration levels in Figures 3.7 and3.8. The peak SO2 and PM concentrations reach 31 ZIg/m3 and 41 utg/m3, respectively,thus satisfying Polish air quality standards for both pollutants. The peak for SO2
concentration is located in the town center, PM concentration is now highest at thesoutheast peak.
28 Energy Use, Air Pollution, and Environmental Policy in Krakow
Figure 3.5 SO2 Concentration, Krakow Area 2010 (C&Cl)
C,<~~~~~~~~~~~~~~~-
Maximum concentration = 44 microgram/m3
Figure 3.6 PM Concentration, Krakow Area 2010 (C&CI)
Maximum concentration = 46 microgram/mn3
Policy Scenarios l: Base Case and C&C 29
Figure 3.7 SO2 Concentration, Krakow Area 2010 (C&C2)
_ _ 7
25 20~1
172Maximum concentration 31 microgram/m3
Figure 3.8 PM Concentration, Krakow Area 2010 (C&C2)
5~~~~~~~~~~~
Maximum concentration = 41 microgramIM3
4Policy Scenarios II: Economic InstrumentsIn chapter 3, we developed a base-case (BC) scenario as a rrference point for the
evolution of emissions and air quality in Krakow, absent explicit environmental policyactions. The BC scenario demonstrates the dramatic gains in emissions and air qualitythat might follow just from the implementation of better economywide policies.Nevertheless, emissions could start to increase above 1990 levels after 2005. Themaximum average concentrations of SO2 in Krakow continue below the 1990 level untilat least 2010, but PM reattains the 1990 figure by 2010, and concentrations of bothpollutants in any case lie outside the standards. Hence, as concluded in Stages I and 3,environmental policy is necessary to build further on the gains of economic restructuringand energy price reforms.
The C&C scenarios showed how emissions and air quality might evolve under astrictly enforced regulatory regime. Compared with the BC scenario, emissions fallconsistently throughout the period, and concentrations of SO2 and PM are both withinPolish standards in 2010. In this chapter, we employ the C&C scenarios as a baseline foremissions that the economic scenarios must reach. In addition, Poland's air qualitystandards establish the goal for concentrations at all points in the grid under the economicscenarios. Accordingly, within each class of economic instruments, we will look at twovariants: one designed to reduce emissions in the Krakow region to the level achieved inthe C&C case, and the other to ensure that the air quality objectives of Polish legislationare met. The possible savings in resources from economic instruments will then beinferred from the difference in costs between the C&C and economic scenarios.
Three classes of economic instruments are considered: emission taxes, fuel taxes,and tradable permits. However, only the first two are modeled, since we are able to relyon the formal equivalence of emission taxes and tradable permits for our discussion of theapplicability of the latter class of instrument in Krakow. The model focuses on bilateralchoices between abatement and paying an emission tax, or between fuel switching andpaying a fuel tax, rather than looking at the full three-way set of choices. In the case of afuel tax, only two options are available: changing the amount of pollutant in the fuel usedby employing abatement techniques would not reduce the tax liability. In the case of theemission tax, fuel switching is possible in principle, but it is not considered by the model,
31
32 Energy Use, Air Pollution, and Environmental Policy in Krakow
for the reasons given below. (For convenience, all the scenarios are summarized inTable 3.1 and described in detail in Table A 1.6.)
Emission Taxes
CharacteristicsIn the first set of scenarios applying economic instruments, emission taxes are
imposed, from 1995 onward, on larger emitters of SO2 and PM. As taxes will be aneffective pollution control instrument only if closely monitored, they are not applied togenerators of less than 200 kW capacity. For these smaller sources, it is more realistic toassume that alternative measures would be implemented, such as regulations or a tax onfuel. As in the main C&C scenario, small businesses and households are subject to a coalban, and small boiler houses are gradually connected to the district heating system. Weconsider later what would be the effect of a fuel tax.
Emission taxes can be established to meet a variety of different objectives. Forexample, the goal may be to ensure that, by 2010. emissions of SO2 and PM in theKrakow area are no higher than in the C&C scenario. Another goal would be to seekconicentrations of SO, and PM in the air that meet Polish air quality standards. We callthese scenarios ET1 and ET2, respectively. The levels of emission tax required underETI and ET2 are not necessarily the same, and air quality objectives could require ahigher tax than an emissions objective. If unit abatement costs in the high-stack sectorare lower than for other sectors, given the economies of scale in pollution control, thenhiigh-stack sources will abate emissions at a lower tax than low-stack sources. Thus, agiven emission tax will reduce emissions more than concentrations, because emissionsfrom low-stack sources raise pollutant concentrations more, per tonne of pollutantemitted, than those from high-stack sources.
Faced with the tax, the model presents each source with two options: to pay thetax on the current level of emissions; or to reduce emissions by fitting abatementequipment and pay the tax only on residudl emissions. A third possibility would be toswitch to a nonpolluting fuel, such as gas-which we consider in more detail in the fueltax scenario. But fuel switching for large sources would require more gas in the Krakowarea than is available today or anticipated in the base case over the next 20 years.Modeling a three-way choice would also have been computationally more complex,without materially altering the results. The availability of a third option could havereduced somewhat the resource costs associated with the use of emission taxes; but, as weshall see later, an emission tax in any case already represents the least-cost solution, sothe merits of the various policies would not have changed. We therefore restrict ourattention, for large sources, to reducing emissions through abatement teclnologies.
The decision about whether to pay or abate depends on the level of the chargecompared with the cost of reducing emissions. Equilibrium requires that the marginal
Policy Scenarios 11: Economic Instruments 33
cost of abatement be equal to the tax level. For an individual plant, the average cost ofabatement decreases with increased emission reduction (e.g., the cost of removing 40percent of the sulfur in the gases is more than half the cost of removing 80 percent). Eachsource correspondingly chooses a "corner solution," paying the tax and not abating at allor using abatement technology up to its efficiency limit and paying the charge only on theresidual emissions. We assume that the marginal cost of abatement is constant at alllevels of abatement efficiency, but this does not affect the result, as polluters will stillchoose corner solutions.
More formally, we define k as the annualized capital cost of the emissionabatement technology able to achieve 90 percent abatement levels and appropriate for aspecific source; c as the operating cost of that technology, per unit of emission; x as theannual emission level under the base case; and t as the emission tax rate (per unit ofemission). Without abatement, the annual tax liability of a source would be tx; whereasadopting the abatement technology and paying the tax on residual eiiiissions would cost k+ cx + (0.1 )tx. The source therefore chooses to adopt the abatement technology if t > (k/x+ c)/(0.9).
These cost characteristics produce a discontinuity in the relationship between thelevel of the emission tax and the reduction in emissions, especially at tax levels wherelarge sources start to adopt pollution control technologies. In our simulation, it meansthat it is not possible to set a tax on emissions that exactly achieves the level of emissions(or air quality) in the C&C scenario. We have therefore modeled the situation in whichthe tax is set at the lowest level necessary to reduce emissions (or concentrations) at leastto thie required level.
Emission Taxes to Meet Emission Objectives (ETI)Meeting the objective of reducing emissions to the levels in the C&C scenario
requires emission taxes of US$471 per tonne for SO2 and US$70 per tonne for PM,reflecting the marginal abatement costs for these two pollutants. The PM tax is muchlower, as discussed in chapter 2, for the following reasons:
* ESP costs are lower than FGD costs.
* To function efficiently, FGD units require a high level of dust collection, and ESP isoften justified by the increased efficiency that can be achieved in sulfur removal.
These taxes are higher than the fees in effect on April 1, 1993, by factors of more than 6and nearly 2, respectively. The corresponding emissions are in Tables Al.10 and Al.11,which compare them with those in the base case. By the year 2010, SO2 and PMemissions would be reduced by 52 percent with respect to the base case, 13 percent morethan in the C&C scenario. As explained earlier, marginally lower taxes would not havesatisfied the requirement that emissions should not be greater than in the C&C scenario.
34 Energy Use, Air Pollution, and Environmental Policy in Krakow
The resulting concentrations of SO2 and PM in the Krakow area for the year 2010are shown as contour maps in Figures 4.1 and 4.2. The concentration of S02 in the year2010 reaches a maximum of 32 Jig/m3, which satisfies Polish standards, and is 68 percentless than in the base case for 2010. The reduction stems mainly from the disappearanceof emissions from households, and the reduction in emissions from small businesses andboiler houses. However, the overall peak concentration level in the old town is higherthan in the C&C scenario despite a lower level of emissions. The problem is that thelevels of S02 concentration caused by emissions from high-stack sources in the C&Cscenario are already so low that any improvement has only a marginal effect on thequality of air. On the other hand, the concentration caused by emissions from smallbusinesses and boiler houses is higher than in the C&C scenario.
Figure 4.1 SO2 Concentration, Krakow Area 2010 (ETI)
Maximum concentration = 32 microgram/m3
Total annual average concentration of PM in 2010 reaches a maximum of 643Jig/m , to the southeast of the town center. Although representing a 42 percent reduction
with respect to the base case peak in 2010, it is higher than the Polish standards. Theresulting level of concentration would be caused mainly by emissions from high-stacksources, which caused the migration of the peak from the old town. As in the case ofSO2, taxing PM emissions to a level that ensures that total emissions are lower than in theC&C scenario would result in concentration levels higher than those achieved in the C&Cscenario.
Policy Scenarios II: Economic Instruments 35
Figure 4.2 PM Concentration, Krakow Area 2010 (ETI)
Maximum concentration = 64 microgram/m3
Emission Taxes to Meet Deposition Objectives (ET2)The emission taxes introduced above are calibrated to achieve at least the same
level of emission reduction as in the C&C scenario. Although they also achieve the airquality standards for SO2, PM concentration levels are too high. The goal of ET2,therefore, is to make PM concentration levels conform to the Polish air quality standardswhile leaving SO2 emissions unaffected. The goal is achieved by increasing the tax onPM emissions from US$70 per tonne to US$175 per tonne, again reflecting the marginalabatement costs (but for a more stringent control criterion). The increase in the tax levelon PM emissions makes it possible to reduce the tax rate on SO2 to US$420 per tonne,without encouraging an increase in emissions with respect to ET ], because thewidespread adoption of ESP increases the efficiency of FGD. Compared with the Polishemissions fees in effect on April 1, 1993, these taxes represent increases of 460 percentfor PM and 560 percent for SQ2.
The higher tax on PM emissions induces a 78 percent reduction in emissions in2010, with respect to the base case (Table Al.12). High stacks would reduce emissionsby 78 percent, boiler houses by 76 percent, and small businesses by 53 percent.Households are still subject to a ban on coal usage. Because SO2 emissions areunchanged from ETI, so are concentration levels, and we can focus on the level of PMconcentration generated by the reduced amount of emissions.
36 Energy Use, Air Pollution, and Environmental Policy in Krakow
Figure 4.3 presents the PM concentration levels under the higher tax. The overallconcentration level reaches a maximum of 31 Ilg/m 3, at the southeast peak, less than halfthe level achieved by the tax imposed in ET], and well within the Polish standards. Theoverachievement of the standards is a function of the discontinuities in the modeling ofthe decision process by which sources adopt abatenment technologies. As usual, high-stack sources are mainly responsible for the southeast peak, whereas small businesses andboiler houses are the primary cause of the secondary peak, in the town center.
Figure 4.3 PM Concentration, Krakow Area 2010 (ET2)
Maximum concentration = 31 microgram/M3
Fuel Taxes
Characteristics
In the second set of scenarios applying economic instruments, we analyze theeffect of taxing coal and coke, the fuels mainly responsible for SO2 and PM pollution inKrakow, to reduce their consumption. Cleaner fuels, such as gas, are excluded from thetax as a way of encouraging households and businesses to switch to them. Unlike thecase with the emission tax scenarios (ETI and ET2). small businesses and households are
Policy Scenarios I: Economic Instruments 37
not subject to a ban on coal use. The costs of switching from coal and coke to gas-firedboilers for households, small businesses, boiler houses, and high-stack emitters aredescribed in Annex 2, section 2.2. Unlike emission taxes, fuel taxes give no incentive toagents to fit abatement equipment; they can only save by reducing their consumption ofthe taxed fuel.
Switching to gas to avoid paying the tax incurs a capital cost (equipmentconversion) and additional anlual costs (the higher operating cost of gas, in calorificterms). We define q as the aLnual level of coal consumption; Pc as the price of coal; pG,as the price of gas; FG as the coefficient of equivalence between coal and gas, in terms ofdelivered calorific value, as defined by equation 4 in Annex 2; k(, as the annualized costof equipment conversion to gas; and tF as the coal tax per unit of coal. The annual cost ofnot converting to gas and paying the fuel tax on the annual level of coal consumptioln isequal to qtF. Converting to gas, on1 the other hand, would involve an annual cost ofkic + q(pcFG - Pc) Therefore, a source will switch to gas if tF > k0 /q + pJF(, - pc.
The fuel tax can be either a specific tax, levied on each tonne of coal consumed,or an ad valorem tax, based on the fuel price. Because households typically face a higherfuel price than industrial users, a specific tax results in the latter paying a higher advalorem rate. However, as will be seen below, industrial users' behavior is unaffected bythis difference at tax rates sufficient to ensure compliance with air quality standards.
As with emission taxes, fuel taxes can be set to reduce emissions to the same levelachieved by the C&C scenario or to limit emissions to attain the Polish concentrationstandards. We call these scenarios FTI and FT2. respectively. Because households havea greater responsibility for pollutant depositions than emissions, tax policies that have aproportionately stronger effect on households will also affect pollutant concentrationsmore than emissions.
In order to analyze the impact of fuel taxes, assumptions must be made about theprice elasticities of demand for the different fuels. Given the uncertainties anddeficiencies in the Polish data on the relationship between energy prices and energydemand, we rely on the same approach as in Stage I (Bates, Cofala, and Toman 1994: 16,20). The model introduces a set of long-run own-price elasticities of fuel demand that isbroadly consistent wvith other estimates (Bates and Moore 1992; Bohi 1981), and noattempt is made to incorporate cross-price elasticities. The full set of assumptions is inTable 4.1, reproduced from Bates. Cofala, and Toman (1994. Table A1.6) In brief, therelevant elasticities for present purposes are -0.4 for households and -0.5 for other(industrial/business) sectors.
38 Energy Use, Air Pollution, and Environmental Policy in Krakow
Table 4.1 Own-Price Elasticities in Model
Fuel/sector Industry Transport Residential! commercial
Note: In the transport sector, it is assumed that only the dcmand for motor fuels (gasoline and diesel oil) is priceelastic. Little hard coal is consumed in this sector; and although electricity is used by railways, electricity costs are asmall proportion of total costs, so it has been assumed that no demand adjustment will occur as a result of higherelectricity prices resulting from stricter environmental regulations.
Fuel Taxes to Meet Emission Objectives (FTI)To meet the emissions targets of the C&C scenario, a specific tax of US$14 per
tonne is needed on coal and coke, which translates into an ad valorem tax rate of 14percent on household fuel and 23 percent on industrial fuel. Compared with the basecase, total emissions fall by 42 percent in 2010, principally because of abatement by high-stack sources (they are the main emitters and experience a 42 percent reduction). Smallbusinesses and boiler houses reduce emissions by 41 percent and households by almost 6percent. The large reduction by industrial sources is attributable to some switching togas. Those with higher load factors are the first to switch, as their intensive use of newgas-powered installations makes the investment worthwhile. Households and other smallsources do not switch from coal to alternative fuels. The only reduction in theiremissions is from the fall in their coal consumption brought about by the increase inprices.
Although they meet the criteria for emission reduction established by the C&Cscenario, the resulting concentrations for SO2 are not brought down to acceptable levels.The SO2 and PM concentrations in the FTI scenario are illustrated in Figures 4.4 and 4.5,respectively. In comparison with the base case, SO2 concentrations in 2010 fall from 99
3to 54 jig/m . Although this represents a fall of 45 percent, the peak remains far in excessof the 32 jg/mi3 standard. PM concentrations fall from 110 to 49 jLg/mi3 in 2010, and aretherefore just within the standards.
The FTI scenario delivers adequate emission reductions but not pollutantconcentration reductions for S02. Households are the principal source of SO2concentrations in Krakow, even though their emissions are far lower than those ofindustrial sources (high stacks in particular). Consequently, if Polish air quality standardsare to be met, a fuel tax must have a significant effect on household emissions. Given thelower cost of gas conversion for industrial users, any tax high enough to induce asufficient reduction in coal demand by households will induce large-scale switching togas by the industrial sector. The implications of this phenomenon are explored further inthe second fuel tax scenario.
Policy Scenarios 11: Economic Instruments 39
Figure 4.4 SO2 Concentration, Krakow Area 2010 (FT1)
10
2~~~~'
Maximum concentration = 54 microgram/m3
Figure 4.5 PM Concentration, Krakow Area 2010 (FT1)
Maximum concentration = 49 microgram/m3
40 Energy Use, Air Pollution, and Environmental Policy in Krakow
Fuel Taxes to Meet Deposition Objectives (FT2)To reach the required standard for SO2, the fuel tax has to be raised much further,
to US$48 per tonne of coal or coke, equivalent to an ad valorem rate of almost 50 percentfor households and 80 percent for industry. At this level, households still do not switchto alternative fuels, but their coal consumption falls by 20 percent. The emissions fromall other sources are almost completely eliminated, and the resulting peak ambientconcentration of 33 Aig/m3 stems almost entirely from households (12 ptg/m3) and thebackground (18 [ig/m3 ). Although peak ambient concentration is fractionally above theair quality standard, it can be considered satisfactory given the uncertainty inherent in thedata.
The air quality standard for PM, on the other hand, is overachieved, withconcentrations peaking at 15 ,ig/m3. principally because industrial users switch to gas.Tables Al.13 and Al.14 illustrate emissions of SO, and PM for FT2 relative to the basecase. The resulting concentrations for 2010 are shown in Figures 4.6 and 4.7,respectively.
Figure 4.6 SO2 Concentration, Krakow Area 2010 (FT2)
Maximum concentration = 33 microgram/m3
Although the above analysis involves a unit tax per tonne of coal and coke,exactly the same result follows if the tax is a percentage of the coal price. Householdemissions only fall to acceptable levels in 2010, when the fuel tax reaches 49 percent. Atthis rate, industrial users will be paying US$29 per tonne (in 2010) rather than US$48 pertonne in the previous scenario. Nonetheless, more than 99 percent of emitters in theindustrial sectors convert to gas. It costs industrial users far less to convert, whichexplains why it is possible to replicate the emissions reductions (but not concentrations)of the C&C scenario at relatively low tax rates. It is also interesting to note that a unit tax
Policy Scenarios 11: Economic Instruments 41
of approximately US$80 per tonne (82 percent in 2010) would be necessary to inducehouseholds to switch from coal to gas. In contrast, levying a tax of US$15 per tonneleads some 40 percent of industrial users to switch to gas, whereas US$18 per tonne leadsto an 80 percent reduction in emissions from this sector.
Figure 4.7 PM Concentration, Krakow Area 2010 (FT2)
Maximum concentration = 15 microgram/M3
Tradable Permits
CharacteristicsIn theory, emission taxes and tradable permits are two dimensions of the same
policy framework (Eskeland and Jimenez 1991). A tax would reduce emissions, throughfuel switching or abatement, as long as marginal abatement costs are lower than the taxlevel. The price of tradable permits would act in the same way. In a world of perfectcertainty, the tax that delivers a certain level of emissions is equal to the permit price thatwould emerge in a market where the corresponding quantity of permits is available.
To show how this equivalence works in practice, consider a situation in whichemissions are initially unconstrained. A permit system is then introduced, in which thetotal amount of permits issued requires a reduction in emissions by 1 tonne of pollutant,with respect to the original level. If permits are freely traded, the source with thecheapest abatement cost would reduce emissions by the required amount, and the permitprice would be equal to the cost of such reduction. Assuming that marginal abatementcosts are increasing within each source, a tax at the level of the resulting permit price
42 Energy Use, Air Pollution, and Environmental Policy in Krakow
would have the same effect on emissions, since only the cheapest source would abate bythe same amount.
If the number of permits is reduced, and more emission abatement is required, thepermit price rises. Only the sources that have abatement costs below the new permitprice would find it economic to abate, avoiding the need to buy permits. By the same lineof reasoning, the identical sources would abate if faced by an emission tax equal to thepermit price. Apart from showing the theoretical equivalence between emission chargesand tradable permits based on emissions, this argument provides a reference fordiscussing the implications of our results for a tradable permit scheme.
Tradable permits are of two types: emission permits and deposition permits. Withthe former, each source is required to hold enough permits to cover its emissions; withthe latter, the permits must cover the source's contribution to depositions at a designatedmonitoring station. With emission permits, emissions are treated as perfectlysubstitutable, regardless of where they occur. They are most appropriate for uniformlymixed pollutants, such as C02 , which cause the same amount of damage wherever theyare emitted. With deposition permits, emissions from different sources are regarded asdifferent problems, depending on their effect at the monitoring station. They are mostappropriate for pollutants such as PM, which cause local and specific damage.
In theory, air quality control through deposition permits should involve as manydifferent classes of permits as there are air quality monitoring stations. A source shouldhold a portfolio of permits of different classes, according to the relative effect of itsemissions at different stations. Sources located in different places would need, in general,a different portfolio of permits. Implementing enough separate deposition permit classesto tackle the spatial dimension of air quality control would be very complex, and it is notsurprising that deposition permits have never been used in practice. However, a lesscomplex permit system could go some way toward taking into account the spatial effectof emissions, and their impact on air quality. Such a scheme has been described in whicheach source would be given a score representing the effect of its emissions on theconcentration of pollutants at various monitoring stations (U.K. Department of theEnvironment 1992). The permit system would allow trading between sources on thebasis of "rates of exchange," determined by the relative scores of the different sources.Although this scheme cannot guarantee that a particular standard of air quality isachieved in all locations, it corrects for the differential effects of emissions from differentsources on air quality, something that traditional emission permits cannot do withoutimposing additional constraints on permit trading.
Application to KrakowThe results presented in this report have shown that the relationship between
emissions and air quality is not simple or monotonic. It largely depends on the type andlocation of the sources from which the emissions emanate. High-stack sources in the
Policy Scenarios 11: Economic Instruments 43
Krakow area are responsible for the largest share of emissions of both pollutants, but therelative impact of low-stack sources on concentration levels is much greater. However, itis generally cheaper to reduce emissions from large sources than from small sources,mainly because of the economies of scale in abatement and the higher differential in fuelprices that small sources face. Thus, a contrast is notable between the economics ofemission reduction and the effect of emissions on air quality.
The emission tax needed to induce high-stack sources to abate is lower than thatneeded to induce households to switch to gas. In fact, almost all large-source emissionswould be eliminated by a tax of US$600 per tonne of SO2 and US$780 per tonne of PM,but households would only switch to gas if the tax reaches an equivalent level ofUS$2,667 per tonne of SO2 or US$3,333 per tonne of PM, based upon the assumptionsabout SO2 and PM emissions per tonne of coal used in compiling our data base.Admittedly, our model assumes that all households have identical technicalcharacteristics and face the same prices for fuels, so they would all switch at once.Nonetheless, the striking difference between households and other sources would stillhold, even if conversion costs for households varied more continuously.
Because of the equivalence of emission permits and taxes, our results for theemission and fuel tax scenarios can be interpreted in terms of a tradable permit system.As fuel tax scenario FT2 shows, if compliance with Polish air quality standards has to beachieved by the introduction of a tradable permit scheme extended to all sources, a permitprice of US$1,600 per tonne of SO2 (equivalent to the fuel tax of US$48 per tonne ofcoal) would result. Such a permit price would induce almost complete switching to gasby small businesses, boiler houses, and high-stack sources, whereas households wouldonly reduce coal consumption by 20 percent because of increased prices.
Alternatively, households and small sources (capacity less than 200 kW) could besubjected to a coal ban while the permit scheme is confined to larger sources. In thiscase, issuing a quantity of emission permits consistent with the achievement of the Polishair quality standards would result in an equilibrium permit price of US$420 per tonne forSO2 and US$175 per tonne for PM, as in the emission tax scenario.
When establishing a permit market, it is important to consider the number ofpermits to issue (i.e., the amount of pollution to allow). If the policy target is set in termsof total emissions, the number of permits should obviously be equal to this target.Whatever the final allocation of the permits across different sources, the target wouldthen be met with certainty. If, however, the policy target is set in deposition orconcentration terms, a given number of emission permits may over- or underachieve thetarget, depending on which sources end up holding the permits.
Our results suggest that if households are included in the permit scheme andpermits are allocated in proportion to existing emissions, then households would purchasea disproportionately large share of permits because of their high abatement costs. Thenumber of permits that would allow the Polish standards to be achieved-especially in
44 Energy Use, Air Pollution, and Environmental Policy in Krakow
the case of SO2, where a substantial background level has to be included-is thereforerelatively small, and their price is correspondingly high. At this level of permit price, allother sources would find it convenient to abate emissions, while households would stillemit about 80 percent of their base-case level.
The implementation of a tradable permit scheme based on a scoring system (alongthe lines suggested above) would overcome the difference in emission reductionopportunities across different sources. This is equivalent to a tax system in which the taxlevied on households is higher (on a per-tonne-of-coal basis) than that facing othersources. For SO2 , which has the most stringent standards relative to the base case, ourresults indicate that an exchange rate of about 6:1 would be appropriate. A permit priceof US$471 per tonne of SO2 would emerge from a scheme intended to achieve theconcentration standards everywhere in the Krakow area. With a 6:1 exchange rate, smallsources would face an effective permit price of US$2,826 per tonne of SO2. Such apermit price level would induce these sources to convert to gas.
A further alternative would be to create a more sophisticated scoring systemwhere, for example, small sources located in the old town center might be assigned ahigher score (6:1) than all the other small sources and the large sources. The result ofsuch a policy would be to induce a complete switch to gas for the small sources located inthe critical central area, solving in this way the peak concentration problem. Smallsources in other locations would continue to emit and hold permits with a price in theorder of US$15 per tonne of coal. Large sources would abate in the same way as underan emission tax. In both cases, however, the same results can be achieved by imposing aban on coal usage by households, everywhere or only in the town center. A coal banwould be easier to implement and monitor.
5Conclusions:
Can Economic Incentives Really Help?In chapters 3 and 4, we have shown the effects of different policy scenarios on the
level of emissions and on the concentration of pollutants in the Krakow area. The mainfeatures of those scenarios were summarized in Table 3.1 and detailed in Table A1.6. Wenow draw together the results of the policy analysis and modeling to identify the resourcecosts involved in these policies and, where relevant, the financial consequences of thetaxes that accrue. Finally, we draw some general conclusions on environmental policy todeal with emissions and air pollution in the Krakow region and on the extent to whicheconomic incentives can really help.
Resource Costs
Table Al.15 presents estimates of the annualized resource costs of the differentpolicy scenarios. The values refer to the year 2010 and are calculated with reference tothe base case. These resource costs cover the capital and operating costs of whateveraction the source chooses to take in response to the introduction of each policy scenario,but they exclude any tax that the source pays, as this is just a transfer. Regarding thedifferent scenarios considered, resource costs may therefore include a subset of thefollowing items:
* The capital and operating costs of any emission abatement technology
* The capital cost of equipment conversion to gas
* The capital and operating costs of coinecting boiler houses to the district heatingsystem
* The difference in the cost of producing the same end-use quantity of heat, with gasand coal.
Unlike our procedure in Stage 1, we have not tried to include estimates of the lossof producers' and consumers' surplus, which arises as the additional costs of pollutioncontrol are passed through to consumers in the form of higher prices for final goods and
45
46 Energy Use, Air Pollution, and Environmental Policy in Krakow
services (Bates, Cofala, and Toman 1994, chapter 2). It is not clear how higher pollutioncontrol costs incurred by energy supply enterprises in the Krakow area would be reflectedin energy prices, which are set according to a much broader range of costs. Furthermore,based on the results of Stage 1, there are reasons for supposing that the substance of ourconclusions should not be biased by excluding the loss of producers' and consumers'surplus from our results: Resource costs account for most of the total economic costs ofpollution control.
As expected, policies based on economic instruments, such as emission chargesand fuel taxes, are cheaper than C&C policies. However, only a subset of four of thescenarios achieves the twin objectives of reducing both emissions and amnbientconcentrations of SO2 and PNM to acceptable levels:
* The basic command-aAd-control scenario (C&C)
* A variant of the command-and-control scenario, relaxing the coil ban on householdsoutside the city center (C&C2)
* Emission taxes of US$175 per tonne on PM and US$420 per tonne on S02, combinedwith regulatory measures on small sources (ET2)
* An across-the-board tax of US$48 per tonne on coal and coke (FT2).
We now focus our discussion on these four policy scenarios; for convenience, thecorresponding costs are summarized in Table 5.1.
Table 5.1 Resource Costs of Selected Policy Scenarios (US$ millions per year)
Smallbusinesses
Small Boiler and boiler High-businesses houses houses stack
Scenario Households (<200 kW) (<200 kW) (>200 kW) sources Total
C&C 0.97 0.19 2.39 6.16 33.97 43.67
C&C2 0.37 0.19 2.39 6.16 33.97 43.08
ET2 0.97 0.19 2.39 0.38 30.57 34.49
FT2 0.00 0.14 1.10 1.12 34.79 37.15
C&C Scenarios
In each of the four scenarios, the resource costs of pollution control fallpredominantly on large sources. However, the two C&C scenarios are the most costly, atmore than US$43 million per year, because they require all the large sources to abate.Thus, the cost of C&C would represent 19 percent of total fuel expenditures in Krakowfor the year 2010, which we have estimated at US$230 million. The outcome is that
Conclusions: Can Economic Incentives Really Help? 47
high-stack sources, along with small businesses and boiler houses with capacity in excessof 200 kW, end up reducing their emissions by 50 percent. That is an expensive solution,given the scale economies (with respect to sulfur abatement) characterizing abatementtechnologies. Broadly, it is only possible to abate emissions by 50 percent by installingthe same equipment as would be required for complete abatement (see the discussion of"end-of-pipe" technologies in chapter 2). The C&C scenarios thus involve largerresource costs than the scenarios based on economic instruments, which allow sources tochoose between abating completely, and not abating at all, but paying taxes.
Economic Instruments
With regard to the scenarios involving economic instruments, we have assumedthat emission taxes could only be applied in practice to large sources. On the other hand,we know that emissions from low-stack sources contribute disproportionately to the airquality problem in Krakow. To meet the Polish air quality standards, scenario ET2therefore combined emission taxes with a ban on coal usage in the household sector andrequired the connection of small boiler houses to the district heating system. Theoutcome was that scenario ET2 provided the least-cost method of pollution control, anannual cost of US$34.5 million (i.e., about 15 percent of fuel expenditures in 2010). Thereason is that despite the inclusion of C&C measures for small sources, emission taxesallow for the redistribution of pollution control responsibilities among large sources tominimize costs. Consequently, under ET2, resource costs are 20 percent lower than inC&C2. Most of the cost savings are achieved by small businesses and boiler houses withcapacity greater than 200 kW, as emission taxes allow a major part of the requiredreduction in emissions to be reallocated to the high-stack sector and, because ofeconomies of scale in pollution abatement, high stacks face lower costs in reducingemissions.
An attractive feature of a fuel tax is that it widens the scope for reallocatingpollution reduction responsibilities, so that (unlike the situation of emission taxes) thehousehold sector can be included. Households, however, are characterized by the highestcosts for emission reduction and would not switch to gas when faced with the tax levelsassumed in FT2. The reduction in coal consumption in households therefore reliesentirely on the own-price elasticity of demand with respect to solid fuels. Given thehigher costs of fuel switching in households, we might have simulated a differential fueltax, involving a higher tax for households than for industry. We did not do so becausesevere practical obstacles would ensue from maintaining such a differential without theappearance of "black markets" and "smuggling" between the two sectors. Furthermore, asimplification had to be made in the modeling, because of the lack of data: Individualhouseholds are assumed to be homogenous with regard to the cost of switching, whereas,in practice, households would differ, and exhibit a continuum of switching, as the coal taxincreases. Nevertheless, differences in the cost of switching between households areunlikely to be large enough to undermine the result that other sources-high stacks in
48 Energy Use, Air Pollution, and Environmental Policy in Krakow
particular-would have to abate substantially more to compensate for the effect ofemissions from households on ambient concentrations. Total emissions would thereforehave to be significantly lower to achieve the same standards as when households aresubject to a ban on coal usage. This explains why resource costs under the FT2 scenario,although lower than the C&C scenarios, are 8 percent higher than in the ET2 scenario.Furthermore, the levels of tax rate necessary (for households and industry) would beunacceptably high in political, social, and economic terms. The fuel tax facing industry,at 80 percent ad valorem, would constitute a major competitive disadvantage to manyiirms in the Krakow area. The rate of almost 50 percent on households would mean thatindividuals would be paying US$1 million per year in fuel taxes.
Tax Revenues
A full investigation of the wider economic implications of the introduction ofpollution charges and fuel taxes on income distribution and the prices of final goods isbeyond the scope of this study. Nevertheless, it is appropriate to consider the taxrevenues generated by such charges. Estimates are presented in Table 5.2, correspondingto the relevant scenarios (ETI, ET2, FTI, and FT2) based on simulations for the year2010. Hlowever, we do not discuss here ETI and FTI. which achieve emissions targetsbut do not satisfy air quality standards.
Table 5.2 Revenues from Pollution Charges (2010)(US$ millions)
Scenario Households Other sources Total
E r 1 0 28.9 28.9
ET2 0 26.6 26.6
FTI 0.4 18.6 18.9
FT2 1.1 0.) 1.3
Imposition of a coal ban on small sources and of emission charges on largesources at levels that ensure that the Polish concentration standards are achieved for bothSO2 and PM would raise US$26.6 million per year (ET2). This amount represents nearly12 percent of estimated fuel expenditures in 2010 and would include revenues ofUS$23.1 million raised through a tax on SO2 emissions and revenues of US$3.5 millionfrom a tax on PM emissions. Hence, ET2 is not only the scenario involving the lowestresource costs to achieve emissions and concentration objectives; it also generates thelargest amount of revenue for the government, all of it from large industrial sources.
When economic instruments are widened to include all sources, through a fuel taxthat seeks to achieve similar concentration standards, tax revenues are reduced to US$1.3million. In this scenario, the household sector is the primary contributor (85 percent of
Conclusions: Can Economic Incentives Really Help? 49
the total), because the high level of the fuel tax imposed induces the majority of all othersources to switch to gas.
Conclusions and Recommendations
The Stage 2 analysis confirms several of the conclusions of Stage I (summarizedin chapter 1). First, although economic restructuring can be expected to decreaseemissions of SO2 and PM, at least until 2005 (Table Al.5), strictly enforced C&C shouldlead to considerable additional decreases in emissions (Tables Al.8 and Al.9). Second,clear cost savings derive from using incentive-based instruments (Table A1.15). C&Cpolicies, which impose emissions targets on all large sources, may force them to incurunnecessary costs in attaining air quality objectives. Third, a tax on a single fuel is notsufficiently broadly based to be an effective policy instrurment for pollution control. InStage 1, even with a 1 00 percent tax on coal, it was not possible to reduce emissions ofSO2 and PM sufficiently to satisfy environmental objectives. In Stage 2, although a coaltax was calculated that meets emissions and depositions goals, the level of the tax wasunlikely to be acceptable in political, social, or economic terms. Fourth, theimplementation of any policy to reduce emissions and improve air quality in the Krakowarea will raise the costs of energy supply. However. the possible effect on energy pricesis likely to be relatively minor next to the consequences of economic restructuring inPoland as a whole. We indicated above that environmental policy might increase totalfuel expenditures in Krakow by 15 to 20 percent in 2010. The Stage 1 results, in contrast,implied that economic restructuring in Poland as a whole would require increases in realfuel prices and expenditures substantially in excess of this figure (Bates, Cofala, andToman 1994: 32 and Table AI.4).
Unlike our procedure in Stage 1, we did not design Stage 2 to examine the costsof meeting EC or German standards or to address policy issues related to decentralizedemissions sources, such as transport. On the other hand, Stage 2 yields some interestinginsights into differences between pollution control policies that focus on air quality ratherthan emissions. Environmental damage from SO, and PM arises from excessiveconcentration of pollutants in the air or high levels of deposition. In the Krakow area, thehousehold sector has a disproportionate effect on the concentration of pollutants in the airand high abatement costs. In this situation, an approach based purely on economicinstruments faces difficulties in delivering an efficient solution to the air quality-asopposed to the emissions-problem.
* Emission taxes cannot be applied to the household sector because of the complexityof implementing and monitoring such economic instruments at the household level.It is therefore more efficient to impose a ban on coal use (possibly limited to the towncenter) and to leave emission taxes to allocate pollution control responsibilitiesamong the other sources. Among all the scenarios considered, this particular mixture
50 Energy Use, Air Pollution, and Environmental Policy in Krakow
of C&C and economic instruments satisfies the emissions and air quality objectives atleast cost (Table 5.1).
* For tradable permits, we argued that a simple emission permit trading systemextended to all sources would not be appropriate to tackle the air quality problem inKrakow. Although more complex systems may be devised in which "exchange rates"are introduced between permits from different sources, they would still have to inducethe conversion to gas of the household sector, at least in the critical town center. Sucha solution can be achieved more easily and more economically by introducing anadministrative control on the use of coal by households. In any case, an emissiontrading system confined to large sources would yield a result similar to that of ouremission tax scenario.
* A tax on solid fuels has the attraction that it is relatively easy to administer, providedthat no attempt is made to differentiate between consumer groups. On the other hand,a swingeing tax rate is necessary to cut household emissions enough to meet ambientair quality targets: Given the high costs of fuel switching for households, the cut iseffected solely through the own-price elasticity for solid fuels, which is low (Table4.1); emissions in the high-stack sector have to be eliminated almost completely tooffset the effect of household emissions on depositions (Tables Al.13 and A1.14).Consequently, resource costs under the uniform fuel tax are higher than thecombination of emission taxes and C&C (Table 5.1).
Stage 2 therefore reinforces one of the most important conclusions of Stage 1: Inpractice, environmental policy may have to rely on a mixed strategy, based on applyingcommand-and-control measures to households and economic instruments to largersources. Economic incentives, such as emission taxes and emission permit trading, canhelp to reduce the costs of furthering emissions and air quality objectives, in the case oflarge pollution sources. Nevertheless, it makes sense to treat small pollution sourcesdifferently, because they exhibit different abatement costs and markedly different effectson the local environment. In recommending a mixed strategy, Stage I pointed primarilyto the large increase in emission fees that would be associated with a pure economic-incentive strategy, the high costs of applying economic instruments to small sources, andthe institutional difficulties associated with economic instruments. Although theincreases in emissions fees from the April 1, 1993, levels implied by Stage 2 are lessexorbitant than Stage 1, we have added a further dimension to the argument in Stage 2,stemming from the practical difficulties of using economic instruments to target airquality rather than emissions.
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Bates, R. 1993. "Economic Policy Instruments for the Control of Air Pollution in Poland." InProceedings of the 86th Annual Meeting of the Air and Waste Management Association,vol. 2, Denver, Colorado.
Bates, R., S. Gupta, and B. Fiedor. 1994. "Economywide Policies and the Environiment: A CaseStudy of Poland." Environment Working Paper 63. World Bank EnvironmentDepartment, Washington, D.C.
Bates, R., J. Cofala, and M. Toman. 1994. Alternative Policies for the Control of Air Pollutionin Poland World Bank Environment Paper 7. Washington, D.C.: World Bank.
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EAP (Environmental Action Programme for Central and Eastern Europe). 1993. Documentsubmitted to the Ministerial Conference, Lucerne, Switzerland, 28-30 April 1993.Washington, D.C.: World Bank, March.
Eskeland, G. S., and E. Jimenez. 1991. "Choosing Policy Instruments for Pollution Control: AReview." Policy Research Working Paper 624. World Bank, Country EconomicsDepartment, Washington, D.C.
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Gyorke, D., M. Blinn, and T. Butcher. 1992. "The Krakow Clean Fossil Fuels and EnergyEfficiency Project." In Proceedings of the 85th Annual Meeting of the Air and WasteManagement Association, vol. 11, Kansas City, Missouri.
Hughes, G. 1991. "Are the Costs of Cleaning up Eastern Europe Exaggerated? EconomicReform and the Environment." Oxford Review of Economic Policy 7 (4): 106-36.
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Juda, J., K. Budzinski, and J. Dobija. 1992. A Concept of the Pollution Risk Integrated ModelAssessment. Warsaw: Warsaw University of Technology.
Kornai, J. 1980. Economics of Shortage. 2 vols. Amsterdam: North Holland.
Nowicki, M. 1992. Environment in Poland. Issues and Solutions. Warsaw: Ministry ofEnvironmental Protection, Natural Resources and Forestry.
1993. Environment in Poland: Issues and Solutions. Dordrecht: Kluwer.
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52 Energy Use, Air Pollution, and Environmental Policy in Krakow
Pearce, W., and R. Turner. 1990. Economics of Natural Resources and the Environment.Baltimore: Johns Hopkins University Press.
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1992. Environmental and Natural Resource Economics, 3rd ed. New York:HarperCollins.
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Annex 1: Supplementary Tables
Table A1.1 Polish Standards for S02 Emissions(grams of S02 per GJ of fuel input)
Existing plant
Fuel Technology Until 1997 After 1997 New plant
Coal Fixed grate 990 720 650
Mechanical grate 990 640 200
Pulverized fuel 1,240 870 200
Lignite All technologies 1,540 1,070 200
Coke Fixed grate 410 410 410
Mechanical grate 500 250 250
Fuel oil Capacity under 50 MW thermal 1,720 1,250 1,250
Capacity over 50 MW thermal 1,720 170 170
Table A1.2 Polish Standards for Particulate Matter Emissions(grams of PM per GJ of fuel input)
Existing plantF ruel Technology Until 1997 After 1997 New plant
Coal Fixed grate 1,850 1,370 1,370
Mechanical grate 800 600 600
Dry pulverized fuel 260 130 130
Wet pulverized fuel 170 90 90
Lignite Dry pulverized fuel 195 95 95
Wet pulverized fuel 140 70 70
Coke Fixed grate 720 235 235
Mechanical grate 310 235 235
53
54 Energy Use, Air Pollution, and Environmental Policy in Krakow
Table A1.3 Polish Standards for NO, Emissions(grams of NO, per GJ of fuel input)
Existing plant
Fuel Technology Until 1997 After 1997 New plant
Coal Fixed grate 35 35 35
Mechanical grate 160 95 95
Dry pulverized fuel 330 170 170
Wet pulverized fuel 495 170 170
Lignite Dry pulverized fuel 225 150 150
Wet pulverized fuel 225 150 150
Coke Fixed grate 45 45 45
Mechanical grate 145 145 110
Fuel oil Capacity under 50 MW thermal 120 120 90
Capacity over 50 MW thermal 160 160 120
Natural gas Capacity under 50 MW thermal 60 35 35
Capacity over 50 MW Thermal 145 85 85
Wood Grate 50 50 50
Annex 1 55
Table A1.4 Maximum Pollutant Content of Fuels and Abatement EfficiencyConsistent with Polish Emission Standards
High stack: cement Coal 15,763 1.12 1.26 1.26 1.31 1.31
High stack: electricity Coal 2,190,149 1.00 1.14 1.32 1.50 1.68
High stack: tobacco Coal 33,165 0.00 0.00 0.00 0.00 0.00
Units used for the consumption of fiuels in 1990 are 103m for gas: tonnes for coal, coke, and oil; andMWh for electricity.
b All boiler houses are assumed to follow the district heating index.
Annex 1 59
Table A1.8 SO2 Emissions in the C&C Scenario
Category 1990 1995 2000 2005 2010 2015
Emissions (tonnes)
Households 2,520 2,787 1.082 0 0 0
Small businesses 825 611 420 246 230 215
Boiler houses 2,758 2,073 1.487 905 1,026 1,125
High stacks 99,401 59,185 60,769 63,659 68.073 72,664
TOTAL 105,504 64,655 63.758 64,810 69,328 74,004
Reduction from base case (percent)
Households 0.0 0.0 50.0 10(.0 100.0 100.0
Small businesses 0.0 25.7 47.2 68.2 66.3 63.7
Boiler houses 0.0 30.8 53.1 75.4 75.4 75.4
High stacks 0.0 34.9 35.4 36.2 37.3 38.3
TOTAL 0.0 33.7 36.4 38.8 39.3 40.0
Table A1.9 Particulate Matter Emissions in the C&C Scenario
Category 1990 1995 2000 2005 2010 2015
Emissions (tonnes)
Households 2,023 2,238 889 34 32 33
Small businesses 625 455 300 154 133 110
Boiler houses 2.210 1,662 1,194 729 826 906
High stacks 79.526 47,350 48,615 50,928 54,458 58,131
TOTAL 84,383 51,705 50.999 51,844 55,450 59,180
Reduction from base case (percent)
Ilouseholds 0.0 0.0 48.9 97.4 95.4 93.0
Small businesses 0.0 27.1 50.0 73.2 73.1 73.2
Boiler houses 0.0 30.8 53.0 75.2 75.2 75.2
High stacks 0.0 34.9 35.4 36.2 37.3 38.3
TOTAL 0.0 33.7 36.4 38.8 39.3 40.0
60 Energy Use, Air Pollution, and Environmental Policy in Krakow
Table A1.10 SO2 Emissions in the Emission Tax Scenario: ETI
Category 1990 1995 2000 2005 2010 2015
Emissions (tonnes)
Households 2,520 2,787 1.082 0 0 0
Small businesses 825 762 578 395 389 343
Boilerhouses 2,758 2,328 1,757 1,148 1,246 1,347
High stacks 99,401 69,788 70.051 69,588 53,266 52,785
TOTAL 105,504 75,665 73,468 71,131 54.901 54,475
Reduction from base case (percent)
Households 0.0 0.0 50.( 100.0 100.0 100.0
Small businesses 0.0 7.3 27.4 48.9 42.9 42.1
Boiler houses 0.0 22.3 44.6 68.7 70.1 70.5
High stacks 0.0 23.3 25.5 30.3 50.9 55.2
TOTAL 0.0 22.5 26.7 32.8 52.0 55.9
Table A1.11 Particulate Matter Emissions in the Emission Tax Scenario: ET1
Category 1990 1995 2000 2f005 2010 2015
Emissions (tonnes)
Households 2,023 2,238 889 34 32 33
Small businesses 625 576 426 273 260 213
Boiler houses 2,210 1,867 1.410 923 1,002 1,083
High stacks 79,526 55,833 56,041 55,671 42,613 42,228
TOTAL 84,383 60,513 58,767 56,900 43,907 43.557
Reduction from base case (percent)
Households 0.0 0.0 48.9 97.4 95.4 93.0
Small businesses 0.0 7.7 2'9.0 52.5 47.2 48.3
Boiler houses 0.0 22.3 44.5 68.6 70.0 70.4
High stacks 0.0 23.3 25.5 30.3 50.9 55.2
TOTAL 0.0 22.5 26.7 32.8 52.0 55.9
Annex 1 61
Table A1.12 Particulate Matter Emissions in the Emission Tax Scenario: ET2
Category 199() 1995 2000 2005 2010 2015
Emissions (tonnes)
Households 2,023 2,238 889 34 32 33
Small businesses 625 568 415 263 233 202
Boiler houses 2,210 1,821 1.328 839 809 849
High stacks 79,526 23,629 29,146 18,014 19,172 16,406
TOTAL. 84,383 28,255 31.779 19,150 20,246 17,491
Reduction from base case (percent)
Households 0.0 0.0 48.9 97.4 95.4 93.0
Small businesses 0.0 9.0 30.8 54.2 52.7 50.8
Boiler houses 0.0 24.2 47.7 71.5 75.7 76.8
High stacks 0.0 67.5 61.3 77.4 77.9 82.6
TOTAL 0.0 64.0 60.3 77.4 77.8 82.3
Table A1.13 SO2 Emissions in the Fuel Tax Scenario: FT2
Caleg"Otr 1995 2000 2005 2010 2015
Emissions (tonnes)
Households 2,635 2,028 1,269 669 451
Small businesses/ 1,594 1,505 143 164 190boiler houses
High stacks 39.776 5,476 0 0 0
TOTAL. 44.005 9,009 1,412 832 641
Reduction from base case (percent)
Households 5 6 21 21 19
Small businesses! 58 62 97 97 96boiler houses
Higgh stacks 56 94 100 100 100
TOTAL 55 91 99 99 99
62 Energy Use, Air Pollution, and Environmental Policy in Krakow
Table Ai.14 Particulate Matter Emissions in the Fuel Tax Scenario: FT2
Category 1995 2000 2005 2010 2015
Emissions (tonnes)
Households 2,116 1,632 1,026 552 382
Small businesses/ 1,245 1,150 50 55 63boiler houses
High stacks 31,823 4.381 0 0 0
TOTAL 35.184 7.163 1.076 608 445
Reduction from base case (percent)
Houselholds 5 6 21 21 19
Small businesses/ 59 63 99 99 98boiler houses
High stacks 56 94 100 100 100
TOTAL 55 91 99 99 100
Table A1.15 Resource Costs of Various Policies(US$ million per year)
Sectors
Small Small businesses
businesses Boiler houses and hoiler houses High-stack
Scenario Hlouseholdls (<200kWI) (<(200kW) (>200AW sources TOTAL
C&C 0.97 0.19 2.39 6.16 33.97 43.67
C&C I 0.00 0.19 2.39 6.16 33.97 42.71
C&C2 0.37 0.19 2.39 6.16 33.97 43.08
ETI 0.97 0.19 2.39 0.34 26.31 30.19
ET2 0.97 0.19 2.39 0.38 30.57 34.49
FTI 0.00 0.18 0.24 0.40 15.89 16.71
FT2 0.00 0.14 1.10 1.12 34.79 37.15
Annex 2: The Costs of Emissions Reduction
2.1 The Cost of Sulfur Abatement Equipment
Cost estimates tor the components of FGD equipment are derived from a detailedassessment undertaken by London Economics (U.K. Department of the Environment1992). We have differentiated capital costs and operating costs.
Capital costs are assumed to be a function of the capacity for the plant. Thefollowing equation has been used to estimate annualized capital costs:
CAPEX= K*C*l.15*a (a)
where:
K = plant capacity (MW)
Ck = unit capital constructioni cost (US$ per MW)
a = arnuity factor = [r( 1 +r)1]/[( 1 +r)" l -I]
r = discount rate
n = amortLisation period
The factor of 1 .1 5 is included to take overhead costs during construction intoaccount. These costs are assumed to be 15 percent of the capital construction costs.
Operating costs are divided into:
* Energy costs, due to the energy consumed by the FGD equipment and the resultingreduction in the net output from the plant (I percent)
* Water costs, to supply the equipment with the required amount of water (0.2 tonnes perMW-h)
* Sorbent costs.
The following equation has been used to estimate operating costs:
64 Energy Use, Air Pollution, and Environmental Policy in Krakow
S sulfur content of fuel
cc =- electricity cost (US$ per kWh)
Cw = water cost (US$ per tonne)
Cs = sorbent cost (US$ per tonne)
cf. required sulfur abatement
The following assumptions have been used (Table i\2.1):
Table A2.1 Capital and Operating Costs Assumptions
Ck Capital costs US$ per MW 150,000
Ce Electricity costs US$ per MWh 25
Cxv Water costs US$ per tonne 0.75
C5 Sorbent costs US$ per tonne 20
r Discount rate 15%
n Amortisation period 10
2.2 The Cost of Switching to Gas
For households, the required capacity for the gas boilers is derived from theirexisting annual coal consumption using the following formula:
K F * Hc * -qc (3)3600 * 8760 * LF
where:
K = plant capacitv (MW)
F = fuel consumption (tonnes)
Hc = calorific value of coal (MJ per tonne)
LF = load factor
qc = thermnal efficiency
Annex 2 65
The net operating cost of switching from coal to gas is the total estimated cost ofgas consumption in each year (FGPG)t less the coal consumption cost for that year (FcP( ),.The required quantity of gas which is equivalent to the current level of coal consumptionon a net energy basis is determined as follows:
FG = FC * Hc * IC 0.000947817
HG *
where:
FG = required gas volume (000m3)
Fc. = coal consumptiorn (tonnes)
Hc = calorific value of coal (MJ per tonne)
HG = calorific value of gas (MBTU per OOOni3)
71c = thermal efficiency of coal-fired boilers
11G = thermal efficiency of gas-fired boilers
The following assumptions have been used (Table A2.2):
Table A2.2 Capital and Operating Costs Assumptions
Hc calorific value of coal (houselholds) MJ per tonne 24,371
IHIG calorific value of gas MBTU/000m3 35.31
flc thermal efficiency of coal-fired boilers:industry 88%houseliolds 80%
Ic thermal efficiency of gas-fired boilers:industry 60%houselholds 50%
The fuel price facing consumers is dependent on whether they are household orindustrial users. The future price is also expected to vary over time. Fuel price forecastsused in the present study are consistent with those used by Stage I (Table A2.3).
66 Energy Use, Air Pollution, and Environmental Policy in Krakoxv
Table A2.3 Fuel Price Forecasts
Categorv 1995 2000 201(
Gas (US$ per 00On 3)
Ilouseholds 28f) 300 310
Industry 1 32 i44 158
Coal (US$ per tonne)
HIousellolds 88 93 98
IndLIstry 52 55 60
Switching to gas, retrofitting F(GD and ESP equipment, and district heatingconnection all involve both capital and operating costs. Given the level of capital cost,the annual capital charge is a functioni of' the expected economic lil'e of' the equipmenit.and of the cost of capital facing the individual operators. In both cases, we have chosen aconservative approach: we have assumed an economic lif'e of' 10 years and a real discountrate of 15 percent. This discount rate is higher than the 12 percent rate used ill Stage 1.A rate of 15 percent is closer to the private discount rate of individual agents.
Table A2.4 shows the sensitivity of' emission reduction costs to alternativehypotheses on the economic life of equipment and on the discount rate. It presents thetotal annualized costs of gas conversion, EGD and ESP retrofitting and district hieatingconnection for a IkW coal-fired boiler operating at 80 percenit load factor tor rate of'return levels of 12 percent. 15 percent, and 18 percent and for economic lives of 10 and1 5 years.
Switching to gas is considerably more expensive for houselholds than forindustrial plant, given the larger differential in fuiel prices faced by the residential sector.
Total annual costs for FGD and ESP retrofitting are more sensitive to alternativelife and rate of return assumptions thani gas conversion costs or district heatinigconnection costs. This is because of the highier capital cost element of such equipment.Using a 12 percent rate of return (as in Stage I ) would have reduIced the anilual cost of'gas conversion by less than I percent for industry, by less thall ' pel-cent for theresidential sector, and by less than 3 percent for the connection of small boiler houses tothe district heating system, but by almost 9 percent for FGD and ESP retrofitting. Allthese differences are well within the range of uncertainty associated with the estimationof sucih costs.
Annex 2 67
Table A2.4 Total Net Costs of Emission Reduction(US$ per year for a 1 kW boiler operating at 80% load factor)
Real discount rateEconomic life (years) 12% 15% 18%
Gas conversion (industrial sector)
10 36.00 36.67 37.38
15 35.09 35.82 36.59
FGD and ESP retrofitting
10 44.91 49.18 53.64
15 39.13 43.77 48.63
Gas conversion (residential sector)
10 89.15 89.82 90.52
15 88.24 88.97 89.73
District heating connection
10 83.55 85.46 87.46
15 80.95 83.04 85.22
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