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Putting a price on carbon – an efficient way for Thailand to meet its bold emission target

Thailand’s strong start towards a low-carbon future would quicken with carbon pricing

Thailand relies heavily on fossil fuels for its energy needs, but is showing promising signs of decreasing energy and CO2 emission intensity. With an ambitious GHG emission reduction target in its commitments under the Paris Agreement, Thailand has started shifting the focus of its energy policy to energy efficiency and the clean energy transition. Putting a price on carbon would greatly accelerate its progress towards the target, and in a cost-effective way.

While Thailand has some experience of creating voluntary carbon markets, and is currently considering a national emission trading system, it faces a number of hurdles. These “readiness gaps” particularly relate to the nature of the country’s power system and policy environment, and stakeholders lacking the right tools to participate in a trading system. The IEA and TGO are working together to support the government in overcoming these hurdles, which are explored below.

Carbon pricing: A means to accelerate the clean energy transition

Carbon pricing is considered part of the core policy mix in a climate-energy policy package, as a way to assign the costs of carbon emissions to those emitting them. This leverages the market to favour low-carbon solutions and enable cost-effective ways to reduce emission across sectors. The two main types of carbon pricing are emission trading systems, such as cap-and-trade programmes, and carbon taxes.

Robust carbon pricing can lead a clean energy transition and green economic development while maintaining energy security, supporting innovation, increasing efficiency and driving retirement of emission-intensive assets. California’s emission trading system is a prime example. Its GHG emissions from electricity generation decreased by 30% between the start of the cap-and-trade programme in 2013 and 2017 due to retirement of coal plant and growth of renewables and natural gas generation. In addition, revenue from the cap-and-trade programme financed the California Climate Investments. These funded renewable fuel research, clean vehicle incentives, energy efficiency installations, wildfire protection and development of a low-carbon economy workforce.

The country has some experience of carbon market mechanisms, but also has “readiness gaps”

Having confirmed its nationally determined contribution under the Paris Agreement in 2016, Thailand is implementing various action plans to reach its target of reducing GHG emissions in 2030 to 20.8% below the business-as-usual level. Its National Climate Change Master Plan (2015-50) refers to the carbon market as a potential mechanism to achieve targeted emission reductions in key industries and promote energy efficiency more widely. The upcoming Climate Change Act is expected to outline specific instruments to prepare for a national emission trading system, with a cabinet decision due in 2022.

Thailand’s experience of carbon market mechanisms began in 2007, when the government established TGO to implement and manage GHG emissions projects. The public body launched two programmes in 2013:

• The Thailand Voluntary Emission Reduction programme, a baseline and credit programme. By 2020 it had 191 registered projects that are due to reduce emissions by 5.28 Mt CO2-eq annually.
• The Thailand Carbon Offsetting Program. It encourages public and private organisations to calculate their carbon footprint and buy carbon credits to offset their unavoidable emissions.

Most significantly, in 2015 TGO launched the Thailand Voluntary Emission Trading Scheme after six years of preparation. It is designed to serve as a pilot, setting up the infrastructure to develop a national emission trading system and identify gaps and opportunities. The first phase (2015-17) established and tested the market’s design features and the measurement, reporting and verification system. During the second phase (2018-20) TGO aims to encourage wider participation and develop participants’ trading capabilities.

Thailand has benefited from the pilot trading scheme in various ways: in addition to gaining valuable knowledge and capacity on carbon markets, it now has the legal framework to establish an effective emission trading system.

Critically, the pilot scheme has also revealed Thailand’s readiness gaps, which fit into three broad themes.

Readiness gap 1: Preparing stakeholders for emission trading

The first relates to stakeholders’ ability to participate successfully in an emission trading scheme. Not all sectors of the Thai economy have had the same exposure to carbon pricing in the pilot programme. Many key stakeholders from both public and private sectors still lack the technology, knowledge and data to participate in an emission trading system. The gap is most significant for the industrial and power sectors. Workshops, training, case studies and carbon pricing pilot programmes could help reduce this readiness gap.

Readiness gap 2: Including the power sector in emission trading

The power sector represents the second readiness gap. This critical sector is currently not included in Thailand’s voluntary emission trading pilot because the structure of the scheme and the regulated nature of the power sector proved to be incompatible. Including the power sector is particularly important because it is Thailand’s largest GHG emitter, producing 88 Mt CO2 in 2017 or 36% of total CO2 emissions from fuel combustion.

In the short term the government may need to adjust the design of the emission trading system so it is better tailored to Thailand’s specific power market structure and regulations. In the long term, power sector regulation and operation may also require some changes to integrate higher share of variable renewables while ensuring electricity security and affordability that would also resolve compatibility challenges with the emission trading system.

Interestingly, the power sector did participate in the first year of the pilot before leaving the programme. Operators expressed concerns over their limited flexibility to respond to economic signals from the carbon price. They had little scope to reduce GHG emissions given that fuel mixes are determined by the Power Development Plan, and each power plant’s output and fuel consumption are determined by power and fuel purchase agreements. Regulated electricity rates also made the purchase of allowances challenging, given that power producers could not generate excess allowances to sell.

Readiness gap 3: Integrating emissions trading into an array of existing policies

The third readiness gap concerns the way carbon pricing is integrated into the existing set of diverse energy and climate policies. While it is likely to be challenging, policy co-ordination among government stakeholders will be critical to successfully aligning carbon pricing with existing polices. This will, in turn, be critical to the success of an emission trading scheme and achieving Thailand’s climate objectives. Without careful integration, the government could see its energy and climate policies interact in a counter-productive way.

The advantage of an emission trading system is that flexibility mechanisms and various design options allow the system cap to adjust to the aims and impacts of other policies, while maintaining stability and confidence for investors.

More broadly, existing energy and climate policies can serve different objectives, such as energy security and affordability, environmental protection, lowering GHG emissions or adapting to climate change. In some cases, these objectives may align. For example, Thailand can meet its wish to reduce natural gas imports for fiscal and security reasons by diversifying power generation resources. In others, they may require stronger co-ordination, such as ensuring renewable energy development is economical and feasible for stakeholders within Thailand’s current power market structure.

The progress that Thailand has already achieved on carbon pricing provides a valuable opportunity to develop and test various components of the emission trading system. It will need to do this before being in a position to introduce a mandatory national system.

Thailand’s climate policy arena is complex and covers a multitude of government stakeholders

Thailand has policies to promote energy efficiency, sustainable transport and the transition to clean energy sources since 2013. The country currently has over 30 national and regional energy and climate policies in effect. Almost as many government ministries and agencies oversee them: 25 public bodies are responsible for drafting, implementing and enforcing the policies. This adds to the complexity of steering Thailand towards meeting its climate commitments.

Climate and environmental policies are scattered across many different agencies, including the Ministry of Industry, the Ministry of Natural Resources and Environment, the Ministry of Transport and also the Ministry of Energy. The energy policy-making process is slightly more straightforward: energy policies are drafted and implemented by the Ministry of Energy and the National Energy Policy Council, with contributions from other relevant government stakeholders. The principal energy policy relevant to reducing GHG emissions is Thailand’s Integrated Energy Blueprint. Provision for emission trading is currently part of the Climate Change Master Plan.

Main Organizations in Charge of Thailand’s Climate and Energy Policy

The power sector has the greatest potential for carbon reductions…

The power sector was Thailand’s largest emitter in 2017 at 88 Mt CO2. Electricity production accounts for 36% of total CO2 emissions from fuel combustion, followed by the transport and industrial sectors at 31% and 20% respectively. This makes the power sector an obvious candidate for action to reduce emissions.

Natural gas has been the dominant source for electricity generation in Thailand since the mid-1980s, its share peaking in the early 2000s at 70%. That fell slightly to 65% in 2017 with the gradual integration of coal and renewables. Natural gas was responsible for 59% of CO2 emissions from electricity generation. Coal generated less than 20% of total electricity, but produced 41% of CO2 emissions from the sector. Generation from renewables accounted for a modest 16% of total generation in 2017 and increased to 20% in 2019.

While electricity generation continues to grow at about 2% per year, shifts in the generation mix and more efficient fossil fuel plants have led CO2 emissions from the power sector to plateau since 2013. Improved technology and efficiency have lowered the CO2 intensity of electricity generation since the 1990s. It fell by 12% between 2013 and 2017 to reach 473 t CO2/GWh in 2017, just below the world average (485 t CO2/GWh).

…but its structure presents particular barriers to reducing emissions

Thailand could further decouple GHG emissions from energy demand and economic development with the quicker uptake of variable renewable energy, such as solar PV and wind turbines. However, not only is the structure of Thailand’s power sector a challenge to introducing an emission trading scheme, it is also a challenge to developing renewables.

Variable renewable power sources have more unpredictable output that requires higher operational and market flexibility. But according to the IEA’s assessment in 2018, Thailand’s current generation mix and transmission system have sufficient flexibility to accommodate a higher share of renewables. Rather, it is constrained by inflexible power purchase agreements and rigid fuel supply agreements. Decarbonising the power sector will therefore require changes in how the sector operates and is regulated overall, alongside dedicated policies to increase the share of variable renewable energy.

The power sector contribution to the mitigation target is moderate

Thailand’s commitment to a 20.8% reduction in its GHG emissions by 2030 compared to a business-as-usual level is established in its nationally determined contribution under the Paris Agreement. The business-as-usual level of GHG emissions in 2030 is expected to reach 555 Mt CO2eq, meaning that the country needs to reduce emissions by 115.6 Mt CO2eq.

Under its Nationally Determined Contribution Roadmap, the government has allocated the bulk of the target, 113 Mt CO2eq, to the power generation, manufacturing, transport and buildings/residential sectors.

 

The government has allocated emission reduction efforts between the sectors in an imbalanced way – of the 113 Mt CO2eq reduction target, 74% has to be achieved by manufacturing and transport sector measures. The largest emitter, the power sector, is only required to reduce GHG emissions by 24 Mt CO2-eq, or 20% of the total emission reduction goal, despite being the sub-sector with several low-carbon technologies that are mature, scalable and competitive.

The government’s mitigation policies emphasise voluntary energy efficiency measures

To support the implementation of the roadmap, Thailand has adopted several new sectoral and regional mitigation plans, given that existing measures are not enough to achieve its nationally determined contribution. Within the energy-using sectors cited above, the focus is on improving energy efficiency and deploying efficient technology, rather than developing variable renewable power sources.

According to the Ministry of Energy, energy efficiency measures are expected to reduce emissions by around 49 Mt CO2-eq on average annually by 2030, over 40% of Thailand’s emission reduction target. The success of energy efficiency measures is therefore crucial to achieving its nationally determined contribution.

The Energy Efficiency Plan (2015-37) aims to reduce energy demand by 30% from business-as-usual levels in 2036, targeting mainly the transport and industrial sectors, which are responsible for 54% and 26% of the total energy demand reduction target respectively. The remaining 20% will primarily be covered by the buildings and residential sectors. As for the power sector, the Power Development Plan outlines a 4 000 MW potential demand reduction through energy conservation.

Current policies to reduce the power system’s carbon intensity focus on coal to gas switching

The main uncertainty for Thailand’s Energy Efficiency Plan is that over 60% of the target is to be met by voluntary programmes. This makes it harder to forecast the carbon reduction achievements. When designing an emission trading system, it is important to consider and monitor the impact of energy efficiency policies on reducing demand. And policy makers need to recognise that energy efficiency policies by themselves do not provide an incentive to deploy the low-carbon energy generation technologies needed to decarbonise the energy system.

Thailand has policies such as the Power Development Plan (2018-37), Alternative Energy Development Plan (2015-36) and Thailand Smart Grid Master Plan (2015‑36) to promote the efficient, secure and reliable supply of electricity. While government recognises that support for the development of renewables is essential for long-term emission reductions, current power system policy focuses on increasing the role of natural gas and renewable energy while reducing the role of coal.

Thailand supports renewables with a feed-in-tariff scheme and has a buy-back policy to support distributed solar generation. In the 2018 Revised Power Development Plan, Thailand shifted from a focus on reducing dependency on natural gas to reducing generation from coal power plants and electricity imports.

Thailand has decoupled energy demand and economic growth since 2013

Reflecting the shift in the fuel mix from the 2015 Power Development Plan, the revised plan reduced Thailand’s 2030 power sector emission projections by 5%, from 100 Mt CO2‑eq to 95 Mt CO2‑eq, while meeting a demand forecast up by 4%.

The 2015 Alternative Energy Plan promotes usage of non-fossil fuels in power and transport. The overall goal is to reduce fossil fuel consumption by 39 Mtoe by 2036, corresponding to 30% non-fossil energy in total final energy consumption.

Addressing GHG emissions is complex because, historically, increased GHG emissions in Thailand were caused by increased energy demand. This in turn stemmed from positive trends such as economic growth, urbanisation and a shift in economic structure towards industrial production.

Between 2005 and 2017, while Thailand’s GDP PPP##anchor2## grew by 49% and its population by 5.5%, CO2 emissions from fuel combustion alone increased by over 20%.

Over the past two decades, both total primary energy supply and total final consumption have more than doubled, with most supply increase driven by increased use of oil and natural gas. However, most of the demand and supply growth occurred before 2013 despite continuous economic growth. Between 2013 and 2017, Thailand’s GDP PPP grew by 12%, while the energy intensity of the economy (total primary energy supply/GDP PPP) decreased by 8%, as natural gas usage started to decrease with greater uptake of renewable energy. During the same period, carbon intensity of energy supply (CO2 emissions/total primary energy supply) decreased by 3%, and energy-related CO2 emissions plateaued and started decrease in 2017.

Power and transport dominate energy-related CO2 emissions, which have plateaued since 2013

In 2017 Thailand’s total primary energy supply was 138 Mtoe and dominated by fossil fuels: 41% from oil, 26% from natural gas and 12% from coal. At 19% of the total supply, biofuels and waste were the largest source of low-carbon energy, while other renewables only counted for 1%. Industry, transport and non-energy##anchor3## use were the main drivers for the increase in total final consumption between 2001 and 2013. While energy consumption in buildings and non-energy uses started to decrease post 2013, transport sector demand grew rapidly due to increased vehicle sales, which spiked between 2012 and 2013 because of first-time buyers’ tax rebate schemes.

Energy-consuming sectors have the greatest potential to reduce Thailand’s GHG emissions. According to its latest reported GHG inventory for 2013, energy use accounted for over 74% of total GHG emissions, and CO2 emissions from fuel combustion made up 94% of energy sector GHG emissions.##anchor4## Emissions from fuel combustion reached 244 Mt CO2 in 2017, increasing steadily since 1990 and driven by power and transport. However, emissions growth has slowed since 2000, and emissions have actually decreased by 0.3% per year on average since 2013.

Oil has always been the largest source of CO2 emissions from fuel combustion in Thailand, but emissions from natural gas and coal have grown rapidly since the 1990s, together accounting for around 60% of the total in 2017. Thailand’s carbon intensity of energy supply has been consistently declining for nearly 25 years and decreased from 2.15 to 1.77 t CO2 per tonne of oil equivalent between 2001 and 2017. Thailand’s carbon intensity is well below the world average, which has stayed at around 2.38 t CO2 per tonne of oil equivalent since 1990.
Source: IEA

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