Carbon pricing options for Taiwan

Report prepared for the Taiwan Environmental Protection Administration

Authors: Josh Burke, Luca Taschini, Stuart Evans, Karishma Gulrajani and Aaron Tam

Annual greenhouse gas emissions in Taiwan reached a record high in 2017. Although estimates indicate that annual emissions have fallen since then, stronger action is needed for Taiwan to reach its 2050 target of a 50 per cent reduction relative to 2005 levels. This report argues that carbon pricing alongside complementary policies can help Taiwan reduce emissions in a fair and cost-effective way. It assesses the options for carbon pricing in Taiwan and seeks to identify the key elements of a successful policy approach. In so doing it identifies a clear path to carbon pricing in Taiwan.

Summary points

• Carbon pricing alongside complementary policies can help Taiwan reduce its greenhouse gas emissions. Designed well, carbon pricing policy represents a powerful tool for Taiwan to incentivise fair and cost-effective emissions mitigation while growing its economy and playing its part in the international effort to combat climate change.
• Taiwan’s major sources of emissions, notably the electricity sector, need to be covered by a carbon price. Consideration must be given specifically to the different options for regulating Taipower, the vertically integrated public utility.
• The potential impacts of carbon pricing on Taiwan’s competitiveness need to be managed. As a small, open economy, detailed consideration must be given to the potential risk of carbon leakage and to policy options to reduce this risk.
• Taiwan is at different stages of ‘readiness’ in terms of its existing capacity to implement different types of carbon pricing instruments. It has most of the capacity required for implementing a carbon levy soon, but further capacity-building would be necessary to implement an emissions trading system (ETS).
• If Taiwan implemented an ETS, the functioning of the secondary market would need to be developed. The relatively small size of its market and the concentration of emissions in a small number of players could lead to challenges regarding the concentration of market power and liquidity in secondary markets.

High level recommendations

1. Taiwan should start with a simple carbon levy, set at an initially low level, but with a clear trajectory to reach higher prices. By starting with a low price Taiwan can learn by doing, to understand the operation of the levy and its impacts on covered firms. However, a clear trajectory of price increases over time is needed to ensure sufficient decarbonisation incentives.
2. Taiwan should retain the option of altering the design of its carbon pricing over time, as circumstances change. The simple approach the authors recommend can be designed with inbuilt flexibility, enabling the policy to be improved over time and providing the opportunity to move to an emissions trading system (ETS) if desired at a future date.
3. Taiwan should cover the full set of greenhouse gases from large emitters in manufacturing and, if possible, electricity generation. The focus on large emitters complements the pre-existing reporting of emissions for large emitters. The electricity sector is a large source of emissions in Taiwan and its inclusion would cover the indirect emissions of households and the services sector.