Price Mechanism for Reducing Pollution Evidence from Taiwan

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Price Mechanism for Reducing Pollution - Evidence from Taiwan Li-Ju Chen and Yan-Ling Lin

Price Mechanism for Reducing Pollution - Evidence from Taiwan Li-Ju Chen and Yan-Ling Lin Feng Chia University November 23, 2013 2020/11/23 1

Outline 2020/11/23 1. Introduction 2. Background – The oil-pricing system in Taiwan – The

Outline 2020/11/23 1. Introduction 2. Background – The oil-pricing system in Taiwan – The historical oil price 3. Empirical strategy and data 4. Results – Baseline results with monthly data – Reinvestigation with yearly data – Discussion – O 3 5. Conclusion 2

1. Introduction • The drawbacks of non-renewable energy resources: 1. cannot be used repeatedly

1. Introduction • The drawbacks of non-renewable energy resources: 1. cannot be used repeatedly 2. the increasing price due to the supply and demand 3. greenhouse effect and climate change 4. air pollution causes deaths To retain a reasonable energy price and reduce the negative effects of air pollution on health, the authorities have to formulate a long-term plan on how to effectively use and restore these non-renewable energy resources. 2020/11/23 3

1. Introduction (cont’d) • Low energy prices in Taiwan make it difficult to effectively

1. Introduction (cont’d) • Low energy prices in Taiwan make it difficult to effectively reduce carbon emissions through conserving energy. 1. unfavorable for energy-conserving products and technologies 2. encourage energy consumption E. g. the housing electricity price is about one half of that in Japan; the price of unleaded gasoline #92 is lower than that in China. As a result, Taiwan has lower per capita GDP, but higher per capita energy consumption. 2020/11/23 4

1. Introduction (cont’d) • Evidence of negative relationship between the oil prices and CO

1. Introduction (cont’d) • Evidence of negative relationship between the oil prices and CO 2 emissions. (Tucker, 1995; Brown et al. , 1996; Friedl and Getzner, 2003) • The negative relationship may drive by the changes in behavior. (Friedl and Getzner, 2003; Agras and Chapman, 1999) In other words, raising the energy price seems to be an effective instrument for reducing emissions of pollutants. For example, energy taxes (Farrington and Needle, 1997; Leicester, 2005). 2020/11/23 5

1. Introduction (cont’d) • Given that the consumers’ behavior may change once the price

1. Introduction (cont’d) • Given that the consumers’ behavior may change once the price truly responds to its cost and the air quality may consequently be improved, this study investigates the effect of the new pricing system on the concentration of 7 air pollutants. • Main results: 1. The oil price can effectively reduce the concentration of air pollutants during the period when the floating oil pricing mechanism is applied. 2. The EKC hypothesis holds for CO and HC. 2020/11/23 6

2. Background – the oil-pricing system in Taiwan • The oil market in Taiwan

2. Background – the oil-pricing system in Taiwan • The oil market in Taiwan has been monopolized by the Chinese Petroleum Corporation (CPC) since 1946. • The oil market turned into an oligopoly when the oil pricing equation was repealed in 2000 and when another competitor – Formosa Petrochemical Corporation (FPCC) – entered the market. • In October 2001, the “Petroleum Administration Act” left the oil price to be determined by the forces of market demand supply. • In August 2005, it was prevented from adjusting the oil price when faced with an upsurge in the international oil price. 2020/11/23 7

2. Background – the oil-pricing system in Taiwan (cont’d) • On September 25, 2006,

2. Background – the oil-pricing system in Taiwan (cont’d) • On September 25, 2006, the government announced a trial period during which a floating oil-price mechanism would be implemented. - The target international oil price was that of West Texas Intermediate (WTI) crude oil posted by Platts. • The floating oil price was officially implemented on January 1, 2007. • A new floating oil-price mechanism was implemented on September 1, 2007, and reviewed the domestic oil price once a week. - based on a combination of 70% of the Dubai crude oil price and 30% of the Brent crude oil price as the target price. 2020/11/23 8

2. Background – the oil-pricing system in Taiwan (cont’d) • The floating oil-price mechanism

2. Background – the oil-pricing system in Taiwan (cont’d) • The floating oil-price mechanism on November 2, 2007 temporarily ceased to be implemented when the domestic oil price was restrained from adjusting in line with the continually rising international oil price. • The government launch the floating oil-price mechanism again on May 28, 2008. 2020/11/23 9

2001/1/5 2001/5/5 2001/9/5 2002/1/5 2002/5/5 2002/9/5 2003/1/5 2003/5/5 2003/9/5 2004/1/5 2004/5/5 2004/9/5 2005/1/5 2005/5/5

2001/1/5 2001/5/5 2001/9/5 2002/1/5 2002/5/5 2002/9/5 2003/1/5 2003/5/5 2003/9/5 2004/1/5 2004/5/5 2004/9/5 2005/1/5 2005/5/5 2005/9/5 2006/1/5 2006/5/5 2006/9/5 2007/1/5 2007/5/5 2007/9/5 2008/1/5 2008/5/5 2008/9/5 2009/1/5 2009/5/5 2009/9/5 2010/1/5 2010/5/5 2010/9/5 2011/1/5 2011/5/5 2011/9/5 2012/1/5 2012/5/5 2012/9/5 2013/1/5 2013/5/5 USD per barrel 2020/11/23 160 40 140 35 120 30 100 25 80 20 60 15 40 10 20 5 0 0 Brent WTI Dubai NTD per liter 2. Background – the historical oil price unleaded gasoline #95 (right) 10

3. Empirical strategy and data The explained variable: air pollution • economic growth v.

3. Empirical strategy and data The explained variable: air pollution • economic growth v. s. environmental quality: pollution often appears to first worsen and to later improve as countries’ incomes grow (Kuznets, 1955; Grossman and Krueger, 1995) • Measure the environmental quality based on the concentration of air pollutants (López, 1994; Selden and Song, 1994; Shafik, 1994; Suri and Chapman, 1998; Aldy, 2005; Hung and Shaw, 2006; Chary and Bohara, 2010; Gassebner et al. , 2011; Lin and Liscow, 2013) 2020/11/23 11

3. Empirical strategy and data (cont’d) • 2020/11/23 12

3. Empirical strategy and data (cont’d) • 2020/11/23 12

3. Empirical strategy and data (cont’d) PM 10 SO 2 O 3 DF CO

3. Empirical strategy and data (cont’d) PM 10 SO 2 O 3 DF CO NO 2 HC Changhua County 67. 48 5. 58 52. 74 4. 35 560. 0 19. 53 292. 2 Chiayi City 77. 23 6. 58 61. 16 4. 06 726. 8 23. 00 327. 6 Chiayi County 71. 18 3. 39 60. 50 3. 78 418. 3 14. 56 190. 0 Hsinchu City 49. 51 4. 95 48. 63 7. 56 617. 4 20. 11 258. 8 Hsinchu County 49. 76 2. 89 54. 44 6. 75 461. 7 15. 72 --- Hualien County 34. 74 1. 84 35. 72 3. 84 592. 6 13. 37 247. 5 Kaohsiung City 82. 73 10. 79 66. 00 4. 28 705. 0 24. 37 387. 9 Keelung City 48. 28 8. 00 47. 11 8. 35 785. 8 20. 21 258. 9 Miaoli County 53. 39 8. 37 53. 84 5. 01 481. 6 17. 74 308. 3 Nantou County 69. 47 2. 78 69. 67 3. 57 595. 6 19. 94 272. 9 New Taipei City 49. 92 5. 89 50. 74 7. 10 820. 5 22. 53 416. 3 Pingtung County 64. 35 3. 28 65. 67 4. 44 464. 4 13. 00 276. 5 Taichung City 62. 07 5. 89 57. 11 6. 18 724. 1 23. 32 281. 7 Tainan City 73. 26 7. 05 63. 21 7. 33 573. 7 18. 89 298. 9 Taipei City 52. 74 5. 47 47. 16 10. 24 1290. 0 26. 89 522. 1 Taitung County 34. 18 1. 17 38. 44 4. 62 472. 2 7. 83 149. 2 Taoyuan County 52. 77 7. 79 49. 58 7. 25 653. 2 21. 32 340. 0 Yilan County 39. 73 2. 28 44. 06 4. 38 497. 8 12. 56 187. 3 Yunlin County 71. 58 3. 61 60. 72 4. 34 472. 2 15. 89 178. 3 2020/11/23 13

3. Empirical strategy and data (cont’d) Rain Motor Car Pop Educ Income Changhua ounty

3. Empirical strategy and data (cont’d) Rain Motor Car Pop Educ Income Changhua ounty 1316. 5 77. 94 36. 36 1214. 66 18. 65 210770 Chiayi City 1832. 8 17. 42 7. 22 4458. 56 35. 49 253260 Chiayi County 1435. 7 32. 03 14. 65 293. 36 15. 13 207058 Hsinchu City 1502. 4 21. 78 10. 99 3617. 96 32. 47 312098 Hsinchu County 1808. 7 21. 93 14. 12 319. 73 23. 59 259061 Hualien County 2108. 3 21. 21 9. 36 75. 70 19. 77 245513 Kaohsiung City 1916. 1 185. 55 70. 35 921. 80 26. 13 262547 Keelung City 3620. 9 15. 90 7. 63 2888. 80 23. 89 259621 Miaoli County 1973. 4 30. 45 16. 32 307. 71 18. 26 224983 Nantou County 2359. 5 30. 28 15. 94 131. 26 18. 72 219895 New Taipei City 2041. 9 181. 77 79. 89 1758. 07 26. 63 268429 Pingtung County 2035. 5 59. 16 21. 72 324. 02 18. 21 234434 Taichung City 1834. 4 134. 65 76. 14 1116. 02 27. 60 253122 Tainan City 1677. 4 115. 92 49. 54 839. 24 24. 47 235477 Taipei City 2342. 2 98. 13 68. 44 9677. 12 46. 61 381593 Taitung County 1769. 9 15. 31 5. 66 69. 14 12. 04 217893 Taoyuan County 1896. 1 85. 45 51. 37 1449. 52 24. 47 269606 Yilan County 2784. 5 26. 03 11. 45 216. 18 18. 93 233074 Yunlin County 1673. 8 42. 57 19. 47 572. 27 16. 15 217219 2020/11/23 14

4. Results – baseline results with monthly data Panel A PM 10 SO 2

4. Results – baseline results with monthly data Panel A PM 10 SO 2 O 3 DF CO NO 2 HC -0. 516*** -0. 019*** -0. 115*** -0. 050** -6. 942*** -0. 237*** -2. 534*** (0. 066) (0. 006) (0. 039) (0. 024) (0. 427) (0. 019) (0. 360) 0. 8084 0. 7627 0. 7268 0. 3045 0. 8586 0. 8249 0. 6252 Observations 2661 2669 2672 2606 2673 2658 1909 Panel B PM 10 SO 2 O 3 DF CO NO 2 HC Price -0. 040* 0. 011*** -0. 013 -0. 012 -2. 65*** -0. 056*** -1. 273*** (0. 021) (0. 002) (0. 017) (0. 012) (0. 172) (0. 006) (0. 289) -2. 573*** -0. 272** 0. 171 -0. 225 -48. 03*** -1. 439*** -60. 28*** (0. 460) (0. 112) (0. 306) (0. 585) (3. 162) (0. 177) (7. 912) 0. 015 0. 001 0. 005 0. 011 0. 003 0. 196 (0. 013) (0. 001) (0. 005) (0. 004) (0. 072) (0. 002) (0. 141) 0. 3774 0. 6112 0. 4384 0. 2539 0. 4997 0. 5573 0. 3376 2438 2445 2449 2389 2449 2438 1711 Price R-squared Post Price*Post R-squared Observations 2020/11/23 15

4. Results – reinvestigation with yearly data Price Post Price*Post Rain Motor Car Pop

4. Results – reinvestigation with yearly data Price Post Price*Post Rain Motor Car Pop Educ Ln(Income)^2 R-squared Observations 2020/11/23 PM 10 0. 160 (0. 116) 11. 049 (10. 406) -0. 135 (0. 113) 0. 001 (0. 001) 0. 101 (0. 063) -0. 542** (0. 250) 0. 012 (0. 008) -0. 623* (0. 327) 456. 1 (425. 65) -18. 249 (16. 992) 0. 8034 354 SO 2 0. 179*** (0. 045) 16. 600*** (3. 187) -0. 163*** (0. 041) -0. 001*** (0. 000) 0. 189*** (0. 066) -0. 726*** (0. 164) -0. 003 (0. 007) -0. 532*** (0. 113) -329. 9 (210. 29) 13. 123 (8. 445) 0. 3868 354 O 3 0. 145** (0. 056) 13. 331*** (3. 909) -0. 192*** (0. 048) 0. 000 (0. 001) -0. 138*** (0. 027) 0. 454*** (0. 116) 0. 003 (0. 005) 0. 324** (0. 120) 83. 3 (286. 95) -3. 711 (11. 615) 0. 8268 353 DF 0. 051 (0. 043) 2. 931 (3. 733) -0. 034 (0. 047) 0. 000 (0. 000) 0. 044** (0. 017) -0. 190** (0. 073) 0. 002 (0. 003) -0. 199*** (0. 062) 159. 8 (115. 47) -6. 521 (4. 610) 0. 4981 345 CO 9. 307** (4. 426) 703. 542** (331. 441) -7. 215 (3. 907) -0. 044** (0. 017) 6. 424** (3. 007) -26. 179** (10. 067) 1. 071* (0. 615) -46. 98*** (11. 753) 98466* (48874) -3994. 1** (1984. 03) 0. 6464 354 NO 2 0. 010 (0. 025) -0. 527 (2. 092) 0. 011 (0. 023) -0. 000 (0. 000) 0. 023 (0. 016) -0. 181** (0. 084) 0. 000 (0. 004) -0. 430*** (0. 096) -600. 4*** (171. 60) 24. 36*** (6. 913) 0. 8645 353 HC 2. 200 (1. 373) 189. 359* (108. 174) -1. 962 (1. 213) -0. 032*** (0. 008) -0. 408 (0. 717) 2. 344 (4. 159) 0. 271** (0. 120) -19. 10*** (3. 973) 15178. 6* (7247. 07) -617. 31** (291. 535) 0. 6202 267 16

4. Results – discussion about O 3 While the primary air pollutants are man-made,

4. Results – discussion about O 3 While the primary air pollutants are man-made, a secondary air pollutant, ozone, is generated through photochemical reactions. control for hours of sunshine 2020/11/23 Price Post Price*Post Sun Rain Motor Car Pop Educ Ln(Income)^2 R-squared Observations (1) 0. 144** (0. 061) 13. 426*** (4. 316) -0. 194*** (0. 052) 0. 000 (0. 001) -0. 138*** (0. 028) 0. 460*** (0. 123) 0. 002 (0. 012) 0. 333** (0. 123) 136. 2 (376. 3) -5. 876 (15. 256) 0. 8246 336 O 3 (2) 0. 135** (0. 060) 10. 923** (4. 148) -0. 164*** (0. 049) 0. 006 (0. 003) 0. 001 (0. 001) -0. 134*** (0. 032) 0. 429*** (0. 107) -0. 000 (0. 013) 0. 325** (0. 153) 201. 6 (377. 97) -8. 464 (15. 331) 0. 8304 336 17

5. Conclusion • Even though other methods have been put forward to improve air

5. Conclusion • Even though other methods have been put forward to improve air quality, including an energy tax and tradable emission permits, Taiwan provides a specific case to study the effect of an oil pricing policy on air pollution. This paper finds that 1. the price is likely to serve as a signal to encourage consumers to save energy. 2. The EKC hypothesis holds for CO and HC. Nevertheless, the frequent yearly data may only allow a general perception of the effect of the floating oil-price mechanism, which is expected to improve in the future. 2020/11/23 18