The Online Journal on Power and Energy Engineering (OJPEE) Vol. (1) No.

(4)
Reference Number: W09-0051 134
Effect of Carbon Tax on Power Generation and
Energy Security in Sri Lanka
Ram M. Shrestha and Chandrabhanu Opathella
School of Environment, Resources and Development, Asian Institute of Technology
P.O. Box 4, Klong Luang, Pathumthani 12120, Thailand
Email: ram@ait.ac.th; opathella@ait.ac.th; Fax: +66 2 524 5439
Abstract- This paper analyzes the effects of carbon tax
on power generation system and energy security in the
case of Sri Lanka during 2005 to 2050 under the least cost
energy system planning based on the MARKAL
framework. Three different carbon tax cases are
considered in the present study. The paper discusses the
effects of carbon tax on energy mix and technology mix of
whole energy system and power generation system. It also
analyzes the effects of carbon tax on CO
2
emission and
energy security of the country.
Keywords- power generation in Sri Lanka, effects of
carbon tax, energy security, MARKAL model
I. INTRODUCTION
The power sector is a major contributor to CO
2
emission in
many countries in the world. The level of CO
2
emission from
the power sector is growing rapidly in many developing
countries. Yet, the long term prospects of greenhouse gases
(GHG) emission mitigation in the power sector have not been
assessed rigorously for most developing countries [12].
Carbon tax is one of the economic policy instruments to
reduce the CO
2
emissions from various sectors of an
economy.
This paper analyzes the effects of carbon tax on power
system development (in particular, generation mix and
technology mix in the power sector) as well as implications
for energy security and emissions of greenhouse gases from
the energy system of Sri Lanka during a relatively long
planning horizon of 2005-2050. Implications of the carbon
tax on power system development as a part of overall effects
in the national energy system.
This paper is organized as follows: A brief overview of the
Sri Lankan energy system is given in Section 2. An outline of
the methodology used in the study is presented in Section 3,
followed by a description of the base case and carbon tax
cases. Section 5 discusses the development of power
generation system and CO
2
emissions from the power sector
during the planning horizon in the base case. This is followed
by discussions on effects of the carbon tax on power system
development in Section 6 and CO
2
emission associated with
power generation in Section 7. Section 8 discusses the effects
of carbon tax on national energy security. Finally, a summary
of key findings is presented.
II. OVERVIEW OF SRI LANKAN ENERGY SECTOR
In 2005 the countrys total primary energy supply (TPES)
was 9.6 Mtoe. Traditional biomass energy has the largest
sharer (48%) in TPES followed by Oil import (43%) and
hydropower (9%). Total final energy consumption was 8.0
Mtoe in 2005 [1]. The level of electrification in the country
was 76.7% in 2005 [2].
Sri Lanka is expected to continue growing rapidly during
the next decade. The economy is expected to grow at the rate
of over 8% per annum during 2008-2011, and is expected to
grow at a slower rate of 7.4% by 2017[6] and is assumed to
continue to grow at that rate till 2050.
III. METHODOLOGY
A long term cost minimizing energy system model is
developed for Sri Lanka based on the framework of
MARKAL [14] for the purpose of the present study. The
model reflects the full Reference Energy System (RES) of the
country including energy resource exploitation, conversion,
transmission, distribution and end use for all sectors. The
model considers not only the resources and technologies in
use currently but also the candidate resources and
technologies that could be used to met the various types of
energy service demands in future. Five economic sectors
namely, residential, transport, industrial, commercial and
agriculture are considered in the study. The residential sector
is disaggregated into rural and urban subsectors in the model.
The future energy service demands are estimated using either
an econometric method or a simpler approach that assumes
the service demand per unit of sectoral value-added to be
constant over time.
For the analysis of energy security implications of the
carbon tax, the following set of indicators is employed:
1. Net Energy Import Ratio(NEIR):
where, NEI is Net Energy Import, DS is Domestic Supply
of Energy.
2. Shannon-Weiner Index (SWI) [3,4]:

i
i i
S Ln S SWI
NEI DS
NEI
NEIR

The Online Journal on Power and Energy Engineering (OJPEE) Vol. (1) No. (4)
Reference Number: W09-0051 135
where, S
i
is the share of primary energy sources i in
primary energy supply mix.
3. Vulnerability Index (VI) [7]
where, EEI is the expenditure on energy imports, and
GDP is the Gross Domestic Product.
IV. DISCRIPTION OF CASES
The base case characterizes the technology options and
energy carriers in the power and other sectors during the
planning horizon without any environmental or climate
policies. Specific power generation plants and projects or
technology options that are committed by the relevant
agencies for addition to the energy system in future years
during the planning horizon also form a part of the base case.
The base case also considers the learning by doing effect
(i.e., defined as the effect of the cumulative global sales
volume of a technology on the unit cost of the technology
[14]) and autonomous energy efficiency improvement (AEEI)
(i.e., non price induced technological change as it affects
energy efficiency in long term energy projections [11]). The
learning rates of new technologies that are estimated in [15,
16] are used in this study. The rate of AEEI is assumed to be
0.25% and 0.5% annually for demand side technologies and
power generation technologies. These rates are lower than
that considered by Kainuma et al. [5] and Webster et al. [11].
Energy resource options considered in the study include
coal, petroleum products, Liquefied Natural Gas (LNG), as
well as renewable energy resources like biomass,
hydropower, solar and wind. Sri Lanka has a wind power
potential of 24,000 MW from excellent wind sites (sites with
average wind speed 7.5-8.8 ms
-1
) [8]. Even though wind
energy is an attractive primary energy resource, it has two
main technical aspects of wind based electricity generation
that needs to be considered: The first is the stability limit of
the power system and the other is the contribution of wind
power to meet the peak power demand of the system. The
maximum permissible share of wind power in total capacity is
considered to be 30% in this study. Sri Lankas annual
sustainable biomass potential is 672.5 PJ [9]. Clean coal
technology options (such as IGCC and PFBC) are also
considered in the study along with the options of carbon
capture and storage (CCS) with coal and LNG generation
technologies [10, 13]. Advanced demand side technologies
such as hydrogen fuel cell vehicles, hybrid vehicles [5], and
electric transportation options are also considered in the base
case of the study.
Besides the base case, this study considers the following
three different cases with carbon tax that correspond to three
different global GHG stabilization targets [17, 18]:
Carbon Tax Case 1: Using carbon tax of 0.7US$/tCO
2
in
2010 and increase up to 10.1US$/tCO
2
by 2050. This is the
carbon tax level required to achieve the 650ppm stabilization
target (hereafter, this case is called CT650)
Carbon Tax Case 2: Using carbon tax of 1.5US$/tCO
2
in
2010 and increase up to 20.7US$/tCO
2
by 2050. This is the
carbon tax level required to achieve the 550ppm stabilization
target. (hereafter, this case is called CT550)
Carbon Tax Case 3: Using carbon tax of 8.3US$/tCO
2
in
2010 and increase up to 111.6US$/tCO
2
by 2050. This is the
carbon tax level required to achieve the 450ppm stabilization
target (hereafter the case is called CT450)
The variation of carbon tax used over the years under the
three carbon tax cases are presented in Figure 1.
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
2010 2015 2020 2025 2030 2035 2040 2045 2050
2
0
0
5

M
i
l
l
i
o
n

U
S
$
/
k
t
C
O
2
Year
Case 3
Case 2
Case1
Figure (1): Three alternative carbon tax cases, 2005 Million
US$/ktCO
2
V. ELECTRICITY GENERATION IN BASE CASE
At present, electricity generation is based mainly on oil and
hydropower. There is a small wind power plant and a small
biomass plant in the present power system; however, their
capacities are negligible compared to the total generation
capacity. The total electricity generation was 33 PJ in 2005
and was expected to grow at an average rate of 6.3% annually
during the period 2005-2030. During 2030-2050, the
generation is estimated to grow by 7.2% annually to reach the
level of 618 PJ in 2050. Coal, wind and LNG based
generations would start as a major source of electricity supply
in 2010, 2020 and 2025 respectively. The generation capacity
is estimated to grow at 5.3% during 2005-2040. This is a low
growth rate compared to that during 2040-2050, during
which, the electricity generation capacity is to grow at a rate
of 9.5% annually. Accordingly, the total generation capacity
of the system is estimated to grow to 36 GW by 2050.
Figure 2 shows the growth of total emission during the
planning period. The estimated total emission from all sectors
of the country is to grow from 11.8 MtCO
2
in 2005 to about
242.5 MtCO
2
in 2050. In terms of sectoral contributions to
total CO
2
emission, the transport sector accounted for 50% of
the total emission in 2005. However, the share of the
GDP
EEI
VI
The Online Journal on Power and Energy Engineering (OJPEE) Vol. (1) No. (4)
Reference Number: W09-0051 136
transport would decline during the planning horizon and
reach to 30% in 2050. The energy conversion sector is the
second largest contributor to the total CO
2
emission with its
share being 30% on an average during 2005-2050. The share
of the industrial sector in CO
2
emissions would increase from
8% in 2005 to 34% in 2050.
0
50000
100000
150000
200000
250000
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
k
t
C
O
2
Year
Residential
Transport
Industry
Conversion
Commercial
Agriculture
Figure (2): CO
2
Emission Profile during 2005-2050
VI. EFFECT OF CARBON TAX ON POWER
GENERATION
The total share of renewable energy in cumulative
electricity generation during the planning horizon is 19% in
the base case. With the carbon tax, the share is estimated to
increase to 21% under CT650 case mainly due to the
increased wind based electricity generation. In the higher tax
cases of CT550 and CT450, sustainably produced biomass is
also found to be economically attractive for power generation.
As a result, the shares of renewable energy based electricity
generations are increased further to 23% and 37% under
CT550 and CT450 cases.
Carbon tax is also expected to promote the use of more
efficient and cleaner thermal generation technologies as
cleaner coal power plants would become relatively more
economical than conventional coal power plants. The present
analysis shows that the share of coal based power plants
(including conventional and super critical) in total electricity
generation would drop from 36% in the base case to 34% in
the CT650 case. With the application of higher tax levels, it
would further decreased to 31% and 4% in CT550 and CT450
cases. Besides, the share of the combined cycle power plants
would remain same at 43% in the base case and all three
carbon tax cases. Meanwhile, the share of cleaner coal
technologies (integrated coal gasification combined cycle
plants and pulverized coal plants with CCS) shows an
increase from 0% (both in base case and CT650 case) to 1%
and 14% in CT550 and CT650 case.
VII. EFFECT OF CARBON TAX ON CO
2
EMISSIONS
Due to the reduced usage of coal under carbon tax, total
CO
2
emission is expected to be reduced in all the tax cases as
compared with the base case. In the low carbon tax cases of
CT650 and CT550, significant emission reduction would take
place only after 2015 while under the higher tax case of
CT450, significant reduction would start earlier (i.e., from
2010). It is found that the cumulative CO
2
emission during
the planning horizon would be reduced by 2% under CT650
as compared to the total base case emission, while the
corresponding figures under CT550, and CT450 cases would
be 7%, 41% respectively.
CT650 CT550 CT450
Agriculture 42 (4) (8) (7)
Commercial 338 0 0 0
Power Generation 1,213 47 102 682
Industry 1,342 27 175 1,058
Residential 12 (1) (2) (4)
Transport 1,305 25 25 26
Other 8 0 0 0
Total 4,252 94 292 1,755
Note : The figures in parenthesis denotes an increase in CO2 emission from base case
Cumulative Emission Reduction from the base case
emission level under different carbon taxcases, MtCO2
Base case
cumulative CO2
emission, MtCO2
Sectors
Table 2: Sectoral Emission Reduction, MtCO
2
Table 2 gives the estimated sectoral emission reduction
under different tax schemes. Power generation and industry
sectors are the two largest contributors to CO
2
emission
reduction under the carbon tax cases. Under CT450, these two
sectors would account for over 99% of total CO
2
emission
reduction in the country. Note that the power sector accounts
for the largest share in CO
2
reduction at the low tax case
(CT650), while the industry sector plays the most significant
role in emission reduction under the higher tax cases of
CT550 and CT450. The cumulative emission reduction from
the transport sector remains almost unchanged with higher
carbon tax. Although the transport sector accounts for 31% of
the total CO
2
emission in the base case, its contribution in the
total CO
2
emission reduction decreases from 26.6% under
CT650 to 8.5% under CT550 and to 1.5% under CT450.
VIII. EFFECT OF CARBON TAX ON ENERGY
SECURITY
The effects of carbon tax on energy security of the country
are analyzed through the use of three indicators as was stated
in Section III.
Import dependency
The temporal changes in net energy import ratio (NEIR)
under the base and carbon tax cases are shown in Figure 3. As
can be seen, net energy import dependency would grow over
time under both the base case and CT650; it would also
increase over time (except during 2010-2020) under CT550.
Under CT450, the dependency would be significantly lower
than that under the base case and lower carbon tax cases
throughout the planning horizon. Further, the dependency
The Online Journal on Power and Energy Engineering (OJPEE) Vol. (1) No. (4)
Reference Number: W09-0051 137
would remain almost unaffected over time till 2035 under
CT450.
0
10
20
30
40
50
60
70
80
90
100
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
N
e
t

I
m
p
o
r
t

E
n
e
r
g
y

R
a
t
i
o

(
%
)
Year
Base Case
CT650
CT550
CT450
Figure (3): Net Energy Import Dependency under Carbon tax
during 2005-2050
Diversification of Energy Resources
Carbon tax is mostly found to have a positive effect on
diversification in the use of energy resources in the country.
Figure 4 shows the Shannon-Wiener Index (SWI) for
diversification of primary energy use in the country under the
different cases considered in the present study. It is, however,
interesting to note that a higher level of carbon tax does not
necessarily promotes the diversification of energy resources.
For example, the SWI index under CT450 case is found to be
lower than that under the base and lower carbon tax case of
CT650 and CT550 during 2015-2040. The lower level of
diversification during 2015-2040 under CT450 is a result of
more uneven distribution in the use of energy resources in
that coal shares would get significantly reduced while that of
other resources would be increased. Near the end of the
planning horizon, the SWI values under the carbon tax cases
are found to be higher than that under the base case as coal
shares in the carbon tax cases would be decreased and energy
resources are more evenly distributed than that under the base
case.
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
S
h
a
n
n
o
n
-
W
i
e
n
e
r

I
n
d
e
x
Year
Base Case
CT650
CT550
CT450
Figure (4). Diversification of Energy Sources under Carbon
Tax during 2005-2050
Economic Vulnerability of Energy Imports
As shown in Figure 5, the vulnerability index (VI) (defined
here as net energy import as a percentage of GDP) would
improve with the application of carbon tax. In the base case,
the annual vulnerability index ranges from 3.9% to 10.7%
during 2010-2050. The index is not much different under
CT650 and CT550 from that in the base case. The index
exhibits significant reduction only at the higher tax case of
CT450. There would be a sudden drop in VI during 2005-
2010; it is mainly due to the introduction of coal in power
generation and hence a reduction in the use (and import) of
oil.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
V
u
l
n
e
r
a
b
i
l
i
t
y

I
n
d
e
x

(
%
)
Year
Base Case
CT650
CT550
CT450
.
Figure (5). Economic Vulnerability Index under Carbon Tax
during 2005-2050
IX. CONCLUSIONS
The study shows that the carbon tax can affect the energy
resource-mix and technology-mix significantly. In the case of
Sri Lanka, a significant decrease in the use of coal fired
power generation is to take place under the carbon tax, while
there would be an increase in biomass and wind based power
generation. In addition, there would also be an increased use
of cleaner coal technologies (with CCS) at higher carbon
taxes. Significant reductions in net energy import dependency
and economic vulnerability to imported energy costs would
also result under the high carbon tax case (CT450), indicating
an increased energy security of the country over time. The
study also shows that carbon tax below certain levels would
not be so effective in reducing the CO
2
emission nor in
improving the energy security.
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