Thailand Development Research Institute (TDRI)
1. The Twin Climate Change Challenges
Addressing global climate change is crucial for the survival of Thailand’s economy. This involves confronting challenges related to both reducing greenhouse gas emissions, especially carbon dioxide[1] (“mitigation”), and preparing for more severe climatic conditions (“adaptation”). For instance, mitigation efforts include transitioning from using internal combustion engine vehicles to electric vehicles (EVs), increasing the use of renewable energy, and enhancing energy conservation. On the other hand, adaptation measures include upgrading the country’s infrastructure to better handle natural disasters, such as building sea barriers or researching new crop varieties suitable for drought-prone areas. There are also activities addressing both mitigation and adaptation. For example, developing a “smart grid” can both decrease energy losses and ensure the grid is resilient to harsher weather conditions. Planting trees in urban areas can absorb carbon dioxide and make the city’s temperature more tolerable.
Countries need to balance their limited resources in addressing the mitigation and adaptation challenges, which have distinct characteristics. Specifically, when one country reduces its greenhouse gas emissions, every country benefits because the overall amount of greenhouse gases in the atmosphere decreases. This means that greenhouse gases are a kind of “public goods” on a global scale. However, the country making these reductions bears the cost itself, unless aided by the international community. Thus, countries often urge others to reduce their emissions. In contrast, adapting to the changing climate primarily benefits the adapting country, making it more of a “private good.” Hence, each country needs to prioritize its adaptation for climate change, even without significant external pressures.
2. Pressures for Mitigation
As Thailand contributes less than 1% of the world’s total annual greenhouse gas emissions, it should prioritize allocating resources to adapt to the changing climate. Given its small size, any reduction in Thailand’s emissions would not significantly affect the global atmospheric concentrations of greenhouse gases. Meanwhile, according to the Global Climate Change Risk Index 2021 (Eckstein et al., 2021), Thailand ranked as the ninth most at-risk country from climate change impacts between 2000-2019. During this period, Thailand experienced 146 severe weather events, resulting in losses of approximately USD 7.7 billion. Therefore, Thailand should prioritize adapting to the changing climate over reducing greenhouse gas emissions.
However, as a small and open economy that heavily relies on international trade, investment, and tourism, Thailand cannot overlook external pressures, and some internal ones, to reduce its greenhouse gas emissions. These pressures include:
- The Paris Agreement: Like other members of the United Nations Framework Convention on Climate Change (UNFCC), Thailand must set its own target for reducing greenhouse gas emissions, known as the Nationally Determined Contribution (NDC).
- The Carbon Border Adjustment Mechanism (CBAM): The European Union is about to implement this mechanism to adjust the prices for specific heavy-industry products, such as steel and cement, imported into the EU based on their carbon content. It is anticipated that this list will expand, and other countries like the USA, Canada, and Australia are planning to adopt similar measures in the near future.
- International regulatory bodies: The International Civil Aviation Organization (ICAO), which oversees international civil aviation safety, and the International Maritime Organization (IMO), which regulates international maritime safety, are now initiating guidelines to encourage their member countries to reduce greenhouse gas emissions in aviation and maritime transportation, respectively.
- Supply chain leaders: Global leading companies in the supply chains for consumer goods, including automobiles, textiles, and jewelry, are aiming to project their eco-friendly brand images. These companies exert pressure on their suppliers, including Thai companies, to reduce greenhouse gas emissions.
- Foreign Direct Investment: Many leading multinational corporations investing in Thailand, such as Amazon Web Service, Western Digital and Seagate, are pushing Thailand to supply them with 100% renewable energy.
- International Financial and Capital Market: Portfolio investors that adhere to the Principles for Responsible Investment and invest in publicly listed companies in Thailand are pushing the invested companies to reduce their greenhouse gas emissions.
- Activists: NGOs, both locally and internationally, advocating for environmental protection are applying pressure to companies to be socially and environmentally responsible in their operations. This includes environmental conservation and the reduction of greenhouse gas emissions.
- Consumer groups: Environmentally conscious consumers and tourists are pushing companies to act responsibly by choosing to purchase only environmentally friendly products or services.
- Employees and labor unions: Workers, especially the younger and better educated generation, are becoming environmentally conscious. They opt to work for companies or organizations that are socially and environmentally responsible.
Under the Paris Agreement, Thailand has set its national target to achieve net-zero emissions by the year 2065. The target is much later than that of many countries, including those in Asia such as Japan, South Korea, Singapore, Malaysia, Vietnam, and Laos, which set their targets for 2050, and China, which sets its target for 2060. Even though the Paris Agreement does not mandate specific emission reduction targets for individual countries, Thailand’s late target could tarnish its global image and potentially diminish its competitiveness in attracting investments compared to its neighbors.
Thailand’s late target for net zero emission also fail to send the right signals to players in the economic sectors, including those in the real sectors, power generation, finance and the education sector that is responsible for workforce preparation. Thus the delay could impede Thailand’s transition to a low-carbon economy and society.
Thailand also lacks an overarching strategy for reducing greenhouse gas emissions. While there are plans in the energy and transportation sectors for emission reduction, there is no comprehensive plan for the overall economy. Thailand’s policy debates mostly revolve around specific issues like carbon credit trading or afforestation for carbon absorption, whereas other significant reforms such as liberalizing the electric power market and imposing a “carbon tax” have not been sufficiently considered.
3. Carbon Taxation
Countries have several options to reduce greenhouse gas emissions. This ranges from government investments in infrastructure such as mass transit systems to government procurement aimed at promoting “green products”. There are also subsidies for the development and use of low-carbon technologies, as well as establishing mandatory standards, especially fuel standards and building codes. However, one of the most effective options for reducing greenhouse gas emissions is “carbon pricing.” In practice, there are two main approaches to this: a “carbon tax” system and a “cap and trade” system, which is also known as the emission trading system (ETS).
There are several benefits to carbon pricing. It can reduce greenhouse gas emissions at a low cost, stimulate innovation by reducing the “green premia” between low-emission products and services and their high-emission counterparts, and generate revenue for the government, either through collected taxes or by auctioning carbon allowances.
The World Bank’s Carbon Pricing Dashboard project found that 39 countries and 33 local governments are currently using carbon pricing. This covers 23% of the global carbon emissions. Moreover, over 100 more central and local governments plan to adopt carbon pricing in the future, potentially extending the coverage to 58% of the global carbon emissions.
The State and Trends of Carbon Pricing Report (World Bank, 2023) also reveals variation in carbon pricing and its coverage in different countries. For instance, countries in Scandinavia and the European Union priced carbon at nearly USD 100 per ton in 2023, while others have rates between USD 20-60 per ton. Developing countries often price carbon below USD 10 per ton.
Theoretically, carbon tax and ETS have similar effects. Their differences usually depend on specific design details rather than the choice between the two instruments (Stavins, 2019). In practice, however, each approach has its pros and cons. Using ETS allows certainty in carbon emission reduction, making it easier for countries to achieve their national emission reduction targets and facilitating cross-border carbon trading. In contrast, a carbon tax aids businesses in investment decisions because they know with certainty the cost of emitting each ton of carbon based on the tax rate. It also allows governments to easily estimate revenues generated by tax. Practically, implementing a carbon tax is often simpler as it can leverage existing tax collecting mechanisms, especially the excise tax collection. Meanwhile, using an ETS requires new infrastructure, such as primary and secondary markets for carbon trading with sufficient liquidity, which may not be easily established in developing countries just starting to reduce their carbon emission.
In the context of Thailand, we propose an implementation of a carbon tax. This is because introducing a carbon tax is simpler, with the existing excise tax collecting mechanisms. Furthermore, there is no need to develop new trading infrastructures. In particular, we suggest that the Thai government adopt a dual carbon tax system:
- Export Carbon Tax: Under this scheme, products exporting to the EU or other jurisdictions implementing CBAMs would be taxed to avoid paying the importing countries’ border carbon price. The tax would be collected from the producers of these products, specifically only for the portion exported to countries implementing CBAMs. The rate should be comparable to the carbon prices in the importing countries. This scheme ensures that Thailand does not lose its potential tax revenue to importing countries.
- Energy Carbon Tax: Under this scheme, carbon tax would be levied on power plants using fossil fuels and on oil refiners and importers. The aim is to motivate consumers of electricity and fossil fuels to utilize energy efficiently and reduce carbon emissions. Those who pay the export carbon tax proposed above would be exempted from this energy carbon tax for the amount they have already paid.
We estimate that the revenue from the export carbon tax will be minimal, at least initially. This is because the tax base is very narrow, given that few countries outside the EU are considering adopting CBAMs. Moreover, the products under this mechanism are still limited to heavy industry ones, which Thailand does not export in large quantities. On the other hand, the energy carbon tax will have a much broader tax base since every sector of the economy will continue to consume energy from fossil fuels in the foreseeable future. The revenue generated from this tax will depend on the rate set. Initially, it might be prudent to start with a modest rate, for instance, THB 175 (approximately USD 5) per ton of carbon, and gradually adjust it upwards as necessary.
If we were to assume this tax rate on energy, the carbon tax revenue would be about THB 30 billion per year in 2022. The tax would result in a 1.1% increase in gasoline prices, a 1.4% rise in diesel prices, and a 1.8% surge in electricity rate. This modest tax rate would lead to a slight decrease in carbon emissions, by approximately 1.1 million tons, or 0.4 % of Thailand’s total emissions, assuming a long-term price elasticity of demand of -0.826 for fuel (Jarungrattanapong and Untong, 2023) and -0.1 for electricity (Apaitan and Wibulpolprasert, 2018).
We propose that the revenue from the carbon tax should be earmarked to a “Mitigation and Adaptation Fund.” Initially, a majority of this fund should be utilized to support the real sectors in reducing their greenhouse gas emissions. Over time, an increasing proportion should be used to provide support for adaptation of the whole society, especially the vulnerable groups. We also strongly recommend that these revenues not become a part of the general government budget, which might be allocated for other purposes, and thus, risk depleting resources intended to address climate change.
Introducing a carbon tax should be complemented by other supporting measures, including liberalizing the energy market, improving transportation infrastructures, and enhancing energy efficiency. Moreover, once a carbon tax is in place, the government should eliminate redundant measures, such as subsidizing renewable energy at preferential rates since the tax itself would already make renewable sources more competitive. Counterproductive measures, especially subsidies for fossil fuels and incentives for energy-intensive industries, should also be terminated.
In the short run, eliminating diesel price subsidies is even more critical than implementing a carbon tax as diesel enjoys substantial subsidies. For instance, in mid-October 2023, diesel consumers benefitted from a THB 5.52 per liter subsidy through the Oil Fund while paying THB 4.04 per liter in excise and local taxes. This results in a net subsidy for diesel of THB 1.48 per liter, or THB 550 (roughly USD 15.8) per ton of carbon, a much higher level than the proposed carbon tax rate.
Therefore, before introducing a carbon tax on diesel, the government should gradually reduce the subsidy. Such a move would bring about immediate benefits, including promoting energy conservation, reducing pollutants detrimental to health, and alleviating the deficit of the Oil Fund, which currently stands at a substantial THB 72 billion.
4. Development of a Voluntary Carbon Credit Market
The agricultural sector is a significant contributor to greenhouse gas emissions, particularly from deforestation and slash-and-burn farming. This results in environmental issues such as PM 2.5 pollution, which is harmful to public health. According to the World Health Organization, pollutions related to PM 2.5 caused the deaths of approximately 31,000 Thais and resulted in about 660,000 Disability-Adjusted Life Years (DALYs) in 2019.[2] In practice, taxing carbon from this sector is challenging due to numerous collection points. Moreover, governmental efforts over the years to prohibit forest burning have never been effective.
One solution to this problem is the development of a voluntary carbon credit market. This provides an incentive for farmers and forest resource collectors to earn income from forest conservation since they can sell carbon credits to interested buyers. Selling carbon credits benefits not only individual farmers but also the whole community by reducing pollution by preventing forest burning. However, it is crucial to ensure that activities receiving carbon credits genuinely contribute to additional carbon reduction. A trustworthy mechanism for verification is necessary, and activities should not be those mandated by other measures, whether regulatory standards or carbon taxation.
We conducted an in-depth interview with the Mae Fah Luang Foundation, which uses carbon credits to address forest fires. It is found that carbon credits can effectively incentivize the reduction of greenhouse gas emissions from forest burning when the associated processes are appropriately designed. This includes setting up a project by matching businesses wanting to buy carbon credits with communities looking after forests, evaluating community readiness, and educating them, aerial mapping, using technology to delineate forest areas, registering the project with the Thailand Greenhouse Gas Management Organization (TGO), setting up reporting and monitoring systems for forest stewardship, and verifying the carbon reduction amount.
By using this approach, the project’s first phase, covering 7,384 acres of forest, saw a reduction in forest fire areas from 23.5% between 2016-2020 to 6.2% in 2022. The project’s second phase, covering 11,212 acres, is even more impressive, reducing the forest fire areas from 21.4% between 2017-2021 to just 0.3% in 2022. Furthermore, this initiative has provided new job opportunities and improved living standards for local people.
At the same time, this case study highlights the challenges in scaling up carbon credit projects. Firstly, the project has high operational costs, especially those associated with verifying carbon emissions. Secondly, low carbon price indicates that there is a need to increase the demand for carbon credits, which would increase their price and provide a stronger incentive for preventing forest fire. Hence, to develop an active carbon credit market in Thailand, efforts must be made both in terms of supply and demand, with appropriate government policies in place.
On the supply side, the focus should be on reducing the costs of verification by supporting the development of more verifiers to meet the increasing demand. On the demand side, measures should be introduced to encourage businesses to reduce carbon emissions, such as requiring large companies to report their carbon emission levels, mandating energy-intensive products to disclose their carbon footprint and linking the Thai carbon credit market with international markets, facilitating cross-border carbon credit trading. However, the government should ensure that policies promoting the carbon credit market do not negatively impact local communities and the environment, for example, by increasing encroachments on forests and coastal mangrove areas.
5. Summary and Policy Recommendations
From the above discussion, it is clear that Thailand urgently needs to expedite its greenhouse gas reduction efforts and accelerate its current national targets. This is vital given the increasing global pressures to combat climate change. At the same time, Thailand should seize this opportunity to expedite the development of a “green economy” to be a new engine for economic growth. This will also create well-paying jobs for Thai workers and reduce health impacts, especially from air pollutants like PM 2.5, which often accompanies greenhouse gas emissions.
To achieve these goals, the government should consider the following seven policy measures:
- Transitioning to the Green Economy: Set the transition goal to a “green economy”, which can create many high paying “green jobs” for Thai workers as its main policy agenda.
- Implementing Carbon Tax: Gradually reduce and eventually eliminate fossil fuel subsidies and impose a carbon tax within the next five years, and use the revenue to establish a Transition and Adaptation Fund. This fund will support efforts to reduce greenhouse gas emissions and adapt to changing climatic conditions. In the long run, the country’s excise tax should be transformed into a carbon tax.
- Creating a Well-Functioning Carbon Credit Market: Accelerate the development of a voluntary carbon credit market on both the demand and the supply sides. The focus should be on reducing verification costs and increasing the demand for carbon credits in the business sector.
- Reforming the Electricity Market: Overhaul the country’s electricity market, which is currently a bottleneck for transitioning to a green economy. The new market structure should promote the growth of renewable energy by liberalizing electricity generation, allowing third-party access to the grid at a cost-based price, and allowing direct peer-to-peer electricity trading.
- Implementing Complementary Measures: Use various incentives, including government procurement policies, to promote “green products”. Standards for green products should also be established, along with investments in essential infrastructure, especially efficient mass transit systems in major cities.
- Implementing Large-scale Greenhouse Gas Reduction Initiatives: Implement “sandbox” projects for large-scale greenhouse gas reductions. For instance, the collaborative project in Saraburi, dubbed the “Saraburi Sandbox”, involves private sectors, the government, academics, and professional organizations, aiming to create Thailand’s first low-carbon prototype city. This sandbox initiative should be upgraded and institutionalized by enacting the proposed “Government Management Modernization Act”. Lessons learned from this sandbox should be used nationwide and further structural reforms should be made.
- Mobilizing External Fundings to Speed up the Mitigation Efforts: Develop projects to reduce greenhouse gas emissions and mobilize international funding to accelerate Thailand’s reduction target.
By implementing these recommendations, Thailand can effectively transition to a sustainable and prosperous green economy, ensuring environmental health, and economic wellbeing for its citizens.
References
Apaitan, T. and Wibulpolprasert, W. (2018): “Stylized Facts on Thailand’s Residential Electricity Consumption”, PIER Discussion Paper No. 107
Eckstein, D., Künzel, V. and Schäfer, L. (2021). The Global Climate Risk Index 2021. Bonn: Germanwatch.
Jarungrattanaponga, R. and Untong, A. (2023). Reference-dependent preferences and gasoline consumption in Thailand. Kasetsart Journal of Social Sciences 44 pp. 365–376
Stavins, Robert N. 2019. “The Future of US Carbon-Pricing Policy,” in: Environmental and Energy Policy and the Economy, volume 1, pages 8-64, National Bureau of Economic Research
World Bank. 2023. State and Trends of Carbon Pricing 2023 (http://hdl.handle.net/10986/39796)
[1] This article will use the term ‘carbon dioxide’ or ‘carbon’ interchangeably with ‘greenhouse gas’ unless stated otherwise.
[2] https://www.who.int/data/gho/data/indicators/indicator-details/GHO/ambient-air-pollution-attributable-deaths