Spain has set an ambitious goal to cut its greenhouse gas (GhG) emissions by 30 percent from 2023 levels by 2030, requiring new measures beyond current efforts. The country has significantly reduced emissions in the past 15 years, with electricity generation being the sector with the largest reduction due to the rise in renewable energy share. However, sectors like agriculture and waste management have lagged behind.
Key findings include:
- Emission intensity varies widely across Spanish firms, offering potential for reductions by incentivizing laggards to match less-polluting peers.
- Achieving emission intensity convergence of lagging Spanish firms toward best practice within their industry could reduce economy-wide emissions by approximately 22 percent, nearly 75 percent of the needed 30 percent reduction to achieve the 2030 target.
- Upgrading existing capital to new less energy- or emission-intensive alternatives could also achieve about 22 percent reduction in economy-wide emissions.
The report examines the fiscal and economic impact of different climate mitigation policies using a multi-sector heterogeneous-firm general equilibrium model. It finds that:
- Subsidies for capital upgrades could help reduce GhG emissions, but continued expansions in the scope and level of carbon pricing would achieve more ambitious targets at a lower economic and fiscal cost.
- To achieve a 15 percent reduction in GhG emissions, the carbon price would need to increase by about US$ 64 per ton of CO2eq, while capital subsidies would require covering over 50 cents for every dollar a firm spends on upgrading capital.
- Relying solely on capital subsidies to achieve large emission cuts, such as Spain’s NECP target for 2030, is found to be unfeasible.
Policy recommendations include:
- Expanding the scope and level of carbon pricing as the most cost-effective option to reduce GhG emissions.
- Complementary domestic actions are needed to meet Spain’s 2030 emission goal, such as raising carbon taxation in residential and road transport sectors, encouraging the adoption of a landfill tax by more autonomous communities, and providing price-based incentives to optimize the use of fertilizers in agriculture.
- Introducing feebates in the agriculture and livestock sector.
- Mitigating the social impact of carbon pricing by using some of the revenues to compensate the most vulnerable and cut distortionary taxes on households and firms.
The report also highlights that mitigation actions could help increase productivity over time, contributing to keep the economic cost of carbon pricing low.
