Spain has set an ambitious goal to cut its greenhouse gas (GhG) emissions by 30 percent from 2023 levels by 2030. While Spain has significantly reduced its emissions over the past 15 years, with electricity generation being the sector with the largest reduction, other sectors like agriculture and waste management have lagged behind. The emission intensity across Spanish firms varies widely, offering potential for further 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 meeting the 30 percent reduction needed to achieve the 2030 target. This potential improvement could be largely achieved by upgrading existing capital to new, less energy- or emission-intensive alternatives, which also tends to be accompanied by output and productivity gains.
A general equilibrium multi-sector model with heterogeneous firms is developed to evaluate the economic effects of alternative emission reduction policies. The model simulations show that while subsidies for capital upgrades could help reduce GhG emissions, 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 above its baseline level, while capital subsidies would need to cover over 50 cents for every dollar a firm spends on upgrading capital. The net present value loss in consumption from relying solely on capital subsidies would be over 10 percent, whereas the net present value cost from higher carbon pricing would be negligible.
Spain has been moving toward achieving its 2030 climate targets through a mix of policy instruments, including investments, subsidies, and regulatory measures, fueled by the implementation of its Recovery, Transformation and Resilience Plan. To meet its 2030 emission goal, additional efforts should be centered around emission pricing mechanisms. Expanding the scope and level of carbon pricing is the most cost-effective option to reduce GhG emissions, allowing Spain to reach more ambitious abatement targets at a lower economic and fiscal cost. Complementary domestic actions are needed to meet Spain’s 2030 emission goal, such as raising carbon taxation in the 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. Mitigation actions could also help increase productivity over time, contributing to keep the economic cost of carbon pricing low. Measures that mitigate the social impact of carbon pricing, such as using some of the revenues to compensate the most vulnerable and cut distortionary taxes on households and firms, would improve its political acceptability.
