Transcript Document

The international economics of climate
change, emissions trading and innovation
Joint Institute of Policy Studies / EFNZ presentation
Wellington, 18 Oct 2006
Michael Grubb, Chief Economist, The Carbon Trust
Visiting Professor of Climate Change and Energy Policy, Imperial College, London, &
Senior Research Associate, Faculty of Economics, Cambridge University
Imperial College
OF SCIENCE, TECHNOLOGY AND MEDICINE
Outline
 The nature of the problem
 Stabilisation strategies and economics
 Mitigation: scale of challenge and costs
 Economic instruments and insights from the EU Emissions
Trading Scheme
 Low carbon innovation
 The international stage
The nature of the problem
- Is not that climate change may hurt ‘us’
at some time in the future, but that it is …
.. Already evident, probably implicated in some
’extreme events’ , but unevenly distributed and
(usually) difficult to isolate from other factors
(a) c. 1900
(b) Recent
Photos: Courtesy of Munich Society
for Environmental Research
… inherently unpredictable concerning some of the
most important potential impacts, which arise from
instabilities rather than incremental change …
… and cumulative over huge time horizons with
a lot of inertia and irreversibility
“Climate Uncertainty” has only been going one
way since 2001 IPCC report
 Significant uncertainties still exist over the scale, timing and
distribution of climate impacts
 However, almost all the new research over the last 5 years has
shown impacts to be happening quicker than previously expected
e.g. ice sheet melting; glacier retreat; ecological boundaries, etc
 Last main element of “contrarian” evidence – apparent
discrepancy in satellite temperature data – now resolved
 Previous “focal point” of 550ppm now seen as too high ..
Scale of the challenge
– where are we trying to get to?
Temperatures projections and stabilized
temperatures at different CO2 concentrations
Source: IPCC Synthesis Report, 2001
• 1000 to 1861, N.
Hemisphere, proxy data;
• 1861 to 2000 Global,
Instrumental;
• 2000 to 2100, SRES
projections
Range temperature for
stabilization of CO2
concentration at
equilibrium after 2100
650
550
450
Climate change impacts are best expressed in
terms of risk categories
Very low
Positive or negative monetary;
majority of people adversely affected
0
Past
Negative for Distribution
most regions of impacts
Increase
Large increase
Risks to some
Risks to many
1
2
450
3
4
Future
550
Increase in global mean temperature after 1990 (°C)
Source: IPCC Synthesis Report, 2001
Aggregate impacts
Net negative in all metrics
Negative for
some regions
-0.7
Risks of large scale
singularities
Higher
650
Risk of extreme
weather events
Risks to unique &
threatened systems
5
Quantifying impacts in global economic
terms is fraught with difficulty
 Discounting – the weight accorded to future impacts – is critical
and is subject to basic ethical principles
– Discounting for public policy is not the same as deriving from market
returns, but expresses fundamental principles about responsibilities for
and expectations about the welfare of future generations
– Discount rate should be “endogenous” in case of impacts that could
have substantial impact on global welfare
 Aggregation – the weight accorded to impacts on different peoples
& countries – similarly has to reflect fundamental ethical principles
cannot be dismissed eg. by comparison with foreign aid
– no practical substitution between foreign aid and mitigation
expenditure
– a highly imperfect expression of willingness to help others
– confuses willingness to help others with responsibilities not to inflict
damage (fundamental distinction between acts of omission and acts of
commission)
 Done properly, the costs of climate change left unchecked probably
equate to 10-30% of current consumption-equivalent
Mitigation: the challenge and the
costs
Historic emissions show developed country
responsibility for fossil CO2….
7
Emissions in Tg CO2eq.
3
Annex I
x 10
N2O
CH4
Forestry CO2
Fossil CO2
2.5
2
1.5
1
0.5
0
1900
1910
1920
1930
1940
7
Emissions in Tg CO2eq.
3
1950
Year
1960
1970
1980
1990
2000
1960
1970
1980
1990
2000
Non-Annex I
x 10
N2O
CH4
Forestry CO2
Fossil CO2
2.5
2
1.5
1
0.5
0
1900
1910
1920
1930
1940
1950
Year
Source: Marland et al. / Houghton et al. / EDGAR 3.2
.. Rich countries still dominate in per-capita terms, in
a unequal patterns of emissions that underlie both
political complexities and huge pressures for growth
Emissions (Tonnes of Carbon Per Capita)
6.00
United States
5.00
per-capita emissions vs population, 2000
Can-Aus-NZ
4.00
Russia
Japan
Developing country (non-Annex I) countries
W. Europe
3.00
EITs
2.00
South
Africa
Middle East
Latin
America
1.00
China
Other Asia
India
Other
Africa
0
1000
2000
3000
4000
Population (Million)
5000
6000
7000
.. Whilst most growth is expected to be in
developing countries
Emissions in Tg CO2eq.
3
x 10
7
N2O
CH4
Forestry CO2
Fossil CO2
2.5
2
1.5
How can developed country
emissions be reduced…
1
0.5
0
1900
3
Emissions in Tg CO2eq.
Annex I
x 10
1910
1920
1930
1940
7
1950
Year
1960
1970
1980
1990
2000
Non-Annex I
… and
developing
country
emission
growth be
limited?
N2O
CH4
Forestry CO2
Fossil CO2
2.5
2
1.5
1
0.5
0
1900
1910
1920
1930
1940
1950
Year
1960
1970
1980
1990
2000
2010
2020
2030
2040
IPCC SRES A1B scenario
Abatement scenarios involve a wide range of
technologies and systems across all big countries ..
- Emissions and technologies in Indian long-term Scenarios
Conventional Technology Paths
Synfuels, Gas hydrates, Nuclear fission
Fuel cell vehicle: Carbon-free hydrogen
Energy efficient appliances/ infrastrucutre
6750
6000
IA2
Frozen Technology
CO2 Emissions (Million Ton)
5250
4500
3750
IB2
Nuclear Fusion, Backstops
IA1
Information highways, High speed trains
IA1T
Advanced materials, Nanotechnology
3000
IB1
2250
High share of renewable Energy
Renewable
Lifestyle
changes,
EnergyEco-friendly
Technologies
choices
1500
750
2000
CO2 Capture/ Storage, pipeline networks
Substitution of transport by IT
2020
2040
2060
2080
2100
Dematerialization, material substitutions
Source: P.R.Shukla
Sustainable habitats, Public amenities
450ppm requires radical action in next 10 years
– even 550ppm will be difficult
Global anthropogenic CO2 emissions (GtC)
14
Global CO2 emissions: 8.5 to 10.5 GtC
Change from 1990 to 2020: +23% to +50%
13
12
550
ppmv
11
10
9
8
7
450
ppmv
6
5
1970
1980
1990
2000
2010
2020
2030
2040
Mitigation costs with endogenous technical change
suggest that efficient stabilisation at 450ppmCO2 may
cost c. 1% GDP by 2050, and similar total discounted
- But outliers indicate both risk of higher costs and opportunities for gain
Present value total costs discounted @5% from 10 different models
Mitigation policies
A low carbon economy will need both much cleaner
energy and big reductions in energy demand
“Clean” energy supply
Levers to reduce UK carbon emissions
Carbon intensity
(MtCe/MToe)
0.8
1990 (0.219)
2000 (0.161)
0.7
IAG Global
Sustainability
0.6
0.5
%Reduction
RCEP 2
0.4
0.3
20% (0.103)
Carbon Trust
0.2
30% (0.072)
40% (0.050)
50% (0.033)
60% (0.021)
RCEP 1
0.1
0
0
0.05
0.1
0.15
0.2
Energy intensity (MToe/£Bn GDP)
Reduced energy demand
0.25
0.3
The UK 2003 Energy White Paper
set the UK on a path to reduce
carbon emissions by 60% by 2050
through a combination of energy
efficiency in the short term and
renewables in the long term:
“[To achieve the required savings
from energy efficiency] would
need roughly a doubling of the
rate of energy efficiency
improvement seen in the past
thirty years”
“Technology innovation will have a
key part to play in underpinning
all our goals and delivering a low
carbon economy”
“To deliver these outcomes our
aim will be to provide industry and
investors with a clear and stable
policy framework”
Note: Figures in brackets show UK carbon intensity (MtC/£Bn), Scenarios show 2050 projections
Source: RCEP 1998, DTI EP68 GDP growth forecasts, IAG “Long-term Reductions in GHG in the UK”, Feb 2002
Different drivers and concerns imply different instruments
- mitigation not delivered by one policy any more than one technology
- costs and competitiveness reflect the range of +ve & -ve impacts
Behaviour
Buildings,
Appliances
& other
Industry
Substitution
(Manufacturing
and
Construction)
Transport
Technical
innovation
Economic
instruments
Innovation
instruments
Economic Competitiveness
Voluntary,
regulatory
and systemic
instruments
Economic instruments and the
EU Emissions Trading Scheme
EU Emissions Trading Scheme – Overview
Participants
Allocation
Timing
Key issues
• All EU 25 countries
• All electricity, ferrous metals, pulp & paper, cement and all facilities >
20MW, total 46% of EU emissions
• International links through Kyoto project crediting
• Member states develop National Allocation Plans (NAPs) by sector
and installation
• To be consistent with Kyoto target and anti-subsidy provisions
• 2005-7: phase 1, no national target, opt-out provisions
• 2008-12: governed by Kyoto target, opt-in possibilities
• 2013+ ? Likely to strengthen
• Market price – uncertainty – driven by NAPs, relative coal-gas pricing,
and emerging nature of market with mixed / late participation
• Specific allocation issues – including new plant, plant closure, etc
• Various legal issues surrounding legal nature, tax rules etc.
The market works but carbon price has had a
bumpy ride since inception
EUA price 25 October 2004-24 May 2006
35
30
Euro/t CO2
25
20
Futures Dec 2007
Futures Dec 2006
OTC Index
15
10
5
0
1-Oct-04
31-Dec-04
1-Apr-05
1-Jul-05
30-Sep-05
30-Dec-05
31-Mar-06
BIG Money – though not quite in the way
that some expected
 At €20/tCO2, the asset value of 2.2bnCO2 allowance is
around €40bn/yr … €100ms have been won or lost in
trades against erroneous price expectations
 Disputes continue over the reasons for the surplus in
2005 - but it is some combination of overallocation and
greater than predicted abatement (eg. in cement sector)
 Where competitive electricity markets, pricing effects as
expected lead to profits – probably totalling around €5bn
across the EU, swamping the modest net purchases in the
sector
EU ETS can substantially increase marginal operating
costs, but (eg. cement) can maintain profits with only
modest pass-through & price impact (current allocns)
Increase in
marginal
production cost, %
Cost pass-through required to maintain sector operating profits
Proportion of increase in
marginal cost passed
through to prices, %
Increase in
wholesale
cement price, %
Scenario 1
€5/tCO2
27.3%
7.0%
0.6%
Scenario 2
€15/tCO2
70.5%
7.5%
2.0%
Scenario 3
€25/tCO2
w/cutback
136.3%
39.7%
16.8%
Phase 1 & 2, direct allocation helps offsets electricity price rise (c.90% cost pass-through in electricity)
Long term scenario, required cement cost pass through increases as its direct allocation is cut back 30%
Profit-maximising pass through predicted by market modeling: c.80%
Profit/loss depends upon pricing policies and incentives,
allocation, and trade situation
net value-at-stake insufficient for major problems in Kyoto period
Potential value at stake (NVAS / MVAS)
under 0 to 100% free allocation
20%
18%
16%
MVAS: Max. value at stake
(no free allocation)
Electricity
Refining & Fuels
Cement
NVAS: Net value at stake
(100% free allocation;
exposure to electricity price only)
14%
12%
Food &
Tobacco
10%
Glass & Ceramics
8%
Iron & Steel
Pulp &
Paper
6%
Non-ferrous metals
inc. aluminium
Chemicals & Plastics
Metal Manufactures
4%
Textiles
2%
0%
0%
5%
10%
15%
20%
25%
30%
35%
UK trade intensity from outside the EU
• Upper end of range: zero free allocation
• Lower end of range: 100% free allowances (effect of €10/MWh electricity price increase to sectors)
• Assumes allowance price of €15/tCO2 and no CO2 price pass through in sector
As a result, most participating sectors profit on domestic
markets (but exports hit if no reimbursement)
Non-participants carry the cost, Al. may exit if buys from grid
Policy
coverage
Value at stake in 2020, %*
(% change in EBITDA predicted by Cournot model in brackets)
• EU ETS low
scenario
(15Euro/tCO2)
• EU ETS high
scenario
(30Euro/tCO2)
• EU ETS high
scenario with
allowance cut
back increased
to 30%
11 (16)
23 (13)
27 (26)
Source:
0.5 (0.4)
52 (25)
43 (11)
• Steel imports impact profit
taking at higher prices, still
profit from ETS under 30%
cutback but only a little
Note:
Petroleum
Cement
Steel
75 (6)
• Cement imports constrain
cost pass through, 30%
cutback neutralises gains
1.3 (0.7)
2.0 (-0.1)
General Insights
• All ETS sectors profit
under our standard
allocations, as product
pricing effects outweigh
net input cost increase
• ETS enables these
sectors to capture bulk
of the ‘scarcity rent’
• At €30/tCO2 both
cement and steel
approaching turning
point from imports
• Sectors outside ETS
face the higher prices,
Al. exits if on grid
• Marginal effect as
energy is small fraction
costs and profits
*Value at stake = (increase in total costs after allowance allocation)/(starting EBITDA); high variant scenarios with CCL
doubled; carbon price of 30Euro/tCO2 and cut back of 1% pa versus business as usual projected emissions
Oxera
Some initial high-level conclusions from
EU experience with economic instruments
 No practical economic instrument is ‘pure’: because it aims to
change relative prices in ways that favour lower carbon
technologies over high carbon incumbents, fierce struggles
are inevitable
 It has proved possible to implement a harmonised market in
emissions cap-and-trade for industrial emissions across 25
diverse countries
 Industry attitudes change once the instrument is adopted:
lobbying then focuses upon ‘getting the best’, and ‘the best’
has been large aggregate profits for some sectors,
 The EU ETS will continue post 2012 irrespective of progress
elsewhere
The power sector and low-carbon
innovation
The need for carbon pricing implies ..
 An internationalist strategy that links abroad
– To provide a sizeable, liquid carbon market that maximises
opportunities for efficient mitigation
– To assist developing country mitigation through the CDM
– To help converge carbon prices
– To strengthen influence in future ETS developments and
provide a stronger international basis for next steps
 Decarbonising the power sector
– is the basis for minimising economic impact on other sectors
– may ultimately provide a platform for low carbon transport
solutions
 An integrated strategy covering energy efficiency, electricity
regulation, emission allowances and innovation
price
In theory, rising carbon prices / strengthened emission
caps can provide the incentive for strategic investment
in innovation…
Volume = learning investment (10s
of $bns across technologies)
Volume = benefits
compared to reference
system generating costs
with existing technology
($trillions)
Diverse scenarios are possible to get low carbon
electricity; radical scenarios with high percentage of
renewables require changes to system structure and
more use of advanced transmission and power control
Iceland
Demand
390TWh
Wind
45-50%
PV
3-5%
Biomass
25%
Marine
5-10%
CO2
capture
Only for
hydrogen
Nuclear
-
MicroGen
20%
Norway
Northern
Ireland
Figure 1.5 : “Green plus” Scenario: UK Electricity Network in 2050
France
Source: Ch.2 in Future Electricity Technologies and Systems, CUP, 2006
Netherlands
Accelerating innovation requires combining ‘push’
and ‘pull’ to drive investment in technologies and
systems that traverse the entire innovation chain
Government
Policy & Programme Actions
Product/ Technology Push
Basic
R&D
Applied
R&D
Cost per unit
Pure
research
Demonstration Pre
Niche Market Fully
Commercial Supported
Commercial
Commercial
Market expansion
Technology “Valley of Death”
Consumers
Market engagement
programmes
Strategic deployment Internalisation
policies
& Barrier removal
Market Pull
Investments
Business and finance community
Rents in the EU ETS – enough to pay the bill ?
EUA price 25 October 2004-24 May 2006
•Power sector profits from EU
ETS c. €5bn during 2005
Euro/t CO2
35
30
•E.On announce €100m R&D
Centre
25
•UK Environmental
Transformation Fund announced
‘co-incident’ with Auctioning
decision
20
Futures Dec 2007
Futures Dec 2006
OTC Index
15
•UK £1bn National Institute for
Energy Technologies (NIET)
announced to be 50:50 cofunded with private sector, initial
sponsors E.On, EdF, Shell, BP.
10
5
0
1-Oct-04
31-Dec-04
1-Apr-05
1-Jul-05
30-Sep-05
30-Dec-05
31-Mar-06
•International and sectoral
investment linkages emerging
through the CDM
The international stage …
Carbon Emissions (MTCpa)
Impact of any Kyoto-like agreement will
accumulate over time and depend upon scope &
strength of future action
14,000
Developing country scenarios of
technology & policy spillover
First
Commitment Period
Zero
Adoption
12,000
developing
country
emission
scenarios
10,000
8,000
Intermediate
Adoption
6,000
4,000
2,000
1990
Industrialised Country
Emissions (Kyoto -1% pa)
2010
2050
Source: Grubb, Hope and Fouquet, in Climatic Change, 2003
Maximum
Adoption
(Intensity
Convergence)
2100
2005 saw the launch of four international
negotiation processes about the future ..
 The Kyoto Second Period negotiations launched at the
Montreal Meeting of Parties to the Protocol (153 countries of
which 32 are currently Annex B with a couple seeking to
join)
 The UN global dialogue on future action launched at the
Montreal Conference of Parties to the UNFCCC (c. 180
countries)
 The Gleneagles (G8+5+?) Dialogue that culminates in Japan
in 2008 including the world’s Big Emitters
 The Asia-Pacific Partnership on clean technologies including
the A-P Big Emitters
Future development of the cap-and-trade structure
could be usefully complemented by strengthening
‘other legs’ of the UNFCCC/Kyoto package
A core structure of sequential commitment periods
capping national emissions (‘assigned amounts’):
– First period defined for industrialised countries 2008-2012 with
differentiated allowances: total 5% reduction below 1990
– ‘Basket’ of six greenhouse gases, plus some allowance for sinks /
land-use change and forestry
– Extensive international adjustment / transfer provisions (‘Kyoto
flexible mechanisms’)
• Joint Implementation
• Clean Development Mechanism
• International Emissions Trading
+ Range of other provisions concerning activities in
developing countries, technology transfer, policies and
measures, etc.
After long hiatus, the international
process is slowly gearing up ….
 There is not yet any feasible ‘zone of agreement’,
but ..
 Conditions are changing and 2007-8 will see a
number of forces combining for breakthroughs:
– IPCC Fourth Assessment, and Stern Review, will force open the
international debate on the basis of the seriousness of problem
and the feasibility of solutions
– Established carbon markets and investment flows through
Kyoto mechanisms will embed these as a ‘reality’
– Growing business concern about risks of inaction, and costs of
an unstable and fragmented international regime, will help
convergence
– Growing appreciation that ‘energy efficiency’, carbon markets
and technology innovation are not alternates, but
complements appropriate to different parts of the problem
Conclusions and prospects
Conclusions
 Science
– provides a clear and compelling case for action
– Suggests aiming to stabilise in range c.450ppm-500CO2e ?
 Economic analysis
– confirms that not nearly enough is being done as yet
– Suggests costs of stabilisation broadly around 500ppmCO2e
manageable, if action is swift and broad-based
 Economic instruments
– EU ETS demonstrates feasibility of cap and trade but also complexity
of the allocation process
– Generate revenues that can usefully be used to support eg. …
 Innovation
– requires additional instruments and integration with regulatory and
infrastructure decisions
 International
– Gearing up for the next round, built upon the emerging experience
Further information
EU ETS & Kyoto mechanisms:
www.climate-strategies.org
‘Allocation and competitiveness in the EU ETS’
Climate Policy Special Issue, 2006
Energy efficiency, innovation & the Carbon Trust:
www.carbontrust.co.uk
‘UK Climate Change Programme:
potential evolution for business and public sector’
Global economics:
‘Endogenous technical change & the
economics of atmospheric stabilisation’,
Energy Journal Special Issue, 2006