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Climate Change Policy: Cost Effective
Strategies
Dr. Margo Thorning
Managing Director,
International Council for Capital
Formation
Brussels Office:
Park Leopold, Rue Wiertz
50/28 B-1050
Brussels, Belgium
Tel: +32.2.401.68.44
Fax: +32.2.401.68.68
Email: [email protected]
Web: www.iccfglobal.org
Washington D.C. Office:
1750 K Street, Suite 400
Washington, D.C. 20006
Tel: 202-293-5811
Fax: 202-785-8165
Where Does Europe Stand on Actually Complying with Kyoto?
 European Union is projected to be 7% above the 1990 emission
levels by 2010.
 EU leaders realize they cannot reconcile goals of increased EU
industrial competitiveness as well as tighter future targets for GHG
emission reductions.
 EU policy-makers are beginning to worry about the additional steps
required to meet the targets including impact of emission trading
schemes on industry.
 Slow EU economic growth hinders reducing energy intensity
(energy used per Euro of output)
Greenhouse Gas Emissions in the European
Union Projected to Exceed Kyoto Targets in 2010
-10%
-5%
0%
5%
10%
15%
EU-15
Sweden
UK
Germany
Luxembourg
France
Netherlands
Italy
Greece
Belgium
Ireland
Finland
Austria
Potugal
Spain
Denmark
Source: European Environmental Agency, November 30, 2004
20%
25%
30%
35%
40%
The cost of the Kyoto Protocol varies according
to which type of economic model is used:
 Sectoral models such as PRIMES(used by DG Environment) are
designed to show the effect of policy changes on the energy sector
rather than economy wide effects. Primes estimates cost of Kyoto
is 0.12 % of GDP in 2010.
 General equilibrium models such as that used by UNICE and the
Danish consulting firm COWI are designed to show the “big
picture” impacts of policy changes in the long run after the
economy has had time to adjust to energy price changes. Costs
range from 0.7 to 1.5% of GDP in 2010.
 Macroeconomic models such as those used by Oxford Economic
Forecasting or Global Insight are designed to capture the short-run,
frictional costs of adjusting to policy changes. Costs range from 1.0
to 4.8% of GDP in 2010.
Impact of Climate Change Policy on EU
Competitiveness in 2010:
General Equilibrium Model Results
GDP
Consumption
Exports Outside
the EU
0
-0.2
-0.4
-0.3
-0.38
-0.6
-0.8
-1
New electricity
technology easily and
cheaply available
-0.6
-0.84
New electricity
technologies slow to
become available and
imports are limited in
supply
-0.95
-1.2
-1.4
-1.6
-1.6
-1.8
Assumptions: Cost of a permit to emit a ton of Carbon ranges from €55 to €238
depending on rate of economic growth and speed of new technology penetration.
Source: COWI Report for UNICE, October 2004
Impact of Kyoto Protocol and Additional
Targets on GDP In the EU in 2010 and 2020:
Macroeconomic Model Results
Real GDP - % Difference from Baseline
Ger
UK
NL
Spain
Italy
Ger
UK
NL
Spain Italy*
0
-1
-2
-3
-4
-5
2010
2020
-6
Kyoto Target
60% Below 2000 Levels by 2050
*Italian Target is a 70% Reduction below 1990 by 2050
Source: DRI-WEFA, 2002. www.iccfglobal.org
Rapid Growth in China’s and India’s CO2 Emissions Projected
(Million Metric Tons CO2)
8,000
6,000
4,000
If increase
limited to 50%
of baseline
forecast
China
2,000
India
0
1990
2001
Base Case Projection: Energy Information Administration,
2025
International Energy Outlook, 2004
Million Mt CO2 per Billion 1997 Dollar GDP
Limiting Emissions Growth to 50% Would
Require Much Faster Reductions in CO2 Intensity
China
3
2
India
Base Case
CO2 Cap
Base Case
1
0
2001
2025
2001
2025
Maintaining 2025 per Capita GDP requires much
faster reductions in CO2 Intensity improvements
CO2 Cap
Thousands of 1997 US Dollars
Even Limiting Emissions Growth to 50%
Could Have Big Impact on Per Capita GDP
China
4
India
Base Case
3
CO2 Cap
2
Base Case
1
0
2001
2025
2001
Limits 2025 per Capita GDP to cap emissions,
while maintaining CO2 Intensity improvements
2025
CO2 Cap
Economic Freedom and the Adoption of
New Energy Technologies
 Economic Freedom Promotes Improved Living
Standards: protection of investment, openness of internal
markets, overall share of output absorbed by government,
political freedom
 Faster Economic Growth: associated with adoption of
new energy technologies which reduces energy intensity of
emissions as living standards rise
 Barriers to new technology:




Pricing distortions
Lack of markets
Subsidies through State run enterprises
Lack of protection for property rights including intellectual
property
 Restrictions on foreign direct investment
 Lack of infrastructure, education, skills to handle new
technology
 Import restrictions
Economic Freedom Compared to
Energy Intensity in 2001
80000
Russia
70000
2001
50000
Carbon / GDP
60000
40000
China
30000
India
S. Korea
20000
Singapore
USA
10000
Namibia
0
3.00
4.00
5.00
6.00
7.00
8.00
9.00
Greenhouse Gas Emissions
Million Metric Tonnes Carbon/Billion $1997
Per Dollar of Output
0.7
0.6
0.5
0.4
Installed Base
0.3
New Investment
0.2
0.1
0
China
India
U.S.
Japan
Comparison of EU and US Energy Intensity
Reduction 1992-2002
1992-1997
0
US
EU
1997-2002
US
EU
1992-2002
US
EU
Percent Change
-4
-2.5%
-8
7.0%
-6.9%
-9.3%
-12
10.7%
-16
-16.9%
-20
Data: EIA International Energy Annual 2002.
Practical Strategies to Address
Economic Growth and Climate Change Policy
Remove barriers to developing world’s
access to more energy and cleaner technology
by promoting economic freedom and market
reforms
 Increase R&D for new technologies to
reduce energy intensity
 Develop sequestration through both
natural and man-made technologies
 Promote nuclear power for electricity
 Expand bilateral cooperation with
developing countries
 Promote a truly global solution
