Download Macroeconomic Impacts of EU Climate Policy in 2008-2012

Macroeconomic Impacts of
EU Climate Policy in 2008-2012
AIECE
November 5, 2008
Olavi Rantala - Paavo Suni
The Research Institute of the Finnish Economy
ETLA
1
Macroeconomic baseline scenario
 Financial crisis dampens strongly world economic growth in 2008-2012
- United States falls into recession, Japanese growth is slow
- Developing countries, esp. China hit hard,
but continue growing relatively rapidly
- Commodity producers’ surpluses diminish,
which lags their investments
 EU countries face a severe slowdown
- Many EU countries going into recession as EU as a whole
 Growth getting stronger in the course of 2010, but slowly
- Previous 5-year period was especially strong
 After the current turmoil growth rates recover back to potential
but below the recent record strong growth
2
World economic growth by region, %
Share
of total, %
2005
2002 2007
2007*
2008f
2009f
World
100.0
4.6
4.5
3.3
2.4
3.4
Asia
29.0
9.6
3.7
2.9
24.4
22.4
8.2
23.5
5.7
China
Middle East
Africa
North America
United States
Latin America
EU (baseline scenario)
2009 –
2012f
7.6
7.5
6.1
5.4
11.0
11.9
10.0
9.0
8.6
5.9
5.8
2.8
5.9
6.3
1.8
6.2
5.5
1.3
5.5
5.5
0.0
5.6
5.8
1.5
2.8
1.7
1.3
-0.1
1.4
5.1
2.7
5.6
2.9
4.5
1.4
3.0
0.4
3.8
1.7
3
World economic growth 2002-2012
2002-2007
2008f
2009f
2009-2012f
12
11
10
9
8
7
6
%
5
4
3
2
1
0
-1
World
Asia
China
Middle East
Africa
Norh
America
United
States
Latin
America
EU (baseline
scenario)
4
Primary energy prices
 Energy prices have peaked in 2008 at record levels
- Oil: peaked at close to 150 USD/b,
by mid-October below 70 USD/b
- Coal: fiscal year prices doubled in case of steam oil
- Gas: prices follow oil and oil product price decline with a lag
 In the longer term, the availability of energy
is one of the key risks for global growth
5
World market prices of oil and coal and gas price in Europe
Oil (Brent, € / barrel, lhs.)
Coal (Australia, € / ton, lhs.)
Gas (import price in EU, € / Mbtu, rhs.)
100
10
90
9
80
8
70
7
60
6
50
5
40
4
30
3
20
2
10
1
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008f
2010f
2012f
Year
6
The baseline scenario of CO2 emissions
 In the forecasting model the baseline scenario
of CO2 emissions is based on energy demand in four sectors:
industry, transport, households and the rest of the economy
 CO2 emissions reflect
electricity supply generated by fossil fuels
and other consumption of fossil fuels
 CO2 emissions of electricity generation are increased
by the demand for electricity in the four sectors
and decreased by the clean electricity generated
by means of renewable energy sources
and nuclear power
 Recent Eurostat data indicates a rebound
in electricity consumption and estimated CO2 emissions in the EU
in spring 2008
7
CO2 emissions in baseline scenario
Output by sector
Electricity
consumption
Temperature
Heat
consumption
Industrial
processes
Clean electricity
generation
Rainfall
Transport
Energy produced
by fossil fuels
CO2 emissions
8
Increase of CO2 emissions in the EU baseline scenario
Electricity generation
Other consumption of fossil fuels
CO2 emissions
150
100
Million tonnes
50
0
-50
-100
-150
-200
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008f
2010f
2012f
Year
9
Recent increase of CO2 emissions in EU
Changes from corresponding month of prevous year
Emissions
Oil consumption
-15
%
4
-15
20
08
/1
-10
10
-10
7
-5
4
-5
20
07
/1
0
10
0
7
5
4
5
20
06
/1
10
10
10
7
15
4
15
20
05
/1
%
Consumption of fossil fuels
Electricity produced by fossil fuels
Year / month
10
Climate policy and the electricity market
 The cornerstone of EU climate policy is
the reduction of CO2 emissions in electricity generation and industry
under the European Union Emission Trading Scheme (EU ETS)
 CO2 emissions result largely from electricity generation
 More than 50 % of electricity is produced by fossil fuels in the EU
 There are hardly any substitutes for fossil fuels
in electricity production in the short run
 The price of emission allowances creates
an extra marginal cost in electricity production
 Increases in the price of emission allowances
are largely passed through to the price of electricity
11
Supply and demand for electricity in EU
140
Demand curve
Price including taxes
Variable production costs and price
120
Producer price
100
Price of emission
allowance
80
Price of emission
allowance
60
40
20
Coal
Gas
Nuclear power
Hydro and w ind pow er
0
0
500
1000
1500
2000
2500
3000
Output 2006, TWh
12
Channels to macroeconomic developments
 The price of emission allowances has become
an important determinant of the price of electricity
 The price of electricity is the main channel of the impacts of
climate policy on macroeconomic developments
 The price elasticity of the demand for electricity is rather low
(-0.1 for industry and -0.2 for households)
 The downward adjustment of the demand for electricity and CO2 emissions
may necessitate a large increase in the price of emission allowances
and in the the price of electricity
 This leads to increasing costs in industry,
higher consumer prices for households
and decreasing macroeconomic activity
 The macroeconomic adjustment finally leads to
lower demand for energy and reductions in CO2 emissions
13
Macroeconomic adjustment to climate policy
World economic growth
(+)
EU economic growth
(–)
(–)
(+)
Domestic demand
Energy
consumption
(–)
Exports
(–)
(+)
Household
real income
CO2
emissions
(–)
Emission
allowances
(–)
(+)
Consumer
prices
(–)
Price of emission
allowances
Industry
production costs
(+)
(+)
(+)
(+)
Price of electricity
14
Baseline scenario of CO2 emissions in EU ETS
 CO2 emissions in the EU emission trading sector under the EU ETS
grew by about 4 per cent in 2007
 According to our baseline scenario
the emissions will decrease in 2008-2012
 CO2 emissions will exceed the emission allowances
on average by about 100 million tonnes annually in 2008-2012
 Uncertainties in the baseline EU ETS emission scenario:
- macroeconomic developments and energy demand
- clean electricity supply
15
Baseline scenario of CO2 emissions
in the EU emission trading sector
Emissions
Baseline scenario
Emission allowances
Million tonnes
2300
2200
2100
2000
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008f
2010f
2012f
Year
16
Primary energy sources of EU electricity generation
Nuclear power
Hydro power
Wind
Biomass
Clean electricity
Fossil fuels
2000
1500
TWh 1000
500
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008f
2010f
2012f
Year
17
Assumptions in policy scenarios
 Emission allowances for the Kyoto period 2008-2012
have been cut by some 10 percent as compared
to the first emission trading period 2005-2007
 Our most stringent policy scenario - “maximum impact policy scenario” assumes that the CO2 emissions of EU ETS
must be reduced to the allowed cap in 2008-2012
 Emission trading and other Kyoto mechanisms
(Clean Development Mechanism, CDM, and Joint Implementation, JI)
allow flexibility in the adjustment of the CO2 emissions
 The other extreme policy scenario - “minimum impact policy scenario” assumes a perfectly elastic supply of emission reduction units
(Certified Emission Reductions, CER)
from developing countries at the minimum price of 10 €/t
(roughly the minimum price set by China)
 Our forecast for the emissions of the EU emission trading sector in 2012
lies in the middle of the two extreme scenarios
18
Adjustment of CO2 emissions in the EU emission trading sector
Possible adjustment paths
Forecast
Emission allowances
2300
Million tonnes
2200
2100
2000
1900
1800
2005
2006
2007
2008f
2009f
2010f
2011f
2012f
Year
19
Emission allowance price and electricity prices
 The increase in emission allowance price
will be gradually passed on to electricity prices
 In the minimum impact policy scenario
the emission allowance price is assumed to be only 10 €/t
and the impact on electricity prices is rather small
 The maximum impact policy scenario
implies a sharp rise in emission allowance price
and electricity prices
20
Price of emission allowances
Possible adjustment paths
Forecast
200
€/t
150
100
50
0
2005
2006
2007
2008f
2009f
2010f
2011f
2012f
Year
21
Electricity price for European industry
Possible adjustment paths
Forecast
400
€ / MWh
300
200
100
0
2005
2006
2007
2008f
2009f
2010f
2011f
2012f
Year
22
Electricity price for European households
Possible adjustment paths
Forecast
800
€ / MWh
600
400
200
0
2005
2006
2007
2008f
2009f
2010f
2011f
2012f
Year
23
Macroeconomic impacts of EU climate policy
 The increase in emission allowance and electricity prices
will weaken export competitiveness and export performance
especially in export markets outside the EU area
 Rising electricity prices will also raise consumer prices
and slow down household real income and consumption growth
 The negative impact on exports and domestic demand
will be reflected on GDP and employment
 Macroeconomic impacts may be stronger
in the small open energy-intensive EU countries
than in the major EU countries
24
Macroeconomic impacts of climate policy in the EU area in 2012 as compared to
the baseline scenario, %
Baseline
scenario
in 2012,
Policy impact in 2012, %
Maximum
Forecast
Minimum
impact
impact
2007=100
Industry:
Price of electricity
Output costs
153
120
20
0.5
75
2.3
157
5.1
Households:
Price of electricity
Consumer prices
172
113
20
0.3
75
1.0
157
1.8
Macro economy:
Exports
Industrial production
Domestic demand
GDP
117
109
110
108
-0.2
-0.2
-0.2
-0.2
-0.8
-0.7
-0.5
-0.6
-1.5
-1.3
-0.8
-1.0
Employment
104
-0.1
-0.3
-0.5
25
Differences in the macroeconomic impacts
between countries
 Exports in relation to GDP, especially exports outside EU
 Energy-intensity of industry
 Impact of temperature on energy demand
26
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Exports / GDP in 2005
Exports outside EU
Exports to EU
160
140
120
100
% 80
60
40
20
0
27
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m
MWh / mill. €
Manufacturing industry electricity consumption / output volume
in 2005
500
400
300
200
100
0
28
Household electricity consumption and temperature
in EU countries 1990-2000
5
Annual consumption per capita, MWh
Sweden
4
Finland
3
Belgium
Denmark
2
France
Austria
Germany
Italy
1
Estonia
Spain
Latvia
Greece
Malta
Cyprus
Portugal
Romania
0
0
2
4
6
8
10
12
14
16
18
20
22
Annual mean temperature, oC
29
Greenhouse gas developments in EU
 EU total greenhouse gas emissions meet
the Kyoto commitment target in 2008-2012
according to our baseline scenario
 Emissions will fall clearly below the Kyoto target
according to our policy scenario
 EU climate policy seems to be
unnecessarily stringent in 2008-2012
30
Greenhouse gas emissions in EU
Emissions
Baseline scenario
Forecast
Kyoto Protocol target
5800
Million tonnes
5600
5400
5200
5000
4800
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008f
2010f
2012f
Year
31
Conclusions
 EU climate policy dampens the medium-term
economic growth in the EU area
 EU climate policy seems to be
unnecessarily stringent in 2008-2012
in terms of the Kyoto commitment target
on greenhouse gas reductions
 Uncertainties in the scenarios:
- The baseline macroeconomic scenario
- The flexibility in CO2 emissions allowed by the Kyoto mechanisms,
especially the supply of clean development (CDM) credits
from China and other developing countries
32