Download Opportunities and wider benefits from climate change

Chapter 10: Macroeconomic models of costs
Chapter 12: Opportunities and wider benefits
from climate policies
Beate Friedl
Alexandra Kulmer
Alexandra Pack
Content
Macroeconomic models of costs
• Costs of emissions-saving measures: results from other
models
• Key assumptions affecting cost estimates
• Understanding the scale of total global costs
• Conclusions
Opportunities and wider benefits
•
•
•
•
•
•
Opportunities from growing markets
Co-benefits
Coal and CCS
Access to energy and indoor air pollution
Energy subsidies
Conclusion
Chapter 10
Macroeconomic models of costs
Costs of emissions-saving measures:
Results from other models
• numerous other economic models attempt to determine
equilibrium allocations of energy and non-energy
emissions, costs and prices
• different results depend on underlying assumptions
– see meta-data analysis of Barker et al. (2006)
Costs of emissions-saving measures:
Results from other models
• meta-data analysis conducted by Barker et al. (2006)
– reduction in annual CO2 emissions from the baseline and
– associated changes in world GDP in 2100.
Source:
Barker et al.
(2006)
Costs of emissions-saving measures:
Results from other models
• Aim of the meta-analysis work…
– quantifying the importance of parameters and assumptions
common to the various models in generating results
– generating an new, overarching model
• based on estimates of the impacts of individual model
characteristics
• able to switch on/or off the factors identified as being significant in
cutting costs
Costs of emissions-saving measures:
Results from other models
• Metadata analysis of Barker:
– estimated costs in 2030 for stabilization at 450ppm CO2 (~500550ppm CO2e)
all the
identified
CGE
modelling
cost-cuttingreduces
factors
assumptions
are switched
offto the
costs,
compared
use of econometric model
results
allows for unlimited
allow for international
substitution
at high
trade incarbon
emission
permits
enough
prices
benefits
of
mitigation
in the
form of avoided climate
reduction of GHG also
change are monetized and
reduces other emissions
discounted
Including
ITC reduces
active use of carbon tax or
costs
auction revenues to
reduce distorting taxes or
to provide incentives for
low carbon innovation.
Source: Barker et al. 2006
Key assumptions affecting cost
estimates
• key factors in determining cost estimates
– (1) assumed baseline emissions
– (2) technological change
– (3) flexibility
• (i) flexibility between sectors
• (ii) flexibility between technologies
• (iii) flexibility between gases
• (iv) flexibility between countries
– (4) ambition of policy
– (5) others
Key assumptions affecting cost
estimates
• (1) assumed baseline emissions
– costs of stabilising GHG emissions depend on the amount of
additional required mitigation
– gap between BAU emissions (without climate change policies)
and the emissions goal determine costs
– the higher the differences → the higher the costs
– criticisms about the IPCC BAU scenario
• underestimation of the future role of coal
Key assumptions affecting cost
estimates
• (2) technological change
– costs vary between studies, depending on
• assumed rate of technological learning
• the number of learning technologies included
• the time frame considered
– examples…
• induced technical change and the availability of non-GHG ‘backstop’
technologies reduce costs (by 1 to 2 percent points)
• climate policies are necessary to provide the incentive for low-GHG
technologies
– “Without a ‘loud, legal and long’ carbon price signal the technologies
will not emerge.”
Key assumptions affecting cost
estimates
• (3) flexibility: (i) flexibility between sectors
– cutting GHG emissions from some sectors will be cheaper
rather than from others
• e.g. transport sector versus power generation sector
• flexibility reduces modelled costs
• models restricted to a narrow range of sectors with inelastic demand
(e.g. transport) estimate high costs of mitigation
Key assumptions affecting cost
estimates
• (ii) flexibility between technologies
– including a set of technologies is cheaper
– models concentrating on individual technologies show
increasing costs of abatement
• (ii) flexibility between gases
– including also non-CO2 gases opens additional low-cost
abatement opportunities
– e.g. model comparison by Energy Modelling Forum:
• including non-carbon GHG
• achieving the same climate goal at considerably lower costs
• costs fall by 30-40% relative to a CO2-only approach
Key assumptions affecting cost
estimates
• (iv) flexibility between countries: some countries
have cheaper abatement options than others
– natural resource endowments make some forms of
emissions abatement cheaper
• e.g. sugar production in Brazil (biofuels)
– flexibility mechanisms under the Kyoto Protocol
• International emissions trading
• JI/CDM
Key assumptions affecting cost
estimates
• timing of emission saving (in countries)
– emission reductions cheaper in countries that are in the process
of making big capital investment
– “It is much cheaper to build a new piece of capital equipment
using low-emission technology than to retro-fit dirty capital
stock” (Stern, Part III, p.246)
– China and India are expected to increase their capital
infrastructure substantially over coming years
Key assumptions affecting cost
estimates
• (4) the ambition of policy
– early policy on mitigation can reduce costs of emission-saving
technologies
– models including perfect foresight (transparent and predictable
policy) show reduced costs because people can plan more
efficiently
– cost effective planning requires
• accurate information
• well-functioning capital markets
Key assumptions affecting cost
estimates
• (5) other common features of model projections
– increasing marginal costs of mitigation
• each additional unit reduction of GHG becomes more expensive as
abatement increases
• absence of energy models which analyse the costs of stabilisation
concentrations below 500ppm CO2e because of high associated
costs
• e.g. Barker et al. (2006)
Key assumptions affecting cost
estimates
• Barker et al. (2006):
– profile of Changes in Gross World Product with ITC
• Scenario stabilization at 500ppm CO2(2100) – right hand
• Scenario stabilization at 450ppm CO2 (2100) – left hand
stabilization at 450ppm CO2
stabilization at 500ppm CO2
Understanding the scale of total
global total costs
If climate change policy instruments are applied efficiently
and flexible, the estimated effects of mitigation costs on
economic output are small:
If mitigation costs 1% of world GDP by 2100, then this is
equvalent to a drop of the growth rate of annual GDP
from 2.5% to 2.49%.
This estimation includes no climate-change demages.
Understanding the scale of total
global total costs
If climate-change demages are taken into account:
– The BAU level of world GDP will be lower then
estimated.
– Mitigation protects growth, while failing to mitigate
does not.
Conclusion
Mitigation costs will depend on
– the design and application of policy regimes
– the „what, where and when“ flexibility
– the timing
– incentives for low-GHG technologies
With the right policies the effects on economic
output can be kept small.
Chapter 12
Opportunities and wider benefits
from climate change
Content
Macroeconomic models of costs
•
•
•
•
Costs of emissions-saving measures: results from other models
Key assumptions affecting cost estimates
Understanding the scale of total global costs
Conclusions
Opportunities and wider benefits
•
•
•
•
•
•
Opportunities from growing markets
Co-benefits
Coal and CCS
Access to energy and indoor air pollution
Energy subsidies
Conclusion
Opportunities from growing markets
“Markets for low-carbon energy sources are growing
rapidly”.
Growing markets:
– Markets for renewable energy generation
– Financial and Investment markets
– Carbon trading markets
– Markets for financial intermediaries
– Insurence sector
Markets for renewable energy
Source: Renewables Global Status Report 2007, p9
Renewable energy supplied 18% of the world’s final energy
consumption in 2006.
Markets for renewable energy
Average annual growth rates for renewable
energy capacity 2002-2006.
From 2002–2006
global renewable
energy capacity
grew at average
rates of 15–30%
annually.
Source: Renewables Global Status Report 2007, p 10
Markets for renewable energy
$ 77.3
$ 254.4
Source: „Clean Energy Trends“, Clean Edge, 2008, p 2
Markets for renewable energy
“Growth rates in these markets will continue to be
strong, creating opportunities for business and for
employment.”
Main drivers are:
– high fossil fuel prices
– strong government policies to tackle climate change
and policies for renewable energy
Markets for renewable energy
Policy targets in at least 66 countries worldwide:
• renewable energies as shares of electricity production,
primary energy and final energy
• policies to promote renewable power generation (feed-in
policies, …)
• biofuels as shares of transport energy
• policies for solar hot water
Financial markets
Annual investment in new renewable energy
capacity, 1995–2007
An estimated $71
billion was invested
in new renewable
power and heating
capacity worldwide
in 2007.
Investment in large
hydropower
was an additional
$15–20 billion.
Source:Renewables Global Status Report 2007, p 16
Carbon trading markets
The carbon market
grew in value to an
estimated US$30
billion in 2006 three
times
greater than the
previous year.
Source: The world bank, 2007, p 3
Markets for financial intermediaries
•
•
•
•
•
•
•
Corporate and project finance
Monitoring, reporting and verification services
Brokers
Carbon asset management and strategy
Registry services
Legal services
Trading services
Insurence sector
The insurence sector will face
• higher risks
• broader opportunities
– wider range of weather and climate-related products
The insurence sector will require
• greater access to long-term capital funding
• to overlook the pricing
Opportunities from growing markets
“Companies and countries should position themselves
now to take advantage of these opportunities”
Countries can seek to position their economy
– to win strong shares of growing clean energy market
– to support the development of particular technologies
– to gain scientific or technical expertise
“Climate change policies can be a general spur to greater
efficiency, cost reduction and innovation for the private
sector”.
Co-benefits of climate change
• Climate change to ensure efficiency and productivity
• Overestimating costs of environmental regulation (CFCs)
– Increase in price between $650 and $1.200 – actually $40 - $400
• Co-Benefits
– Reducing costs and saving GHG emissions
• BP $650 m savings through operational efficiency and improved
energy management (10 % reduction in GHG emissions)
– Increasing energy security
• Policy mix
• Coal as an exception
– Carbon capture and storage
– Air pollution and health
– Ending deforestation
“Climate change and energy security drivers will often work
in the same direction although there are important
exceptions”.
Co-benefit energy security
• Energy security
–
–
–
–
Geopolitical risks of physical interruption of supply
Problems with domestic infrastructure
Promoting energy efficiency to reach energy security
Attractive option for developing countries with low standards of
energy efficiency
– Energy mix to ensure energy security
Some facts about coal
• Coal combustion emits almost twice as much CO2 than
combustion of natural gas per unit of energy
• Many countries have a lot of coal available and therefore
use it to reduce energy import dependency
• China is the largest coal producer, consumption of coal
might double between 2000 and 2010
• The US, Australia, China and South Africa invest into
coal-to-liquid technologies to use it as a transport fuel
– Emissions are almost double comparing to crude oil
• CCS as a solution?
Coal reserves by country (end 2005)
Source: WEO, 2006
China – total energy production
1971-2005
Source: IEA, Energy Statistics
Carbon dioxide capture and
storage (1)
Source: IPCC Special Report on Carbon dioxide Capture and Storage
Carbon dioxide capture and
storage (2)
• Many of possibilites to store CO2
• Requirements:
– Economically viable
– Technically feasible and safe
– Environmentally and socially sustainable
Technical potential > actual storage capacity
Global cumuluative CO2
storage (1)
Contribution of CCS:
450 ppmv CO2: 20-95 %
750 ppmv CO2 : 0-68 %
B1: best case
scenario
A2: national
enterprise
A1Fl: fossil
fuel intensive
A1T:
concentrating on
technology
A1B: balanced
Source: IPCC Special Report on Carbon dioxide Capture and Storage
Global cumuluative CO2
storage (2)
B1: best case
scenario
A2: national
enterprise
A1Fl: fossil fuel
intensive
A1T:
concentrating on
technology
A1B: balanced
Source: IPCC Special Report on Carbon dioxide Capture and Storage
Global cumuluative CO2
storage (3)
• Fujii and Yamaji (1998)
– Stabilisation level of 550 ppmv, 920 GTCO2 of the
emissions reductions could be met by CCS
– One third captured in the ocean
Access to energy
• 1.6 billion people without modern energy services
• Problem of an increase in energy emissions
–
–
–
–
Renewable technologies
Microgeneration, hydropower
Decentral energy production
Replace low-quality biomass
•
•
•
•
2.5 billion rely on traditional biomass
Smoke causes deaths esp. women and children
Less time for education
Local deforestation
– Affordability
• Income distribution more effective
Share of traditional biomass in
residential consumption by country
Source: WEO, 2006
Primary energy source for cooking in
households in India and Botswana
Source: WEO, 2006
Deaths by year caused by
indoor air pollution
*IEA estimate based on WHO figure for all solid fuels
Source: WEO, 2006
Ending deforestation and
enjoying co-benefits
• Protect environment/biodiversity
– 70 % of earths plants and animals live in tropical forests
• Source for pharma industry
– Destroying plants = destroying sources of pharmaceutical
ingredients
• Protection of indigenous people
– Around 50 million people are living in tropical forests
• Tourism
• Extreme weather events
– Forests play an important role in watersheds – a loss can result
in an increase in flooding
Energy subsidies
• High subsidies to inefficent technologies
– stimulating unnecessary consumption/waste
– income distribution in the wrong direction
– undermining capacity
– lobbying
– decreasing incentive to invest in low carbon
technologies
Energy subsidies
Conclusion
• Climate change faces challenges, costs and
opportunities
• New markets and trading possibilities
• Sorting out inefficiencies
• Co-benefits available
• But: risk for undermining sustainable development
Thanks for your attention!
But some more minutes left.....
Questions
Questions
• Which key assumptions affect estimated costs of
GHG stabilisation (overview)?
• How do the inclusion of backstop technologies
and induced technology affect the cost of GHG
stabilisation. Can you give example of carbon
free “backstop technologies”1?
1
In the literature on resource economics a perfect substitute for an exhaustible resource is denoted a back-stop technology.
This definition assumes that there is no physical constraint on the availability of the substitute good . Furthermore, the
essential feature characterizing a perfect substitute is that if the prices between the alternatives differ, the demand is
directed either towards the resource or against the substitute good (e.g. biomass)
Questions
• How does flexibility affect abatement costs? Can
you think of any examples where mitigation
strategies aimed to cut emissions are cheaper in
some countries than in other countries.
• Can you explain the relative absence of energy
model results for stabilisation concentration
below 500ppm CO2e.
Questions
• What are the fast-growing new markets, that will
gain by the shift to a low-carbon economy. And
which countries will especially profit of this new
market opportunities?
• While talking about climate change people
always think about costs, a loss in consumption
and restrictions. What are the co-benefits of
climate change? Are there any conflicts in
meeting different policy goals?
Questions
• Stern mentions the conflict about coal and
energy security. What is the real problem with
using coal for energy production and could
Carbon Capture and Storage be a possibility for
using coal and meeting the reduction in GHG
emissions?
• What is the current problem with energy
subsidies? What are the inefficiencies
associated with subsidies?
Finally finished!!!
Thanks again!!!!