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Workshop at the 2009 Climate Change Summit Wednesday 4 March 2009 Economics of climate change Context and concepts related to mitigation HARALD WINKLER Energy Research Centre University of Cape Town ERC Climate change – an integrated framework Source: IPCC 2001 ERC Climate change economics Environmental issue, rising emissions Deeply economic issue – at heart of energy economy “Climate change presents a unique challenge for economics: it is the greatest and widest-ranging market failure ever seen” (Stern Review 2006) ERC History: minerals-energy complex Complex comprising mining, minerals processing, the energy sector, and associated industries (Fine & Rustomjee 1996) Coal ¾ of TPES > 90% of electricity ‘cheap’ and inefficient Particular challenge for mitgation … … while increasing access to affordable eneryg services Short-term: energy efficiency Medium-term: change fuel mix ERC Future: low-carbon future Redefine competitive advantage from attracting energy-intensive sectors to building a new advantage around climatefriendly technologies and systems ERC Towards climate policy LTMS strategic option of ‘Use the Market’ Polokwane resolution on climate change Treasury work on environmental fiscal reform Theme of ‘putting a price on carbon’ Question is ‘how?’ ERC Carbon and carbon markets Markets are a means, not an end May be efficient, but not good at equity Carbon cycle is global – problem of common property management How to manage Multi-laterally – UNFCCC, but also other scales Price vs quantity Pure regulation – standards Pure price – tax Combination – cap-and-trade ERC Conceptual distinctions Economic instruments Direct Indirect Carbon tax Cap and trade Fuel input tax Green or white certificates Regulatory instruments GHG emission standards Building standards ERC Some broad questions 1. What would the distributional implications of different economic instruments be? 2. What are the implications, including costs and benefits, of choosing to use an economic instrument for mitigation? 3. How could different instruments be combined 4. How responsive is the system (and its parts) to various economic instruments for mitigation? (elasticity) 5. What would a consistent and effective approach to energyintensive sectors, in order to increase efficiency, encourage fuel switching and eventually diversify products 6. What are the key design elements that need to be considered to design the best instrument for mitigation in SA? 7. What supportive measures might be needed to implement a set of instruments? Implications of existing policy? What legal and institutional arrangements could we build on? ERC Thank you Energy Research Centre University of Cape Town Environmental Policy Research Unit, University of Cape Town Genesis Analytics www.erc.uct.ac.za ERC