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Energy Policy Cédric Philibert Energy Policy 13 Cédric Philibert Energy Policy Cédric Philibert Outline • • • • • • The problems with the Kyoto protocol Rejecting Kyoto? Keeping Kyoto (unchanged)? Transforming Kyoto! Certainty versus Ambition Your exams Energy Policy Cédric Philibert The problems with Kyoto • 1st commitment period to end by 2012 • Kyoto only addresses 1/3 of global emissions – Although through the Clean Development Mechanism its theoretical potential is greater • Kyoto entails uncertain abatement costs – This explains (at least in part) the reluctance of some industrialised countries and all developing countries, to accept being bound by emission quotas Energy Policy Cédric Philibert Kyoto is not enough Gigatonnes of CO2 25 International Bunkers 20 Non-Annex I Parties 15 10 5 0 1990 Non-Participating Annex I Parties Kyoto Parties 1995 Kyoto target 2000 2003 Energy Policy Cédric Philibert Uncertain economic growth 450 400 ~100 350 300 250 200 150 100 2005 2010 8% per year 2015 10% per year 2020 Energy Policy Cédric Philibert Keeping Kyoto? • • • • Unrealistic global ‘allocations’ Wait for a change in US policy Wait for developing countries to develop Likely to be a slow process: – Concerns about competitiveness – … might prevent ‘Kyoto countries’ to tighten targets – Agenda of cuts will define concentration levels (CO2) Energy Policy Cédric Philibert No-harm vs equal per capita Developed Developing “No-harm” rule Current Emissions Developed Surplus allowances (above BaU) Developing Equal per capita allocation Assigned Amounts Energy Policy Cédric Philibert Rejecting Kyoto? What are the possible alternatives? • Carbon taxes: politically difficult • Technology agreements: useful, but likely to be insufficient and/or too costly • Policies and measures: needed, but can a global coordination of PaMs work? • Climate change is a public good: unilateral action unlikely to be enough Energy Policy Cédric Philibert Transforming Kyoto! • Keep emissions trading: – Cost-effective = environmentally effective – Allows preserving vested interests – Allows the rich to pay for the poor • Address uncertainty on GHG reduction costs with more flexible options: – – – – Targets indexed on actual economic growth Price caps for industrialised countries Non-binding targets for developing countries Sector-wide crediting mechanisms to start with Energy Policy Cédric Philibert Indexed targets • Assigned amounts based on economic projection, adjusted to actual growth • “Intensity targets” only a special case • Now endorsed as an option for developing countries by most experts, for industrialised countries by some • How much do they reduce uncertainty? – Maybe not enough for developing countries, suggests a comparison of emissions and GDP trends (extrapolated from 1971 to 1991) and actual economic performances and emissions from 1997 to 2001 Energy Policy Cédric Philibert Intensity Targets: a reality test Regression line: coefficient of determination = 17.4% Intensity targets Energy Policy Cédric Philibert Non-binding targets • Targets with no consequences for non-attainment • Could allow trading • “Carrots, no stick” • Gives an incentive to achieve win-win reductions – Need to make sure only • Could be negotiated countries in compliance within the CDM are net sellers! framework • Target may be more • Not considered for stringent industrialised Cies • Could ease the political process Energy Policy Cédric Philibert Price caps • Supplementary permits made available in unlimited quantities at a given price • At domestic and/or international levels – If at the international level, one institution must be tasked with selling permits to governments, and goverments to entities – If at the domestic level only, international coordination requires all-sectors emission coverage through an upstream regime or ETS and taxes at the level of the price cap • If some money is raised – Could finance more adaptation, or partially close the gap in financing some more reductions Energy Policy Cédric Philibert Other options • Sectoral targets – Fixed or dynamic, binding or not – Industry sectors or domestic sectors? – Could allow trading – Limited costeffectiveness – If dynamic, special risk of leakage – A pragmatic first step? • Policies&measures – Commitment to specific P&Ms – Large potentials for P&Ms, but does the commitment help? – World standards vs trade barriers – Sovereignty issue – Compliance? – Trade-offs financial &technical aid? Energy Policy Cédric Philibert COP 8 - 2002 COP 11 - 2005 Energy Policy Cédric Philibert Certainty versus Ambition • The problem of climate change is fraught with uncertainty • Decision making under uncertainty rests on ‘expected’ costs or benefits, i.e. all possible outcomes times their probabilities of occurrence • However, this presentation does not offer a cost benefit analysis of climate change • It provides a stylised analysis of instrument choice under uncertainty Energy Policy Cédric Philibert Certainty versus Ambition General case: Optimum when marginal benefit equals marginal cost Cost uncertainty matters for instrument choice € Marginal cost Price (tax) Marginal benefit BaU Target Reductions Energy Policy Cédric Philibert Certainty versus Ambition Climate change: damages relate to concentrations, abatement costs relate to emission reductions xx € Possible Marginal benefit curve is roughly flat Unlikely ? x€ Emission reductions CO2 Concentrations : Possible 0 384 ppmv (No KP) 383 ppmV (Full KP) Energy Policy Cédric Philibert Certainty versus Ambition Climate change ~ flat marginal benefit curve € Marginal cost Uncertain costs Marginal benefit BaU Target Far from the optimum Reductions Energy Policy Cédric Philibert Certainty versus Ambition Price instruments minimise the error due to cost uncertainty € Marginal cost Tax Marginal benefit BaU Uncertain abatement Close to the optimum Reductions Energy Policy Cédric Philibert Certainty versus Ambition Climate change ~ flat marginal benefit curve Price instrument vs. the equivalent quantity instrument: Greatly reduces expected costs € Marginal cost Tax Marginal benefit saved added BaU Target Reductions Energy Policy Cédric Philibert Certainty versus Ambition Climate change ~ flat marginal benefit curve Price instrument vs. the equivalent quantity instrument: Greatly reduces expected costs May slightly reduce expected benefits Increases expected NET benefits (benefits minus costs) € Marginal cost Tax Marginal benefit lost BaU gained Target Reductions Energy Policy Cédric Philibert Certainty versus Ambition Compared to the equivalent best-guess target, a price instrument makes possible a more ambitious policy at lower expected costs € Marginal cost Tax Marginal benefit BaU Target Reductions Energy Policy Cédric Philibert Certainty versus Ambition Compared to the equivalent best-guess target, a price instrument makes possible a more ambitious policy at lower expected costs But targets have political advantages over taxes € Marginal cost Price cap Tax Marginal benefit BaU Target Reductions Energy Policy Cédric Philibert Certainty versus Ambition Introducing a price cap makes possible a more ambitious policy: - Same expected benefits. Lower expected costs (e.g. fairness) - Same expected costs. Higher expected benefits (e.g. environment) € Especially useful when benefits are deeply uncertain… Marginal cost Price cap Tax Marginal benefit BaU Target Reductions Energy Policy Cédric Philibert Certainty versus Ambition • Short term certainty on emission levels may be costly but has little value – because climate change is cumulative • Flexible options reduce expected costs – help get more countries on board – allow more ambitious policies • More ambitious targets can be chosen – higher benefits and lower costs (on expectation) – especially useful if benefits are deeply uncertain – help match marginal costs with benefits despite uncertainties (Economic efficiency) – help accomodate differing visions Energy Policy Cédric Philibert Certainty versus Ambition • What about climate catastrophes? – If a GHG threshold is known and close: • Use a quantity target to stop emissions – If a GHG threshold is a possibility but its level is unknown: • Favour the most ambitious policy • How do we go to stabilisation? – Level and agenda left undecided • Ensure action, not exact results • Favour the most ambitious policy • Over time, adjust the target and the price cap Energy Policy Cédric Philibert Too low price caps? • Price caps should be set in the upper range of cost expectations for a given target… – … until targets are ratcheted down… • Governments may not use them ‘right’… – would they do better without price caps? • Would agreeing on a price cap level be « a nightmare »? – Differentiation amongst countries would remain through differentiated assigned amounts – ENGOs say abatement costs are low; industry say they are high. Some price cap level might be felt high enough by the ENGOs and low enough by the industry – Price caps may lead both to be more careful in their public statements about abatement costs… • An international agreement on price cap level would be preferable for cost-effectiveness but is not necessary – Several price cap levels may coexist in one international trading system; to avoid the domination of the lowest price cap level, only complying countries (i.e. not ‘using’ the price cap) should be net sellers Energy Policy Cédric Philibert A threat to technology development? • Reducing expected abatement costs reduces expected benefits of climate-friendly technologies… • … if there is no price floor… • … and if the ambition in the targets is unchanged – Targets and price cap level drive technology development, not certainty on quantitative results – Price volatility (e.g. oil) shown to deter investments; more ambitious targets and price caps would lead to less volatile carbon prices – In any case, more specific instruments remain needed to promote costly technologies with great learning-by-doing potential (e.g. PV) • The price cap should smoothly grow over time • And in a decade or two reach a level above the cost of CO2 capture and storage (‘backstop’ technology), so coal can be used in a carbon-constrained world Energy Policy Cédric Philibert Conclusion • Fixed targets give certainty on short term emission results • More flexible options might facilitate: – The participation of more countries – The adoption of relatively more ambitious targets • More flexible options give less certainty of achieving precise levels – But a greater probability of doing better! Energy Policy Cédric Philibert Your exams A little more on coal… • Why oil became the first energy source? – Quality of lighting – Energy density (1912…) – Liquidity, Low cost… • When will coal peak – Consumption/reserves ratio at current levels – The peak is only the beginning of the end… • Clean coal – Not only coal washing… – Air pollutants (SOx, NOx, PM, Metals, Nukes…) – CO2 capture storage • Coal to Liquids – Increase consumption – Increase emissions… – CTL w/o CCS a disaster • Information sources Energy Policy Cédric Philibert 30000 CO2 Emissions : + 137% by 2050 ! 25000 ENERGY TECHNOLOGY PERSPECTIVES 20000 Scenarios & Strategies to 2050 MtCO2 2006 15000 26294 11733 10000 7603 6512 5000 4490 9946 5469 5122 3255 1718 0 2003 2050 Electricity Conversion Industry Transport Build’s. Energy Policy Cédric Philibert Your final exam Thursday 21 June 9:00 to 11:00 • Your final exam will be made of four topics. • All must be addressed in brief, e.g. 4 to 6 bullet points or short paragraphs. • It is more important to get all the major aspects than to support your points in detail. – For each topic, full responses in bullet points will be noted on 5, and one additional point might be attributed to more detailed answers. – A perfect paper in bullet points would get 20/20, a perfect paper with slightly more detailed answers would get 24/20...