Energy Policy 13

1. Energy Policy 13 Cédric Philibert

2. Outline • The problems with the Kyoto protocol • Rejecting Kyoto? • Keeping Kyoto (unchanged)? • Transforming Kyoto! • Certainty versus Ambition • Your exams

3. 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

4. Kyoto is not enough

5. Uncertain economic growth ~100

6. 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)

7. No-harm vs equal per capita Assigned Amounts Surplus allowances (above BaU) Developed Developing Developed Developing “No-harm” rule Equal per capita allocation Current Emissions

8. 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

9. 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

10. 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 Indexed targets

11. Intensity Targets: a reality test Regression line: coefficient of determination = 17.4% Intensity targets

12. Targets with no consequences for non-attainment Could allow trading Need to make sure only countries in compliance are net sellers! Target may be more stringent Could ease the political process “Carrots, no stick” Gives an incentive to achieve win-win reductions Could be negotiated within the CDM framework Not considered for industrialised Cies Non-binding targets

13. 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

14. Sectoral targets Fixed or dynamic, binding or not Industry sectors or domestic sectors? Could allow trading Limited cost-effectiveness 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? Other options

15. COP 8 - 2002 COP 11 - 2005

16. 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

17. Certainty versus Ambition General case: Optimum when marginal benefit equals marginal cost Cost uncertainty matters for instrument choice € Marginal cost Price (tax) Marginal benefit Target BaU Reductions

18. Certainty versus Ambition Climate change: damages relate to concentrations, abatement costs relate to emission reductions xx € x € 0 Possible Unlikely ? Possible Marginal benefit curve is roughly flat Emission reductions CO2Concentrations : 384 ppmv (No KP) 383 ppmV (Full KP)

19. Certainty versus Ambition Climate change ~ flat marginal benefit curve € Marginal cost Uncertain costs Marginal benefit Target BaU Reductions Far from the optimum

20. Certainty versus Ambition Price instruments minimise the error due to cost uncertainty € Marginal cost Tax Marginal benefit BaU Uncertain abatement Reductions Close to the optimum

21. saved added 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 Target BaU Reductions

22. gained lost 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 Target BaU Reductions

23. 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 Target BaU Reductions

24. 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 Target Target Target BaU Reductions

25. Certainty versus Ambition Introducing a price cap makes possible a more ambitious policy: Lower expected costs Higher expected benefits • 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 Target BaU Reductions

26. 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

27. 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

28. 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

29. 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), socoal can be used in a carbon-constrained world

30. 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!

31. 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 Your examsA little more on coal…

32. ENERGYTECHNOLOGYPERSPECTIVES 2 0 0 6 Scenarios &Strategiesto 2050 CO2 Emissions : + 137% by 2050 ! ElectricityConversionIndustryTransportBuild’s.

33. Your final examThursday 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...