Achieving the 2 C target in the Copenhagen Accord: an assessment using a global model E3MG

1. Achieving the 2�C target in the Copenhagen Accord: an assessment using a global model E3MG The presentation covers the contribution by 4CMR to the ADAM project in modelling very stringent GHG targets (400ppmv by 2100) using a combination of policies for carbon pricing and regulation for energy and carbon efficiency. It is to be published as �Modeling Low Climate Stabilization with E3MG: Towards a �New Economics� Approach to Simulating Energy-Environment-Economy System Dynamics� byTerry Barker and S. S,erban Scrieciu in The Energy Journal, Volume 31 (Special Issue 1). The Economics of Low Stabilization, 2010. The abstract of the presentation is: "The ADAM project assessed the implications of a low-stabilisation target of 400ppm CO2-equivalent by 2100 using several models. This presentation will focus on the results for one model, E3MG, which allows for unemployed resources and induced technological change. We find that a combination of carbon price policies and regulation may be effective in achieving more stringent climate targets for rapid and early decarbonisation. Such actions are likely to induce more investment and increased technological change in favour of low-carbon alternatives. A transition towards a low-carbon society as modelled with E3MG leads to macroeconomic benefits, especially in conditions of unemployment, with GDP slightly above a reference scenario, depending on use of tax or auction revenues."The presentation covers the contribution by 4CMR to the ADAM project in modelling very stringent GHG targets (400ppmv by 2100) using a combination of policies for carbon pricing and regulation for energy and carbon efficiency. It is to be published as �Modeling Low Climate Stabilization with E3MG: Towards a �New Economics� Approach to Simulating Energy-Environment-Economy System Dynamics� byTerry Barker and S. S,erban Scrieciu in The Energy Journal, Volume 31 (Special Issue 1). The Economics of Low Stabilization, 2010. The abstract of the presentation is: "The ADAM project assessed the implications of a low-stabilisation target of 400ppm CO2-equivalent by 2100 using several models. This presentation will focus on the results for one model, E3MG, which allows for unemployed resources and induced technological change. We find that a combination of carbon price policies and regulation may be effective in achieving more stringent climate targets for rapid and early decarbonisation. Such actions are likely to induce more investment and increased technological change in favour of low-carbon alternatives. A transition towards a low-carbon society as modelled with E3MG leads to macroeconomic benefits, especially in conditions of unemployment, with GDP slightly above a reference scenario, depending on use of tax or auction revenues."

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3. 3 Key Features of the Copenhagen Accord, December 2009 Maintains the twin-track progress under the UNFCCC: long-term cooperative action further commitments of Annex I parties under the Kyoto Protocol Agreed by the largest countries contributing to GHG emissions: US, China, Political, non-legally-binding statement Recognizes �the scientific view that the increase in global temperatures should be below 2 degrees Celsius�

4. 4 Policy outcomes of the Copenhagen Accord, December 2009 Annex I (developed countries) quantified GHG emission reduction targets for 2020 to be reported by 31/1/2010 US$30bn 2010-2012 and $100bn by 2020 to support adaptation and mitigation in non-Annex I countries accounting of targets and finance to be �rigorous, robust and transparent� Non-Annex I (developing countries) nationally appropriate mitigation actions to be reported by 31/1/2010 supported actions to be subject to �international measurement, reporting and verification�

5. 5 Implications for GHG reductions and carbon prices from IPCC AR4 IPCC AR4 assessed climate modelling literature and synthesised the results Ultimate target is to avoid dangerous climate change, but this can be converted to global temperature rise GHG concentrations by 2100 GHG emission reductions below 1990 or 2005 levels

6. 6 Figure 2: Average global temperatures, GHG concentrations and emissions 2000-2100

7. 7 Copenhagen temperature target, Stern�s concentration range and �safe� and �feasible� concentration targets

8. 8 Targets to avoid �dangerous� climate change �dangerous� is an ethical and political issue Target of 2�C above pre-industrial is very stringent and requires stabilisation below 450ppm CO2eq to have a 50% probability of being met stabilisation below 400ppm CO2e is more likely to achieve less than 2�C Stern, p. 284: �The current evidence suggests aiming for stabilisation somewhere within the range 450 - 550ppm CO2e. Anything higher would substantially increase risks of very harmful impacts..� but costs of <450 are unreliable and may be small Most modelling scenarios have been for targets c 650ppm CO2eq (EMF19, EMF21). Innovation Modelling Comparison Project (IMCP) had one scenario around 550 CO2eq (450 CO2 only) ADAM project assessed the 400ppm CO2e target (4 models) Stern, Nicholas (2006) The Economics of Climate Change, Cambridge University Press.Stern, Nicholas (2006) The Economics of Climate Change, Cambridge University Press.

9. 9 Implications for avoiding dangerous climate change To have a good probability of achieving <2�C rise CO2-eq concentrations have to be <450ppm CO2 eq (c/f c430 now) global GHG emissions have to fall by >70% below baseline by 2050 technologies have to be developed to capture CO2 Fossil-fuel GHG stocks cause damages and industrialized countries are responsible for most of current stocks hence reduction in OECD of c90% below BAU/1990 by 2050 Risks are asymmetric so precaution suggests a zero-carbon economy as soon as possible (without excessive costs) Eventually all countries & sectors have to decarbonize not �How much?� but �When?� for each business and government with a policy portfolio that is effective, efficient, equitable and flexible

10. 10 Policies for global decarbonisation Policy portfolios (market-based, regulation, voluntary) suited to national conditions could be effective, efficient, equitable and flexible Market economies respond to price signals, hence the need for a global carbon price that will achieve net zero GHG emissions by an agreed date (2050?) Market and political forces will encourage wider cap-and-trade Technological standards and agreements support low-cost deployment of low-GHG processes and products Gains from co-ordination +sum game and room for negotiation climate change threatens long-term growth, so funding of mitigation benefits all as well as being equitable substantial demand-side low-GHG investment can utilise resources otherwise wasted (construction downturn) Energy - 10/01/2007 New EU energy plan - more security, less pollution The European commission wants to improve energy-supply security in Europe while combating climate change and making the industry more competitive. To this end, it has tabled proposals to pave the way for a common European energy policy. The proposals include a cut in CO2 emissions by at least 20% by 2020. The commission will propose increasing the use of renewable energy sources, to limit global temperature changes to no more than 2�C above pre-industrial levels. It also wants to improve the EU's energy efficiency by 20%. This would make Europe the most energy-efficient region in the world. The fight against climate change goes hand-in-hand with greater security of energy supply for Europe - greater use of sustainable energy sources is one way dependence on external sources could be reduced. Commission president Barroso also stressed the need for the EU to speak with one voice in dealing with its energy partners. Commenting on the Russia-Belarus oil row that led to an interruption in EU oil supplies, he said: "This situation adds urgency to our drive to boost our common energy policy. It is another demonstration, if it was necessary, that we need a common energy policy." The commission therefore proposes to develop a coordinated approach to energy issues and to introduce effective energy-sharing mechanisms to deal rapidly with any future supply crises. With the liberalisation of electricity and gas markets by 2009, the EU's energy sector should also become more competitive. The commission proposes a clearer separation of energy production from distribution. "A recent investigation on competition has shown that the status quo is not an option," Mr Barroso said.Energy - 10/01/2007 New EU energy plan - more security, less pollution The European commission wants to improve energy-supply security in Europe while combating climate change and making the industry more competitive. To this end, it has tabled proposals to pave the way for a common European energy policy. The proposals include a cut in CO2 emissions by at least 20% by 2020. The commission will propose increasing the use of renewable energy sources, to limit global temperature changes to no more than 2�C above pre-industrial levels. It also wants to improve the EU's energy efficiency by 20%. This would make Europe the most energy-efficient region in the world. The fight against climate change goes hand-in-hand with greater security of energy supply for Europe - greater use of sustainable energy sources is one way dependence on external sources could be reduced. Commission president Barroso also stressed the need for the EU to speak with one voice in dealing with its energy partners. Commenting on the Russia-Belarus oil row that led to an interruption in EU oil supplies, he said: "This situation adds urgency to our drive to boost our common energy policy. It is another demonstration, if it was necessary, that we need a common energy policy." The commission therefore proposes to develop a coordinated approach to energy issues and to introduce effective energy-sharing mechanisms to deal rapidly with any future supply crises. With the liberalisation of electricity and gas markets by 2009, the EU's energy sector should also become more competitive. The commission proposes a clearer separation of energy production from distribution. "A recent investigation on competition has shown that the status quo is not an option," Mr Barroso said.

11. 11 What are the macro-economic costs by 2030 for different stabilization levels?

12. 12 3% maximum global cost by 2030 AR4 WG3 Chapter 11, pp 43-44footnotes 10 and 11 Footnote 10: These include 3 scenarios in U.S. Climate Change Science Program (US CCSP, 2006). � Footnote 11: These scenarios exclude post SRES results, which did not report carbon prices; see footnote 11. The Category B outlier scenario comes from the CCSP-IGSM model. The price rises to 1651 US$/tCO2 by 2100. This high price is partly due to the assumption of limited substitution towards electricity as an energy source for transportation: �In the IGSM scenarios, fuel demand for transportation, where electricity is not an option and for which biofuels supply is insufficient, continues to be a substantial source of emissions.� (US CCSP, 2006, p. 4 -21). US CCSP (U.S. Climate Change Science Program), 2006: Scenarios of Greenhouse Gas Emissions and Atmospheric Concentrations. Report by the U.S. Climate Change Science Program and ap10 proved by the Climate Change Science Program Product Development Advisory Committee. Clarke, L., J. Edmonds, J. Jacoby, H. Pitcher, J. Reilly, R. Richels (Eds), 2006. AR4 WG3 Chapter 11, pp 43-44footnotes 10 and 11 Footnote 10: These include 3 scenarios in U.S. Climate Change Science Program (US CCSP, 2006). � Footnote 11: These scenarios exclude post SRES results, which did not report carbon prices; see footnote 11. The Category B outlier scenario comes from the CCSP-IGSM model. The price rises to 1651 US$/tCO2 by 2100. This high price is partly due to the assumption of limited substitution towards electricity as an energy source for transportation: �In the IGSM scenarios, fuel demand for transportation, where electricity is not an option and for which biofuels supply is insufficient, continues to be a substantial source of emissions.� (US CCSP, 2006, p. 4 -21). US CCSP (U.S. Climate Change Science Program), 2006: Scenarios of Greenhouse Gas Emissions and Atmospheric Concentrations. Report by the U.S. Climate Change Science Program and ap10 proved by the Climate Change Science Program Product Development Advisory Committee. Clarke, L., J. Edmonds, J. Jacoby, H. Pitcher, J. Reilly, R. Richels (Eds), 2006.

13. 13 Illustration of the maximum 3% cost number

14. 14 Summary: the costs of achieving the 2� C target Key conclusion from IPCC AR4: not enough studies on stringent mitigation have been done! Extrapolating from current studies: The macro-economic costs of the 2�C target appear to be negligible (even beneficial) for global GDP and welfare, provided policies are �well-designed� Equilibrium models (providing nearly all the cost estimates) assume that mitigation will be costly, despite evidence from econometric models and business Low-cost, low-GHG technologies are likely to be developed both directly and through rising carbon prices But this requires international co-operation on allocation of burdens and benefits

15. 15 Conclusions for policy 450ppmv CO2-eq is not stringent enough to avoid dangerous climate change A rising real carbon price is required of about $100/tCO2 by 2020 (rising thereafter) to be on the safe side, e.g. by a trading scheme the price should be guaranteed by government so as to reduce the risks of investing in low-GHG technologies a portfolio of supporting policies (regulation, ecotax reform, information) reduces costs and accelerate change A zero-carbon economy appears feasible at negligible (but uncertain) macroeconomic costs, with high carbon prices and strong regulation costs critically depend on international co-ordination

16. 16 Summary of IPCC AR4 on stringent climate change mitigation Latest CBA studies suggest that damages at the current stock of GHGs are unbounded (ethical discount rates and unlimited escalating damages and risks) AR4: there is not enough evidence from modelling studies for reliable costs of targets more stringent than 445-550 ppmv CO2-eq AR4 Literature suggests that global GHG reduction targets are required of at least 30% by 2020 and at least 80% by 2050 for 400-450ppmv CO2-eq by 2100

17. 17 Lack of studies of stringent mitigation (below 450ppmv CO2 eq by 2100) GDP cost by 2030

18. 18 The E3MG approach and the treatment of costs and benefits of mitigation Detailed, annual, dynamic, non-linear econometric simulation model with database 1970-2002, projecting to 2100 Improved forecasting performance in the short to medium run Aggregation over countries our approach: 20 world regions, local market valuations Aggregation over time not done, i.e. no discounting except for simulating business decisions Environmental benefits (e.g. less air pollution) set aside as conventionally done in the literature Recycling of carbon tax and other government revenues explicitly treated as lowering indirect taxes, not lump-sum Costs measure: %GDP, not price of permit or consumers� expenditure Technology benefits (hybrid top-down bottom-up approach) accelerated technological change with higher economic growth The analysis uses the newly developing Tyndall Community Integrated Assessment System (CIAS) Linking economic system, physical climate system and impacts of climate change E3MG (Energy-Environment-Economy Model of the Globe) is the key economic component of this system enabling study of technological change and mitigation costs ITC is modelled in the context of a theory of demand-led economic growth, partly a result of technological change The analysis uses the newly developing Tyndall Community Integrated Assessment System (CIAS) Linking economic system, physical climate system and impacts of climate change E3MG (Energy-Environment-Economy Model of the Globe) is the key economic component of this system enabling study of technological change and mitigation costs ITC is modelled in the context of a theory of demand-led economic growth, partly a result of technological change

19. 19 Design of measures implemented in E3MG Contribution to ADAM FP6 project (ADaptation And Mitigation strategies for climate change) Combines mitigation and technology policies for both carbon pricing and regulation Designed to give rise to economies of scale & economies of specialisation in the deployment of low C technologies Implemented in a cumulative manner (each component includes additional measures to the previous one)

20. 20 Measures implemented in E3MG for achieving 400ppm CO2e (1) Carbon prices auctioning for the energy sector & carbon taxes for non-energy sectors revenue recycling through reduction in indirect taxes, and investment incentives for low-GHG measures in all main sectors Subsidising low-C electricity technologies ($/kWh) using part of the revenue from 100% auctioning evenly spread across renewables and CCS 40% from 2011 to 2030, dropping to 20% by 2040 and to 0% by 2050 Accelerated diffusion of CCS and electric plug-in vehicles through technological agreements and regulations all new coal-based power plants after 2020 to be fitted with CCS 30% of vehicle fleets to be electric by 2020

21. 21 Measures implemented in E3MG for achieving 400ppm CO2e (2) Incentives for conversion to low-GHG production methods in energy-intensive sectors Incentives for energy-efficiency investments in households 15% of the revenue recycled from the carbon tax improving efficiencies of existing domestic dwellings & appliances introducing new low-C dwellings & appliances Accelerated increase in carbon prices

22. 22 E3MG: E3 Links

23. 23 Emission reductions pathways: baseline, 550ppm and 400ppm to 2100

24. 24 Global GDP and investment 2000-2100:Baseline, 550ppm and 400ppm

25. 25 Annual changes in global GDP and investment cycles, 2000-2100:550ppm and 400ppm stabilisation scenarios

26. 26 The importance of regulation and recycling in achieving the 400ppm CO2-e target (by excluding electric cars or extra incentives for low-carbon technology deployment)

27. 27 Electricity investment in context: global investment, 2000 $bn

28. 28 Examples of accelerated decarbonisation France�s move to nuclear power in the 1980s Copenhagen�s 25% reduction in CO2 emissions below 1990 levels Studies of 30% reduction in US CO2 emissions required for Kyoto ratification

29. 29 France: decarbonising electricity production from 50% thermal in 1980 to 10%in 1987

30. 30 Copenhagen�s 25% cut in per capita CO2 emissions by 2005 below 1990 levels �Every citizen has reduced his input to global warming from 7 tons to 4.9 tons, by 2.1 tons in fact compared to the 1990 figures.� � despite remarkable growth in the city � due to connecting the district heating system and generating stations to cleaner fuels, especially �natural gas.� �So, we dare to set an ambitious new goal of reducing CO2 emissions by a further 20% by 2015 compared to today (2005 figures). This means that by 2015 we will have reduced emissions by 40% compared to 1990.� http://www.miljoemetropolen.kk.dk/centrumforverdensklimapolitik.aspx?lang=enhttp://www.miljoemetropolen.kk.dk/centrumforverdensklimapolitik.aspx?lang=en

31. 31 US study of accelerated reductions in CO2 emissions

32. 32 Conclusion (1): A portfolio of policies is needed for low-cost mitigation Both carbon prices and regulation is required for 400ppmv CO2e by 2100 to be feasible at low cost Carbon pricing via emission trading and carbon taxes leads markets to choose low-cost options Regulation via carbon-efficiency standards for vehicles and power stations leads to increased investment in low-carbon technologies and reductions in costs

33. 33 Conclusion (2): Climate policy if well-designed leads to GDP gains Climate policies can lead to higher, more efficient and more productive investment low-carbon technologies are more capital intensive than fossil fuel technologies potential for learning by doing is greater market failures, as in �no regrets� options for energy-saving in buildings, can be addressed Higher investment leads to multiplier effects, especially in times of recession, higher output and lower unemployment

34. 34 Conclusion (3): More stringent policies accelerate change and reduce costs further Decarbonisation of the global economy is required over the next 50-70 years to make the achievement of the 2�C target likely All sectors will eventually have to become based on clean electricity or solar power The new technologies can develop with substantial economies of specialization and scale across the global economy with international cooperation of R&D and standards

35. 35 Thank you

36. 36 Memo: Relationship between $50/tCO2 and US fuel prices