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The role of carbon prices for low-carbon technologies Evidence from the EU ETS

Institutional Framework for the Carbon Market Can Financial Markets and Institutions be a Model? Workshop at the University of Graz, 25 November 2010. The role of carbon prices for low-carbon technologies Evidence from the EU ETS. Stefan P. Schleicher

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The role of carbon prices for low-carbon technologies Evidence from the EU ETS

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  1. Institutional Framework for the Carbon MarketCan Financial Markets and Institutions be a Model? Workshop at the University of Graz, 25 November 2010 The role of carbon prices for low-carbon technologiesEvidence from the EU ETS Stefan P. Schleicher Wegener Center for Climate and Global ChangeUniversity of Graz Austrian Institute of Economic ResearchVienna

  2. My agenda • A reminder • What was the question for proposing the EU ETS mechanism? • The answer • Did EU ETS deliver? • Second thoughts • Did we expect too much from EU ETS?

  3. A reminderWhat was the question forproposing the EU ETS mechanism?

  4. The global challengeThe transition to a low-energy and low-carbon economy The need for a radical technological change of our energy systems The need for reducing by 2050 GHG emissions in industrial countries by 80 to 95 percent

  5. Smart buildingsAlmost-zero and plus energy building standards

  6. Smart mobilityElectric vehicles with multifunctionality • Plug-in vehiclesThey provide storage services for the grid • From ownership to accessServices are sold, not the car

  7. Smart energy generationHigh-efficient energy conversion and distribution • e.g. biorefining • Processing of biomass into a spectrum of bio-based products (food, feed, chemicals, materials) and bioenergy (biofuels, power and heat) .

  8. Scenario for an energy system in 2050Low energy and low carbon structures • Emission reductions by 80% requirea reduction of energy flows by at least 50% 2010 16 Losses 27 Mobility 2050 2050 22 Low temp. 5 Losses 10 Fosils 7 Mobility 40 Renewables 6 Low temp. 17 High temp. 15 High temp. 10 Light, motors 10 Light, motors 8 Non-energetic 7 Non-energetic

  9. The answerDid the EU ETS really deliver?

  10. EU ETSWide differences in stringency among Member States Net positions:Actual emissionsminusallocations Only seven MS have been short in Phase 2 so far 2008-09

  11. EU ETS Wide differences in stringency among sectors Only the power sector has been short in phase 1 and phase 2 2008-09

  12. EU ETS Net positions since 2005 Significant differences betweenpower sectors andmanufacturing sectors

  13. EU ETSAn interpretation of the evidence since 2005 • Effective emission restrictions only for power sector • Could shift carbon price • No emission restrictions for manufacturing sectors on EU level • But major differences on MS level

  14. EU ETSRemembering again the question • To what extent did EU ETS stimulate technological change • Neither the power nor the non-power sectors had a strong incentive to change operating and investment decisions • But this was the key intention of EU ETS • Even the designers of EU ETS gave more emphasis to the proposition of a cost minimizing mechanism for meeting an emission target than to technological change • Attempting to achieve an emission target does not necessarily trigger the radical technological change needed

  15. Second thoughtsDid we expect too much from EU ETS?

  16. How relevant is the main stream perception ofthe carbon market?

  17. The carbon marketThe simplistic view emissionscap carbonprice • Based on courageous assumptions • Perfectly informed forward looking agents • Market knows until 2020 the aggregated marginal abatement costs for about 12.000 installations marginalabatementcosts expectedmarketprice allowances

  18. The carbon market and a bit more realityPerceived abatement costs may vary emissionscap carbonprice • There is high uncertainty about abatement costs • Abatement costs vary • Interest rates • Capital depreciation rates • Energy prices • Economic activity • Abatement costs may not be unique at all • e.g. joint production processes for power and heat marginalabatementcosts expectedmarketprice allowances

  19. The carbon market and a bit more realityAbatement costs may not be an operational concept emissionscap carbonprice • Abatement costs may not be unique at all • e.g. joint production processes for power and heat • Abatement costs depend on time horizon • Changes in operating • Changes in investments • Changes in swystem integration marginalabatementcosts expectedmarketprice allowances

  20. The carbon market and a bit more realityPerceived supply of allowances may vary emissionscap carbonprice • The impact of strategic buyers and sellers marginalabatementcosts expectedmarketprice allowances

  21. Did our preoccupation with targetsoverlook technologies?

  22. Changing the EU policy mind set (1)Accepting the global technology competition 2009 investmentsin USD Competition has shifted from targets to technologies An exampleChina and United States takethe lead in renewablesinvestments

  23. Changing the EU policy mind set (2)Prices are not the only drivers of technological change Pricedetermined Cap &Trade • Carbon prices are not the only drivers Economicactivity Energyandemissions PathDependent Technologies Non-pricedetermined

  24. Changing the EU policy mind set (3)Energy services determine energy flows Energy Services TotalEnergySupply FinalEnergyConsumption ApplicationTechnologies TransformationTechnologies

  25. Shouldn't we integrate EU ETS into a broader policy framework?

  26. Developing a shared visionReduction paths to 2050 • In view of 2050 targets the EU needs a more ambitious reduction path

  27. Technologies matterTargets are not sufficient • EU needs to start an ambitious technology program in view of the already ongoing global technology competition • Targets will follow from such a technology program • A revived SET Plan could be an adequate procedural instrument for stimulating a technology program

  28. EU ETS in an enhanced energy and climate policyCurrent carbon markets need more credibility • Carbon markets need to be sheltered against strategic trading and unexpected economic events • There is a need for a policy commitment to a long-term reduction path • A more ambitious reduction path needs a new distribution of efforts • Between ETS and Non-ETS • Non-ETS effort of Member States

  29. Thank you. Stefan P. Schleicher Stefan.Schleicher@uni-graz.atStefan.Schleicher.wifo.at +43 (676) 591-3150

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