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Leakage Implications for climate policy

IFO-PIK Workshop: Transition towards global carbon pricing and fossil energy markets. Karsten Neuhoff. Leiter Abteilung Klimapolitik DIW Berlin. Leakage Implications for climate policy. Technology „Leakage“ – example RE investment. 1. $ Billion Investment in 2012. China. US. Germany.

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Leakage Implications for climate policy

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  1. IFO-PIK Workshop: Transition towards global carbon pricing and fossil energy markets Karsten Neuhoff Leiter Abteilung Klimapolitik DIW Berlin Leakage Implications for climate policy

  2. Technology „Leakage“ – example RE investment 1 $ Billion Investment in 2012 China US Germany 67,7 Japan 80,6 Uk Australia South Africa 2 44,2 Brazil 4,3 France 5,3 16,3 22,8 Mexico 6,2 5,5 Other countries 8,3 Source: Bloomberg, New Energy Finance, Jan 2013

  3. Policy leakage - example feed-in tariff 2 Source: http://www.pv-tech.org/tariff_watch/list

  4. Modernisation leakage – example slavery accurate, publicly available information about the impact of slavery on lives - also against attempts by slavery's defenders the role of discounting the value of slave lives gradually more ambitious action against slavery, penalties £100/head in 1807 to the death penalty for traders in 1827 compensation for slave owners (£20 million in 1838) not with a global treaty, but country by country 3

  5. 4 Production/Investment leakage – sectors potentially at risk Commodities with significant carbon cost Lime Casting of iron 40% Impact from direct emissions Preparation of yarn Impact from indirect emissions (electricity) Copper Other textile weaving Household paper Flat glass Other inorganic basic chemicals 30% Veneer sheets Non-wovens Retreading/ rebuilding tyres Industrial gases Coke oven Cost increase relative to value added Fertilisers & Nitrogen Malt 20% Rubber tyres & tubes manufact. Starches& starch products Hollow glass Cement Basic iron & steel Finishing of textiles 10% Refined petroleum Pulp & Paper Aluminium 4% 2% 0% 1.0% 0.0% 0.2% 0.4% 0.6% 0.8% Share of GDP of UK

  6. Illustrative for UK 50% Iron and steel Hot rolled Semi finished 40% Total cost increase from CO2 pricing 30% Cost increase from passed on CO2 pricing of first production stage only Cost increase relative to value added (20 €/t CO2) 20% Total cost increase from higher electricity prices 10% 0% 0 500 1000 1500 2000 2500 3000 Cumulative gross value added (mio €) 5 Ist all about the detail in analysis, model and policy Climate Policy after Copenhagen – The role of Carbon Pricing, Cambridge University Press

  7. Conditions for green paradoxon (I/II) Increase production Investment Lower revenue for resource extraction due to carbon price 5 years Strong carbon price Time frame too short? Demand Response too big? Uncertainty too high? Difficulttoseehowthisshouldwork

  8. Conditions for green paradoxon (II/II) Coal Gas Oil Requirement I Scarce resource /increasing cost curve Yes? No? No? • Oil • Iran • Saudi • Russia • Stans Requirement II Optimization horizon T&T No Algeria No US No US No Requirement III Ability to control Difficultto find actormeetingrequirements

  9. Fossil fuel channel • Oil (+) • Coal (0) • Gas (?) • Invest uncertainty(-) (?) Country B Country A (with cap) (-) Modernisation leakage Climate policy (+?) Product./investment leakage Direct Emission reductions Potential leakage Summary on leakage channels 6 (-) Policy leakage Technology leakage (-) Dominant effect: Unilateral climatepolicytriggers additional international emissionreductions

  10. Karsten Neuhoff kneuhoff@diw.de

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