Barbara K. Buchner Fondazione Eni Enrico Mattei, Italy

1. TAXBEN Final Conference CEPS - 27 November 2006, BrusselsPolicy Discussion of Work package 5:Abating global warming, emissions trade and the need for European coordination Barbara K. Buchner Fondazione Eni Enrico Mattei, Italy

2. Overview • Climate Policies and Economic Growth by Alho, K. (ETLA) • Post-2012 Climate Policies: A Simulation Study with WorldScan by Boeters, S. (CPB), Verweij, G. (CPB) • Taxes and Tradable Permits in the EU to curb CO2 Emissions: Efficient and Transitional Climate Policies A Combined Analysis Using PACE and WorldScan by Böhringer, C. (ZEW), Boeters, S. (CPB), Moslener, U. (ZEW) • Post-Kyoto Climate Policies: From G8 to L20 by Böhringer, C. (ZEW), Moslener, U. (ZEW) • Efficiency Losses from Overlapping Economic Instruments in European Carbon Emissions Regulation by Böhringer, C. (ZEW), Koschel, H. (ZEW), Moslener, U. (ZEW) • The EU-ETS and existing energy taxes by Veenendaal, P.J.J. (CPB)

3. Climate Policies and Economic Growth Main question: • What are economic effects of climate policies? • Important policy question (US position, Stern…) Main insights for policy: • Technology matters • Price of tradable permit significant role • Optimal subsidy to R&D activity in clean energy technology quite high • But: consider that reallocation of resources from energy-intensive sectors to those that use other inputs is difficult • CO2 = different • Indeed, leakage not that bad

4. Post-2012 climate policy - Background Broad participation on climate change control is hard to achieve because of: • Public good – free-riding incentives • Large economic and environmental structural asymmetries among world regions • Absence of supra-national authority • Difficulty of negotiations • Low environmental effectiveness of Kyoto Protocol • Look for incentives

5. Post-2012 Climate Policies Main question: • How to extend climate policies? • Important policy question: currently negotiations Main insights for policy: • 3 separate markets: expensive • Link would enable efficiency gains, but there are winners & losers and indirect effects • CDM can set incentives (FSU?) • Stand-alone policy of US might benefit EU • essential to identify incentives for each country to find common ground for negotiations

6. Efficient and Transitional Climate Policies Main question: • What is trade-off between allocative / overall efficiency and distributional considerations / political feasibility? • Important policy question: wait & see or act? Turning point? Is there a “point of no return”? Main insights for policy: • Political feasible transition scenarios: initially lower than efficient abatement levels, with more pronounced temperature increase requires sharper emissions decline later on • Stringent targets infeasible / expensive • Obstacle for future climate negotiations • go beyond political feasibility

7. From G8 to L20: a smaller negotiation group Main question: • Is negotiation in a smaller group easier/more efficient? • Important policy question: are there more participation incentives for such an approach? Main insights for policy: • In line with theoretic considerations and political reality • But: Trade-off limited ↔ global coverage may not be easily agreed upon (costs) • Key role of equity • Difficult but essential to cover all countries: policy proposal: regional/subglobal climate blocs • involve all, binding / non-binding elements

8. EU Carbon Policy: Overlapping Economic Instruments Main question: • Potential efficiency losses from co-existence of emission taxes and emissions trading in EU? • Important policy question: are there distortions? implications for EU ETS design / climate policy? Main insights for policy: • Price-based mechanism within quantity-based scheme: unlikely to alter environ. effectiveness; increases overall EU compliance costs • Carbon tax for non-trading sectors • Careful handling of carbon/energy taxes in trading sectors • Portfolio of climate policy instruments: yes • But: careful design

9. EU ETS and existing energy taxes Main question: • Interactions between EU ETS & EU energy taxation Main insights for policy: • Taxes differ strongly between countries and sectors; mainly political reasons for energy taxes, almost no environmental considerations • Existing energy taxes: distortive  power of rearranging existing taxes • EU ETS: given energy taxes, substantial extension unlikely to increase efficiency • EU ETS: auctioning can increase economic welfare • CO2 emission reductions often as by-product of other (mainly energy-related) concerns • Portfolio approach crucial

10. Summary: The Facts • Speed of climate change: alarming, unexpected • Increasing evidence for potentially large impacts of climate change • Increasing evidence for high costs or even infeasibility of reaching stringent targets • Need to involve as many countries as possible • CO2 = different (indeed, leakage not that bad) • CO2 emission reductions often as by-product of other (mainly energy-related) concerns • Existing energy taxes: distortive • Use insights of papers to set incentives for participation

11. Summary: Implications for post-2012 • Difficult but essential to cover all countries: regional / subglobal climate blocs • Involve all, binding / non-binding elements • Essential to identify incentives for participation and compliance • Better coordination / institutions • Portfolio approach to climate policyBut: careful design • Linking of ET markets important but complicated • first step: link CDM to ET markets • Global participation, but differentiated commitments • Improvement of energy system • Go beyond political feasibility!

12. Summary: Implications for EU climate policy • Essential to identify incentives and impacts for each country / sector • Difficult but essential to cover all sectors • Substantial extension of EU ETS not recommended due to existing energy taxes • Better coordination • Portfolio approach to EU climate policyBut: careful design • Linking of ET markets important but complicated (current evidence from EU ETS) • first step: strengthen link to CDM • One more recommendation for auctioning • Go beyond political feasibility!

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