Carbon pricing and complementary mechanisms

1. Carbon pricing and complementary mechanisms Christina Hood, International Energy Agency ECF Roundtable “From Roadmaps to Reality” Brussels 23 October 2012

2. Outline • From climate models to real-world policy: the case for policy packages in climate change • Policy interactions : mutually reinforcing, or undermining ? • Promoting investment under uncertainty

3. From MAC curves to policy packages Price of CO2 €/tCO2e Infrastructure, Financing Reduced long-term marginal abatement cost MtCO2 Carbon price mediates action economy-wide • Technology support policies to: • reduce long-term costs • Enable timely scale-up Policies to unlock cost-effective energy efficiency potential that is blocked by non-economic barriers Source: Summing up the Parts, 2011

4. What investments are we trying to drive? Source: Energy Technology Perspectives 2012

5. Policy Interactions: Energy efficiency policies and carbon pricing can be mutually reinforcing. • Carbon price reduces rebound from energy efficiency policies • Energy efficiency policies keep carbon prices from being unnecessarily high

6. Technology support can lower long-term carbon prices Price of CO2 €/tCO2e (a) Carbon price ambitious target Carbon price modest target New Technology Conventional Technologies MtCO2 Modest target Ambitious target Price of CO2 €/tCO2e (b) Carbon price ambitious target Carbon price modest target MtCO2 Modest target Ambitious target Source: Energy Technology Perspectives 2012

7. Policies interact, so design as a package e.g. Carbon price level depends on supplementary policy delivery BAU EMISSIONS (a) (b) SUPPLEMENTARY POLICIES OVERACHIEVE SUPPLEMENTARY POLICIES UNDERACHIEVE 15 % 10 % 5 % EMISSIONS CAP 30% BELOW BAU Reductions from: energy efficiency polices technology policies price response in trading scheme Source: Summing up the Parts, 2011

8. e.g. Carbon price level more sensitive to economic conditions with supplementary policies Reductions from: energy efficiency polices technology policies price response in trading scheme BAU EMISSIONS BAU 5% LOWER THAN FORECAST (a) (b) 10 % 5 % EMISSIONS CAP 30% BELOW BAU Adjust cap downward to restore scarcity in trading scheme? Source: Summing up the Parts, 2011

9. Questions on policy interactions Policy packages can reduce costs and improve the feasibility of climate policy in the short and long term. But… • Can policy overlaps and interactions be adequately managed? … and if not, when is it better to choose a simpler policy package and sacrifice some mitigation potential? 2. How does the answer depend on whether policies are implemented at EU or member state level?

10. The door to 2°C is closing, but will we be “locked-in” ? 45 6°C trajectory 40 35 CO2 emissions (gigatonnes) 30 2°C trajectory 25 Delay until 2017 20 Delay until 2015 15 Emissions from existing infrastructure 10 5 0 2010 2015 2020 2025 2030 2035 Without further action, by 2017 all CO2 emissions permitted in the 450 Scenariowill be “locked-in” by existing power plants, factories, buildings, etc Source: World Energy Outlook 2011, IEA

11. Question - how to best deliver investment in low-carbon despite current uncertainties? 1. Improve long-term certainty of domestic policy… ? … but until there is greater consensus internationally there will still be discounting … but mixed messages based on today’s political actions 2. Supplement with transitional policies to steer investment (e.g. UK CFDs) until there is greater international consensus on climate policy? Should this be explicitly acknowledged at EU level?

12. Thank youchristina.hood@iea.orgwww.iea.org