Energy Policy Cédric Philibert Energy Policy 13 Cédric Philibert

Energy Policy Cédric Philibert

Energy Policy 13 Energy Policy 13

Cédric Philibert


OutlineOutline

• The problems with the Kyoto protocol

• Rejecting Kyoto?

• Keeping Kyoto (unchanged)?

• Transforming Kyoto!

• Certainty versus Ambition

• Your exams


The problems with KyotoThe problems with Kyoto• 1st commitment period to end by 2012• Kyoto only addresses 1/3 of global

emissions– Although through the Clean Development

Mechanism its theoretical potential is greater

• Kyoto entails uncertain abatement costs– This explains (at least in part) the reluctance of

some industrialised countries and all developing countries, to accept being bound by emission quotas


0

5

10

15

20

25

1990 1995 2000

Kyoto target

Gigatonnes of CO2

International Bunkers

Non-Annex I Parties

Non-Participating Annex I Parties

Kyoto Parties

2003

Kyoto is not enoughKyoto is not enough


100

150

200

250

300

350

400

450

2005 2010 2015 2020

8% per year 10% per year

~100

Uncertain economic growthUncertain economic growth


Keeping Kyoto?Keeping Kyoto?• Unrealistic global ‘allocations’

• Wait for a change in US policy

• Wait for developing countries to develop

• Likely to be a slow process:– Concerns about competitiveness– … might prevent ‘Kyoto countries’ to tighten

targets– Agenda of cuts will define concentration levels

(CO2)


No-harm No-harm vs vs equal per capitaequal per capitaSurplus allowances(above BaU)

Developed Developing Developed Developing “No-harm” rule Equal per capita allocation

Current Emissions Assigned Amounts


Rejecting Kyoto?Rejecting Kyoto?What are the possible alternatives?

• Carbon taxes: politically difficult

• Technology agreements: useful, but likely to be insufficient and/or too costly

• Policies and measures: needed, but can a global coordination of PaMs work?

• Climate change is a public good: unilateral action unlikely to be enough


Transforming Kyoto!Transforming Kyoto!• Keep emissions trading:

– Cost-effective = environmentally effective– Allows preserving vested interests– Allows the rich to pay for the poor

• Address uncertainty on GHG reduction costs with more flexible options:– Targets indexed on actual economic growth– Price caps for industrialised countries– Non-binding targets for developing countries– Sector-wide crediting mechanisms to start with


Indexed targetsIndexed targets• Assigned amounts based on economic

projection, adjusted to actual growth• “Intensity targets” only a special case• Now endorsed as an option for developing

countries by most experts, for industrialised countries by some

• How much do they reduce uncertainty?– Maybe not enough for developing countries, suggests a

comparison of emissions and GDP trends (extrapolated from 1971 to 1991) and actual economic performances and emissions from 1997 to 2001


Intensity Targets: a reality testIntensity Targets: a reality test

Regression line: coefficient of determination = 17.4%

Intensity targets


Non-binding targetsNon-binding targets• Targets with no

consequences for non-attainment

• Could allow trading– Need to make sure only

countries in compliance are net sellers!

• Target may be more stringent

• Could ease the political process

• “Carrots, no stick”• Gives an incentive to

achieve win-win reductions

• Could be negotiated within the CDM framework

• Not considered for industrialised Cies


• Supplementary permits made available in unlimited quantities at a given price

• At domestic and/or international levels– If at the international level, one institution must be

tasked with selling permits to governments, and goverments to entities

– If at the domestic level only, international coordination requires all-sectors emission coverage through an upstream regime or ETS and taxes at the level of the price cap

• If some money is raised– Could finance more adaptation, or partially close the gap

in financing some more reductions

Price capsPrice caps


Other optionsOther options• Sectoral targets

– Fixed or dynamic, binding or not

– Industry sectors or domestic sectors?

– Could allow trading– Limited cost-

effectiveness– If dynamic, special risk of

leakage– A pragmatic first step?

• Policies&measures– Commitment to

specific P&Ms– Large potentials for

P&Ms, but does the commitment help?

– World standards vs trade barriers

– Sovereignty issue– Compliance?– Trade-offs financial

&technical aid?


COP 8 - 2002 COP 11 - 2005


• The problem of climate change is fraught with uncertainty

• Decision making under uncertainty rests on ‘expected’ costs or benefits, i.e. all possible outcomes times their probabilities of occurrence

• However, this presentation does not offer a cost benefit analysis of climate change

• It provides a stylised analysis of instrument choice under uncertainty

Certainty versus AmbitionCertainty versus Ambition


€

ReductionsBaU Target

Marginal benefit

Marginal cost

Price(tax)

General case: Optimum when marginal benefit equals marginal cost

Cost uncertainty matters for instrument choice



Emission reductions

CO2 Concentrations : 384 ppmv (No KP) 383 ppmV (Full KP)

xx €

x €

0

Possible

Unlikely ?

Possible

Climate change: damages relate to concentrations, abatement costs relate to emission reductions

Marginal benefit curve is roughly flat



€


Marginal benefit

Marginal cost

Uncertain costs

Far from the optimum

Certainty versus AmbitionCertainty versus AmbitionClimate change ~ flat marginal benefit curve


€

ReductionsBaU

Marginal benefit

Marginal cost

Tax

Price instruments minimise the error due to cost uncertainty

Uncertain abatement

Close to the optimum



€


Price instrument vs. the equivalent quantity instrument:

Marginal benefit

Marginal cost

Greatly reduces expected costs

addedsaved

Tax

Climate change ~ flat marginal benefit curveCertainty versus AmbitionCertainty versus Ambition


€


Marginal benefit

Marginal cost

May slightly reduce expected benefitsIncreases expected NET benefits (benefits minus costs)

gainedlost

Price instrument vs. the equivalent quantity instrument:Greatly reduces expected costs

Tax

Climate change ~ flat marginal benefit curveCertainty versus AmbitionCertainty versus Ambition


€

ReductionsBaU

Marginal benefit

Marginal cost

Tax

Compared to the equivalent best-guess target, a price instrument makes possible a more ambitious policy at lower expected costs

Target



€

ReductionsBaU

Marginal benefit

Marginal cost

Tax

Price cap

Target

But targets have political advantages over taxes

TargetTarget

Certainty versus AmbitionCertainty versus AmbitionCompared to the equivalent best-guess target,

a price instrument makes possible a more ambitious policy at lower expected costs


- Same expected benefits. Lower expected costs (e.g. fairness) Lower expected costs Higher expected benefits

€

ReductionsBaU

Marginal benefit

Marginal cost

Tax

Target

- Same expected costs. Higher expected benefits (e.g. environment)

Introducing a price cap makes possible a more ambitious policy:

Price cap

Especially useful when benefits are deeply uncertain…



• Short term certainty on emission levels may be costly but has little value– because climate change is cumulative

• Flexible options reduce expected costs– help get more countries on board

– allow more ambitious policies

• More ambitious targets can be chosen – higher benefits and lower costs (on expectation)

– especially useful if benefits are deeply uncertain

– help match marginal costs with benefits despite uncertainties (Economic efficiency)

– help accomodate differing visions



• What about climate catastrophes?– If a GHG threshold is known and close:

• Use a quantity target to stop emissions

– If a GHG threshold is a possibility but its level is unknown:

• Favour the most ambitious policy

• How do we go to stabilisation?– Level and agenda left undecided

• Ensure action, not exact results• Favour the most ambitious policy• Over time, adjust the target and the price cap



Too low price caps?Too low price caps?• Price caps should be set in the upper range of cost expectations

for a given target…– … until targets are ratcheted down…

• Governments may not use them ‘right’…– would they do better without price caps?

• Would agreeing on a price cap level be « a nightmare »?– Differentiation amongst countries would remain through differentiated

assigned amounts – ENGOs say abatement costs are low; industry say they are high. Some

price cap level might be felt high enough by the ENGOs and low enough by the industry

– Price caps may lead both to be more careful in their public statements about abatement costs…

• An international agreement on price cap level would be preferable for cost-effectiveness but is not necessary– Several price cap levels may coexist in one international trading system; to

avoid the domination of the lowest price cap level, only complying countries (i.e. not ‘using’ the price cap) should be net sellers


A threat to technology development?A threat to technology development?

• Reducing expected abatement costs reduces expected benefits of climate-friendly technologies…

• … if there is no price floor…• … and if the ambition in the targets is unchanged

– Targets and price cap level drive technology development, not certainty on quantitative results

– Price volatility (e.g. oil) shown to deter investments; more ambitious targets and price caps would lead to less volatile carbon prices

– In any case, more specific instruments remain needed to promote costly technologies with great learning-by-doing potential (e.g. PV)

• The price cap should smoothly grow over time • And in a decade or two reach a level above the cost of CO2

capture and storage (‘backstop’ technology), so coal can be used in a carbon-constrained world


ConclusionConclusion• Fixed targets give certainty on short

term emission results

• More flexible options might facilitate:– The participation of more countries– The adoption of relatively more ambitious

targets

• More flexible options give less certainty of achieving precise levels– But a greater probability of doing better!


Your examsYour examsA little more on coal…A little more on coal…

• Why oil became the first energy source?– Quality of lighting– Energy density (1912…)– Liquidity, Low cost…

• When will coal peak– Consumption/reserves

ratio at current levels– The peak is only the

beginning of the end…

• Clean coal– Not only coal washing…– Air pollutants (SOx, NOx,

PM, Metals, Nukes…)– CO2 capture storage

• Coal to Liquids– Increase consumption– Increase emissions…– CTL w/o CCS a disaster

• Information sources


9946

26294

1718

76036512

11733

3255

54694490

5122

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5000

10000

15000

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25000

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2003 2050

MtC

O2

2 0 0 6

ENERGYTECHNOLOGYPERSPECTIVES

Scenarios &Strategies

to 2050

COCO22 Emissions : Emissions : + 137% by 2050 !+ 137% by 2050 !

Electricity Conversion Industry Transport Build’s.


Your final examYour final examThursday 21 June 9:00 to 11:00Thursday 21 June 9:00 to 11:00

• Your final exam will be made of four topics. • All must be addressed in brief, e.g. 4 to 6

bullet points or short paragraphs. • It is more important to get all the major

aspects than to support your points in detail. – For each topic, full responses in bullet points will be

noted on 5, and one additional point might be attributed to more detailed answers.

– A perfect paper in bullet points would get 20/20, a perfect paper with slightly more detailed answers would get 24/20...

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Energy Policy Cédric Philibert Energy Policy 13 Cédric Philibert