Energy Policy 13

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Energy Policy 13

• Cédric Philibert

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Outline

• The problems with the Kyoto protocol
• Rejecting Kyoto?
• Keeping Kyoto (unchanged)?
• Transforming Kyoto!
• Certainty versus Ambition
• Your exams

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The 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

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Kyoto is not enough
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Uncertain economic growth
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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)

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No-harm vs equal per capita
Surplus allowances (above BaU)
Developed Developing Developed
Developing No-harm rule Equal per
capita allocation
Current Emissions
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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

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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

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Indexed 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

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Intensity Targets a reality test
Regression line coefficient of determination
17.4
Intensity targets
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Non-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

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Price caps

• 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

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Other 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?

• Policiesmeasures
• Commitment to specific PMs
• Large potentials for PMs, but does the
  commitment help?
• World standards vs trade barriers
• Sovereignty issue
• Compliance?
• Trade-offs financial technical aid?

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COP 8 - 2002
COP 11 - 2005
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Certainty versus Ambition

• 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

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Certainty versus Ambition
General case Optimum when marginal benefit
equals marginal cost
Cost uncertainty matters for instrument choice

Marginal cost
Price (tax)
Marginal benefit
Target
BaU
Reductions
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Certainty versus Ambition
Climate change damages relate to concentrations,
abatement costs relate to emission reductions
xx x 0
Possible Unlikely ? Possible
Marginal benefit curve is roughly flat
Emission reductions CO2  Concentrations
384 ppmv (No KP) 383
ppmV (Full KP)
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Certainty versus Ambition
Climate change flat marginal benefit curve

Marginal cost
Uncertain costs
Marginal benefit
Target
BaU
Reductions
Far from the optimum
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Certainty versus Ambition
Price instruments minimise the error due to cost
uncertainty

Marginal cost
Tax
Marginal benefit
BaU
Uncertain abatement
Reductions
Close to the optimum
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Certainty versus Ambition
Climate change flat marginal benefit curve
Price instrument vs. the equivalent quantity
instrument
Greatly reduces expected costs

Marginal cost
Tax
Marginal benefit
Target
BaU
Reductions
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Certainty versus Ambition
Climate change flat marginal benefit curve
Price instrument vs. the equivalent quantity
instrument
Greatly reduces expected costs
May slightly reduce expected benefits
Increases expected NET benefits (benefits minus
costs)

Marginal cost
Tax
Marginal benefit
Target
BaU
Reductions
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Certainty versus Ambition
Compared to the equivalent best-guess target, a
price instrument makes possible a more ambitious
policy at lower expected costs

Marginal cost
Tax
Marginal benefit
Target
BaU
Reductions
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Certainty versus Ambition
Compared to the equivalent best-guess target, a
price instrument makes possible a more ambitious
policy at lower expected costs
But targets have political advantages over taxes

Marginal cost
Price cap
Tax
Marginal benefit
Target
Target
Target
BaU
Reductions
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Certainty versus Ambition
Introducing a price cap makes possible a more
ambitious policy
Lower expected costs Higher expected benefits

• Same expected benefits. Lower expected costs
  (e.g. fairness)

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

Especially useful when benefits are deeply
uncertain

Marginal cost
Price cap
Tax
Marginal benefit
Target
BaU
Reductions
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Certainty versus Ambition

• 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

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Certainty versus Ambition

• 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

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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

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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

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Conclusion

• 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!

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Your examsA 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

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CO2 Emissions 137 by 2050 !
Electricity Conversion Industry Transport Builds.
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Your final examThursday 21 June 900 to 1100

• 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...