Macroeconomic baseline scenario

1
Macroeconomic Impacts of EU Climate Policy in 2008-2012 AIECE November 5, 2008 Olavi Rantala - Paavo Suni The Research Institute of the Finnish Economy ETLA
2

• Macroeconomic baseline scenario
• Financial crisis dampens strongly world economic
  growth in 2008-2012
• United States falls into recession, Japanese
  growth is slow
• Developing countries, esp. China hit hard,
• but continue growing relatively rapidly
• Commodity producers surpluses diminish,
• which lags their investments
• EU countries face a severe slowdown
• Many EU countries going into recession as EU as
  a whole
• Growth getting stronger in the course of 2010,
  but slowly
• Previous 5-year period was especially strong
• After the current turmoil growth rates recover
  back to potential
• but below the recent record strong growth

3
(No Transcript)
4
(No Transcript)
5

• Primary energy prices
• Energy prices have peaked in 2008 at record
  levels
• Oil peaked at close to 150 USD/b,
• by mid-October below 70 USD/b
• Coal fiscal year prices doubled in case of
  steam oil
• Gas prices follow oil and oil product price
  decline with a lag
• In the longer term, the availability of energy
• is one of the key risks for global growth

6
(No Transcript)
7

• The baseline scenario of CO2 emissions
• In the forecasting model the baseline scenario
• of CO2 emissions is based on energy demand in
  four sectors
• industry, transport, households and the rest of
  the economy
• CO2 emissions reflect
• electricity supply generated by fossil fuels
• and other consumption of fossil fuels
• CO2 emissions of electricity generation are
  increased
• by the demand for electricity in the four sectors
• and decreased by the clean electricity generated
• by means of renewable energy sources
• and nuclear power
• Recent Eurostat data indicates a rebound
• in electricity consumption and estimated CO2
  emissions in the EU
• in spring 2008

8
(No Transcript)
9
(No Transcript)
10
(No Transcript)
11

• Climate policy and the electricity market
• The cornerstone of EU climate policy is
• the reduction of CO2 emissions in electricity
  generation and industry
• under the European Union Emission Trading Scheme
  (EU ETS)
• CO2 emissions result largely from electricity
  generation
• More than 50 of electricity is produced by
  fossil fuels in the EU
• There are hardly any substitutes for fossil
  fuels
• in electricity production in the short run
• The price of emission allowances creates
• an extra marginal cost in electricity production
  
• Increases in the price of emission allowances
• are largely passed through to the price of
  electricity

12
(No Transcript)
13

• Channels to macroeconomic developments
• The price of emission allowances has become
• an important determinant of the price of
  electricity
• The price of electricity is the main channel of
  the impacts of
• climate policy on macroeconomic developments
• The price elasticity of the demand for
  electricity is rather low
• (-0.1 for industry and -0.2 for households)
• The downward adjustment of the demand for
  electricity and CO2 emissions
• may necessitate a large increase in the price of
  emission allowances
• and in the the price of electricity
• This leads to increasing costs in industry,
• higher consumer prices for households
• and decreasing macroeconomic activity

14
(No Transcript)
15

• Baseline scenario of CO2 emissions in EU ETS
• CO2 emissions in the EU emission trading sector
  under the EU ETS
• grew by about 4 per cent in 2007
• According to our baseline scenario
• the emissions will decrease in 2008-2012
• CO2 emissions will exceed the emission
  allowances
• on average by about 100 million tonnes annually
  in 2008-2012
• Uncertainties in the baseline EU ETS emission
  scenario
• macroeconomic developments and energy demand
• clean electricity supply

16
(No Transcript)
17
(No Transcript)
18

• Assumptions in policy scenarios
• Emission allowances for the Kyoto period
  2008-2012
• have been cut by some 10 percent as compared
• to the first emission trading period 2005-2007
• Our most stringent policy scenario - maximum
  impact policy scenario -
• assumes that the CO2 emissions of EU ETS
• must be reduced to the allowed cap in 2008-2012
• Emission trading and other Kyoto mechanisms
• (Clean Development Mechanism, CDM, and Joint
  Implementation, JI)
• allow flexibility in the adjustment of the CO2
  emissions
• The other extreme policy scenario - minimum
  impact policy scenario -
• assumes a perfectly elastic supply of emission
  reduction units

19
(No Transcript)
20

• Emission allowance price and electricity prices
• The increase in emission allowance price
• will be gradually passed on to electricity
  prices
• In the minimum impact policy scenario
• the emission allowance price is assumed to be
  only 10 /t
• and the impact on electricity prices is rather
  small
• The maximum impact policy scenario
• implies a sharp rise in emission allowance price
• and electricity prices

21
(No Transcript)
22
(No Transcript)
23
(No Transcript)
24

• Macroeconomic impacts of EU climate policy
• The increase in emission allowance and
  electricity prices
• will weaken export competitiveness and export
  performance
• especially in export markets outside the EU area
• Rising electricity prices will also raise
  consumer prices
• and slow down household real income and
  consumption growth
• The negative impact on exports and domestic
  demand
• will be reflected on GDP and employment
• Macroeconomic impacts may be stronger
• in the small open energy-intensive EU countries
• than in the major EU countries

25
(No Transcript)
26

• Differences in the macroeconomic impacts
• between countries
• Exports in relation to GDP, especially exports
  outside EU
• Energy-intensity of industry
• Impact of temperature on energy demand

27
(No Transcript)
28
(No Transcript)
29
(No Transcript)
30

• Greenhouse gas developments in EU
• EU total greenhouse gas emissions meet
• the Kyoto commitment target in 2008-2012
• according to our baseline scenario
• Emissions will fall clearly below the Kyoto
  target
• according to our policy scenario
• EU climate policy seems to be
• unnecessarily stringent in 2008-2012

31
(No Transcript)
32

• Conclusions
• EU climate policy dampens the medium-term
• economic growth in the EU area
• EU climate policy seems to be
• unnecessarily stringent in 2008-2012
• in terms of the Kyoto commitment target
• on greenhouse gas reductions
• Uncertainties in the scenarios
• The baseline macroeconomic scenario
• The flexibility in CO2 emissions allowed by the
  Kyoto mechanisms,
• especially the supply of clean development (CDM)
  credits
• from China and other developing countries