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Chapter 10: Macroeconomic models of costs Chapter 12: Opportunities and wider benefits from climate policies Beate Friedl Alexandra Kulmer Alexandra Pack

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Chapter 10: Macroeconomic models of costs Chapter 12: Opportunities and wider benefits from climate policies. Beate Friedl Alexandra Kulmer Alexandra Pack. Content. Macroeconomic models of costs Costs of emissions-saving measures: results from other models - PowerPoint PPT Presentation

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Page 1: Beate Friedl Alexandra Kulmer Alexandra Pack

Chapter 10: Macroeconomic models of costs

Chapter 12: Opportunities and wider benefits from climate policies

Beate Friedl

Alexandra Kulmer

Alexandra Pack

Page 2: Beate Friedl Alexandra Kulmer Alexandra Pack

Content

Macroeconomic models of costs• Costs of emissions-saving measures: results from other

models• Key assumptions affecting cost estimates• Understanding the scale of total global costs• ConclusionsOpportunities and wider benefits• Opportunities from growing markets• Co-benefits• Coal and CCS• Access to energy and indoor air pollution• Energy subsidies• Conclusion

Page 3: Beate Friedl Alexandra Kulmer Alexandra Pack

Chapter 10 Macroeconomic models of costs

Page 4: Beate Friedl Alexandra Kulmer Alexandra Pack

Costs of emissions-saving measures: Results from other models

• numerous other economic models attempt to determine equilibrium allocations of energy and non-energy emissions, costs and prices

• different results depend on underlying assumptions

– see meta-data analysis of Barker et al. (2006)

Page 5: Beate Friedl Alexandra Kulmer Alexandra Pack

Costs of emissions-saving measures: Results from other models

• meta-data analysis conducted by Barker et al. (2006)

– reduction in annual CO2 emissions from the baseline and

– associated changes in world GDP in 2100.

Source:Barker et al. (2006)

Page 6: Beate Friedl Alexandra Kulmer Alexandra Pack

Costs of emissions-saving measures: Results from other models

• Aim of the meta-analysis work…

– quantifying the importance of parameters and assumptions common to the various models in generating results

– generating an new, overarching model

• based on estimates of the impacts of individual model characteristics

• able to switch on/or off the factors identified as being significant in cutting costs

Page 7: Beate Friedl Alexandra Kulmer Alexandra Pack

Costs of emissions-saving measures: Results from other models

• Metadata analysis of Barker:

– estimated costs in 2030 for stabilization at 450ppm CO2 (~500-550ppm CO2e)

Source: Barker et al. 2006

all the identified cost-cutting factors are switched off

CGE modelling assumptions reduces costs, compared to the use of econometric model results allows for unlimited substitution at high enough carbon prices

allow for international trade in emission permits benefits of mitigation in the

form of avoided climate change are monetized and discounted

reduction of GHG also reduces other emissions

active use of carbon tax or auction revenues to reduce distorting taxes or to provide incentives for low carbon innovation.

Including ITC reduces costs

Page 8: Beate Friedl Alexandra Kulmer Alexandra Pack

Key assumptions affecting cost estimates

• key factors in determining cost estimates

– (1) assumed baseline emissions

– (2) technological change

– (3) flexibility

• (i) flexibility between sectors

• (ii) flexibility between technologies

• (iii) flexibility between gases

• (iv) flexibility between countries

– (4) ambition of policy

– (5) others

Page 9: Beate Friedl Alexandra Kulmer Alexandra Pack

Key assumptions affecting cost estimates

• (1) assumed baseline emissions

– costs of stabilising GHG emissions depend on the amount of additional required mitigation

– gap between BAU emissions (without climate change policies) and the emissions goal determine costs

– the higher the differences → the higher the costs

– criticisms about the IPCC BAU scenario

• underestimation of the future role of coal

Page 10: Beate Friedl Alexandra Kulmer Alexandra Pack

Key assumptions affecting cost estimates

• (2) technological change– costs vary between studies, depending on

• assumed rate of technological learning

• the number of learning technologies included

• the time frame considered

– examples…

• induced technical change and the availability of non-GHG ‘backstop’ technologies reduce costs (by 1 to 2 percent points)

• climate policies are necessary to provide the incentive for low-GHG technologies

– “Without a ‘loud, legal and long’ carbon price signal the technologies will not emerge.”

Page 11: Beate Friedl Alexandra Kulmer Alexandra Pack

Key assumptions affecting cost estimates

• (3) flexibility: (i) flexibility between sectors– cutting GHG emissions from some sectors will be cheaper

rather than from others

• e.g. transport sector versus power generation sector

• flexibility reduces modelled costs

• models restricted to a narrow range of sectors with inelastic demand (e.g. transport) estimate high costs of mitigation

Page 12: Beate Friedl Alexandra Kulmer Alexandra Pack

Key assumptions affecting cost estimates

• (ii) flexibility between technologies– including a set of technologies is cheaper

– models concentrating on individual technologies show increasing costs of abatement

• (ii) flexibility between gases

– including also non-CO2 gases opens additional low-cost abatement opportunities

– e.g. model comparison by Energy Modelling Forum:

• including non-carbon GHG

• achieving the same climate goal at considerably lower costs

• costs fall by 30-40% relative to a CO2-only approach

Page 13: Beate Friedl Alexandra Kulmer Alexandra Pack

Key assumptions affecting cost estimates

• (iv) flexibility between countries: some countries have cheaper abatement options than others

– natural resource endowments make some forms of emissions abatement cheaper

• e.g. sugar production in Brazil (biofuels)

– flexibility mechanisms under the Kyoto Protocol

• International emissions trading

• JI/CDM

Page 14: Beate Friedl Alexandra Kulmer Alexandra Pack

Key assumptions affecting cost estimates

• timing of emission saving (in countries)

– emission reductions cheaper in countries that are in the process of making big capital investment

– “It is much cheaper to build a new piece of capital equipment using low-emission technology than to retro-fit dirty capital stock” (Stern, Part III, p.246)

– China and India are expected to increase their capital infrastructure substantially over coming years

Page 15: Beate Friedl Alexandra Kulmer Alexandra Pack

Key assumptions affecting cost estimates

• (4) the ambition of policy

– early policy on mitigation can reduce costs of emission-saving technologies

– models including perfect foresight (transparent and predictable policy) show reduced costs because people can plan more efficiently

– cost effective planning requires

• accurate information

• well-functioning capital markets

Page 16: Beate Friedl Alexandra Kulmer Alexandra Pack

Key assumptions affecting cost estimates

• (5) other common features of model projections

– increasing marginal costs of mitigation

• each additional unit reduction of GHG becomes more expensive as abatement increases

• absence of energy models which analyse the costs of stabilisation concentrations below 500ppm CO2e because of high associated costs

• e.g. Barker et al. (2006)

Page 17: Beate Friedl Alexandra Kulmer Alexandra Pack

Key assumptions affecting cost estimates

• Barker et al. (2006): – profile of Changes in Gross World Product with ITC

• Scenario stabilization at 500ppm CO2(2100) – right hand

• Scenario stabilization at 450ppm CO2 (2100) – left hand

stabilization at 450ppm CO2 stabilization at 500ppm CO2

Page 18: Beate Friedl Alexandra Kulmer Alexandra Pack

Understanding the scale of total global total costs

If climate change policy instruments are applied efficiently and flexible, the estimated effects of mitigation costs on economic output are small:

If mitigation costs 1% of world GDP by 2100, then this is equvalent to a drop of the growth rate of annual GDP

from 2.5% to 2.49%.

This estimation includes no climate-change demages.

Page 19: Beate Friedl Alexandra Kulmer Alexandra Pack

Understanding the scale of total global total costs

If climate-change demages are taken into account:

– The BAU level of world GDP will be lower then estimated.

– Mitigation protects growth, while failing to mitigate does not.

Page 20: Beate Friedl Alexandra Kulmer Alexandra Pack

Conclusion

Mitigation costs will depend on– the design and application of policy regimes– the „what, where and when“ flexibility– the timing– incentives for low-GHG technologies

With the right policies the effects on economic output can be kept small.

Page 21: Beate Friedl Alexandra Kulmer Alexandra Pack

Chapter 12 Opportunities and wider benefits from climate change

Page 22: Beate Friedl Alexandra Kulmer Alexandra Pack

Content

Macroeconomic models of costs• Costs of emissions-saving measures: results from other models• Key assumptions affecting cost estimates• Understanding the scale of total global costs• Conclusions

Opportunities and wider benefits• Opportunities from growing markets• Co-benefits• Coal and CCS• Access to energy and indoor air pollution• Energy subsidies• Conclusion

Page 23: Beate Friedl Alexandra Kulmer Alexandra Pack

Opportunities from growing markets

Growing markets:– Markets for renewable energy generation– Financial and Investment markets– Carbon trading markets– Markets for financial intermediaries– Insurence sector

“Markets for low-carbon energy sources are growing rapidly”.

Page 24: Beate Friedl Alexandra Kulmer Alexandra Pack

Markets for renewable energy

Source: Renewables Global Status Report 2007, p9

Renewable energy supplied 18% of the world’s final energy consumption in 2006.

Page 25: Beate Friedl Alexandra Kulmer Alexandra Pack

Source: Renewables Global Status Report 2007, p 10

From 2002–2006 global renewable energy capacity grew at average rates of 15–30% annually.

Average annual growth rates for renewable energy capacity 2002-2006.

Markets for renewable energy

Page 26: Beate Friedl Alexandra Kulmer Alexandra Pack

Markets for renewable energy

Source: „Clean Energy Trends“, Clean Edge, 2008, p 2

$ 77.3 $ 254.4

Page 27: Beate Friedl Alexandra Kulmer Alexandra Pack

Markets for renewable energy

“Growth rates in these markets will continue to be strong, creating opportunities for business and for employment.”

Main drivers are: – high fossil fuel prices – strong government policies to tackle climate change

and policies for renewable energy

Page 28: Beate Friedl Alexandra Kulmer Alexandra Pack

Policy targets in at least 66 countries worldwide:• renewable energies as shares of electricity production,

primary energy and final energy• policies to promote renewable power generation (feed-in

policies, …)• biofuels as shares of transport energy • policies for solar hot water

Markets for renewable energy

Page 29: Beate Friedl Alexandra Kulmer Alexandra Pack

Financial markets

Source:Renewables Global Status Report 2007, p 16

Annual investment in new renewable energy capacity, 1995–2007

An estimated $71 billion was invested in new renewable power and heatingcapacity worldwide in 2007.

Investment in large hydropowerwas an additional $15–20 billion.

Page 30: Beate Friedl Alexandra Kulmer Alexandra Pack

Carbon trading markets

The carbon market grew in value to an estimated US$30 billion in 2006 three timesgreater than the previous year.

Source: The world bank, 2007, p 3

Page 31: Beate Friedl Alexandra Kulmer Alexandra Pack

Markets for financial intermediaries

• Corporate and project finance• Monitoring, reporting and verification services• Brokers• Carbon asset management and strategy• Registry services• Legal services• Trading services

Page 32: Beate Friedl Alexandra Kulmer Alexandra Pack

Insurence sector

The insurence sector will face• higher risks• broader opportunities

– wider range of weather and climate-related products

The insurence sector will require• greater access to long-term capital funding• to overlook the pricing

Page 33: Beate Friedl Alexandra Kulmer Alexandra Pack

Countries can seek to position their economy– to win strong shares of growing clean energy market– to support the development of particular technologies– to gain scientific or technical expertise

“Companies and countries should position themselves now to take advantage of these opportunities”

Opportunities from growing markets

Page 34: Beate Friedl Alexandra Kulmer Alexandra Pack

“Climate change policies can be a general spur to greater efficiency, cost reduction and innovation for the private sector”.

Page 35: Beate Friedl Alexandra Kulmer Alexandra Pack

Co-benefits of climate change

• Climate change to ensure efficiency and productivity• Overestimating costs of environmental regulation (CFCs)

– Increase in price between $650 and $1.200 – actually $40 - $400

• Co-Benefits– Reducing costs and saving GHG emissions

• BP $650 m savings through operational efficiency and improved energy management (10 % reduction in GHG emissions)

– Increasing energy security• Policy mix • Coal as an exception

– Carbon capture and storage

– Air pollution and health– Ending deforestation

Page 36: Beate Friedl Alexandra Kulmer Alexandra Pack

“Climate change and energy security drivers will often work in the same direction although there are important exceptions”.

Page 37: Beate Friedl Alexandra Kulmer Alexandra Pack

• Energy security– Geopolitical risks of physical interruption of supply– Problems with domestic infrastructure– Promoting energy efficiency to reach energy security– Attractive option for developing countries with low standards of

energy efficiency– Energy mix to ensure energy security

Co-benefit energy security

Page 38: Beate Friedl Alexandra Kulmer Alexandra Pack

• Coal combustion emits almost twice as much CO2 than combustion of natural gas per unit of energy

• Many countries have a lot of coal available and therefore use it to reduce energy import dependency

• China is the largest coal producer, consumption of coal might double between 2000 and 2010

• The US, Australia, China and South Africa invest into coal-to-liquid technologies to use it as a transport fuel– Emissions are almost double comparing to crude oil

• CCS as a solution?

Some facts about coal

Page 39: Beate Friedl Alexandra Kulmer Alexandra Pack

Coal reserves by country (end 2005)

Source: WEO, 2006

Page 40: Beate Friedl Alexandra Kulmer Alexandra Pack

China – total energy production 1971-2005

Source: IEA, Energy Statistics

Page 41: Beate Friedl Alexandra Kulmer Alexandra Pack

Carbon dioxide capture and storage (1)

Source: IPCC Special Report on Carbon dioxide Capture and Storage

Page 42: Beate Friedl Alexandra Kulmer Alexandra Pack

Carbon dioxide capture and storage (2)

• Many of possibilites to store CO2

• Requirements:– Economically viable– Technically feasible and safe– Environmentally and socially sustainable

Technical potential > actual storage capacity

Page 43: Beate Friedl Alexandra Kulmer Alexandra Pack

Global cumuluative CO2 storage (1)

Source: IPCC Special Report on Carbon dioxide Capture and Storage

Contribution of CCS:

450 ppmv CO2: 20-95 %

750 ppmv CO2 : 0-68 %

B1: best case scenario

A2: national enterprise

A1Fl: fossil

fuel intensive

A1T: concentrating on technology

A1B: balanced

Page 44: Beate Friedl Alexandra Kulmer Alexandra Pack

Source: IPCC Special Report on Carbon dioxide Capture and Storage

Global cumuluative CO2 storage (2)

B1: best case scenario

A2: national enterprise

A1Fl: fossil fuel intensive

A1T: concentrating on technology

A1B: balanced

Page 45: Beate Friedl Alexandra Kulmer Alexandra Pack

Global cumuluative CO2 storage (3)

• Fujii and Yamaji (1998)– Stabilisation level of 550 ppmv, 920 GTCO2 of the

emissions reductions could be met by CCS– One third captured in the ocean

Page 46: Beate Friedl Alexandra Kulmer Alexandra Pack

• 1.6 billion people without modern energy services• Problem of an increase in energy emissions

– Renewable technologies– Microgeneration, hydropower– Decentral energy production– Replace low-quality biomass

• 2.5 billion rely on traditional biomass

• Smoke causes deaths esp. women and children

• Less time for education

• Local deforestation

– Affordability • Income distribution more effective

Access to energy

Page 47: Beate Friedl Alexandra Kulmer Alexandra Pack

Share of traditional biomass in residential consumption by country

Source: WEO, 2006

Page 48: Beate Friedl Alexandra Kulmer Alexandra Pack

Primary energy source for cooking in households in India and Botswana

Source: WEO, 2006

Page 49: Beate Friedl Alexandra Kulmer Alexandra Pack

Source: WEO, 2006

Deaths by year caused by indoor air pollution

*IEA estimate based on WHO figure for all solid fuels

Page 50: Beate Friedl Alexandra Kulmer Alexandra Pack

• Protect environment/biodiversity– 70 % of earths plants and animals live in tropical forests

• Source for pharma industry– Destroying plants = destroying sources of pharmaceutical

ingredients

• Protection of indigenous people– Around 50 million people are living in tropical forests

• Tourism• Extreme weather events

– Forests play an important role in watersheds – a loss can result in an increase in flooding

Ending deforestation and enjoying co-benefits

Page 51: Beate Friedl Alexandra Kulmer Alexandra Pack

Energy subsidies

• High subsidies to inefficent technologies– stimulating unnecessary consumption/waste– income distribution in the wrong direction– undermining capacity– lobbying– decreasing incentive to invest in low carbon

technologies

Page 52: Beate Friedl Alexandra Kulmer Alexandra Pack

Energy subsidies

Page 53: Beate Friedl Alexandra Kulmer Alexandra Pack

• Climate change faces challenges, costs and opportunities

• New markets and trading possibilities• Sorting out inefficiencies • Co-benefits available• But: risk for undermining sustainable development

Conclusion

Page 54: Beate Friedl Alexandra Kulmer Alexandra Pack

Thanks for your attention!

But some more minutes left.....

Questions

Page 55: Beate Friedl Alexandra Kulmer Alexandra Pack

Questions

• Which key assumptions affect estimated costs of GHG stabilisation (overview)?

• How do the inclusion of backstop technologies and induced technology affect the cost of GHG stabilisation. Can you give example of carbon free “backstop technologies”1?

1 In the literature on resource economics a perfect substitute for an exhaustible resource is denoted a back-stop technology. This definition assumes that there is no physical constraint on the availability of the substitute good . Furthermore, the essential feature characterizing a perfect substitute is that if the prices between the alternatives differ, the demand is directed either towards the resource or against the substitute good (e.g. biomass)

Page 56: Beate Friedl Alexandra Kulmer Alexandra Pack

Questions

• How does flexibility affect abatement costs? Can you think of any examples where mitigation strategies aimed to cut emissions are cheaper in some countries than in other countries.

• Can you explain the relative absence of energy model results for stabilisation concentration below 500ppm CO2e.

Page 57: Beate Friedl Alexandra Kulmer Alexandra Pack

• What are the fast-growing new markets, that will gain by the shift to a low-carbon economy. And which countries will especially profit of this new market opportunities?

• While talking about climate change people always think about costs, a loss in consumption and restrictions. What are the co-benefits of climate change? Are there any conflicts in meeting different policy goals?

Questions

Page 58: Beate Friedl Alexandra Kulmer Alexandra Pack

• Stern mentions the conflict about coal and energy security. What is the real problem with using coal for energy production and could Carbon Capture and Storage be a possibility for using coal and meeting the reduction in GHG emissions?

• What is the current problem with energy subsidies? What are the inefficiencies associated with subsidies?

Questions

Page 59: Beate Friedl Alexandra Kulmer Alexandra Pack

Finally finished!!!

Thanks again!!!!