Finn Roar Aune, Hanne Marit Dalen and Cathrine Hagem

Transcription

1 Dscusson Papers No. 630, September 2010 Statstcs Norway, Research Department Fnn Roar Aune, Hanne Mart Dalen and Cathrne Hagem Implementng the EU renewable target through green certfcate markets Abstract: The EU Parlament has agreed on a target of a 20 % share of renewables n the EU s total energy consumpton by To acheve the target, the Councl has adopted mandatory dfferentated natonal targets for each of the Member States. In ths paper we consder the potental for cost reductons by allowng for trade n green certfcates across Member States. We show that dfferentated natonal targets cannot ensure a cost effectve mplementaton of the overall target for EU s green energy consumpton. Trade n green certfcates can ensure a cost effectve dstrbuton of green energy producton, but the natonal targets prevents a cost effectve dstrbuton of energy consumpton. Nevertheless, our numercal model ndcates that EU-wde trade n green certfcates may cut the EU s total cost of fulfllng the renewable target by as much as 70 % compared to a stuaton wth no trade. However, the desgn of green certfcate markets may have large mpact on the dstrbuton of costs across countres. Keywords: Energy polcy, green certfcate markets, renewable targets JEL classfcaton: Q48, Q54, Q58 Acknowledgement: The authors would lke to thank Annegrete Bruvoll, Torbjørn Hægeland and Knut Enar Rosendahl for ther helpful comments and valuable suggestons. The fnancal support of the Norwegan Research Councl s RENERGI program (project no /S39) s gratefully acknowledged. Address: Fnn Roar Aune, Statstcs Norway, Research Department. E-mal: fau@ssb.no Hanne Mart Dalen, Statstcs Norway, Research Department. E-mal: mhd@ssb.no Cathrne Hagem, Statstcs Norway, Research Department. E-mal: cah@ssb.no

2 Dscusson Papers comprse research papers ntended for nternatonal journals or books. A preprnt of a Dscusson Paper may be longer and more elaborate than a standard journal artcle, as t may nclude ntermedate calculatons and background materal etc. Abstracts wth downloadable Dscusson Papers n PDF are avalable on the Internet: For prnted Dscusson Papers contact: Statstcs Norway Sales- and subscrpton servce NO-2225 Kongsvnger Telephone: Telefax: E-mal: Salg-abonnement@ssb.no

3 1. Introducton In December 2008, the EU Parlament agreed on a Clmate and Energy Package whch s desgned to acheve the EU s overall envronmental target of a 20 % reducton n greenhouse gas (GHG) emssons and the renewable target of a 20 % share of renewables n the EU s gross fnal energy consumpton by 2020, see EU (2009a) and EU (2009b). EU (2009b) s henceforth referred to as the Renewables Drectve, whereas the term EU s Energy and Clmate Package covers both EU (2009a) and EU (2009b). A green certfcate system, also known as renewable portfolo standards or renewable oblgatons, requres consumers, retalers or producers to derve a certan percentage of fnal energy consumpton/producton from renewable sources. The purpose of ths paper s to analyse the costeffectveness of varous desgns of green certfcate systems to acheve EU s renewable target. In the lght of our fndngs, we dscuss EU s adopted polcy of dfferentated renewable natonal targets across Member States. As the GHG reducton target s not our man focus, we assume as a startng pont for our analyss that all GHG emssons wthn the EU are restrcted through a unform prce on emsson, whch ensures that the GHG emsson reducton target s met. Accordng to the lterature, f the goal s to secure a certan share of renewables n fnal consumpton, a green certfcate market provdes a cost effectve achevement (Bye, 2003, Haas et al., 2004, and Aune et al. 2008). Green certfcates are currently ntroduced n several European countres (EU, 2008a). However, the lterature also shows that f the purpose of the regulatons s to acheve GHG emsson reductons, a green certfcate market s not the frst best polcy, nether alone (Palmer and Burtrow, 2005) or n combnaton wth an emsson tradng scheme (Böhrnger and Rosendahl, 2009, and del Río González, 2007). 1 Stmulatng green energy producton can of course be motvated by objectves other than GHG emssons reductons. EU argues that the renewable target means a boost for hgh-tech ndustres, new economc opportuntes and jobs (EU, 2008b). It s a well known result that prvate markets wll under-nvest n R&D due to frms nablty to approprate the socal returns of nvestment (Stoneman and Vckers, 1988). Hence, some knd of governmental fundng of R&D may be approprate to make nvestors nternalze the postve externaltes assocated wth R&D. These objectves could 1 For other studes on the performance of green certfcates see, e.g. Amundsen and Nese (2009), Amundsen and Mortensen (2001), Morthorst (2001), Fscher (2006) and Bertold and Huld (2006). 3

4 nevertheless be met more cost effectvely by R&D subsdes than by settng a fxed renewable target. As ponted out n Sorrell and Sjm (2003), the objectves must be explct n order to desgn effcent polces. In ths paper, we do not queston whether a renewable target s a part of an effcent polcy or the motvatons for stmulatng green energy producton. 2 We smply take the renewable target as a premse for our study. To acheve the target of a 20 % share of renewables n EU s total energy consumpton, the European Councl has adopted mandatory dfferentated natonal targets for each of the Member States. The natonal targets range from 10 % to 49 %, but are consstent wth EU s overall renewable target. Accordng to the Renewable Energy Drectve (EU, 2009b, artcle 5), the consumpton of renewables s defned as electrcty and heat produced from renewable sources, plus the consumpton of other renewable energy sources, such as bofuels. Hence, the renewable target can be nterpreted as a target for green energy producton + net mport of green energy, relatve to fnal energy consumpton. EU s clmate and energy package sets no restrctons on how countres may stmulate ther green energy producton. Currently, there s a wde range of polcy nstruments amed at promotng renewable energy n use n the EU countres (Haas et al., 2004 and EU, 2008a). As a pont of departure for our analyss, we consder a stuaton where the polcy nstrument to acheve the renewable target s a green certfcate system n all countres. However, t s worth notcng that the market soluton followng from the green certfcate system can be mmcked through a subsdy on green energy producton and a tax on energy consumpton under the restrcton of budget neutralty (Aune et al., 2008, chapter 6.2). The Renewables Drectve states that the Member States may meet ther natonal renewable targets by fnancng green energy producton n other countres, so-called statstcal transfers. 3 The opton for statstcal transfers s a means to reduce the total cost of meetng the renewable target by dstrbutng green energy producton across Member States more cost effectvely, compared to a stuaton where each country has to meet ts target by domestc renewable energy producton. It s, however, yet unclear to whch extent ths opton wll be utlzed by the Member States. Accordng to EU (2010), only 5 EU countres wll rely on non-domestc measures to meet ther targets, and less than 1 per cent 2 Although a properly desgned green certfcates system leads to cost-effectveness when the polcy goal s to ncrease the share of renewables, t s not an effcent nstrument for correctng for externaltes (see Aune et al., 2008, chapter 6.2). 3 See artcle 6 of EU (2009b). 4

5 of the renewable producton wll be traded between member countres or between EU countres and thrd party countres. A potental system that fully explots the beneft from a cost effectve dstrbuton of renewable energy producton s an EU-wde green certfcate system: All producers receve a green certfcate for every unt green energy produced, and all consumers of energy must purchase green certfcates correspondng to the specfed share of renewable energy faced by ther countres of orgn. 4 The EU s system of statstcal transfers can be seen as a frst step towards a full green certfcate system n the Communty. To explore the mpact of EU-wde trade, we compare a stuaton wth full trade n green certfcates wth no trade n green certfcates across Member States. Furthermore, to explore the mpact of dfferentated natonal renewable targets, we also consder a cost-effectve polcy whch s ensured by a common renewable target for all EU members and full trade n green certfcates. Ths leaves us wth an evaluaton of three dfferent relevant polcy scenaros; ) a common renewable target for all Member States wth EU-wde trade n green certfcates, ) dfferentated natonal targets for each of the Member States wth EU-wde trade n green certfcates, and ) dfferentated natonal targets for each of the Member States wth domestc trade n certfcates only. To our knowledge, the present paper s the only study whch theoretcally and emprcally evaluates the cost reducng potental of allowng for trade n green certfcates across countres by comparng these three scenaros. 5 By the use of a theoretcal model, we fnd that the use of dfferentated natonal targets s not a costeffectve polcy to reach a certan renewable share. Ths concluson holds also when there s EU-wde trade n green certfcates. Hence, there s an mportant dstncton between a green certfcate market and an emssons permt market. Wth tradable emssons permts, cost effectveness s acheved (n a compettve market) regardless of the ntal allocaton of permts (Montgomery, 1972). In a green certfcate market the consumers margnal costs of energy dffer f the renewable targets vary across countres. Ths volates the condtons for a cost effectve dstrbuton of energy consumpton. Cost- 4 In ths paper we do not dscrmnate between old and new renewable energy, as s done n some green certfcate markets. Plumb and Zamfr (2009) gve a comparatve analyss of dfferent green certfcate markets n the EU. 5 Aune et al. (2008) calculate the outcome of natonal certfcate markets n the EU and compare ths wth a common certfcate market n the EU. EU (2008a) and Capros et al. (2008) compare a cost-effectve mplementaton of the renewable target versus natonal renewable targets. However, ther numercal smulatons dffer from ours n several ways: They do not employ a green certfcate market, whch mples that they do not have fnancal transactons across agents through a certfcate market. Furthermore, they ntroduce several restrctons on the mplementaton of the renewable target. For nstance, ther smulatons on natonal renewable targets restrct the renewable share of the ndvdual countres exactly to the targets n the EU proposal, whch mply hgher greenhouse gas emssons reductons costs than wthout that restrcton. 5

6 effectveness s only acheved by mposng a common renewable target for all countres and allowng for free trade n green certfcates. We employ a numercal mult-market energy equlbrum model to assess the mpact of the varous desgns of green certfcate markets. The model smulatons ndcate large gans from trade n green certfcates. Gven the dfferentated natonal targets set by the Councl, the overall cost of achevng the EU s renewable target can be cut by almost 70 per cent by EU-wde trade n green certfcates. The effcency loss related to dfferentated targets, and hence dfferentated ncrease n consumer prces across countres, s more modest. Gven trade n green certfcates, the EU s total cost can be further reduced by almost 4 per cent by havng a common renewable target compared to dfferentated natonal targets (scenaro () versus scenaro ()). The varous desgns of green certfcate markets have large mpacts on the dstrbuton of costs across countres, and not all countres are better off wth trade. Secton 0 provdes our theoretcal model to llustrate the qualtatve results. Thereafter, n secton 3, we present the numercal model and the results. Concludng remarks are gven n secton The Theoretcal Model To analyse the scenaros theoretcally t s suffcent to consder a two country case. We also smplfy the analyss by gnorng trade n energy wth thrd countres (the numercal model provdes a more realstc presentaton of the energy market n the EU, ncludng trade wth countres outsde the EU). Let e 1 and e 2 denote the consumpton of energy from the two countres, 1 and 2. Let x and y denote country 's producton of renewable (green) and fossl (brown) energy, respectvely. For the consumers, we assume that both types of energy are perfect substtutes. Furthermore, let c(x) and f(y) be country 's cost functons for producng green and brown energy, respectvely, whereas B(e) denotes country 's beneft of consumng energy. We assume free trade, no transportaton costs, and the followng propertes of the cost and beneft functons: c (x ) 0, c (x ) 0, f (y ) 0, f (y ) 0, B (e ) 0, and B (e ) 0. The market equlbrum condton s: (1) e1 e2 x1 x2 y1 y2. 6

7 As a startng pont we consder a stuaton where the two countres jontly have a target for emssons of CO 2 from the combuston of fossl fuels. As we only consder one type of fossl fuels n ths theoretcal part of the paper, ths corresponds to a target ( Y ) for total consumpton of fossl fuels: (2) y1 y2 Y. The countres have a common target for the share (α) of renewable green energy n ther fnal consumpton: (3) x1 x 1 (e1 e 2), 0 1. Throughout ths theoretcal analyss we only consder stuatons where both constrants are bndng. Hence, (2) and (3) are satsfed wth equalty. Total welfare (W) s gven by: W B (e ) c (x ) f (y ), (4) Maxmzng (4) w.r.t. e, x and y subject to (1), (2) and (3), yelds the followng optmalty condtons:, (5) B1 3 B2 3 c1 3 c2 3 f1 2 f2 2 1 where 1 s the shadow cost of the market equlbrum constrant (1), 2 s the shadow cost of the fossl fuel target constrant, (2), and 3 s the shadow cost of the renewable target constrant, (3). Let e,x,y,, and denote the outcome of the optmal soluton followng from (1), (2), (3) and * * * * * * (5), =1,2. We see from (5) that the margnal cost of producng green energy must exceed both the margnal beneft of consumng energy and the margnal cost of producng fossl fuels n optmum (as 3 and 2 > 0, and 0 1 by assumpton). Furthermore, we see that the margnal beneft of consumpton s equalzed across consumers, the margnal cost of green energy producton s equalzed across green 7

8 energy producers, and fnally, the margnal cost of fossl fuel producton s equalzed across fossl fuel producers. In the next sectons we consder three dfferent scenaros for achevng the renewable target by the use of a green certfcate system, gven a common compettve energy market and a common compettve tradable emssons permts market. The scenaros correspond to ) - ), descrbed n the ntroducton Scenaro ): Common target - Common certfcate market The countres have a common target for the share (α) of renewable energy n ther fnal consumpton. Ths mples that all consumers of energy are oblged to purchase α green certfcates for each unt of energy they consume. Let β denote the unt prce on certfcates. Renewable energy producers have the rght to sell one green certfcate per unt renewable energy produced. Let p denote the market prce on energy. Let t denote the market prce on emsson permts, and let p denote the consumer prce on energy. The net beneft from consumpton (w) n country s: (6) w B (e ) (p )e, 1,2 As we have assumed that both types of energy are perfect substtutes for the consumers, the consumer prce cannot dffer across energy types. The producer prce on each energy source equals the market prce less of any net taxes (taxes mnus subsdes). The producers of renewable energy also gan β on each unt of energy. Hence, the green and brown energy producers proft functons, denoted x and y, are respectvely: (7) x (p )x c (x ) 1,2 (8) y (p t)y f (y ) 1,2 The producer prce on energy for fossl fuel producers equals p-t, whereas the producer prce on green energy equals p+ β. The frst order condtons for consumers welfare optmzaton and producers proft maxmzaton are found by maxmsng (6) w.r.t. e, maxmzng (7) w.r.t. to x, and maxmzng (8) w.r.t. to y : 8

9 B B c c f t f t p (9) Let e(p ),x(p )andy(p t) denote the demand and supply functons followng from (9). The renewable target constrant, (3), sets the market equlbrum condton for the certfcate market: (10) (e 1(p )) (e 2(p )) x 1(p ) x 2(p ) By nsertng the demand and supply functons followng from (9) nto (1) and (2) we fnd the equlbrum condtons for p, t and, denoted * p, * t and *, respectvely from (1), (2) and (10). Hence, * * t and ensure that the constrants regardng total consumpton and producton (eq. (1)- (3)) are satsfed. Furthermore, we see from (9) that a common green certfcate market also ensures the optmal dstrbuton of producton and consumpton across countres. Thus, t follows from (9) that e(p ) e,x(p ) x andy(p t) y. * * * * * * * * * * p, Hence, the green energy certfcate market ensures the optmal soluton, gven a target for the share of green energy n fnal energy consumpton (eq. (3)) Scenaro ): Dfferentated targets A common certfcate market In ths stuaton, each country has an ndvdual target for ts share of renewable energy n fnal consumpton, α. There s a common green certfcate market. Ths mples that the producer prce on green energy equals p n both countres, as n scenaro ), whereas the consumer prces on energy ( p ) dffer. Replacng p wth p n (6), the frst order condtons for consumers welfare maxmzaton and producers proft maxmzaton are gven by: B B c c f t f t p (11) We see from (11), that B 1 B 2for 1 2 and c 1 c 2. Hence, we can derve the followng proposton: 9

10 Proposton 1: Consder a group of countres wth a target for a specfc share of total renewable energy n overall energy consumpton. A green certfcate market does not lead to a cost-effectve achevement of the overall target f the ndvdual countres are assgned dfferentated targets. However, the producton of green energy s cost effectvely dstrbuted across producers. When the green certfcates are tradable across countres, all green energy producers face the same producer prce and a cost effectve dstrbuton of green energy producton s ensured. Dfferentated targets lead to dfferentated consumer prce on energy across consumers and the consumpton of energy s thus not dstrbuted optmally across consumers Scenaro ): Dfferentated targets - Natonal certfcate markets In ths stuaton, each country has an ndvdual target for ts share of renewable energy n fnal consumpton α, and each country has an ndvdual certfcate market. Let denote the market prce on certfcates n country. The consumer prce on energy n country s p. Replacng p wth p n (6) and replacng wth n (7), the frst order condtons for consumers welfare maxmzaton and producers proft maxmzaton are gven by: B B c c f t f t p (12) We see from (12) that the margnal beneft of energy s not equalzed across consumers (countres), 1 2 except by chance, as B 1 B 2for. Furthermore, margnal cost of green energy producton s 2 1 not equalzed across producers, except by chance, as c 1 c 2 for 1 2. Ths leads to the followng proposton: Proposton 2: Consder a group of countres wth a target for a specfc share of total renewable energy n overall energy consumpton. Indvdual green certfcate markets lead to an neffcent dstrbuton of green energy producton and an neffcent dstrbuton of energy consumpton. 10

11 3. Numercal llustratons In order to evaluate the qualtatve mpact of the alternatve scenaros, we need an energy market model that captures the man features of the dfferent alternatves, and quantfy the mpact on man economc varables, such as total cost, consumer surplus, producer surplus, energy producton and prces. To conduct ths qualtatve evaluaton, we use the mult-market energy equlbrum model LIBEMOD. The model s focus s on the electrcty and natural gas markets of Western Europe, but t also covers global markets for coal and ol. See Golombek et al. (2009) for a documentaton of the present verson of LIBEMOD, and Aune et al. (2008) for a more detaled descrpton of LIBEMOD, ncludng data sources Detaled descrpton of the numercal model LIBEMOD dstngushes between 16 endogenous Western European model countres 7, three exogenous model countres whch are mportant for the Western European gas market 8,and an exogenous regon contanng the rest of world. Only the endogenous model countres have a full set of energy markets. However, also the exogenous model countres possess endogenous supply of one or more fossl fuels. As the EU s Energy and Clmate Package covers all of the current 27 EU members, (EU-27), whereas LIBEMOD only reports CO 2 emssons and green energy producton from the Western European countres, LIBEMOD has a lmtaton when t comes to smulatng the full effects of EU s polcy. However, we beleve that LIBEMOD-smulatons stll provde a good pcture of the mpact of the varous desgns of green certfcate markets n the EU, as LIBEMOD s endogenous model countres cover 85 % and 84 % of EU-27 s energy consumpton and producton, respectvely (Eurostat, 2008). 9 6 The verson of LIBEMOD used n the present paper LIBEMOD 2000 CCS dffers somewhat from the one documented n Aune et al. (2008), the man dfferences beng ) electrcty s traded n two (not sx) perods over the 24-hour cycle, ) more electrcty technologes are avalable (CCS technologes for coal and gas power plants), and ) a more aggregated representaton of coal markets s used. 7 Austra, Belgum (ncl. Luxembourg), Denmark, Fnland, France, Germany, Greece, Great Brtan and northern Ireland, Ireland, Italy, the Netherlands, Norway, Portugal, Span, Sweden and Swtzerland. 8 Algera, Russa and Ukrane 9 The Renewables Drectve s relevant for EEA. Norway s not an EU member, but a member of EEA. Therefore, t s reasonable to nclude Norway among countres covered by EU s clmate and energy package. Swtzerland on the other hand, s not a member of EEA. Whle Swtzerland s not yet a part of the EU-ETS tradng scheme, they am to merge ther natonal tradng scheme wth the European emssons tradng scheme, see The Renewables Drectve, artcle 9 opens for jont projects n producton of renewable electrcty between EU member states and thrd countres. We therefore also nclude Swtzerland among countres covered by EU s clmate and energy package n our numercal analyss. 11

12 We have made some adjustment to the targets specfed n EU s Energy and Clmate Package to take nto account that LIBEMOD s endogenous model countres dffer from EU-27. The Renewables Drectve sets dfferentated natonal targets for the ncrease n renewables n each of the Member States, whch are consstent wth a target of at least a 20 % share of energy from renewable sources n the Communty s fnal consumpton, see Appendx A. When we sum up the Renewables Drectve s natonal targets for LIBEMOD s endogenous model countres, we fnd these targets consstent wth a target of a 19.7 % share of energy from renewable sources n the fnal consumpton n LIBEMOD. 10 We have also made an adjustment to ncorporate EU s target of a 20 % reducton n GHG relatve to 1990 levels. Ths target s acheved partly by a 21 % reducton below 2005 levels from sources covered by EU s emsson tradng scheme (EU-ETS), and partly by dfferentated natonal targets for emsson from sources not covered by EU-ETS. We fnd the total target for LIBEMOD s endogenous model countres by assumng a 21 % reducton relatve to 2005, of emssons covered by EU-ETS n these countres. The sum of emssons reductons for sectors outsde EU-ETS are found from summng up the dfferentated natonal targets for the LIBEMOD s endogenous model countres, gven n EU (2009a). 11 As the Renewables Drectve s the man focus of ths paper, we have smplfed the GHG emssons polcy by assumng that all sources of emssons face the same prce on emsson, n terms of a common CO 2 tax, and ths tax ensures that the target s fulflled. Furthermore, we only consder emssons of CO 2, and assume that the percentage G HG reducton targets holds for CO 2 -emssons. All markets n LIBEMOD are compettve. In each endogenous model country there s nvestment n energy nfrastructure, as well as producton, consumpton and trade of energy. In equlbrum all arbtrage possbltes are exploted and thus prce dfferences for each good reflect cost dfferences only. Seven energy goods are ncluded; electrcty, bomass, ol, natural gas, lgnte, steam coal and cokng coal. Natural gas and electrcty are traded between endogenous model countres as well as a few exogenous model countres such as Russa. Ol, steam coal and cokng coal are traded n global markets. 10 For Norway the natonal renewable target s set to 68 %. Ths s found from usng the same method as employed by the EU for settng the natonal targets for EU Member States (see EU, 2008a, Annex 6). Pont Carbon (2008), fnds, by usng ths method that Norway should ncrease ts renewable share wth 14.5 percentage ponts. We apply the same ncrease n renewable share for Norway n our numercal smulatons. The natonal renewable target for Swtzerland s set to 0 (see footnote 9). 11 For both Norway and Swtzerland the natonal goals are set to a 20 percent reducton n natonal non EU-ETS CO 2 emssons n 2020 compared to

13 LIBEMOD offers a detaled descrpton of producton of electrcty n each model country. In general, there are a number of technologes avalable for producton of electrcty n exstng plants or n new plants. For steam coal power and gas power, a producer can nstall carbon capture and storage n an exstng plant, or buld a new power plant wth CCS. There are four groups of users of energy: Power producers, households/servces, ndustry and transport. The frst group represents ntermedate demand; power plants demand a fuel as an nput n producton of electrcty. Ths fuel could be steam coal, lgnte, natural gas, ol or bomass. The three latter groups represent end-user demand. LIBEMOD gnores the use of bomass n other sectors than the electrcty sector. As we know that the use of bomass (bodesel and boethanol) can substtute fossl fuels n the transport sector and bomass can substtute gas or coal for heatng, we have decded to exogenously determne the use of bomass n the transport sector and n the statonary energy sector. EU statstcs provde nformaton about the use of bomass n 2005 n these sectors for all endogenous model countres. 12 We have prolonged ths use of bomass to Furthermore, from the EU Renewable Energy Drectve we adopt that the use of bomass n the EU transport sector ncreases to 10 per cent of the total energy use n that sector n For the statonary energy sector, we assume that the percentage share of bomass n 2020 corresponds to the percentage renewable targets (19.7 %). The dstrbuton across countres s determned by assumng the same percentage pont ncrease from 2005 to 2020 across all countres. In total, ths gves us a use of renewables n the statonary energy sector n 2020 approxmately n lne wth EU s projectons 13. The absolute values of bomass n the transport sector and statonary energy sector are dentcal n all three scenaros. We do not consder any trade n bomass across countres. However, the bomass used as nput factor n the producton of electrcty s endogenously determned n the model Smulatons Usng the LIBEMOD model, we compare the costs of mplementng EU s renewable target through the three dfferent scenaros descrbed n the theoretcal model: ) an equal percentage renewable target for all countres and EU-wde trade n green certfcates system, ) ndvdual renewable targets and EU-wde trade n green certfcates and ) ndvdual renewable targets and no EU-wde trade n green certfcates. 12 For each country, see Table 7, category Fnal consumpton of RES (excl. electrcty) n Eurostat (2008) 13 See EU (2007), page 20, fgure Renewables growth: Heatng and coolng projectons by

14 As a startng pont for our analyss, we frst smulate a base scenaro wth no renewable target, but wth a common EU-wde carbon tax suffcently hgh to ensure a 20 % reducton of emssons of carbon doxde n Thereafter, we smulate the three dfferent scenaros for green certfcates systems, gven both the target for CO 2 emssons and the renewable target. Table 1 presents the mpact of ntroducng a renewable target through the three dfferent scenaros for green certfcates. The absolute numbers represent the changes relatve to the case wth no renewable target (base scenaro), whereas the percentage numbers n the brackets represents the percentage change n outcome of scenaro ) and ) relatve to scenaro ). Hence, the percentage numbers show the effects of openng up for trade n green certfcates, gven a renewable target. From Table 1 we see that openng up for EU-wde trade n green certfcates strongly reduces the cost of ntroducng a renewable target compared to domestc certfcate trade only. The cost of meetng the overall EU target s reduced by 69 % under system ) compared to system ). The cost effectve soluton wth a common renewable target and EU-wde trade n certfcates (system ) reduces the costs by 71 % compared to system ). Ths tells us that the man drvng force to reduce the cost of the renewable target s to allow for trade n green certfcates. 14 Gven free trade n green certfcates, shftng from dfferentated natonal targets to common natonal targets only reduces the costs further by approxmately 4 %. From Table 1, we also see that the ntroducton of the Renewables Drectve causes large changes n the producer and consumer surplus. 15 The large ncrease n the producer surplus s manly caused by ncreased ncomes from green certfcates. The producers of renewable energy receve an ncome from the green certfcate system and therefore ncrease ther producer surplus. We see that the producer surplus s very smlar under system ) and ), but s much hgher under system ). Ths s manly drven by the hgher prces on green certfcates under scenaro ). The average prce of green certfcates equals 47 n scenaro ), whereas the common certfcate prce has fallen to 26 n scenaro ) and ), due to the EU-wde trade n green certfcates Our estmated gans from trade n certfcates are somewhat hgher than the estmate n EU (2008a), where the costs from achevng the renewable and greenhouse gas target are based on smulatons usng the PRIMES and GAINS models. They fnd that trade n green certfcates, gven dfferentated renewable targets, can reduce costs by 8 Bn compared wth no trade n certfcates. See table 36 n EU (2008a). Ther results are not drectly comparable wth ours due to dfferent countres beng ncluded n the analyss and dfferent assumptons about the carbon costs n the non EU ETS sector. 15 Consumer surplus s here understood as the surplus for all end-users of energy (households, the servce ndustres, other ndustres and transportaton). 16 One certfcate beng equal to one MWh of renewable energy producton. 14

15 The consumer surplus s substantally reduced n all three scenaros. Introducng a renewable target s costly for the consumers as they have to pay for green certfcates n order to be able to consume energy. However, Table 1 shows that the loss n consumer surplus s consderably lower when the green certfcates are tradable EU-wde. Agan, ths follows from a lower certfcate prce wth EUwde tradable green certfcate systems compared to natonal green certfcate systems. In all three systems there s also a clear decrease n tax ncome. Taxes ncluded n the model are energy taxes, VAT and carbon taxes. The renewable target leads to lower energy consumpton n general and especally lower consumpton of fossl energy. Hence, revenues from energy taxaton are reduced due to a lower tax base. Furthermore, the renewable target ncreases the cost of consumng fossl energy. The level of the carbon tax necessary to acheve the target for CO 2 emssons s therefore lower n a stuaton wth a renewable target compared to a stuaton wthout. In our model smulaton, the carbon tax suffcent to acheve the 20 % reducton n carbon emssons target falls from 59 to 52 per tonne CO 2 when the renewable target s ntroduced. As green certfcate schemes are revenue neutral, there s no green tax ncome to compensate for the loss n energy- and carbon tax revenues. 17 From Table 1 we see that the choce of scenaro for green certfcate markets also affects total gross consumpton of energy. By the ntroducton of the renewable target through scenaro ), the fnal gross consumpton of renewable energy s reduced by 60 Mtoe, whch corresponds to a reducton of 4 percent relatve to the base scenaro. Wth EU-wde trade n green certfcate, the reducton n gross fnal consumpton s 50 % less. Hence, as all scenaros must fulfll the renewable target, the amount of renewable energy consumpton s larger under EU-wde certfcate trade than under domestc certfcate trade only. Average producer prce of electrcty, weghted by each countres producton share, s reduced wth between 2 and 3 per MWh, equvalent to a reducton between 4 and 4.5 % n all three scenaros. The green certfcate market can be vewed as a subsdy to green energy producton and a tax on energy consumpton. Both green energy producton subsdes and taxes on consumpton reduce producer prces (exclusve the certfcate prce) and the results are thus n accordance wth theory. 17 Note that our smulaton does not take nto account how the loss of CO 2 tax revenues must be compensated by an ncrease n other producer or consumer taxes, or reduced governmental spendng. 15

16 The effect on the end-user electrcty prce (electrcty prce plus certfcate prce) by ntroducng the green certfcate market s not gven from theory (see e.g. Amundsen and Mortensen, 2001, Bye, 2003 and Fscher, 2006). Dependng on the slope of the nonrenewable energy supply curve relatve to the renewable energy supply curve, the combnaton of a tax and a subsdy mght lead to both ncreasng and decreasng end-user electrcty prces. In our numercal model, the average end-user prce on electrcty, weghted by consumpton, ncreases as a result of the renewable target beng mplemented. The ncrease s more than twce as large wth natonal targets and no trade n green certfcates as wth trade n certfcates. Table 1: Effects of dfferent mplementatons of the Renewables Drectve n 2020 (annually). Cost of ntroducng the renewable target (M ) Domestc certfcate trade only System ) Dfferentated natonal targets and no EU-wde trade n green certfcates EU-wde trade n certfcates Number n brackets express the percentage changes relatve to scenaro ) System ) Dfferentated natonal targets and EU-wde trade n green certfcates System ) Common renewable target and EU-wde trade n green certfcates (-69 %) 5745 (-71 %) Change n producer surplus (M ) (-51 %) (-52 %) Change n consumer surplus (M ) (-59 %) (-60 %) Change n taxes (M ) (-13 %) (-12 %) Change n carbon tax rate ( per tonne CO 2 ) Change n renewable energy consumpton (Mtoe) Change n gross fnal consumpton of energy (Mtoe) Change n electrcty producton (TWh) Change n end-user electrcty prces ( MWh) Change n electrcty prces ( /MWh) M = mllon (-0.8 %) (-0.8 %) (11 %) 33 (11 %) (-51 %) -30 (-50 %) (-62 %) -26 (-71 %) (-55 %) 2.81 (-62 %) (10 %) (9 %) All our numercal results regardng dfferent ways to mplement the renewable target depend heavly on our assumptons about avalable technologes to ensure both the carbon reducton and renewable energy target. Our numercal model comprses the potental for usng CCS technology, and ths technology wll be mplemented on all new coal fred power plants for CO 2 -taxes above 31 per tonne 16

17 CO 2. Obvously, there are uncertantes related to the performance of ths, stll mmature, technology. If t turns out that the CCS technology wll be too costly to mplement or that t s not an accepted abatement technology due to the uncertantes related to safe storage of CO 2, the cost of reachng a 20 % reducton n carbon emssons ncreases substantally. Due to the correspondng hgh carbon prces, renewable energy become more proftable and there s no added cost by mplementng the renewable target as long as there s EU-wde trade n green certfcates (the certfcate prce s zero). Wthout trade n certfcates the total cost of reachng the renewable target s 4225 mllon,.e. the added cost of the renewable target s substantally lower than wth CCS Results by country The costs of the dfferent ways of mplementng the renewable target dffer substantally between countres. In Fgure 1 we see the cost reducton across countres from havng EU-wde trade n green certfcates. Cost n scenaro ) and ) are compared to the stuaton under scenaro ). In scenaro ) and ), the dfferentated natonal renewable targets are dentcal, but scenaro ) allows for EU-wde certfcate trade, whereas scenaro ) does not. Access to an EU-wde market s n tself benefcal for all countres. It s partcularly benefcal for countres that become large traders n the certfcate market. However, EU-wde trade n green certfcates affects the equlbrum prces on all energy sources. Due to these terms of trade effects, some countres are worse off n scenaro ) compared to scenaro ). Fnland, Italy, Norway and Sweden wll beneft most from a shft from scenaro ) to scenaro ). We see from Fgure 2 that Italy has a hgh natonal prce on green certfcates n scenaro ). The hgh prce s a reflecton of hgh domestc costs of green energy producton. Hence, the cost of meetng ther renewable target s substantally reduced when they get access to green certfcates at a much lower prce n scenaro ). For Fnland, Norway and Sweden, the gans from an EU-wde market for certfcates follow from ther capacty to produce green energy at low costs. We see from Fgure 2, that ther prce on green certfcates s zero under scenaro ), even though they have natonal targets way above the average (see appendx A). Ths ndcates that these countres wll become large sellers of certfcates n scenaro ) and explot the gans from trade. Whether a country s better off n scenaro ) than n scenaro ) depends manly on whether ts natonal target n scenaro ) s above or below the common target n scenaro ). Sweden and Norway have the hghest natonal targets, set at 40 % and 68 %, respectvely, n our model. Surely, they wll 17

18 both beneft substantally by a replacement of ther natonal targets wth the common targets of 19.7 % n scenaro ). Fgure 1: Countres yearly cost reducton n system ) and ) compared to system ), as share of ther GDP (2009) 0,014 0,012 System ) System ) 0,010 0,008 0,006 0,004 0,002 0,000-0,002-0,004 Austra Belgum Swtzerland Germany Denmark Span Fnland France Great Brtan Greece Ireland Italy The Netherlands Norway Portugal Sweden Fgure 2: Green certfcate prces. /MWh System ) System ) and ) Austra Belgum Swtzerland Germany Denmark Span Fnland France Great Brtan Greece Ireland Italy The Netherlands Norway Portugal Sweden 4. Concludng remarks The EU has agreed on dfferentated renewable targets across Member States to acheve the renewable target of a 20 % share of renewables n the EU s total fnal energy consumpton by We have shown that dfferentated natonal targets do not lead to a cost effectve mplementaton of EU s 18

19 renewable target (see proposton 1 and 2). However, an mportant result from our numercal model s that, gven dfferentated natonal targets, the overall cost of achevng the EU s renewable target can be cut by almost 70 per cent f the Member States are allowed to trade green certfcates. The Renewable Energy Drectve (EU, 2009b) allows for so called statstcal transfers, whch means that Member States may meet ther natonal renewable targets by fnancng green energy producton n other countres. Our paper shows the great potental for cost savngs by developng ths system nto a well functonng green certfcate market. Our numercal model also shows that the varous desgns of green certfcate markets have great nfluence on the dstrbuton of costs across countres. Hence, allowng for trade n green certfcates (or statstcal transfers) alters the dstrbuton of costs across countres. If the EU also has a target for dstrbuton of costs across countres, a development of a green certfcate market may also necesstate a redstrbuton of the dfferentated renewable targets across countres, f fnancal transfers/compensatons are excluded. But then agan, a redstrbuton of natonal targets affects the effcency loss followng from the correspondng dfferentated consumer prces on energy. Ths s the well known result that dstrbutonal concerns must (n general) be separated from effcency concerns when desgnng cost effectve polcy nstruments. 19

20 References Amundsen, E. S. and J. B. Mortensen (2001). The Dansh Green Certfcate System: some smple analytcal results. Energy Economcs 23, Amundsen, E. S. and G. Nese (2009). Integraton of tradable green certfcate markets: What can be expected? Journal of Polcy Modelng 31 (6): Aune, F. R., R. Golombek, S. A. C. Kttelsen and K. E. Rosendahl (2008). Lberalzng European Energy Markets. An Economc Analyss. Cheltham, UK, Edward Elgar Publsher. Bertold, P. and T. Huld (2006). Tradable certfcates for renewable electrcty and energy savngs. Energy Polcy 34, Böhrnger, C and K. E. Rosendahl (2009). Green Serves the Drtest: On the Interacton between Black and Green Quotas, Forthcomng, Journal of Regulatory Economcs. Bye, T. (2003). On the Prce and Volume Effects from Green Certfcates n the Energy Market, Dscusson Papers No. 351, Statstcs Norway, Research Department. Capros P., L. Mantzos, V. Papandreou and N. Tasos (2008). Model-based Analyss of the 2008 EU Polcy Package on Clmate Change and Renewables, Report to European Commsson DG ENV. del Río González, P. (2007). The nteracton between emssons tradng and renewable electrcty support schemes. An overvew of the lterature. Mtgaton and Adaptaton Strateges for Global Change 12 (8): EU (2007). COM(2006) 848 Fnal, ( ) EU (2008a). Annex to the mpact assessment. Commsson Staff Workng Document, SEC (2008) 85, VOL. II, Commsson of the European Communtes. EU (2008b). MEMO/08/33, date 23 January. ( ) EU (2009a). DECISION No 406/2009/EC of the European Parlament and of the Councl, ( ) EU (2009b). DIRECTIVE 2009/28/EC of the European Parlament and of the Councl, ( ) EU (2010): ge=en&gulanguage=en, ( ) Eurostat (2008). Energy Yearly statstcs 2006 Fscher, C. (2006). How can renewable portfolo standards lower electrcty prces? Dscusson Paper REV, Resources for the Future. 20

21 Golombek, R.., M. Greaker, S. A. C. Kttelsen, O. Røgeberg and F. R. Aune (2009). Carbon capture and storage technologes n the European power market, Dscusson Papers No. 603, Statstcs Norway, Research Department. Haas, R., W. Echhammer, C. Huber, O. Langnss, A. Lorenzon, R. Madlener, P. Menanteau, P. E. Morthorst, A. Martns, A. Onszk, J. Schlech, A. Smth, Z. Vass and A. Verbruggen (2004). How to promote renewable energy systems successfully and effectvely. Energy Polcy 32 (6): Montgomery, W. D. (1972). Markets n lcenses and effcent polluton control programs. Journal of Economc Theory 5 (3): Morthorst, P. E. (2001). Interactons of a tradable green certfcate market wth a tradable permts market. Energy Polcy 29 (5): Palmer, K. and D. Burtraw (2005). Cost-effectveness of renewable electrcty polces. Energy Economcs 27 (6): Plumb, I. and A.-I. Zamfr (2009). A comparatve analyss of green certfcates markets n the European Unon. Management of Envronmental Qualty: An Internatonal Journal 20 (6): Pont Carbon (2008). Fornybarmål for Norge 2020 lys av EUs energ- og klmapakke, En rapport for EBL Kompetanse, 6. ma (Renewable target for Norway 2020 n lght of EUs energy and clmate package, a report for EBL Kompetanse, May ) Sorrell, S. and J. Sjm (2003). Carbon Tradng n the Polcy Mx. Oxford Revew of Economc Polcy 19 (3): Stoneman, P. and J. Vckers (1988). The Assessment: The Economcs of Technology Polcy. Oxford Revew of Economc Polcy 4 (4): -xv. 21

22 Appendx Natonal renewable shares n LIBEMOD for 2005 and overall natonal targets n LIBEMOD for the share of energy from renewable sources n gross fnal consumpton of energy n 2020 Renewable share (2005) Renewable target share (2020) Austra 26.4 % 37.1 % Belgum 1.8 % 12.6 % Swtzerland 20.2 % 0.0 % Germany 4.4 % 16.6 % Denmark 12.1 % 25.1 % Span 7.5 % 18.8 % Fnland 23.9 % 33.4 % France 8.6 % 21.3 % Unted Kngdom 1.2 % 14.9 % Greece 6.8 % 17.9 % Ireland 2.1 % 15.0 % Italy 4.4 % 16.2 % The Netherlands 1.3 % 12.9 % Norway 53.4 % 67.9 % Portugal 17.8 % 28.3 % Sweden 30.9 % 40.1 % 22