In light of the Paris Agreement: carbon markets, competitiveness and energy policy () Seminar, Chair for Sustainable Energy, Universitat de Barcelona 21st April 2016 Folie 1
Outline 1. The climate regime after 2020 2. Carbon markets 3. Competitivenessissues 4. Energypolicy 5. The Paris Agreement and energy trends Folie 2
1 Key features of the Paris Agreement Signing ceremony starts tomorrow in New York (open for signature: 22nd April 2016 21st April 2017) Universality Three areas covered: mitigation, adaptation, finance Bottom-up climate policy: NDCs (pre-paris: INDCs) Industrial countries responsibilities are documented Process-based agreement review cycles Folie 3
2 The future of carbon pricing under the Paris Agreement Kyoto Protocol included flexible mechanisms: Emissions trading, clean development mechanism and joint implementation Paris Agreement: Article 6, future of explicit and implicit carbon pricing different types of mechanisms subject to further precision under the COP process (2016) Voluntary cooperative approaches in Art 6.1 recognized when implementing NDCs Clubs are an option More explicit types 1. Transfers of mitigation outcomes (Art. 6.2 6.3) internationally transferred mitigation outcomes (ITMOs) The CMA stipulates the accounting rules ( shall apply robust accounting ), but the mechanisms are not under the supervision of the COP/CMA. Thus anything goes, JCM, REDD+, 2. Mechanisms contributing to mitigation and to sustainabily ( SDM ) (Art. 6.4 6.7) (predecessor: CDM), subject to further negotiations, definitions not clear yet, environmental integrity issues, accounting rules, oversight (baseline and credit mechanism?) 3. Non-market approaches framework Folie 4
2 Carbon pricing clubs Idea from game theory how to provide a global public good Nordhaus (2015), others: incentives and sanctions need to be included e.g. technology transfer, trade measures UNSG summit 2014/World Bank initiative in context with COP21: French Environment minister Royal and Dutch CEO of Royal DSM head the Carbon Pricing Leadership Coalition Global goals for a broader coverage of GHG by carbon pricing Regular progress reporting Business support Increasing the overall price level of CO2, stable and predictable pricing, drive cohesion, not competition Article 6 of the Paris Agreement Folie 5
EU Climate and Energy Agenda 2030 (INDC) Greenhouse Gases Renewable Energy All sectors Sectors covered by the European Emissions Trading Scheme Sectors not covered by the European Emissions Trading Scheme Renewable energy share in gross final energy consumption EnergyEfficiency Absolute reduction in primary energy demand compared to a BAU case At least -40% from 1990 levels -43% from 2005 levels -30% from 2005 levels -27% of European level -27% (indicative) Folie 6
2 Carbon pricingin theeu: ETS Target for emission reductions by the EU: at least 40 percent (compared to 1990) ETS takes over roughly 40% of this target, covering power sector and manufacturing Non-ETS sectors: transport, buildings, agriculture MS level, EU effort sharing decision 2016 EU target for 2050: 85-90% Reform debate: Backloading, Market Stability Reserve, National or EUwide floor price(s) Folie 7
2.1 CO 2 emissionsconcentratedin a fewsectors (UK example) Electricity cost increase (blue); cost for buying all allowances (grey) - relative to gross value added. Potential maximum gross value added at stake (MVAS) and net gross value added at stake (NVAS) 40% 30% 20% 10% 4% 2% 0% Lime Cement Allocation dependent (direct) CO 2 costs / GVA Electricity (indirect) CO 2 costs / GVA Basic iron & steel Refined petroleum Price increase assumption: CO 2 = 20/t CO 2; Electricity = 10/MWh Other inorganic Household paper Casting of iron basic chemicals Non-wovens Copper Industrial gases Flat glass Coke oven Veneer sheets Fertilisers & Nitrogen Malt Rubber tiers & tubes Aluminium Pulp & Paper Hollow glass Finishing of textiles 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% UK Study examined 159 subsector activities and identified a top 20+3 for which combined cost impacts @ 20/tCO2 exceed 4% of Sector Value Added. These activities account for 1% of UK GDP (Climate Strategies 2007: Hourcade, Neuhoff, Demailly and Sato, Differentiation and dynamics of EU ETS industrial competitiveness impacts) UK GDP Folie 8
2.1 CO 2 emissionsconcentratedin a fewsectors (German example) Electricity cost increase (blue); cost for buying all allowances (grey) - relative to gross value added. Graichen et al. 2009, in: Grubb, Brewer, Houser & Sato, Climate policy and industrial competitiveness: ten lessons from the EU ETS, German Marshall Fund US, Washington DC, 2009; 20 t/co2 Folie 9
2.1 Carbon pricingin theeu Source: CEPS, 2016 State of the EU ETS Report, based on EEA (2015, Trends and projections in the EU ETS in 2015 p. 30) After 2020: 2.2% cap decline per year Folie 10
2.1 Reform plansforfreeallocationundertheeu ETS European Commission 2015 11 Folie
2 Carbon pricing in China Announcement by China in 2015: a national ETS plannedfrom2017 Targeted industries: 8 sectors and 18 sub-sectors which consume >10,000 of coal equivalent per year. Power sector Petrochemicals (crude oil, ethylene) Chemicals (methanol, ammonia, carbide) Iron and Steel Non-ferrous metals Building production and materials (clinker, glass) Pulp and paper Aviation Market stability reserve and new entrants reserve Hybrid allocation system full auctioning envisaged after 2020 Carbon leakage list is possible Folie 12
2 Carbon pricing around the globe Source: Neuhoff et al. (2014): Staying with the Leaders: Europe s path to a low carbon economy. www.climatestrategies.org DIW Berlin Calculations based on Ecofys, 2013; Sopher, P., Mansell, A., 2013; OECD, 2013; Jotzo, F. et al., 2013; Rudolph, S., Kawatsu, T., 2012; Ptak, M., 2010. Folie
3 Competitiveness implications Levelling of the playing field Drivers of EII competitiveness China as a game changer? Competitiveness from an environmental point of view: carbon leakage effects Folie 14
3 Concepts Competitiveness: of firms and of countries Carbon Leakage: emissions (re)location Carbon Footprint: emissions associated with the chain of production, consumption and final disposal of goods Carbon Flows/Embedded Carbon: CO2 content of traded goods Carbon leakage channels: Global energy markets Industrial competitiveness: operational and investment decisions Technological spill-overs Folie 15
3 Carbon leakage energy markets Energy market effects under the Kyoto Protocol, CGE modelling. Estimated leakage rates range from -14% to 130%. However, central estimates rather range from approximately 5% to 25%. The extreme cases with negative leakage rates or rates above 100% are due to particular assumptions. In general, CGE modellers stick to basic assumptions of perfect competition with constant returns to scale as well as an exogenous representation of technological change via autonomous energy efficiency improvement (AEEI) parameters. Folie 16
3 Carbon leakage CGE modelresultsforthekyoto world 140% 120% 100% 80% n.a. GTAP-E n.a. GTAP-EG WorldScan GTAP-EG GTAP-E MS-MRT WorldScan GTAP-E WorldScan WorldScan GREEN MS-MRT WorldScan WorldScan MIT-EPPA WorldScan Light WorldScan GREEN MIT-EPPA Light Light MIT-EPPA MIT-EPPA 60% 40% Leakage rate* 20% 0% G-Cubed MIT-EPPA GTAP-EG GTAP-EG GEM-E3 GTAP-E GREEN GEM-E3 GTAP-E GTAP-E GTAP-EG GREEN Light -20% CGE-Models with different specifications 17 Folie *share of emission reduction in Annex-I-countries that is not a global reduction, but due to an increase of emissions in Non-Annex-I countries
3 Carbon leakage in the energy-intensive industries Dirty dozen prone to leakage if there is a competitive international market situation cost pass-through differs across sectors In Europe a few key sectors deserve (and get) special treatment. 8% of manufacturing industries spend more than 6% of their revenue on energy. For some of their energy intensive processes, energy price differentials to the rest of the world can matter. (Germany: for 92% of manufacturing, energy bills are on average less than 1.6% of revenue) However, energy price differences with competitors due to differences in natural resource endowment can only be compensated for through additional efforts on energy efficiency and innovation. Folie 18
4 Energy policy and energy market trends Questions in context with INDCs and with the global climate policy agenda: What drives energy policy? Global energy markets (e.g. shale gas, coal price, oil price) Security of supply and geo-politics Economic cycles/employment Environmental policy targets What drives the markets? Demand side trends Investment options Innovation Deployment and economies of scale Carbon pricing energy subsidies regulation in the power sector Folie 19
4 Subsidies for fossil fuels without externalities(g20) IMF Pre-Tax Subsidies in USD bn. (nom. 2015) Russia 0,00 42,8 Saudi Arabia 37,2 United States 13,3 India 11,3 Indonesia 9,6 Argentina 8,8 EU 28 8,6 Germany 3,3 South Africa 2,5 Brazil 1,7 Canada 1,4 Australia 0,8 United Kingdom 0,5 Turkey 0,2 France 0,1 Japan 0,1 Korea 0,0 Mexico 0,0 Italy 0,0 China 0,0 Petroleum Coal Natural gas Electricity Source: IMF 2015 Folie 20
4 Subsidies for fossil fuels external effects(g20) IMF: Post-Tax Subsidies in USD bn (nom. 2015) Pre-tax subsidies Global warming Local air pollution Congestion Accidents Road damage Foregone consumption tax revenue China United States 699,2 Russia 335,4 EU 28 329,8 India 277,3 Japan 157,1 Saudi Arabia 106,6 Korea 73,0 Indonesia 69,2 Germany 55,6 Brazil 55,4 South Africa 46,4 Canada 46,0 United Kingdom 41,2 Turkey 38,9 Mexico 30,9 France 30,1 Australia 30,1 Argentina 17,5 Italy 13,7 Source: IMF 2015 2.271,9 Folie 21
4 Subsidies for fossil fuels with external effects(g20) IMF Post-Tax Subsidies in USD bn. (nom. 2015) China United States 699,2 Russia 335,4 EU 28 329,8 India 277,3 Japan 157,1 Saudi Arabia 106,6 Korea 73,0 Indonesia 69,2 Germany 55,6 Brazil 55,4 South Africa 46,4 Canada 46,0 United Kingdom 41,2 Turkey 38,9 Mexico 30,9 France 30,1 Australia 30,1 Argentina 17,5 Italy 13,7 Petroleum Coal Natural Gas Electricity Source: IMF 2015 2.271,9 Folie 22
4Energytrendsin theindcs Special WEO by the IEA looks into 2030, considering the INDCs (end of 2015) what would the energy sector look like if all INDCs were implemented? Key messages No climate solution without changes in the energy system INDCs majority is about well-known agendas: efficiency improvements. Only a few countries list: phase-out of inefficient coal-fired power plants, lowering methane emissions from oil and gas production, fossilfuel subsidy reform or carbon pricing Rarely mentioned: energy sector technology or policy options that are required for a long term transformation: nuclear power, CCS, alternative vehicle fuels Overall energy-related GHG emission growth will slow. Electricity demand will rise by 40 per cent. Non-fossil fuels share will rise to 25% (compared to 20% 2015) Decoupling: OECD electricity demand to rise by 10 per cent, CO2 emissions to drop by one third Folie 23
5 Paris Agreement energy emission reductions What will drive(global) emission reductions and decarbonisation of the energy sector under the Paris Agreement? National interest and co-benefits from INDCs implementation: security of supply; cost savings / competitiveness/ comparative advantage Review under PA more transparency/knowledge/policy competition Deployment of technologies (via means of implementation, via markets) Investments: global context of slow growth, low interest rates, and ROI Folie 24
Thank you for your attention Susanne.Droege@swp-berlin.org Droege, S., Geden, O. (2016): After the Paris Agreement New Challenges for EU s Leadership in Climate Policy, Comments 2016/C 19, April 2016 Droege, S. (2016): The Paris Agreement 2015. Turning Point for the International Climate Regime, Research Paper 2016/RP 04 http://www.swpberlin.org/fileadmin/contents/products/research_papers/2016rp04_dge.pdf Folie 25