Exploring the Potential for International Mitigation Clubs for the Road from Paris - An initial exploration - Preliminary results Steven Rose and Richard Richels 15th IEA-IETA-EPRI Annual Workshop on Greenhouse Gas Emission Trading, Paris, France September 29, 2015
Motivation The Challenge Shifting global emissions trends to stabilize/reverse temperature growth (e.g., to avoid 2 C or? of warming) Aggressive climate targets likely expensive. Policy design important! INDC country pledges are just the beginning How will/can INDCs be implemented? INDCs take us to 2030 where do we go from there, and how? Important issues The opportunities for international cooperation? The implications of long-term policy for near-term decisions and opportunities? Building blocks to a more comprehensive international system? Aggressive action requires looking beyond sectors, borders, and 2030. 2
Sample of INDC statements regarding international market mechanisms USA: At this time, the United States does not intend to utilize international market mechanisms to implement its 2025 target. EU: No contribution from international credits. Russia: The INDC indicator is to be achieved with no use of international market mechanisms. Switzerland: Carbon credits from international mechanisms will partly be used. Mexico: In order to achieve rapid and cost efficient mitigation, robust global market based mechanism will be essential. Mexico s unconditional INDC commitment will be met regardless of such mechanisms, although these would assist cost-effective implementation. Achieving our conditional goal will require fully functional bilateral, regional and international market mechanisms. Norway: [Supports] inclusion of market based mechanisms in the 2015 agreement, and the opportunity to continue using units accruing from the CDM and JI. 3
Scope of Present Analysis Exploring opportunities for and implications of international cooperation between US, EU, and China in the form of tri-lateral trade in emission permits Emissions pathways under unilateral & tri-lateral action Emissions permit market volumes, prices, financial flows Regional power sector, energy system & economic implications 4
Scenario Design Exploring two key dimensions: Regional mitigation action: unilateral, bilateral or multi-lateral Post-2030 additional policy ambition: none to more Near-term policy Post-2030 policy Regional coordination INDC Pledge No additional ambition Unilateral to multi-lateral More aggressive Unilateral to multi-lateral Using MERGE a global intertemporal optimization integrated assessment model (economy, energy, & climate systems) 5
US, EU, & China Unilateral Action GHG Emissions preliminary billion tco 2 eq 30 25 20 15 10 5 US EU China 30 25 Opportunities 20 for US-EU- China permit trade? Baseline billion tco 2 eq No additional ambition 15 10 5 billion tco 2 eq 30 25 20 15 10 5 Long-run ambition affects China s peaking More aggressive (50%) No add l ambition Delayed add l ambition More aggressive (25%) 0 Scenarios More aggressive 0 2010 2030 2050 2070 2010 2030 2050 2070 0 2010 2030 2050 2070 Long-run Policy (2030-) Scenario Near-term Policy US and EU China I Pledges to 2025/2030 No additional ambition No additional ambition II Pledges to 2025/2030 More aggressive No additional ambition III Pledges to 2025/2030 More aggressive Delayed additional ambition IV Pledges to 2025/2030 More aggressive More aggressive - 2050 25% below 2030 cap V Pledges to 2025/2030 More aggressive More aggressive - 2050 50% below 2030 cap 6
US-EU-China Permit Trade Financial Flows preliminary $ billions per year $800 $600 $400 $200 $- $(200) $(400) $(600) China EU US Sales Purchases $(800) US, EU & CHN no add'l amb agg - CHN no add'l amb agg - CHN delayed add'l amb agg - CHN more agg (25%) agg - CHN more agg (50%) 7
US-EU-China Permit Trade Prices preliminary billion tco 2 eq per year 8 6 4 2 0-2 -4-6 Permit exports Permit imports China permits EU permits US permits Permit price $300 $250 $200 $150 $100 $50 $ / tco 2 eq -8 $- US/EU, CHN no add'l amb US/EU more agg - CHN no add'l amb US/EU more agg - CHN del add'l amb US/EU more agg - CHN more agg (25%) US/EU more agg - CHN more agg (50%) 8
US-EU-China Discounted Value Of Permit Trade preliminary $3 $ trillions (NPV) $2 $1 $0 -$1 China EU US Sales Purchases -$2 -$3 US, EU & CHN no add'l amb agg - CHN no add'l amb agg - CHN delayed add'l amb agg - CHN more agg (25%) agg - CHN more agg (50%) 9
US-EU-China Permit Trade Energy System Costs preliminary Changes in NPV energy system expenditures due to US-EU-China permit trading (relative to unilateral action) $800 $600 Increasing low carbon investments for revenues from permit sales $ billions (NPV) $400 $200 $0 -$200 Purchasing permits & reducing energy system costs EU US -$400 agg - CHN no add'l amb agg - CHN more agg 50% 10
US-EU-China Permit Trade Value (Consumption Gains) preliminary $400 Changes in NPV aggregate economic consumption due to US-EU- China permit trading (relative to unilateral action) $ billions (NPV) $350 $300 $250 $200 $150 $100 EU US Increases in consumption levels due to permit trade $50 $0 agg - CHN no add'l amb agg - CHN more agg (50%) 11
Initial Observations & Insights There is the potential for mutually beneficial small clubs The size of the permit market and whether a country is a seller or buyer will depend upon a variety of factors Coalition composition, individual emission reduction goals, relative marginal costs Permit trade could lead to substantial financial transfers & have trade balance implications Expanding the number of trading partners will likely increase the trade benefits for the whole coalition, but may change the distribution Long-term policies shape near-term actions, especially peaking & permit trade However, peaking emissions pathways create a challenge for emissions trading Interesting additional lines of inquiry International club composition, permit trade & technology, permit banking Could international emissions trading be a means of engaging countries, increasing global effort, increasing receptiveness to pledge verification? 12
Thank You! Steven Rose srose@epri.com 13