Transcript PowerPoint-presentation
Global climate policy
Lennart Hjalmarsson
Distributional dimensions important • • • •
Who are going to pay?
We or our children? (Discount rate) Rich - or poor countries?
High-emitting or low-emitting countries?
Vulnerable or less vulnerable countries?
Important reports • •
UN:s Climate report 2007: IPCC Scientific analysis Almost unanimous
• •
The Stern report 2006: The Economics of Climate Change Economic analysis Very controversial
Key parameter: Discount rate
Max ∫U[C(t)]e δt dt Ramsey equation: r = δ + ηg Discount rate = pure time preference rate + value of increased consumption x increase in consumption Very controversial issue. Big debate today.
Discount rate
δ and η capture preferences g captures technology δ discounts utility r discounts consumption r derived from all three parameters both taste and technology η curvature of the utility function
Discount rate • •
η elasticity of the marginal utility relative risk aversion measure of aversion to interpersonal inequality and measure of personal risk aversion
Discount rate
The big issue: How much should we save (sacrifice) today for future generations?
T = 200 years Close long-term link between r and s, discount rate and savings rate: g = sr balanced optimal growth rate with constant savings rate and permanent income rW s = (r δ)/ηr
Discount rate
Standard assumptions: δ + ηg = 2 + 2x2 = 6 s = (r δ)/ηr = 4/12 = 1/3 = 0,33 Savings rate = 33%
Discount rate
Stern’s assumption: δ = 0,1 η = 1 g = 1,2 r = 1,3 But then s = (r δ)/ηr = 1,2/1,3 = 0,92 92% savings rate!!
Important debate • • •
Journal of Economic Literature 2008: Weitzman Nordhaus DasGupta Excellent discussion about discounting
Conclusions about discount rate
Weitzman: Uncertainty about g (thick tail) may lead to a lower discount rate: r ≈ 3% Nordhaus: Do not adjust the discount rate! Limit climate change directly by taxes or caps (and trade)
Policies and measures • • • • •
Carbon taxes Cap and trade (Kyoto) (Green certificates) Standards, regulations and energy conservation Technology agreements
Important aspects • • • • •
Economic efficiency:Same marginal abatement cost everywhere Distribution – burden sharing Monitoring Enforcement Incentives for R&D : Endogeneous technical progress
Carbon taxes • • • •
Most efficient instrument when stock pollutant No distribution (but redistribution) of assets across countries Difficult to monitor real impact of taxes Requires strong international institutions
Carbon taxes, cont.
• • •
Energy prices extremely high in most poor countries even at subsidised world market prices Energy taxes regressive Politically impossible in many countries
EU experience • • •
Extremely difficult to harmonise taxes: Sweden and UK totally against Very low minimum taxes: 0.05 Eurocents/kWh for coal and gas Exemptions even from these taxes (LTA)
Cap and trade • • • • •
Efficient solution to threshold problem Difficult to negotiate worldwide allocation Very large asset values : EU 2 billion ton at 20 Euro/ton yields an asset value of 40 billion Euro per year Easy to monitor permit trade in case of CO2 only Can rely on national legal systems in ”decent” countries
EU-Kyoto experience • • •
Grandfathering may be necessary although auctions preferable Grandfathering creates incentives for ”industrial policy” Regional solution – industry relocation to ”pollution havens”??
EU-Kyoto experience, cont • • • •
Limited efforts: Kyoto 5% reduction, 20% of the world, ETS 8% ≈ BAU No incentives to comply – and some countries will not comply Success stories not due to Kyoto (UK, Germany) Difficult to predict CO2-prices
Standards
Might be good in some cases.
• • •
Ex: Catalytic converters: Economies of scale and learning – low cost production Product market international Consumer network externalities But: Strong incentives for pressure groups
Energy conservation
Subsidies cost inefficient: Large variation in marginal abatement costs
• • •
Ambiguous impact on energy demand: Selection effect Rebound effect Vintage effect
Typical industrial structure 2020-04-26
Average practice vs best practice over time
Technology agreements • • • • •
R&D: Extend the nose vs cutting off the tail Rich countries only Difficult to coordinate even within countries Industrial policy – R&D races...
Picking winners difficult
Technology agreements, cont
Productivity in knowledge production Experience from 1973/74-
US synfuel program inefficient
Swedish government-funded R&D inefficient (De stora programmens tid.)
Only success story: Not governement-funded heat pumps
Cap and trade vs carbon taxes
In principle the same outcome
Paradox:
Why so difficult to agree on low level minimum taxes?
Why so easy to agree on EU-ETS with huge potential impact on electricity and fuel prices?
Smart or stupid politicians?
The text book model
Efficiency ≠ equity Allocation of permits of no importance.
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Hidden assumption: Allocation (grandfathering) forever
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or Auctioning In EU-ETS allocation for a short period: updating problem
Asset allocation in EU • •
EU 2008-12: At least 90% grandfathering – in practice >95%.
Old plants: Historical emissions New plants: Benchmark emissions Permit allocation = industrial policy National allocation plans
EU-ETS: Heavy industry and energy
Industry: Very high price sensitivity, competes in the world market. ( η≈8) Energy: Very low price sensitivity ( η≈0.1– 0.3) and substantial restrictions on technology choice esp. hydro and nuclear.
ETS Efficiency: Incumbent plants
No emissions – no permits Industry: Annual free permit allocation eliminates the increase in marginal production cost for industry: No incentives to reduce production or close down Energy: Small incentives to reduce production or close down Putty-clay technology.
EU-ETS: What will happen?
Extremely low flexibility Where will adjustment take place?
What will happen to CO 2 prices?
CO 2 -price explosion? Not yet but..?
Electricity-price explosion?
Electricity-price induced adjustment outside the trading sector.
Very difficult to predict!
ETS Efficiency: New plants
No emissions – no permits Coal and gas plants: permits Hydro, nuclear and wind: no permits Investment subsidy to emitting plants
Weak investment incentives • • • • •
Volatile CO 2 prices Time horizon 2012 Annual free-permit allocation Less CO 2 - emissions – less free-permit allocation Huge intra-industry profits in electricity and very concentrated el. markets
ETS Equity • • • •
Political aspects: Most capital owners in the trading system more than compensated No capital owners outside the trading system compensated and esp. not in the electricity intensive industry High electricity prices Huge intra-industry profits in electricity
What will happen?
Decrease in profitability esp in electricity-intensive plants Relocation Political pressure for:
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Exemptions of some industries (e.g. Steel) Regulation of the electricity market
Global impact of EU climate policy
Impact through global markets: price changes through decrease in demand for fossil fuels What about supply of fossil fuels?
Oil and gas ≈ no impact Coal: less supply
Electricity: The key sector • • • •
25 % of global CO2-emissions Interfuel substitution coal/gas Increased thermal efficiency CHP: Combined heat and power
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CO2-free technologies
CO2-free electricity technologies • •
Hydro:
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Controversial To a large extent already exploited except for Himalaya Wind:
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Surface intensive NIB large scale (millions) location problem Expensive Stochastic supply
CO2-free electricity technologies •
Geothermal
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Location specific Limited cheap Abundant very expensive
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Solar and wave
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Still very expensive Location specific Surface intensive
CO2-free electricity technologies •
Wood
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CHP otherwise expensive Limited resources – deforestation Competition from forest industry Competition from biomass fuels in the future
CO2-free electricity technologies •
Nuclear
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Cheapest large scale technology Not surface intensive – few locations Very compact waste – small deposit problems
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Requires strong regulators Proliferation problem (Iran, North Korea)
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Some countries political comparative advantages (France, Finland, UK, ....)
Comparative generating cost in EU - 10% discount rate
Gas CCGT Coal - pulverised
2005 $c/kWh Projected 2030 with € 20-30/t CO2 cost
3.4-4.5 4.0-5.5
3.0-4.0 4.5-6.0
Coal - fluidised bed 3.5-4.5 5.0-6.5
Coal IGCC
Nuclear
4.0-5.0 5.5-7.0
4.0-5.5 4.0-5.5
Wind onshore Wind offshore 3.5-11.0 2.8-8.0
6.0-15.0 4.0-12.0
European Commission, January 2007
Future solution
Most attractive GHG-free solution: Nuclear and hydrogen: Electricity and fuel cells
Nuclear and hydrogen • • • •
Problems: Nuclear regulation in weak states Fuel reprocessing Nuclear proliferation R&D:
• •
Fuel cells Hydrogen storage
Nuclear and hydrogen • • • • •
Attractive properties: No GHG emissions Large scale Low cost – global feasibility Not surface intensive Not location specific
Nuclear and hydrogen • • • • • •
Political aspects: Little reallocation of assets Little industrial restructuring Still cheap electricity Foreign technology Foreign control and ownership Capital intensive investments
Major political obstacle to climate policy
Nobody should get hurt: Very expensive policy (subsidies, regulations) with a lot of variation in marginal abatement costs.
Low productivity in climate policy
Low productivity example
Potential Swedish railroad investments: 5 Billion Euro – 1 Mton CO 2 4% - 60 years – 0.064 in annuity: 320 MEuro per year i.e. 320 Euro/ton CO 2 in abatement costs (10 times too expensive)