A sectoral approach balancingglobal efficiency and equity

June 2010

Guy MeunierJean-Pierre PonssardEcole Polytechnique

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Département d’Économie

The empirical context

• Copenhague showed the limitations of an approach based on uniform carbon price worldwide

• Developping countries intensity targets• Unilateral policies such as EU-ETS deliver little

in terms of effectiveness – In principle, leakage– In practice, special treatments for sensitive

sectors2

Agenda

• A conceptual framework to structure a proposal: the Chilchilnisky controversy

• Literature on sectoral approaches

• The proposal

• Next steps

BLS applied touniform versus differentiated carbon prices

Chichilnisky, G. and G. Heal (1994), Who should abate carbon emissions?: An international viewpoint." Economics Letters, 443-449.

Sheeran, K.A. (2006), Who should abate carbon emissions? A note." Environmental and Resource Economics, 35, 89-98.

Tirole, J. (2009), Politique climatique : une nouvelle architecture internationale. CAE.

Godard, O. (2009), Quelle architecture internationale pour la politique climatique ? Ecole Polytechnique, Paris.

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MAC and WMUC

MAC if WMUC

EU

China

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2

Preliminaries

MAC if WMUC

WMUC

MAC

Preliminaries

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Preliminaries

• Figure 4

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A

B’

B

BAU

Unique CO2 price with transfer

Differentiated CO2 prices

Sectoral approach

C

Literature on sectoral approachesCenter for Clean Air Policy (2010), Global Sectoral Study: Final Report. World Business Council for Sustainable Development (2009), A sectoral

approach: Cement Sustainability Initiative.International Energy Agency (2009), How the energy sector can deliver on a

climate agreement in Copenhagen. Special delivery excerpt of the World Energy Outlook 2009 for the Bangkok UNFCCC meeting." OECD/IEA, Paris, octobre.

Baron, R., B. Buchner, and J. Ellis (2009), Sectoral Approaches and the Carbon Market." IEA/OECD paper for the Annex I Expert Group on the UNFCCC, OECD/IEA, Paris.

Hamdi-Cherif, M., C. Guivarch, and P. Quirion (2009), Sectoral targets for developing countries: Combining Common but differentiated responsibilities with Meaningful participation". Working Paper CIRED.

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The proposal

• For industrialized countries: cap and trade at all times without free allocations

• For emerging countries: intensity commitments to allow economic growth

• Carbon intensive sectors subject to international trade: firms abide to the local rules in the countries they sell

• Financial transfers from industrialized countries to developing countries in proportion to revenues collected to the permits

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The simulation Model• The framework

– Two regions : EU and China– Three sectors: Electricity, Cement and Steel– Static for the horizon 2015-2020

• Three scenarios to be compared to BAU– Sectoral Approach

• For EU: Cap and trade without free allocations, 30% transfer of revenues to China for NAMAs (electricity)

• For China: NAMAs (electricity) and integration of Cement and Steel in the EU-ETS for exports, OBA for domestic production

– Global Cap (first best) – EU-only

• For EU: Cap and trade with free allocations for Cement and Steel (OBA)• For China: BAU

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The model: multi-sector staticlinear demand, linear MAC

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Source: interviews from industry experts

Parameters of the Cournot models2015-2020

unit EU China unit EU China unit EU Chinamarket size Twh 3 600 6 600 Mt 250 1 200 Mt 200 400 market structure # players 40 40 # players 8 12 # players 10 10 elasticity 0,4 0,2 0,3 0,3 0,6 0,6 unit cost €/Mwh 60 40 €/t 45 35 €/t 300 300 @ 0€/t tCO2/Mwh 0,4 0,8 tCO2/tcement 0,7 0,7 tCO2/tsteel 1,3 1,3 @ 30€/t tCO2/Mwh 0,3 0,5 tCO2/tcement 0,6 0,6 tCO2/tsteel 1,0 1,0 + unit cost €/Mwh 0,5 4,5 €/t 1,5 1,5 €/t 4,5 4,5 + % total cost % 18% 46% % 43% 56% % 12% 12%transport cost €/unit 100 100 €/t 100 35 €/t 31 31 import BAU % % 14% % 25%price BAU €/Mwh 64 46 €/t 73 48 €/t 346 360

Electricity cement steel

Abatement costs

c (u) = c° + (u – u°)2

c° , , u° industry and country dependent

Comparison of scenarios

• Sectoral approach– Set a carbon price for EU

Emissions in elec in EUEmissions in steel and cement for consumption in EUTotal emissions in EU 20%

- Revenues in EU transfers in elec in China- Total emissions worldwide

- Global cap with identical total emissions

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CO2 Impact of the scenarios

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CO2price Cap

CO2 impact scenario €/t Total

EU Global cap 22€ 22 12%

China 22 30%

All 26%

EU Sectoral approach 38 20%

China 27%

All 26%

Equity issues for consumers

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elec cement steel

Consumption scenario price increase %

quantity decrease

%

price increase

%

quantity decrease

%

price increase

%

quantity decrease

%

EU Global cap 22€ 12% 5% 19% 5% 7% 4%

China 31% 6% 28% 8% 7% 4%

EU Sectoral approach

20% 8% 32% 9% 12% 7%

China 0% 0% 5% 1% 2% 1%

Welfare comparisons

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EU China AllBAU 407 100 1 049 955 1 457 055 Global Cap 403 078 1 024 711 1 427 789 Sect Ap 382 541 1 043 511 1 426 052

EU China AllBAU 100 100 100Global Cap 99,0 97,6 98,0Sect Ap 94,0 99,4 97,9

Utility

UtilityWelfare analysis %

Welfare analysis M€

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Financial flows Global Cap

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Financial flows MM€Elec cement Steel total

EU China EU China EU China EU Chinaconsumers

budget change (price*quantity) - 15,3 - 68,0 - 2,4 - 10,0 - 2,0 - 3,4 - 19,6 - 81,4

firms

variation sales 15,3 68,0 2,6 9,8 2,3 3,2 20,1 81,0

cost w/o CO2 9,4 1,1 0,1 3,2 0,9 5,1 10,4 9,4

CO2 cost dom - 26,1 - 73,6 - 2,9 - 15,2 - 3,6 - 9,1 - 32,6 - 97,9

CO2 cost export - - - - 0,4 - - 1,1 - - 1,5

free allocation - - - - - - - -

financial transfers - - - - - - - -

profit change - 1,3 - 4,5 - 0,3 - 2,6 - 0,4 - 2,0 - 2,0 - 9,1

state

revenues from permits 26,1 73,6 2,9 15,5 3,6 10,3 32,6 99,4

free allocation - - - -

financial transfers - - - - -

internal tax abatement 32,6 99,4

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Financial flows Sectoral Approach

Financial flows MM€Elec cement Steel total

EU China EU China EU China EU Chinaconsumers

budget change (price*quantity) - 24,2 - - 3,7 - 1,8 - 3,1 - 1,0 - 30,9 - 2,8

firms

variation sales 24,2 - 4,2 1,4 3,6 0,5 31,9 1,8

cost w/o CO2 14,8 - 15,3 - 0,1 - 1,4 1,0 0,4 15,7 - 16,3

CO2 cost dom - 41,2 - - 4,6 - 25,8 - 5,2 - 13,9 - 50,9 - 39,7

CO2 cost export - - - - 0,5 - - 1,5 - - 2,0

free allocation - - - 25,8 - 13,9 - 39,7

financial transfers - 15,3 - - - - - 15,3

profit change - 2,2 - - 0,5 - 0,5 - 0,6 - 0,7 - 3,3 - 1,2

state

revenues from permits 41,2 4,6 26,3 5,2 15,4 50,9 41,7

free allocation - - 25,8 - 13,9 - 39,7

financial transfers 15,3 - - - 15,3 -

internal tax abatement 35,7 2,0

Scenario Global cap w/o tranfers

Differentiated CO2 prices

Sectoral Approach

Equity - - ++ +

Cost efficiency ++ - - +

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Welfare comparisons

Comparing sectoral approach with EU-only and BTA

• EU-only– EU-target at 20%– Free allocations (« capacity based » as output

based) for sensitive sectors– Border tax adjustment

• Leakage• Imports• Revenues for permits

Competitiveness issues

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% abattement / BAU

impact CO2

scenario Total ciment acier ciment acier ciment acier

UE EU-only 20% 0,3% 0,5% -10% -14% 18% 30%

Chine BAU 0% NB NB NB NB NB NB

Total 4%

UE 20% 8,8% 6,6% -82% -81% 10% 23%

Chine 27% NB NB NB NB NB NB

Total 26%

Approche MultiSect

% baisse profit en UE

% baisse production en UE

% imports en UE

CO2

Double dividend

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Double Dividende

scenario Total elec ciment acier

UE EU-only 40 40 0 0

Chine BAU 0 NB 0 0

UE 51 41 4,6 5,2

Chine 1,0 2,0

MM € Revenues des permits UE

Approche MultiSect

Next Steps

• A proposal which takes the constraints seriously– growth in emerging countries– competitiveness in industrialized countries

• A proposal which identifies– the limited loss of efficiency relative to a first best option– The substantial gains in terms of equity– The elimination of the competitiveness issue– the double dividend associated with the elimination of the leakage issue

• Who should make the next steps for implementation?

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A sectoral approach balancingglobal efficiency and equity

Thank you

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