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Economics of The European 2020 Climate GoalsTorben K. Mideksa Center for International Climate and Environmental Research - Oslo

April 18, 2009The 18th Ph.D. Student Workshop on International Climate Policy Columbia UniversityNew York

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Motivation“Europe showed itself ready to give global leadership: to tackle climate change, to face up to the challenge of secure, sustainable and competitive energy, and to make the European economy a model for sustainable development in the 21st century.”

Targets for 2020• A reduction of at least 20% in greenhouse gases (GHG) by 2020• A 20% share of renewable energies in EU energy consumption by 2020• Saving 20% of energy consumption by 2020 through energy efficiencyBeyond 2020 : “Galvanizing the potential for deeper cuts in emissions … to meet the target of halving global emissions by 2050” through• Stimulating technological development • Promoting a comprehensive international agreement

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Two Big Questions• How are we going meet the targets for the 2020?• How would meeting these targets pave the way to the ultimate destination of a carbon neutral society?

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Q1. How are we going to meet the targets for 2020?Specifically:A. What is the regional and sectoral distribution of abatement if emissions are reduced cost effectively? B. What derives major abatement? Is it due toi. fuel switching? ii. efficiency improvements? or iii. structural adjustments? C. What is the cost of meeting these targets?

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Method• We used a Recursively Dynamic Global General Equilibrium Model[GRACE]

– With GTAP v6 database (12 regions + 19 sectors)• 10 European Regions, Developed, and Developing Regions.• Disaggregated European Electricity Supply sector, using bottom-up information, into1. Coal2. Natural Gas3. Oil4. Nuclear 5. Hydro and6. Other Renewable• Sectoral capital mobility

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Climate Policy Scenarios• Common assumptions

– Economic Growth 2% in EU and developed regions– 4% in the rest of the world– Maximum Capacity expansion for hydro in each country --10%(2010) and 20%(2020)– Maximum Capacity expansion for nuke in each country -- 10%(2010) and 20%(2020) but constant in the case of Germany.– Capacity limit for others is 200%.

• SCENARIO-1: Business As Usual [BAU]• SCENARIO-2:A Cost effective 20% Abatement [Ideal]• SCENARIO-3: SCENARIO-2 plus 20% share of renewable target• SCENARIO-4: Scenario –3 Realistic

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II. RESULTS BAU

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Regional Distribution of AbatementRegions BAU EM. 20% ideal 20% ideal & 20% Renewable 20% RealisticNordics 5 % 3 % 3 % 4 %

UK & Ireland 17 % 16 % 16 % 16 %

France & Switzerland 13 % 10 % 10 % 11 %

Germany & Austria 21 % 21 % 21 % 21 %

BeNeLux 8 % 8 % 8 % 8 %

Latvia, Lithuania, Estonia, Poland 7 % 10 % 10 % 9 %

Spain & Portugal 10 % 8 % 9 % 9 %

Italy 10 % 9 % 9 % 9 %

Greece 2 % 3 % 3 % 3 %

Rest of Eastern Europe 8 % 12 % 12 % 11 %

Sectoral Distribution of AbatementSectors Share of BAU

Emissions20% ideal 20% & 20% Ren 20% Close

Transport Services 24 % 11 % 11 % 13 %

Heavy Industry 6 % 8 % 8 % 8 %

Agriculture and Food 4 % 5 % 5 % 5 %

Metals 2 % 3 % 3 % 3 %

Services 5 % 5 % 5 % 6 %

Energy Prod 1 % 0 % 0 % 0 %

Electricity 31 % 53 % 54 % 47 %

Other Industry 3 % 4 % 4 % 4 %

Household 23 % 10 % 10 % 13 %

Total

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What derives major abatement?[1]

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What derives major abatement?[2]

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III. Economic Costs1. Permits trade and inter country resource flow2. “Welfare” cost- price of environmental improvement3. Changes in the price of the product that derives major abatement

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Permit Revenue (2001 $bn)Regions 20% ideal 20% with 20% Renewable 20% RealisticNordics 10 9 12UK & Ireland 35 34 38France & Switzerland 23 22 29Germany & Austria 47 45 45BeNeLux 15 14 18Latvia, Lithuania, Estonia, Poland 20 19 23Spain & Portugal 13 13 20Italy 17 17 22Greece 4 4 5Rest of Eastern Europe 24 23 25

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Permit Trade in 2001 $bn (Net Export)Regions 20% ideal 20% with 20% Renewable 20% RealisticNordics -2.42142 -2.22431 -1.73194UK & Ireland 0.36673 0.17071 -0.71434France & Switzerland -5.46901 -5.25035 -5.95698Germany & Austria 4.58992 4.6056 -4.11032BeNeLux -3.17848 -3.07256 -2.61935Latvia, Lithuania, Estonia, Poland 7.69056 7.20134 10.06682Spain & Portugal -7.768 -7.25738 -2.57286Italy -3.11914 -2.89834 -2.62475Greece -0.85977 -0.85427 -0.2547Rest of Eastern Europe 10.16857 9.57955 10.51821

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3.2 The Cost of Environmental ImprovementRegions 20% ideal 20% with 20% Renewable 20% RealisticNordics -1.80 % -2.09 % -2.47 %UK & Ireland -2.34 % -2.36 % -2.71 %France & Switzerland -1.84 % -1.78 % -2.38 %Germany & Austria -2.53 % -3.03 % -3.38 %BeNeLux -2.44 % -2.52 % -3.01 %Latvia, Lithuania, Estonia, Poland -6.52 % -6.39 % -6.72 %Spain & Portugal -2.56 % -3.19 % -3.71 %Italy -2.25 % -2.60 % -3.23 %Greece -3.86 % -4.25 % -4.40 %Rest of Eastern Europe -6.91 % -6.77 % -7.76 %

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Changes in Electricity Price Relative to the BAURegions 20% ideal 20% with 20% Renewable 20% Realistic

Nordics 18 % 14 % 9 %UK & Ireland 46 % 42 % 30 %France & Switzerland 27 % 24 % 17 %Germany & Austria 50 % 41 % 28 %BeNeLux 36 % 32 % 23 %Latvia, Lithuania, Estonia, Poland 96 % 90 % 65 %Spain & Portugal 31 % 25 % 17 %Italy 33 % 25 % 17 %Greece 83 % 74 % 52 %Rest of Eastern Europe 58 % 54 % 40 %

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Summary so far• If Europe attains its 20% emission reduction goal by 2020 in a cost effective manner, the electricity sectors plays major role in the abatement of emissions. • The abatement in the electricity sector is achieved partly by switching to other fuels, partly by reducing production, and by expanding production in the renewable energy sector.• These changes raise the price of electricity by 25% to 50% in Europe. • Moderate cost solution characterized by

– Substitution within fossil fuels– Substitution to non-revolutionary renewable– Energy efficiency improvements– Reduced output in e-intensive tradable

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Q.2 What are the Implications for Long term Goals? • Why minimum carbon leakage?

– Effective global agreement– Stimulating cleaner energy technology

• Why technological Progress?– Deeper Emission cut– Broader Participation (Especially Developing Countries)

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4.1 Carbon LeakageEU Emission in 2010-2020 in Gt CO2Gross Abatement Carbon Leakage to ROW Net Abatement

20% ideal 2.75 -0.29 2.4620% & 20% Ren. 2.75 -0.28 2.4720% Realistic 2.73 -0.27 2.46

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4.2 Implication for Technological Progress?• Cap and trade supplemented by renewable support (cross subsidies) yields

– Low emission prices– Low electricity prices

• Do we have reasons to believe that we will have better than non-revolutionary renewable and CCS?

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In sum,• If Europe wants to meet the 2020 targets, the electricity sector derives major abatement mainly through fuel switching but also through efficiency improvements, and structural adjustments with modest cost. • Meeting the target costs less than 3% of GDP and raises price of electricity by no more than 50% in most regions. • Thus, due to lower changes in price and significant leakage, the implications for global climate agreement and far reaching technological progress are quite weak.

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Finally, Thank Youtorben.mideksa@cicero.uio.no