M.Sc. in Engineering Policy and Management of Technology

1. M.Sc. in Engineering Policy and Management of Technology Energy Policy Mechanisms Energy and Environment Prof. Manuel Heitor mheitor@ist.utl.pt Maria João Rodrigues mjrodrigues@dem.ist.utl.pt

2. CLASS OUTLINE PART I 9h00-11h00 Paper Presentation @ Break: 11h00-11h30 PART II 09h00-11h00 Energy Policy objectives and strategies design Kyoto Protocol @

3. THE POLICY MAKING PROCESS Objectives Instruments Evaluation

4. GENERAL ENERGY POLICY OBJECTIVES @ Security of Supply and Diversification of Sources Minimizar os riscos e impactos na economia e sociedade resultantes de uma disrupção de abastecimento @ Competitive Energy Systems Assegurar baixos custos de energia para produtores e consumidores por forma a contribuir para a competitividade industrial e outros objectivos sociais mais latos @ Environmental Protection Minimizar o impacto ambiental associado quer à produção quer ao consumo de energia por forma a manter os equilíbrios ecológico e geofísico da natureza

5. GOVERNMENT INTERVENTION An energy subsidy is defined as any government action that concerns primarily the energy sector that lowers the cost of energy production, raises the price received by energy producers or lowers the pricepaid by energy consumers Some energy subsidies have a direct effect on price, like grants and tax exemptions, while others act indirectly, such as regulations that skew the market in favour of a particular fuel or government-sponsored technology research and development How governments choose to go about subsidizing energy depends on a number of factors. These include the overall cost of the programme, the transaction and administration costs, and the impact — financial and otherwise — on different social groups Source: UNEP/IEA, 2002

6. GOVERNMENT INTERVENTION

7. POLICY DESIGN Basic Principles of Energy Support-Programmes Design Well-Targeted Subsidies should go only to those who are meant and deserve to receive them Efficient Subsidies should not undermine incentives for suppliers or consumers to provide or use a service efficiently Soundly-based Subsidy programmes should be justified by a thorough analysis of the associated costs and benefits Source: UNEP/IEA, 2002

8. POLICY DESIGN Basic Principles of Energy Support-Programmes Design Practical The overall amount of the subsidy should be affordable and the administration of the subsidy programme should be at a reasonable cost Transparent Information on the amount of government money spent on the subsidy and on subsidy recipients should be disclosed Limited in Time Sunset clauses should be included in the design of subsidy programmes to avoid consumers and producers becoming overly dependent on this support and costs spiralling out of control Source: UNEP/IEA, 2002

9. POLICY DESIGN Efficiency (static and dynamic) and Efectiveness Static Efficiency – Ability to ensure minimal production cost and price Dynamic Efficiency – Ability to foster innovation, thus driving down prices Effectiveness – Ability to fulfill the goal Stability of the regulatory framework Does the scheme provide a stable financial framework to investors? Do doubts about scheme legality undermine any identified benefits? Compliance with EU internal market and state-aid rules Does the scheme allow for EU internal market trade? Does the scheme allow for competition? Political and administrative consequences of the scheme

10. RATIONALE FOR GOVERNMENT INTERVENTION environment Without proactive government policies and measures, the energy sector in most countries will continue to develop in ways that are incompatible with sustainable development, both in environmental and social terms Energy sustainability will not happen naturally. Governments, individually and collectively, will need to make it happen through appropriate policies and measures, including a range of regulatory and market-based interventions The right approach for each country must take account of local market conditions, the structure of the energy sector, patterns of energy use, institutional characteristics and changing circumstances Getting market signals right so that prices better reflect the true costs of producing and consuming energy, taking account of the environmental and social consequences, should be a key guiding principle in all cases Source: UNEP/IEA, 2002

11. Source: UNFCC

12. Source: UNFCC

13. KYOTO PROTOCOL Countries Annex I Parties – Industrialised countries commited to take the lead in reducing GHG Annex II Parties – Members of OECD as of 1992 (EU, Canada, USA, Japan, Australia, New Zealand and Turkey) EIT Parties – Industrialised countries with economies in transition (former Soviet Union countries, Central abd Eastern Europe) Non- Annex I Parties – Developing countries Annex B Parties – Countries with legally binding obligation to limit their 2008-2012 emissions to 1990 levels (countries from annex I)

14. KYOTO PROTOCOL 55 parties must ratify; Annex I countries accounting for 55% emissions in 1990 Source: IEA, 2001

15. Joint Implementation (JI) Project-based mechanism within Annex I countries Clean Development Mechanism (CDM) Project-based mechanism reducing non-Annex I countries emissions, which are credited to Annex I Emission Trading Permits-based mechanism within Annex B countries KYOTO PROTOCOL Source: IEA, 2001

16. FLEXIBLE MECHANISMS MCA A A* C C* Q Emissions reduction KYOTO PROTOCOL Emission Trading MCA Q* (P*) - Emission permit (Price) JI and CDM Q – Q* = Permits bought A P Net avoided cost P* Emissions reduction Q* Q MCA Q’* (P’*) - Emission permit (Price) A Net benefit Q’* – Q’ = Permits sold P’* P’ Emissions reduction Q’ Q’*

17. EMISSION TRADING KYOTO PROTOCOL

18. EMISSION TRADING KYOTO PROTOCOL Projected savings for Annex B countries: 89% compared with a no-trade scenario Projected savings for North America: 63% compared with a no-trade scenario Projected savings for Pacific Region: 55% compared with a no-trade scenario Projected savings for Europe: 29% compared with a no-trade scenario Source: IEA, 2001

19. EMISSION TRADING KYOTO PROTOCOL Power generation industry Major uncertainty: to determine marginal cost of abatement Electricity and primary fuel prices Meeting electricity demand in liberalised market Policies in support of renewable energy Source: IEA, 2001

20. EU GHG EMISSIONS TRADING DIRECTIVE Establishes a common scheme for GHG emission allowance trading within the EU Two periods of implementation: 2005-2008 and 2008-2012 2005-2008: only CO2 and some sectors of activity 2008-2012: revisions may be considered Permits are allocated by sector and for the implementing period Governments are obliged to develop a National Allocation Plan for each period There is the obligation to surrender allowances equal to the total emissions each year For the 1st (2nd) period MS are obliged to allocate at least 95% (90%) of the allowances free of charge Penalties are set at 40 €/tCO2 from 2005-2008 and 100 €/tCO2eq from 2008-2012 Installations are still obliged to surrender an amount of allowances equal to excess emissions in the following calendar year Source: EU, 2003

21. REFERENCES & FURTHER READING • UNEP and IEA (2002), Reforming Energy Subsidies • http://www.iea.org/envissu/johannesburg/reforming.pdf • OECD/IEA (2001), International Emission Trading – From concept to reality • http://library.iea.org/dbtw-wpd/bookshop/add.aspx?id=12 • Official Journal of the European Union L275/32, 25.10.2003, Directive 2003/87/EC of the European Parliement and of the Council of 13 October 2003 • Establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC • ECN/ UAM/CMUR/RISØ/ZEW (2000), InTraCert Project – The Role of an Integrated Green Certificate System in a Liberalising Market, Contract no. NNE5/1999/428, European Commission 1999, Inception Report, Report No. EC-C--00-085, ECN • http://www.ecn.nl/library/reports/2000e/c00085.html • ECN/Oeko-Institut/SPRU (1999), The Implications of Tradable Green Certificates for the Deployment of Renewable Energy Technologies, Altener Contract No. XVII/4.1030/Z/98-037, European Commission 1998, Mid-Term Report, Report No. ECN-C--99-072, ECN • http://www.ecn.nl/library/reports/1999e/c99072.html • Hoogland, F.C.J, Metzelaar, W.F., Schaeffer, G.J., Boots, M.G., Martens, J.W., Voogt, .H. (1999), Green Certificates: Empowering the Market?!, 2nd World Sustainable Energy Fair, • Amsterdam, The Netherlands • http://www.ecn.nl/library/reports/1999e/i99001.html

22. REFERENCES & FURTHER READING • Hoogland, F.C.J, Metzelaar, W.F., Schaeffer, G.J., Boots, M.G., Martens, J.W., Voogt, .H. (1999), Tradable Green Certificates – A new Market-based Incentive Scheme: Introduction and Analysis, Report No. ECN-I--99-004, ECN (NL) • http://www.ecn.nl/library/reports/1999e/i99004.html • Wiser, R.H., Fowlie, M. (2001), Public Goods and Private Interests: Understanding Non-residential Demand for Green Power, Report No. LBNL-47300, Lawrence Berkeley National Laboratory (USA) • http://eetd.lbl.gov/ea/ems/ems_pubs.html#RES • Wiser, R.H. (1999), The Role of Public Policy in Emerging Green Power Markets – An analysis of Marketer Preferences, Report No. LBNL-44178, Lawrence Berkeley National Laboratory (USA) • http://eetd.lbl.gov/ea/ems/ems_pubs.html#RES • Meyer, N., European schemes for promoting renewables in liberalised markets, Energy Policy 31 (2003) 665-676 • http://www.sciencedirect.com/ • Reiche, D., Bechberger, M., Policy differences in the promotion of renewable energies in the EU member states, Energy Policy 32 (2004) 843-849 • http://www.sciencedirect.com/