Compatibility of EU climate and energy policies: Green, white, and black certificates

1. Mechanisms of EU climate and energy policies: Compatibility of green, white and black certificates byEirik S. Amundsen University of Copenhagen, University of BergenThe Danish Economic Councils Talk prepared for the S.CO.RE. seminar , Loyola de Palacio Chair, RSCAS, European University Institute, San Domenico, April 18, 2015

2. Contents • EU-targets on climate and energy • A critical view • Measures and instruments designed to attain the targets: TGCs, TWCs, TEPs • Compatibility of instruments on the electrcicity market • Comparison of RES measures • Conclusions

3. EU-targets on climate and energy

4. EU climate and energy targets • Targets for 2020 • a 20% cut in greenhouse gas emissions (GHG) compared with 1990 levels • at least a 20% share of renewable energy consumption • at least 20% energy savings compared with the business-as-usual scenario • Targets for 2030 • a 40% cut in GHG emissions compared with 1990 levels • at least a 27% share of renewable energy • at least 27% energy savings compared with the business-as-usual scenario • Target for 2050 • Low carbon society with (a 80% - 95% cut in GHG emissions compared with 1990 levels)

5. Framework for climate and energy policies (2020), (1)

6. Framework for climate and energy policies (2020),(2)

7. A critical view on EU climate and energy targets

8. Economic arguments for regulation • Regulation called for if market failures are present. For example: • External effects (negative and positive) • ”Public goods” (in Samuelson sense) • Natural monopolies • ”Missing markets” (e.g. due to lack of assignment of property rights)

9. Why targets on CO2 emission in EU? • Emission of greenhouse gases gives a negative external effect on a public good (i.e. a stable and predictable climate) • “Climate change is the biggest market failure the world has ever seen.” • Stern Review on the Economics of Climate Change (political • report by Sir Nicholas Stern (and co-authors) to British • government): 2007

10. Why targets on shares of renewables? • Four common arguments • Will reduce CO2-emission, but … • Will increase the degree of security of supply, but… • Will create green jobs, but… • Will give the MSs ”First mover advantage” in production and exports of RES-tecknologies and capital equipment, but …

11. Why targets on energy saving? • Some of the arguments put forward are the same as for the renewable target (e.g. reduction of CO2-emission). • Increasing energy prices will by itself lead to energy saving and to stimulation of research and deployment of new technology (“smart grids” etc.) • Why then specific targets on energy saving? (Is there some kind of information failure?)

12. Measures and instruments designed to attain the targets

13. Some measures and instruments for CO2- emission and energy saving • CO2-emission: • EU ETS (Tradable Emission Permits) • CO2 taxes (in the non-quota sector) • Command and control measures • Energy saving: • White certificates (TWCs) • Energy taxes • Command and control measures

14. Measures and instruments for renewable energy in EU • Coop-Mex (The EU RES-Directive, 2009/28/EC) • Statistical transfers (involve trade between MSs) • Joint projects between MSs (may involve private companies) • Joint support schemes • Feed-in tariffs • Green certificates (TGCs)/ Renewables Obligation Certificates

15. Green certificates (TGCs) • System in operation in many countries (e.g. Sweden, UK, Italy, Belgium) • Sweden and Norway connected with a joint TGC market from January 1., 2012 • System intended to stimulate new RES-capacity based on water, wind, biomass, peat, sun, waves, geothermic power (however, only small water power plants qualify for TGCs) • System is technology neutral (all kinds of green electricity get the same support) • System to be in operation until 2035

16. The basic ideas of a TGC-system • The TGC system is a market based subsidy system for renewables in electricity provision (i.e. “green electricity”) It relieves the government from making direct subsidies as in a feed-in system • Sellers of TGCs are the producers of green electricity • For each MWh they load into the network they get a TGC to be sold on the TGC-market • Buyers are the consumers/retailing companies that are required to hold at least a certain percentage (e.g. 20%) of TGCs corresponding to total consumption/ end-use deliveries • Hence, for each MWh green electricity the producers get the wholesale price plus the certificate price • In general, the system puts a constraint on energy consumption

17. The TWC-system • Many different systems in use (e.g. UK, Italy, USA) with different names ( e.g. USA “Energy Efficiency Portfolio Standards”, Energy Efficiency Certificates) • Typical for such systems is that producers, suppliers or distributors of electricity, gas and oil are required to achieve energy efficiency measures according to pre-defined percentages • The certificates issued for attaining the targets are typically also tradable • Here, we consider a system similar to the TGC system i.e. where the producers/distributors of energy undertake the energy saving and are issued TWCs for sale in the TWC market. Buyers are the suppliers/retailing companies that are required to hold at least a certain percentage of TWCs corresponding to total consumption/ end-use deliveries. Like the TGC system, the TWC system puts a constraint on energy consumption.

18. A simple model (Amundsen og Mortensen, 2001: Amundsen and Bye, 2012) • Symbols og functional forms • y: quantity ”black” electricity • z: quantity ”green” electricity • w: quantity electricity saving • x: total quantity electricity equivalents, x=y+z+w • p(x): demand for electricity equivalents, p(x)’<0 • q: wholesale price • s: price of green certificates • r: price of white certificates • α: percentage requirement for TGCs, • β: percentage requirement for TWCs, • c(y): Black industry cost function, c’(y,τ)>0, c’’(y)≥0 • h(z): Green industry cost function, h’(z)>0,h’’(z)>0 • k(w): Industry cost function for saving, k’(w)>0,k’’(w)>0

19. A simple model (continued) • Assume perfect competition «all over» • Optimization problem for producers: • max Ω=q(y+z+w)+sz+rw-c(y)-h(z)-k(w) • F.O.C. c’(y)=q, h’(z)=q+s, k’(w)=q+r • Optimization problem for retailers: • max Π=(p(x)-q-s(α/(1+β))-r(β/(1+β)x • F.O.C. in equilibrium: p(x)=q+s(α/(1+β))+r(β/(1+β))

20. A simple model (continued) • The equilibrium is characterized by: • p(x)=q+s(α/(1+β))+r(β/(1+β)) • z=α(y+z) • w=β(y+z) • x=y+z+w • c’(y)=q • h’(z)= q+s • k’(w)=q+r • Observe: • a) p(x)=((1-(α/(1+β))-(β/(1+β))c’(y) • +(α/(1+β))h’(z) +(β/(1+β)k’(w) • The end user price is equal to a convex combination of marginal costs • b) TGCs: sz=(α/(1+β))sx: subsidies = taxes • c) TWCs: sz=(β/(1+β))rx: subsidies = taxes

21. A simpel model: Illustration (only TGCs)

22. A simple model: some results

23. A simpel model: Some conclusionsAmundsen and Mortensen (2001), Amundsen, Baldursson and Mortensen (2006), Amundsen and Nese (2009), Amundsen and Bergman (2012) • Some conclusions: • Introduction of a TGC system and a TWC system will: • - achieve the percentage targets (in theory) • - be «financially self-contained in the market» (i.e. no external finance) • - imply a reduced (or constant) wholesale price of electricity • - reduce the generation of black electricity • But: • - an increase of the percentage requirement for TGCs may lead to less green electricity • - an increase of the percentage requirement for TWCs may lead to less energy saving • - an increase of the percentage requirements for TGCs and/or TWCs may lead to a lower end user price of electricity and an increase of electricity consumption • - an increase of the carbon price may lead to less green electricity

24. A simpel model: Someconclusions (cont.) Amundsen og Mortensen (2001), Amundsen, Baldursson og Mortensen (2006), Amundsen og Nese (2009), Amundsen og Bergman (2012) • Some conclusions: • - if there is no market for TGCs, an increase of the percentage requirement for TWCs would lead to • less generation of electricity (both black and green) i.e. there are compatibility problems • - Producers of green electricity may possess strong market power • - TGC- prices may be highly volatile if the system is primarily based on wind power

25. Conclusions on international cooperation on renewables • The cap on EU ETS should be lowered and the system expanded. This would give rise to RES expansion and energy saving • There may be large benefits from separating which country is actually constructing new capacity for renewables and which countries are paying for it. • Such a separation will equilibrate the marginal costs of installing new capacity for renewables, lower the customer prices and give benefits from trade • Therefore, an institutional set up such as the EU-ETS is called for • Hence, one should promote the initiatives of cooperation that is included in the EU RES-directive, 2009/28/EC under Coop-Mex • If a MS has a comparative advantage in constructing new capacities for renewables and a TGC market is established that MS could profit from selling TGCs to other MSs.