Beate Friedl Alexandra Kulmer Alexandra Pack

1. Chapter 10: Macroeconomic models of costs Chapter 12: Opportunities and wider benefits from climate policies Beate Friedl Alexandra Kulmer Alexandra Pack

2. Content Macroeconomic models of costs • Costs of emissions-saving measures: results from other models • Key assumptions affecting cost estimates • Understanding the scale of total global costs • Conclusions Opportunities and wider benefits • Opportunities from growing markets • Co-benefits • Coal and CCS • Access to energy and indoor air pollution • Energy subsidies • Conclusion

3. Chapter 10 Macroeconomic models of costs

4. Costs of emissions-saving measures: Results from other models • numerous other economic models attempt to determine equilibrium allocations of energy and non-energy emissions, costs and prices • different results depend on underlying assumptions • see meta-data analysis of Barker et al. (2006)

5. Costs of emissions-saving measures: Results from other models • meta-data analysis conducted by Barker et al. (2006) • reduction in annual CO2 emissions from the baseline and • associated changes in world GDP in 2100. Source: Barker et al. (2006)

6. Costs of emissions-saving measures: Results from other models • Aim of the meta-analysis work… • quantifying the importance of parameters and assumptions common to the various models in generating results • generating an new, overarching model • based on estimates of the impacts of individual model characteristics • able to switch on/or off the factors identified as being significant in cutting costs

7. Costs of emissions-saving measures: Results from other models • Metadata analysis of Barker: • estimated costs in 2030 for stabilization at 450ppm CO2 (~500-550ppm CO2e) all the identified cost-cutting factors are switched off CGE modelling assumptions reduces costs, compared to the use of econometric model results allows for unlimited substitution at high enough carbon prices allow for international trade in emission permits benefits of mitigation in the form of avoided climate change are monetized and discounted reduction of GHG also reduces other emissions Including ITC reduces costs active use of carbon tax or auction revenues to reduce distorting taxes or to provide incentives for low carbon innovation. Source: Barker et al. 2006

8. Key assumptions affecting cost estimates • key factors in determining cost estimates • (1) assumed baseline emissions • (2) technological change • (3) flexibility • (i) flexibility between sectors • (ii) flexibility between technologies • (iii) flexibility between gases • (iv) flexibility between countries • (4) ambition of policy • (5) others

9. Key assumptions affecting cost estimates • (1) assumed baseline emissions • costs of stabilising GHG emissions depend on the amount of additional required mitigation • gap between BAU emissions (without climate change policies) and the emissions goal determine costs • the higher the differences → the higher the costs • criticisms about the IPCC BAU scenario • underestimation of the future role of coal

10. Key assumptions affecting cost estimates • (2) technological change • costs vary between studies, depending on • assumed rate of technological learning • the number of learning technologies included • the time frame considered • examples… • induced technical change and the availability of non-GHG ‘backstop’ technologies reduce costs (by 1 to 2 percent points) • climate policies are necessary to provide the incentive for low-GHG technologies • “Without a ‘loud, legal and long’ carbon price signal the technologies will not emerge.”

11. Key assumptions affecting cost estimates • (3) flexibility: (i) flexibility between sectors • cutting GHG emissions from some sectors will be cheaper rather than from others • e.g. transport sector versus power generation sector • flexibility reduces modelled costs • models restricted to a narrow range of sectors with inelastic demand (e.g. transport) estimate high costs of mitigation

12. Key assumptions affecting cost estimates • (ii) flexibility between technologies • including a set of technologies is cheaper • models concentrating on individual technologies show increasing costs of abatement • (ii) flexibility between gases • including also non-CO2 gases opens additional low-cost abatement opportunities • e.g. model comparison by Energy Modelling Forum: • including non-carbon GHG • achieving the same climate goal at considerably lower costs • costs fall by 30-40% relative to a CO2-only approach

13. Key assumptions affecting cost estimates • (iv) flexibility between countries: some countries have cheaper abatement options than others • natural resource endowments make some forms of emissions abatement cheaper • e.g. sugar production in Brazil (biofuels) • flexibility mechanisms under the Kyoto Protocol • International emissions trading • JI/CDM

14. Key assumptions affecting cost estimates • timing of emission saving (in countries) • emission reductions cheaper in countries that are in the process of making big capital investment • “It is much cheaper to build a new piece of capital equipment using low-emission technology than to retro-fit dirty capital stock” (Stern, Part III, p.246) • China and India are expected to increase their capital infrastructure substantially over coming years

15. Key assumptions affecting cost estimates • (4) the ambition of policy • early policy on mitigation can reduce costs of emission-saving technologies • models including perfect foresight (transparent and predictable policy) show reduced costs because people can plan more efficiently • cost effective planning requires • accurate information • well-functioning capital markets

16. Key assumptions affecting cost estimates • (5) other common features of model projections • increasing marginal costs of mitigation • each additional unit reduction of GHG becomes more expensive as abatement increases • absence of energy models which analyse the costs of stabilisation concentrations below 500ppm CO2e because of high associated costs • e.g. Barker et al. (2006)

17. Key assumptions affecting cost estimates • Barker et al. (2006): • profile of Changes in Gross World Product with ITC • Scenario stabilization at 500ppm CO2(2100) – right hand • Scenario stabilization at 450ppm CO2 (2100) – left hand stabilization at 450ppm CO2 stabilization at 500ppm CO2

18. Understanding the scale of total global total costs If climate change policy instruments are applied efficiently and flexible, the estimated effects of mitigation costs on economic output are small: If mitigation costs 1% of world GDP by 2100, then this is equvalent to a drop of the growth rate of annual GDP from 2.5% to 2.49%. This estimation includes no climate-change demages.

19. Understanding the scale of total global total costs If climate-change demages are taken into account: • The BAU level of world GDP will be lower then estimated. • Mitigation protects growth, while failing to mitigate does not.

20. Conclusion Mitigation costs will depend on • the design and application of policy regimes • the „what, where and when“ flexibility • the timing • incentives for low-GHG technologies With the right policies the effects on economic output can be kept small.

21. Chapter 12 Opportunities and wider benefits from climate change

22. Content Macroeconomic models of costs • Costs of emissions-saving measures: results from other models • Key assumptions affecting cost estimates • Understanding the scale of total global costs • Conclusions Opportunities and wider benefits • Opportunities from growing markets • Co-benefits • Coal and CCS • Access to energy and indoor air pollution • Energy subsidies • Conclusion

23. Opportunities from growing markets Growing markets: • Markets for renewable energy generation • Financial and Investment markets • Carbon trading markets • Markets for financial intermediaries • Insurence sector “Markets for low-carbon energy sources are growing rapidly”.

24. Markets for renewable energy Source: Renewables Global Status Report 2007, p9 Renewable energy supplied 18% of the world’s final energy consumption in 2006.

25. Average annual growth rates for renewable energy capacity 2002-2006. Markets for renewable energy From 2002–2006 global renewable energy capacity grew at average rates of 15–30% annually. Source: Renewables Global Status Report 2007, p 10

26. Markets for renewable energy $ 254.4 $ 77.3 Source: „Clean Energy Trends“, Clean Edge, 2008, p 2

27. Markets for renewable energy “Growth rates in these markets will continue to be strong, creating opportunities for business and for employment.” Main drivers are: • high fossil fuel prices • strong government policies to tackle climate change and policies for renewable energy

28. Markets for renewable energy Policy targets in at least 66 countries worldwide: • renewable energies as shares of electricity production, primary energy and final energy • policies to promote renewable power generation (feed-in policies, …) • biofuels as shares of transport energy • policies for solar hot water

29. Annual investment in new renewable energy capacity, 1995–2007 Financial markets An estimated $71 billion was invested in new renewable power and heating capacity worldwide in 2007. Investment in large hydropower was an additional $15–20 billion. Source:Renewables Global Status Report 2007, p 16

30. Carbon trading markets The carbon market grew in value to an estimated US$30 billion in 2006 three times greater than the previous year. Source: The world bank, 2007, p 3

31. Markets for financial intermediaries • Corporate and project finance • Monitoring, reporting and verification services • Brokers • Carbon asset management and strategy • Registry services • Legal services • Trading services

32. Insurence sector The insurence sector will face • higher risks • broader opportunities • wider range of weather and climate-related products The insurence sector will require • greater access to long-term capital funding • to overlook the pricing

33. Opportunities from growing markets Countries can seek to position their economy • to win strong shares of growing clean energy market • to support the development of particular technologies • to gain scientific or technical expertise “Companies and countries should position themselves now to take advantage of these opportunities”

34. “Climate change policies can be a general spur to greater efficiency, cost reduction and innovation for the private sector”.

35. Co-benefits of climate change • Climate change to ensure efficiency and productivity • Overestimating costs of environmental regulation (CFCs) • Increase in price between $650 and $1.200 – actually $40 - $400 • Co-Benefits • Reducing costs and saving GHG emissions • BP $650 m savings through operational efficiency and improved energy management (10 % reduction in GHG emissions) • Increasing energy security • Policy mix • Coal as an exception • Carbon capture and storage • Air pollution and health • Ending deforestation

36. “Climate change and energy security drivers will often work in the same direction although there are important exceptions”.

37. Co-benefit energy security • Energy security • Geopolitical risks of physical interruption of supply • Problems with domestic infrastructure • Promoting energy efficiency to reach energy security • Attractive option for developing countries with low standards of energy efficiency • Energy mix to ensure energy security

38. Some facts about coal • Coal combustion emits almost twice as much CO2 than combustion of natural gas per unit of energy • Many countries have a lot of coal available and therefore use it to reduce energy import dependency • China is the largest coal producer, consumption of coal might double between 2000 and 2010 • The US, Australia, China and South Africa invest into coal-to-liquid technologies to use it as a transport fuel • Emissions are almost double comparing to crude oil • CCS as a solution?

39. Coal reserves by country (end 2005) Source: WEO, 2006

40. China – total energy production 1971-2005 Source: IEA, Energy Statistics

41. Carbon dioxide capture and storage (1) Source: IPCC Special Report on Carbon dioxide Capture and Storage

42. Carbon dioxide capture and storage (2) • Many ofpossibilites to store CO2 • Requirements: • Economically viable • Technically feasible and safe • Environmentally and socially sustainable Technical potential > actual storage capacity

43. Global cumuluative CO2storage (1) Contribution of CCS: 450 ppmv CO2: 20-95 % 750 ppmv CO2 : 0-68 % B1: best case scenario A2: national enterprise A1Fl: fossil fuel intensive A1T: concentrating on technology A1B: balanced Source: IPCC Special Report on Carbon dioxide Capture and Storage

44. Global cumuluative CO2storage (2) B1: best case scenario A2: national enterprise A1Fl: fossil fuel intensive A1T: concentrating on technology A1B: balanced Source: IPCC Special Report on Carbon dioxide Capture and Storage

45. Global cumuluative CO2storage (3) • Fujii and Yamaji (1998) • Stabilisation level of 550 ppmv, 920 GTCO2 of the emissions reductions could be met by CCS • One third captured in the ocean

46. Access to energy • 1.6 billion people without modern energy services • Problem of an increase in energy emissions • Renewable technologies • Microgeneration, hydropower • Decentral energy production • Replace low-quality biomass • 2.5 billion rely on traditional biomass • Smoke causes deaths esp. women and children • Less time for education • Local deforestation • Affordability • Income distribution more effective

47. Share of traditional biomass in residential consumption by country Source: WEO, 2006

48. Primary energy source for cooking in households in India and Botswana Source: WEO, 2006

49. Deaths by year caused by indoor air pollution *IEA estimate based on WHO figure for all solid fuels Source: WEO, 2006

50. Ending deforestation and enjoying co-benefits • Protect environment/biodiversity • 70 % of earths plants and animals live in tropical forests • Source for pharma industry • Destroying plants = destroying sources of pharmaceutical ingredients • Protection of indigenous people • Around 50 million people are living in tropical forests • Tourism • Extreme weather events • Forests play an important role in watersheds – a loss can result in an increase in flooding