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Global governance of climate change

Global governance of climate change. 1. international climate regime. 2. European policies. 3. French experience. Where we should go. Stabilisation below 450 ppm means that global emissions have to peak by 2010 an then to decline by an average of 6 %- 10% per year

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Global governance of climate change

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  1. Global governance of climate change

  2. 1 international climate regime 2 European policies 3 French experience

  3. Where we should go

  4. Stabilisation below 450 ppm means that global emissions have to peak by 2010 an then to decline by an average of 6 %- 10% per year • Stabilisation at 550ppm means that global emissions have to peak in 2020 and then decline by 1-2,5 % • TEN YEARS DELAY IN ACTION DOUBLE THE NECESSARY DECLINE RATE AFTER

  5. Sommaire 1 Climate policies 1 International regimes

  6. 1 Prevent climate change Today choices determine climate impacts for tomorrow • Possibilities of action … But the system is path dependent, huge inertia SCENARIOS without reduction of emissions

  7. Combating climate change does not mean 0 growth

  8. The economics of climate change: • What is the economics and how does it • depend on the science? Analytic foundations • Climate change is an externality with a difference: • • Global • • Long-term • • Uncertain • • Potentially large and irreversible

  9. Economics of climate change • Correcting market failures, providing the right signals for investment • Price signals should be established, different ways: • green house taxes, cap and trade systems, implict prices through regulation • Economics of risk points to long terms goals and stabilisation of concentrations (Stern report) • Economics of costs point to short term flexibility over sector or country and time • Credibility, flexibility, predictability of price signals are key to influence private investment in the long term correcting market failures, providing the right signals for investment

  10. The Politics of climate change • Historical responsibility of developed countrsies • Concerns about equity and development from developing countries • Uncertainty makes difficult to build international institutionnal arrangements and cooperation • Sovereignty of nation States as an obstacle to international regime to tackle climate change • Top down regimes difficult to implement • Understanding of potential damages from CC both in developed and developing countries as a key political element Countries

  11. 1 International negotiations (1/2) • UNFCCC = United Nations Framework Convention on Climate change • Signed in Rio (1992), ratified by 188 countries (inc. US), entry into force 21/03/94 • Insufficient to reach the goal : stabilise « Green house gas concentrations in the admospher at a level that prevent a dangerous perturbation of climate system »   • Protocole de Kyoto • Adopted in Kyoto 11/12 1997. Ratified by 168 countries (no US and Australia) • Entry into force 16/02/ 2005, 90 days after ratification by Russia • COP7 (nov. 2001) adopted «  Marrakech agreement » to operationalize kyoto protocol : • Compliance comittee • financial mechanisms of Protocol and Convention • Governing rules of flexibility mechanisms • COP 11 et 12 finalized

  12. 1 Kyoto protocol (1/2) Main features • Regulation based on nations. Quantitative emissions objective : • Developed countries only (« Annex I ») • 6 green house gas , ie carbon dioxyde (CO2) methane (CH4) • CO2 = combustibles fossil fuels (oil, gas, coal…) • CH4 = agriculture, husbandry & waste • comitments= volumes of emissions for 2008-2012 period : • average : - 5%; Europe : -8%; USA : -7%; Japon : -6% (versus 90) • Europe committed in solidarity in «European bubble  » flexibility mechanisms to facilitate national policies implementation : • Emissions trading  : • Joint implementation • Clean development mechanism • Companies may buy « credits » linked to CDM § JI projects

  13. 1 ratification of the Kyoto protocol L’enjeu Russe • Entry into force depended of russian decision (17,4% world emissions) • Get benefits from « carbone finance » • Market equilibrium modified by american withdrawal • Global deal with Europe (trade benefits)

  14. Technology € Pays A Pays B Credits CO2 1 Kyoto Protocol (2/2) New financial mechanisms • Joint Implementation (JI) • Article 6 Kyoto Protocol • 2 l’Annexe I countries ( EU-Russia) • Clean Development Mechanism (CDM) • Article 12 Kyoto protocol • Between ’Annexe I countries and Annexe II (EU-China) Two innovative financial mechanisms /complementary objective : technology transfer

  15. 1 Emissions credits • Emissions trading • Credits needs a buyer and a given volume of emissions • « projects » or « investment » logic: • Projects which reduce emissions not included in emission trading shemes (between annex I) • CDM or JI in Kyoto Protocol • Principles : • Verification and certification of emissions reductions by a third party • Emissions credits created to match industrial emissions • Growth of emissions • Compensated – in theory – by emissions reductions ouside the market (CDM) • Certification of emissions reduction is the weak point of the system

  16. Émissions UE Chine With CDM 1 CDM impact on global emissions (1/2) North south transfer • In theory a good mechanism Émissions UE Chine without CDM total emissions unchanged … if additionality is respected

  17. Émissions Émissions UE UE China China Without CDM With CDM 1 CDM (2/2) risk • If credits are not based on real additional reductions= problem total emissions increase

  18. 1 Kyoto Protocol National policies • National objectives or comitments : national strategies • France : objective (0%/1990) on a domestic base • Netherlands : 50% external projects • Strategies : • Must cover all sectors industry, transport, building, agriculture… • Need a mix of instruments: taxes, subsidies, voluntary agreements, emission trading… • Emission trading for industry : • Not included in Kyoto Protocol (only countries). • Within national or european policies

  19. 1 Kyoto protocol Impact Carbone markets • Supply and demand of quotas are stable: • demand from Parties about 800 M tCO2 for 2008-2012 • Quotas exceeding : 6 000 M tCO2 • All Parties can respect Kyoto if they pay for emissions reductions not fulfilled within territory • Willingness to pay ?(cf. Canada) ? • What use for financial transfer ? • CDM is a successs (10Mds de $ to 2012), but mechanisms has flaws Projects • industrials gases = 2/3 of credits • Projects concentrated in China, India, Brazil , South Korea • No projects in infrastructures key drivers of energy demand • Few projects energy efiiciency

  20. 1 post-2012 Common and differenciated responsibility • No long term solutions without developing countries involvement • Résolution 98 of american Senate (1997) no ratification without serious comitment of developing countries» • North responsable ( CO2 Emissions 2= industrialization of northern countries ) • CO2= Énergy= growth= development • No limit on emissions (= no limit to development) • Need of transferof technology and funding Nord South Who is right ?

  21. 1 Post Kyoto actions post-2012 • Two processes in UNFCCC • dialogue on actions in the framework of UNFCC • ad hoc group on reinforcement of protocol comitments Bonn et Nairobi progress: • South Africa proposal • Brazil and deforestation • No concrete step • positive signs • Changes in some countries : • Chinese plans • Nex dynamic in US • Some partial initiatives ( G8 / G20) • Europe is more credible but may be isolated, and must change it’s strategy of negociation

  22. International regimes perspectives for Post Kyoto The issue is to foster a new industrial technological revolution, a shift in the development paradigm • That implies a multiple tracks of progress • Investment • Technological development • Market signals • Long term planning in infrastructure

  23. A fragmented process • Links between trade and climate : competitiveness and carbon constraint • Club models and fragmented negociation • One fits for all solution impsssible • A coordination based on domestic policies and private decision making • New deal between developed economies with emerging and poor • countries

  24. Sommaire Climate policies 2 European policies H. Kieken – Nov. 2006

  25. 2 European emission trading (EU.ETS) • industrial installations & only CO2 • ~11,500 installations (électricity / sectors énergy intensive). • ~50% European CO2 • 2 periods : 2005-07 (“pilot”) and 2008-12 (“Kyoto”) • industrial transfer « compensated » by country transfer • Allocation plan of permits (NAP) decided at national level • Units allocated EUA : EU allowances • Recommandations of EU Commission validate NAP ( harmonization) • Negotiations for NAP 2. Less Allocations ? • Open to“credits” issued by projects (JI) or CDM • Penalty : 40€/tCO2 (2005-07) et 100€/tCO2 (08-12)

  26. 2 Tradable emissions permits(1/4) • TEP are emissions quotas : one permit of 1 t = right to emit 1 ton of CO2 • Right to emit given by an administrative authority • Part of quotas maybe traded • Trade reallocate but total volume stay constant permit price give the economic signal to industrial investment ( cleaner)

  27. 3 Emission trading(2/4) Example 1400 ktCO2 1250 ktCO2 1000 ktCO2 1000 ktCO2 Sold at 20€/t 850 ktCO2 600 ktCO2 Allowance Emissions Allowance Emissions Allowance Emissions Emissions Allowance Cost of emissions reduction Savings 10 €/t 25 €/t 3000 k€ 750 k€ ALLOCATION PRACTICE • Emission trading allows to invest on the less expensive emission reduction • Total emission volume remains unchanged

  28. Periode/ objective Validation a posteriori Reduction Emissions Control Allocation CO2 balance Trading of permits Control of permits 2 Tradable emissions permits(3/4) Monitoring & compliance • Market rely on control a posteriori of permit coverage of emissions : • surplus of permit can be used after (« banking ») • If emissions are superior to allowances or permits owned, company is sanctionned (financial & environnemental) • process :

  29. 2 Emission Trading permits(4/4) Conclusion • permits = control on volume. • industrial total emissions = permits allocated ab initio. • no individual objective of reduction • but coverage of emissions by permits, independent of initial level of emissions! • permits don’t substitute to investment but • Give price signal to évaluate oportunity of investment. • Trading facilitate reductions • Investments where less costly. • global cost of limitation is reduced.

  30. 2 Emissions credits in EU-ETS • In European sheme, 3 types of credits : • «  Kyoto like  credits» : CDM / JI • domestic projects credits. • CDM & JI : • International (ITL) registration • Perspectives post-2012 ? • « Europe +10 » : articulation ETS / JI • « forests»credits • Domestic projects : • Incentives for local actors • Risks in coherence of policies (ex biofuels) or aothers policies on climate

  31. 2 Allowances (1/2) 3 types of allowances : • Based on historical emissions(« grandfathering ») • Based on best technologies available or intersectoral comparisons (« benchmark ») • Auctionning of emissions rights Main concerns for permits allocation : • Not create rent for historical high emitters • Take in account early actions (reward front runners) • No entry barrier for new incomers • No adverse incentives • Produce pertinent signals for long term decisions

  32. 2 allocations (2/2) Conclusion • No perfect allocation !!! • Different equity criteria give different allocations : • Equity in costs for companies • Equity in objectives same reductions • Reference to a common standard … • initial allocation = « share of the pie» : • « inequity » (within the same industrial sector or between sectors) • rents § finanacial transfers which can be environmentally justified • In Europe, validation of allocation of permits rules by EU Commission for NAP2

  33. 2 European Market allowances • Allowance 1st period (2005-07) • Real allowance = 2,2 Gt CO2/an → total value ~ 50 à 150Mds€ • Allowance 2nde period (2008-12) • En cours. 10% auctionning. Need for ’harmonization of the rules for auctionning Distribution of allowances influence dynamic of the market (actors, price…)

  34. 2 Theoretical impact of european directive Impact power sector • Price CO2 : 14€/tCO2e • Price electricity : 25€/MWh Coal plant • Emissions : 1 tCO2e/MWh • Valorisation of CO2 : 50% of selling price of electricty Gas plant • Emissions : 0,36 tCO2e/MWh • Valorisation of CO2 : 20% of electricity selling price significant impact on power sector incentive in favour of energy efficiency

  35. 2 Balance for 2005 Prices, volumes § trading flowss Sources: Point Carbon, European Climate Exchange, PowerNext &CDC Volume EUA (8 mois) Total 2005: 362 Mt CO2 7,218 M€

  36. 2 Balance for 2005 1st emissions • 25/04-Netherlands : 80.4 MtCO2 (NAP=86.5 Mt, = -7%) • 25/04-Tcheck republic : 83 MtCO2 (NAP=97.1Mt, = -15%) • 26/04-France : 150.8 MtCO2 (NAP=156Mt, = -11.6%) • 26/04-Wallonie : 22 MtCO2 (NAP=25.9Mt, = -15%) • Warnings on permits deficit by traders wrong • Fall in CO2 price • Impact NAP 2 Negotiations (national § Europe)

  37. 2 Bilan de l’année 2005 Rise in électricity prices carbon cost explain part of the rise • And • Cold winter • Low hydro power • Rise in gas prices Significant rise in electricity price (x 2) in markets Sources: PowerNext & CDC

  38. 2 How to undersatnd prices, Coal/ gas Sources: PowerNext & CDC • practically real cost of carbon value is weak faible ( free allowances) • Rent for power sector (windfall profit) • Impact on consumers in and out ET Electricity market price Value of permits CO2 Other costs of production Price differential between gaz/coal creates strong demand for CO2

  39. 2 Price formation • Electricicty producer arbitrate daily • Ex. ENEL (Italy) : nets buys8 Mt CO2 en 2005 – “cost”(?)= 182 M€ • Some sectors don’t use the market : • Technical vision " : allowance is the real emission objective • marginal Cost of CO2 taken in account only if emissions overshoot initial allowance • Or : transactions cost high / uncertainty price / image • situation that fit for some actors? perspective of négociations for NAP 2 maybe incentive to delay some investements • Situation which lower permit supply, and makes prices rise

  40. 2 Efficiency of the market? Environnemental efficiency • Industry : does not trust markets incentives • Myopia linked : short term + price uncertainty + futures evolutions of EU-ETS • Marginal cost of CO2 superior to transport costs from existing facilities ( cement from Tunisia or China) • Électricity : a major concern • Price signals unsufficient to rellocate or modify investments in this sector=> majority of investmenst must be renewed within 2015-2025 Economic efficiency • Contradiction between messages from industriescompeting in world market (« too high ») and power sector (« too low») • Contradiction between CO2 market & power market liberalization Source: E.ON

  41. 2 Evolution of EU-ETS international convergence • Solution (necessary ?) for industries competing in world markets • If all competitors must be concerned compétiteurs sont concernés : • All must integrate carbon costs (+/- similar) • Possibility to value this carbon cost in world prices: passing cost to consumers • Processes : • Mega- sectoral CDM→ does not resolve competitiveness issues • Convergence of regional markets → some difficulties • Sectoral agreements post-2012 → actual propositions post-2012 intègrent partiellement les problèmes de compétitivité • Future optimism ?

  42. International perspective • Kyoto logic • Agreement on quantified targets for nations states • Markets mechanisms for efficient implementation • Actual impasses • integration of emerging countries • US vs EU confrontation : illogic but understandable • A possible breakthrough • US & China : internal implementation needs international coordination • a very different Post Kyoto : hybrid, more inclusive but less coverage and fragmented • No exclusive options but combination : technological innovation te coordination framework/ international regulation • carbon value = managed scarcity • market failures needs accompanying measures ( technological pull/push capital markets failures for innovation)

  43. Europe the laboratory for climate policies • EU-ETS carbon market first step • Implementation problems and efficiency of the signals? Long term objectives ? • Acceptable climate change = +2°C (~550ppm) • Europe 3 ou 4 / emerging countries : stabilisation / less developed X 2 • New EU commission package on tracks but tensions with competitiveness issues • « Facteur 4 » scenarios : what have we learnt? • Technically feasible • No technological miracle : even optimist scenario requires structural changes • and early signals but non short term only policies

  44. Sommaire 1 Climate policies 3 National responses H. Kieken – Nov. 2006

  45. 3 Sectoral responsibilities World china La production d’énergie a été imputée aux différents secteurs CO2 uniquement (70% des GES français) Tous GES, France

  46. 3 sectoral emissions in France Émissions individuelles Émissions collectives (France, 1990-2001) Source : MIES

  47. 3 A priority : energy efficiency « Mesure sans regrets » Emissions Reductions « no regret » • UK – Nov. 2003 - Campagne « Energy = LifeBlood of your business » • Waste of energy in SME = 1 Mds £ / an • Johnson & Johnson : US EPA « Climate Leader » • Objective: -14 % CO2 en 10 ans • ways : projects NRJ avec TRI > 20%

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