Combining climate and energy policies: synergies or antagonisms?
Modelling interactions with energy efficiency instruments
Oskar Lecuyer
19 October 2011
ICP workshop Malta
Context
►GHG emissions reductions remains principal climate and energy objective in the EU agenda
■ EU‐ETS was recently strengthened
■ CO2 price expected to be main driver of decarbonization
►There are binding side objectives
■ Instruments for RE promotion already in place
■ Instruments for EE soon expected
19 October 2011
ICP Workshop Malta
Context
►Emissions, energy production from various sources and energy savings are tightly linked
►Combined instruments can thus lead to unexpected results
■ Synergies ■ Antagonisms ►Can those be caracterized and quantified ?
19 October 2011
ICP Workshop Malta
Context
►Literature analyzes and classifies interactions
■ Most analysis consider only 2 of the 3 objectives of the Climate and Energy Package
■ Most classifications are governance‐oriented
►Need for an economic demonstration of interaction effects in an integrated framework
19 October 2011
ICP Workshop Malta
Outline
1.
2.
3.
4.
European rationales for combining policies Description of the model
Results
Discussion 19 October 2011
ICP Workshop Malta
1
European rationales for
combining policies
►In addition to the european ETS, policy instruments are justified:
■ to improve the design of the ETS ■ to correct market failures of the ETS ■ to meet other objectives besides emission mitigation.
►The EU commonly invokes all three 19 October 2011
ICP Workshop Malta
1
Two different visions
►One objective
■ Additional instruments tackle market failures
►Several objectives
■ Additional instruments have their own purpose
►Efficiency analysis of policy bundle depends
on this vision
19 October 2011
ICP Workshop Malta
2
A minimal common framework
for interactions
►A static model of the energy sector
■ Two energy production sectors: fossil and renewable ■ Energy efficiency investments reducing energy demand
■ Variable demand function
►Featuring instruments from the CEP ■ Price instruments : carbon tax, RE and EE subsidies
■ Quantity instruments: EE quota
19 October 2011
ICP Workshop Malta
2
A minimal common framework
for interactions
►Using the several objective vision, we analyze the efficiency of a complete climate and energy policy
bundle
►We analyze efficiency with respect to emission
reductions, RE production and energy savings
►We examine variations in production, wholesale
price and environmental commodities prices with
respect to variations in policy objectives and instruments
19 October 2011
ICP Workshop Malta
2
Equations
►Profit maximization programs:
max = ( p − φ ) ⋅ f − C f ( f )
f
max = ( p + ρ ) ⋅ r − Cr (r )
r
max = ( p + ε ) ⋅ e − Ce (e)
e
►Demand function:
f + r = D( p) − e
19 October 2011
ICP Workshop Malta
2
Equations
►Derivatives system
dp = (df + dr + de) / D' ( p )
df = (dp − dφ ) / C "f ( f )
dr = (dp + dρ ) / C (r )
"
r
"
e
de = (dp + dε ) / C (e)
►We calculate the partial derivatives of the system variables with respect to policy
instruments
19 October 2011
ICP Workshop Malta
2
Market equilibrium
ېGJ
30
25
20
Net energy supply
Cf '
Cr '
Ce'
Net demand
15
10
5
0
0
20
40
19 October 2011
60
80
100
ICP Workshop Malta
120
EJ
2
ېGJ
Introduction of price
instruments
30
25
Net energy supply
Cf '
Cr '
Ce'
Net demand
BAU
20
15
10
5
0
0
20
40
19 October 2011
60
80
100
ICP Workshop Malta
120
EJ
3
Results: CO2 permit price
►Signs of variation of ETS permits with respect to changes in instrument levels
With two price instruments
With a subsidy and an EE quota
ETS certificate
price
ETS certificate
price
RE subsidy
—
RE subsidy
—
EE subsidy
—
EE quota
—
19 October 2011
ICP Workshop Malta
3
Results 3 price instruments
Results:
►Signs of variation with respect to changes in tax and subsidy levels
Fossil
Renewable
production production
Energy
savings
Wholesale
price
Carbon tax
—
+
+
+
RE subsidy
—
+
—
—
EE subsidy
—
—
+
—
19 October 2011
ICP Workshop Malta
3
Results synergies
Results:
►Signs of variation with respect to changes in tax and subsidy levels
Fossil
Renewable
production production
Energy
savings
Wholesale
price
Carbon tax
—
+
+
+
RE subsidy
—
+
—
—
EE subsidy
—
—
+
—
Synergy
19 October 2011
ICP Workshop Malta
3
Results antagonisms
Results:
►Signs of variation with respect to changes in tax and subsidy levels
Fossil
Renewable
production production
Energy
savings
Wholesale
price
Carbon tax
—
+
+
+
RE subsidy
—
+
—
—
EE subsidy
—
—
+
—
Antagonisms
19 October 2011
ICP Workshop Malta
3
Results addition of an EE quota
Results:
►Signs of variation with respect to changes in tax, RE subsidy and EE quota levels
Fossil
Renewable
production production
Energy
savings
Wholesale
price
White Certificate
price
Carbon tax
—
+
+
+
—
RE subsidy
—
+
—
—
+
EE quota
—
—
+
—
+
19 October 2011
ICP Workshop Malta
3
Results
Results
►Intensity of interactions depend on slopes of supply and demand functions
ηf
∂p
=
∂φ η f + η r + ηe + η D
►Any program affecting those slopes could have an effect on interactions
19 October 2011
ICP Workshop Malta
4
Conclusion
Conclusion
►Regarding the CO2 objective:
■ There is a synergy between all instruments
■ Effects on carbon price are negative ►When several objectives are considered:
■ Major antagonisms arise
■ RE and EE promotion work against each other
■ Effect on price is uncertain
19 October 2011
ICP Workshop Malta
4
Conclusion
Conclusion
►Compatibility of future EE quota with other existing instruments has to be carefully assessed
►Considering current concerns about the European sovereign debt crisis, it might be a solution to ensure at least one objective at long term and to control costs
19 October 2011
ICP Workshop Malta