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
 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
Sommaire
1
Climate policies
1
International regimes
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
Combating climate change does not mean 0
growth
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
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

correcting market failures, providing the right signals for investment
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
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
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
Kyoto protocol
1
(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
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)
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
Technology
€
Pays A
Pays B
Credits CO2
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
1
CDM impact on global emissions
(1/2)
North south transfer

In theory a good mechanism
Émissions
UE
Émissions
UE
Chine
Chine
without CDM
With CDM
total emissions unchanged
… if additionality is respected
1
CDM
(2/2)
risk

If credits are not based on real additional reductions= problem
Émissions
UE
Émissions
UE
China
Without CDM
total emissions increase
China
With CDM
Kyoto Protocol
1
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
Kyoto protocol Impact
1
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
post-2012
1
Common and differenciated responsibility

North responsable

( CO2 Emissions 2= industrialization of northern countries )
CO2= Énergy= growth= development

No long term solutions without
developing countries involvement
Nord
South No limit on emissions
(= no limit to development)
 Résolution 98 of american Senate
(1997) no ratification without
serious comitment of developing
countries»
Need of transferof technology and funding

Who is right ?
Emissions in Tg CO2eq.
3
x 10
7
2.5
Fossil CO2
2
1.5
1
0.5
0
1900
3
Emissions in Tg CO2eq.
Annex I
x 10
1910
1920
1930
1940
7
1950
Year
1960
1970
1980
1990
2000
1960
1970
1980
1990
2000
Non-Annex I
2.5
2
Fossil CO2
1.5
1
0.5
0
1900
1910
1920
1930
1940
1950
Year
2010
2020
2030
2040
IPCC SRES A1B scenario
Post Kyoto
1
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
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
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
Sommaire
Climate policies
H. Kieken – Nov. 2006
2
European policies
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)
Tradable emissions permits(1/4)
2



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)
3
Emission trading
(2/4)
Example
1400 ktCO2
1250 ktCO2
1000 ktCO2
Cost of
emissions
reduction
10 €/t
25 €/t
ALLOCATION
Savings
3000 k€
Allowance
600 ktCO2
Emissions
Allowance
Emissions
Allowance
Emissions
850 ktCO2
Emissions
Sold at
20€/t
Allowance
1000 ktCO2
750 k€
PRACTICE
 Emission trading allows to invest on the less expensive emission
reduction
 Total emission volume remains unchanged
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 :
Periode/ objective Validation a posteriori
Allocation
Reduction
Emissions
Trading of
permits
Control
Control of
permits
CO2 balance
2
Emission Trading permits
(4/4)
Conclusion

permits = control on volume.


no individual objective of reduction


but coverage of emissions by permits, independent of initial level of
emissions!
permits don’t substitute to investment but


industrial total emissions = permits allocated ab initio.
Give price signal to évaluate oportunity of investment.
Trading facilitate reductions


Investments where less costly.
global cost of limitation is reduced.
2

In European sheme, 3 types of credits :



« Kyoto like credits» : CDM / JI
domestic projects credits.
CDM & JI :





Emissions credits in EU-ETS
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
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
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
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…)
size
%
Allowance
%
sites
[Mt
allowance
CO2/an]
< 100kt
77.7
120
5.5
0.1-10 Mt
21.8
960
43.2
> 10 Mt
0.5
1,140
51.3
Total
2,220
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
2
Balance for 2005
Prices, volumes § trading flowss
Sources: Point Carbon, European Climate Exchange, PowerNext &CDC
EUA volume: Total Market Volume
(May 2005 - October 2005)
Total 2005:
362 Mt CO2
7,218 M€
ECX
34%
Volume EUA
(8 mois)
Nordpool
10%
OTC
54%
EXAA
0%
OTC
ECX
Nordpool
Powernext
Powernext
1%
EEX
1%
EEX
EXAA
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)
2 Bilan de l’année 2005
Rise in électricity prices
Significant rise in
electricity price
(x 2) in markets
carbon cost explain part of the rise
 And
 Cold winter
 Low hydro power
 Rise in gas prices
Sources: PowerNext & CDC
2 How to undersatnd prices,
Coal/ gas
Sources: PowerNext & CDC
Fuel Switch
Charbon
Gaz
Other costs of
production
Charbon
Value of
permits CO2
Gaz
Electricity
market price
Price differential between gaz/coal creates strong
demand for CO2
 practically real cost of carbon value is weak faible ( free allowances)
 Rent for power sector (windfall profit)
 Impact on consumers in and out ET
2
Price formation
 Electricicty producer arbitrate daily
 Ex. ENEL (Italy) : nets buys 8 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
2
Efficiency of the market?
Environnemental efficiency
 Industry : does not trust markets incentives

 Myopia linked : short term + price uncertainty + futures evolutions of EUETS
 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
Source: E.ON
Economic efficiency
 Contradiction between messages from industriescompeting in world
market (« too high ») and power sector (« too low»)
 Contradiction between CO2 market & power market liberalization
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 ?
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)
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
Sommaire
1
Climate policies
H. Kieken – Nov. 2006
3
National responses
Sectoral responsibilities
3
World china
Emissions de GES mondiales (1990)
Emissions mondiales de CO2 (de combustion)
Répartition sectorielle en 2000
13%
20%
La production d’énergie a été imputée aux différents secteurs
4%
31%
24%
33%
20%
14%
41%
Batiments
Industrie
Tous GES, France
Transports
Agriculture
Production d'électricité
Batiments
Industrie
Transports
Agriculture
CO2 uniquement (70% des GES français)
14
%
30
20
10
0
-10
-20
-30
-40
Émissions individuelles
Émissions collectives
(France, 1990-2001)
Source : MIES
ta
l
To
Dé
ch
et
s
re
ltu
Ag
ric
u
En
er
gi
e
st
rie
In
du
Bâ
tim
en
ts
+
+
22
%
sectoral emissions in France
Tr
an
sp
or
ts
3
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%
3
Stimulate technology innovation
Learning process
Cost of emission
reduction lower
discovery of low cost
reductions

positive effects of
anticpated constraint
Result in innovation

Expectation
Projection - existing
technology
1998 Cost Curve
n
tio
va h
no tc
In stre

Cost curves : Looking ahead
Capex

2001 Cost Curve
New build standards,
sequestration, innovative
technology + market
mechanisms are needed
GHG reduction (tonnes of CO2 equivalent)
Most of these
reductions probably at
negative costs
3
Perspectives de long terme
Changer l’économie, changer la société…
« We need urgent global action to tackle climate
change. We are showing leadership by putting the
UK on a path to a 60% reduction in its carbon
dioxide emissions by 2050 »
Tony Blair,
Our energy future –
Creating a low carbon economy, 2003
=
2 à 3% / reduction per year of Green house gases from now
change energy model
Objectif Europe : maximum rise = 2°C
 stabilisation of émissions =450-550ppm
 “Factor 3” ou “Factor 4” on emissions
 Pour respecter la Convention Cadre des Nations
Unies sur le changement Climatique (ratifiée par USA)
 Fondé sur la capacité d’absorption du CO2 par
l’écosystème (env. 0,5 tC / hab / an)
3
Scenario optimist
 En 2100, CO2 concentration double from pre-industrial level
 Nedd reduction by a Factor 4 of french emissions

 more extreme events
 ski stations loose on
month of snow (or more)
en 2050
Source : Ministère de l’Équipement
2003 summer very hot) :
 become frequent en 2050
 Normal in 2070
 very cold in 2100 !
Merci de votre attention
hubert.kieken@iddri.org