Economic policy for low-carbon transition
and the role of carbon leakage
Tsinghua University 4.9.2008
Karsten Neuhoff
Faculty of Economics
Cambridge University
www.electricitypolicy.org.uk/tsec/2
www.climate-strategies.org
www.electricitypolicy.org.uk\tsec\2
Outline
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•
•
•
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The challenge for low-carbon policies
Provide for the needs of different investors
Provide for different technologies
Leakage concerns
European package – a consistent framework?
Karsten Neuhoff
www.electricitypolicy.org.uk\tsec\2
The challenge for emission reductions
5
Gt CO2
in EU-27
4
3
2
1
0
2007
2012
2020
2050
Karsten Neuhoff
Upward bias of ex-ante estimates (bottom up)
ex ante
ex post
5000
Costs (£M)
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6000
Cost estimates of UK Policies during 1990-2001
4000
3000
2000
1000
0
Lead Free Euro I petrol 2000 fuel
Petrol
Cars*
standards
2005 fuel in Flue Gas De- Low NOX
2000/1 Sulphurisation burners
(FGD)
* Upper estimate >£8000 million.
Source: AEA Technology Environment, 2005, An Evaluation of the Air Quality Strategy,
Report to DEFRA, available at: http://www.defra.gov.uk/
Karsten Neuhoff
www.electricitypolicy.org.uk\tsec\2
Effective climate policy for EU industry
•
•
•
•
•
The challenge for low-carbon policies
Provide for the needs of different investors
Provide for different technologies
Leakage concerns
European package – a consistent framework?
Karsten Neuhoff
Allowance prices – important for project investment
40.00
Phase I Allowances
Phase II Allowances (2011)
Phase II Allowances (2008)
35.00
EUA Price (Euros)
30.00
25.00
20.00
15.00
10.00
5.00
20
07
5/
20
07
01
/0
3/
20
07
01
/0
1/
20
06
01
/0
1/
20
06
01
/1
9/
20
06
01
/0
7/
20
06
01
/0
5/
01
/0
20
06
3/
20
06
01
/0
1/
20
05
01
/0
1/
20
05
01
/1
9/
01
/0
20
05
7/
01
/0
20
05
5/
01
/0
20
05
3/
20
05
01
/0
1/
01
/0
1/
20
04
0.00
01
/1
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EU ETS Price Development
• Risk of very low carbon prices hampers investment
• Use reserve price in government auctions to create price floor
Karsten Neuhoff
European CO2 emissions year
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Future carbon targets – determine strategic
choices
Illustrative
Energy Efficiency
Gas
Renewables
Oil
Conventional coal
today
2020
2050
Karsten Neuhoff
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Create clear emission reduction trajectories
• Define clear (& small) CDM inflow volumes
– CDM for diffusion of technologies / removal of
barriers
• Use auction revenue for international cooperation
• Avoid leakage (emissions moving outside cap)
-> Visibility for investment and corporate strategies
Karsten Neuhoff
www.electricitypolicy.org.uk\tsec\2
Effective climate policy for EU industry
•
•
•
•
•
The challenge for low-carbon policies
Provide for the needs of different investors
Provide for different technologies
Leakage concerns
European package – a consistent framework?
Karsten Neuhoff
www.electricitypolicy.org.uk\tsec\2
Empirical evidence – experience reduces cost
Source IEA
Karsten Neuhoff
Low carbon technology
Cost
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Technology policy complements carbon pricing
Learning
Learning
investment
investment
Carbon
cost
Conventional
technology
Future
Future
savings
savings
Experience (e.g. installed capacity)
Karsten Neuhoff
www.electricitypolicy.org.uk\tsec\2
Effective climate policy for EU industry
•
•
•
•
•
The challenge for low-carbon policies
Provide for the needs of different investors
Provide for different technologies
Leakage concerns
European package – a consistent framework?
Karsten Neuhoff
Lime
Casting of iron
40%
Impact from direct emissions
Preparation of yarn
Copper
Impact from indirect emissions (electricity)
Other textile weaving
Other inorganic
basic chemicals
30%
Household paper
Non-wovens
Industrial gases
Coke oven
Fertilisers & Nitrogen
4%
2%
0%
0.0%
Malt
Starches& starch
products
Flat glass
Veneer sheets
Retreading/
rebuilding tyres
Rubber tyres &
tubes manufact.
Hollow glass
Finishing
of textiles
Refined petroleum
0.2%
Aluminium
10%
Basic iron & steel
20%
Cement
Cost increase relative to value added
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Commodities with significant carbon cost
Pulp &
Paper
0.4%
0.6%
Share of GDP of UK
0.8%
1.0%
Karsten Neuhoff
Conditional
free allocation
State aid
Initial evaluation
•Little substitution to low
carbon products/services
•Distorts investment
•Bureaucratic constraints
for innovation
•Risk of lock-in
Export taxes
Border adjustment
•Has to be aligned with
international climate
engagement
•Requires at least
informal international
cooperation
Cost
Cost
CO costs
2
Price level
Cost
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Three approaches address leakage for exposed
sectors
Government led
sectoral agreement
•Requires strong policies
of developing countries
•Risk of low common
denominator
Karsten Neuhoff
Summary leakage
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• Potential issue only for 1-2% of economic activity
– Materiality to be assessed on sub-sector level
– Relevance only if there will no strong global deal 2009
• Instruments exist to avoid leakage – sub-sector by sub-sector
– State aid, free allocation, border adjustment
– Side effects: lower efficiency / international complications
• In Europe decide on instrument in 2010/2011
– Focus first on international deal
– Cooperate in parallel internationally on instruments to address leakage
– Ensure transparent approach – no special provisions in Directive
• This creates maximum investment security
– Industry & environment interest coincide -> we will avoid leakage
– Investments that would be viable under global deal remain viable
Karsten Neuhoff
www.electricitypolicy.org.uk\tsec\2
Effective climate policy for EU industry
•
•
•
•
•
The challenge for low-carbon policies
Provide for the needs of different investors
Provide for different technologies
Leakage concerns
European package – a consistent framework?
Karsten Neuhoff
5
Gt CO2
in EU-27
Contribution from
energy efficiency
4
Renewable
target
2
1
0
2007
2012
Contribution from
new low carbon
technology portfolio
20% without
internat. action
3
Kyoto target
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How does it all fit together?
2020
2050
Karsten Neuhoff
www.electricitypolicy.org.uk\tsec\2
Effective climate policy for EU industry
Emission trading – share target across sectors
• Short-term – address ‘risk’ from low carbon prices
• Long-term – clear European and National targets
Technology policy
• Support deployment of low carbon technologies
• Ensure a portfolio of renewables is available by 2020
Beyond Europe
• For few sectors, work internationally on leakage policies
• Lead by example in implementation and technology
www.electricitypolicy.org.uk
www.climate-strategies.org
Karsten Neuhoff