Economics of
The European 2020 Climate Goals
Torben K. Mideksa
Center for International Climate and Environmental Research - Oslo
April 18, 2009
The 18th Ph.D. Student Workshop on International Climate Policy
Columbia University
New York
1
Motivation
“Europe showed itself ready to give global leadership: to tackle climate
change, to face up to the challenge of secure, sustainable and competitive
energy, and to make the European economy a model for sustainable
development in the 21st century.”
Targets for 2020
• A reduction of at least 20% in greenhouse gases (GHG) by 2020
• A 20% share of renewable energies in EU energy consumption by
2020
• Saving 20% of energy consumption by 2020 through energy
efficiency
Beyond 2020 : “Galvanizing the potential for deeper cuts in emissions … to
meet the target of halving global emissions by 2050” through
• Stimulating technological development
• Promoting a comprehensive international agreement
2
Two Big Questions
• How are we going meet the targets for
the 2020?
• How would meeting these targets pave
the way to the ultimate destination of a
carbon neutral society?
3
Q1. How are we going to meet the targets
for 2020?
Specifically:
A. What is the regional and sectoral distribution of abatement if emissions
are reduced cost effectively?
B. What derives major abatement? Is it due to
i.
ii.
iii.
fuel switching?
efficiency improvements? or
structural adjustments?
C. What is the cost of meeting these targets?
4
Method
• We used a Recursively Dynamic Global General
Equilibrium Model[GRACE]
– With GTAP v6 database (12 regions + 19 sectors)
• 10 European Regions, Developed, and Developing Regions.
• Disaggregated European Electricity Supply sector, using
bottom-up information, into
1.
2.
3.
4.
5.
6.
Coal
Natural Gas
Oil
Nuclear
Hydro and
Other Renewable
• Sectoral capital mobility
5
Climate Policy Scenarios
• Common assumptions
– Economic Growth 2% in EU and developed regions
– 4% in the rest of the world
– Maximum Capacity expansion for hydro in each country -10%(2010) and 20%(2020)
– Maximum Capacity expansion for nuke in each country -10%(2010) and 20%(2020) but constant in the case of Germany.
– Capacity limit for others is 200%.
• SCENARIO-1: Business As Usual [BAU]
• SCENARIO-2:A Cost effective
20% Abatement [Ideal]
• SCENARIO-3: SCENARIO-2 plus 20% share of renewable target
• SCENARIO-4:
Scenario –3 Realistic
6
II. RESULTS
BAU
7
Regional Distribution of Abatement
Regions
Nordics
BAU EM.
20% ideal
20% ideal &
20% Renewable
20%
Realistic
5%
3%
3%
4%
UK & Ireland
17 %
16 %
16 %
16 %
France & Switzerland
13 %
10 %
10 %
11 %
Germany & Austria
21 %
21 %
21 %
21 %
BeNeLux
8%
8%
8%
8%
Latvia, Lithuania, Estonia, Poland
7%
10 %
10 %
9%
Spain & Portugal
10 %
8%
9%
9%
Italy
10 %
9%
9%
9%
Greece
2%
3%
3%
3%
Rest of Eastern Europe
8%
12 %
12 %
11 %
8
Sectoral Distribution of Abatement
Sectors
Transport Services
Share of BAU
Emissions
20% ideal
20% & 20%
Ren
20%
Close
24 %
11 %
11 %
13 %
Heavy Industry
6%
8%
8%
8%
Agriculture and Food
4%
5%
5%
5%
Metals
2%
3%
3%
3%
Services
5%
5%
5%
6%
Energy Prod
1%
0%
0%
0%
31 %
53 %
54 %
47 %
3%
4%
4%
4%
23 %
10 %
10 %
13 %
Electricity
Other Industry
Household
Total
What derives major abatement?[1]
10
What derives major abatement?[2]
11
III. Economic Costs
1. Permits trade and inter country resource flow
2. “Welfare” cost- price of environmental improvement
3. Changes in the price of the product that derives major
abatement
12
Permit Revenue (2001 $bn)
Regions
20% ideal
20% with 20%
Renewable
20%
Realistic
9
Nordics
10
UK & Ireland
35
France & Switzerland
23
22
29
Germany & Austria
47
45
45
BeNeLux
15
14
18
Latvia, Lithuania, Estonia, Poland
20
19
23
Spain & Portugal
13
13
20
Italy
17
Greece
Rest of Eastern Europe
34
17
12
38
22
4
4
5
24
23
25
13
Permit Trade in 2001 $bn (Net Export)
Regions
Nordics
20% ideal
20% with 20%
Renewable
20%
Realistic
-2.42142
-2.22431
-1.73194
0.36673
0.17071
-0.71434
-5.46901
-5.25035
-5.95698
4.58992
4.6056
-4.11032
-3.17848
-3.07256
-2.61935
7.69056
7.20134
10.06682
-7.768
-7.25738
-2.57286
Italy
-3.11914
-2.89834
-2.62475
Greece
-0.85977
-0.85427
-0.2547
Rest of Eastern Europe
10.16857
9.57955
10.51821
UK & Ireland
France & Switzerland
Germany & Austria
BeNeLux
Latvia, Lithuania, Estonia, Poland
Spain & Portugal
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3.2 The Cost of Environmental Improvement
Regions
20% ideal
20% with 20%
Renewable
20%
Realistic
Nordics
-1.80 %
-2.09 %
-2.47 %
UK & Ireland
-2.34 %
-2.36 %
-2.71 %
France & Switzerland
-1.84 %
-1.78 %
-2.38 %
Germany & Austria
-2.53 %
-3.03 %
-3.38 %
BeNeLux
-2.44 %
-2.52 %
-3.01 %
Latvia, Lithuania, Estonia, Poland
-6.52 %
-6.39 %
-6.72 %
Spain & Portugal
-2.56 %
-3.19 %
-3.71 %
Italy
-2.25 %
-2.60 %
-3.23 %
Greece
-3.86 %
-4.25 %
-4.40 %
Rest of Eastern Europe
-6.91 %
-6.77 %
-7.76 %
15
Changes in Electricity Price Relative to the
BAU
Regions
20% ideal
20% with 20%
Renewable
20%
Realistic
Nordics
18 %
14 %
9%
UK & Ireland
46 %
42 %
30 %
France & Switzerland
27 %
24 %
17 %
Germany & Austria
50 %
41 %
28 %
BeNeLux
36 %
32 %
23 %
Latvia, Lithuania, Estonia, Poland
96 %
90 %
65 %
Spain & Portugal
31 %
25 %
17 %
Italy
33 %
25 %
17 %
Greece
83 %
74 %
52 %
Rest of Eastern Europe
58 %
54 %
40 %
16
Summary so far
• If Europe attains its 20% emission reduction goal by 2020 in a cost
effective manner, the electricity sectors plays major role in the
abatement of emissions.
• The abatement in the electricity sector is achieved partly by
switching to other fuels, partly by reducing production, and by
expanding production in the renewable energy sector.
• These changes raise the price of electricity by 25% to 50% in
Europe.
• Moderate cost solution characterized by
–
–
–
–
Substitution within fossil fuels
Substitution to non-revolutionary renewable
Energy efficiency improvements
Reduced output in e-intensive tradable
17
Q.2 What are the Implications for Long term
Goals?
• Why minimum carbon leakage?
– Effective global agreement
– Stimulating cleaner energy technology
• Why technological Progress?
– Deeper Emission cut
– Broader Participation (Especially Developing Countries)
18
4.1 Carbon Leakage
EU Emission in 2010-2020 in Gt CO2
Gross Abatement
Carbon Leakage to
ROW
Net Abatement
20% ideal
2.75
-0.29
2.46
20% & 20% Ren.
2.75
-0.28
2.47
20% Realistic
2.73
-0.27
2.46
19
4.2 Implication for Technological Progress?
• Cap and trade supplemented by renewable support
(cross subsidies) yields
– Low emission prices
– Low electricity prices
• Do we have reasons to believe that we will have better
than non-revolutionary renewable and CCS?
20
In sum,
• If Europe wants to meet the 2020 targets, the electricity sector
derives major abatement mainly through fuel switching but also
through efficiency improvements, and structural adjustments with
modest cost.
• Meeting the target costs less than 3% of GDP and raises price of
electricity by no more than 50% in most regions.
• Thus, due to lower changes in price and significant leakage, the
implications for global climate agreement and far reaching
technological progress are quite weak.
21
Finally,
Thank You
torben.mideksa@cicero.uio.no
22