Energy Policy
Cédric Philibert
Cédric Philibert

Energy Policy
Cédric Philibert
• The problems with the Kyoto protocol
• Rejecting Kyoto?
• Keeping Kyoto (unchanged)?
• Transforming Kyoto!
• Certainty versus Ambition
• Your exams

Energy Policy
Cédric Philibert
• 1st commitment period to end by 2012
• Kyoto only addresses 1/3 of global emissions
– Although through the Clean Development
Mechanism its theoretical potential is greater
• Kyoto entails uncertain abatement costs
– This explains (at least in part) the reluctance of some industrialised countries and all developing countries, to accept being bound by emission quotas

Gigatonnes of CO
2
25
International Bunkers
Energy Policy
Cédric Philibert
20
Non-Annex I Parties
15
Non-Participating Annex I Parties
10
5
0
1990
Kyoto Parties
1995 2000
Kyoto target
2003

Energy Policy
Cédric Philibert
450
400
350
300
250
200
150
100
2005 2010
8% per year
2015
10% per year
2020
~100

Energy Policy
Cédric Philibert
• Unrealistic global ‘allocations’
• Wait for a change in US policy
• Wait for developing countries to develop
• Likely to be a slow process:
– Concerns about competitiveness
– … might prevent ‘Kyoto countries’ to tighten targets
– Agenda of cuts will define concentration levels
(CO
2
)

Energy Policy
Cédric Philibert
Surplus allowances
(above BaU )
Developed
“No-harm” rule
Developing
Current Emissions
Developed Developing
Equal per capita allocation
Assigned Amounts

Energy Policy
Cédric Philibert
What are the possible alternatives?
• Carbon taxes: politically difficult
• Technology agreements: useful, but likely to be insufficient and/or too costly
• Policies and measures: needed, but can a global coordination of PaMs work?
• Climate change is a public good: unilateral action unlikely to be enough

Energy Policy
Cédric Philibert
• Keep emissions trading:
– Cost-effective = environmentally effective
– Allows preserving vested interests
– Allows the rich to pay for the poor
• Address uncertainty on GHG reduction costs with more flexible options:
– Targets indexed on actual economic growth
– Price caps for industrialised countries
– Non-binding targets for developing countries
– Sector-wide crediting mechanisms to start with

Energy Policy
Cédric Philibert
• Assigned amounts based on economic projection, adjusted to actual growth
• “Intensity targets” only a special case
• Now endorsed as an option for developing countries by most experts, for industrialised countries by some
• How much do they reduce uncertainty?
– Maybe not enough for developing countries, suggests a comparison of emissions and GDP trends (extrapolated from 1971 to 1991) and actual economic performances and emissions from 1997 to 2001

Energy Policy
Cédric Philibert
Regression line: coefficient of determination = 17.4%
Intensity targets

Energy Policy
Cédric Philibert
• Targets with no consequences for non-attainment
• Could allow trading
– Need to make sure only countries in compliance are net sellers!
• Target may be more stringent
• Could ease the political process
• “Carrots, no stick”
• Gives an incentive to achieve win-win reductions
• Could be negotiated within the CDM framework
• Not considered for industrialised Cies

Energy Policy
Cédric Philibert
• Supplementary permits made available in unlimited quantities at a given price
• At domestic and/or international levels
– If at the international level, one institution must be tasked with selling permits to governments, and goverments to entities
– If at the domestic level only, international coordination requires all-sectors emission coverage through an upstream regime or ETS and taxes at the level of the price cap
• If some money is raised
– Could finance more adaptation, or partially close the gap in financing some more reductions

Energy Policy
Cédric Philibert
• Sectoral targets
– Fixed or dynamic, binding or not
– Industry sectors or domestic sectors?
– Could allow trading
– Limited costeffectiveness
– If dynamic, special risk of leakage
– A pragmatic first step?
• Policies&measures
– Commitment to specific P&Ms
– Large potentials for
P&Ms, but does the commitment help?
– World standards vs trade barriers
– Sovereignty issue
– Compliance?
– Trade-offs financial
&technical aid?

COP 8 - 2002 COP 11 - 2005
Energy Policy
Cédric Philibert

Energy Policy
Cédric Philibert
• The problem of climate change is fraught with uncertainty
• Decision making under uncertainty rests on ‘expected’ costs or benefits, i.e. all possible outcomes times their probabilities of occurrence
• However, this presentation does not offer a cost benefit analysis of climate change
• It provides a stylised analysis of instrument choice under uncertainty

Energy Policy
Cédric Philibert
General case: Optimum when marginal benefit equals marginal cost
Cost uncertainty matters for instrument choice
€
Marginal cost
Price
(tax)
BaU Target
Marginal benefit
Reductions

Energy Policy
Cédric Philibert
Climate change: damages relate to concentrations, abatement costs relate to emission reductions xx €
Possible
Marginal benefit curve is roughly flat
Unlikely ?
x € Possible
Emission reductions
0
CO
2
C oncentrations : 384 ppmv (No KP) 383 ppmV (Full KP)

Energy Policy
Cédric Philibert
Climate change ~ flat marginal benefit curve
€
Uncertain costs
BaU
Marginal cost
Marginal benefit
Target
Far from the optimum
Reductions

Energy Policy
Cédric Philibert
Price instruments minimise the error due to cost uncertainty
€
Marginal cost
Tax
Marginal benefit
BaU
Uncertain abatement
Close to the optimum
Reductions

Climate change ~ flat marginal benefit curve
Price instrument vs.
the equivalent quantity instrument:
Greatly reduces expected costs
Energy Policy
Cédric Philibert
€
Marginal cost
Tax
Marginal benefit
BaU saved
Target added
Reductions

Energy Policy
Cédric Philibert
Climate change ~ flat marginal benefit curve
Price instrument vs.
the equivalent quantity instrument:
Greatly reduces expected costs
May slightly reduce expected benefits
Increases expected NET benefits (benefits minus costs)
€
Marginal cost
Tax
Marginal benefit
BaU lost gained
Target
Reductions

Energy Policy
Cédric Philibert
Compared to the equivalent best-guess target, a price instrument makes possible a more ambitious policy at lower expected costs
€
Marginal cost
Tax
Marginal benefit
BaU Target
Reductions

Energy Policy
Cédric Philibert
Compared to the equivalent best-guess target, a price instrument makes possible a more ambitious policy at lower expected costs
But targets have political advantages over taxes
€
Marginal cost
Price cap
Tax
Marginal benefit
BaU
Reductions

Energy Policy
Cédric Philibert
Introducing a price cap makes possible a more ambitious policy:
- Same expected benefits. Lower expected costs (e.g. fairness )
Higher expected benefits e.g. environment )
Especially useful when benefits are deeply uncertain…
€
Marginal cost
Price cap
Tax
Marginal benefit
BaU Target
Reductions

Energy Policy
Cédric Philibert
• Short term certainty on emission levels may be costly but has little value
– because climate change is cumulative
• Flexible options reduce expected costs
– help get more countries on board
– allow more ambitious policies
• More ambitious targets can be chosen
– higher benefits and lower costs (on expectation)
– especially useful if benefits are deeply uncertain
– help match marginal costs with benefits despite uncertainties (Economic efficiency)
– help accomodate differing visions

Energy Policy
Cédric Philibert
– If a GHG threshold is known and close:
• Use a quantity target to stop emissions
– If a GHG threshold is a possibility but its level is unknown:
• Favour the most ambitious policy
– Level and agenda left undecided
• Ensure action, not exact results
• Favour the most ambitious policy
• Over time, adjust the target and the price cap

Energy Policy
Cédric Philibert
• Price caps should be set in the upper range of cost expectations for a given target…
– … until targets are ratcheted down…
• Governments may not use them ‘right’…
– would they do better without price caps?
• Would agreeing on a price cap level be « a nightmare »?
– Differentiation amongst countries would remain through differentiated assigned amounts
– ENGOs say abatement costs are low; industry say they are high. Some price cap level might be felt high enough by the ENGOs and low enough by the industry
– Price caps may lead both to be more careful in their public statements about abatement costs…
• An international agreement on price cap level would be preferable for cost-effectiveness but is not necessary
– Several price cap levels may coexist in one international trading system; to avoid the domination of the lowest price cap level, only complying countries (i.e. not ‘using’ the price cap) should be net sellers

Energy Policy
Cédric Philibert
• Reducing expected abatement costs reduces expected benefits of climatefriendly technologies…
• … if there is no price floor…
• … and if the ambition in the targets is unchanged
– Targets and price cap level drive technology development, not certainty on quantitative results
– Price volatility (e.g. oil) shown to deter investments; more ambitious targets and price caps would lead to less volatile carbon prices
– In any case, more specific instruments remain needed to promote costly technologies with great learning-by-doing potential (e.g. PV)
• The price cap should smoothly grow over time
• And in a decade or two reach a level above the cost of CO
2 capture and storage (‘backstop’ technology), so coal can be used in a carbon-constrained world

Energy Policy
Cédric Philibert
• Fixed targets give certainty on short term emission results
• More flexible options might facilitate:
– The participation of more countries
– The adoption of relatively more ambitious targets
• More flexible options give less certainty of achieving precise levels
– But a greater probability of doing better!

Energy Policy
Cédric Philibert
• Why oil became the first energy source?
– Quality of lighting
– Energy density (1912…)
– Liquidity, Low cost…
• When will coal peak
– Consumption/reserves ratio at current levels
– The peak is only the beginning of the end…
• Clean coal
– Not only coal washing…
– Air pollutants (SOx, NOx,
PM, Metals, Nukes…)
– CO
2 capture storage
• Coal to Liquids
– Increase consumption
– Increase emissions…
– CTL w/o CCS a disaster
• Information sources

Energy Policy
Cédric Philibert
30000
2
25000
20000
ENERGY
TECHNOLOGY
PERSPECTIVES
2 0 0 6
Scenarios &
Strategies to 2050
15000
26294
11733
10000
7603
6512
5469
4490
5122
5000 9946
3255
1718
0
2003 2050
Electricity Conversion Industry Transport Build’s.

Energy Policy
Cédric Philibert
Thursday 21 June 9:00 to 11:00
• Your final exam will be made of four topics.
• All must be addressed in brief, e.g. 4 to 6 bullet points or short paragraphs.
• It is more important to get all the major aspects than to support your points in detail.
– For each topic, full responses in bullet points will be noted on 5, and one additional point might be attributed to more detailed answers.
– A perfect paper in bullet points would get 20/20, a perfect paper with slightly more detailed answers would get 24/20...