Global governance of climate change
Dec 19, 2015
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
Prevent climate change
Possibilities of action
… But the system is path dependent, huge inertia
SCENARIOS without
reduction of emissions
1
Today choices determine
climate impacts for tomorrow
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
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
correcting market failures, providing the right signals for investment
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
International negotiations (1/2)1
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 (1/2)
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
1Main features
ratification of the Kyoto protocol1L’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)
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
Kyoto Protocol (2/2)
New financial mechanisms
1
Pays BPays A
Technology
Credits CO2
€
Emissions credits
Emissions tradingCredits 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)
In theory a good mechanism
North south transfer
UE
Chine
Émissions
without CDM
total emissions unchanged
… if additionality is respected
UE
Chine
Émissions
With CDM
1
risk
CDM (2/2)
If credits are not based on real additional reductions= problem
total emissions increase
UE
China
UE
China
Émissions Émissions
Without CDM With CDM
1
Kyoto Protocol
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
1National policies
Kyoto protocol Impact
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
1Carbone markets
North responsable
( CO2 Emissions 2= industrialization of northern
countries )
CO2= Énergy= growth= development
No limit on emissions (= no limit to development)
Need of transferof technology and funding
Common and differenciated responsibility
post-2012
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
x 107 Annex I
Year
1910 1920 1930 1940 1950 1960 1970 1980 1990
x 107 Non-Annex I
Year
Fossil CO2
19000
0.5
1
1.5
2
2.5
3
19000
0.5
1
1.5
2
2.5
3
2000 2010 2020 2030 2040
IPCC SRES A1B scenario
Fossil CO2
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
x 107 Annex I
Year
1910 1920 1930 1940 1950 1960 1970 1980 1990
x 107 Non-Annex I
Year
Fossil CO2
19000
0.5
1
1.5
2
2.5
3
19000
0.5
1
1.5
2
2.5
3
2000 2010 2020 2030 2040
IPCC SRES A1B scenario
Fossil CO2
No long term solutions without developing countries involvement
Résolution 98 of american Senate (1997) no ratification without serious comitment of developing countries»
South Nord
Who is right ?
1
Post Kyoto
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
1 actions post-2012
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
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)
2
Tradable emissions permits(1/4)
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)
2
Emission trading (2/4)3Example
Cost of emissions reduction
10 €/t 25 €/t
Em
issi
ons A
llow
anc
e Em
issi
ons A
llow
anc
e
ALLOCATION
3000 k€
Em
issi
ons A
llow
anc
e Em
issi
ons A
llow
anc
e
PRACTICE
Savings
1000 ktCO2
850 ktCO2
1400 ktCO2
1250 ktCO2
600 ktCO2
Sold at 20€/t
750 k€
1000 ktCO2
Emission trading allows to invest on the less expensive emission reduction
Total emission volume remains unchanged
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 :
CO2 balance CO2 balanceControlControl
AllocationAllocation
Reduction Emissions
Reduction Emissions
Trading of permits
Trading of permits
Control of permits
Control of permits
Periode/ objective Validation a posteriori
Tradable emissions permits (3/4)2Monitoring & compliance
Emission Trading permits (4/4)
permits = control on volume. industrial total emissions = permits allocated ab initio.
no individual objective of reduction
but coverage of emissions by permits, independent of initial level of emissions!
permits don’t substitute to investment but Give price signal to évaluate oportunity of investment.
Trading facilitate reductions Investments where less costly. global cost of limitation is reduced.
2Conclusion
Emissions credits in EU-ETS
In European sheme, 3 types of credits : « Kyoto like credits» : CDM / JI domestic projects credits.
CDM & JI : 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)
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
2Conclusion
European Market
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
size % site
s
Allowance[Mt
CO2/an]
% allowanc
e
< 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
Distribution of allowances influence dynamic of the market (actors, price…)
2allowances
Theoretical impact of european directive
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
Impact power sector
2
significant impact on power sector
incentive in favour of energy efficiency
EUA volume: Total Market Volume (May 2005 - October 2005)
ECX34%
OTC54%
EEX1%
Nordpool 10%
Powernext1%
EXAA0%
OTC ECX Nordpool Powernext EEX EXAA
Total 2005:362 Mt CO2 7,218 M€
Sources: Point Carbon, European Climate Exchange, PowerNext &CDC
Volume EUA (8 mois)
2 Balance for 2005Prices, volumes § trading flowss
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 Balance for 20051st emissions
carbon cost explain part of the rise
And Cold winter Low hydro power Rise in gas prices
Significant rise in electricity
price (x 2) in markets
Sources: PowerNext & CDC
2 Bilan de l’année 2005Rise in électricity prices
practically real cost of carbon value is weak faible ( free allowances)
Rent for power sector (windfall profit) Impact on consumers in and out ET
Value of permits CO2
Other costs of production
Electricity market price
Price differential between gaz/coal creates strong demand for CO2
Charbon
Gaz
Fuel Switch
Charbon
Gaz
Charbon
Gaz
Fuel Switch
Charbon
Gaz
Sources: PowerNext & CDC
2 How to undersatnd prices, Coal/ gas
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 Price formation
Environnemental efficiency Industry : does not trust markets incentives
Myopia linked : short term + price uncertainty + futures evolutions of EU-ETS
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
Economic efficiency Contradiction between messages from industriescompeting in
world market (« too high ») and power sector (« too low») Contradiction between CO2 market & power market
liberalization
Source: E.ON
2 Efficiency of the market?
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 ?
2 Evolution of EU-ETS international convergence
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
CO2 uniquement (70% des GES français)
Sectoral responsibilities
World china
La production d’énergie a été imputée aux différents secteurs
Emissions de GES mondiales (1990)
13%
33%
14%
20%
20%
Batiments Industrie Transports Agriculture Production d'électricité
3
Tous GES, France
Emissions mondiales de CO2 (de combustion) Répartition sectorielle en 2000
31%
41%
24%
4%
Batiments Industrie Transports Agriculture
Émissions individuelles
Émissions collectives
Source : MIES
sectoral emissions in France
(France, 1990-2001)-40
-30
-20
-10
0
10
20
30
3
A priority : energy efficiency
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« Mesure sans regrets »
Stimulate technology innovation
Cost of emission reduction lower
discovery of low cost reductions
positive effects of anticpated constraint
Result in innovation
3Learning process
Capex
GHG reduction (tonnes of CO2 equivalent)
Expectation Projection - existing technology
New build standards, sequestration, innovative technology + market mechanisms are needed
Innovation
stretch
Cost curves : Looking ahead
2001 Cost Curve
1998 Cost Curve
Most of these reductions probably
at negative costs
= 2 à 3% / reduction per year of Green house gases from now
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
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
change energy model
Scenario optimist
En 2100, CO2 concentration double from pre-industrial
level Nedd reduction by a Factor 4 of french emissions
more extreme events
2003 summer very hot) : become frequent en 2050 Normal in 2070 very cold in 2100 !
ski stations loose on month of snow (or more) en 2050
Source : Ministère de l’Équipement
3