Climate Policy for Industrythe EU Emissions trading scheme

Climate Change Summit, March 2009Johannesburg

Karsten NeuhoffFaculty of EconomicsCambridge University

www.electricitypolicy.org.uk/tsec/2

Karsten Neuhoff

ww

w.e

lectr

icit

ypoli

cy.

org

.uk\t

sec\2

Outline

• The challenge for low-carbon policies

• Provide for the needs of different investors

• Provide for different technologies

• European package – a consistent framework?

Karsten Neuhoff

ww

w.e

lectr

icit

ypoli

cy.

org

.uk\t

sec\2

0

1

2

3

4

5

2007 2020 2050

Gt CO2

in EU-27

Assumed emission growth business as usual 1%/year

2012

Linear 75% reduction trajectory

The challenge for emission reductions

Karsten Neuhoff

ww

w.e

lectr

icit

ypoli

cy.

org

.uk\t

sec\2

Upward bias of ex-ante estimates (bottom up)

* 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/

Cost estimates of UK Policies during 1990-2001

0

1000

2000

3000

4000

5000

6000

Lead Free

Petrol

Euro I petrol

Cars*

2000 fuel

standards

2005 fuel in

2000/1

Flue Gas De-

Sulphurisation

(FGD)

Low NOX

burners

Co

sts

(£M

)

ex anteex post

Karsten Neuhoff

ww

w.e

lectr

icit

ypoli

cy.

org

.uk\t

sec\2

A carbon price works through the value chain – example cement

Clinker Cement Concrete Building

Other building materials

LeanerstructuresLower clinker

content

Sub

stitu

tion

Efficiency

Karsten Neuhoff

ww

w.e

lectr

icit

ypoli

cy.

org

.uk\t

sec\2

Cross-country comparisons suggest strong link between energy price and energy intensity

Source: Nebwery 2003

Denmark

JapanNorway

Austria

ItalyGermany Luxembourg

Switzerland SwedenPortugalFrance Finland

Spain

United

Kingdom

Netherlands

Greece

New Zealand

Belgium

United States

Australia

Mexico

Turkey

Hungary

Korea

Canada

Slovakia

Czech RepublicPoland

0

200

400

600

800

1,000

1,200

1,400

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0Average energy intensity (kg oil equivalent/$1995 GDP)

Ave

rage e

nerg

y p

rice $

/toe

Best fit constant price

elasticity of -1.0 a

Karsten Neuhoff

ww

w.e

lectr

icit

ypoli

cy.

org

.uk\t

sec\2

Allowance prices – important for project investment

Karsten Neuhoff

ww

w.e

lectr

icit

ypoli

cy.

org

.uk\t

sec\2

Eur

opea

n C

O2

emis

sion

s ye

ar

2020today 2050

Conventional coal

Oil

Gas

Illustrative

Future carbon targets – determine strategic choices

BAU

Energy Efficiency

RenewablesCCS/ additional nuclear

Karsten Neuhoff

ww

w.e

lectr

icit

ypoli

cy.

org

.uk\t

sec\2

Empirical evidence – experience reduces cost

Source IEA

Karsten Neuhoff

ww

w.e

lectr

icit

ypoli

cy.

org

.uk\t

sec\2

Technology policy complements carbon pricing

Low carbon technology

Conventional technology

Learninginvestment

Future savings

Learninginvestment

Future savings

Cos

t

Experience (e.g. installed capacity)

Carboncost

Karsten Neuhoff

ww

w.e

lectr

icit

ypoli

cy.

org

.uk\t

sec\2

0

1

2

3

4

5

2007 2020 2050

Gt CO2

in EU-27

Assumed emission growth business as usual 1%/year

2012

Linear 75% reduction trajectory

Contribution from new low carbon technology portfolio

Renewable target

Kyo

to t

arge

t

Trajectory

20%

with

out

inte

rnat

. ac

tion

How does it all fit together?

Contribution from energy efficiency

Karsten Neuhoff

ww

w.e

lectr

icit

ypoli

cy.

org

.uk\t

sec\2

Effective climate policy for 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.ukwww.climate-strategies.org