The EU Energy and Climate Policy and Its Macroeconomic Impacts on the EU Economy

Symposium on Options for Energy

Environmental Policy in Japan

July 6, 2013

Unnada Chewpreecha, Cambridge Econometrics

06/07/2011

Disclaimer

• This presentation does not necessarily represent the views of the European Commission (EC) or any collaborating institution

Overview

• The EU Energy and Climate policy• Assessing macroeconomic impacts using

E3ME and E3MG• Headline results

Overview

• The EU Energy and Climate policy• Assessing macroeconomic impacts using

E3ME and E3MG• Headline results

The EU Energy and Climate Policy

• Headline 20-20-20 energy and climate change targets for 2020

20% cut in GHG emissions (from

1990 levels)

20% share of renewable energy

20% improvement in

energy efficiency (from 2005)

The EU Climate and Energy Package

• A set of binding legislation which aims to ensure the 20-20-20 targets are met

• Separate Energy Efficiency Plan and the Energy Efficiency Directive

EU ETSEffort sharing

at national level

RES targets at national

level

CCS framework

Complexity and Interaction with Other EU Targets and Policies• The 20-20-20 targets are overlapped

– e.g. RES target could undermined the EU-ETS

• But one target alone will not necessary lead to other targets being met– market failure e.g. pricing mechanism alone may not lead to

RES and or energy-efficiency targets being met

• Complexity in designing national targets to achieve one single EU target

• Other factors undermining EU-ETS– recent economic crisis – EU ETS allowance prices collapse, structural reform of ETS – no incentive for industries to invest in low carbon technologies

Complexity and Interaction with Other EU Targets and Policies

• Link to other EU 2020 Targets such as employment and R&D and other EU policies such as resource efficiencies– need careful policy considerations to avoid contradictions– examples:

• increase in biocrops leads to higher food price• material tax increase costs of investment goods• EU ETS and competitiveness

– negative impacts can be avoided/mitigated through measures such as Environmental Tax Reform (ETR)

Examples of Energy and Climate Policies in the EU

Freezers/refrigerators (+labeling) Regulation

2009/643/EC

Recast of the EPBD

2010/31/EU9

TVs (+labeling) Regulation

2009/642/EC

Circulators Regulation

2009/641/EC

Labelling regulation for tyres

2009/1222/EC

Electric motors

Regulation 2009/640/EC

GHG Effort Sharing Decision

2009/406/EC*

Regulation Euro VI for heavy duty

vehicles 2009/595/EC

RES directive

2009/28/EC (Power

Generation)

RES directive

2009/28/EC (Transport))

GHG Effort Sharing Decision

2009/406/EC*

EU-ETS

MBI

Regulations

key

EU Policies Beyond 2020

• 2030 framework and 2050 roadmap• Continue the momentum of 2020 targets and

taking account of long-term climate goal (2°C degree)

• Build on the experience of, and lessons learnt from, the 2020 framework and identify where improvements can be made.

EU Policies Beyond 2020

Total

Power (CO2)

Industry (CO2)

Transport (incl. CO2 aviation, excl. maritime)

Residential and services (CO2)

Agriculture (Non-CO2)

Other Non-CO2 emissions

-100 -80 -60 -40 -20 0 20 40

GHG Reduction (%) Compared to 1990

2050

2030

2005

source(s): 2050 Roadmap, DG Climate Action, European Commission

Overview

• The EU Energy and Climate policy• Assessing macroeconomic impacts using

E3ME and E3MG• Headline results

Assessing Macroeconomic Impacts using E3ME and E3MG

• E3ME (Europe) and E3MG (world) models are:– computer-based econometric models…– covering economy, energy and emissions…– with detailed sectors (linked by IO tables) and regions (Japan)…– and endogenous technological progress

• They can be used for forecasting but are typically used for policy analysis

• They are versatile tools that can be used for economic and economy/environment analysis

• They have often been used to support the official European Commission policy impact assessments

Modelling Structure – E3 Model

ECONOMYas in national

accounts

TECHNOLOGYspecifications &

costs

ENVIRONMENTALEMISSIONS

as in environmentalstatistics

ENERGYas in energy

statistics

e.g. industrial emissions of SF6

funding R&D

pricesandactivity

investment

fuel usefuel prices and costs

fuel use

pollution-abatementequipment

fuel use

How Energy and Environment Taxes are Modelled in E3ME/E3MG

Increase in energy prices Reduction in energy consumption Reduction in emissions

IndustryHouseholds

Loss of real income

Lower spending

Loss of output

Loss of competitiveness

Worsening trade balance

Loss of jobs

Studies Using E3ME/E3MG

Topics E3ME/E3MG was used to..

EU ETS assess the economic impacts of different mechanisms for allocating ETS allowances

The Energy Taxation Directive

model the Europe-wide economic and environmental impacts of different energy taxation regimes

Environmental Tax Reform provide European economic and environmental impacts of different ETR regimes,

Energy Efficiency provide input to the proposed Energy Efficiency Directive by providing a quantitative assessment of the measures proposed to reduce energy demand.

Moving Beyond 20% provide input for DG CLIMA’s communication on changing the 2020 GHG target to 30% by assessing the economic impacts of a 30% target

Green Jobs model labour market implications of the EU climate and energy policies

Copenhagen targets analyse global economic impacts of the agreed Copenhagen targets

Studies Using E3ME/E3MG (cont)

Topics E3ME/E3MG was used to..

Non-CO2 trading scheme assessing the impacts of introducing an EU SO2/NOx trading scheme

Resource efficiency model EU resource efficiency policies through the E3ME material sub-model which covers physical resources such as food, feed, wood, metals, minerals,

Carbon leakage examine the extend of carbon leakage for EU industries as a result of EU climate policies

REDD provide an assessment of the two-way linkages between REDD and global carbon markets. E3MG was expanded to incorporate marginal abatement cost curves specific to the forestry sector

Global 2c scenario investigate global economic implications of reaching the 2c target in 2050

Environmental harmful subsidies

investigate the implications of removing environmental harmful subsidies in the EU

other non-environmental applications

carry out analysis on trade, labour market, sector study, R&D and investment multipliers, commodity prices and government policies

Overview

• The EU Energy and Climate policy• Assessing macroeconomic impacts using

E3ME and E3MG• Headline results

Headline Results

• Results taken from CE work done for DG Employment “Studies on Sustainability Issues – Green Jobs; Trade and Labour”, 2011

• E3ME was used to estimate macroeconomic and labour market impacts of the EU energy and climate policies

Scenarios Summary

• Reference case where 20% renewables and GHG targets are met through mixture of MBIs and regulations

• Two scenarios where target is met differently• Two scenarios with additional targets (30%

GHG and 20% energy efficiency target)• Revenues from MBIs recycled via income tax

Headline Results: Impacts on GDP

-0.2%

-0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

2005 2010 2015 2020 2025

EU27 GDP

Source(s): E3ME, Cambridge Econometrics.

S5

S6

S4

ref

S3

% difference from baseline Ref + Energy efficiency target is also met

Ref: 20% Renewable + GHG targets met (mix MBIs & regulations)

Ref: through MBIs

Ref: through regulations

Ref+ 30% GHG targets met (mix MBIs & regulations)

Headline Results: Impacts on Employment

Results Summary

• Positive GDP and employment results are driven by investment in renewables

• MBIs generate revenues to be recycled while regulations increase costs but no revenues

• Large amount of investment requires to meet energy efficiency target (IEA 2010 estimates for every 1% reduction in energy consumption, the EU buildings sector must invest €31.4bn a year)

Revenue Recycling and Investment

Increase in energy prices Reduction in energy consumption Reduction in emissions

IndustryHouseholds

Loss of real income

Lower spending

Loss of output

Loss of competitiveness

Worsening trade balance

Loss of jobs

Revenue recycling: lower income tax

Investment

Sensitivity: Revenue Recycling

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Different Revenue Recycling Methods

GDP

Employment

% difference from baseline

Important Notes

• E3ME/E3MG modelling results form part of wider impact assessments

• Complement other analysis such as– other model types (CGEs)– quantitative analysis (e.g. CBA, input-output)– qualitative study, literature reviews– sector specific studies– survey and consultations

• All above need to be taken into account when carry out an impact assessment

Overview- Summary

• The EU Energy and Climate policy– 20-20-20 targets and beyond– issues and complexities

• Assessing macroeconomic impacts using E3ME and E3MG– overview of the models– model applications

• Headline results– macroeconomic impacts from EU energy and environmental

policies– implications of various revenue recycling methods

Thank you for your attention!

• The DG CLIMA web pages contain further information, including the full EC communication– http://ec.europa.eu/clima/policies/brief/eu/index_en.htm

• For full E3ME and E3MG projects and published papers as well as the model manual– www.e3me.com – www.e3mgmodel.com

• For further information on the modelling:– Unnada Chewpreecha, uc@camecon.com or – Hector Pollitt, hp@camecon.com