Climate Policy Models

1. Climate Policy Models Climate Change Forum organised by ICCF and FORATOM Are we ready for COP9? N. Kouvaritakis - ICCS/NTUA Tel: 0030-210-7723629 Fax: 0030-210-7723630 E-mail: kapros@central.ntua.gr

2. Presentation overview Fundamental questions addressed • Using a wide range of quantitative tools does a broad Consensus emerge on the Cost of meeting Climate Change Policy targets? • According to model evidence how are such Costs affected when additional Flexibility is assumed? • Types of flexibility examined: • Internationally Traded Pollution Permits (enlarging markets). • Multi Gas Flexibility (enlarging the abatement options to include more GHGs) • Role of technological progress • Endogenous Learning (possibility of climate policy indirectly inducing technological improvements) ICCS/NTUA

3. Presentation overview Examples from a wide selection of projects and models assisted by DG Research (1998 – 2003) • Cost of Climate Change Policies • Results from ACROPOLIS Project • Role of Flexibility • GHG emission trading studies • Results from the TEEM Project • Spin-off from “Climate Policy” project in the form of a study carried out for DG Env. and published in Journal of Energy Policy Vol. 27 (1999) • Multi gas assessment studies • Results from GECS Project • Role of technological progress • Results from TEEM Project • Role of endogenous learning • Results from TEEM Project ICCS/NTUA

4. Cost of Climate Change PoliciesACROPOLIS Project • “Common” Climate Policy Scenario: Case Study 2 • Global carbon emissions stabilized at approximately 10 GtC in 2030. Beyond 2030 a constrained profile consistent with ultimate concentration of 550 ppmv • Beyond 2010 all world regions contribute to carbon reduction and participate in trade of carbon emission permits. • Annex B Countries (apart from USA) meet Kyoto Protocol. In the period 2010-2030 they obtain emission allowances at the same decreasing rate. • USA implements only domestic policies up to 2010 and and participates in the emissions permits market after 2010. • Non-Annex B Countries emission rights allowances are based on their 2010 emissions and consistent with stabilization targets at different dates depending on theirGDP/cap. and emissions/cap (“Soft Landing”) * ACROPOLIS is a European research project partly funded by the 5thEuropean Union RTD Framework Programme ICCS/NTUA

5. Cost of Climate Change PoliciesACROPOLIS Project Models participating in the Climate Policy case study Integrated Assessment Model (Dynamic NLP) Perfect foresight Perfect foresight Perfect foresight Perfect foresight Perfect foresight ICCS/NTUA

6. Cost of Climate Change PoliciesACROPOLIS Project CO2 reductions and carbon permit prices – World Models CO2 reduction Carbon Value ICCS/NTUA According to DNE21 the permit price is 0 in 2010, due to the‘hot air’ traded by the former Soviet Union and the other countries of EasternCountries. At that date only Western Europe, Japan and Oceania purchase emissionpermits, but their needs (372.4 MtC/year) are more than covered by the availability ofthe Eastern Europe, hence the zero price of permits.

7. Cost of Climate Change PoliciesACROPOLIS Project • The response of the world economy to emissions constraints and tradeable permitsgoes in the direction of decreasing carbon intensity rather than energy intensity. • All models except MESSAGE forecast an increase in world permits price over time. MESSAGE, instead, projects the reverse due to a sharp decline in carbon emissions among the more important permits purchasers: North America and Western Europe. • The world price of emission permits in 2050 ranges between 11 €95/tCO2 of MESSAGE to the 60.7 €95/tCO2 of DNE21. • In 2030 this price goes from 9.7 €95/tCO2 of GMM to the 36.8 €95/tCO2 of DNE21. ICCS/NTUA

8. Cost of Climate Change PoliciesACROPOLIS Project CO2 reductions and carbon permit prices – Western Europe CO2 reduction Carbon Value ICCS/NTUA

9. Cost of Climate Change PoliciesACROPOLIS Project GEME-3 Model General Equilibrium Models (Change in Welfare) ICCS/NTUA

10. Cost of Climate Change PoliciesACROPOLIS Project NEWAGE Model General Equilibrium Models (Change in Welfare) ICCS/NTUA

11. Cost of Climate Change PoliciesACROPOLIS Project GEME-3 Model General Equilibrium Models (Change in Production) ICCS/NTUA

12. Emission Trading Studies TEEM Project Analysing the costs of CO2 reduction in meeting Kyoto Targets • Partial equilibrium models participating: • POLES (World) • PRIMES (EU) • Scenarios Examined: • No Trading Case (NT) • Annex B Trading only (PT) • Full Trading (FT) * TEEM (Energy Technology Dynamics and Advanced Energy System Modelling) was partially funded by the European Commission in the 5th Framework Programme (Non Nuclear Energy) JOULEIII ICCS/NTUA

13. Emission Trading Studies TEEM Project The costs of CO2 reduction in meeting Kyoto Targets ICCS/NTUA

14. Emission Trading Studies Journal of Energy Policy Vol. 27(1999) pp 833-844 The study is one of the earliest performed to analyse the importance of flexible mechanisms in meeting Kyoto commitments (early 1998) • Scenarios examined: • Reference • The scenario was constructed in 1998 using the POLES Model and assuming no policy to meet Kyoto targets • Kyoto Protocol without trading (NT) • Full Trade across Annex I countries only (FT) • No ceilings on the use of flexibility instruments. • Half Trade among Annex I countries (HT) • Assumes a ceiling operating on all flexible mechanisms simultaneously • The trade volumes resulting from full trade are reduced by half • Both buyers and sellers are restricted in terms of “desired” transfers • Full Trade Worldwide (FT) • Half Trade Worldwide (HT) ICCS/NTUA

15. Emission Trading Studies Journal of Energy Policy Vol. 27(1999) pp 833-844 Equilibrium implications of ceilings: P* equilibrium price in a perfect permit market Q* equilibrium amount of emissions traded Qc ceiling on amount of emissions traded Pd maximum price that prospective buyers would be prepared to pay Ps minimum price that sellers would be asking ICCS/NTUA

16. Emission Trading Studies Journal of Energy Policy Vol. 27(1999) pp 833-844 ICCS/NTUA

17. Emission Trading Studies Journal of Energy Policy Vol. 27(1999) pp 833-844 • Under Full Trade within Annex I the contribution of domestic action in the reduction effort still dominates • Full Trade worldwide would imply a substantial shift of the effort towards permit acquisition in the international markets ICCS/NTUA

18. Emission Trading Studies Key Findings Meeting Kyoto Targets • Permit Prices • Without international trade stand at around 30- 40 EURO per tonne of CO2. • Assuming Annex I wide trade they fall by about two thirds. • In the (theoretical) case of full utilisation of worldwide flexibility mechanisms at no transaction cost they fall by a further two thirds. • The system costs for EU15 • Represent 0.1% to 0.12% of GDP (in 2010) in the case when there is no international permit trade. • Assuming Annex I wide trade these costs fall by 20% to 40% • With full utilisation of worldwide flexibility mechanisms such costs would represent between 0.03% and 0.05% of GDP in 2010. ICCS/NTUA

19. Multi gas assessment studies GECS Project • World Models Involved in the project: • POLES (Partial Equilibrium, Energy) • GEME3 (General Equilibrium) • Scenarios Examined: • Soft Landing Multi-Gas. • Soft Landing CO2 only. • Per Capita Convergence Multi-Gas • Soft Landing CO2 proportional. * GECS (Greenhouse Emission Control Strategies) is a European research project partly funded by the 5thEuropean Union RTD Framework Programme ICCS/NTUA

20. Multi gas assessment studies GECS Project • Soft Landing Multi Gas (SL – MG) • OECD Countries: • 2030 Emissions should be 15% lower than 2010 level • Eastern Europe and FSU: • 2030 emissions should be stabilized to 2010 level • Non Annex B with GDP/PC > 60% of the 2010 OECD90 GDP/PC: • 2030 emissions should be stabilized to 2015 level • Non Annex B with 15%<GDP/PC< 60% of the 2010 OECD90 GDP/PC: • 2030 emissions should be stabilized to 2030 level • Non Annex B with GDP/PC<15% of the 2010 OECD90 GDP/PC: • Have to stabilize their emissions in 2045 • Soft Landing CO2 only • apply the whole volume of reductions from the SL-MG scenario to the energy related CO2 emissions. ICCS/NTUA

21. Multi gas assessment studies GECS Project ICCS/NTUA

22. Multi gas assessment studies GECS Project Effort Rate and Welfare Changes in 2030 ICCS/NTUA

23. Multi gas assessment studies GECS Project GEME3 Model – Changes in GDP and Production in 2030 ICCS/NTUA

24. Multi gas assessment studies GECS Project • Changing from a CO2 to a Multi-Gas approach reduces Marginal Abatement Costs by around 30 %. • According to general equilibrium analysis the cost of achieving the reductions represent 0.65% of world GDP (2030) in the multi-gas case compared to 0.85% in the case of CO2 only. • Both models suggest that Multi-gas flexibility reduces the global cost of meeting the emission targets by around one quarter. • The inclusion of abatement options involving non-energy related GHGs is particularly beneficial in the adjustment process of highly developed economies. • The dominant redistributive element in the scenarios consists of the opportunities they provide for income transfers in the form of net permit sales/purchases. In this sense the enhanced flexibility is in general detrimental for benefits of net permit exporters. • However, significant deviations from this dominance occur through effects on the terms of trade, especially among major energy exporters and economies with a structure favouring energy intensive activities. ICCS/NTUA

25. Role of Technological Progress TEEM Project • Partial Equilibrium Models Participating: • POLES (World) • PRIMES (EU15) • Abatement Scenarios Examined • Reference (Post Kyoto Scenario) • Replication of Kyoto targets for Annex B countries 2010-2030 • For FSU countries 2030 target is the 1990 level • Non Annex B countries: 43% incr. for Asia, 56% inc. for RoW from 2010 to 2030 • Nuclear Scenario, nuclear technology breakthrough in terms of cost and safety (S1). • Clean Coal Scenario, technicoeconomic characteristics improvement of Supercritical Coal, IGCC, Advanced Thermal Cycle technologies (S2). • Gas Scenario, technicoeconomic characteristics improvement of GTCC, CHP (S4) combined with assumptions of a more abundant Natural Gas resource base (undiscovered resources). • Renewable Scenario, breakthrough in wind, solar, biomass gasification and small hydro technologies (S5). • Pessimistic Scenario, frozen technicoecnomic characteristics for all technologies at their 1998 values (except standard LWR with deteriorating characteristics) (Pessimistic). ICCS/NTUA

26. Role of Technological Progress TEEM Project POLES Results ICCS/NTUA

27. Role of Technological Progress TEEM Project PRIMES Results Gas and All Nuclear Hard coal Renewable Demand side Post Kyoto fuel cells technology story story s story story story stories Required carbon value (EUR'90 per tn 178 116 210 93 153 79 40 ICCS/NTUA

28. Role of Endogenous Learning TEEM Project • Models Participating: • POLES (Simulation) • Two Factor Learning Curve Functions – cumulative R&D and experience in the form of cumulative technology take-up improving the technical and economic performance of specific power technologies. • Special module to simulate R&D portfolios of power plant manufacturers in terms of sales expectations and risk averse stances. • Expectations modified by levels of carbon value. • ERIS (World), MARKAL EUROPE (optimisation, perfect foresight) • One Factor Learning Curve for power technologies – Learning by experience. • Non-Convex optimisation due to lock-in effects under perfect foresight. • Scenarios Examined • TEEM Post-Kyoto Scenario • Assuming exogenous technological improvements • Assuming endogenous learning (activation of appropriate model mechanisms). ICCS/NTUA

29. Role of Endogenous Learning TEEM Project POLES Model Results ICCS/NTUA

30. Role of Endogenous Learning TEEM Project Endogenous Learning with ERIS and MARKAL Models ERIS Model MARKAL Europe Model ICCS/NTUA

31. Role of Endogenous Learning TEEM Project- Key Conclusions • Technological improvements could play a key role in reducing the cost of reaching specific Climate Change Policy targets • Models fitted with endogenous learning mechanisms generally show significant cost reductions particularly when they incorporate agents’ reactions to Climate Policy signals. • The TEEM evidence suggests that these reductions range from 15 to 60 percent highly dependent on the endogenisation mechanisms adopted. ICCS/NTUA

32. General Conclusions from model based studies • In recent years there has been emerging a consensus from a wide variety of models that an effective Climate Change Policy is feasible at a non-trivial but bearable cost (possible shift of debate towards perceived benefits of avoidance). • The cost of such policies can be substantially reduced by designing them to incorporate flexibility. • Models tend to indicate lower costs when they include more mechanisms – a more complete description of dynamic reactions to policy signals. ICCS/NTUA