1 Economics of The European 2020 Climate Goals Torben K. Mideksa Center for International Climate and Environmental Research - Oslo [CICERO] April 18, 2009 The 18th Ph.D. Student Workshop on International Climate Policy Columbia University New York

2 Motivation “Europe showed … global leadership: to tackle climate change, to face up to the challenge of secure, sustainable and competitive energy, and to make the European economy a model for sustainable development in the 21st century” by setting a legally binding goal of emission reduction by Targets for 2020 At least 20% reduction in GHG Raising the share of renewable in energy consumption to 20% Saving 20% of energy consumption through energy efficiency Beyond 2020 : “Galvanizing the potential for deeper cuts in emissions … to meet the target of halving global emissions by 2050” through  Stimulating technological development  Promoting a comprehensive international agreement

3 Two central questions How are we going meet the targets for the 2020? How would meeting these targets pave the way to the ultimate destination?

4 Meeting the near term targets? A. What is the regional and sectoral distribution of abatement if emissions are reduced cost effectively? B. What derives major abatement? Is it due to i.fuel switching? ii.efficiency improvements? or iii.structural adjustments? C. What is the cost of meeting these targets? i.In terms of ‘welfare cost’ ii.In terms of carbon price & value of permits iii.In terms of price of goods

5 Framework of analysisanalysis Recursively dynamic global general equilibrium model[GRACE] based on the GTAP database 10 European Regions, Developed, and Developing Regions. 19 sectors Disaggregated European Electricity Supply sector, using bottom-up information, into Coal, Natural Gas, Oil, Nuclear Hydro, and Other Renewable Sectoral capital mobility within generating technologies Set of climate policy scenarios

6 Climate Policy Scenarios Assumptions common to all scenarios –Economic Growth »2% in developed regions & » 4% in the ROW –Maximum capacity expansion for hydro in each country »10%(2010) and »20%(2020) –Maximum capacity expansion for nuke in each country »10%(2010) and 20%(2020) but »constant in the case of Germany. SCENARIO-1[BAU]: No climate policy SCENARIO-2[Ideal]: A cost effective 20% abatement SCENARIO-3[Ideal&20%]: [Ideal] and 20% share of renewable SCENARIO-4[Realistic]: Final compromise of

7 Result: The BAU sectoral share of emissions

Result: Sectorwise Distribution of Abatement SectorsShare of BAU Emissions IdealIdeal & 20%Realistic Transport Services24 %11 % 13 % Heavy Industry6 %8 % Agriculture and Food4 %5 % Metals2 %3 % Services5 % 6 % Energy Prod1 %0 % Electricity31 %53 %54 %47 % Other Industry3 %4 % Household23 %10 % 13 %

9 What derives major abatement?[1]

10 What is the nature of fuel substitution?[2]

11 Result [2]: What is the costs of meeting the targets? Permits trade and inter country resource flow[?] The welfare cost of environmental improvement Changes in the price of the product that derives major abatement

12 Economic Activity of the carbon market: Permit Revenue (2001 $bn) RegionsIdealIdeal & 20%Realistic Nordics UK & Ireland France & Switzerland Germany & Austria47 45 Belgium, Netherlands, and Luxembourg Latvia, Lithuania, Estonia, and Poland Spain & Portugal13 20 Italy & Malta17 22 Greece4 4 5 Rest of Eastern Europe

13 The Cost of Environmental Improvement RegionsIdealIdeal & 20%Realistic Nordics-0,66 %-1,00 %-1,01 % UK & Ireland-0,42 %-0,54 %-0,66 % France & Switzerland-0,56 % -0,74 % Germany & Austria-0,52 %-1,11 %-1,43 % Belgium, Netherlands, and Luxembourg-0,54 %-0,71 % Latvia, Lithuania, Estonia, and Poland2,17 %1,88 %2,95 % Spain & Portugal-0,93 %-1,64 %-1,17 % Italy & Malta-0,73 %-1,15 %-1,27 % Greece-1,12 %-1,64 %-0,95 % Rest of Eastern Europe3,04 %2,70 %2,67 % EU Total-0,44 %-0,76 %-0,84 %

14 Changes in Electricity Price Relative to the BAU RegionsIdealIdeal & 20%Realistic Nordics18 %14 %9 % UK & Ireland46 %42 %30 % France & Switzerland27 %24 %17 % Germany & Austria50 %41 %28 % Belgium, Netherlands, and Luxembourg36 %32 %23 % Latvia, Lithuania, Estonia, and Poland96 %90 %65 % Spain & Portugal31 %25 %17 % Italy & Malta33 %25 %17 % Greece83 %74 %52 % Rest of Eastern Europe58 %54 %40 %

15 Summary so far In the strategy of meeting targets of cost effective emission reduction goal by 2020, the electricity sectors plays major role. The abatement in the electricity sector is achieved partly by switching to other fuels, and partly by expanding production in the renewable energy sector. The cost of meeting the target is moderate »Welfare cost of: -0,84 % »Average change in the price of electricity: 30% Moderate cost solution characterized by –Substitution within fossil fuels –Substitution to non-revolutionary renewable –Energy efficiency improvements in transport

16 What are the Implications for Long term Goals? Carbon leakage –Effective global agreement –Stimulating cleaner energy technology Far reaching technological progress –Credible source of deeper emission cut –Broader participation (Especially Developing Countries)

17 Carbon Leakage EU Emission in in Gt CO 2 Gross AbatementCarbon Leakage to ROW Net Abatement Ideal Ideal & 20% Realistic Approximately leakage rate of 10%

18 Implication for Technological Progress? Cost effective driven solution results in gas dependency Cap and trade supplemented by renewable support (cross subsidies) yields –Low emission prices –Low electricity prices Low prices and gas dependency are unlikely to send sufficient signal to innovators of far reaching, perhaps radical technological progress in generation of clean energy

19 Taking Stock 1. Meeting European climate goals for 2020 is possible 2. The electricity and transport sectors derive major abatement mainly through fuel switching and efficiency improvements 3. The cost is moderate compared to many regulations. 4. But due to lower changes in prices, gas dependency and sizable leakage, the implications for global climate agreement and far reaching technological progress are seems weak.