P ÁZMÁNY U NIVERSITY On the Policy and Politics of Climate Change Session VIII David Ellison Institute for World Economics (Budapest) Comments Welcome ( Comments Welcome

Goals for Today Questions? EU Climate Strategy ETS ETS Effort-Sharing Effort-Sharing RES RES EE? EE? LULUCF? LULUCF? Work on paper topics?

Current level of EU Emission Reductions? EEA Data: in 2009, across the EU27, emissions were 17.3% lower than in 1990 Basic question is what explains this performance? What role do Kyoto commitments play? What role do Kyoto commitments play? What role does EU policy play? What role does EU policy play? What role does the strategy of individual member states play? What role does the strategy of individual member states play? How can this relative success be continued…? How can this relative success be continued…?

What factors explain success? EU27 Emission Reductions primarily due to 2 factors:  Central and East European performance  Economic recession Other factors?  Some EU15 Member states good at introducing renewable technologies  Some EU15 Member states good at other things…  Many EU15 Member states have not done well…

Current EU Policy Strategy Could things be done differently? Will look at the following: Emission Trading Scheme (ETS) Emission Trading Scheme (ETS) Renewable Energy Sources (RES) Renewable Energy Sources (RES) Non-ETS Sector (Effort-sharing) Non-ETS Sector (Effort-sharing) Energy Efficiency (EE) Energy Efficiency (EE) LULUCF? LULUCF?

Current EU Policy Strategy Could things be done differently? Will look at the following: Emission Trading Scheme (ETS) Emission Trading Scheme (ETS) Renewable Energy Sources (RES) Renewable Energy Sources (RES) Non-ETS Sector Non-ETS Sector Energy Efficiency (EE) Energy Efficiency (EE) LULUCF? LULUCF?

The ETS Sector Heavy emphasis on the Emission Trading Scheme (ETS) and the ETS sector ETS sector encompasses: ETS sector encompasses: Fossil fuel-based power sector (coal, natural gas) Fossil fuel-based power sector (coal, natural gas) High-emitting firms (cement, steel, etc.) High-emitting firms (cement, steel, etc.) Assumes emissions can successfully be reduced in this sector Assumes emissions can successfully be reduced in this sector How much real capacity is in the ETS sector?

ETS Sector as of December 2008 Original Plan: As of 2013, must purchase emission allowances Original Plan: As of 2013, must purchase emission allowances Power sector: more or less 100% (with derogations) High-emitting firms: 20% with progressive annual increase up to 100% by 2020 Dec Changes: Dec Changes: Derogations possible for “certain” member states fulfilling the following conditions (most NMS’s): Interconnectivity of electricity grid Interconnectivity of electricity grid Share of single fossil fuel in electricity generation Share of single fossil fuel in electricity generation GDP/capita as share of EU-27 average GDP/capita as share of EU-27 average For Power sector: For Power sector: Free allowances can only be distributed up to 70% of CO2 emissions in phase 1 and will decline thereafter Plants must have been under construction prior to the end of 2008

ETS Sector as of December 2008 For firms subject to “carbon leakage” (i.e. firms exposed to international competition) For firms subject to “carbon leakage” (i.e. firms exposed to international competition) Can receive 100% free allowances But must use most efficient technology And emissions cannot exceed limits in first ETS period ( ) Amount of free allowances will decline annually from 2013, along with EU-wide cap Auctioning requirement for non-exposed firms will start at 30% in 2013, reach 70% in 2020, and 100% in 2027 Auctioning requirement for non-exposed firms will start at 30% in 2013, reach 70% in 2020, and 100% in 2027 December 2008 changes strongly driven by beginning of economic recession December 2008 changes strongly driven by beginning of economic recession

Can Progress be Made in the ETS Sector? And how? To some extent we do not know: Sandbag suggests only a small share of emission reductions will come from this sector: Sandbag suggests only a small share of emission reductions will come from this sector: 0.3% for 2012, compared to requirement of 8% reduction 2009 ETS emissions 11.6% lower than 2008 emissions? 2009 ETS emissions 11.6% lower than 2008 emissions? Weaknesses in ETS Model: Focus on individual firms? Focus on individual firms? Incentive to reduce emissions Can individual firms reduce emissions…? Corporate structure and ETS? Is there an advantage of focusing on states/govts instead? Is there an advantage of focusing on states/govts instead? These can define national level strategies…

Carbon Intensity in Electricity Generation

The Hungarian Power Sector

Beyond the ETS Sector Weak emphasis on other firms and sectors Countries do have Non-ETS sector emission targets Countries do have Non-ETS sector emission targets

Where are Emissions Growing the Fastest (in Hungary)?

Non-ETS Sectors Commitments (Thanks go to Kornél Varsányi for providing foundational data)

So Much of it is Natural Gas

Ability to trade certificates (carbon allowances) How? Across sectors, countries? How? Across sectors, countries? Incentivizing the state would make it easier to motivate individuals to improve their energy use Incentivizing the state would make it easier to motivate individuals to improve their energy use Reducing Energy Use/Energy Efficiency Directive? Reducing Energy Use/Energy Efficiency Directive? Memorandum from Commission Memorandum from Commission No Carbon Price on Natural Gas Natural gas use in building sector Natural gas use in building sector Could Initiatives be Strengthened in the Non-ETS Sector?

Incentives in Non-ETS Sector? Non-ETS sector changes (December 2008): Member states given more leeway to trade non-ETS sector emission reductions Member states given more leeway to trade non-ETS sector emission reductions (but no flexibility across ETS and non-ETS barrier)

20% Increase in share of renewable energy resources Sounds like a good strategy Sounds like a good strategy Wind, solar, geothermal, biomass, hydro Wind, solar, geothermal, biomass, hydro Possible limitations/objections to this strategy? Cost Cost Power fluctuations (base load power vs. other sources) Power fluctuations (base load power vs. other sources) Power Grid Quality/Stability Power Grid Quality/Stability Magnitude of future projected energy needs Magnitude of future projected energy needs The Renewables Directive

Individual country renewable targets revised Green Guarantee of Origin certificate system Support trade in renewables effort across countries Support trade in renewables effort across countries The Renewables Directive

Renewables Targets

Considerable controversy over Guarantee of Origin (GO) system Compatibility with national-level incentive systems UK strongly supports GO system UK strongly supports GO system Other countries support idea of trade in certificates, but worry about national-level incentive systems (FIT countries) Other countries support idea of trade in certificates, but worry about national-level incentive systems (FIT countries) Fear conflict between national systems and EU-wide system EU-wide GO Green Certificates and National- Level Incentive Systems

Feed-in Tariff or “FIT” system (eg Germany): Pays a guaranteed, fixed higher price (per Kwh) for different types of renewable-based electricity delivered to the power grid (wind, solar, geothermal, etc.) Pays a guaranteed, fixed higher price (per Kwh) for different types of renewable-based electricity delivered to the power grid (wind, solar, geothermal, etc.) Favors distributed generation (Jeremy Rifkin), high diversity, any/all bidders Favors distributed generation (Jeremy Rifkin), high diversity, any/all bidders Renewable Obligations (eg UK) Requires utility companies to support/purchase a given share of renewable energy Requires utility companies to support/purchase a given share of renewable energy Utility companies then contract out for bids to construct renewable power generation facilities Utility companies then contract out for bids to construct renewable power generation facilities Favors cheapest bidders, low diversity, large producers Favors cheapest bidders, low diversity, large producers National level Incentive Systems

Why Concern over GO System? Feed-in tariffs (FIT) may be better Can promote more diversity in renewable energy sources (wind, solar, geothermal, tidal, biomass, regional efforts) Can promote more diversity in renewable energy sources (wind, solar, geothermal, tidal, biomass, regional efforts) FIT systems have been far more successful at introducing renewable technologies FIT systems have been far more successful at introducing renewable technologies And FIT systems have typically been cheaper than GO type systems introduced at national level (eg UK) And FIT systems have typically been cheaper than GO type systems introduced at national level (eg UK) Single Price for GO certificates May limit/reduce choice of renewable energy to cheapest sources (wind) May limit/reduce choice of renewable energy to cheapest sources (wind) thus undermine national-level FIT systems Neglects base load and grid demand/load problems Neglects base load and grid demand/load problems

An Alternative EU-wide FIT Model?

Advantages of Alternative Model Would leave national-level incentive systems untouched States could decide to support or not support different Renewables as they choose… Would promote diversity in the choice of Renewables at the EU and national levels Amounts to an EU-FIT model

Cost of Germany FIT Model In 2005, 1.84 Euros, or approximately 3.4% of total electricity cost.

Thank you for listening…! Questions and Comments welcome: David Ellison