Climate change policy in EU and in Denmark Professor Eirik S. Amundsen, The Danish Economic Councils and the University of Copenhagen Lecture given at the University of Southern Denmark, Esbjerg, December 3, 2008

Danish Economic Councils The Economic Council is an economic advisory body established by law in The Council has 26 members representing unions, employers, the Central Bank and the Danish Government. Independent economic experts are members as well. The Environmental Economic Council is an economic advisory body established by law in The Council has 24 members representing unions, employers, ngos and the Danish Government. Independent economic experts are members as well. Both councils are presided over by four independent chairmen (called the "wise men"). The chairmen are generally university professors. The Economic Council meets twice a year to discuss a report prepared by the Chairmanship. The Environmental Economic Council meets once a year. The Chairmanship prepares reports to the councils. The reports contain economic analyses and policy statements. The reports to the Economic Council contains analyses on fiscal and monetary policies, labour market issues, etc. The report also contains a forecast of the Danish economy for the coming 2 to 3 years. The report to the Environmental Economic Council contains analyses on diffrent environmental issues with relevance to the Danish or Global economy. The reports are in Danish with an English summary.

Contents New framework for energy and climate policies Inter-relationship between objectives and measures Main conclusions from the DMØR- report Danish energy- and climate policies

Main focus of the energy and climate policies in Denmark and the EU Reduction of CO2-emission Increase of the share of total energy consumption Reduction of energy consumption

New framework for climate and energy policies 1 Regulated by EURegulated by MS CO 2 : Quota area -Total constraint of CO2 emission within EU - Issue of quotas to countries and sectors - Administration relating to assignment of quotas free of charge or by sale CO 2 : Non- quota area - Fixation of national targets -Rules and regulations by law -Economic and administrative measures

New framework for climate and energy policies 2 Regulated by EURegulated by MS Renew- able energy - Fixation of national targets relating to share of renewables out of gross energy consumption - Rules and regulations by law - Economic and administrative measures - Implement quota system as decided on by EU Energy savings/ more efficient use of energy - No particular regulation, but standards of energy efficiency and rules of customer information on energy efficiency of electric equipment - Fixation of national targets - Rules and regulations by law - Economic and administrative measures

Shares of renewable energy in Europe (Dansk Energi, 2008)

Why targets on share of renewables in EU? Reduction of CO2 emission –But: this is already taken care of by the CO2 quota system and the CO2 taxes Increase of security of supply –But: This problem primarily relates to oil and gas deliveries from unstable political regimes (e.g. natural gas from Russia). This problem could be solved by specific excise taxes or by bilateral agreements. A general requirement of shares of renewables is not a very precise measure. As for EU, the security of supply between MSs is presumably very high. Ensure R%D on new renewable technologies that otherwise would have been under financed –But: this could be achieved by direct support to research on renwables. A general requirement of shares of renewables is not a very precise measure. ”First mover advantage” in producing and exporting new technologies and capital equipment of renewable energy –But: all countries within EU can not have a “first mover advantage” (generally, not a good idea to try to pick a winner). Anyway, a general requirement of shares of renewables is not a very precise measure.

Why targets on energy savings? Energy generation should take place at the lowest possible cost to society (e.g. this is the rationale for deregulating the electricity market) Energy is a production factor just like other production factors (labour, capital services, raw materials and intermediaries). In this respect it is not quite obvious why one should reduce the use of this particular factor. Environmental problems as well as problems of security of supply relating to energy use should be taken care of by internalizing these effects in the costs of using the various energy services and not by requiring a general reduction of energy use.

Instruments: CO 2 -quotas and -taxes - different, but closely related instruments A CO 2 -tax fixes the price of CO 2 - emission and lets the market decide on the quantity of CO 2 emissions. A CO 2 -quotasystem fixes the total quantity of CO 2 emission and lets the market decide on the price of CO 2 emission. In many MSs CO 2 -emission is regulated both by the European quota system CO 2 -taxes

Instruments: The EU proposal on shares of renewables –Inefficient requirements –The requirements set for each single country do not guarantee an equalization of marginal costs of generating renewable energy between countries. –Necessary to separate who is paying from who is doing. –A need of systems that can equalize the marginal costs of generating renewable energy between countries and thus realize gains of trade.

Instruments: A quota system for renewable energy A quota system for renewables does not seem as ”clear cut” as the CO 2 -quota system. –In Sweden and UK the quota systems (green certificates) are markets for “percentages”. –There are many renewable technologies with different marginal costs. If a diversification is required there is a need for different quota prices. There may be compatibility problems with the CO2 quota system. The EU proposal: A combination of feed-in tariffs and quotas (using “guarantees of origin”) –Unclear which effects these will have

Instruments: Energy savings Energy taxes in consumption is a very precise instrument for achieving this Alternatively EU contemplates introducing so called white certificates –Design problems –High administrative costs Administrative measures such as building codes on insulation may work better and be more to the point.

Relationship between CO 2, renewables and energy saving Harsh CO 2 -policy increases the costs of fossil energy and implies efficient –Increase of the share of renewables –Reduction of energy consumption Provided that CO 2 emission is the real target, individual targets on renewables’ share and energy savings may imply lack of efficiency and excessive social costs of attaining the target

Implications of the new framework on energy and climate policies: Examples

Forecast to 2025 of energy consumption and CO 2 -emission Assumptions Economic growth 1½ pct. Continued reduction of energy intensity according to trend Energy policy: Business as usual (prior to the energy agreement of February 2008) The ETS system continues efficiently (quota price 150 DKK) Prices of energy according to IEA’s assessment

End-user energy consumption

GNP, energy and CO 2 - emission

CO 2 -emission

CO 2 -emission, including air and sea transport

Development of energy intensity in some countries

Main results of forecasts to 2025 End user consumption increases by 11 percent while gross energy consumption is about constant. The target in the Energy Agreement is a reduction of gross consumption of 4 percent i The share of renewable energy increases to 30%.This corresponds to the Government’s target Consumption of fossil fuels falls by 15 %. This corresponds to the Government’s target. CO 2 -emission falls by 15 % but the electricity consumption of the households and the industries increases. The Government has no general target for CO2 emission in However, there is a target of 20 % CO2 emission for the sectors in the economy that are not included in the ETS.

The new political agreement 1 On the right track –The CO2 - Quota area and the Non-quota area should be aligned CO2 taxes in the Non-quota area should be set equal to the expected quota price compensation of the CO 2 -taxes is introduced (along the same lines as free allocation of CO2 quotas) But.. –The correct quota price is not known at the time the tax is set and the quota price varies over time. –Independent targets of CO 2 -emission in the two sectors in the economy may result in inefficient reduction of CO 2 emission even though the tax is equal to the quota price.

Policy recommendations I The Danish energy policy should focus on the Non- quota area of the Danish economy (individual heating and transport etc.). It is only on that area that the policy affects the CO 2 -emission. The energy agreement has too large a focus on the Quota area of CO2 emission The Danish energy policy should to a larger extent be directed to acquiring revenue to the Government i.e. less support more taxes. The energy agreement does not have this focus The CO 2 -taxes in the Non-quota area should reflect the quota price. This is a part of the energy agreement CO 2 -quotas should not be allocated free of charge and the revenue from CO2 taxes should not be returned to the the producer. The energy agreement does not have a policy on these issues

Policy recommendations II Not a need for additional support to renewable energy. The energy agreement focuses too strongly on supporting renewables that will be commercial with the new impetus of the ETS and the increased CO2 taxes The targets on the share of renewables can be attained by the existing regulation. Reductions on the administrative regulations should be contemplated (free choice of fuels) Support of research and development may be called for. However, the ”arm’ s length principle” should be applied such that one avoids direct industry support.