1. Carbon pricing and policy packages for energy transitions
Sara Moarif, Acting Head, Environment and Climate Change Unit, IEA
Asia Pacific Climate Week, Singapore, 12 July 2018

2. 1. Context: energy and climate policies

3. Global energy-related CO2 emissions
The scale of the energy transition challenge
Global energy-related CO2 emissions
Gt CO2 36
Central Scenario
Efficiency
Renewables
Fuel-switching
CCS
Other
Nuclear
44%
36% 2% 6% 9% 32
Sustainable
Development Scenario 28 24 20 16
2010
2020
2030
2040
The Sustainable Development Scenario depicts a rapid, but achievable, transformation of the energy sector: the outcome for CO2 emissions is stark

4. Energy sector transitions
Energy transitions are driven by multiple objectives
Energy sector transitions
Drivers
GHG reductions
Lower energy costs
Jobs and growth
Energy security
Air quality

5. Energy Sector Transitions
Climate and energy policy links occur within broader policy landscape
Are critical for achieving
Energy Sector Transitions
GHG reduction
Are not the only (or primary) driver of
Interactions with various related policy objectives

6. Policy packages Power Generation 23%
Supporting markets and infrastructure
Carbon Pricing
Air quality regulations
Power Generation 23%
Fossil fuel phase-down
Energy efficiency
support
Renewables support
A broad basket of policies is relevant for energy transition: policy overlaps and interactions need to be taken into account for effective implementation

7. … but real-world policymaking is more challenging!
A broad basket of policies is relevant for energy transition: policy overlaps and interactions need to be taken into account for effective implementation

8. Policy packages, including carbon pricing, nevertheless remain key
Supporting markets and infrastructure
Carbon Pricing
Air quality regulations
Power Generation 23%
Energy efficiency
support
Fossil fuel phase-down
Renewables support
Different country contexts will lead to different policies playing different roles in line with policy priorities; their “size and shape” may vary and evolve over time

9. 2. Role of carbon pricing in energy transitions

10. [And “Bridge” Scenario]
Policy packages with “moderate” carbon prices
Region
2020
2030
2040
NPS
[And “Bridge” Scenario]
European Union 20 37 50
Chile 6 12
Republic of Korea
China 10 23 35
South Africa 7 15 24
450 Scenario
United States and Canada
100
140 22
Japan
Australia and New Zealand
China, Russia, Brazil and South Africa 75
125
Expected carbon prices are well below those needed to meet climate objectives

11. Comparing the role of carbon price and policies in IEA scenarios
Source: World Energy Outlook Special Report: Energy and Climate Change, 2015
Targeted policies can peak emissions, but high carbon prices and advance technologies give deeper reductions consistent with climate goals

12. Emissions from new investments in power generation
Source: World Energy Outlook Special Report: Energy and Climate Change, 2015
The targeted policies of the Bridge Scenario do a good job of aligning new power sector investment with a 2C Scenario .

13. What’s missing? Coal retirement and CCS retrofit
Source: World Energy Outlook Special Report: Energy and Climate Change, 2015
High carbon prices in the 450 Scenario are needed to drive early retirement of coal plant and retrofit for carbon capture and storage.

14. Transport sector: Comprehensive policy packages needed
Source: World Energy Outlook Special Report: Energy and Climate Change, 2015
Carbon pricing itself cannot unlock more substantial technology shifts such as electrification or advanced biofuels development.

15. Other policies can address…
Carbon pricing is key; but other policies are needed
Other policies can address…
1. Insufficient carbon price levels
2. Other (non-GHG) objectives
3. Non-cost barriers
4. Long-term transformation

16. Real-world policy packages
Domains of policy packages
Multiple objectives
Real-world policy packages
Domains
Constraints
Economic development
Negative cost opportunities
Optimisation based on pricing
Short-term investment for long-term returns
Economic competitiveness and distributional impacts
Social and health benefits
Historical economic structure & existing assets
Energy security
Attractiveness to investment
Sustainable energy transition

17. Optimising for short- and long-term reductions ?
Source: Perrissin and Foussard., 2016
A policy package for long-term transition may contain different elements than one for a shorter timeframe

18. 3. Examples: carbon pricing within policy packages

19. Interesting elements of Canada case study
National circumstances shape
1) Shared jurisdiction on energy and climate policy between federal and sub- national governments
2) Important global energy producer with strong climate and energy transition agenda
the policy package
Complex package of policies under the Pan-Canadian Framework on Clean Growth and Climate Change
A carbon price has been established as a central component of Canada’s policy package. The policy is designed as a backstop price, meaning that sub-national jurisdictions that do not meet an established benchmark will have a federal backstop price implemented, which takes the form of a carbon levy or tax, and for large final emitters the application of an output-based intensity-based tradeable performance standard, largely to help facilitate the transition for these sectors.

20. Shared jurisdiction over low-carbon energy policy
Both benefits and costs to policy being driven at the sub-national level
Canada’s approach to carbon pricing: balancing federal coordination with sub- national autonomy:
Backstop carbon price only applies to jurisdictions that do not meet benchmark
Revenues of federally-imposed carbon price are fully returned to jurisdictions
Many policy design features are left to provinces/territories
Silent on jurisdictions’ GHG targets and contributions to national target
Credit: Environment and Climate Change Canada

21. Complementing a carbon price with other policies in Canada
Role
Acting where carbon prices do not act effectively
Lowering long-term costs
Strengthening a “real world” carbon price
Canadian policy examples
National Model Building Code
Appliance energy efficiency standards
Financial and research support at all stages of innovation
Coal phase-out
Vehicle emissions standards
Carbon pricing is critical to driving energy transition, but other policies are needed.

22. Different policies in the transport sector serve different objectives
Example: Policy packages in Canada’s transport sector
Policy
Primary objective(s)
Vehicle emissions standards
Improve vehicle fuel efficiency
Renewable Fuels Regulation
Drive switch to biofuels in transportation and supporting infrastructure
Clean Fuel Standard (proposed)
Drive switch to cleaner fuels in all sectors and supporting infrastructure
Support for transit and active transportation; Urban planning
Drive modal shift
Reduce vehicle distance travelled
Carbon price
Lower demand (especially in the long term)
Switch to cleaner fuels
Different policies in the transport sector serve different objectives

23. Industrial re-structure
Overview of climate & energy policy package in China
Electricity Sector Reform (NEA)
Renewable curtailment (NEA)
Green Certificates (NEA)
Feed-in-tariffs (NEA)
Top Companies Energy Conservation (NDRC, MIIT, MOHURD)
Energy Consumption Quota Trading (NDRC)
Energy Supply
Energy Demand
Industrial re-structure
Climate change
National ETS (MEE)
Air Pollution
GHG 2030 peaking target (MEE)
Coal consumption cap
War on Air Pollution (MEE)
Provincial and local plans +

24. Carbon pricing in China
Origin: the 12 Five-Year Plan with 7 ETS pilots operational since 2013
Launch of the national ETS in December 2017
Began in 2018, moving to full compliance in 2020
Rate-based and bottom-up determined cap
Covers power sector now and will expand to include a total of 8 industrial sectors
Output-based allocation, based on proposed 11 benchmarks differentiated by fuel and plant size
Ongoing power sector reform taking place in parallel

25. Key questions for China ETS
What will be the role and function of the ETS?
Important to define initial design and how it will evolve over time
How will it interact with other energy transitions policies in China? (e.g. energy conservation, air pollution, renewable energy, economic restructure)
Understanding interactions
Addressing them – using mechanisms that promote flexibility and predictability
How will it interact with the nature of China’s power system?
Power market liberalisation and ETS development have great potential for mutual support
How will it manage industry concerns (in the near-term) and phase out transitional assistance over time?
Convergence of allocation benchmarks; shift to auctioning

26. Concluding points
Carbon pricing plays a critical role in the policy mix for energy sector decarbonisation…
…. but understanding its role, and how it layers with other policies, can be complex.
A high carbon price alone does not address all the aspects of energy transition...
.... Comprehensive policy packages are needed which vary by
energy sub-sector and over time.
Upcoming IEA work in this area:
Complete paper on international ETS experiences relevant to China’s national ETS
Deepen analysis on key issues raised (power sector and ETS; policy interactions)

27. Thank you Sara Moarif sara.moarif@iea.org