1. ERC HARALD WINKLER Economics of climate change Context and concepts related to mitigation Energy Research Centre University of Cape Town Workshop at the 2009 Climate Change Summit Wednesday 4 March 2009

2. ERC Climate change – an integrated framework Source: IPCC 2001

3. ERC Climate change economics lEnvironmental issue, rising emissions lDeeply economic issue – at heart of energy economy “Climate change presents a unique challenge for economics: it is the greatest and widest-ranging market failure ever seen” (Stern Review 2006)

4. ERC History: minerals-energy complex History: minerals-energy complex lComplex comprising mining, minerals processing, the energy sector, and associated industries (Fine & Rustomjee 1996) lCoal l¾ of TPES l> 90% of electricity l‘cheap’ and inefficient lParticular challenge for mitgation … l… while increasing access to affordable eneryg services lShort-term: energy efficiency lMedium-term: change fuel mix

5. ERC Future: low-carbon future lRedefine competitive advantage lfrom attracting energy-intensive sectors lto building a new advantage around climate- friendly technologies and systems

6. ERC Towards climate policy lLTMS strategic option of ‘Use the Market’ lPolokwane resolution on climate change lTreasury work on environmental fiscal reform lTheme of ‘putting a price on carbon’ lQuestion is ‘how?’

7. ERC Carbon and carbon markets lMarkets are a means, not an end lMay be efficient, but not good at equity lCarbon cycle is global – problem of common property management lHow to manage lMulti-laterally – UNFCCC, but also other scales lPrice vs quantity lPure regulation – standards lPure price – tax lCombination – cap-and-trade

8. ERC Conceptual distinctions Carbon tax GHG emission standards Cap and trade Economic instrumentsRegulatory instruments Green or white certificates Building standards Direct Indirect Fuel input tax

9. ERC Some broad questions 1. 1.What would the distributional implications of different economic instruments be? 2. 2.What are the implications, including costs and benefits, of choosing to use an economic instrument for mitigation? 3. 3.How could different instruments be combined 4. 4.How responsive is the system (and its parts) to various economic instruments for mitigation? (elasticity) 5. 5.What would a consistent and effective approach to energy- intensive sectors, in order to increase efficiency, encourage fuel switching and eventually diversify products 6. 6.What are the key design elements that need to be considered to design the best instrument for mitigation in SA? 7. 7.What supportive measures might be needed to implement a set of instruments? Implications of existing policy? What legal and institutional arrangements could we build on?

10. ERC Thank you Energy Research Centre University of Cape Town www.erc.uct.ac.za Environmental Policy Research Unit, University of Cape Town Genesis Analytics