1. Climate Policy for Industry the EU Emissions trading scheme Climate Change Summit, March 2009 Johannesburg Karsten Neuhoff Faculty of Economics Cambridge University www.electricitypolicy.org.uk/tsec/2

2. Karsten Neuhoff www.electricitypolicy.org.uk\tsec\2 Outline The challenge for low-carbon policies Provide for the needs of different investors Provide for different technologies European package – a consistent framework?

3. Karsten Neuhoff www.electricitypolicy.org.uk\tsec\2 0 1 2 3 4 5 200720202050 Gt CO 2 in EU-27 Assumed emission growth business as usual 1%/year 2012 Linear 75% reduction trajectory The challenge for emission reductions

4. Karsten Neuhoff www.electricitypolicy.org.uk\tsec\2 Upward bias of ex-ante estimates (bottom up) * Upper estimate >£8000 million. Source: AEA Technology Environment, 2005, An Evaluation of the Air Quality Strategy, Report to DEFRA, available at: http://www.defra.gov.uk/http://www.defra.gov.uk/ Cost estimates of UK Policies during 1990-2001 0 1000 2000 3000 4000 5000 6000 Lead Free Petrol Euro I petrol Cars* 2000 fuel standards 2005 fuel in 2000/1 Flue Gas De- Sulphurisation (FGD) Low NOX burners Costs (£M) ex ante ex post

5. Karsten Neuhoff www.electricitypolicy.org.uk\tsec\2 A carbon price works through the value chain – example cement Clinker CementConcreteBuilding Other building materials Leaner structures Lower clinker content Substitution Efficiency

6. Karsten Neuhoff www.electricitypolicy.org.uk\tsec\2 Cross-country comparisons suggest strong link between energy price and energy intensity Source: Nebwery 2003

7. Karsten Neuhoff www.electricitypolicy.org.uk\tsec\2 Allowance prices – important for project investment

8. Karsten Neuhoff www.electricitypolicy.org.uk\tsec\2 European CO 2 emissions year 2020today 2050 Conventional coal Oil Gas Illustrative Future carbon targets – determine strategic choices BAU Energy Efficiency Renewables CCS/ additional nuclear

9. Karsten Neuhoff www.electricitypolicy.org.uk\tsec\2 Empirical evidence – experience reduces cost Source IEA

10. Karsten Neuhoff www.electricitypolicy.org.uk\tsec\2 Technology policy complements carbon pricing Low carbon technology Conventional technology Learning investment Future savings Learning investment Future savings Cost Experience (e.g. installed capacity) Carbon cost

11. Karsten Neuhoff www.electricitypolicy.org.uk\tsec\2 0 1 2 3 4 5 200720202050 Gt CO 2 in EU-27 Assumed emission growth business as usual 1%/year 2012 Linear 75% reduction trajectory Contribution from new low carbon technology portfolio Renewable target Kyoto target Trajectory 20% withoutinternat. action How does it all fit together? Contribution from energy efficiency

12. Karsten Neuhoff www.electricitypolicy.org.uk\tsec\2 Effective climate policy for industry Emission trading – share target across sectors Short-term – address ‘risk’ from low carbon prices Long-term – clear European and National targets Technology policy Support deployment of low carbon technologies Ensure a portfolio of renewables is available by 2020 Beyond Europe For few sectors, work internationally on leakage policies Lead by example in implementation and technology www.electricitypolicy.org.uk www.climate-strategies.org