© OECD/IEA 2010 Carbon pricing and complementary mechanisms Christina Hood, International Energy Agency ECF Roundtable From Roadmaps to Reality Brussels 23 October 2012

© OECD/IEA Outline From climate models to real-world policy: the case for policy packages in climate change Policy interactions : mutually reinforcing, or undermining ? Promoting investment under uncertainty

© OECD/IEA Price of CO 2 /tCO 2 e MtCO 2 Policies to unlock cost- effective energy efficiency potential that is blocked by non-economic barriers Carbon price mediates action economy-wide From MAC curves to policy packages Technology support policies to: reduce long-term costs Enable timely scale-up Reduced long-term marginal abatement cost Infrastructure, Financing Source: Summing up the Parts, 2011

© OECD/IEA What investments are we trying to drive? Source: Energy Technology Perspectives 2012

© OECD/IEA Policy Interactions: Energy efficiency policies and carbon pricing can be mutually reinforcing. Carbon price reduces rebound from energy efficiency policies Energy efficiency policies keep carbon prices from being unnecessarily high

© OECD/IEA Price of CO 2 /tCO 2 e MtCO 2 Conventional Technologies New Technology (a) Price of CO 2 /tCO 2 e MtCO 2 (b) Ambitious target Carbon price ambitious target Modest target Carbon price modest target Ambitious target Carbon price ambitious target Modest target Carbon price modest target Technology support can lower long-term carbon prices Source: Energy Technology Perspectives 2012

© OECD/IEA EMISSIONS CAP 30% BELOW BAU BAU EMISSIONS Reductions from: energy efficiency polices technology policies price response in trading scheme 10 % 15 % SUPPLEMENTARY POLICIES UNDERACHIEVE (a) 5 % SUPPLEMENTARY POLICIES OVERACHIEVE (b) Policies interact, so design as a package e.g. Carbon price level depends on supplementary policy delivery Source: Summing up the Parts, 2011

© OECD/IEA EMISSIONS CAP 30% BELOW BAU BAU EMISSIONS Reductions from: energy efficiency polices technology policies price response in trading scheme 10 % 5 % BAU 5% LOWER THAN FORECAST (a) Adjust cap downward to restore scarcity in trading scheme? (b) e.g. Carbon price level more sensitive to economic conditions with supplementary policies Source: Summing up the Parts, 2011

© OECD/IEA Questions on policy interactions Policy packages can reduce costs and improve the feasibility of climate policy in the short and long term. But… 1.Can policy overlaps and interactions be adequately managed? … and if not, when is it better to choose a simpler policy package and sacrifice some mitigation potential? 2. How does the answer depend on whether policies are implemented at EU or member state level?

© OECD/IEA Delay until 2017 Delay until Emissions from existing infrastructure The door to 2°C is closing, but will we be locked-in ? Without further action, by 2017 all CO 2 emissions permitted in the 450 Scenario will be locked-in by existing power plants, factories, buildings, etc 45 6°C trajectory 2°C trajectory CO 2 emissions (gigatonnes) Source: World Energy Outlook 2011, IEA

© OECD/IEA Question - how to best deliver investment in low-carbon despite current uncertainties? 1. Improve long-term certainty of domestic policy… ? … but until there is greater consensus internationally there will still be discounting … but mixed messages based on todays political actions 2. Supplement with transitional policies to steer investment (e.g. UK CFDs) until there is greater international consensus on climate policy? Should this be explicitly acknowledged at EU level?

© OECD/IEA Thank you