1 Economics of The European 2020 Climate Goals Torben K. Mideksa Center for International Climate and Environmental Research - Oslo April 18, 2009 The 18th Ph.D. Student Workshop on International Climate Policy Columbia University New York

2 Motivation “Europe showed itself ready to give global leadership: to tackle climate change, to face up to the challenge of secure, sustainable and competitive energy, and to make the European economy a model for sustainable development in the 21st century.” Targets for 2020 A reduction of at least 20% in greenhouse gases (GHG) by 2020 A 20% share of renewable energies in EU energy consumption by 2020 Saving 20% of energy consumption by 2020 through energy efficiency Beyond 2020 : “Galvanizing the potential for deeper cuts in emissions … to meet the target of halving global emissions by 2050” through Stimulating technological development Promoting a comprehensive international agreement

3 Two Big Questions How are we going meet the targets for the 2020? How would meeting these targets pave the way to the ultimate destination of a carbon neutral society?

4 Q1. How are we going to meet the targets for 2020? Specifically: A. What is the regional and sectoral distribution of abatement if emissions are reduced cost effectively? B. What derives major abatement? Is it due to i.fuel switching? ii.efficiency improvements? or iii.structural adjustments? C. What is the cost of meeting these targets?

5 Method We used a Recursively Dynamic Global General Equilibrium Model[GRACE] –With GTAP v6 database (12 regions + 19 sectors) 10 European Regions, Developed, and Developing Regions. Disaggregated European Electricity Supply sector, using bottom-up information, into 1.Coal 2.Natural Gas 3.Oil 4.Nuclear 5.Hydro and 6.Other Renewable Sectoral capital mobility

6 Climate Policy Scenarios Common assumptions –Economic Growth 2% in EU and developed regions –4% in the rest of the world –Maximum Capacity expansion for hydro in each country -- 10%(2010) and 20%(2020) –Maximum Capacity expansion for nuke in each country -- 10%(2010) and 20%(2020) but constant in the case of Germany. –Capacity limit for others is 200%. SCENARIO-1: Business As Usual [BAU] SCENARIO-2: A Cost effective 20% Abatement [Ideal] SCENARIO-3: SCENARIO-2 plus 20% share of renewable target SCENARIO-4: Scenario –3 Realistic

7 II. RESULTS BAU

8 Regional Distribution of Abatement RegionsBAU EM.20% ideal20% ideal & 20% Renewable 20% Realistic Nordics5 %3 % 4 % UK & Ireland17 %16 % France & Switzerland13 %10 % 11 % Germany & Austria21 % BeNeLux8 % Latvia, Lithuania, Estonia, Poland7 %10 % 9 % Spain & Portugal10 %8 %9 % Italy10 %9 % Greece2 %3 % Rest of Eastern Europe8 %12 % 11 %

Sectoral Distribution of Abatement SectorsShare of BAU Emissions 20% ideal20% & 20% Ren 20% Close Transport Services24 %11 % 13 % Heavy Industry6 %8 % Agriculture and Food4 %5 % Metals2 %3 % Services5 % 6 % Energy Prod1 %0 % Electricity31 %53 %54 %47 % Other Industry3 %4 % Household23 %10 % 13 % Total

10 What derives major abatement?[1]

11 What derives major abatement?[2]

12 III. Economic Costs 1. Permits trade and inter country resource flow 2. “Welfare” cost- price of environmental improvement 3. Changes in the price of the product that derives major abatement

13 Permit Revenue (2001 $bn) Regions20% ideal20% with 20% Renewable 20% Realistic Nordics UK & Ireland France & Switzerland Germany & Austria47 45 BeNeLux Latvia, Lithuania, Estonia, Poland Spain & Portugal13 20 Italy17 22 Greece4 4 5 Rest of Eastern Europe

14 Permit Trade in 2001 $bn (Net Export) Regions20% ideal20% with 20% Renewable 20% Realistic Nordics UK & Ireland France & Switzerland Germany & Austria BeNeLux Latvia, Lithuania, Estonia, Poland Spain & Portugal Italy Greece Rest of Eastern Europe

The Cost of Environmental Improvement Regions20% ideal20% with 20% Renewable 20% Realistic Nordics-1.80 %-2.09 %-2.47 % UK & Ireland-2.34 %-2.36 %-2.71 % France & Switzerland-1.84 %-1.78 %-2.38 % Germany & Austria-2.53 %-3.03 %-3.38 % BeNeLux-2.44 %-2.52 %-3.01 % Latvia, Lithuania, Estonia, Poland-6.52 %-6.39 %-6.72 % Spain & Portugal-2.56 %-3.19 %-3.71 % Italy-2.25 %-2.60 %-3.23 % Greece-3.86 %-4.25 %-4.40 % Rest of Eastern Europe-6.91 %-6.77 %-7.76 %

16 Changes in Electricity Price Relative to the BAU Regions20% ideal20% with 20% Renewable 20% Realistic Nordics18 %14 %9 % UK & Ireland46 %42 %30 % France & Switzerland27 %24 %17 % Germany & Austria50 %41 %28 % BeNeLux36 %32 %23 % Latvia, Lithuania, Estonia, Poland96 %90 %65 % Spain & Portugal31 %25 %17 % Italy33 %25 %17 % Greece83 %74 %52 % Rest of Eastern Europe58 %54 %40 %

17 Summary so far If Europe attains its 20% emission reduction goal by 2020 in a cost effective manner, the electricity sectors plays major role in the abatement of emissions. The abatement in the electricity sector is achieved partly by switching to other fuels, partly by reducing production, and by expanding production in the renewable energy sector. These changes raise the price of electricity by 25% to 50% in Europe. Moderate cost solution characterized by –Substitution within fossil fuels –Substitution to non-revolutionary renewable –Energy efficiency improvements –Reduced output in e-intensive tradable

18 Q.2 What are the Implications for Long term Goals? Why minimum carbon leakage? –Effective global agreement –Stimulating cleaner energy technology Why technological Progress? –Deeper Emission cut –Broader Participation (Especially Developing Countries)

Carbon Leakage EU Emission in in Gt CO 2 Gross AbatementCarbon Leakage to ROW Net Abatement 20% ideal % & 20% Ren % Realistic

Implication for Technological Progress? Cap and trade supplemented by renewable support (cross subsidies) yields –Low emission prices –Low electricity prices Do we have reasons to believe that we will have better than non-revolutionary renewable and CCS?

21 In sum, If Europe wants to meet the 2020 targets, the electricity sector derives major abatement mainly through fuel switching but also through efficiency improvements, and structural adjustments with modest cost. Meeting the target costs less than 3% of GDP and raises price of electricity by no more than 50% in most regions. Thus, due to lower changes in price and significant leakage, the implications for global climate agreement and far reaching technological progress are quite weak.

22 Finally, Thank You