1. Personal CO2 quotas and their techno-institutional context
Frede Hvelplund
2/6 2008

2. 1. Two “economics” approaches

3. Neoclassical approach- start position in optimum-only market tools
Supply
Demand
Initial institutional conditions.
- Tax structure
- Demography
- Time budgets
Etc.
Amount
Price
Market tools: quota,Co2tax etc.
Initial institutional conditions are ”Blackboxed” and regarded as being ”optimum” and producing ”optimum”

4. Institutional economy approach (market and institutional policy)

5. 2. CO2 emission from different sectors

6. PCA potential 1. Heat and electricity 11.7 mill tons CO2
2. Private transportation mill. tons CO2
3. Sum mill. ton CO2 or
30% - 40% of total DK CO2 emission.
This share may be increased if increasing parts of the CO2 emission from goods and services are included.

7. 3. The EU quota system and the concrete institutional setting (Nordpool)
Nordpool construction

8. Power demand before (red) and after CO2 quota (green)
Price 2
Price 1
Demand
Amount 2
Amount 1

9. Motivation of DONG,Vattenfall –existing large actors
Make sure that coal plants remains at the market as they are “producing” the high price level.
Avoid too much wind power , as it pushes the curve to the right and lowers the price at Nordpool.
Establish “barriers to entry” that protects the high coal power “produced” price.
A conclusion different from the anticipated
“textbook” effects og the EU system.

10. The EU quota system and its effects upon the consumer
After quota price p2
Coal Power Plant/company
Here goes the money from ”free quotas”
Electricity sale
Payment
Consumer
Electricity
consumption
Quota emitting authority
Co2 quota
El price
El sold
GWh
Market place i.e. Nordpool
Price increase 300 – 600 Dkr annually for all electricity consumed
Before ”quota” price p1

11. Price increase and motivation for conservation
Price increase of øre/ Eurocent per kWh for all electricity motivates for conservation.(7- 9 % price increase.
A motivation that for an average household amounts to Dkr. Annually.

12. 4. PCA and CO2 from heat and power production

13. PCA potential 1. Heat and electricity 11.7 mill tons CO2
2. Private transportation mill. tons CO2
3. Sum mill. ton CO2 or
30% - 40% of total DK CO2 emission.
This share may be increased if increasing parts of the CO2 emission from goods and services are included.

14. Personal CO2 allowances and the Danish techno- institutional structure

15. Institutional conditions in cogeneration systems
1.Often high fixed tariffs. In Aalborg a heating bill for a 140 m2 house will be around Dkr annually. Out of which will be fixed tariffs. So marginal heating costs is only Dkr. annually.
Result: Conservation motivation low
2. CO2 emission is the result of a mixture of coal and incineration plant heat and industrial wast. The CO2 cost is not a marginal cost in this system, but an average cost:
Result: CO2 allocation lower than marginal CO2 costs.

16. Household CO2 emission linked to heat and power

17. Institutional economy approach (market and institutional policy)

18. PCA plus institutional reforms

19. 5. The car example

20. Two cars Car Econ Car A 24 20.000 Cons. Car B 12 Km per liter
Km per year
Econ Car A 24
20.000
Cons. Car B 12

21. Neoclassical approach- start position in optimum-only market tools
Supply
Demand
Initial institutional conditions.
- Tax structure
- Demography
- Time budgets
Etc.
Amount
Price
Market tools: quota,Co2tax etc.

22. Incentive for change to economy car at 200 Dkr/26
Incentive for change to economy car at 200 Dkr/26.5 Euro/ton CO2 emission
Car
Annual
CO2 cost at 200 Dkr/ton
Marginal gasoline and O/M costs in Dkr per km
CO2 cost Dkr per km
Marginal cost Dkr per km after CO2 tax
Marginal cost increase in %
Econ A
400
0.6
0.02
0.62 3
Cons. B
800
1.2
0.04
1.24
Extra cost for B/incentive

23. Institutional economy approach (market and institutional policy)

24. Change of tax structure and 600 Dkr/tons CO2
Car
Marginal cost Dkr per km. Gasoline+ O&M
Change to km “Weight tax” Dkr per km
Km insurance payment
CO2 cost Dkr per km at 600 Dkr/tons
Marginal cost Dkr per km
Econ A
0.6
0.03
0.25
0.06
0.6/
0.94
Cons. B
1.2
0.15
0.35
0.12
1.2/
1.82
Extra cost for B/incentive
0.10
0.88

25. This is a change of marginal costs without change of average costs per km for a 20.000 km/year car.

26. 6. Three Governance tools and average price increases
Assumptions.
We want a marginal incentive of 600 Dkr per ton CO2.
1000 inhabitants in country A. Emission ton CO2.
EU quota ton CO2.
Three Governance ways:
CO2 taxation: The government gets the free quota)
Present EU quota system: The large companies gets the free quota.
PCA system: The consumer gets the free quota.

27. Average price increase in the three Governance methods
CO2 tax give price increase og 600 Dkr.
EU quota system gives price increase og 600. Dkr.
PCA gives price increase of 200 Dkr.
600 Dkr
1. and 2. average price increase
3.PCA based price average increase
200 Dkr
CO2 “Tax”
3 ton
4.5 ton
Present emission
Individual quota

28. 7. Conclusion
Necessary to develop a good description of the techno-institutional structure.
Develop PCA plus reforms of initial institutional setting is a must. PCA´s does not “do” it alone.
PCA´s are important because they represent a “taxation” of marginal use. In that way it makes a high conservation incentive possible without increases in average energy prices for an average consumer.