The Cambridge-MIT Institute Allocation of CO 2 Emission Allowances Carnegie Mellon University October 2004 Karsten Neuhoff University of Cambridge In collaboration with Kim Keats, ICF Consulting, London. See also CMI working paper 49 @ econ. cam. ac. uk/electricity
Outline • CO 2 emission reduction strategy – Failure of voluntary commitments – Effectiveness of price mechanism – Separate environmental externalities from technology policy (learning externalities) • The European Emission Trading Scheme • Impact of updating (conditional allowance allocation) • Impact of free allowance allocation to new entrants • Border tax adjustment to allow auction of allowances and higher CO 2 prices 2
European strategy to reduce CO 2 emissions • European Climate Change Program 2000 • Bonn/Marrakech/EU required delivery of Kyoto targets • After criticising US, policymakers had to show action • Failure of voluntary commitments in 1990 3
Instrument I: Industry self regulation Example Germany • CO 2: 2000 industry promised 20 Mtones reductions by 2005 –so far only increase • Industry option to avoid renewables legislation by achieving quota (1990) failed • Education quotas at firm level • Price stability with Euro introduction • Self-regulation of energy sector • Cigarette advertising/ product labelling • Lacks sanctions: free riding in sector • BUT good to delay state intervention 4 Source: Kontraste. de, Axel Friedrich Umweltbundesamt
Development of Energy intensity from 1971 to 2000 Austria Belgium France Germany JPN UK USA Mtoe/mld USD 0, 5 0, 4 0, 3 0, 2 0, 1 0 1970 1980 1990 2000 Oil price spike in 1970’s increased energy efficiency far more than climate debate of 1990’s. Source: Miroslav Honzík, GDP is translated using PPP, Prices of 95 5
Instrument 2 … prices The economy can change energy intensity Cross-section relation between average energy intensity and average energy price 1993 -99 1400 DEN average energy price $/toe 1200 JPN NOR 1000 AUT ITA 800 LUX SUI Inertia? SWE 600 UK FIN BEL 400 NZ USA HUN TUR KOR MEX CAN POL CZE SVK 200 Best fit constant price elaticity of -1. 0 (S. E. 0. 14), R 2 = 0. 69 (Excl CEE) 0 0. 00 0. 10 0. 20 0. 30 0. 40 0. 50 0. 60 0. 70 0. 80 average energy intensity (kg oil equivalent/$95 GDP) Source: Nebwery 2003 0. 90 1. 00 6
Instruments CO 2 price … increasing energy costs $/t. CO 2 Energy efficiency measures Allowance price t 7
Implied CO 2 price varies widely between sectors and countries 157 169 119 120 126 134 136 49 67 82 85 91 94 97 98 110 2010 Min. 2003 Min. 1993 Min. UK Germany Denmark Italy France Netherlands Ireland Finland Spain Belgium Austria Poland Luxembourg Greece 18 c/gln = CO 2 Price E 20/tonne Sweden 180 160 140 120 100 80 60 40 20 0 US taxation rate (cents/gallon) Example: Diesel Source: EU Commission (Stand 2002/Deutschland 2003); American Petroleum Institute 2004, Energy Information Administration, 2004 8
And inertia / transaction costs need to be addressed • EU Commission Green Paper 2000: technical potential for improved energy efficiency of 40% • EU Commission Green Paper: “CCLA’s were far more >18% potential for cost likely to have taken action effective improvements to improve energy efficiency … 87% of CCLA firms had taken action or were planning to do so compared with 42% of non -CCLA firms” Source: CBI/EEF review of CCL, October 2002 9
Instrument CO 2 price … changing relative costs $/t. CO 2 Renewables without technology support for initial deployment Allowance price t CO 2 pricing is unlikely to unlock new renewable technologies. But reduces costs of strategic deployment programs. 10
Technology cost reductions with deployment 11
Technology Policy – separate from CO 2 trading • Renewable contribution – Quotas EU commitment: 13. 9% (97’) to 22% (10’) – Implemented using national policy – So far only feed in delivered (DK, D, ES) • Some renewable RDD programs • Transport of energy / transport fuel – H 2, 2 bil. Euro in 6 th framework/ in US $1. 7 bil. • Carbon Sequestration/nuclear perceived as marginal – Public concerns about leakage Source: Directive 2001/77/EC , http: //www. europa. eu. int/comm/energy/res/legislation/electricity_member_states_en. htm 12
Emission Trading Scheme and Kyoto • ETS independent of Kyoto entering into force • ETS set up to comply with Kyoto targets • Russian signature (seems quite secure) – Would start Kyoto – Will Russia/Ukraine oversupply? – CO 2 allowance trade only at state level – Review if member state import more than 6% of allowances. – Limit imports to keep carbon price up • US participation would increase carbon price 13
The ETS System: A Four Level Approach EU MS 1. . . Residential Sector 1 …DE. . . ET Sector X Install. 1. . . Sector n …Install. X. . . EU MS n Transport Reserve …Install. n Cap defined by EU Burden Sharing Different cap options (modeling, voluntary agreements, distance to target) Different cap options (Flat rate, sector specific caps) Different Allocation options. Most likely: common formula + extra allocation 14 Ref: Matthes, Oeko Institute
Average cap and BAU emissions compared to Kyoto commitment for 2006 Source: ECOFYS, The BAU numbers are in most cases indicated in the National Allocation Plan. If BAU was not available in NAP, but needed to be derived from other sources, this is indicated by using an open circle, instead of a closed circle. If it was not possible to derive a BAU, no circle is given for that specific country. 15
Issues about the NAPs • Incentive for countries to allocate more rights – Value of rights for national industry/auction – Impact on EU emission price -> cost of inappropriate adjustment • Objective of Commission to implement mechanism on time (January 2005) 16
Allocation plans • Political economy – buy in of companies • SO 2/NOx: In US – lump sum to incumbents. • CO 2: higher value + politicians equity concern – Explicit updating • NAPs defined till 2007, Kyoto till 2012 – Implicit updating regarding future allocation • New Entrant provisions – Regional competition or Coal support? 17
Empirical - Impact of CO 2 allowances 18
Comparing marginal costs of coal and gasfired plant 19
Net cashflow impact with auctioned emission rights All figures in £/k. Wyr (1) Energy sales revenue (2) Fuel expense (3) O&M expense (4=1 -2 -3) Energy sales margin (5) Net purchases of CO 2 allowances (6=4 Operating margin -5) (7) Scarcity rent (8=7+6) Total margin Pulverised coal plant BAU € 10/t. CO 2 Change 117. 8 134. 9 17. 1 70. 8 69. 9 -0. 9 33. 1 0. 0 Gas -fired CCGT plant BAU € 10/t. CO 2 Change 131. 1 164. 5 33. 4 95. 9 106. 8 11. 0 21. 7 0. 0 13. 8 31. 9 18. 1 13. 5 35. 9 22. 4 0. 0 33. 1 0. 0 17. 5 13. 8 13. 7 27. 5 -1. 2 13. 7 12. 4 -15. 1 0. 0 -15. 1 13. 5 13. 7 27. 2 18. 4 13. 7 32. 0 4. 9 0. 0 4. 9 20
UK - change of CO 2 emission with regulation 21
UK - change of SO 2 emission with regulation 22
1840 UK - cost of implementing Carbon Constraint Static 1385 23
Impact of updating I 24
One time updating Assume one time updating - pt+1 const A’ = 0 A’->inf A’ positive … only price increase … only emission increase … both price and emission increase 25
Continuous updating Future allowance price also increases, enhancing the effect of updating on today’s allowance price. 26
Quantification of CO 2 constraint Assume A’->inf … government fixes allowance price Calculate E’ as function of fuel switching etc. 27
1840 Cost of implementing Carbon Constraint - Static 1385 28
Allocation of Allowances to new entrants pmax cm, 2 Dmin K 1 Fixed costs: cf, 1 Dmax K 2 cf, 2 (assume 29 Dmax-Dmin=1)
Impact of the amount of free allocation pt=ct 30
Government strict on quota d. K 2 /dμ>0 -> d. K 1/dμ >0 if Scarcity value of capacity decreasing. To ensure profitability of technology 1, dct/dμ > 0 • Investment in both technologies is increased (while scarcity value positive) • Allowance price and for d. A/dct>0 emissions increase. 31
Government stabilises price d. K 2 /dμ>0 -> d. K 1/dμ <0 if Scarcity value of capacity decreasing. d. K 2/dμ>0 d. K 1 /dμ <0 and d(K 1 +K 2)/dμ K’ 1+K’ 2>0 emissions increase dct/du > 0 • Low emission technology is displaces by high emission technology and total capacity increases. • Allowance price and emissions are increased. 32
Impact of Allocation Rules on UK Wholesale Prices Price reflects energy-weighted average wholesale power price across UK assuming a CO 2 price of 10€/tonne. Source: ICF Consulting, March 2004. 33
Impact of competing countries not participating • Concerns for competitiveness of EU industry • Could particularly affect location decisions • Hence provisions for allocation of allowances to new entrants in NAPs (for 2005 -2007) – Distortions of technology choice (Germany) – Distortions of location choice (between countries) – Long-term commitment reduces policy options – How many reserves to retain for entrants? • Updating provisions – reduce effectiveness 34
Requirement to implement stringent policy • Emission trading only works if – No updating: allowance price=opportunity cost – Minimise allocation to new entrants • EU Energy intensive industry will lobby against high CO 2 prices if they are unilateral • US Energy intensive industry will increase lobby against CO 2 constraints if they can free ride • We need border tax adjustment 35
Border Tax Adjustment for CO 2 allowance costs • • Reimburse exporter for allowance costs Add import tax for avoided CO 2 allowance costs Allows for internalisation of externalities Treatment similar to value added tax – Other regions can apply it (e. g. Canada) – But product not process based • Focus on energy intensive component – Small transaction costs – Based on best available technology – Simple monitoring / tariff setting • WTO compatible 36
Conclusion • • ETS in place and starting January 2005 Covers emissions from large installations Technology policy separate (and needs to be) To get industry buy in: Free allocation – Politicians then required Updating – New entrant allocation • Result are likely – Allowance prices look higher -> don’t be fooled! – Distortions in investment decisions. • Border tax adjustment could allow for higher CO 2 price levels. 37
Скачать презентацию The Cambridge-MIT Institute Allocation of CO 2 Emission
4185d8e9319511b5b747b841377f4507.ppt