Infrastructure Investment under Uncertainty The Role of EU ETS Infraday Berlin October 8/9, 2007 Karsten Neuhoff www.electricitypolicy.org.uk/tsec/2 Version 1.10.2007
Infrastructure Investment under Uncertainty • Carbon price is fundamental – transition is challenge • Actors differ across sectors/organisations • Low Carbon policy tailored for decision makers Karsten Neuhoff, 2
Carbon price fundamental 1,400 Denmark 1,200 Japan 1,000 Norway Best fit constant price Average energy price $/toe Austria elasticity of -1.0 a Italy 800 Germany Luxembourg Switzerland Sweden Portugal Finland France 600 Spain New Zealand Netherlands Hungary United States Greece Turkey Australia 400 Korea Slovakia Mexico United Czech Republic Canada Poland 200 Kingdom Belgium 0 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Average energy intensity (kg oil equivalent/$1995 GDP) Source:Newbery, D. M. (2003) Sectoral dimensions of sustainable development: energy and transport. Karsten Neuhoff, 3 Economic Survey of Europe 2(73-93).
The challenges for the transition • Concerns about leakage • Distributional impact from changes of relative prices • Managing the transition: “next 10 to 20 years …[until] carbon pricing is universal and is automatically factored into decision making” [The Stern Report] Karsten Neuhoff, 4
Perspective ‘Oil companies’ - the big picture mio t oe EE 3000 Renewables Nuclear 2500 1. Early role of Gas 1 energy efficiency Oil 2000 2. Long-term role for Solid fuels renewables, but 2 1500 no time frame 3. Phasing out of conventional coal 1000 500 3 0 0 3 6 9 2 5 8 1 4 7 0 3 6 9 2 5 8 1 4 7 0 9 9 9 9 0 0 0 1 1 1 2 2 2 2 3 3 3 4 4 4 5 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 Historic data – Energy and Transport in Figures, 2006. Own projections for 20% Emission reductions by 2020 and 80% by 2050. Karsten Neuhoff, 5 CCS fraction 2% in 2020, efficiency 85% in 2020 and 80% in 2050, all emission reduction domestically
Perspective ‘Technology company’ - Renewable targets Illustrative Energy from renewable Energy 1. ‘Early’ role for 2 renewables 2. Long-term position of technologies conditional on their Wind 1 performance l a m r e h t r a l o S / V P / e n i r a M Biomass Hydro 2050 Today 2020 Karsten Neuhoff, 6
Perspective ‘Large utilities’ - Emission projections MtCO2/year 2500 Proposed 125 NAP II** 88 2000 Final NAP II*** Other Adjustments* Adjustments 1500 NAP II for opt-in in + (JI/CDM range) Phase II Max projection 1000 60% 20% projections projections 500 Verified Min Projection Emissions 0 Avg. 2005 2008 2009 2010 2011 2012 2008-12 Source: Emissions Projections 2008-2012 versus NAP II (2006) by Karsten Neuhoff, Federico Ferrario and Michael Grubb. Published in Climate Policy 6(5), pp 395-410. Karsten Neuhoff, 7
Perspective ’Non-energy companies and banks’ - CO 2 market prices Illustrative 1. Short and not Price CO 2 allowances representative history 2. Downside risk for high Carbon assets 2 main obstacle for coal investment 3. Difficult to quantify 1 downside risk for low Carbon investments 3 2050 Today 2020 Everyone looks Banks and utilities look at at price history Forward prices Karsten Neuhoff, 8
Perspective ‘Small decisions’ - Regulation and standards • In many decisions Carbon price insignificant • Landlord tenant issues, habits, information failure -> Carbon price alone can not tackle inertia • Regulation against the price signal difficult to enforce -> Regulation alone does not do the trick either Karsten Neuhoff, 9
Conclusion – and outlook ‘Stylised sector’ Decision based on Policy implication Oil majors Credible emission Consistent policy target Large utilities ETS cap Strong caps, auctions, put options by government Non-energy/ bank CO2 price projection Reservation price in auction Technology Renewable target Enact national responsibility Small decisions Current Make ministries prices/standards responsible www.electricitypolicy.org.uk/tsec/2 Karsten Neuhoff, 10
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