1 Christoph Böhringer, Brita Bye, Taran Fæhn, Orvika Rosnes Joining a carbon policies coalition: Regional vs. Sectoral Where -Flexibility IAEE 2017 conference, Wien, September 3-6 1
Background • « Where -flexibility»: Possibilities for a small open economy to join a larger climate policy coalition • Example: Norway – not part of EU, but has the option to join the EU’s climate policy institutions and emissions targets • The gain is – or can be – more regional flexibility and allowance trading. • However – today’s EU has only a sectorally limited allowance market (EU-ETS) – joining will mean loss of sectoral flexibility compared to a unilateral solution • Obviously a trade-off between regional and sectoral flexibility 2
Norway’s climate policy history - Norway’s reduction targets have traditionally been high…. - but ambitions for domestic emission reductions have always failed – costly to reduce emissions (hydro-power) - Lesson learned: be sure to have access to flexibility as – Clean Development Mechanisms (CDM, Kyoto 2008-12 + 2013-20) – EU Emissions Trading System (ETS – Norway part of from 2008) – Suggestions for 2030 goals (Norway): Also integrate the non-ETS (NETS) sectors with EU Integrate the policy into the effort sharing decision in the EU Hope to get access to flexibility mechanisms that will pay for NETS abatement in the EU countries No decision yet, but positive signals from the EU Many questions are still unsolved on effort sharing and flexibility in EU 3
Literature Many previous articles have studied (ex.) • EU’s ETS and non -ETS targets and flexibility mechanisms • How EU should design its policy – and costs of second-best solutions – e.g. separating ETS and NETS targets. • Linking of ETS systems in different parts of the world • Alexeeva-Talebi & Anger 2007; Böhringer et al. 2008; Tol 2009; Flachsland et al 2011; Marschinski et al 2012….. Here: The perspective of a small, open, ambitious country • Is it economically worthwhile to join a larger coalition? – Is flexibility within ETS or NETS (regional) more welfare-improving than flexibility within Norway (sectoral)? • Method: Global CGE-model, Norway is a region • Abatement costs, welfare, competitiveness and carbon leakage 4
Emission reduction targets (Paris) in 2030 (from a simulated 2030 benchmark) NOR EUR nets -10% nets -40% ets ets -10% -35% 5
Policy scenarios Norway’s choices for obtaining the Paris target of 35-40% cut – Domestic, cost-effective policy (sectoral flexibility – no regional) NATional – Join the EU-ETS (less sectoral flex, more regional flex) ETS – Join the whole EU climate efforts and hope for NETS flexibility SILO – Total cost-effective EU policy (full flexibility – region and sector) ALL Leads to 3 research questions: 6
7 Flexibility regimes Research question 1: Is moving from HIGH Sectoral and LOW Regional (as in NAT) flexibility to HIGH Regional but LOW sectoral ( as in ETS) a good idea? = The decision Norway made when entering the EU ETS system in 2008 It gains to increase regional flexibility but it costs to reduce sectoral flexibility – the answer is not obvious.……. SECTORAL LOW MEDIUM HIGH Within ETS Within both ETS and NETS Across ETS and NETS LOW NONE NAT REGIONAL National HIGH ETS SILO ALL International 7
8 Flexibility regimes Research question 2: How much can be gained by linking NETS to the EU? i.e. going from ETS to SILO? = The current Norwegian & EU climate policy negotiations Without flexibility in NETS: Nothing to gain With flexibility in NETS (which Norway hopes for): How much can be gained? SECTORAL LOW MEDIUM HIGH Within ETS Within both ETS and NETS Across ETS and NETS LOW NONE NAT REGIONAL National HIGH ETS SILO ALL International 8
9 Flexibility regimes Research question 3: What are the effects of going from SILO (partial international flexibility) to ALL (full international flexibility) ? For the whole EU+NOR region, it gains to attain full sectoral flexibility But not necessarily for Norway? (In fact - distributional concern is the main obstacle for this policy in the EU) SECTORAL LOW MEDIUM HIGH Within ETS Within both ETS and NETS Across ETS and NETS LOW NONE NAT REGIONAL National HIGH ETS SILO ALL International 9
The global CGE model SNOW * * Statistics NOrway’s World model • Multi-region (8 regions) • Multi-sector (17 sectors), ETS and NETS sectors • ETS sectors also include EITE sectors • Static, calibrated to 2011, projects 2030 benchmark and policies • Includes CO 2 emissions only • One representative household in each region • Labour and capital mobile within regions, not across • Bilateral (Armington) trade • Options for emissions trade • Programmed in GAMS-MPSGE 10 10
Regions in the SNOW model NOR Norway EUR Rest of Europe NAM North America CHN China RUS Russia OOE Other OECD EEX Energy-exporting countries ROW Rest of the World 11 11
12 Sectors in SNOW ETS COL Coal CRU Crude oil extraction ETS GAS Natural gas extraction ETS OIL Petroleum and coal products (refined) EITE ETS PPP Paper and pulp and print EITE ETS CRP Chemical products EITE ETS NMM Non-metalic minerals EITE ETS I_S Iron and steel EITE ETS NFM Non-ferrous metals EITE ETS ELE Electricity ETS ATP Air transport ETS OTP Other transport WTP Water transport AGR Agriculture and forestry and fishery C Household G Government consumption I Investment 12
13 Method: Numerical simulations of abatement costs Reduced form representation of the CGE model’s abatement costs - Direct abatement costs – integral of the marginal abatement cost curves (MACs) - Not including general equilibrium effects (come back to) • Graphical illustration: C‘ (€/t) 160 140 120 100 Poly. (NOR ETS) 80 Poly. (NOR NETS) 60 Poly. (EUR ETS) 40 Poly. (EUR NETS) 20 0 0 10 20 30 40 50 abatement (Mt CO 2 ) 13
14 Are there net abatement costs? moving from NAT to ETS for NORWAY? YES The loss of sectoral flexibility outperforms the gain of regional flexibility (+260 mill €) For Norway it was not a good idea to join the ETS COSTS (as shares o GDP) SECTORAL LOW MEDIUM HIGH Within ETS Within both ETS and NETS Across ETS and NETS NAT NOR: 0.58% GDP LOW NONE REGIONAL National ETS NOR: 0.64% GDP HIGH SILO ALL 14 International
15 Are there net abatement costs of moving from NAT to ETS for EU ? For EUR (as a whole): Also loss No surprise – only a cost (except for distribution?) Trading with Norway no impact. Much smaller impacts of climate policy - Lower marginal abatement cost curves - Much shorter left to go (10% vs almost 40%) SECTORAL MEDIUM LOW Within both ETS and HIGH Within ETS NETS Across ETS and NETS NAT NOR: 0.58% GDP LOW NONE EUR: 0.02% GDP National REGIONAL ETS NOR: 0.64% GDP EUR: 0.03% GDP HIGH SILO ALL International 15
16 RQ2: Gain of linking NETS policy to that of the EU, too - from ETS to SILO Making use of both partial ets and partial nets flexibility in the EU system No change for the ets sector More flexibility in the nets sector Unambiguous gain = down to ¼ of the cost If……full flexibility in the nets (still a political question) SECTORAL LOW MEDIUM HIGH Within ETS Within both ETS and NETS Across ETS and NETS LOW NONE NAT REGIONAL National ETS SILO HIGH ALL NOR: 0.64% GDP NOR: 0.16% GDP International 16
17 RQ 3: Gain of full flexibility (from SILO to ALL) Not necessarily a gain for Norway: One uniform price -> one sector obtains lower, the other higher, price. The net cost depends on the net effect for its two sectors Result: Norway gains to increase sectoral flexibility even further More in line with the costs of the EU (0.02%-0.03% in all the scenarios) SECTORAL LOW MEDIUM HIGH Within ETS Within both ETS and NETS Across ETS and NETS LOW NONE NAT REGIONAL National SILO ALL ETS 0.16% GDP 0.04% GDP HIGH International 17
18 Summing up In the current situation (with EU-ETS), any scope of flexibility in NETS will help compensating for the excess cost of having joined the ETS A full SILO solution will be very favourable for Norway (1/4 of the cost) Full flexibility (ALL) is not very likely due to distributional concerns both across countries and sectors. However - that would render costs of Norway more in line with those of the EU (0.02-0.03%) SECTORAL LOW MEDIUM HIGH Within ETS Within both ETS and NETS Across ETS and NETS NAT NOR: 0.58% GDP LOW NONE REGIONAL National SILO ALL ETS NOR: 0.64% GDP 0.16% GDP 0.04% GDP HIGH 18 International
Additional effects – final remarks • Welfare impacts - including terms of trade, tax interaction effects No final results yet, but it seems – Terms-of-trade effects are negligible, – Tax interaction effects turn welfare effects opposite the abatement costs in some regimes – Carbon leakage: small (10-15%) i.e. from SILO to ALL raises ETS price • Industrial competitiveness and distribution – The higher ETS price, the more competitiveness loss for EITE sectors – Interesting differences among sectors – reason to rethink EU’s free allowance policies and the electricity compensation scheme? • ->Topics for further research 19 19
Thanks for the attention bby@ssb.no 20 20
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