On the Interaction of Policy Instruments: Implications of - PowerPoint PPT Presentation

On the Interaction of Policy Instruments: Implications of Overlapping Regulation under Different Levels of Electricity Demand Oliver Schenker ZEW – Centre for European Economic Research, Mannheim

European Climate and Energy Policy – Targets for 2020 20% share of 20% GHG renewable emissions 2008 energy reduction Climate and Energy Package. Targets for 2020 20% improvement in energy efficiency CECILIA2050 Conference ● Bruxelles ● March 6, 2014 2

European Climate and Energy Policy – Achievements GHG emissions 13% share of in 2012 18% renewable lower than in energy in 2012 1990 Achievements The energy intensity of the EU economy has reduced by 24% between 1995 and 2011 CECILIA2050 Conference ● Bruxelles ● March 6, 2014 3

European Climate and Energy Policy – Instruments and policies   Renewable EU ETS  Energy MS policies Directive (ESD)  Instruments and MS policies policies to reach these targets  Energy Efficiency Directive  MS policies CECILIA2050 Conference ● Bruxelles ● March 6, 2014 4

Instruments and Policies Overlap and Interact Interactions Why several instruments? Consequences ? CECILIA2050 Conference ● Bruxelles ● March 6, 2014 5

Why several instruments?  Goal to mitigate GHG is one of many policy goals  Reduce air pollution  Energy security  Create jobs, secure competitiveness  Tinbergen Rule: # Policy Target = # Policy Instruments  But also additional market failures beyond climate ext.  Market failures in knowledge generation  Distorted incentives for energy efficiency measures 6 CECILIA2050 Conference ● Bruxelles ● March 6, 2014

Climate policy has to work in a complex real world with:  Significant transaction and enforcement costs  Complicated innovation and diffusion processes (path dependency, lock-in, long- lasting nature of investments)  Political and legal constraints. Policies have to be embedded in existing frameworks 7 CECILIA2050 Conference ● Bruxelles ● March 6, 2014

Consequences of interaction:  Modelling in 2007 indicated EU-ETS price of ~ 30 EUR/tCO2.  In fact, in 2013: 5 EUR/tCO2 or lower  Current European climate policy has to work under unforeseen economic crisis  But another part of the explanation:  RE deployment policies reduce fossil fuel use, CO2 emissions, and thus, demand for allowances  Several measures proposed to stabilise prices  Backloading, Market Stability Reserve, Carbon Market Authority 8 CECILIA2050 Conference ● Bruxelles ● March 6, 2014

Economic situation and the interaction between RE target and EU ETS  Policy targets are set ex-ante. Economic activity in target year is unknown.  Question: How does the economic situation affect the interaction between RE target and EU ETS? 9 CECILIA2050 Conference ● Bruxelles ● March 6, 2014

Basic Intuition – Power Sector Abatement if Demand is Low Emission reduction GAS target is reached with fuel switch only COAL Emission Reduction Target BAU Emission Red. CECILIA2050 Conference ● Bruxelles ● March 6, 2014 10

A Stylized Model of the European Power Sector  Distinguish between 6 generation technologies: Nuclear, Coal, Gas, Wind (R), Solar (R) , Rest  Technologies differ in their carbon intensity  Calibrated to the European electricity market of 2030 as in the Reference Scenario of „EU energy trends for 2030“. Outcome of PRIMES Model  3 policy scenarios: I. Single Emissions Cap (CO2 Reduction -40%) II. Single Renewable Share (30%) III. Joint Emissions Cap and Renewable Share  Economic growth scenarios and respective electricity demand: IA Energy Roadmap 2050 CECILIA2050 Conference ● Bruxelles ● March 6, 2014 12

Carbon and RES Prices 80 CO2 Price [EUR/tCO2] Joint 60 Single Cap 40 20 0 3750 3800 3850 3900 3950 4000 4050 4100 4150 4200 4250 4300 Total Demand Electricity in 2030 [TWh] IA RM High Growth IA RM Low Growth 50 RES-E Price [EUR/MWh] Single RES-E 40 Joint 30 20 10 0 3750 3800 3850 3900 3950 4000 4050 4100 4150 4200 4250 4300 Total Demand Electricity in 2030 [TWh] CECILIA2050 Conference ● Bruxelles ● March 6, 2014 13

Excess Costs in 2030 1400 1200 Excess Costs [Mil EUR p.a.] 1000 800 600 400 200 0 Low Growth Scenario Reference High Growth Scenario CECILIA2050 Conference ● Bruxelles ● March 6, 2014 14

Dynamic incentives  If there are additional market failures,  e.g., because firms are unable to appropriate the full benefits from innovation, thus underinvest  Additional instruments are necessary to correct for these additional market failures  Optimal policy involves a policy portfolio  Criteria: Benefit of additional instrument vs. cost of overlap 15 CECILIA2050 Conference ● Bruxelles ● March 6, 2014

Conclusion Policy interactions might have unintended consequences:  When properties of targets are related  Crowding out of less emission-intensive tech by more intensive tech  May make carbon price more sensitive to energy demand changes  Causes excess costs, in particular when electricity demand is low But there are good arguments for policy portfolios:  Additional market failures  Additional policy goals  Instruments have to work in the real world, not a sandbox! 16 CECILIA2050 Conference ● Bruxelles ● March 6, 2014

Thank you for your attention ZEW Lunch Debate: The 2030 Climate and Energy Framework Oliver Schenker Tuesday, 18. March 2014, 12-2 pm ZEW - Centre for European Economic Research at the Representation of the State of Baden-Württemberg to the EU schenker@zew.de  Günther H. Oettinger, European Commissioner for Energy http://www.entracte-  Prof. Andreas Löschel , ZEW project.eu  Prof. Vittorio Prodi , MEP  Sir Graham Watson , MEP ENTRACTE is funded by the European Commission under the 7th Framework Programme of the European Union 17 CECILIA2050 Conference ● Bruxelles ● March 6, 2014

Calibrated Supply Curves 110 EUR/MWh 100 Nuclear Coal and lignite 90 Gas Wind, Biomass & Wase Solar Price Industry REF 2030 EUR/MWh MWh 80 0.00E+00 2.00E+08 4.00E+08 6.00E+08 8.00E+08 1.00E+09 1.20E+09 1.40E+09 1.60E+09 1.80E+09 CECILIA2050 Conference ● Bruxelles ● March 6, 2014 18

Power Mix in 2030 100% 3.2% 3.6% 3.8% 3.8% 24.1% 25.6% 26.1% 26.1% 80% Solar 17.8% 18.6% 17.4% 17.7% 60% Wind Gas 21.1% 16.5% 16.9% Coal 19.1% 40% Nuclear Base 25.8% 25.8% 24.1% 23.8% 20% 9.8% 9.8% 9.8% 9.8% 0% Baseline Single Cap Single RES Joint CECILIA2050 Conference ● Bruxelles ● March 6, 2014 19

Objectives of ENTRACTE I. Coherently assess climate policy instruments with the full range of economic research methods II. Understand interactions between multiple climate policy instruments III. Take into account the barriers to implementation IV. Identify mixes of instruments that provide an effective, efficient, and feasible overall EU climate policy to achieve legislated and aspirational targets of GHG emission reductions CECILIA2050 Conference ● Bruxelles ● March 6, 2014 20

Structural facts about ENTRACTE  Duration: 36 months (01/09/2012 – 31/08/2015)  Requested EU Contribution: 2,935,276 €  9 Partners from 6 countries: CECILIA2050 Conference ● Bruxelles ● March 6, 2014 21