"The EU 2050 low-carbon strategy: which policy design?" - PowerPoint PPT Presentation

"The EU 2050 low-carbon strategy: which policy design?" Anil Markandya Ikerbasque Professor, BC3, Spain Honorary Professor, Bath University, UK Your logo here

Issues to Discuss  We have an EU commitment to reduce GHGs by 80% by 2050.  Implications of such a commitment depend on what other countries do.  We look at these implications for a variety of possible coalitions with different commitment to reduce emissions.  A key instrument in achieving the 80% reduction will be taxes on GHGs. One question that comes up a lot is the distributional implications of these taxes.  We look at the distributional implication of carbon taxes and pollution taxes for different EU member states.  Lastly we already have a system of implicit carbon taxes but they are very inefficient. We look at the extent of this inefficiency to see what kind of changes we will need to make to get a unified carbon tax system in place. Date: meeting 2

Meeting the 2050 Goal – Different Scenarios

1. Introduction  We consider different coalitions for reducing GHGs and examine their impacts in terms of:  Emissions of GHGs  Energy  Carbon leakage Industrial and Terrestrial (ICL/TCL)  Land use  Price of food  Climate system Date: meeting 4

2. Model:  Global Change Assessment Model (GCAM): an Integrated Assessment model that links the world’s energy, agriculture and land use systems with a climate model. • GCAM was one of the four models chosen by IPCC to create one of the main scenario (RCP 4.5) for the IPCC’s AR5 (Thomson et al. 2011). • GCAM model can track not only fossil fuel and industrial emissions but also terrestrial emissions associated to land use change. • GCAM contains detailed representations of technology options for each of its economic components with technology choice determined by market probabilistic competition (Clarke and Edmonds 1993).  More info: http://wiki.umd.edu/gcam/ 5

3. Scenarios (1/3): different coalitions Scenarios Scenario Participating Regions REF None FR1 EU-27 Share of the global total CO2 emissions by FR2 EU-27 + US scenario, 2050 FR3 All Developed FR4 All Developed + China FR5 All Developed + BASIC FR6 All, except Africa, Russia, Middle East BASIC (Brazil, South Africa, India and China) group was formed by an agreement on 28 November 2009. 6

3. Scenarios (2/3): temporal commitments  First Time Period: • Developed countries follow EU if inside the agreement: then they reduce emissions by 80% in 2050. • Developing countries follow China: peak emissions in 2030.  Second Time Period: • From 2030 for developing countries and from 2050 for developed countries. • Common but differentiated convergence approach. • Developed and developing countries converge towards an equal per- capita emissions levels in 2100 [0.5 tons of CO2-eq to meet the 2 C target]. (Could be linked to the ambition mechanisms of Paris). 7

Scenarios (3/3): emissions per capita (tCO2pc) 4. 8

5. Results: energy system  The main channel for ICL is the change in fossil fuel prices, which decrease with the increasing size of coalition. Global Fossil Fuel Price Index,2050 (2010=100) Global Energy Mix, 2050 (EJ/y) 9

5. Results: global land-use change  There is an incentive to trade products from land with low carbon density (e.g. crop land) for products from land with high carbon density (e.g. forest) as CO2 from land has now a market price. Evolution of Global Forest Area (Mkm2) 10

5. Results: regional land-use change  As a result of the same factors there will be also an incentive for deforestation in non-participant regions. Evolution of Regional Forest Area (Mkm2 wrt to REF) Africa, Russia and ME 11

5. Results: side-effects on the price of food  There is a important trade-off to pay from afforestation: an important increase in the price of food.  The highest increases in prices are in the price of animal products such as beef and poultry. Global Food Price index (Base 2010=100) 12

5. Results: climate system (1/3)  Price of CO2 increases with participation as global mitigation effort will also increase.  In scenarios FR4, FR5 and FR6 there will be two CO2 markets (developing and developed ) and, therefore, there will be two prices for CO2. CO2 prices by regions ($/tCO2 US$2010) 13

5. Results: climate system  Unilateral action from developing countries will have a small impact.  It will be very difficult to met the 2 degree target if some countries never join to the coalition (unless negative emission technologies or Bioenergy in combination with Carbon Capture & Storage would be available) Global temperature change, 2010-2100 (ºC) 14

1. Carbon Leakage  Fragmented climate policy -> carbon leakage (Böhringer et al. 2012)  Carbon leakage: carbon regulation/price in some countries could increase the carbon emissions of non-participatory countries.  Main channels: change in the price of fossil fuels (ICL, Calvin et al. 2009) and changes in competitiveness (Rutherford et al 1995).  However, there is another channel has received little attention: the carbon leakage triggered by land use changes or “terrestrial carbon leakage” (TCL)  Literature on TCL: Wise et al. (2009), Calvin et al. (2010, 2014) and Kuik (2014)  No previous study has analyzed the “industrial” (ICL) and “terrestrial” (TCL ) channel in combination (Otto et al. 2015). We explore these two forms of leakage when emissions from both sources are taxed identically.  Our analysis does not cover carbon leakage due to change in competiveness. 15

5. Results: regional carbon leakage (GtCO2, wrt REF, 2010-2050) Africa, Russia and ME Africa, Russia and ME Africa, Russia and ME Africa, Russia and ME Africa, Russia and ME Africa, Russia and ME 16

5. Results: global carbon leakage (GtCO2)  The relation between leakage (in absolute terms) and the size of the coalition implementing the climate regime shows an inverted-U shape.  TCL is relevant for the period 2020-2050, when land-use change take place. However, in the longer period 2020-2100 and once the carbon storage potential of afforestation is fully exploited, the ICL effect dominates. Global carbon leakage (GtCO2) for 2020-2050 (left) and 2020-2100 (right) 17

Results: carbon leakage rate (%) 5.  Carbon leakage rate: % of the reduction shifted to non-participants.  ICL is below 30%, but TCL is much larger due to the afforestation/deforestation processes.  Total carbon leakage rate decreases with the size of the coalition from 24% in FR1 to 5% in FR6. Cumulative carbon leakage rate (%) for 2020-2050 (left) and 2020-2100 (right) 18

6. Conclusions 1. A large coalition is needed to get us close to the 2°C target. 2. Fragmentation takes us for from that target. 3. Fragmentation in terms of coalitions can lead to relevant carbon leakage effects, especially if terrestrial carbon leakage is considered. 4. Fragmentation can hurt vulnerable countries (even if they do not participate in the climate coalition), because it induces deforestation in those regions and increases (remarkably) the global price of food. 5. The dominant type of carbon leakage up to 2050 is the terrestrial channel, although industrial carbon leakage takes over during the second half of the century, once the carbon storage potential of afforestation is fully exploited. 19

Distributional Implications of Carbon and Pollution Taxes

Who pays for mitigation policies? Most studies find regressivity in GCC related taxes, but this conclusion cannot be GCC tax taken as a rule because it depends on the case study. LAP Tax

Here, we conduct a distributional analysis of an LAP tax (based on the internalization of the external costs of several pollutants) and compare it in a comprehenive way with a GCC tax (tax on CO2) The distributional implications of a revenue- neutral tax reform are also explored.

Methodology Environmental Income ∆ Consumer taxes allocated to impacts of prices producers households INPUT-OUTPUT DEMAND MODEL MODEL (AIDS)

Scenarios Scenarios Description Tax Equivalent GCC tax Tax on CO2 emissions levied on € 25/t CO2 producers. LAP Tax Tax on NH3, NOX, SO2, NMVOC, We use the external and PM10 emissions levied on cost of CASES project producers. but only internalize 47.2% of external costs Revenue-Recycling Reduction in social security 7.5% reduction in SS contributions paid by employers contributions

Change (%) in production prices. Top and bottom sectors 0,00 2,50 5,00 7,50 10,00 Electricity, water and gas production Food Sector Energy sector top 5 Industries Mining and quarrying Sanitary and vetinary activities; social services Real estate activities and entrepreneurial services Bottom 5 Education Financial intermediation Homes that employ domestic staff GCC tax LAP tax

Cost impacts change (EV, %) by expenditure deciles 1,40% 1,20% 1,00% 0,80% 0,60% 0,40% 0,20% 0,00% 1 2 3 4 5 6 7 8 9 10 LAP tax GCC tax

The importance of consumption pattern 100% Other services 90% Restaurants and hotels Education 80% Leisure and culture 70% Communication 60% Transport 50% Health 40% Home furnishing and home maintenance 30% House 20% Clothing and footwear 10% Alcoholic beverages, tobacco and narcotic Food 0% 1 2 3 4 5 6 7 8 9 10

Second exercise: Revenue recycling