Aligning Energy Markets Dynamics and Climate Policy Targets in Europe. Carlo Carraro University of Venice, FEEM and CMCC

Transcription

1 Aligning Energy Markets Dynamics and Climate Policy Targets in Europe Carlo Carraro University of Venice, FEEM and CMCC

2 Energy and carbon markets in Europe 2

3 Global CO2 emissions and climate stabilization 10 x No Policy BAU 6 History ( ) 4 Moderate Policy 2 50% 0 66% Achieving 2C with sufficient probability would require departing from historical trends in emissions in the next 5-10 years at most (source: historical: EIA/IEA, projections: LIMITS multi model ensamble) 3

4 EUROPE emissions and carbon intensity CO2 emissions CO2/GDP (right axis) CO2/10,000 persons (right axis) (p) Source. Eurostat, EIA and IEA 0,35 0,3 0,25 0,2 0,15 0,1 0,05 0 Emissions in Europe have declined due to the economic recession The decline in carbon intensity has slowed down 4

5 EUROPE carbon intensity: percent changes 0,02 0, ,01-0,02-0,03-0,04 5

6 Gross Inland Consumption (% of 2010 Level) 2012 Coal surge in Europe 110% 105% 100% 95% 90% Coal Gas Oil 85% 80% Source. Eurostat - nrg_101m, nrg_102m and nrg_103m Coal use has increased in the EU in 2011 and 2012 leading to an increase in emissions in some member states. Natural Gas has decreased notably during the same period. 6

7 Coal surge in Europe 300,0 UK CO2 emissions by fuel 250,0 200,0 150,0 100,0 +28% Gas Oil Coal 50,0 0,0 Source. DECC Coal use has increased in key countries in 2012 (UK, above, Germany), leading to an increase in emissions in some member states 7

8 EU ETS: Price and volumes ETS prices remain below 5 Euros/tCO2 (though they have been as low as 3 Euros last April) Source. EEX 8

9 Scenarios 9

10 The scenario matrix a. Base b. No Renewable Target c. High Energy Efficiency 1. No Policy NoPol 2. Moderate Policy Pledge Pledge/NoRET Pledge/HEE 3. Stepped up Policy Pledge+ Pledge+/NoRET Pledge+/HEE 4. 2 C Policy 2Deg 2Deg/NoRET 2Deg/HEE

11 Global primary energy by fuel in the NoPol scenario Energy demand will continue to grow, and will be largely satisfied by a global increase in fossil fuels, most notably coal. 11

12 Global CO2 emissions by region in the NoPol scenario This will lead to an increase of global BAU emissions over time, doubling in 2050, due to fast growth in developing economies. 12

13 Global CO2 emissions per capita by region in the NoPol scenario China would approach US per capita emissions by mid century in the NoPol scenario 13

14 Carbon intensity (emissions/gdp) by region in the NoPol Carbon intensity is projected to decline across regions, but especially in developing countries, which gradually converge to OECD levels- 14

15 Focus on Europe 15

16 Europe GHG targets In the two mild policy scenarios, the emission reduction target in 2030 would be 25% and 45% with respect to todays for the Pledge and Pledge+ policy scenarios respectively (40% and 60% in 2050) Actual emissions would be slightly higher, due to imports of CO2 permits from international offsets 16

17 Power generation shares by fuel: Pledge policy The policy scenarios foresee a reduction in coal, an increase in gas and renewables, and a decreasing role for nuclear. 17

18 Power generation shares by fuel: Pledge+ policy Results are very similar when moving to the Pledge+ climate policy 18

19 Natural gas electricity Natural gas remains flat till 2020 but grows significantly afterwards, in both the Pledge and Pledge+ policies In the high energy efficiency scenarios, this growth is delayed by about 10 years 19

20 Natural gas primary energy supply A similar pattern is observed for overall primary energy consumption of gas, though the recovery takes more time. 20

21 Renewable electricity Renewables experience a rapid growth till 2020, but remain rather flat thereafter Without the RE 2020 target, the development is slower, but eventually reaches similar levels of deployment 21

22 Modern renewable primary energy supply The increase in renewables in the short term is induced by the 20% RE target. When this is not accounted for, the same emissions reduction targets is achieved differently (via more efficiency and more gas). This gap remains visible also in Wind is most responsive to policies and more important than solar 22

23 Policy costs (GDP losses) Policy costs in the Pledge scenario are in the order of 0.5% GDP loss in 2020, growing to 1.5% by mid century. The RE target induces higher costs initially, but the gap wanes over time The Pledge+ policy induces moderately higher costs (0,7%, 1,8%) In the Energy Efficiency scenarios costs are lower (due to technical change) 23

24 Policy costs (GDP losses) If for some reasons the use of Gas remains at 2010 levels (Gas2010 scenarios), policy costs would increase after 2030, and more so in the Pledge+ policy case. Even more, with more ambitious policy targets. Gas is necessary to align energy market dynamics and climate policy targets. 24

25 Carbon prices 2020 carbon prices are $/tco2 (depending on energy efficiency) in the Pledge policy, and $/tco2 in the Pledge+. The RE target reduces carbon prices in 2020 by about 10 $/tco2 Beyond 2020, the biggest determinant of prices is the level of energy efficiency 25

26 Fiscal Revenues from Carbon Market Full auctioning of permits could generate significant public revenues. In 2020, the renewable target reduces revenues by about 40 Billions USD Increasing the policy ambition to the Pledge+ would allow 2020 revenues to total above 100 Billions Promoting Energy Efficiency measure without stepping the policy up would reduce revenues substantially 26

27 Investments Investments in coal would be pushed up by the high costs of CCS For renewables, investments would decline after

28 Investments in clean energy R&D In an optimal setting to minimise costs, climate policies require investments in Research and Development, allowing to meet the SET plan objectives 28

29 2 C Durban Action policy 29

30 Global CO2 emissions by scenario The 2 C Degree policy would require global emissions cut which are much more significant than in the other policies considered, by approximately 60% by 2050 at the global level (-80% in Europe). 30

31 Europe GHG emission targets Under the 2 C policy, emissions in Europe would need to be cut by 60% in 2030 and 80% in 2050 (consistent with the EU 2050 roadmap) 31

32 Power generation shares by fuel In the 2 C policies, coal would almost phase out by mid century. Gas would maintain a similar share in the power mix (slightly lower) than in the moderate and stepped up policies. This confirms gas as the transition technology. 32

33 Power generation shares by fuel Energy efficiency policies are quite effective in reducing coal consumption and GHG emissions. 33

34 Policy costs (GDP losses) Policy costs would be significant for the 2 C scenario, 3 times as large as in the other policy scenarios considered 34

35 Policy costs (GDP losses) In the 2 C policy scenario, cost dynamics is similar to the one in in the other policy scenarios, with the RE target initially increasing costs. If the use of international offsets is limited in the 2 C policy scenario (LimOffsets scenario) costs would increase, confirming that market integration is an important component of cost containment. 35

36 Main insights 1: setting the right carbon price 1. Even a moderate climate policy is sufficient to provide the right incentives to energy markets. This requires a carbon price above 15 $/tco2 and growing to $/tco2 over time. This can be achieved by a 2030 emission reduction target in the range of 25%-35%, and a 2050 target of 40-60% (all relative to 2005). 2.The 2050 Energy Roadmap (-60% in 2030, -80% in 2050, consistent with a global objective of 2 C) would push carbon prices higher and would have a significant economic impact (higher GDP losses). More international coordination and/or carbon market integration is needed. 3.Modern renewables are becoming competitive thanks to the existing targets and incentives, and would continue to play an important role after 2020 by simply keeping carbon prices sufficiently high (e.g $/tCO2) even without additional incentives or subsidies. 4.Energy efficiency regulation could play an important role by reducing overall electricity demand: this demand reduction would affect all sources, including gas. 36

37 Main insights 2: Gas is the transition technology 1. The contradictory trend of coal and natural gas is going to be reverse even by a moderate climate policy. Even more so by an ambitious one. Natural gas is expected to slightly decline to 2020, due to slow demand growth but mostly to the growing role of renewables induced by the EU target and related incentives and subsidies. But after 2020, both the Pledge and Pledge+ climate policies will induce gas to increase significantly and coal to decrease. 2. After 2020, gas consumption and coal phase out could be enhanced by promoting climate policies which would sustain carbon prices above 15$/tCO2 and up to 50-70$/tCO2 in the following decades. Gas demand would increase after 2020 in all simulated policy scenarios, even in the 2 C scenario, thanks to CCS. 3. The growth of renewables is likely to slow down after 2020 due to system integration limitation. This will enhance the role of gas as the transition technology. However, to achieve the 2 C target a further development of renewables is required, even at high costs. 37

38 Main insights 3: a single instrument 5. Carbon prices in 2020 will be in the range of $/tco2 for standard policies, and $/tco2 if the supply of permits is tightened. The renewable target lowers prices by about 10 $/t, but after 2020 the biggest determinant of prices is the level of energy efficiency. 6. Subisidies and incentives to renewables are not needed beyond 2020, provided the carbon price is sufficiently high (above $/tco2 and increasing over time). In addition subsidies and incentive are both costly and reduce the revenues from issuing emission permits. Hence a single instrument, carbon pricing, is preferable: - It s effective to achieve the optimal energy mix, - It reduces emissions - It helps public budgets. - It avoids distortions in the markets 7. An active policy to monitor the carbon price is necessary (similar to the one by a central bank to monitor money supply and interest rates). 38