Economics & Policy Sessions

Transcription

1 Economics & Policy Sessions Economics primer 2-28 Economic Growth and Emissions 3-5 Economics of the global commons 3-7 GHG Emissions Control 3-12 Introduction to the Toy IGSM 3-14 Allowance trading systems 3-21 Mitigation benefits 4-4 Climate Policy Analysis 4-9 Kyoto and Post-2012 Options 4-30

2 GHG Emissions & Policy Costs Today s Agenda Review of concepts, terminology, issues Example using price only The use of MAC curves CGE models + sample applications Trade effects (Kyoto) Long-term stabilization (CCSP) Technology costing approaches Grass again Auto example Issues in the handling of technology Endogenous change & new technology Low-hanging fruit, free lunches, etc.

3 Cost/Welfare Concepts Emissions price Area under marginal abatement curve Simple macroeconomic aggregates (models with one non-energy output) GDP Consumption (e.g., Homework #2) Equivalent variation (economic welfare) Income compensation to restore consumers to pre-constraint level of welfare ( consumption)

4 What to Include? What greenhouse substances? CO 2 only? CH 4, N 2 O, HFCs, PFCs & SF 6 Aerosol precursors (e.g., SO 2 ) O 3 precursors Carbon sinks? Ancillary benefits of GHG controls? Urban air pollution Other?

5 Cost to Whom? What unit of analysis? Nation Global, or Annex I vs. Non-Annex I Other? Issues of aggregation Of nations Of sub-national components

6 Approaches to the Task Shrt Long Trade Tech n term term effects detail Carbon price MAC curves Market-based (CGE) Technology-Cost Hybrids MARKAL-Macro U.S. NEMS Others (e.g., EPPA)

7 Example Using Price Only (The MIT Coal Study) CO 2 Price ($/t) Low CO 2 Price High CO 2 Price Scenarios of Penalties on CO 2 Emissions ($/t CO 2 in constant dollars) Figure by MIT OCW, based on MIT Coal Study.

8 1000 Global Primary Energy Consumption under High CO 2 Prices (Limited Nuclear Generation and EPPA-Ref Gas Prices) EJ/Year Energy Reduction from Reference Non-Biomass Renewables Commercial Biomass Nuclear Coal w/ CCS Coal w/o CCS Gas w/o CCS Ol w/o CCS Figure by MIT OCW. Global Primary Energy Consumption under High CO 2 Prices (Expanded Nuclear Generation and EPPA-Ref Gas Prices) 1000 Energy Reduction from Reference Non-Biomass Renewables Commercial Biomass Nuclear Coal w/ CCS Coal w/o CCS Gas w/o CCS Ol w/o CCS EJ/Year Figure by MIT OCW.

9 Exajoules of Coal Use (EJ) and Global CO 2 Emissions (Gt/yr) in 2000 and 2050 with and without Carbon Capture and Storage* Business As Usual Limited Nuclear Expanded Nuclear With CCS Without CCS With CCS Without CCS Coal Use: Global U.S China Global CO 2 Emissions CO 2 Emissions from Coal * Universal, simultaneous participation, High CO 2 prices and EPPA-Ref gas prices. Figure by MIT OCW.

10 Marginal Abatement Curve Marginal Cost p (MAC) How to Construct? Total cost O k j Abatement

11 Aggregating Gases CO 2 Other GHG or sink Total p OT p COM p C O k C O k OT O k COM

12 Aggregating Sources Country A Country B Market p B p MKT p A O k A A O B k B O k MKT

13 MACs and Banking MAC MAC $20/ton $10/ton 5% O k 04 Cut O k 05 Cut Discount rate = 5%/year

14 Shortcomings of MACs Marginal Cost p Trade effects Distortions in markets O k j Abatement

15 CGE (EPPA): What Tradeoffs? Multiple objectives in design Analysis of policy cost, short and long term Drive the climate portion of the IGSM Characteristics CGE model (market interaction vs. specific technologies) Short-term detail vs. long-term structure CO 2 and non-co 2 GHGs gases all endogenous Two versions Recursive-dynamic (the workhorse) Forward-looking (some simplifications)

16 Factors Determining Results Population growth Labor productivity growth Energy efficiency change (AEEI) Substitution elasticities Vintaging assumption Costs of future technologies Non-CO 2 gas assumptions Fossil energy resources Toy Toy

17 Examples of Cost Analyses Short-term mitigation targets Trade effects Kyoto Protocol Intensity vs. absolute targets Emissions trading Inefficient policies Multi-gas strategies vs. CO 2 only Cap-&-trade bills (3-21) Long-term atmos. goals CCSP study Studies of particular technologies Carbon capture and storage Biomass, solar and wind, nuclear

18 Effects Through Trade Annex I Constrains CO 2, OPEC view) Penalty on CO 2 emissions in Annex I Price of Annex I energy use rises oil world oil demand: export volume cost of manufacture of energy-intensive goods in Annex I Change in the terms of trade Oil prices fall Price of energy-intensive imports rises Net of all welfare effect & view from US?

19 Kyoto Example Figure 1. Reference and Kyoto Carbon Emissions MtC Annex B Non-Annex B Annex-B, Kyoto Time

20 Transfer of Costs to LDC s Figure 3. Welfare Effects of Kyoto Protocol: EV% (NT-D, 2010) EV% USA JPN EEC OOE FSU EET Annex B KOR IDN CHN IND MEX VEN BRA RME RNF SAF EV% Non-Annex B

21 Cost of Long-Term Targets Total reduction required Reference emissions growth Carbon cycle (ocean/land uptake) The role of technological change Ease of substitution Autonomous change Endogenous change (policy influenced) Sources of endogenous change AEEI, σ = f(carbon price) Explicit modeling of R&D, and its effects Learning by doing: Cost = f( Q) Specification of a backstop technology

22 (550 ppmv) 8% Percentage Loss in Cross World Product 7% 6% 5% 4% 3% 2% 1% IGSM_Level2 MERGE_Level2 MNCAM_Level2 -Why different? Technology Sum of emissions Ocean uptake 0% Level 2 Scenarios Figure by MIT OCW.

23 Relation of Carbon Price to Percentage Abatement Price ($/tonne C) $2,000 $1,600 $1,200 $800 Price vs Percentage Abatement 2050 EPPA 2050 MINICAM 2050 MERGE 2050 Price ($/tonne C) $2,000 $1,600 $1,200 $800 Price vs Percentage Abatement 2100 EPPA 2100 MINICAM 2100 MERGE 2100 $400 $400 $0 0% 20% 40% 60% 80% 100% Percentage Abatement $0 0% 20% 40% 60% 80% 100% Percentage Abatement

24 CCSP stabilization scenarios IGSM Scenarios IGSM_REF IGSM_Level1 IGSM_Level2 IGSM_Level3 IGSM_Level4 Gt C/yr Figure by MIT OCW. MERGE Scenarios MiniCAM Scenarios MERGE_REF MERGE_Level1 MERGE_Level2 MERGE_Level3 MERGE_Level MNCAM_REF MNCAM_Level1 MNCAM_Level2 MNCAM_Level3 MNCAM_Level4 Gt C/yr Gt C/yr Figure by MIT OCW. Figure by MIT OCW.

25 Gt C/yr IGSM_REF IGSM_Level1 IGSM_Level2 IGSM_Level3 IGSM_Level4 IGSM Scenarios Ocean uptake Figure by MIT OCW. Gt C/yr MERGE_REF MERGE_Level1 MERGE_Level2 MERGE_Level3 MERGE_Level4 MERGE Scenarios Gt C/yr MiniCAM Scenarios MNCAM_REF MNCAM_Level1 MNCAM_Level2 MNCAM_Level3 MNCAM_Level Figure by MIT OCW. Figure by MIT OCW.

26 Technology Costing Approach (Cutting Grass Again) C sis Conventional Oil Renewable Oil L, P L E, P E K, P K C push C power # Hectares GHGs With limited L, K cost of cutting emissions C ride Cost GHG

27 Reference Energy System Energy process model (MARKAL) Resource Extraction Refining and Conversion Transport Conversion Transmission and Distribution Utilizing Device End Use Renewables Nuclear Coal Natural Gas Crude Oil Domestic Electric Heat Solid Gas Liquid Misc. Electric Aluminum Iron and Steel Agriculture Air Conditioning Space and Water Heat Process Heat Petrochemicals Automobile Bus, Truck, Rail and Ship Figure by MIT OCW.

28 Hybrid: EPPA & MARKAL Transport Demand Fuel Prices Modal Split Models Mode Shares Transport Demand Technology Data Base EPPA (Economy) Structural Change MARKAL (Technology) Technology Dynamics Substitution Elasticities, AEEI

29 Alternative Auto Technologies Vehicle Measures Vehicle Fuel Use (MPG) Investments, US$ Cumulative Annualized + gas cost 95 Flt Baseline Packaging Improvements Engine Management Lower Drag Coef., Tire Roll Resistance CVT LoCost 5 Material Substitution, Interior High-Strength Steel Unibody Higher Compression Ratio VVLT and Cylinder Deactivation PowTrn 9 Elec. Pow. Steering, Parasitic Losses Alum 10 Aluminum Intensive Vehicle , VVLT & Cyl. Deactivate, No Brake Drive , Hybrid 11 ICE-Hybrid ( Gas Fuel Cell) ,342 1,063 U.S. FTP-75 Driving Cycle. Capital recovery factor = 30%, gasoline price = $1.20 per gal., annual driving of 10,000 mi.

30 Auto Technology Penetration 5000 ( Kyoto + 20% by 2030) Billion Passenger-km Total Fleet (Reference Case) Demand Loss Total Fleet (Kyoto+ Case) 95 Flt +PowTrn LoCost +Alum Hybrid Preliminary: Do not cite.

31 Thinking about Technology What is technology, and tech. change? What leads to change? Does change tend to economize on one factor or another, in response to prices? What is the role of R&D expenditure? To what degree is it ad hoc or random? How to distinguish tech change from Change in inputs (in response to price) Economies of scale

32 New Technologies Carbon capture and storage From electric power plants From the air Renewables Wind & solar Biomass Tidal power Geothermal Fission and fusion Solar satellites Demand-side technology Fuel cells and H 2 fuel What determines the likely contribution of each? Other? (lighting, buildings, ind. process, etc.)

33 Explaining Why Technologies Are Not Used Market failures: decision-makers don t see correct price signals Lack of information Principal-agent problems (e.g., landlordtenant) Externalities & public goods Market barriers Hidden costs (e.g., transactions costs) Disadvantages perceived by users High discount rates