Multi-gas abatement analysis of the Marrakesh Accords

Transcription

1 Multi-gas abatement analysis of the Marrakesh Accords PAUL L. Lucas, Michel G.J. den Elzen, Detlef P. van Vuuren Netherlands National Institute of Public Health and the Environment (RIVM) P.O. Box 1, 3720 BA Bilthoven, The Netherlands Paper prepared for the CATEP workshop Global Trading at the Kiel Institute for World Economics, Kiel, September 30-October 1, 2002 Abstract This paper evaluates the environmental effectiveness and economic efficiency of the Kyoto Protocol after the Marrakesh Accords on the basis of a multi-gas abatement analysis. The analysis is structured according to the major steps in the international negotiation process. The results are compared with earlier research, which covered only CO 2. Compared to the analysis for CO 2 only, including all Kyoto gases results in a decline of the international permit price for the Bonn-Marrakesh Accords (from 6US$/tCeq in the CO 2 -only case towards 2 US$/tCeq including all Kyoto gases). Consistent with earlier research, banking is of absolute importance for the development of a viable emission trading market. Banking 80% of the total amount of hot air results in an increase of the environmental effectiveness with an emission reduction of 9.4% compared to base-year emission level. The international permit price rises towards 11 US$/tCeq and the annual Annex I abatement cost to 3.3 bus$. The multi-gas analysis indicates a stronger reduction of CH 4 than CO 2 due to its lower cost and large potential. Furthermore, trading results in a shift in abatement options towards even larger reductions for CH 4, and smaller reductions for CO 2. Most CH 4 abatement takes place in the gas sector due to leaking pipelines in the Annex I FSU. In absolute terms, however, most reductions still occur for CO 2 emissions from energy use. Corresponding author: Tel ; Fax: address: Paul.Lucas@rivm.nl 1

2 1. Introduction In previous work the environmental effectiveness and economic efficiency of the Bonn Agreement and the Marrakesh Accords 1 was evaluated based on CO 2 abatement only (den Elzen and de Moor 2002). However, the Kyoto Protocol includes not only CO 2, but a set of six greenhouse gases (GHG), i.e. carbon dioxide (CO 2 ), methane (CH 4 ), nitrous oxide (N 2 O), hydrofluorocarbons (HFC), perfluorocarbons (PFC) and sulphur hexafluoride (SF 6 ). According to several studies (Reilly at al. 1999, 2000, Grütter 2001, Jensen et al. 2001) including the abatements of other GHGs than CO 2 reduces the overall costs of the implementation of the Protocol. Therefore, this paper re-evaluates the environmental effectiveness and economic efficiency of the Marrakesh Accords including all GHGs and their emission sources. This paper is broken down into 2 separate sections. First, we will go back to our original analysis of the different steps of the international negotiation process and evaluate the differences between the original CO 2 -only analysis and the new analysis encompassing all Kyoto gasses. This first analysis will cover three cases that correspond with the major steps in the international negotiation process (all three steps assume unrestricted trading): 1. the pre-cop 6 version of the Kyoto Protocol: that is with international emissions trading but without sinks; 2. the withdrawal of the US from the Kyoto Protocol; 3. the Marrakesh Accords including the final decisions on sinks; Second, we evaluate a fourth case in more detail in terms of regional differences in abatements across the different GHGs and their sources. This fourth case is based on the latest developments in the international negotiations, i.e. it assumes implementation of the Marrakesh Accords, without the participation of the US and Australia and also includes the application of an optimal banking strategy for the main supplying regions. 2. Methodology We evaluated the environmental effectiveness and economic efficiency of the Kyoto Protocol using the FAIR 1.1 model (Framework to Assess International Regimes for differentiation of future commitments, den Elzen et al., 2001). This model has been designed to quantitatively explore a range of alternative climate policy options for international climate change regimes. The model consists of an integration of three different models: a simple integrated climate model, a burdensharing model for calculating regional emission allowances or permits for various options for the differentiation of future commitments, and a cost model for the calculation of emissions trading and abatement costs. For the analysis we use the IMAGE 2.2 implementation of the IPCC SRES A1B scenario (IMAGE-team, 2001) as reference scenario, which can be characterised as a scenario showing increasing globalisation and a rapid introduction of new and more efficient technologies and high economic growth. To calculate the CO 2 -equivalent emissions for the different GHGs, Global Warming Potentials (GWPs) with a 100- year time horizon are used, as adopted at the third meeting of the Conference of the Parties (1997). 1 For the exact details on all issues, see UNFCCC (2001). 2

3 The environmental effectiveness relates to Annex I abatement efforts, defined as the total amount of emission reductions within Annex I countries by means of domestic policies, IET, JI and CDM, but excluding sinks. Note that our methodology does not include sinks as abatement effort. Because they do remove CO 2, we present Annex I efforts both excluding and including removals through sinks. Domestic abatement indicates how much Annex I countries reduce their CO 2 -equivalent emissions domestically if they strictly follow a least-cost approach; it is expressed as percentage of total reductions. Obviously, the remainder will be realised through the Kyoto Mechanism. Economic efficiency is represented by annual abatement costs (in US$95) for Annex I countries to comply to their Kyoto commitments, and the expected average clearing price in the international permit market over the commitment period. For the regions participating under the Kyoto Protocol we assume their original assigned amounts in the cases 1 and 2, and their amounts after assigning the allowed use of sinks under the Marrakesh Accords in cases 3 and 4. For the USA, we assumed in the first case it would comply with its Kyoto target, and in cases 2 and 3 that it is not implementing a climate policy. In 2002, the Bush administration presented its own climate policy to improve the GHG-intensity of its economy by 18% in the period. In previous work, we have indicated that this policy target is likely to result in only small improvements compared to baseline development (van Vuuren et al., 2002). Therefore, we assume in case 4 that the USA will follow their baseline emissions. Several specific Articles of the Kyoto Protocol lead to other country-specific base-years than 1990 (e.g., Meinshausen and Hare, 2001). This has an impact on the environmental effectiveness, when comparing the level of emissions in 2010 with those in More precisely, the Kyoto targets for the whole of Annex I, including the USA, will not be 5.2% below 1990 emission level, but only 3.6%. For the evaluation of the Marrakesh Accords, we translated the decisions on sinks towards 120 MtCeq of sinks credits, using FAO data to quantify Article 3.3 activities and agricultural management and applying the country specific caps on forest management and the cap of of base-year emissions for CDM-sinks (den Elzen and de Moor, 2001). Furthermore, we assumed sinks to be zero-cost options, which are therefore made before actual abatements and emission trading. Marginal Abatement Cost (MAC) curves are used in the FAIR model to explore the abatement costs and permit prices 2. The model calculates the international permit price, tradable emission permits and abatement costs for the first commitment period, i.e , with or without emissions trading and allocates the permits over the different sources following a least-cost approach. The calculations in the cost model use aggregated permit supply and demand curves to compute the market equilibrium permit price under different regulation schemes on the basis of the same methodology of Ellerman and Decaux (1998) and Criqui et al. (1999). This methodology can be adapted to account for concrete caps on permit imports and exports (via import restrictions or a minimum permit price), transaction costs associated with the use of the Kyoto Mechanism and a CDM 2 A MAC curve reflects the additional costs of reducing the last unit of CO 2 -equivalents and differs per country and sector. The MAC curve also allows assessment of the willingness of any Party to import permits or to abate more than is required to meet the Kyoto commitment. MAC curves can thus be used to determine marginal and total abatement costs and to examine the gains of emissions trading (den Elzen and Both, 2002). 3

4 accessibility factor reflecting the operational availability of viable CDM projects (den Elzen and Both 2002). 3 To allow for a multi-gas analysis the FAIR cost model is expanded with cost curves for the 6 GHGs and their sources. The MAC curves for the different GHGs have been developed in the GECS project (Greenhouse gas Emission Control Strategies), a European multi-partner project in the 5th Framework Program of DG Research coordinated by the University of Grenoble (IEPE) 4. They have been constructed mostly on the basis of detailed abatement options per gas and per source. Per region 13 different sources for the 6 different GHGs are distinguished (see Table 1). In our calculations, the MAC curves have been scaled using the actual volume of emissions within the different sectors to allow for differences in emissions between different baselines. Figure 1 represents some of the aggregated sectoral MAC curves for the world as used in this analysis. The MACs are shown in terms of percentage reduction from the baseline to compare the variations across the different sources, without taking into account the volume of these emissions. This figure demonstrates that the most costeffective abatement options are found for reducing CH 4 emissions in production and transport of coal and natural gas and for emissions in the N 2 O industry sector, while CO 2 energy abatements are relatively more expensive. Relatively low costs are also found for modest reductions of SF 6 emissions and CH 4 emissions from the waste sector, but abating more than 55% and 25% respectively, further abatement in these sectors becomes relatively expensive. For the CO 2 -only analysis carried out by den Elzen and de Moor (2002), MAC curves from the WorldScan model are used, which is a dynamic multi-sector, multiregion computable general equilibrium model (CBP, 1999). To compare the results towards the multi-gas analysis, the CO 2 -only analysis is redone using the CO 2 MAC curves from the GECS project. A comparison between the CO 2 MAC curves from WorldScan and the GECS project will be part of further research. Table 1: Sectoral sources of the GECS project. Gas Sector Sources CO 2 Energy Total Industry Cement production CH 4 Energy Oil production (losses/leakage) Energy Gas production (losses/leakage) Energy Coal production (losses/leakage) Agriculture Wetland rice, animals and animal waste Agriculture Waste (landfills and sewage) N 2 O Energy Transport Industry Adipic and nitric acid production Agriculture Fertiliser, animal waste and domestic sewage HFC Total Total PFC Total Total SF 6 Total Total 3 In our analysis we have set transaction costs at 10% and the CDM accessibility factor at 20%. Furthermore, no import restrictions or a minimum permit price is applied. 4 Project partners include CNRS-IEPE, ICCS-NTUA, JRC-IPTS, CES-KUL, BFP, CIRAD and RIVM. 4

5 100 Ceq-tax ($/tceq) CO2ene gas coal wst N2Oind SF Reduction compared to baseline emissions (%) 100 Figure 1: Aggregated sectoral abatement cost curves for the world. 4. CO 2 -only versus a multi-gas analysis For a comparison between the CO 2 -only and the multi-gas analysis the environmental effectiveness and the economic efficiency is evaluated for the three analytical cases mentioned in the introduction and the fourth case that will be discussed in more detail in section 4 (see Table 2). In the CO 2 -only cases abatement is only applied on CO 2 emissions. In the multi-gas analysis, abatement is applied on all Kyoto gases. Both analyses show similar trends: i.e. the withdrawal of the US has a dramatic impact on the environmental effectiveness and economic efficiency of the Kyoto Protocol, while including sinks is of relative minor importance. The application of a multi-gas approach instead of an CO 2 -only analysis results in a decline of the international permit price, which results in less Annex I domestic reductions and lower annual Annex I costs. 1. Kyoto Protocol with the USA. In the CO 2 -only case the permit price amounts 26$/tCeq and the annual Annex I costs are 11.6b$. Including the other Kyoto gases results in an increase of the environmental effective abatements (abatements excluding the amount of hot air sold) with 13%. The international permit price drops towards 15$/tCeq and the annual Annex I costs towards 7.3 bus$. Total Annex I CO 2 -equivalent emissions decline towards 5.2% below base-year level Kyoto Protocol without the USA. For both the CO 2 -only as for the multi-gas approach, the USA accounts for roughly half of total Annex I reduction commitments. The withdrawal of the USA, therefore results in drop of the demand on the permit market, which results in a drop of the international permit price. For the CO 2 -only case, the international permit price is 13 US$/tCeq with annual Annex I abatement costs of 2.6 bus$. Including all GHGs results in a drop of the permit price towards 5 US$/tCeq and annual Annex I abatement costs of 1.1 bus$. Environmental effective abatement (without US emissions) is 4.3% below base-year level. 5 For the CO 2 -only cases, the reduction costs of the non-co 2 gases are not included, while the environmental effectiveness refers to all GHGs. 5

6 Table 2: Environmental effectiveness and economic efficiency of the four different cases for both the CO 2 -only and the multi-gas analysis (all GHG). Environmental effectiveness Economic efficiency Annex I CO 2 - equivalent emissions excl. US relative to base-year (%) V Domestic reduction Annex I (%) International permit price (US$/tCeq) annual Annex I costs (bus$) 1 KP with US CO 2 only All GHG KP without US CO 2 only All GHG Marrakesh Accords CO 2 only -0.6 (-4.3) All GHG -0.6 (-4.3) MA w/o Australia with optimal banking All GHG -9.4 (-13) V The numbers between brackets include, besides abatement efforts through emission reductions, efforts to remove CO 2 through sinks to capture the overall effect on atmospheric CO 2 built. 3. The Bonn Agreement and the Marrakesh Accords. Compared to the US withdrawal the decisions in the Bonn Agreement and the Marrakesh Accords, in particular on sinks, have a relatively minor impact on the environmental effectiveness of the Kyoto Protocol 6. Total Annex I abatement reduction drops with 120 MtCeq, which results in an increase of the amount of hot-air for Annex I FSU with 47 MtCeq. This implies a decline in permit demand and an increase in permit supply on the international market. For the CO 2 -only case, the international permit price is 6 US$/tCeq and annual Annex I abatement costs are 1.0 bus$ 7. Including the other Kyoto gases results in a decline of the international permit price towards 2 US$/tCeq and annual Annex I abatement costs of 0.4 bus$. Total Annex I CO 2 -equivalent emissions drop towards 0.6% below base-year level. If sinks are seen as efforts additional to emission reductions, the environmental effectiveness raises to 4.3% below base-year level. This concludes that total Annex I sinks account for 3.6% of their base-year emissions. Figure 2 illustrates the impacts on the permit market of the different cases for the multi-gas analysis. The figure clearly shows a shift in the permit demand and supply curves. As the US withdrawal and the decisions on sinks continuously push down the demand curve, the permit price drops towards 2 US$/tCeq. The quantities traded on the permit market drop from 593 MtCeq for original Kyoto towards 411 MtCeq for the Marrakesh Accords, while the share of hot air rises from 48% towards 84% of total emissions traded. The share of JI drops from 40% towards 12% and for CDM from 12% towards 4%. 6 The requirements on the commitment period reserve, intended to prevent a country from overselling, do not effectively restrict Annex I FSU permit sales. 7 Sink credits are assumed to be more cost-effective than credits from (energy-related) emission reductions. The costs related to the implementation of ARD projects and forest management in Annex I, as well as costs under CDM are assumed to be negligible and are therefore set to 0 US$/tCeq. 6

7 Figure 2: Permit demand and supply curves for the major steps towards the Marrakesh Accords 8. Ceq-tax ($/tceq) 75 KP w ith US (w ith IET) demand KP w ith US (w ith IET) supply 50 KP w /o US (w ith IET) demand KP w /o US (w ith IET) supply Marrakesh Accords demand 25 Marrakesh Accords supply MA w ith OB w /o Aus. Demand Abatement (MtCeq) MA w ith OB w /o Aus. Supply Figure 2 also shows that the total Annex I demand on the permit market does not change significantly due to the withdrawal of Australia (case 4). This can be explained by their small share in total Annex I reductions due to their choice of baseyear and the assigned amount of sinks credits under the Marrakesh Accords 9. As concluded for the CO 2 -only analysis (Den Elzen and de Moor, 2002), banking of hot air is of vital importance for as well the environmental effectiveness as the total revenues of the dominant seller, i.e. Annex I FSU. For case 4 an optimal strategy implies 80% banking, which, compared to the 40% to 70% in the CO 2 -only case, stresses the importance of banking once more. The applied strategic behaviour results in a rise of the international permit price towards 11 US$/tCeq and a doubling of the Annex I FSU revenues. The annual Annex I costs rise towards 3.3 bus$. Due to the decline of the amount of hot-air, the amount of environmental effective permits traded on the international market increases. This results in a rise of the Annex I environmental effective abatement towards 9.4% below base-year level, which is 13% if sinks are seen as additional efforts to emission reductions. The quantities traded on the permit market drop with 23% towards 316 MtCeq, which concludes that 3 is abated domestically. Approximately 22% of the total demand consists of hot air, 60% is traded through JI and 18% through CDM. 5. Multi-gas abatement options The multi-gas analysis in the previous chapter was carried out by dividing the regional emission burden over the different emission sources applying a least-cost approach. This chapter evaluates the share of the different gases and their sources in total abatement by further analysing the results of case 4. To evaluate the differences 8 The demand curves for the Marrakesh Accords with and without Australia or optimal banking are the same as well as the supply curves for the KP with or without the USA. 9 Compared to 1990 level their emissions may increase with 22%, while taking into account their sinks credits from the Marrakesh Accords this increase is 30%. 7

8 in abatement options between the different regions, and especially between the Annex I and non-annex I regions, the analysis was carried out with and without trading. Figure 3 illustrates the abatements for the different gases, including hot air and sinks. When no trading is applied, most abatement is made for CO 2 (67%), while the shares of CH 4 and N 2 O are much smaller (10% and 2% respectively). Within the group of high-gwp gases, only HFC abatements are significant (5% of total reductions) and domestic sinks account for 14%. When full-trading is applied, the emission share of CO 2 abatements decline towards 38%, while the share of CH 4 triples towards 27%. Abatement shares for N 2 O and the high-gwp gases are insignificant ( each), while the share of hot-air and sinks account for 3 of total world abatements. Table 3 illustrates the share of the different sources in the total emission reduction. Almost all emission reductions for CO 2 are made in the energy sector. For CH 4, 60% of its abatements are made in the gas sector, 22% in the waste sector and 17% in the coal sector, while N 2 O abatements are almost fully made in the industry sector (adipic and nitric acid production). In terms of relative reductions, strong abatements occur for PFC and SF 6 (12% and 19% of total sectoral emissions respectively). Also CH 4 emissions in energy production (coal mining and natural gas production) decline relatively strong (22% and 13% respectively). In relative terms CO 2 emissions from energy production decline with 2.5%, while total CO 2 -equivalent emissions decline with 3.2%. In absolute figures, however, most abatement is still made in the CO 2 energy sector. From Figure 3 and Table 3 can thus be concluded that trading results in a shift in abatement options towards larger reductions for CH 4, and smaller reductions for CO 2. This can be explained by differences in volume of emissions and the costs of the abatement options for the different sources between the different regions, especially between the permit supplying and permit demanding regions. By far, the largest seller of emission permits is the Annex I FSU (Russia and the Ukraine), which has relatively large CH 4 emissions and cheap abatement options in coal mining and natural gas production (among others leakage s in natural gas pipelines). Non-Annex I regions have even larger CH 4 emissions, but most of these emissions have their origin in the agriculture sector, which have large abatement costs in this analysis. Furthermore, the model assumed that only 10% of all non-annex I abatement options could be supplied through CDM projects, which reduces the emission reduction potential for these regions drastically. Table 3: World abatement division over the different sources for case 4. NO TRADE Total CO2 ene CO2 ind oil gas coa Reference MtCeq , ,2 42, ,5 40,4 Target MtCeq , ,5 34, ,5 36,8 Reduction % 3,4 4,4 0,0 0,5 3,9 5,8 0,1 5,4 5,3 17,7 0,1 17,6 19,7 8,8 Burden* MtCeq ,1 0,4 16,6 11,7 0,6 24,9 0,8 7,5 0,5 28,5 6,0 3,6 TRADE Emissions MtCeq , ,1 39, ,0 32,7 Reduction % 3.2 2,5 0,0 4,1 21,5 12,7 0,0 7,3 1,1 6,4 0,0 3,4 11,5 19,0 Dom. Action MtCeq ,5 0,0 0,3 10,7 8,4 0,1 20,0 0,1 1,7 0,1 4,7 1,9 3,2 Trade MtCeq ,0 2,7 81,5 17,2 0,2 13,8 0,0 1,0 0,0 0,8 1,6 4,4 Reduction # MtCeq ,0 3,0 92,2 25,6 0,2 33,9 0,2 2,7 0,1 5,4 3,5 7,7 * Total emissions burden divided over the sources following a least-cost approach excluding hot air. # Total environmental effective emissions reduction taking into account the amount of hot air. agr wst N2O tra N2O ind N2O agr HFC tot PFC tot SF6 tot 8

9 Figure 3: Total abatements in percentage of total reductions, including hot air and sinks, for no-trade (left) and full trade (right) for case 4. 5% 2% 10% 14% 12% 13% 6% CO2 N2O HFC PFC SF6 Hot Air DOM Sinks CDM Sinks 67% 38% 27% 6. Conclusions We have shown that a multi-gas analysis result in significant lower Annex I emission reduction costs than an analysis taking only CO 2 into account. Nevertheless, the trends found earlier in the CO 2 -only analysis of dropping carbon prices in consecutive steps of the negotiation process remain the same. Given the current situation with a relatively low demand for emission reduction credits, an optimal banking strategy seems vital for the Annex I FSU revenues. We have shown that in an optimal case, 80% of all hot air is banked. This results in a rise of the international permit price towards 11 US$/tCeq and an increase of the environmental effective reduction towards 9.4% below base year level, which is mainly due to an increase of the amount of environmental effective permits on the international market. Including all Kyoto gases in the analysis results in relatively large reductions for CH 4, PFC and SF 6 in terms of the percentage reduction from the baseline. In absolute terms, however, the largest reductions still occur for CO 2 emissions from energy use. Trading results in a shift in abatement options towards larger reductions for CH 4, and smaller reductions for CO 2. The main CH 4 reduction sources are emissions from coal mining and natural gas production, which are mainly accomplished in the Annex I FSU (Russia and the Ukraine). Furthermore, abatements in the agricultural sectors were found to be insignificant in our analysis, due to relatively high costs and the bad accessibility of CDM projects. 6. Acknowledgement This work was conducted at the RIVM National Institute of Public Health and the Environment. We would especially like to thank Andre de Moor for his useful comments and fruitful discussions and Patrick Criqui for supplying the MAC curves. Furthermore we would like to thank Cor Graveland for his support on the cost curves and sinks and Martien de Haen for his assistance with the technical realisation. 9

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