Issues in Estimating the Cost and Effectiveness of Climate Policies. Mark Jaccard

Transcription

1 Issues in Estimating the Cost and Effectiveness of Climate Policies Mark Jaccard School of Resource and Environmental Management Simon Fraser University Vancouver April, 2010 FEEM, Venice 4/2010 Jaccard-Simon Fraser University 1

2 Presentation overview Estimating the cost of energy efficiency: revisiting old debates. Hybrid models for simulating energy-environment policies and their implications for estimating energy efficiency potential. Estimating the likely effectiveness and contribution of energy efficiency policies some empirical case studies. 4/2010 Jaccard-Simon Fraser University 2

3 Calculating energy conservation cost curves Compare a conventional technology with a higher efficiency alternative providing the same service. Divide extra capital cost of efficient technology by its discounted energy savings = life-cycle-cost of conservation ($/kwh). Graph estimated total energy savings (each service) in ascending order of cost to produce steps of conservation cost curve. Initial steps could have negative costs; all steps costing less than utility rates are privately profitable; all steps costing less than new energy supply are socially profitable. 4/2010 Jaccard-Simon Fraser University 3

4 Energy conservation cost curve $ / kwh delivered cost from new generation electricity rates efficient building shell 0 efficient motors efficient fridges efficient light bulbs electricity saved 4/2010 Jaccard-Simon Fraser University 4

5 Calculating GHG abatement cost curves Compare a conventional technology with a lower emission alternative for the same service. Calculate present value of capital and operating costs of both technologies. Take the difference in these costs and divide by the difference between emissions = cost of abatement ($/tonne of CO2). Graph estimated total emissions reductions (each service) in ascending order of cost to produce abatement cost curve. Initial steps could have negative costs, meaning profits + GHG abatement ( win-win, no regrets ) 4/2010 Jaccard-Simon Fraser University 5

6 GHG abatement cost curve energy efficiency dominant 4/2010 Jaccard-Simon Fraser University 6

7 Issues with the use of cost curves Conservation cost curves were popular 30 years ago and GHG abatement cost curves 20 years ago. They fell out of favor with most energy-economy modelers, who argued these curves mislead about costs and are unhelpful with policy. Yet these cost curves have recently re-emerged in GHG abatement policy discussions, rekindling old debates. Déjà vu all over again. 4/2010 Jaccard-Simon Fraser University 7

8 Issue #1 Actions assumed independent Construction of cost curves implies that each action is completely independent of every other action. (extreme partial equilibrium analysis) (1) demand-side, (2) supply-demand including price, (3) micro-macro rebounds $ / kwh Delivered cost from new generation Assumed independent efficient fridges efficient motors efficient light bulbs 0 electricity saved efficient building shell 4/2010 Jaccard-Simon Fraser University 8

9 Issue #2 Market conditions assumed homogeneous Market evidence shows that acquisition of a more efficient or lower emission technology will cost X for the first 20% of the market, X+Y for the next 20%, X+Y+Z for the next 20%, and so on. Reasons include: different age of existing capital stock and hence cost of replacement at a particular time local differences in transaction costs learning, acquisition, installation and operation 4/2010 Jaccard-Simon Fraser University 9

10 Issue #3 Technologies assumed perfect substitutes Quality of service assumed identical. But some technologies provide (or are perceived to provide) lower quality service a frequent concern with new technologies (e.g., efficient light bulbs, transit vs personal vehicles) Risk assumed identical. But (1) long payback investments usually higher cost risk, and (2) new technologies usually higher failure risk. Incorporating this risk usually causes higher expected cost for high efficiency / low emissions technologies. 4/2010 Jaccard-Simon Fraser University 10

11 Correction for expected cost $ / kwh ordering could also change expected cost higher 0 electricity saved 4/2010 Jaccard-Simon Fraser University 11

12 Modeler response to first three issues with cost curves Construct integrated models: energy supply with energy demand energy system with rest of economy economy with natural system (integrated assessment models) Track vintages of equipment stocks and portray heterogeneous character of market response Estimate model behavioral parameters that explicitly or implicitly incorporate: non-financial values (preferences related to technology attributes) perceived and real differences in risk (parameters could be price elasticities or specific behavioral parameters in a model that simulates technology choice) 4/2010 Jaccard-Simon Fraser University 12

13 Energy-economy models: Estimating marginal abatement cost (MAC) curves Using elasticities or other behavioral parameters, energy-economy models simulate responses of firms and households to changing energy prices due to market developments or emissions pricing policies. Graphing the results from raising the price of CO2 produces a marginal abatement cost (MAC) curve. This differs from conservation or abatement cost curves because: Each point on curve has simultaneous actions occurring (equilibrium effects) A particular action (more efficient fridges) occurs continuously along the curve, if model includes capital stock vintages and market heterogeneity. If model incorporates intangible costs and responsiveness to pricing policy (a simulation model), MAC curve likely to be much higher. 4/2010 Jaccard-Simon Fraser University 13

14 Energy-economy model: sample MAC curve $ / tonne CO 2 e multiple locations high efficiency fridge (heterogeneous market) includes transactions costs, preferences and risks throughout curve 50 simultaneous actions at one point (integrated model), including equilibrium feedbacks 20% 40% GHG abatement 4/2010 Jaccard-Simon Fraser University 14

15 300 McKinsey study vs. CIMS hybrid model MAC: US CIMS marginal abatement cost curve 200 $/tco2 100 McKinsey abatement cost curve Gigatonnes CO2 abated /2010 Jaccard-Simon Fraser University 15

16 CIMS: A technology choice simulation model hybrid Model keeps explicit track of capital stocks of different types of technologies in terms of efficiency and emissions level. Technology choices driven by three uncertain parameters time preference, degree of market heterogeneity, technology specific intangible costs. Parameters estimated using revealed and stated preference research. (see next slide) Model has other dynamics learning curves, neighbor effect, rebound effect which also require parameter estimation (published studies) Technology simulation model provides elasticity of substitution values for a CGE model (global model, US model, Canada model). Price shocking of CIMS produces pseudo data for estimating ESUBs for the CGE. 4/2010 Jaccard-Simon Fraser University 16

17 LCC CIMS: Technology choice algorithm MS j = ( CC CRF + OC + EC + i j j j j j) v CC k CRF k + OC k + EC k + i k ( ) v CRF j = r 1 (1+ r) n j Three key behavioural parameters: Discount rate (r) reflecting time preference with respect to technology acquisition decisions Intangible cost (i) preferences associated with technology quality attributes, including differential risk Market heterogeneity (v) - different consumers and businesses face different costs, have different perceptions and preferences. 4/2010 Jaccard-Simon Fraser University 17

18 Discrete choice models to estimate r, i and v in CIMS Survey / Observation Empirical Model (DCM) CIMS r, i and v Standard discrete choice model for technology choice surveys U j = β j + βcccc + βococ + β EC EC + CC β j r = i j = β β β AC AC e j v = ordinary least squares to estimate value for which predictions from CIMS are consistent with those from the DCM model. Depends on size of error terms relative to values of beta parameters. 4/2010 Jaccard-Simon Fraser University 18

19 Empirically estimated behavioral parameters uncertainty propagated to model outputs Cogeneration Market Share Increase over Business as Usual 40% 35% 30% 25% 20% 15% 10% 5% 0% MLE estimate 95% C.I Year 4/2010 Jaccard-Simon Fraser University 19

20 200 Simulation vs optimization, CIMS vs MARKAL: Canada-Kyoto target, $ / tonne CO 2 e CIMS 50 MARKAL GHG reduction (MT CO 2 e) 4/2010 Jaccard-Simon Fraser University 20

21 Issue #4 Cost curve policy implications Studies producing conservation and abatement cost curves often silent on policy. But, implicit cost message: It is cheap to achieve substantial reductions of energy use and/or emissions. Implicit policy implication: With conservation so cheap, little need for emissions pricing and regulations. Just focus on information and subsidies (including offsets) to drive energy conservation. 4/2010 Jaccard-Simon Fraser University 21

22 Policy challenges: efficiency subsidies and free-riders Kwh/m 3 * * * * * * * average fridge efficiency * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * must accelerate efficiency trend 1950s 1960s 1970s 1980s 1990s 2000s 4/2010 Jaccard-Simon Fraser University 22

23 Estimated free-ridership rates: quasi-experiments Technology Source Free-ridership Furnace Malm (1996) 89% Refrigerator Train and Atherton (1995) 36% Air conditioner Train and Atherton (1995) 66% Building shell retrofit Grosche and Vance (2009) 50% Electric utility DSM programs various Loughran and Kulick (2004) 50-90% Hybrid vehicles Chandra et al. (2009) 74% 4/2010 Jaccard-Simon Fraser University 23

24 Estimated effectiveness of efficiency subsidies in Canada Rivers and Jaccard, /2010 Jaccard-Simon Fraser University 24

25 Net effect of subsidies on energy use Free riders evidence suggests 25-75% Direct rebound evidence suggests 5-20% Productivity rebound uncertain, but initial evidence suggests high rebound potential when policy is efficiency subsidies (new devices, new energy services) 4/2010 Jaccard-Simon Fraser University 25

26 US data for other household devices - number Steve Groves, SFU /2010 Jaccard-Simon Fraser University 26

27 US data for other household devices electricity consumption Steve Groves, SFU /2010 Jaccard-Simon Fraser University 27

28 Bottom-up estimate of efficiency s contribution: Canada in /2010 Jaccard-Simon Fraser University 28

29 Hybrid estimate of efficiency s contribution: Canada in /2010 Jaccard-Simon Fraser University 29

30 Incremental contribution of nonprice policies: Canada /2010 Jaccard-Simon Fraser University 30

31 CIMS EMF25: US CO 2 e Emissions Incl. Elec. Gen. (Million Tons) Reference Case Carbon Tax Energy Tax Standards Subsidies Standards and Tax /2010 Jaccard-Simon Fraser University 31

32 CIMS EMF25: US Energy Consumption Excl. Elec. Gen. (QBTU) Reference Case Carbon Tax Energy Tax Standards Subsidies Standards and Tax /2010 Jaccard-Simon Fraser University 32

33 Extra slides 4/2010 Jaccard-Simon Fraser University 33

34 Views on profitable efficiency Greater technical energy efficiency Technologist s profitable efficiency If environmental externalities were internalized? Technologist s explanation: Market barriers: financing, info, split-incentive, capacity Economist s critique: Technologies differ with respect to risk, Technologies differ with respect to quality Economist s profitable efficiency Address real market failures: Information as public good, Average cost pricing of utilities Baseline efficiency trend Passage of time 4/2010 Jaccard-Simon Fraser University 34

35 Parameter Implications - Market Heterogeneity Market Share of Tech A Source: Nyboer, 1997 Power Parameter, v Point where Tech A is 15% cheaper than Tech B Relative Price of Tech A to Tech B 4/2010 Jaccard-Simon Fraser University 35

36 Carbon offsets: another form of subsidy Definition of offset a subsidy, usually from one private entity to another, to help fund an action that reduces emissions from what they otherwise would be (business as usual) Voluntary offset individuals and corporations can voluntarily acquire offsets in order to reduce their net emissions Regulated entity offset a cap and trade system could allow a regulated entity to meet some or all of its emission reductions by acquiring offsets from unregulated entities (Alberta, Canada, CDM of the Kyoto Protocol) Governments require, and offsetter companies promise, that offsets are verified to be additional and permanent 4/2010 Jaccard-Simon Fraser University 36

37 Range of carbon offsets 1. Improve energy efficiency so that less fossil fuels are combusted and less GHG emitted 2. Subsidize renewable energy to reduce the carbon that otherwise would have been emitted 3. Changing agricultural practices, such as tillage, manure handling and livestock feed. 4. Planting trees to increase carbon in biomass on the earth s surface 5. Capture or prevent a GHG emission (land fill gases, pipeline methane leaks, carbon capture and storage) 4/2010 Jaccard-Simon Fraser University 37

38 Offsets via the Clean Development Mechanism Warr and Victor, /2010 Jaccard-Simon Fraser University 38

39 Subsidies to changing tillage practices? 100% 90% No tillage Land area by tillage type (percent) 80% 70% 60% 50% 40% 30% 20% 10% Conservation tillage Convention al tillage 0% /2010 Jaccard-Simon Fraser University 39

40 Afforestation offsets Subsidize x percentage of landowners to plant trees on marginal agricultural land. Offsetter companies verify that the trees are planted and the land remains forested. Over time this policy should raise the value of agricultural land relative to forested land. This would cause some forest owners with land of moderate agricultural value to convert it to agriculture. This is leakage economists call it a general equilibrium effect. 4/2010 Jaccard-Simon Fraser University 40