Reconciling Carbon Pricing with Energy Policies in Developing Countries

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1 Interactions between carbon pricing and energy policies Reconciling Carbon Pricing with Energy Policies in Developing Countries Christophe de Gouvello Dominique Finon Pierre Guigon PMR Workshop on Post-2020 Mitigation Scenarios and Carbon Pricing Modelling Brasilia Feb 2, 2016

2 Carbon Pricing: From theory perspective: a no-brainer Customers respond to the carbon price signal and reduce their emissions accordingly Price Elasticity: An easy concept for modeling impact of carbon pricing on demand to reduce emissions In practice: a series of issues A few examples: - Oil price volatility - Undesired Rent Transfer

What response can be expected from investors and customers when

Oscillates over last 10 years: $ 29 $ 145 / bbl Hike Fall $35

(2013/2014) to $ 29 per bbl (2016) + $ 255 /tco2 - $ 200 /tco2

Tax Sweden Tax Switzerland France 2015 Tax Japan Tax Mexico

3 What response can be expected from investors and customers when oil prices are so volatile? Oscillates over last 10 years: $ 29 $ 145 / bbl Hike Fall $35 bbl (July 2007) to $145 bbl (December 2008) $115 bbl (2013/2014) to $ 29 per bbl (2016) + $ 255 /tco2 - $ 200 /tco2 Equivalent to : $ 67 $ 335 /tco 2 Can models address this issue? Tax Sweden Tax Switzerland France 2015 Tax Japan Tax Mexico South Africa 2015 Tax Chile EU-ETS New Zealand California RGGI 5-20 $ 1-2 $ 12 $ 5.5

4 Issue: Risk of Inefficiency of price signal Oil price volatility can offset carbon price signal, generates uncertainty for investors No silver bullet: look at what drives the whole energy price signal Volatility has also been a problem for energy policies: For decades: energy pricing instruments to mitigate volatility and protect customers Look at existing practices, experiences

Issue: Rent transfer from customers to power generators Carbon price changes merit order, carbon intensive plants are less dispatched, emissions are reduced Additional margin for Gas New clearance

less emissions Wholesale power price increases If pass-through: retail price paid by customers increases If free allowances : the generator compare between i) production of electricity + use of the

5 Issue: Rent transfer from customers to power generators Carbon price changes merit order, carbon intensive plants are less dispatched, emissions are reduced Additional margin for Gas New clearance price These coal plants are still dispatched margin clearance price Additional margin Hydro, Nuke Additional margin for Coal if free allowances These coal plants are not dispatched any more, thus less emissions Wholesale power price increases If pass-through: retail price paid by customers increases If free allowances : the generator compare between i) production of electricity + use of the allowances, or ii) sales of allowances on the carbon market «Opportunity Cost» of allowances is passed through in the price bids and eventually to customers Carbon rent captured by generators, rent transfer from customers to generators Happened during EU-ETS Pilot Phase: now auctioning for power sector

6 Carbon price does not come into an empty space Already many Taxes and Levies on Energy (ex: Electricity in Brazil) Fonte: Acende Brasil. Disponível em Agência Nacional de Energia Elétrica ANEEL. Disponível em Taxes and Levies on Electricity Regulation Point Calculation Basis Taxa de Fiscalização de Serviços de Energia Elétrica (TFSEE) Encargos de Serviço do Sistema (ESS) Reserva Global de Reversão (RGR) Contas de Consumo de Combustível (CCC) Conta de Desenvolvimento Energético (CDE) Compensação Financeira pela Utilização de Recursos Hídricos (CFURH) Encargos de Energia de Reserva (EER) Operador Nacional do Sistema (ONS) Pesquisa e Desenvolvimento e Eficiência Energética (P&D) Programa de Incentivo às Fontes Alternativas (PROINFA) Geração, transmissão, distribuição ou comercialização de energia elétrica Comercialização de energia na CCEE (Câmara de Comercialização de Energia Elétrica) Investimento de concessionárias de energia elétrica Distribuição de energia elétrica Uso de bem público, multas e comercialização de energia a consumidor final Uso de recursos hídricos para a geração hidrelétrica Comercialização de energia na CCEE Agentes conectados à rede básica Receita de concessionárias de geração, transmissão e distribuição Comercialização de energia a consumidor final Receita operacional líquida Proporcional aos serviços prestados pelo sistema Valor dos investimentos com teto definido pela receita Consumo de energia elétrica Uso de bem público, multas e comercialização de energia a consumidor final Receita operacional bruta Consumo de energia elétrica Potência máxima Receita operacional líquida Consumo de energia elétrica Value Collected (in Million of R$) 195,9 (ano 2012) 1.416,6 (ano 2011) 1.724,9 (ano 2011) 5.571,7 (ano 2011) 3.722,6 (ano 2012) 1.635,8 (ano 2011) 321 (ano 2011) 352,42 (ano 2010) 650 (ano 2010) 2.252,7 (ano 2012) Thus important to understand how Carbon Pricing can interact with Energy Policy Instruments

7 Similar instruments for Carbon and Energy Policies Pricing instruments Carbon Carbon tax ETS Energy: Energy taxation Subsidies: Price equalization, social tariffs, FIT for renewable Green, White Certificates Power sector market regulation Quantity instruments Carbon: - Caps and Trade Energy: Oil Import Quotas (ex: China, US , France , Germany (oil and coal imports quotas, etc.) Renewable and Energy Efficiency Standards (Tradeable) Command and control Instruments Carbon: - Emission Performance Rates (US: Clean Power Plan to phasing-out of most carbon intensive coal power plants in US Energy: - Efficiency Performance Standards

8 Beyond Instruments: Policy Objectives Instruments are not an end in themselves: they are designed to pursue policy objectives Carbon pricing: protect global environment, reduce greenhouse gas effect Energy: Multiple Policy Objectives Differences between OECD and Developing Countries

9 Relative Priorities of Energy Policy Objectives in Developing Countries and OECD Countries Emerging Economies OECD Countries since 1995 Priorities Priorities Economic development Macroeconomic objectives Inflation, balance of payments Reliability of supply Price affordability Redistributive objectives +++ Rural Access and regional policies ++ Energy independence by development of national resources ++ Economic development Macroeconomic objectives Inflation, balance of payments 0/+ Adequate power capacity and reasonable price, + market-based competition Consumer protection and redistributive objectives + Rural Access and regional policies + Energy independence, security of supply + Industrial Competitiveness ++ Industrial competitiveness ++ Environmental and climate protection + Environmental and climate protection +++

10 Convergence and conflicts between carbon pricing and energy policy objectives Examples of Convergence Examples of Conflict Unexpected Effects

11 Potential convergences and conflicts between Carbon Pricing and Energy Policy Objectives Economic development Macroeconomic objectives Balance of payments, Inflation Price affordability Redistributive objectives Rural Access Convergences Development of Renewables Industry Possible reduction of fossil fuels imports Development of decentralized local renewables Conflicts Phasing out Fossil Fuel Industry Possible loss of GDP Increase of prices Increase of energy prices Risk of rent transfer Energy independence Development of national renewable resources Limit development of national fossil fuel resources Industrial Competitiveness Environment safeguards Reduce air pollution Penalizes competitiveness Impacts of renewables (hydro, wind, bioenergy)

Examples of conflict: Competitiveness of Energy Intensive Industries (Eiis): German Steel Industry case Comparison of Electricity prices for Eiis in 10 OECD Countries

exemption (Wire Rod; Electric Arc Furnace EAF) In Germany (DE) Energy and Climate tax and levies would make the electricity price paid by Eiis much higher than in other

12 Examples of conflict: Competitiveness of Energy Intensive Industries (Eiis): German Steel Industry case Comparison of Electricity prices for Eiis in 10 OECD Countries plus China Impact on competitiveness : Example of German Steel Industry : Comparison of product price with and without exemption DE : with exemption (DE) : without exemption (Wire Rod; Electric Arc Furnace EAF) In Germany (DE) Energy and Climate tax and levies would make the electricity price paid by Eiis much higher than in other countries Without the exemption program (BesAR), production cost of wire rod would be slightly higher than the observed market price Source: Ecofys, Fraunhofer-ISI and GWS, 2015

Example of unexpected effect The rent transfer

Diverse Power Sector Models lead to diverse

Integrated State-owned Auctions First, only

g. California, Brazil, Chili, Colombia, Peru,

13 Example of unexpected effect The rent transfer presented above was actually a simplification: Diverse Power Sector Models lead to diverse effect of carbon pricing along the value chain Integrated State-owned Auctions First, only step in many countries «Reform of the Reform» E.g. California, Brazil, Chili, Colombia, Peru, UK (currently) IPPs IPPs IPPs Deverticalized Market-based

14 Reconciling Carbon Pricing and Energy Policies Compensations internal to the design of the Carbon Pricing instruments to comply with the Energy Policy objectives Reforms, adjustments of existing Energy Policy Instruments to the Climate Objective Full integration of Carbon and Energy policies objectives in joint design of instruments

15 Reconciling Carbon Pricing and Energy Policies Compensation "internal to the design of the Carbon Pricing Instrument to comply with Energy Policy Objectives Mainly: 1) Recycling of Carbon Revenues and/or 2) Tax Exemptions / Free Allowances Example : California s Climate Credits : - Carbon pricing instrument: ETS - Energy Policy Objective: Affordability, Protection of Customers Power Utilities receive free allowances However, they have to sell these allowances on the carbon market The proceeds of the sale are returned to customers as flat Climate Credits Power utilities need to re-purchase allowances on the market and redeem them according to their emissions (thus incentive to reduce emissions) Same Climate Credit amount for both small and large residential customers Cost is passed through into tariffs charged to final customers (thus incentive for customers to reduce consumption) Both: carbon objective and protection of small customers

16 Reconciling Carbon Pricing and Energy Policies Reciprocal: Revise existing Energy Policy Instruments to align them with the Carbon Objective Example: Subsidies for access to basic electricity services Before Adjustment After adjustment to carbon objective Affordability, Protection of consumers Subsidized Social Tariffs Subsidy Removal + Cash transfer (thus incentive to control consumption) Rural Access Cross-subsidies for conventional grid-based electrification Subsidies for Electrification based on decentralized renewables and systems (thus zero emissions)

17 Reconciling Carbon Pricing and Energy Policies Full integration of Carbon and Energy policies objectives in joint design of instruments Examples: Integrate carbon value in medium-long-term energy planning, short term dispatching, PPA, Auctioning, etc. Integrate green/white certificates with carbon certificates (one certificate, two values: can be traded on either green/white certificates market or on carbon market) Recycle revenues from carbon tax or allowances auctioning to finance Feed-in-Tariff to develop national renewable energy resources Address market / regulatory barriers which prevent Energy Efficiency activities which both reduce the energy demand and CO2 emissions Merge Carbon Pricing and Energy Taxation Energy + Carbon Price stabilization scheme Etc...

18 Merging and Adjusting Energy and Carbon Taxes to stabilize «Energy + Carbon Price» Price $ Desired trajectory for Total Energy + Carbon price cost of low-carbon technology needed to achieve INDC target Flexible carbon-energy tax International Oil Price Time horizon of INDC target Time

19 Recommendations Map out Energy Policy Objectives and Instruments (acknowledge their legitimacy!) Understand which energy instruments are contrary to (or aligned with ) carbon mitigation objective, and reciprocally Compare, combine, (re-)design jointly : New carbon pricing instruments designed to be consistent with energy policy objectives Reform, revision, adjustment of energy policy instruments to become consistent with the carbon mitigation objective A joint policy (reform) package

Global Carbon Finance (GLOCAF) model

OFFICIAL-SENSITIVE Global Carbon Finance (GLOCAF) model PMR Technical Workshop on Post-2020 Mitigation Scenarios and Carbon Pricing Modelling Brasilia, 03 February 2016 Contents Introduction GLOCAF model