Are Low Carbon Policies Affordable?

Transcription

1 Are Low Carbon Policies Affordable? David Newbery Renewable Energy Foundation Are Low Carbon Policies Affordable? St George s House Windsor Castle 28 th October uk

2 Outline Can the world afford low-c policies? Will we be able to agree on actions? Can the developed world pay the price? What is the role of the EU and UK? Can the UK afford low-c policies? What is needed to deliver low-c Britain? Are we pursuing sensible low-c policies? If not what is wrong and what should we do? Newbery IIB 1 D Newbery REF Windsor castle

3 Bottom line UK low-c targets: 200 billion by 2020 = 700 per household per year for 10 years partly to replace obsolete plant but much in extra cost of renewables Why subsidize renewables? => burden sharing under Renewables Directive justified by learning-by-doing Aim to deliver agreed goal at least cost Newbery IIB 1 D Newbery REF Windsor castle

4 Emissions pathway to stabilise at below 550 ppm - but 450 ppm needed to stay below 2 o C Note 1GtC=3.67 Gt CO 2 Business as usual (A2) Source IPPC D Newbery REF Windsor castle

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7 Climate change challenges World should not release all C from fossil fuels Climate policy risks depressing fossil fuel prices unless CCS on major scale? Current low-c technologies not yet competitive especially given low EUA price How best to drive down clean energy costs? Research, Development, Demonstration and Deployment D Newbery REF Windsor castle

8 Peak CO 2 -warming vs cumulative emissions If we want a 50% chance of less than 2 o C rise we can only use another 500 Gt C ever! Now Unconventional oil +gas Proven L H Resource MR Allen et al. Nature 458, (2009) doi: /nature08019

9 Ethics and economics Stern: Climate change is the greatest and widest-ranging market failure ever seen CO 2 is a persistent global stock pollutant emissions anywhere affect all for centuries uncorrected free markets will fail to charge true cost global public bad requires collective action => Least cost solution: all agents face carbon price What price? Who should pay? D Newbery REF Windsor castle

10 Putting a price on carbon Social cost = present cost of future damage Who counts? How much? How uncertain? Stern - utilitarian social welfare viewpoint all count, how much depends on discount rate Stern takes pure time preference at 0.1% social damage inverse to consumption level => ethical appeal - lives of poor as valuable as rich => solves problem of risk => insurance valuable time scales of centuries, huge uncertainty D Newbery REF Windsor castle

11 Effect of discounting Share of total damage occurring after 2200 at different rates of pure time preference at 0.1%: 52-57% depending on scenarios at 1%: 16-19% at 3%: 0-3% High discount rates => trash the planet D Newbery REF Windsor castle

12 Social cost of carbon (SCC) SCC = damage caused by extra tonne of carbon equivalent of GHG released now rises at discount rate Stern: $85/t CO 2 = $312/tC coal : $40-60/t, with tc/t coal ETS price 13 /t CO 2 = $19/t CO 2 = $70/tC DEFRA SCC= 26.5/tCO 2 = 31 /t CO 2 = 97/tC= $160/tC D Newbery REF Windsor castle

13 So what should it be? Pragmatism: what is needed to avoid disaster? = Predictable, credible rising future C price sufficient to induce low-c investment (nuclear, wind based on costs of delivery, avoids ethics (somewhat) collective agreement - we each worry about our own descendants => encourage agreement - bribes and penalties Transfers to non annex I, border C taxes? D Newbery REF Windsor castle

14 EU climate change policy ETS to price CO 2 fixes quantity not price => poor guide for low-c Directive: demand pull for renewables justified by learning spill-overs and burden sharing each country must do an appropriate part EU SET-Plan to double R&D spend to support less mature low-c options But ETS and Renewables Directive conflict D Newbery REF Windsor castle

15 CO 2 prices are volatile and now too low EUA price October 2004-April 2010 Actual emissions revealed Futures Dec 2007 OTC Index Second period Dec 2008 Second period next Dec CER 09 Euro/t CO Second period 5 start of ETS 0 D Newbery REF Windsor castle Oct-04 Apr-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10

16 Costs of errors setting prices or quantities /tc Correct MC With quota would produce up to here Start of ETS at high cost efficiency loss from quota MC Best estimate of Marginal Cost of abatement t* t efficiency loss from tax With tax would produce here at low cost MB, Marginal benefit from abatement Q* Q Reductions in emissions Newbery IIB 1 D Newbery REF Windsor castle

17 Failures of ETS Current ETS sets quota of total EU emissions Weitzman argues for tax/charge not quota Renewables Directive increases RES => increased RES does not reduce CO 2 => reduces price of EUA => prejudices other low-c generation like nuclear Risks undermining support for RES Solved by fixing EUA price instead of quota D Newbery REF Windsor castle

18 2020 projected CO2 price Euros/tonne CO projections Renewables depresses C-price 2009 projections after Renewables Directive and recession 10 0 with 12.5% renewables with 20% renewables 2009 projections Source: Committee on Climate Change, 2008 and 2009 D Newbery REF Windsor castle

19 Reforming ETS Reform EU ETS to provide rising price floor sufficient for nuclear or on-shore wind if cheaper => Carbon Bank trades EUAs to stabilise price Commitment to raise CO 2 price at 3% p.a. over life of plant may suffice 25/EUA 2010 => 34 in 2020, 61 in Making it credible: write CfD on this path remove uncertainty for low-c generation investment makes extra carbon savings additional D Newbery REF Windsor castle

20 UK Electricity R&D intensity 3.0% percent electricity revenue 2.5% 2.0% 1.5% 1.0% ROCs other power hydrogen and fuel cell nuclear fission and fusion Renewables fossil fuels High rate of growth little delivery 0.5% 0.0% D Newbery REF Windsor castle

21 What of UK energy policy? Renewables Directive as burden-sharing sound but risk that we all chase cheapest solution least bad solution to problem? UK promotes renewables via ROCs costly => large windfalls, replace with FITs? Small scale wind encouraged by silly FIT Good news: low carbon network fund induces innovation to overcome barriers Bad news: planning still a mess, leading to very expensive off-shore solutions D Newbery REF Windsor castle

22 Domestic fuel bill breakdown via ETS incl in supply cost Proportionately nearly 3 times higher on elec than gas Source: Ofgem D Newbery REF Windsor castle

23 Affordability (climate change) Average domestic electricity bill 400/yr Main programmes EU Emissions trading scheme 24 Carbon Emissions Reduction Target* 15 Community Energy Savings Programme* 1 Renewables Obligation 12 Total (annual cost) = 52 =13% of total bill Subsidy from reduced VAT ( 53) * allocated pro-rata to expenditure on electricity and gas D Newbery REF Windsor castle

24 ROCs are expensive UK Renewables policy reward scarcity, deter entry, discourage localism The problem is planning coalition has abolished IPC (but that was not suited to on-shore wind anyway) => Separate system planning (SP) from TSO => SP finds optimal RES sites, secures consent => runs tender auctions for least cost FIT D Newbery REF Windsor castle

25 UK ROC, EUA, and electricity prices ROC+RPD 1 yr centred MA RPD ROC windfall profits /unit 60 ROC price stable Q Q Q Q Q Q Q Q Q1 D Newbery REF Windsor castle

26 CCCʼ09 UK 2020 target is 27,000 MW Installed wind capacity 25,000 20,000 MW 15,000 10,000 UKʼs target looks feasible at DE roll-out rate 5, Denmark Germany Spain UK D Newbery REF Windsor castle

27 What to do? 1. An adequate credible durable carbon price => carbon tax plus CfD 2. most socially beneficial portfolio of RES => tender auctions for preferred portfolio 3. Least cost investment in capital-intensive kit => reduce risk with long-term contracts 4. Least cost delivery => reform market, nodal priced dispatch Newbery IIB 1 D Newbery REF Windsor castle

28 Are Low Carbon Policies Affordable? David Newbery Renewable Energy Foundation Are Low Carbon Policies Affordable? St George s House Windsor Castle 28 th October uk