Accounting for Market Realities: Greenhouse Gas Offset Supply Incentives

Transcription

1 Accounting for Market Realities: Greenhouse Gas Offset Supply Incentives Steven Rose (EPRI), Katherine Calvin (PNNL), Bruce McCarl (Texas A&M University), Jae Edmonds (PNNL), Marshall Wise (PNNL) International Energy Workshop Paris, France June 19, 2013

2 Compliance Costs Extremely Sensitive to Offset Supply e.g., H.R (Waxman-Markey) Cumulative abatement (GtCO 2 eq) $10 H.R Jun 2009 analysis $18 No Int'l Offsets Jan 2010 analysis $12 H.R (Updated) $18 No Int'l Offsets $27 No int l or domestic offsets 2 * Ignoring significant forest leakage $13 Int l offsets delayed 20 years $15 No REDD offsets Source: Derived by S Rose from original and supplemental EPA Analysis H.R * See 2013 Rose Electric and Power Research Sohngen Institute, (2011) Inc. All rights reserved. $13 Early Developing Country Action $8 Intl offsets additional purchased Intl offsets credited Domestic offsets Capped 2012 allowance price No Developing Country Action $30 $25 $20 $15 $10 $5 $- 2000$/tCO 2 eq

3 Overall Study Objectives 1. Generate more market and policy realistic estimates of GHG offset abatement potential, especially for the critical near-term. 2. Inform public and private decision-making Study relevant to many policy contexts offsets writ large (e.g., Australia, California, Quebec), sectoral, UNFCCC, linked markets, generic risks. 3

4 Overall Study Improving Offset Supply Estimates Three Analytical Innovations: 1. Quantifying relative offset investment risks 2. Accounting for investment risks and different investment contexts 3. Modeling incentives for offset suppliers in carbon markets Two Products: 1. Improved offset supply curves that better reflect market realities 2. A consistent and flexible global dataset of offset investment risks (200 countries x 65 technologies) 4

5 Supply Incentives for Offset Suppliers Past offset supply modeling was based on comprehensive pricing of all emissions (and sequestration), but this approach is inconsistent with how offset markets operate in practice. In offset sectors, actors choose to supply mitigation activity in exchange for payment. Unlike capped sectors, emissions are not priced in these sectors, and there is no emissions cost for non-participants. Offset supply incentives should be modeled in estimating offset supplies. This has not been done in most previous analyses. 5

6 Modeling Offset Supply Incentives For international electric and non-electric energy mitigation Incentive: subsidy for low-carbon energy technologies For U.S. agriculture and forestry mitigation Incentive: payment for opting-in production activities 6

7 International Electric and Non-electric Energy Offsets Supply Model: GCAM Global integrated assessment model couples representations of the economy, energy system, agriculture and land-use system, and climate system Significant technology detail within energy supply and demand Subsidy implementation Prescribed abatement credits for each technology Only above baseline deployment eligible for credits & payment Crediting schemes Operating Margin: better than average energy mix emissions factor OM variant with no crediting for advanced fossil fuel technologies Combined Margin: weighted combination of Operating & Build Margins (BM emissions factor for recent historical builds) 7

8 International Energy Offsets 2020 $45 $40 $35 $30 Economic potential $ / tco2 $25 $20 $15 $10 $5 $ GtCO2 / year 8

9 International Energy Offsets 2020 Operating Margin: crediting for above baseline deployment and better than average energy mix emissions. $45 $40 Offset credits w/ subsidy $35 $30 Economic potential $ / tco2 $25 $20 $15 $10 $5 $ GtCO2 / year 9

10 International Energy Offsets 2020 Operating Margin: crediting for above baseline deployment and better than average energy mix emissions. $45 $40 Net abatement w/ subsidy Offset credits w/ subsidy $ / tco2 $35 $30 $25 $20 $15 $10 $5 Overpayment ~$55 billion at $20/tCO 2 Economic potential Credits issued exceed abatement (and net emissions increasing) Overpayment occurs in developing & developed regions $ GtCO2 / year 10

11 International Electricity Generation Subsidized electricity EJ / year Reference Economic potential with $20/tCO2 Low-carbon energy subsidy (w/ delivery risk) with $20/tCO2 11

12 International Generation 2020 Differences from Baseline (with $20/tCO 2 ) 12 EJ / year Wind Gas Coal Solar Wind Oil w/o CCS Oil w/ CCS Nuclear Hydro Geothermal -2-4 Gas w/o CCS Gas w/ CCS Coal w/o CCS -6 Coal w/ CCS -8 Economic potential with $20/tCO2 Low-carbon energy subsidy (w/ delivery risk) with $20/tCO2 Low-carbon energy subsidy (w/ delivery risk, not for advanced fossil) with $20/tCO2 Biomass w/o CCS Biomass w/ CCS 12

13 International Final Energy 2020 Differences from Baseline (with $20/tCO 2 ) EJ / year Economic potential Subsidy (w/ delivery risk) Economic potential Subsidy (w/ delivery risk) Economic potential Subsidy (w/ delivery risk) Buildings Industry Transportation Electricity Coal Gases Liquids Biomass Other Net 13

14 Might Alternative Crediting Schemes Help? 1. No crediting for advanced fossil fuel technologies coal IGCC, natural gas CC, natural gas turbine, and oil IGCC 2. Crediting based on Combined Margin (Operating & Build Margins) vs. Operating Margin alone electric sector only 14

15 Alternative Crediting Schemes No crediting for advanced fossil fuel technologies EJ / year Non-US Generation Differences from Baseline ($20/tCO 2 ) Economic potential with $20/tCO2 Wind Gas Coal Low-carbon energy subsidy (w/ delivery risk) with $20/tCO2 Low-carbon energy subsidy (w/ delivery risk, not for advanced fossil) with $20/tCO2 Solar Wind Oil w/o CCS Oil w/ CCS Nuclear Hydro Geothermal Gas w/o CCS Gas w/ CCS Coal w/o CCS Coal w/ CCS Biomass w/o CCS Biomass w/ CCS No direct payments for advanced fossil, but still subsidizing system 15

16 Alternative Crediting Schemes Combined vs. Operating margin (electric sector) GtCO International Electric Sector Only Credits and Abatement ($20/tCO 2 ) Credits Abatement Problems persist combined margin reduces, but does not eliminate overpayment -0.4 Economic potential Subsidy - Operating Margin Subsidy - Combined Margin 16

17 GHG Market Implications (Int l energy offsets & mitigation) Significant use of offset credits GHG mkt scenario US energy CO 2 80% below 2005 in 2050 International energy offsets permissible KP ratifying countries (less Russia) similar CO 2 targets GtCO US cumulative mitigation & 2020 Allowance Price allowance price Capped reductions Offset credits X $40 $30 $20 $10 Allowance price 2020 ($/tco2) -20 No offsets With subsidy offsets and DR With economic potential offsets $- 17

18 GHG Market Implications (Int l energy offsets & mitigation) But, actual reductions from offsets negative GHG mkt scenario US energy CO 2 80% below 2005 in 2050 International energy offsets permissible KP ratifying countries (less Russia) similar CO 2 targets GtCO US cumulative mitigation & 2020 Allowance Price allowance price Capped reductions Offset and outside cap reductions Offset credits X $40 $30 $20 $10 Allowance price 2020 ($/tco2) -20 No offsets 18 With subsidy offsets and DR With economic potential offsets $- Note: This outcome is possible if all GHG emissions are priced and markets are linked

19 US Ag/Forest Offsets Supply Model: FASOM Dynamic partial equilibrium model of U.S. forestry and agricultural sectors Opt-in program implementation Opt-in/out option for all production activities Opt-in receives credit payment based on crediting scheme Crediting schemes (bookends) Perfect crediting crediting only for net mitigation (= participant + non-participant emissions baseline emissions). Captures additionality and leakage. Crediting for existing carbon and new mitigation w/o additionality requirement (& no non-participant leakage accounting) 19

20 US Ag/Forest Supply (Opt-in Program with Crediting Bookends) Credits/Abatement (perfect crediting) Economic potential $ / tco2e Abatement (no add l req) Credits (no add l req) MtCO2e / year (annualized) Bookends reveal that mitigation will be less than when emissions are priced. Mitigation could be positive. Real world crediting lies in between bookends. Perfect crediting information requirements very demanding (realistic?). 20

21 Key Messages Offset supply incentives should be modeled in estimating offset supplies Responses to offset supply participation incentives can be very different from responses to the pricing of emissions Actual GHG emissions abatement achieved in response to offset supply incentives could be less than the offset credits issued, or even negative Possible policy design ramifications Integrity implications for emissions caps/targets and linked trading systems Crediting scheme is important, but practical effective design unclear Investment risks and transaction costs also important issues for supply e.g., investment risks reduce near-term aggregate supply over 50% (80% for some sectors) This study is relevant to offsets writ large and other market contexts 21

22 EPRI Report Forthcoming Rose, Steven K., Robert Beach, Katherine Calvin, Bruce McCarl, Jeffrey Petrusa, Brent Sohngen, Rob Youngman, Adam Diamant, Francisco de la Chesnaye, Jae Edmonds, Rich Rosenzweig, and Marshall Wise. Estimating Global Greenhouse Gas Emissions Offset Supplies: Accounting for Investment Risks and Other Market Realties. EPRI, Palo Alto, CA. Report

23 Thank You For more information Steven Rose Energy and Environmental Analysis Research Group 23