International Offsets: The potential role of the energy sector Geoffrey J. Blanford, Ph.D. Global Climate Change Program, EPRI Global Technology Strategy Project Technical Workshop College Park, MD May 26, 21
The Offset Dilemma Under Waxman-Markey bill, offsets of several stripes are admissible with a high limit on international crediting Abatement opportunities internationally are abundant and cheap, but many institutional barriers exist near-term In long-term, as support for global stabilization efforts broadens, non-oecd countries will become less willing to export cheap abatement options Is there a window of opportunity for offsets? 2
Sources of Off-System Compliance Domestic Non-CO 2 offsets Trading with other OECD Non-CO 2 offsets from non-oecd (e.g. CDM) Energy-related CO 2 offsets from non- OECD Afforestation / REDD offsets MERGE Integrated Assessment Model Analysis 3
OECD Potential Supply Curves for 23 18 16 14 Non-CO 2 data are from USEPA Global Mitigation Report (26) Energy-related CO 2 data are MERGE model results Forestry CO 2 data are from Rose and Sohngen (21), Global Forest Carbon Sequestration and Climate Policy Design 12 $/ton CO2-e 1 8 6 4 OECD ag-related non-co 2 Non-OECD non-co 2 OECD required reductions 2 2 4 6 8 1 12 14 billion tons CO2-e reduction from BAU 4
Non-OECD energy-related CO 2 abatement 18 16 Year = 23 14 12 $/ton CO2 1 8 6 Russia China 4 2 2 4 6 8 1 12 14 billion tons CO2 reduction from BAU 5 MERGE model results
7% of abatement occurs in electric sector 18 16 electric sector other Year = 23 14 12 Single Largest Source $/ton CO2 1 8 6 Russia China 4 2 2 4 6 8 1 12 14 billion tons CO2 reduction from BAU 6 MERGE model results
Details of the Sectoral Mechanism Energy-related offsets must come from a capped sector in a participating country under a qualifying agreement Cap must be below BAU; only reductions beyond the cap can be sold as offsets, market mechanisms are unclear Originally conceived for internationally competitive industries (e.g. steel), but electric sector is by far the most important for generating offset trade volume 7
Can a deal be negotiated? China by itself comprises half of non-oecd Would China accept an electric-sector cap linked to the US trading system? Or will it continue to pursue its own policy? Negotiation (with China or others) must balance host country s political position on burden-sharing with potential financial benefits of offset trade 8
Host Country Economics of Crediting Baseline Host country MAC Marignal Cost ($/t CO 2 ) International price Costs incurred by host country Crediting Baseline <- Trade volume -> Rents captured by host country Abatement (t CO 2 ) 9
China s Electric Sector Emissions 14 12 1 Steel sector is currently ~1% of emissions, share likely to fall + Fewer options for abatement BAU Billion tons CO2 8 6 In 23, electric sector is half of total emissions (~4% now) $18 4 2 2 21 22 23 24 25 $28 $48 $86 $161 $/ton CO 2 in 23 1
China s Electric Sector Emissions 14 12 BAU 1 Billion tons CO2 8 6 Suppose an agreement is reached with China s electric sector. $18 Crediting Baseline 4 2 2 21 22 23 24 25 $28 $48 $86 $161 $/ton CO 2 in 23 11
Offset Transfers from Non-OECD to OECD International policy environment: 8% below 199 by 25 in OECD (USA + EU + Japan + CANZ) W-M scale offset provisions in all OECD countries Expanding CDM for non-co 2 offsets from non-oecd Energy offsets from capped Chinese electric sector only Billion tons CO 2 -e 4 3.5 3 2.5 2 1.5 1.5 Current CDM volume Non-CO 2 @ $15 OECD import limit CO 2 from China s electric sector @ $3 @ $45 @ $6 21 22 23 24 25 12
Offset Transfers from Non-OECD to OECD International policy environment: 8% below 199 by 25 in OECD (USA + EU + Japan + CANZ) W-M scale offset provisions in all OECD countries Expanding CDM for non-co 2 offsets from non-oecd Energy offsets from capped Chinese electric sector only Full potential for global forestry Billion tons CO 2 -e 4 3.5 3 2.5 2 1.5 1.5 Current CDM volume OECD import limit Forestry offsets @ $3 Non-CO 2 @ $15 21 22 23 24 25 13
Compliance in OECD with Cap on China Elec. 8 USA 8 Other OECD BAU 7 6 CAP Reductions BAU 7 6 CAP Reductions Billion tons CO 2 -e 5 4 3 2 Domestic Non-CO 2 offsets Imported credits 5 4 3 2 Domestic Non-CO 2 offsets Imported credits 1 1 199 2 21 22 23 24 25 199 2 21 22 23 24 25 14
Compliance in OECD with Full Forestry 8 USA 8 Other OECD BAU 7 6 CAP Reductions BAU 7 6 CAP Reductions Billion tons CO 2 -e 5 4 3 2 Domestic Non-CO 2 offsets Imported credits 5 4 3 2 Domestic Non-CO 2 offsets Imported credits 1 1 199 2 21 22 23 24 25 199 2 21 22 23 24 25 15
US Permit Prices with OECD-only Targets 28 $ per ton CO 2 -e 14 12 1 8 6 4 No international offsets Non-CO 2 + China s electric sector International offset price Non-CO 2 + China s electric sector + full forestry International offset price 2 22 23 24 25 16
Impact of Longer Term Global Targets To achieve commonly discussed stabilization targets, all major developing countries must participate Currently, targets are aspirational only, but they could become a reality in the future Consider G8 leaders goal for an emissions path to 25 consistent with a 2 C temperature target 5% global reduction below 2 levels + 8% below for OECD 2% below for non-oecd 17
Baseline Emissions for Non-OECD 6 5 Billion tons CO 2 -e 4 3 2 1 Low-income Mid-income India China Russia 2 21 22 23 24 25 18
2% below 2 = 8% below BAU in 25 6 5 Billion tons CO 2 -e 4 3 2 1 Low-income Mid-income India China Russia 2 21 22 23 24 25 19
In G8 scenario, trade flows the other direction 8 USA 8 Other OECD BAU Billion tons CO2-e 7 6 5 4 3 2 CAP Domestic Non-CO 2 offsets Imported credits Reductions BAU 7 6 5 4 3 2 CAP Domestic Non-CO 2 offsets Imported credits Reductions 1 1 199 2 21 22 23 24 25 199 2 21 22 23 24 25 Result holds even with a BAU allocation to non-oecd through 23 2
US Permit Price in G8 Scenario 14 12 No BAU allocation to non-oecd 28 $ per ton CO 2 -e 1 8 6 4 BAU allocation through 22 through 23 2 Range with OECD-only targets 22 23 24 25 21
Conclusions Energy-related offsets depend on sectoral deals; supply is maximized by loose caps on electric sectors in large countries Political economy behind such agreements is complex, could take several years to negotiate Even with a successful negotiation, mechanism for selling excess reductions to US compliance parties is not clear Ultimately, sectoral caps may be abandoned in favor of national targets as countries join stabilization effort 22