Global governance of climate change

international climate regime

European policies

French experience32

1

Where we should go

Stabilisation below 450 ppm means that global emissions have to peak by 2010 an then to decline by an average of 6 %- 10% per year

Stabilisation at 550ppm means that global emissions have to peak in

2020 and then decline by 1-2,5 %

TEN YEARS DELAY IN ACTION DOUBLE THE NECESSARY DECLINE RATE AFTER

International regimes

1

Sommaire

Climate policies

1

Prevent climate change

Possibilities of action

… But the system is path dependent, huge inertia

SCENARIOS without

reduction of emissions

1

Today choices determine

climate impacts for tomorrow

Combating climate change does not mean 0 growth

The economics of climate change:

What is the economics and how does it depend on the science?Analytic foundations Climate change is an externality with a difference: • Global • Long-term • Uncertain • Potentially large and irreversible

Economics of climate change

Correcting market failures, providing the right signals for investment

Price signals should be established, different ways:

green house taxes, cap and trade systems, implict prices through regulation

Economics of risk points to long terms goals and stabilisation of concentrations (Stern report)

Economics of costs point to short term flexibility over sector or country and time

Credibility, flexibility, predictability of price signals are key to influence private investment in the long term

correcting market failures, providing the right signals for investment

The Politics of climate change

Historical responsibility of developed countrsies

Concerns about equity and development from developing countries

Uncertainty makes difficult to build international institutionnal arrangements and cooperation

Sovereignty of nation States as an obstacle to international regime to tackle climate change

Top down regimes difficult to implement

Understanding of potential damages from CC both in developed and developing countries as a key political element

Countries

International negotiations (1/2)1

UNFCCC = United Nations Framework Convention on Climate change Signed in Rio (1992), ratified by 188 countries (inc. US), entry into

force 21/03/94 Insufficient to reach the goal : stabilise « Green house gas

concentrations in the admospher at a level that prevent a dangerous perturbation of climate system »  

Protocole de Kyoto Adopted in Kyoto 11/12 1997. Ratified by 168 countries (no US

and Australia) Entry into force 16/02/ 2005, 90 days after ratification by Russia

COP7 (nov. 2001) adopted «  Marrakech agreement » to operationalize kyoto protocol : Compliance comittee financial mechanisms of Protocol and Convention Governing rules of flexibility mechanisms

COP 11 et 12 finalized

Kyoto protocol (1/2)

Regulation based on nations. Quantitative emissions objective : Developed countries only (« Annex I ») 6 green house gas , ie carbon dioxyde (CO2) methane (CH4)

− CO2 = combustibles fossil fuels (oil, gas, coal…)− CH4 = agriculture, husbandry & waste

comitments= volumes of emissions for 2008-2012 period : average : - 5%; Europe : -8%; USA : -7%; Japon : -6% (versus 90) Europe committed in solidarity in «European bubble  »

flexibility mechanisms to facilitate national policies implementation : Emissions trading  : Joint implementation Clean development mechanism

− Companies may buy « credits » linked to CDM § JI projects

1Main features

ratification of the Kyoto protocol1L’enjeu Russe

Entry into force depended of russian decision (17,4% world emissions)

Get benefits from « carbone finance » Market equilibrium modified by american

withdrawal Global deal with Europe (trade benefits)

Joint Implementation (JI) Article 6 Kyoto Protocol 2 l’Annexe I countries ( EU-Russia)

Clean Development Mechanism (CDM) Article 12 Kyoto protocol Between ’Annexe I countries and Annexe II (EU-China)

Two innovative financial mechanisms /complementary objective : technology transfer

Kyoto Protocol (2/2)

New financial mechanisms

1

Pays BPays A

Technology

Credits CO2

€

Emissions credits

Emissions tradingCredits needs a buyer and a given volume of emissions

« projects » or « investment » logic: Projects which reduce emissions not included in emission

trading shemes (between annex I) CDM or JI in Kyoto Protocol

Principles : Verification and certification of emissions reductions by a

third party Emissions credits created to match industrial emissions Growth of emissions Compensated – in theory – by emissions reductions ouside

the market (CDM) Certification of emissions reduction is the weak point of the

system

1

CDM impact on global emissions (1/2)

In theory a good mechanism

North south transfer

UE

Chine

Émissions

without CDM

total emissions unchanged

… if additionality is respected

UE

Chine

Émissions

With CDM

1

risk

CDM (2/2)

If credits are not based on real additional reductions= problem

total emissions increase

UE

China

UE

China

Émissions Émissions

Without CDM With CDM

1

Kyoto Protocol

National objectives or comitments : national strategies France : objective (0%/1990) on a domestic base Netherlands : 50% external projects

Strategies : Must cover all sectors industry, transport, building,

agriculture… Need a mix of instruments: taxes, subsidies, voluntary

agreements, emission trading…

Emission trading for industry : Not included in Kyoto Protocol (only countries). Within national or european policies

1National policies

Kyoto protocol Impact

Supply and demand of quotas are stable: demand from Parties about 800 M tCO2 for 2008-2012 Quotas exceeding : 6 000 M tCO2

All Parties can respect Kyoto if they pay for emissions reductions not fulfilled within territory Willingness to pay ?(cf. Canada) ? What use for financial transfer ?

CDM is a successs (10Mds de $ to 2012), but mechanisms has flaws Projects industrials gases = 2/3 of credits Projects concentrated in China, India, Brazil , South Korea No projects in infrastructures key drivers of energy demand Few projects energy efiiciency

1Carbone markets

North responsable

( CO2 Emissions 2= industrialization of northern

countries )

CO2= Énergy= growth= development

No limit on emissions (= no limit to development)

Need of transferof technology and funding

Common and differenciated responsibility

post-2012

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

x 107 Annex I

Year

1910 1920 1930 1940 1950 1960 1970 1980 1990

x 107 Non-Annex I

Year

Fossil CO2

19000

0.5

1

1.5

2

2.5

3

19000

0.5

1

1.5

2

2.5

3

2000 2010 2020 2030 2040

IPCC SRES A1B scenario

Fossil CO2

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

x 107 Annex I

Year

1910 1920 1930 1940 1950 1960 1970 1980 1990

x 107 Non-Annex I

Year

Fossil CO2

19000

0.5

1

1.5

2

2.5

3

19000

0.5

1

1.5

2

2.5

3

2000 2010 2020 2030 2040

IPCC SRES A1B scenario

Fossil CO2

No long term solutions without developing countries involvement

Résolution 98 of american Senate (1997) no ratification without serious comitment of developing countries»

South Nord

Who is right ?

1

Post Kyoto

Two processes in UNFCCC dialogue on actions in the framework of UNFCC ad hoc group on reinforcement of protocol comitments Bonn et Nairobi progress:

− South Africa proposal− Brazil and deforestation

No concrete step positive signs

Changes in some countries :− Chinese plans− Nex dynamic in US

Some partial initiatives ( G8 / G20) Europe is more credible but may be isolated, and must change it’s

strategy of negociation

1 actions post-2012

International regimes perspectives for Post Kyoto

The issue is to foster a new industrial technological revolution, a shift in the development paradigm

That implies a multiple tracks of progress Investment Technological development Market signals Long term planning in infrastructure

A fragmented process

Links between trade and climate : competitiveness and carbon constraint

Club models and fragmented negociation One fits for all solution impsssible A coordination based on domestic policies and private

decision making

New deal between developed economies with emerging and poor

countries

European policies

Sommaire

Climate policies

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European emission trading (EU.ETS)

industrial installations & only CO2 ~11,500 installations (électricity / sectors énergy intensive).

~50% European CO2

2 periods : 2005-07 (“pilot”) and 2008-12 (“Kyoto”) industrial transfer « compensated » by country transfer

Allocation plan of permits (NAP) decided at national level

Units allocated EUA : EU allowances Recommandations of EU Commission validate NAP

( harmonization)

Negotiations for NAP 2. Less Allocations ?

Open to“credits” issued by projects (JI) or CDM

Penalty : 40€/tCO2 (2005-07) et 100€/tCO2 (08-12)

2

Tradable emissions permits(1/4)

TEP are emissions quotas : one permit of 1 t = right to emit 1 ton of CO2

Right to emit given by an administrative authority

Part of quotas maybe traded Trade reallocate but total volume stay constant

permit price give the economic signal to industrial investment ( cleaner)

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Emission trading (2/4)3Example

Cost of emissions reduction

10 €/t 25 €/t

Em

issi

ons A

llow

anc

e Em

issi

ons A

llow

anc

e

ALLOCATION

3000 k€

Em

issi

ons A

llow

anc

e Em

issi

ons A

llow

anc

e

PRACTICE

Savings

1000 ktCO2

850 ktCO2

1400 ktCO2

1250 ktCO2

600 ktCO2

Sold at 20€/t

750 k€

1000 ktCO2

Emission trading allows to invest on the less expensive emission reduction

Total emission volume remains unchanged

Market rely on control a posteriori of permit coverage of emissions : surplus of permit can be used after (« banking ») If emissions are superior to allowances or permits owned,

company is sanctionned (financial & environnemental)

process :

CO2 balance CO2 balanceControlControl

AllocationAllocation

Reduction Emissions

Reduction Emissions

Trading of permits

Trading of permits

Control of permits

Control of permits

Periode/ objective Validation a posteriori

Tradable emissions permits (3/4)2Monitoring & compliance

Emission Trading permits (4/4)

permits = control on volume. industrial total emissions = permits allocated ab initio.

no individual objective of reduction

but coverage of emissions by permits, independent of initial level of emissions!

permits don’t substitute to investment but Give price signal to évaluate oportunity of investment.

Trading facilitate reductions Investments where less costly. global cost of limitation is reduced.

2Conclusion

Emissions credits in EU-ETS

In European sheme, 3 types of credits : «  Kyoto like  credits» : CDM / JI domestic projects credits.

CDM & JI : International (ITL) registration Perspectives post-2012 ? « Europe +10 » : articulation ETS / JI « forests»credits

Domestic projects : Incentives for local actors Risks in coherence of policies (ex biofuels) or aothers policies

on climate

2

Allowances (1/2)

3 types of allowances : Based on historical emissions(« grandfathering ») Based on best technologies available or intersectoral

comparisons (« benchmark ») Auctionning of emissions rights

Main concerns for permits allocation : Not create rent for historical high emitters Take in account early actions (reward front runners) No entry barrier for new incomers No adverse incentives Produce pertinent signals for long term decisions

2

allocations (2/2)

No perfect allocation !!!

Different equity criteria give different allocations : Equity in costs for companies Equity in objectives same reductions Reference to a common standard …

initial allocation = « share of the pie» : « inequity » (within the same industrial sector or between

sectors) rents § finanacial transfers which can be environmentally

justified

In Europe, validation of allocation of permits rules by EU Commission for NAP2

2Conclusion

European Market

Allowance 1st period (2005-07) Real allowance = 2,2 Gt CO2/an → total value ~ 50 à 150Mds€

Allowance 2nde period (2008-12) En cours. 10% auctionning. Need for ’harmonization of the rules for

auctionning

size % site

s

Allowance[Mt

CO2/an]

% allowanc

e

< 100kt 77.7 120 5.5

0.1-10 Mt

21.8 960 43.2

> 10 Mt 0.5 1,140 51.3

Total 2,220

Distribution of allowances influence dynamic of the market (actors, price…)

2allowances

Theoretical impact of european directive

Price CO2 : 14€/tCO2e Price electricity : 25€/MWh

Coal plant Emissions : 1 tCO2e/MWh Valorisation of CO2 : 50% of

selling price of electricty

Gas plant Emissions : 0,36

tCO2e/MWh Valorisation of CO2 : 20% of

electricity selling price

Impact power sector

2

significant impact on power sector

incentive in favour of energy efficiency

EUA volume: Total Market Volume (May 2005 - October 2005)

ECX34%

OTC54%

EEX1%

Nordpool 10%

Powernext1%

EXAA0%

OTC ECX Nordpool Powernext EEX EXAA

Total 2005:362 Mt CO2 7,218 M€

Sources: Point Carbon, European Climate Exchange, PowerNext &CDC

Volume EUA (8 mois)

2 Balance for 2005Prices, volumes § trading flowss

25/04-Netherlands : 80.4 MtCO2 (NAP=86.5 Mt, = -7%)

25/04-Tcheck republic : 83 MtCO2 (NAP=97.1Mt, = -15%)

26/04-France : 150.8 MtCO2 (NAP=156Mt, = -11.6%)

26/04-Wallonie : 22 MtCO2 (NAP=25.9Mt, = -15%)

Warnings on permits deficit by traders wrong Fall in CO2 price Impact NAP 2 Negotiations (national § Europe)

2 Balance for 20051st emissions

carbon cost explain part of the rise

And Cold winter Low hydro power Rise in gas prices

Significant rise in electricity

price (x 2) in markets

Sources: PowerNext & CDC

2 Bilan de l’année 2005Rise in électricity prices

practically real cost of carbon value is weak faible ( free allowances)

Rent for power sector (windfall profit) Impact on consumers in and out ET

Value of permits CO2

Other costs of production

Electricity market price

Price differential between gaz/coal creates strong demand for CO2

Charbon

Gaz

Fuel Switch

Charbon

Gaz

Charbon

Gaz

Fuel Switch

Charbon

Gaz

Sources: PowerNext & CDC

2 How to undersatnd prices, Coal/ gas

Electricicty producer arbitrate daily Ex. ENEL (Italy) : nets buys 8 Mt CO2 en 2005 – “cost”(?)= 182 M€

Some sectors don’t use the market : Technical vision " : allowance is the real emission objective

marginal Cost of CO2 taken in account only if emissions overshoot initial allowance

Or : transactions cost high / uncertainty price / image

situation that fit for some actors?

perspective of négociations for NAP 2 maybe incentive to delay some investements

Situation which lower permit supply, and makes prices rise

2 Price formation

Environnemental efficiency Industry : does not trust markets incentives

Myopia linked : short term + price uncertainty + futures evolutions of EU-ETS

Marginal cost of CO2 superior to transport costs from existing facilities ( cement from Tunisia or China)

Électricity : a major concern Price signals unsufficient to rellocate or modify investments in this

sector=> majority of investmenst must be renewed within 2015-2025

Economic efficiency Contradiction between messages from industriescompeting in

world market (« too high ») and power sector (« too low») Contradiction between CO2 market & power market

liberalization

Source: E.ON

2 Efficiency of the market?

Solution (necessary ?) for industries competing in world markets

If all competitors must be concerned compétiteurs sont concernés : All must integrate carbon costs (+/- similar) Possibility to value this carbon cost in world prices: passing cost

to consumers

Processes : Mega- sectoral CDM

→ does not resolve competitiveness issues Convergence of regional markets

→ some difficulties Sectoral agreements post-2012

→ actual propositions post-2012 intègrent partiellement les problèmes de compétitivité

Future optimism ?

2 Evolution of EU-ETS international convergence

International perspective

Kyoto logic Agreement on quantified targets for nations states Markets mechanisms for efficient implementation

Actual impasses integration of emerging countries US vs EU confrontation : illogic but understandable

A possible breakthrough US & China : internal implementation needs international

coordination a very different Post Kyoto : hybrid, more inclusive but less

coverage and fragmented

No exclusive options but combination : technological innovation te coordination framework/ international regulation carbon value = managed scarcity market failures needs accompanying measures ( technological

pull/push capital markets failures for innovation)

Europe the laboratory for climate policies

EU-ETS carbon market first step Implementation problems and efficiency of the signals?Long term objectives ? Acceptable climate change = +2°C (~550ppm) Europe 3 ou 4 / emerging countries : stabilisation /

less developed X 2 New EU commission package on tracks but tensions

with competitiveness issues « Facteur 4 » scenarios : what have we learnt?

Technically feasible No technological miracle : even optimist scenario

requires structural changes and early signals but non short term only policies

National responses

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Climate policies

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CO2 uniquement (70% des GES français)

Sectoral responsibilities

World china

La production d’énergie a été imputée aux différents secteurs

Emissions de GES mondiales (1990)

13%

33%

14%

20%

20%

Batiments Industrie Transports Agriculture Production d'électricité

3

Tous GES, France

Emissions mondiales de CO2 (de combustion) Répartition sectorielle en 2000

31%

41%

24%

4%

Batiments Industrie Transports Agriculture

Émissions individuelles

Émissions collectives

Source : MIES

sectoral emissions in France

(France, 1990-2001)-40

-30

-20

-10

0

10

20

30

3

A priority : energy efficiency

Emissions Reductions « no regret »

UK – Nov. 2003 - Campagne « Energy = LifeBlood of your business » Waste of energy in SME = 1 Mds £ / an

Johnson & Johnson : US EPA « Climate Leader » Objective: -14 % CO2 en 10 ans ways : projects NRJ avec TRI > 20%

3« Mesure sans regrets »

Stimulate technology innovation

Cost of emission reduction lower

discovery of low cost reductions

positive effects of anticpated constraint

Result in innovation

3Learning process

Capex

GHG reduction (tonnes of CO2 equivalent)

Expectation Projection - existing technology

New build standards, sequestration, innovative technology + market mechanisms are needed

Innovation

stretch

Cost curves : Looking ahead

2001 Cost Curve

1998 Cost Curve

Most of these reductions probably

at negative costs

= 2 à 3% / reduction per year of Green house gases from now

Perspectives de long terme

Changer l’économie, changer la société…

«  We need urgent global action to tackle climate change. We are showing leadership by putting the UK on a path to a 60% reduction in its carbon dioxide emissions by 2050 »

Tony Blair, Our energy future –

Creating a low carbon economy, 2003

Objectif Europe : maximum rise = 2°C

stabilisation of émissions =450-550ppm

“Factor 3” ou “Factor 4” on emissions

Pour respecter la Convention Cadre des Nations Unies sur le changement Climatique (ratifiée par USA)

Fondé sur la capacité d’absorption du CO2 par l’écosystème (env. 0,5 tC / hab / an)

3

change energy model

Scenario optimist

En 2100, CO2 concentration double from pre-industrial

level Nedd reduction by a Factor 4 of french emissions

more extreme events

2003 summer very hot) : become frequent en 2050 Normal in 2070 very cold in 2100 !

ski stations loose on month of snow (or more) en 2050

Source : Ministère de l’Équipement

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Merci de votre attention

hubert.kieken@iddri.org