Planetary economics slide pack here
Transcript of Planetary economics slide pack here
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Michael Grubb With
Jean-Charles Hourcade and Karsten Neuhoff
Routledge/Taylor & Frances, Published March 2014
Energy, Climate Change and the Three Domains of Sustainable Development
Planetary Economics
http://www.routledge.com/books/details/9780415518826/
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
• Nature of the energy challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement • Pillar II: Markets and Pricing• Pillar III: Strategic investment• Growth theory and macroeconomic linkages • Policy Integration• Joint Benefits• The Economics of Changing course
An integrated approach to Energy Transition
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
The energy challenge of decarbonisation
Global energy efficiency
Glo
bal c
arbo
n in
tens
ity
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0 2.5 5 7.5 10 12.5 15 17.5Energy Productivity (GDP/Energy bn$2000/Mtoe)
Historical Decarbonisation/EnergyProductivity
20% by
50% by 2050
Globalemissions reduction below 1990 level
1980
1990
2010
Combination needed for percentage emissions reduction
Possible future paths
Historic average: 1.3%/yrD
ecar
boni
satio
n(C
O2/
Ene
rgy
MtC
O2/
Mto
e)
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
0
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China
Russia
JapanEU15
Australia
EUNew
India
USA
World
Figure 1.6 Trends in carbon intensity, by region and globally from 1980‐2008 Source: Authors. Data from IEA (2010) and World Bank (2011)
Carbon intensity has fallen but countriesremain at widely varying levels
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
0
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issionstonnespercapita(tCO
2)–World
Bank
GDPpercapitaPPP($bn 2000)
USA
Australia
UK
RussianFederation
IndiaBrazil
China
France
Germany
JapanKorean
Canada
Poland
Figure 1.7 Per‐capita CO2 emission trends in relation to wealth ‐ trends of major countries from1990‐2008 Data from World Bank (2011) and IEA (2010)
… last few decades, largely stable per-capita emissions in industrialised countries with little sign of convergence
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
• The proportion of national income spent on energy has remained surprisingly constant- for more than a century - for most countries
- Despite huge variations in energy prices (Bashmakov)
- This cannot be explained through the classical measures of in-country consumer price response (elasticities) but needs also to invoke: – Energy efficiency regulation and related policy responses– Innovation throughout energy supply and product chains
The “Bashmakov-Newbery Constant”
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
RiskConception
BasicBelief TypicalStrategy
Societalprocess
Time‐scaleofclimatechange
Indifferentor
disempowered
Notproven, or“Whatyoudon’tknowcan’thurt
you”
“Ignorance isbliss”
Environmentalgroupcampaignsvs .resistancelobbying
Firstfewdecadesofclimatechange
Tangibleandattributedcosts
Weighupcostsandbenefits
Actatcostsupto“socialcostof
carbon”
Technocraticvaluationandpoliticsofpricing
Asimpactsriseabovethenoise– nextfewdecades
Disruptionandsecuritization
Personalorcollective
securityatrisk,climatechangeasa“threatmultiplier”
“Containmentanddefence”
Mitigate asmuchaspracticalandadapttotherest
Ultimately,forall(systemicandglobalrisk)Most
vulnerable,sooner,withinternationalspillover
Prelude: three levels of risk conception ..
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
• Nature of the challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement• Pillar II: Markets and Pricing• Pillar III: Strategic investment• Policy Integration• Joint Benefits• The Economics of Changing course
Three Domainsand the
Three Pillars of Sustainable Development
An integrating approach to climate policy
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Fig. 2 ‐3 b Resource trade‐offs with the other two domains
Three Domains – an Economic Interpretation
Res
ourc
e U
se /
Ener
gy &
Em
issi
ons
Economic Output / Consumption
3rd Domain
1. Real-world individual and organisational decision-making
“Transforming” behaviour
“Optimising”behaviour
1st Domain“Satisficing”
behaviour
2nd Domain
3. Innovation & evolution of
complex systems
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
The Three Domains rest on different fields of theory that apply at different scales
Neoclassical and welfare
Evolutionary and institutional
TIME
HORIZON
SOCIAL
SCALE
Behavioural and organisational
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Cost$USD/tonneofCO2e(inMillions)
‐100
‐80
‐60
‐40
‐20
0
20
40
60
80
100 EstimatesofGlobalMitigationCostsandPotentialby2030
Annualabatementin2030GtCO2e
Source:PlanetaryEconomics,utilisingMcKinseydatafromPathwaystoaLowCarbonEconomy(2009)
AdvancedEconomiesEmergingAsiaRestoftheWorld
SmarterChoices(PillarI)
5 10 15 20 25
Choosingcleanerproductsandprocesses
(PillarII) InnovationandInfrastructure(PillarIII)
Three realms of abatement opportunities- Global estimates for 2030 highlight first two ..
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
H
M
L
H Highest relevanceM Medium relevanceL Lowest relevance
Satisfice
Transform
Optimise
DomainStandards & Engagement
Markets & Prices
Strategic Investment
Smarter choices
Cleaner products & processes
Innovation & infrastructure
1 2 3
L/M
H
L/M
L
M
H
To deliver
Policy pillars
Solutions need to harness corresponding policy pillars based on the three domains, to transform energy systems
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
• Nature of the challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement• Pillar II: Markets and Pricing• Pillar III: Strategic investment• Policy Integration• Joint Benefits• The Economics of Changing course
Three Domainsand the
First Pillar of Sustainable Development
An integrating approach to climate policy
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
ENDUSE
Buildings and appliances
Industry
Transport
CHANNELS
Direct fuels and heat
Electricity system
Refined fuels system
FUEL
Coal
Gas
Petroleum
Fig.3.1a
Agriculture Landuse , other gases
Process emissions
Emissions from fuel extraction
Energy and emission flows within the fossil fuel systemNote: The lower panel gives the numeric breakdown at each stage illustrated in the upper panel. Numbers at each step in the Chart (fuel, channel, end‐use) independently add to 100%.[All data from the International Energy Agency, accessed through ESDS.
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
In transforming energy systems globally, all three domains are
• … approximately equally important – Cost curve data – Difference between in-country and international elasticities– Observed policies of the most successful countries – Suggestive evidence from economic Growth Accounting& individual pillar ‘bottom up’ evidence
• .. and interdependent– The pillars are complementary, not competing – “Any pillar on its own will fail”
But the relative importance of different measures varies across sectors and nature of co-benefits are diverse
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Riskconception/Domain
Dominantscale Decision
frameworkFieldoftheory
Mitigationeconomicprocess
Realmofopportunity
Pillarofpolicy/response
Ignore/Satisfice
Shortterm /local Indifferentor
disempoweredBehavioural &Organisational
Moveclosertothe‘bestpracticefrontier’’
‘Smarterchoices’
Standardsand
engagement
(PillarI)
Compensate/Optimise
Mediumterm/regional
Costs/impactsaretangibleandsignificant
Neoclassical&welfare
economics
Make besttrade‐offsalongthefrontier
Substitutecleaner
production&products
Marketsandpricing
(Pillar II)
Secure/Transform
Long term/global
Transformationalrisksandopportunities
Evolutionary&Institutional
Evolve thefrontier
Innovation&infrastructure
Strategicinvestment
(PillarIII)
Figure 2‐6 Alignments within each domain
A key to Planetary Economics – and politics – lies in the potential to align different levels of risk conception with the
different pillars of response
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
• Nature of the challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement for Smarter
Choices• Pillar II: Markets and Pricing• Pillar III: Strategic investment• Policy Integration• Joint Benefits• The Economics of Changing course
Three Domainsand the
First Pillar of Sustainable Development
An integrating approach to climate policy
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Energy efficiency remains controversial amongst economists
• 'the energy efficiency role in climate change policy is based on two flawed arguments: that energy efficiency will substantially reduce general energy demand; and that there are lots of projects with positive returns. The former is hard to substantiate, the latter... is open to serious doubts and depends in any event on the price of energy...'.
- Helm (2011)
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. RoutledgeSource:Authors,withdatafromMcKinseyPathwaystoaLowCarbonEconomy(2009)
Evidence confirms potential exists across individuals and organisations and many sectors, and endless scope to argue about how ‘big and real’ it
is …
Domesticbuildings‐electric
Commercialbuildings‐electric
Petroleum&Gas‐General
Commercialbuildings‐thermal
Transport‐ Carsandvans(efficiency)
Waste‐ Landfill
Cement‐Clinkersubstitution
Waste‐ Other
Chemicals‐ General
Iron&Steel‐ Energyefficiencyandco‐
generation
Otherindustry
Cement‐ Alternativefuels
Domesticbuildings‐thermal
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Annualabatementin2030GtCO2eCost$USD/tonneofCO2e
Hidden&Implement‐ation costs
A.ECONOMICSCEPTICISM
B.BUILDINGSEXPERTS
Default(inefficient)baselines&
holisticsolutions
D.REBOUND
Warmerhomes,moredrivingwithlowerenergycosts
C.CO‐BENEFITS
Health,energysubsidies,environmentalbenefits
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Only about a quarter of recommendedmeasures which take longer than a year topay back were implemented by the time offollow‐up survey, and the proportionimplemented varies little for longerpayback times.
Figure 4‐4 Proportion of Carbon Trust recommendations to UK business implemented: dependence on pay‐back periodNote: The graph shows combined responses of public, services, retail and chemical sector regarding recommendations identified in 2006-2007.Source: Source: Carbon Trust, based on Carbon Management/Energy Efficiency Advice Close-out database (personal communication)
… valuable progress made but still big potentialseven for corporate energy use…
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Figure 5‐1 EU Energy Efficiency Labels (a), and (b) market share of appliances in Europe over time since introducing labels
Source: IPCC (2007) and European Commission (2010)
Policies have had a huge impact in specific product markets- Example of EU refrigeration response to labels + standards
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Figure 5‐7 Long‐term energy savings from efficiency improvements of all sectorsSources:(IEA 2008).Note: The estimation is based on data from 11 IEA countries (Australia, Denmark, Finland, France, Germany, Italy, Japan, Norway, Sweden, the UK, and the US).
… but aggregate impact insufficient to halt increasing demand across IEA countries in aggregate, and slowed after
1990 ..
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Figure 5‐11 Embodied energy in buildings
Source: Allwood and Cullen (2012)
But in both buildings & vehicles, balance is moving towards embodied energy
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Consumer-driven energy & emissions
Use EmbodiedEfficiency of Stock
Buildings
Industry
Transport
•Insulation•Integrated heating and cooling system.•Efficient appliances
incorporated
•Efficiency of machinery used•Modes of transporting goods incorporated•Vehicle efficiency
•Avoid dripping taps or showers dripping
•Closing windows while heating or cooling system is operating•Avoid dripping taps or showers dripping
•Efficient use of materials•Heat cascading•Maintenance
•Mode of transport•Tyre pressure•Maintenance.
•Surrounding infrastructure
•Construction materials •Construction and transport •Surrounding infrastructure
mines, pipelines
•Raw materials used: extraction, transport and processing•Leakage from mines, pipelines•Raw materials in vehicle construction•Vehicle disposal
Figure 5‐10 The scope of consumer‐driven emissionsNote that these categorisations of the consumers’ part are not entirely independent of one another. For example the emissions from the industrial process make up the embodied emissions of consumer goods and services.Source: Authors
Taking energy / resource efficiency much further is likely to require digging into dimensions of use and embodied energy
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
• Nature of the challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement• Pillar II: Markets and Pricing for cleaner products
and processes• Pillar III: Strategic investment• Policy Integration• Joint Benefits• The Economics of Changing course
Three Domainsand the
Second Pillar of Sustainable Development
An integrating approach to climate policy
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Australia Czech Republic
France
Germany
Hungary
Italy
Japan
Korea
Netherlands
Poland
Slovak Republic
Sweden
UK
USA
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A������ ������ ��������� ��� ��� ������������2005 GDP�
EU15
Figure 6‐1 The most important diagram in energy economics Note: The graph plots average energy intensity against average energy prices (1990‐2005) for a range of prices. The dotted line shows the line of constant energy expenditure (intensity x price) per unit GDP over the periodSource: After Newbery (2003), with updated data from International Energy Agency and EU KLEMS
Prices Matter!
National energy intensity approx inversely proportional to long-run prices - across countries the % of GDP spent on energy is remarkably constant
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
‐20
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AdvancedEconomiesEmergingAsiaRestoftheWorld
Annualabatementin2030GtCO2e
Figure 6.5 Abatement options in the Second DomainRaw data Source: McKinsey data from Pathways to a Low Carbon Economy (2009)
Chemicals -
5
Cost$USD/tonneofCO2e(inMillions)
Other IndustryIron & Steel – energy efficiency and co-generation
Other Industry
Power -small hydro
Power – shift of coal new buildsto increased gas
Other Industry
Cement –alternative fuels
Chemicals -general
Chemicals -general
Power –small hydro
Power -nuclear Power -nuclear
Power –onshore windPower - solar
Power –offshore wind
Power -solar
Power -nuclear
Power – biomass CCS and co-firing
Pow
er –
onsh
ore
win
d
Power - solarIron & Steel –process changes
Power –offshore wind
Pow
er –
Coal
CCS
Power –biomass CCS and co-firing
Power – Coal CCS
Power – biomass CCS and co-firing
Industrial CCS
Power – Gas CCS
‘Pillar II’ opportunities dominated by substitution in production –mainly low carbon power generation – ie. investment choices by large companies determined by market structure and perceived
risks and relative prices
Carbon-related prices matter especially for decarbonising elec & industry
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
ETS (42%)Non-
ETS (58%)
Figure 7‐1 Coverage of the EU ETS Note: The darker shaded countries are those participating in the EU ETS. The bar shows the distribution of verified emissions over 2005‐8 between the different sectors covered under the EU ETSRaw data Source: European Commission and Ecofys (2009)
The European Emissions Cap-and-Trade system (EU ETS) – the first and by far the biggest attempt to put a price on CO2
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
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Fig.7.2 Evolution of European carbon and international offset pricesData Source: European Climate Exchange
Evolution of the EU CO2 (spot) price
Murphy’s law: “If anything can go wrong, it will”
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Carbon Abatement
Damagecostsarehighlyuncertainbutnot
sensitivetoemissionsoverashortperiod
Mitigationcostsareuncertainandflattenovertime
CO2Emissions
Cost
NearTermOutlook
Shor
t ter
m: b
ound
the
pric
e
Fig.6.6a
Classic argument on price vs quantity instruments (i) in the short term, fix the price
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
CO2 Abatement
Damagecostsarehighlyuncertainbutrisksrisesteeplywithcumulativeemissions
Mitigationcostsareuncertain,butfarmore
scopefordeepreductionsinlongterm(“flatter”)
CO2 EmissionsLong term: target safe quantityFig.6.6b
Figure 6‐6 Stylised benefits and costs of cutting emissions: implications for ‘tax or cap’?
Cost
Classic argument on price vs quantity instruments (ii) in the long term, fix a safe quantity
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
CO
2 Pr
ice
CO2 emissions
The price - where thelines cross- may be verysensitive to errors orchanges in underlyingdemand curve
Emissions cap: supply of emission allowances in a given period is fixed
Figure 7‐5 Source of price instability in an emissions trading system
Initial assumptions on emission trends and abatement costs tend to be conservative and to underestimate uncertainties
Real-world experience has confirmed the wisdom … with added twists
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
CO2Price
Figure 7‐7 a. Impact of emissions banking on carbon price in emissions trading system
Collapseofconfidence– ashorttermview
Decliningbutunstablepricebasedonfuture
expectations
Theoreticalvalueonlongtermview
CO2emissions
Emissionsbanking‘flattensthedemandcurve’(cf Fig7.5)by
extendingtimehorizon
Emissions banking supposed to be answer .. but is only stable within a certain range, otherwise amplifies risks
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Price stabilisation mechanisms therefore essential for credibility – and also for linkages to other domains
Figure 7‐8 Steadying mechanisms for emissions trading systemsNote: The Figure illustrates mechanisms to help emissions cap‐and‐trade systems deal with deep uncertainties , so as to maintain a reasonable balance of price and quantity objectives. The mechanisms are most simply illustrated with respect to price floors and ceilings, in which case the shaded area indicates the likely region of price and quantity for a system with substantial surplus allowances. However the same principle could apply to other ‘threshold’ triggers, for example based on the level of cumulative surplus.
CO2Priceorrelatedindex
EmissionsVolume
Withheldallowancesreturned
Capalleviated
Allowanceswithheldatfloor
Additionalallowanceswithdrawn
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
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ts /
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41%ofEU‘valueadded’(GDP)inmanufacturingindustry+utilities
Motorvehicles(0.6)
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Construction(0.01%)
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Other inorganic basic
chemicals
Paper
Mostofmanufacturingemissionsarefromc.2%‘valueadded’ofEUGDP
Figure 8‐4 Impact of carbon pricing on EU industry sectors and their share of the EU economyData source: Eurostat and EU Commission
Who’s hit? In industry – c. half a dozen primary commodity sectors
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Costpassthrough
Freeallocation
Freeallocation
% o
f allo
wan
ces
rece
ived
for f
ree
Example of Blast Furnace Steel @ €30/tCO2
Increasedprofit
Reducedprofit
20%
100%
% o
f allo
wan
ces
rece
ived
for f
ree
0%
90%Pr
ofit
Mar
gin
0%
5%
10%
15%
End user price increase
CURRENTPROFITMARGIN
5% 10% 15%
0%
Figure 8‐1 Profit and loss depend on the combination of free allocation and cost pass through to final productsNote: the numbers on the graph correspond to one of the most carbon –intensive products, namely steel in Europe, at a carbon price of €20/tCO2, before international effects.
Distributional impacts 1: Up- or mid-stream, winners and losers depend on allocation and market structure
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Cost of Carbon
Increased costs for ETS
companies
Price rises for ETS sector
products
Desired result – supply side
Product substitution and demand
reduction
Substitute low carbon products
developed
Reduced emissions
Desired result – demand side
Profitability of emissions
reducing actions improved
Low carbon technology developed
Reduced emissions
Impacts on trade patterns and
competitiveness
Reduced investment in factories in
ETS -
Fewer jobs in ETS region
Reduced operation in ETS
– Increased production and
emissions outside ETS
Undesirable side-effects
Price pass through
Cost of Carbon
Increased costs for ETS
companies
Price rises for ETS sector
products
Desired result – supply side
Product substitution and demand
reduction
Substitute low carbon products
developed
Reduced emissions
Desired result – demand side
Profitability of emissions
reducing actions improved
Low carbon technology developed
Reduced emissions
Impacts on trade patterns and
competitiveness
Reduced investment in factories in
ETS -
Fewer jobs in ETS region
Reduced operation in ETS
– Increased production and
emissions outside ETS
Undesirable side-effects
Price pass through
Figure 8‐2 Desirable and undesirable effects of carbon pricesSource: Adapted from Carbon Trust (2010)
Carbon pricing has benefits on both supply and demand side – the ‘carbon leakage’ problem lies in seeking both …
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Price with carbon cost
Price without carbon cost
ETS ETS ETSRest of World
Rest of World
Rest of World
Adjust costs downwardsConditional allocation
Adjust costs at border
BorderAdjustments
Adjust global costs upwards
Global carbon pricing
Imports into ETS
Exports from ETS
Price with carbon cost
Price without carbon cost
ETS ETS ETSRest of World
Rest of World
Rest of World
Adjust costs downwardsConditional allocation
Adjust costs at border
BorderAdjustments
Adjust global costs upwards
Global carbon pricing
Imports into ETS
Exports from ETS
Figure 8‐5 Options for tackling leakageSource: Adapted from Neuhoff 2008
… a problem to which there are only three types of responses ..
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
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ld in
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e
Figure 8‐7 Household expenditure on energy UK 2008Source: Office of National Statistics 2009.
.. downstream the direct impacts are ‘all losers’ and regressive: ‘bills constancy’ hinges on the other Pillars
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Pillar II Conclusions
• Too much ‘looking under the lamppost’• The economics of carbon pricing are as much
about design and strategic credibility than level • The politics of carbon pricing are driven by
distributional impacts and the lack of clearly articulated positive narrative for either industry or consumers
• Links to the other two domains are central to any ‘tangible’ positive narrative, drawing on ‘Bashmakov’s Constant of Energy Expenditure’
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
• Nature of the challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement• Pillar II: Markets and Pricing• Pillar III: Strategic investment for Innovation and
Infrastructure• Policy Integration• Joint Benefits• The Economics of Changing course
Three Domainsand the
Third Pillar of Sustainable Development
An integrating approach to climate policy
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Fig.9.1 Immediate costs and future benefits of low carbon technology
From II to III: Clean tech innovation and benefits
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
0
2
4
6
8
10
12
14
16
Fig.9.3 R&D expenditure by top companies in different sectors as % of sales, 2011
Data source: EU Joint Research Centre on Industrial Investment and Innovation, R&D Scoreboard 2012,http://iri.jrc.europa.eu/scoreboard12.html
We are seeking radical innovation in some of the least innovative sectors of our economies
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Diffusion
POLICYENVIRONMENT‐ taxincentives,subsidies,emissionspricing,regulations
Supply/Research
Demand/Consumers
FrameworkConditions– MacroeconomicStability,Education&Skills,IPProtectionEtc.
Market accumul
ation
Commercial-isation
Demon-stration
Applied R&D
Basic Research
Product/TechnologyPush
MarketPull
Fig.9.5 The Innovation Chain
“Invention” “Innovation” “Diffusion”
Technologies have to traverse a long, expensive and risky chain of innovation to get from idea to market
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
INVENTION DIFFUSION
Highlyinnovating,closeconnection
consumersandinnovators
‐ 1st &3rd Domains –
R&Dintensity5‐15%(eg.IT,drugs)
INNOVATION
Moderateinnovation,mostlybusinesstobusinessconnection
‐ 2nd &3rd Domains ‐
R&Dintensity1‐5%(eg.industrial&product
engineering)
Lowinnovation,littleconnectionbetweeninnovatorsandmarkets
R&Dintensity<1%(eg.energy&construction)
Market pullTechnology push Market pull
Technology push
Market pull
Technology push
TechnologyValleyofDeath
Market pull
Figure 9.7. Innovation intensity and the broken chain
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Energy & related sectors are ‘complex sociotechnical systems’, with big evolutionary & lock-in characteristics
• Progress in clean energy industries impressive, but heavily dependent on public policy
• .. and so far outweighed by ‘carbon entanglement’• Consider response to oil price rises• .. and study the policy implications of evolutionary
economics:– Niche accumulation – Hybridisation strategies
• Industrial strategy is unavoidable • … with the potential positive side being
macroeconomic version of “Porter’s kick”
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Transformation involves not just technologies but sectors – is possible, but complex
Three key “case studies”
• Transport in the Americas
• Electricity in Europe
• Urbanisation in Asia
The systems themselves also become more integrated
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Global energy costs Annual
global emissions
Time‘Green’ futures
•Integrated energy system•Biomass and electricity in transport•Low‐carbon electricity•High capital costs….•……but low operating costs
‘Brown’ futures• Continued dependence on fossil fuels• Unconventional and synthetic oil in transport• Low capital costs…•…but high operating costs and a host of environmental issues beyond carbon
Number of potential energy futures near ‘minimum’ cost
Low Carbon High Carbon
Clustering of ‘low cost’ energy futures around higher and lower emissions, rather than in the middle, reflects divergent responses to depletion of
‘easy oil’
We are here
Figure 10-6: Two kinds of energy future – the carbon divideSource: Upper panel: Gritsevskyi and Nakićenović (2000); lower panel: authors
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Some suggestive alignment of Three Domains with structure of the WEF Global Competitiveness Index …
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
The Three Domains also link to debates about macroeconomic growth
• Neoclassical economic growth models have consistently found a ‘residual’ accounting for typically half of observed economic growth that cannot be explained by resource and capital accumulation (Ch.11 the “Dark Matter” of growth)
• Economic research points two broad explanatory areas:– Reducing suboptimal performance of many economic actors and structures– Education, infrastructure and innovation
• ie. First and Third domain processes are recognised as important for macroeconomic growth. Yet these remain– largely absent in global (or national) modelling– poorly charted in policy
• Energy is a particularly strong candidate because– Pervasive input to numerous production sectors– Fossil fuel markets are intrinsically unstable– Exceptionally low rates of innovation particularly electricity & construction
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Macro modelling : Global GDP in mid Century has little or nothing to do with global mitigation …
Figure 11.4 Gross World Product in 2050 (excluding environmental benefits) from a wide range of models
Source: Energy Modelling Forum (2009). MF22 Database: Climate Change Control Scenarios. Available from:http://emf.stanford.edu/events/emf_briefing_on_climate_policy_scenarios_us_domestic_and_international_policy_architectures/
20 GtCO2 = halving of global CO2 emissions by mid Century
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
• Nature of the challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement• Pillar II: Markets and Pricing• Pillar III: Strategic investment• Policy Integration• Joint Benefits• The Economics of Changing course
An integrating approach to climate policy
Planetary Economics
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Fig. 12.3 Public and private returns in the 3 domains
Res
ourc
e U
se /
Ener
gy &
Em
issi
ons
Economic Output / Consumption
Pillar III
1. Private returns often suffice – but are not considered
=> Standards and engagement
Innovation and infrastructure
Cleaner products and processes
Pillar ISmarter choices
Pillar II
3. Public returns (including innovation,
security & environment) >> private returns
=> Strategic investment
Different pillars have different structures of returns -good design of markets & pricing pillar can expand its reach
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Experience and theoretical reasoning on each pillar shows..
• There are multiple lines of evidence that in context of transforming the global energy system over a few decades, all three domains are of comparable importance
• Only approaches that integrate across all three domains have potential to generate ‘Green Growth’
• The dominant neoclassical ‘Second Domain’ theories emphasise instrument (pricing) that maximises political opposition unless it is nested in the complementary triad
• First and Third pillar policies can (and have) delivered multiple benefits, but ….
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
But no pillar on its own can credibly solve the problem – nor offers a politically stable basis for policy
• Energy efficiency policy on its own limited by: – Scale of intervention required– Growing scale satisficing behaviour – …. Leading to large Rebound effects
• Pricing on its own limited by:– Blunt nature of impacts First and Third Domain impacts– Rising political resistance to rising fuel bills – .. and competiveness concerns
• Innovation on its own limited by:– Lack of demand pull incentives– Scale & risks of investment costs– Political failures in absence of rising market feedbacks
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Standards & Engagement
Markets & Prices
Strategic Investment
POLICY PILLARS
Technology options &
competitiveness
Changing course requires a sustained package -the key is to integrate and synergise across all three domains
Manage bills, increase
responsiveness
Revenues, revealed costs, strategic value
Values, pull & preferences
Attention, products &
finance
Education, access & control
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. RoutledgeFigure 12‐4 Potential joint benefits in energy and climate policy
Pillar
Standards&engagementforSmarterChoices
Enhanceefficiency,IndoorandLocal
healthsubsidyremoval..
PricesandmarketsforCleanerproducts
andprocesses
Stabilise investorconfidence,revenues,
airpollution&energysecurity
StrategicinvestmentforInnovation&Infrastructure
AccelerateInnovationinweaksectors,coordinatesupplychain&infrastructure
Co-Benefits Integration
ClimatePolicypotentialto
MotivateStabiliseCoordinateFinance
forlong‐runsecurity
efficiencygrowth
innovation
Whilst the underpinning evidence and theory of Planetary Economics suggests several routes to ‘co-benefits’
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
• Nature of the energy challenge• The Three Domains and Three Pillars of Policy• System key components• Pillar I: Standards and Engagement • Pillar II: Markets and Pricing• Pillar III: Strategic investment• Growth theory and macroeconomic linkages • The Economics of Changing course• Policy Integration
• Joint Benefits• The Economics of Changing course
A peek at global some implications …
- An integrated approach
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Mainstream economic models are weak in the dynamics of energy systems
• The vast majority of economic models assume a cost function in relation to the degree of abatement from ‘reference projection’ at time t
• This has no underlying history eg. DICE equations
Inertia, pathway etc effects have been introduced through • Capital stock lifetimes (many models) • Endogenous technological change (increasing
numbers of models but mostly in academia)
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
A simplifying approach with links to 3 domains
• Cost may also be represented in relation to both the degree and the rate of abatement– First is the classical representation– Second (rate dependent) represents inertia – Ratio represents adaptability - transitional costs with
enduring pathway impacts• This enables link to the 3 domains:
– Most First Pillar gains do not reverse: they have the characteristic of regulatory or behavioural innovation which saves costs
– Most Third Pillar gains do not reverse: infrastructure endures and innovation generally moves forward, not backwards
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
2025. 2040. 2055. 2070. 2085. 2100.Year
5
10
15
20
25
30
GtC yrAnnual emissions
Adaptive energy system
2025. 2040. 2055. 2070. 2085. 2100.Year
1000
1500
2000
GtCCumulative emissions
Adaptive energy system
The ‘global optimal trajectory’ is radically different for an adaptive energy system, given ‘typical’ damage & discounting assumptions
Default (reference)
trajectory
Default (reference)
trajectory
Standard (non-adaptive)
Standard (non-adaptive)
• Both First and Third pillar policies – which can be broadly characterised as regulatory and technological systems innovation – are adaptive in nature (ie. transitional cost with enduring benefit)• A significant degree of direct response to prices may also be adaptive
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
2010. 2025. 2040. 2055. 2070. 2085. 2100.Year0
2
4
6
8$trillion
Annual damages from climate change
‘Optimal’ effort
2010. 2025. 2040. 2055. 2070. 2085. 2100.Year0
2
4
6
8$trillion
Annual abatement cost
• For an adaptive system (characterised by transitional costs with enduring benefits) early efforts have much higher benefit than just emission reductions • eg. Optimal global investment c. $1trn/yr can cut annual costs (abatement + damage) towards end of century by at least 5 times as much
Measures which steadily adjust the pathway are optimal at much higher ‘cost of carbon’
Adaptive energy system
Default (reference)
trajectoryStandard
(non-adaptive)
Standard (non-adaptive)
Adaptive energy system
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Key policy implication of the numerical analysis
• The value of measures which adjust the pathway is several times that of measures which just save CO2
• Useful to think of a ’base’ carbon price as that which can be implemented today to reflect the assumed damage of CO2 emissions
• Measures in the First and Third Domains may well justify a “cost of carbon” well above this base carbon price
• A rising base carbon price can also enhance in particular strategic investments & leverage long term institutional finance
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Thought for discussion: ‘First among Equals?’
• A rising base carbon price is an instrument that contributes across all domains:I. Attention effect and funding for 1st Domain responses – rising steadily enables efficiency to keep pace and stop
much rise in total bills II. Price differential will steadily reduce use of coal in power generation, and help to move renewables on from transitional subsidies into mainstream marketIII. Facilitates increased investment stability and funding for innovation, infrastructure and tech transfer programmes
• Embedding in an international agreement would enhance stability and credibility
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
H
M
L
H Highest relevanceM Medium relevanceL Lowest relevance
Satisfice
Transform
Optimise
DomainStandards & Engagement
Markets & Prices
Strategic Investment
Smarter choices
Cleaner products & processes
Innovation & infrastructure
1 2 3
M
H
M
L
M
H
To deliver
Policy pillars
Figure 2‐5 The three pillars of policyNote: The row titles refer to the realm of opportunity, while the column headings refer to the policy pillars. The size of circles in each cell refers to the degree of relevance of the policy to each of the opportunities.
.. So that pricing spillovers get to the “M”
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Some research challenges
• Better mapping the boundaries of the relevant Domains• Fleshing out the synergies between Pillars, and in
particular how different structures and linkages of carbon prices may help to form more stable and politically appealing packages
• Digging deeper into ‘co-benefits’ and how these vary between regions and economic circumstances, and for different pillar designs
• The role of international cooperation in the Three Domains and the politics of a ‘base price+’ agreement
• Exploring sensitivities and other representations of ‘the Economics of Changing Course’
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Planetary Economics: Energy, Climate Change and the Three Domains of Sustainable
Development
Pillar 1
• Standards and engagement for smarter choice• 3: Energy and Emissions – Technologies and Systems • 4: Why so wasteful?• 5: Tried and Tested – Four Decades of Energy Efficiency Policy
Pillar II
• Markets and pricing for cleaner products and processes• 6: Pricing Pollution – of Truth and Taxes• 7: Cap-and-trade & offsets: from idea to practice• 8: Who’s hit? Handling the distributional impacts of carbon pricing
Pillar III
• Investment and incentives for innovation and infrastructure• 9: Pushing further, pulling deeper• 10: Transforming systems• 11: The dark matter of economic growth
1. Introduction: Trapped?2. The Three Domains
12. Conclusions: Changing Course
Routledge/Taylor & Frances, Published March 2014
Source: Grubb, Hourcade, and Neuhoff. (2014): Planetary Economics: energy, climate change and the three domains of sustainable development. Routledge
Planetary Economics Launch meetings, March – April 2014
Launch: Kings College, Cambridge: 10th March 2014, 6-7.30pm: Chair: Lord Martin Rees
Connaught Rooms London: LSE+ Student Conference on Energy Transitions: Live Cross-University Debate on 'Planetary Economics: 11th March, 2014, 16.00-17.15. http://www.lse-energy.org/event/conference_final/
Imperial College London Grantham Institute: 'Planetary Economics': The Technology and Innovation Pillar12th March, 2014, 17.00-18.00. Follow this link or register on http://app-uk-emailer.co.uk/1I0M-E90/s2.aspx
Brussels Marriot Hotel: Eurelectric Conference: Welcoming the Commission’s 2030 proposals: High road, or low road. 13th March, 2014, 2.15 pm Visit www.eurelectric.org
Geneva WTO: Advanced Course on Trade & Environment. Integrating Approaches to Energy, Environment and Trade. 25th March 2014. Contact: [email protected]
Policy Forum @ Institute of European Studies, Vrije Universiteit Brussels: Implications for European Energy and Climate Policy, Friday 4th April, 13.00-14.30
Deutches Institut für Wirtschaftsforschung (DIW Berlin): stabilizing policies for environment and economic growth 7th April, 2014: 12.00-2.00pm Contact: [email protected]
St. Catharine's College, Cambridge: Finance and the Macroeconomics of Environmental Policies 10th April, 2014, 16.00-17.15 http://www.neweconomicthinking.org/prog_10April2014.htm
OECD Auditorium, Paris: 17th of April, 2014, 12.30-14.30 Public policy launch hosted by OECD Environment Directorate. Contact [email protected]
See www.climatestrategies.org/events/2014-events/book.html for information and maintained register of related events.
As if you haven’t had enough … !