Climate Policy Models

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Climate Policy Models

• Climate Change Forum organised
• by ICCF and FORATOM
• Are we ready for COP9?
• N. Kouvaritakis - ICCS/NTUA
• Tel [phone]
• Fax [phone]
• E-mail kapros_at_central.ntua.gr

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Presentation overview
Fundamental questions addressed

• Using a wide range of quantitative tools does a
  broad Consensus emerge on the Cost of meeting
  Climate Change Policy targets?
• According to model evidence how are such Costs
  affected when additional Flexibility is assumed?
  
• Types of flexibility examined
• Internationally Traded Pollution Permits
  (enlarging markets).
• Multi Gas Flexibility (enlarging the abatement
  options to include more GHGs)
• Role of technological progress
• Endogenous Learning (possibility of climate
  policy indirectly inducing technological
  improvements)

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Presentation overview
Examples from a wide selection of projects and
models assisted by DG Research (1998 2003)

• Cost of Climate Change Policies
• Results from ACROPOLIS Project
• Role of Flexibility
• GHG emission trading studies
• Results from the TEEM Project
• Spin-off from Climate Policy project in the
  form of a study carried out for DG Env. and
  published in Journal of Energy Policy Vol. 27
  (1999)
• Multi gas assessment studies
• Results from GECS Project
• Role of technological progress
• Results from TEEM Project
• Role of endogenous learning
• Results from TEEM Project

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Cost of Climate Change PoliciesACROPOLIS Project

• Common Climate Policy Scenario Case Study 2
• Global carbon emissions stabilized at
  approximately 10 GtC in 2030. Beyond 2030 a
  constrained profile consistent with ultimate
  concentration of 550 ppmv
• Beyond 2010 all world regions contribute to
  carbon reduction and participate in trade of
  carbon emission permits.
• Annex B Countries (apart from USA) meet Kyoto
  Protocol. In the period 2010-2030 they obtain
  emission allowances at the same decreasing rate.
• USA implements only domestic policies up to 2010
  and and participates in the emissions permits
  market after 2010.
• Non-Annex B Countries emission rights allowances
  are based on their 2010 emissions and consistent
  with stabilization targets at different dates
  depending on theirGDP/cap. and emissions/cap
  (Soft Landing)

ACROPOLIS is a European research project partly
funded by the 5th European Union RTD Framework
Programme
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Cost of Climate Change PoliciesACROPOLIS Project

• Models participating in the Climate Policy case
  study

Integrated Assessment Model (Dynamic NLP)
Perfect foresight
Perfect foresight
Perfect foresight
Perfect foresight
Perfect foresight
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Cost of Climate Change PoliciesACROPOLIS Project

• CO2 reductions and carbon permit prices World
  Models

CO2 reduction
Carbon Value
According to DNE21 the permit price is 0 in
2010, due to the hot air traded by the former
Soviet Union and the other countries of Eastern
Countries. At that date only Western Europe,
Japan and Oceania purchase emission permits, but
their needs (372.4 MtC/year) are more than
covered by the availability of the Eastern
Europe, hence the zero price of permits.
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Cost of Climate Change PoliciesACROPOLIS Project

• The response of the world economy to emissions
  constraints and tradeable permits goes in the
  direction of decreasing carbon intensity rather
  than energy intensity.
• All models except MESSAGE forecast an increase in
  world permits price over time. MESSAGE, instead,
  projects the reverse due to a sharp decline in
  carbon emissions among the more important permits
  purchasers North America and Western Europe.
• The world price of emission permits in 2050
  ranges between 11 95/tCO2 of MESSAGE to the 60.7
  95/tCO2 of DNE21.
• In 2030 this price goes from 9.7 95/tCO2 of GMM
  to the 36.8 95/tCO2 of DNE21.

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Cost of Climate Change PoliciesACROPOLIS Project

• CO2 reductions and carbon permit prices Western
  Europe

CO2 reduction
Carbon Value
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Cost of Climate Change PoliciesACROPOLIS Project

• General Equilibrium Models (Change in Welfare)

GEME-3 Model
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Cost of Climate Change PoliciesACROPOLIS Project

• General Equilibrium Models (Change in Welfare)

NEWAGE Model
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Cost of Climate Change PoliciesACROPOLIS Project

• General Equilibrium Models (Change in Production)

GEME-3 Model
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Emission Trading Studies TEEM Project

• Analysing the costs of CO2 reduction in meeting
  Kyoto Targets

• Partial equilibrium models participating
• POLES (World)
• PRIMES (EU)
• Scenarios Examined
• No Trading Case (NT)
• Annex B Trading only (PT)
• Full Trading (FT)

TEEM (Energy Technology Dynamics and Advanced
Energy System Modelling) was partially funded by
the European Commission in the 5th Framework
Programme (Non Nuclear Energy) JOULEIII
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Emission Trading Studies TEEM Project

• The costs of CO2 reduction in meeting Kyoto
  Targets

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Emission Trading Studies Journal of Energy
Policy Vol. 27(1999) pp 833-844
The study is one of the earliest performed to
analyse the importance of flexible mechanisms
in meeting Kyoto commitments (early 1998)

• Scenarios examined
• Reference
• The scenario was constructed in 1998 using the
  POLES Model and assuming no policy to meet Kyoto
  targets
• Kyoto Protocol without trading (NT)
• Full Trade across Annex I countries only (FT)
• No ceilings on the use of flexibility
  instruments.
• Half Trade among Annex I countries (HT)
• Assumes a ceiling operating on all flexible
  mechanisms simultaneously
• The trade volumes resulting from full trade are
  reduced by half
• Both buyers and sellers are restricted in terms
  of desired transfers
• Full Trade Worldwide (FT)
• Half Trade Worldwide (HT)

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Emission Trading Studies Journal of Energy
Policy Vol. 27(1999) pp 833-844

• Equilibrium implications of ceilings

P equilibrium price in a perfect permit
market Q equilibrium amount of emissions
traded Qc ceiling on amount of emissions
traded Pd maximum price that prospective buyers
would be prepared to pay Ps minimum price that
sellers would be asking
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Emission Trading Studies Journal of Energy
Policy Vol. 27(1999) pp 833-844
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Emission Trading Studies Journal of Energy
Policy Vol. 27(1999) pp 833-844

• Under Full Trade within Annex I the contribution
  of domestic action in the reduction effort still
  dominates
• Full Trade worldwide would imply a substantial
  shift of the effort towards permit acquisition in
  the international markets

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Emission Trading Studies Key Findings
Meeting Kyoto Targets

• Permit Prices
• Without international trade stand at around 30-
  40 EURO per tonne of CO2.
• Assuming Annex I wide trade they fall by about
  two thirds.
• In the (theoretical) case of full utilisation of
  worldwide flexibility mechanisms at no
  transaction cost they fall by a further two
  thirds.
• The system costs for EU15
• Represent 0.1 to 0.12 of GDP (in 2010) in the
  case when there is no international permit trade.
• Assuming Annex I wide trade these costs fall by
  20 to 40
• With full utilisation of worldwide flexibility
  mechanisms such costs would represent between
  0.03 and 0.05 of GDP in 2010.

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Multi gas assessment studies GECS Project

• World Models Involved in the project
• POLES (Partial Equilibrium, Energy)
• GEME3 (General Equilibrium)
• Scenarios Examined
• Soft Landing Multi-Gas.
• Soft Landing CO2 only.
• Per Capita Convergence Multi-Gas
• Soft Landing CO2 proportional.

GECS (Greenhouse Emission Control Strategies)
is a European research project partly funded by
the 5th European Union RTD Framework Programme
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Multi gas assessment studies GECS Project

• Soft Landing Multi Gas (SL MG)
• OECD Countries
• 2030 Emissions should be 15 lower than 2010
  level
• Eastern Europe and FSU
• 2030 emissions should be stabilized to 2010 level
• Non Annex B with GDP/PC gt 60 of the 2010 OECD90
  GDP/PC
• 2030 emissions should be stabilized to 2015 level
  
• Non Annex B with 15ltGDP/PClt 60 of the 2010
  OECD90 GDP/PC
• 2030 emissions should be stabilized to 2030 level
• Non Annex B with GDP/PClt15 of the 2010 OECD90
  GDP/PC
• Have to stabilize their emissions in 2045
• Soft Landing CO2 only
• apply the whole volume of reductions from the
  SL-MG scenario to the energy related CO2
  emissions.

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Multi gas assessment studies GECS Project
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Multi gas assessment studies GECS Project

• Effort Rate and Welfare Changes in 2030

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Multi gas assessment studies GECS Project

• GEME3 Model Changes in GDP and Production in
  2030

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Multi gas assessment studies GECS Project

• Changing from a CO2 to a Multi-Gas approach
  reduces Marginal Abatement Costs by around 30 .
• According to general equilibrium analysis the
  cost of achieving the reductions represent 0.65
  of world GDP (2030) in the multi-gas case
  compared to 0.85 in the case of CO2 only.
• Both models suggest that Multi-gas flexibility
  reduces the global cost of meeting the emission
  targets by around one quarter.
• The inclusion of abatement options involving
  non-energy related GHGs is particularly
  beneficial in the adjustment process of highly
  developed economies.
• The dominant redistributive element in the
  scenarios consists of the opportunities they
  provide for income transfers in the form of net
  permit sales/purchases. In this sense the
  enhanced flexibility is in general detrimental
  for benefits of net permit exporters.
• However, significant deviations from this
  dominance occur through effects on the terms of
  trade, especially among major energy exporters
  and economies with a structure favouring energy
  intensive activities.

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Role of Technological Progress TEEM Project

• Partial Equilibrium Models Participating
• POLES (World)
• PRIMES (EU15)
• Abatement Scenarios Examined
• Reference (Post Kyoto Scenario)
• Replication of Kyoto targets for Annex B
  countries 2010-2030
• For FSU countries 2030 target is the 1990 level
• Non Annex B countries 43 incr. for Asia, 56
  inc. for RoW from 2010 to 2030
• Nuclear Scenario, nuclear technology breakthrough
  in terms of cost and safety (S1).
• Clean Coal Scenario, technicoeconomic
  characteristics improvement of Supercritical
  Coal, IGCC, Advanced Thermal Cycle technologies
  (S2).
• Gas Scenario, technicoeconomic characteristics
  improvement of GTCC, CHP (S4) combined with
  assumptions of a more abundant Natural Gas
  resource base (undiscovered resources).
• Renewable Scenario, breakthrough in wind, solar,
  biomass gasification and small hydro technologies
  (S5).
• Pessimistic Scenario, frozen technicoecnomic
  characteristics for all technologies at their
  1998 values (except standard LWR with
  deteriorating characteristics) (Pessimistic).

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Role of Technological Progress TEEM Project

• POLES Results

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Role of Technological Progress TEEM Project

• PRIMES Results

Gas and
All
Nuclear
Hard coal
Renewable
Demand side
Post Kyoto
fuel cells
technology
story
story
s story
story
story
stories
Required carbon
value (EUR'90 per tn
178
116
210
93
153
79
40
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Role of Endogenous Learning TEEM Project

• Models Participating
• POLES (Simulation)
• Two Factor Learning Curve Functions cumulative
  RD and experience in the form of cumulative
  technology take-up improving the technical and
  economic performance of specific power
  technologies.
• Special module to simulate RD portfolios of
  power plant manufacturers in terms of sales
  expectations and risk averse stances.
• Expectations modified by levels of carbon value.
• ERIS (World), MARKAL EUROPE (optimisation,
  perfect foresight)
• One Factor Learning Curve for power technologies
  Learning by experience.
• Non-Convex optimisation due to lock-in effects
  under perfect foresight.
• Scenarios Examined
• TEEM Post-Kyoto Scenario
• Assuming exogenous technological improvements
• Assuming endogenous learning (activation of
  appropriate model mechanisms).

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Role of Endogenous Learning TEEM Project
POLES Model Results
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Role of Endogenous Learning TEEM Project

• Endogenous Learning with ERIS and MARKAL Models

ERIS Model
MARKAL Europe Model
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Role of Endogenous Learning TEEM Project- Key
Conclusions

• Technological improvements could play a key role
  in reducing the cost of reaching specific Climate
  Change Policy targets
• Models fitted with endogenous learning mechanisms
  generally show significant cost reductions
  particularly when they incorporate agents
  reactions to Climate Policy signals.
• The TEEM evidence suggests that these reductions
  range from 15 to 60 percent highly dependent on
  the endogenisation mechanisms adopted.

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General Conclusions from model based studies

• In recent years there has been emerging a
  consensus from a wide variety of models that an
  effective Climate Change Policy is feasible at a
  non-trivial but bearable cost (possible shift of
  debate towards perceived benefits of avoidance).
• The cost of such policies can be substantially
  reduced by designing them to incorporate
  flexibility.
• Models tend to indicate lower costs when they
  include more mechanisms a more complete
  description of dynamic reactions to policy
  signals.