Model Based Policy Analysis (Subject) / Climate Policies and the interlink to Agriculture and bioeconomy (1) (Lesson)
There are 14 cards in this lesson
History of climate policy, EU climate policy, EU ETS, carbon leakage
This lesson was created by Moadscha.
- Name and shortly explain the EU climate policy. Targets are persuaded via a combination of financial support and regulation: 1. Financing: > 20% of EU’s budget should be spent on protecting climate, financing of low-carbon energy projects from the sale of emission certificates 2. Regulation: EUs emission trading system, effort sharing directive, energy efficiency directive, wide range of other EU-wide regulations influencing GHG emissions (e.g. Renewable energy directive
- What is the EU ETS? Cap and trade system - fixation of an emisson cap --> political value - trading of EU emission allowances - Covered: electricity sector and energy intesive sectors - NOT covered: transport sector, households, agriculture, facilities < 20 MW --> not all GHG covered!!!!
- Name and explain the three different phses of the EU ETS. Phase 1 (2005-2007): Allocations of EUAs decided by single member states (mostly grandfathering --> allocation for free based on historic emissions) Oversupply of allowances Phase 2 (2008-2012): Reduction of total volume of EUAs by 6,5% compared to 2005 Flights within EU included Up to 10% of EUAs could be auctioned by member states (instead of free allocation) Additional credits plus financial crisis --> oversupply Phase 3 (2013-2020): Since now trading system failed to reduce emissions due to: 1. Decline in prices for allowances (due to financial crisis) 2. Allowance oversupply 3. Lack in transformation towards renewable energies 4. Not as cost effective 5. Fraud and scams (Betrug) Cap decrease by 1,74 % per year --> aiming to reduce emissions by 21% in 2020 compared to 2005 - Grandfathering --> auctioning (only a low share of EUAs is grandfathered) - Sectors at significant risk of international competition receive 100% permits for free
- What could be reached with EU ETS? Abatement under EU ETS Emission reduction of 2-5% p.a. for Eu, 6-7% for Germany in phase 1 BUT actually, micro data on firm level basis are better to distinguish the effect, e.g. difference-in-difference approach: comparison between treated and non-treated plants EU-ETS had no significant effect on manufacturing plants in phase 1, but caused EU ETS firms to reduce emissions by 26% relative to non-EU ETS firms between 2007 and 2010 16% emission reduction of French EU ETS firms in phase 2
- What is the future role of EU ETS? Expected price: 30€/tCO2 but actual price: < 5€/tCO2 --> abatements cheaper than expected? --> Different views on objectives of climate policy: Reduce GHG emissions, in addition transformation of the EU energy system Back loading: Withdraw of 900 mio. allowances from auctioning in 2014-2016, add them back in 2019-2020, Seen as first step towards reducing near-term quantities of allowances, time provided to build consensus for taking tougher action
- Name the 6 alternatives to restructure the targets of EU ETS for 2030. 1. Increasing the EU reduction target to 30% in 2020 2. Retiring allowances in phase 3 3. Early revision of the 1,74% annual reduction in the cap 4. Extending the scope of ETS to other sectors 5. Limiting access to international credits 6. Creating a discretionary (willkürlich) price management mechanism
- What are proposals for a phase 4 of EU ETS? Aim: reduce emissions by 43% (compared to 2005) in the sectors covered by the EU ETS Proposal by EU Commission: - Reduction rate of the cap increases from 1.74% to 2.2% - Share of allowances auctioned: 57% - Allowances for new entrants - Modernization Fund: 2% of the total quantity of allowances until 2030 shall be auctioned - improve energy efficiency and modernize the energy system of certain Member State - Innovation Fund: 400 million allowances will be made available to support innovation in low carbon technologies and process. - Solidarity mechanism: 10 per cent of total EU allowances to be auctioned will be distributed to member States for the purposes of solidarity and growth - Minimum prices / Hybrid-System - Extend the EU-ETS to other sectors (e.g. the transport sector) - Extend the EU-ETS to all GHG emissions along the process chain
- Why is unilateral climate policy a problem? Unilateral climate policy /sub global climate policy = climate policy only in some countries, e.g. Kyoto Protocol: Only Annex B countries have binding targets Main problem: carbon leakage = increase in carbon emissions in one country as a result of an emission reduction by a second country with (strict) climate policy
- What is carbon leakage and how can it be measured? Carbon leakage = increase in carbon emissions in one country as the result of an emission reduction by a second country with (strict) climate policy Leakage rate = additional emissions in non-regulated country relative to abated emissions in regulated country --> E.g. reduction by 50 MtCo2 vs. increase by 25 MtCO2: 25/50 50% leakage rate
- What channels are there for carbon leakage? 1. trade channel: specialization effect via effects on competitiveness: higher production cost affect competitiveness of energy-intensive industries which can lose market shares in the international markets -> shift in production / relocation, depends on price difference and trade substitution elasticities Investment leakage in the medium-to-long run: firms do not expand facilities in regulated country / relocation of foreign direct investment (FDI) 2. Energy market channel: a) Temporal leakage: Unilateral climate policy in a large country reduces demand and thus international prices of the most carbon-intensive fossil fuels, thus increasing energy demand and carbon emissions in the non-participating countries. b) Intertemporal leakage/Green paradox: since fossil fuels are in finite supply, current extraction decisions depend not on current AND future prices. If climate policies make selling fossil fuels in the future less attractive, suppliers may prefer instead to sell more in the present. (-> Resource Economics) 3. Free rider effect: Less incentives to reduce emissions in other countries, because of reduced climate damages
- What problems arise from carbon leakage? 1. Negative competitive effects for local firms: a) Loss of jobs, market share b) very unpopular, strong opposition from affected industries c) large political argument against unilateral climate policy 2. Reduced environmental effectiveness: a) Global emissions are reduced less than inteneded by unilateral climate policy b) Carbon leakage rate globally at about 10% 3. Sectors, that are carbon intensive and/or exposed to trade are affected the most (study also finds they state that they have to outsource --> create carbon leakage)
- What measures are there to adress carbon leakage? 1. Emission price differentiation/exempting sectors from carbon pricing 2. Border Carbon Adjustment (BCA) 3. Free/generous allocation of emission allowances in the case of an emission trading scheme
- What are advantages and disadvantages of the Kyoto Protocol? Advantages: (+) 1st international agreement with binding targets (+) Creation of carbon markets (+) Basis for further steps Disadvantages: (-) Reduction targets not sufficient stabilize greenhouse gas concentrations (-) USA did not ratify, other countries did not reach targets (-) No targets of emerging economies (-) No mechanism to enforce targets
- What are the key points of the Paris Agreement? 1. Temperature: Aim: Keep warming “well below 2°C”. Continue all efforts to limit the rise in temperatures to 1.5°C 2. Emission goals: Aim for GHG to peak “as soon as possible”. From 2050: rapid reductions to achieve a balance between emissions from human activity and the amount that can be captured by “sinks". 3. Specialization: Developed countries must continue to “take the lead” in the reduction of GHG. Developing nations are encouraged to “enhance their efforts” and move over time to cuts. 4. Reviews: A review every five years (First world review 2023). Each review will inform countries in updating and enhancing their pledges. 5. Financing: Developed countries shall provide 100 billion dollars annually from 2020, as a “floor”. Amount to be updated by 2025 6. Burden sharing: Developed countries must provides financial resources to help developing countries. Other countries are invited to provide support on a voluntary basis.