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84th ICREA colloquium 'Carbon pricing and energy use pathways for staying within 2°C climate change' by Jeroen van den Bergh


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'Parallel tracks towards a post-Paris treaty on carbon pricing'

Stopping climate change has turned out to be an immense challenge. Although denial of the problem seems to weaken somewhat, a serious hurdle to a solution is that many scientists and politicians are insufficiently focused on ultimate effectiveness of policies. We quantify the magnitude of the decarbonization challenge and discuss general solution strategies and policy instruments. We then look into the carbon emissions involved in a renewable energy transition, assess the effects of recessions on carbon emissions and discuss the trade-offs between economic growth and reducing carbon emissions. We zoom in on carbon pricing, listing classic and heterodox arguments in favor of it, dealing with effectiveness, efficiency, equity, national and international feasibility, and systemic effects. Complementary instruments and the reasons for their use are mentioned as well. On the basis of this, implications for the policy trajectory after the Paris international climate agreement are formulated.

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84th ICREA colloquium 'Carbon pricing and energy use pathways for staying within 2°C climate change' by Jeroen van den Bergh

  1. 1. Jeroen C.J.M. van den Bergh VU University Amsterdam Parallel tracks towards a post-Paris treaty on carbon pricing
  2. 2. 2 Time window for action closing quickly As per May 2017; Source:
  3. 3. Decoupling requirement is astonishing Source: van den Bergh and Antal (2016) Reduction in carbon intensity of output to meet 2°C target with 66% probability GDP increase 1.5% 0% Total reduction 2013-2050 81% 67% Annual reduction during 2013-2050 4.4% 2.9% Historical annual reduction 1970-2013 <1%
  4. 4. A brief history of global climate policy  1988: Intergovernmental Panel on Climate Change (IPCC), part of UN, founded by WMO and UNEP – AR1-5  1992: UN Framework Convention on Climate Change (UNFCCC)  1997: Kyoto Protocol – 43 industrialised countries reduced 2012 GHG emissions on average with 5% relative to 1990 levels. Burden-sharing in EU: -21% Germany - +27% Portugal – Developing countries no obligations – “Entry into force”: 16 February 2005.  2015: Paris agreement – Voluntary pledges, to get nations without Kyoto limit aboard – where emissions grow fast – “Entry into force”: 4 November 2016. 4
  5. 5. Why still no stringent climate policy?  Climate public good, no property rights => free riding  Climate change and future damages are uncertain, underestimated or even ignored  Cost of climate mitigation policy is seen as prohibitive  No easy and cheap substitutes for fossil fuels available  Little care for future (high discount rate, myopia).  Voters, politicians and social/policy scientists have insufficient understanding of effective policy. 5
  6. 6. Paris agreement, December 2015  Voluntary country pledges or (Intended) Nationally Determined Contributions (NDCs); revised each 5 years  Four types of pledges: – Absolute emission reduction targets relative to base year (distinct base yrs) – Reduction relative to future emissions growth in BAU scenario – Reduction of emission intensity of national income (carbon/GDP) – Mere ‘projects’ without identifying implications for emissions  Hoped to limit increase in global mean surface temperature to 2 or even 1.5°C but expected increase is 2.5-3°C (Rogelj et al., 2016 Nature; Schleussner et al., 2016 Nature CC).  While initial reactions predominantly positive, later many questioned compliance with NDCs – so far, no country has consistent policies (not even EU/Sweden)
  7. 7. 7 Voluntary pledges, no policy coordination Focus on weak regulation, facilitating voluntary action, and role cities. Paris Agreement will suffer from systemic effects:  National policies likely weak out of fear to loose international competitive position => rebound  National policies likely distinct, as pledges differ (per unit of current emissions or average income) => carbon leakage  Deployment/adoption subsidies likely, as polluters prefer these and meet less political resistance => green paradox (fossil fuel market responses)
  8. 8. 8 Guestimating systemic effects of Paris  Carbon leakage 10-20%, rebound 20-70%, green paradox 5-10%, so total 35-100%.  If total systemic effects imply just 50% lower emission reductions, global average temperature up to ±3.7°C. Back-of-the envelope calculation: more careful analysis needed.
  9. 9. 9 So overly optimistic?
  10. 10. Normalizing 4 types of pledges/NDCs (Base year 2015) 10Source: King & van den Bergh (2018)
  11. 11. 11 Carbon pricing (CP) as a solution  Three motivations: – Carbon pricing is easiest instrument to coordinated and make uniform among all countries in the world. – A focus on CP can overcome free riding in climate negotiations. – Already many CP initiatives around the world – both carbon taxes and markets (cap-and-trade / emissions trading).  Note: Paris agreement NDCs imply implicit carbon prices to vary among countries from approximately 5 to 250 $ (Aldy et al., 2016, Nature CC).
  12. 12. Current carbon pricing initiatives 12 - Already many unilateral initiatives indicating serious interest in CP. - But low and inconsistent prices, and repeated public/political resistance motivated by concerns about international competitive position. - Only upscaling to whole world can overcome these shortcoming. Source: World Bank (2018)
  13. 13. 13 4 classical arguments for carbon pricing 1. It internalizes the global-warming/climate-change externality (“the mother of all externalities” – R. Tol) 2. Can deal with heterogeneous polluters: equalizes marginal abatement costs among polluters => cost-effective - contributes to political acceptability 3. Pricing means “decentralisation” of regulation => low information needs. 4. Permanent incentive for both technology adoption & innovation - moreover, environmental innovation trajectories misguided if prices wrong.
  14. 14. Carbon pricing cost-effective: most effective (= max. emissions reduction) for a given cost – + (main finding of environmental economics)
  15. 15. 15 Carbon pricing: additional arguments 1. Subtle, complete control: all goods/services have price correction proportional to pollution generated over life-cycle – less rebound 2. Most emissions due to market decisions. Price intervention logical 3. No separate LCA needed, integrate in financial accounting firms 4. Pricing generates revenues for correcting undesirable distribution effects (or for innovation subsidies, or climate finance for poor countries) 5. Pricing said to be politically unattractive, but international coordination of policy arguably easiest through pricing – less carbon leakage 6. Guarantees minimal oil price – green paradox avoided 7. Shifts revenues from OPEC to oil importers
  16. 16. Carbon pricing ≠ energy/fuel prices Instead: tax / charge per unit of carbon Energy source EROI Carbon emission factor37 (kgCO2/TJ) EROC (EJ/GtCO2) Coal 46:1 94.6 10.3 Coal with CCS 9:1 9.5 65.1 Oil 19:1 73.3 12.9 Oil shale 7:1 107.0 8.0 Tar sands 4:1 107.0 7.0 Natural gas 19:1 56.1 16.9 Natural gas with CCS 4:1 5.6 101.9 Source: King & van den Bergh (2015) EROI = ‘Energy return on energy investment’ EROC= ‘Energy return on carbon’ of combusting fossil fuels
  17. 17. Carbon pricing = systemic policy 17 Source: van den Bergh et al. (2018)
  18. 18. Systemic effect of carbon pricing Relevant to correctly price energy generating and transforming technologies: renewable energy technologies, LEDs, batteries, electric cars, etc. Source: FengLiu & van den Bergh (2018) CO2 emissions in production of 5 PV technologies in China, EU and USA
  19. 19. Equity carbon price vs other instruments 19  Often suggested CP is inequitable – energy poverty  But CP in fact is the only instrument that generates revenues to be used for compensation of inequitable policy effects  Other instruments are inequitable but lack such revenues to compensate: – Technological standards – Subsidies  Political acceptance: any design of carbon pricing should make explicit how revenues are spent/recycled. Mistake in France (yellow vest protests)
  20. 20. Carbon tax (CT) vs. carbon market (CM) 20  Outcome (total emissions) more certain with CM (cap)  Price endogenous/adaptive under CM, to technological change, new products, fashions, scientific progress on CC.  Once established, CM independent from politics – for CT climate law needed to assure stability.  Global carbon price: linking existing CMs (EU-ETS, China), or global CT (managed by UN) or coordinated national CTs  CT generates regular revenues – inequity compensation.  Combination realistic + feasible; large emitters in CM
  21. 21. Transition through parallel tracks: CP club and UNFCCC-COPs 21
  22. 22. Climate club (Nobel laureate 2018 W.D. Nordhaus)  Motivation: other agreements started as club (GATT/WTO)  Joint, coordinated policy: single carbon price.  Carbon tariff on imports from countries without climate policy. Stimulates outsiders to become member  Start of CP: important export partners to avoid trade conflicts  Multi-level approach: countries and US states – Martin & van den Bergh (2018) identify 23 states as potential club members (38.5% of US emissions). A 2nd group (additional 46.7%) potentially receptive to enticement via trade with 4 key nations. 22
  23. 23. Suitable countries to start club (based on: opinion surveys, NDCs & participation in relevant coalitions) 23 Nation Effectiveness Likelihood of involvement % of total global CO2 emissions % of total global GDP Net likelihood score Net likelihood ranking Australia 1.1 1.8 0.758 1 Brazil 1.6 2.4 0.746 2 Canada 1.6 2.1 0.721 3 South Korea 1.7 1.9 0.711 4 Mexico 1.4 1.6 0.661 5 Japan 3.6 5.9 0.585 6 EU 9.6 21.9 0.571 7 India 6.6 2.9 0.517 8 South Africa 1.4 0.4 0.515 9 Indonesia 1.4 1.2 0.438 10 US 15.5 24.5 0.383 11 China 30.4 15.0 0.366 12 Iran 1.9 0.5 0.326 13 Russia 5.0 1.9 0.284 14 Saudi Arabia 1.8 0.9 0.227 15 Source: Martin and van den Bergh (2018)
  24. 24. 24 UNFCC COP meetings – post-Paris negotiations  Negotiating carbon price reduces free riding and is simpler goal than negotiating 200 national targets or a multitude of technical standards (+ lobbying)  The club can promote its uniform carbon pricing goal at UNFCCC COP meetings. – New members could be invited. – Clubs could even make joint pledges. – Would put pressure on UNFCCC climate negotiations.  To overcome remaining political barriers: – Partial agreement on carbon pricing in UNFCCC: overcomes resistance of reluctant (oil-rich, USA) & hesitating (Canada, Australia) countries – Temporary heterogeneous prices btw rich & poor countries as a transition
  25. 25. 25 Time path carbon price  Gradual carbon price increase allows investors to anticipate: minimizes economic costs and risks  Decisions on initial carbon price (e.g. 50 US$) and annual increase (e.g., 10 US$); final price not fixed now but based on global emissions response: part of CP Club/UNFCCC agreement  Guidance for final price: – Guiding social cost of carbon, meta-estimate: 125 US$/ton CO2 (van den Bergh & Botzen, 2014) – Recent OECD study finds carbon tax 1€/ton CO2 reduces emissions by 0.73 % in long run, i.e. 140€ tax may reduce emission completely (Sen & Vollebergh, 2018)
  26. 26. 26 Main conclusions 1. Voluntary pledge approach Paris basic flaws: expect ↑3.7°C 2. Global CP guarantees effective/systemic & affordable solution through consistent national policies (= equal implicit carbon prices) 3. CP club among ambitious trade partners, with carbon border tariffs to pressure unwilling countries to join 4. UNFCCC negotiations include attention for carbon pricing – CP club talks with one voice at UNFCCC-COP meetings – During transition phase sub-agreements and heterogeneous prices. 5. CP revenues essential part of design for political feasibility – recycle (partly/wholly) to compensate/avoid inequitable effects
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