Low Carbon Prosperity Summit
Wednesday 9 February 2011, Brussels
Background note by Prof. Dr. Ottmar Edenhofer1
1. Climate stabilization will cost 1-2.5% of cumulated global GDP until 2100
Integrated model analyses reveal that stabilizing the climate at 2°C (450ppm CO2) is
technically feasible at costs of 1-2.5% of cumulated GDP until 2100 (Edenhofer et al.
2010). But the window of opportunity for climate policy is narrow and closing. If the
world continues investing business-as-usual until 2030, the 2°C target will no longer be
technically feasible. Postponing global policy until 2020 boosts global mitigation costs by
about 50% (Edenhofer et al. 2009, Figure 1). This also entails an overshooting of CO2
concentrations, thus lowering the probability of achieving 2°C. More ambitious
stabilization levels leave even less scope for delay and non-linearly increasing costs are
observed in modeling exercises (Figure 2).
Delay 2020
EU 2010, others 2020
Annex I 2010, others 2020
Annex I + CHN + IND 2010
All 2010
Figure 1: Global mitigation costs (displayed as consumption losses) for various scenarios with
delayed participation in a global carbon market, and a benchmark case with global participation
from 2010 (All 2010). Percentage changes are relative to baseline using a 3 % discount rate. Source:
Edenhofer et al. 2009.
1 Contact: Prof. Dr. Ottmar Edenhofer, Potsdam Institute for Climate Impact Research (PIK)
P.O. 60 12 03, D-14412 Potsdam, xxxxxxxxx@xxxxxxxxxxx.xx
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Exceedence probability for 2°C [%]
MERGE-ADAM
15%
30%
45%
60%
75%
90%
REMIND-ADAM
4
POLES-ADAM
E3MG-ADAM
3
TIMER-ADAM
GWP]
ETSAP-TIAM
GTEM
2
50 [%
IMAGE
-20
MESSAGE
05
1
FUND
ts 20
MiniCAM - BASE
WITCH-EMF
0
SGM
tion cos
500
750
1000
1250
1500
1750
2000
2250
MERGE Optimistic
-1
MERGE Pessimistic
Mitiga
IMACLIM-RECIPE
REMIND-RECIPE
-2
WITCH-RECIPE
Cumulated CO2 emissions 2000-2050 [GtCO2]
Figure 2: Update of IPCC AR4 mitigation costs. Costs for mitigation are given as as cumulated GWP
losses or cumulated abatement costs (as integral of marginal abatement cost curves) relative to
baseline GWP (in %, discounted with 5% discount rate) for 2005-2050 depending on cumulated fossil
fuel CO2 emissions from 2000-2050. Results are reported for different model comparison exercises
(ADAM scenarios, Edenhofer et al. 2010, in red tones with bullets), EMF-22 scenarios (Clarke et al.
2009, in blue tones with squares) and RECIPE scenarios (Edenhofer et al. 2009, in green tones with
triangles). Numbers are only given for scenarios with all technologies and with full participation. The
cumulated emission budget is a proxy for the probability of exceeding 2°C (given on the upper x-
axis). Source: Knopf et al. 2011.
2. An increasing oil price is the most important risk for climate policy
The IEA expects the oil price to increase over the next decade even if currently proposed
energy policy packages around the world will be implemented (IEA 2010). Without a
reliable international agreement, the increasing oil price will have three effects:
a) Coal will become more competitive in the power sector in China and India. We have
already observed over the last five years that carbon intensity has increased in these
regions.
b) Extraction of non-conventional oil will increase, with quadrupling between 2008 and
2035 (IEA 2010).
c) China, South Africa and India will invest dramatically into coal-to-liquid, contributing
to more than half of the global 1 million barrel per day production projected for 2035
(IEA 2010).
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This process will not be stopped by a scarcity of coal. Coal is abundant and cheap. There
is no scarcity of fossil fuels. The binding constraint is the scarcity of the atmospheric
disposal space (see Figure 3).
Climate policy transforms the rent income of fossil fuel owners into a climate rent. This
rent transformation process is one of the most important reasons why climate policy is
perceived as an economic threat. To make ambitious climate policy viable, this
distributional conflict needs to be resolved. Innovation and Green Growth have a key role
in mitigating this conflict. Without innovation, the climate bargaining problem collapses
into a zero-sum game.
Gas
Oil
Coal
Biomass + CCS
5000
Emitted in the atmosphere or
captured with CCS:
re
Additional use in baseline
he
without climate policy
sp
o
2500
Coal+CCS (400ppm)
)
tm
2
e a
O
C
th
Projected use (400ppm)
in
0
Cumulative historic use
In the ground:
Unconventional resources
-2500
41700
Conventional resources
Carbon stocks (Gt
und
ro
Unconventional reserves
he g
t
-5000
in
Conventional reserves
Biomass+CCS (400ppm)
-7500
Figure 3: The basic challenge of climate economics: Fossil resources in the ground, and historical and
potential future extraction and corresponding CO2 emissions. Reserves are understood as natural
resources economically extractable at current technology levels and prices. Resources are future
extractable amounts of natural resources that exceed reserves. Source: Knopf et al. 2010.
3. Green Growth is needed to mitigate climate policy conflicts. Innovation is key for
Green Growth
Model studies of decarbonizing global economic growth consistently identify energy
efficiency as a crucial – indeed no-regret – option. Cost efficient scenarios always
involve the deployment of a portfolio of technologies. Still, some technologies are more
important than others: Foregoing specific low carbon technologies raises the cost of
reaching a green economy more than others. The availability of Carbon Capture and
Storage (CCS) and renewable energy sources turns out to be of pivotal importance.
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Without deployment of renewable energy beyond its usage in the business-as-usual case
the costs of mitigation may double and models may indeed not be able to report results
for ambitious targets (Figure 4, Edenhofer et al. 2010). Moreover, the costs of the
transformation are critically determined by assumptions regarding the potential of
biomass use. With biomass use of less than 100 EJ per year – compared to 200 EJ per
year in the reference case – mitigation costs more than double. Biomass is especially
important in combination with CCS, as this allows net extraction of CO2 from the
atmosphere. Increased deployment or a constraint of nuclear energy has only a limited
effect on the costs (Figure 4, Edenhofer et al. 2010).
A challenging aspect of a future green energy system is stable network integration of
power supply from fluctuating renewable energy sources. Additional grid infrastructure
for Europe is needed as well as additional research into storage technologies, and
incentives to invest in technologies for balancing intermittent renewable energy supply.
Innovation is key for Green Growth because it enables decoupling of economic growth
and emissions at low costs, thus minimizing social conflicts. Climate-friendly innovations
will only be competitive if the current and future scarcity of the atmospheric disposal
space is reflected in a reliable carbon price. It can be expected that the costs of renewable
energy sources and other technologies will be reduced by learning-by-doing and learning-
by-researching. On the other hand, lower learning rates of renewable technologies can
nearly double the costs of mitigation (Tavoni et al. 2011).
a)
b)
Figure 4: Global mitigation costs as aggregated GDP losses (for the models MERGE and REMIND)
or abatement costs (POLES) until 2100 relative to the baseline. “X” indicates a scenario where the
target is not achieved. Source: Edenhofer et al. 2010.
4. Technology policy is needed to avoid path dependencies in the energy system:
without technology policy, climate policy is more expensive
As innovators cannot fully prevent their knowledge being appropriated by competitors,
they will underinvest to green innovation. Therefore, public technology support is
warranted from an economic theory perspective to avoid lock-in to suboptimal
technology portfolios. Without technology policy, increases in consumptions losses by up
to 1% are possible (Kalkuhl et al. 2011).
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It is important to distinguish between initial support of nascent technologies which should
focus on exploring their potential for further cost reductions; and policies for large-scale
deployment of mature technologies which should be harmonized across Europe to ensure
that these are installed where they can operate most efficiently.
5. Technology policy without carbon pricing becomes very costly. Innovation for
Green Growth cannot substitute carbon pricing
Technology policy should be implemented as a complement to carbon pricing, which is
central for driving Green Growth and achieving climate policy objectives in an efficient
manner. Energy efficiency improvements and technology push policies alone will reduce
the costs of using energy. Thus, reductions in energy consumption will be partially offset
by the increased incentive to use more energy (rebound effect). Achieving emission
reduction only by means of technology policy therefore requires significant technology
expenditures. Technology policy without carbon pricing can increase consumption losses
by 50% compared to the optimal policy portfolio (Kalkuhl et al. 2010). A price on carbon
internalizes the climate externality and raises the price of competing fossil fuels, thus
discouraging their usage. It facilitates the adoption of renewable technologies, energy
efficiency measures and other substitution options by enhancing their competitiveness
relative to fossil fuels.
6. Top-down and bottom-up are not in conflict
Copenhagen has undermined the confidence in the top-down approach to international
climate policy. Many observers now emphasize the advantages of bottom-up approaches
and warn against continued reliance on top-down. It is evident, though, that both
approaches are complementary and needed. Even in presence of a strong top-down
regime, policies and reductions ultimately need to be deployed at the local and regional
scale. It makes sense to set up domestic policies at the national and e.g. city scale now,
not only to harness low or even negative cost abatement options already available today
but to prepare for the implementation of more ambitious policies in the future. In addition,
unilateral technology policy reducing the cost of mitigation is an example of how bottom-
up measures can facilitate future global agreement by reducing the costs of agreement to
emission cuts for national negotiators. In the mid to long-term, ambitious emission
reductions relying only on bottom-up measures without an international agreement will
be impossible to achieve due to the pronounced free-riding incentives. The only way for
bottom-up delivering ambitious reduction would be a (or a series of) technological
breakthroughs not anticipated today that deliver low-cost and low-risk technologies
outcompeting tradition technologies even in less ambitious green investment frameworks.
Carbon leakage is not a major problem in the mid-term. The cost of carbon share in
value-added of almost all exporting industries is negligible, and only a few sectors - iron
and steel, lime and cement, aluminum – will be significantly affected. The biggest
problem is carbon leakage via international energy markets: reduced EU demand
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dampens world fossil fuel prices. The short-term drawbacks need to be pitted against the
short-term benefits from initiating a transformation towards green growth and enhancing
energy security by diversifying energy sources.
7. Regions are acting even in the absence of a global agreement
Nations at Copenhagen were willing to bring unilateral emission reductions to the table
even absent a formal international agreement. The Analysis of a ‘Copenhagen forever’
scenario shows that expected global warming would be at about 3.5°C. However, there
remains a 20% chance that temperatures would rise by 4-5°C (Rogelj et al. 2010). Other
analyses suggest that pledges are consistent with “likely” temperature increases of 2.5° C
to 5° C up to the end of the twenty-first century (UNEP 2010). The IEA concludes that
only “vigorous implementation of Copenhagen Accord pledges to 2020 and much
stronger action thereafter” is “consistent with a pathway limiting the increase in
temperature to 2°C” (IEA 2010).
8. There is a first-mover advantage for Europe
There are clear indications that many world regions are serious about implementing a
reasonable climate and energy policy. If the world is serious about the 2°C, Europe will
enjoy a first mover advantage when unilaterally implementing climate policy even prior
to other regions that may implement aggressive reductions by 2020 only. Europe is better
off compared to the case that it delays action in line with other countries until 2020
(Figure 5, Edenhofer et al. 2009). The benefits of anticipating future emission reductions
and avoiding stranded investments exceed the costs of the higher overall emission
reduction commitment (Edenhofer et al. 2009). A 30% EU emission reduction goal until
2020 sets a credible commitment for the transformation towards a low carbon economy.
To stabilize expectations for investments and innovation, besides the near-term targets in
2020, the long-term benchmark of 80-95% emission reduction until 2050 needs to be
bolstered by intermediate targets for 2030 and 2040.
The world-wide acceptance of ambitious climate policies relies upon the visible
demonstration of feasibility and benefits of Green Growth. Europe as a pioneer in
developing the technologies and institutions of a green economy will benefit not only
from a reduced dependence on oil imports (IEA 2010) and improved environmental
quality but from supplying world markets with cutting edge technology. 200 years after
inventing the industrial revolution, developing the global public good of a “Green
Economic Growth” model will bolster European reputation domestically and across the
world.
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Delay 2020
EU 2010, others 2020
Annex I 2010, others 2020
Annex I + CHN + IND 2010
All 2010
Figure 5: Mitigation costs for Europe (displayed as consumption losses) for various scenarios with
delayed participation in a global carbon market, and a benchmark case with global participation
from 2010 (All 2010). Europe enjoys a first-mover advantage. Percentage changes are relative to
baseline using a 3 % discount rate. Source: Edenhofer et al. 2009.
9. Emission trading is the central pillar in the EU green investment framework The EU Emission Trading System (EU ETS) is Europe’s most important and innovative
policy instrument for climate policy. It sets a consistent incentive for green innovation
and abatement across all economic activities. The EU ETS should be further developed to
become the nucleus of a global carbon market by expanding it across sectors, regions and
time.
Sectors: Including transport and buildings in the EU ETS would roughly double coverage
to more than 70% of European GHG emissions. This sets a consistent incentive for
innovation and abatement across the European economy. In the road transport sector,
current emission intensity regulation of EU car sales and fuel quotas fails to set consistent
incentives and needs to be complemented by the European price on carbon. Including
road transportation in the EU ETS will trigger appropriate demand side reductions and
sets proper long-term incentives for car manufacturers and fuel producers. Given the
overall cap, achievement of the environmental objective is certain. A recent study using
abatement cost curves from several models demonstrates that given the current EU
climate policy setup (abatement goals, access to international offsets), including road
transportation in the EU ETS will not raise the emission allowance price, thus mitigating
concerns over carbon leakage (Flachsland et al. 2011, see Figure 6)
Regions: Other cap-and-trade schemes are emerging in California, other OECD countries
and China. The EU ETS should link to these schemes over time to reap gains from trade
and create a harmonized, large-scale OECD market for green technologies.
Time: Investments to emission-intensive infrastructure have a long time horizon. The
carbon pricing schedule needs to match these time spans to avoid inefficient deployment
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of high-carbon investment. A clear EU ETS budget up to 2050 and clear rules for its
revision as new information about international negotiations and technologies arrive will
stabilize the European investment framework for the transition to a green economy.
20% target with CDM
200
180
160
Pre-link EUA
140
e 120
2
O 100
EUA with
tC
80
Transport
$/
60
40
Pre-link transport
20
shadow MAC
0
Delft
Enerdata-
McKinsey
AIM/Enduse
POLES
Figure 6: The EU ETS allowance (EUA) price does not change when integrating the EU road
transport sector in the EU ETS by 2020, across a range of models (Flachsland et al. 2011).
10. The challenge and value of international cooperation
The EU ETS is one of the most important learning experiments for climate policy.
Agreement over the internal allocation of the climate rent was achieved despite
significant socio-economic asymmetries across member states. This gives some hope for
global negotiations. Technologies are key to reduce the magnitude of the distributional
conflict over emission rights and escape from a zero sum game.
In the long-run, a global agreement to overcome the carbon leakage and free-rider
problems is inevitable. It currently looks unlikely that green technologies will become so
cheap (including their co-benefits) that they will eventually become globally adopted at
large-scales even absent deliberate policy initiatives.
Despite conflicts, the EU ETS has been a major driver for a coherent European Climate
and Energy Policy of the European Union. Neither is national energetic autarky a
reasonable option nor can national climate policy be cost-efficient. In view of the
substantial heterogeneity of 27 member states, the success of the EU ETS sets an
encouraging example for the development of an OECD-wide carbon market and a further
integration of the international community. The EU ETS has the potential to promote
Green Growth and innovation towards a low carbon economy.
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