International Summer School, University of Oslo

1
International Summer School, University of
Oslo Energy planning and sustainable
development 28 June 2002
Economic approaches to greenhouse gas
abatement Dr. Asbjørn Torvanger Center for
International Climate and Environmental Research
- Oslo
2

• Topics
• The climate change problem
• Equity issues
• Optimal climate policy and cost effectiveness
• Adaptation
• Greenhouse gas abatement options and
• policy measures
• Climate policy costs
• Climate policy treaties
• Implementation of the Kyoto Protocol
• Emissions trading
• Future energy challenges

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Climate change Driving forces on many time scales

• External forces
• Variations in solar output (all time scales)
• Variations in the orbit of the Earth (relatively
  slow)
• The form and positions of the continents (slow)
• Vulcanic activity (all time scales)
• Internal forces and feedbacks
• Changes in the Earths albedo (all time scales)
• Changes in the Earths biosphere (all time
  scales)
• Changes in the composition of the atmosphere
• ? gases (fast and relatively slow)
• ? particles (fast)
• ? clouds (fast)

Source IPCC (2001a) and CICERO
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• The atmosphere and climate
• Composition of gases in the atmosphere is a main
  driving force for the climate system
• If the composition of gases changes the climate
  will change
• Humans influence the climate through the release
  of greenhouse gases (GHG)
• Tendency to over-exploitation of the atmosphere
  (emissions of GHG) and thus the climate system,
  leading to climate change (global warming)

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Radiative balance
Source NILU
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CO2 concentration in earlier times
a)
b)
c)
d)
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IPCC Third Assessment Report Summary (2001) An
increasing body of observations gives a
collective picture of a warming world and other
changes in the climate system. The global
average surface temperature has increased over
the 20th century by about 0.6C. There is new
and stronger evidence that most of the warming
observed over the last 50 years is attributable
to human activities.
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IPCC Third Assessment Report Summary (2001)
-Human fingerprint The attribution of climate
change to anthropogenic causes involves
statistical analysis and the careful assessment
of multiple lines of evidence to demonstrate,
within a pre-specified margin of error, that the
observed changes are - unlikely to be due
entirely to internal variability - consistent
with the estimated responses to the given
combination of anthropogenic and natural forcing
and - not consistent with alternative,
physically plausible explanations of recent
climate change that exclude important elements of
the given combination of forcings.
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Does human activity have an effect on our climate?
Source IPCC (2001a)
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Radiative forcing
Source IPCC (1996a)
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Projected global anthropogenic CO2 emissions
Source IPCC (2001a)
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The global climate of the 21st century
Source IPCC (2001a)
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• Greenhouse gas abatement Options
• Increase energy efficiency - new and more
  efficient (energy) technologies
• Substitute high-GHG energy sources for low-GHG
  energy sources coal -gt oil -gt gas -gt heat pumps
  -gt hydropower/solar/wind
• Develop renewable energy sources biomass, solar
  (heating, thermal and photovoltaics), wind and
  wave, geothermal, etc.
• Substitute high-GHG goods and services for
  low-GHG goods and services
• Change products and production processes
• Longer-term reduce transportation needs through
  area planning

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• Climate policy - Equity issues
• All climate policies (also do nothing) have
  equity implications
• Burden sharing A specific policy/measure
  affects the distribution of cost and benefits
  across
• individuals/families
• groups of people
• economic sectors/industries
• nations developing countries/industrialized
  countries
• present and future generations

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• An efficient global climate policy I
• The global optimum
• reducing net emissions of greenhouse gases and
  investing in adaptation measures until the cost
  of the next policy option and investment option
  is equal to the benefit in terms of reduced
  damage from climate change.

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• An efficient global climate policy II
• Minimization of global costs
• implementing policy options and investment
  options according to increasing cost per unit
  greenhouse gas independent of national borders
  until the target is met. Thus options with
  highest abatement effect and lowest cost should
  be implemented first.
• Minimization of national costs
• implementing policy options and investment
  options in a country according to increasing cost
  per unit greenhouse gas abated until target
  met.

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An illustration of a marginal abatement cost
curve(abatement options listed according to
increasing cost)

5
Marginal abatement cost (USD/ton CO2-eq.)
4
3
2
1
0
CO2 equivalent reduction (mill. tons)
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• An efficient global climate policy III
• - other concerns
• Uncertainties emissions, concentration, climate
  change, impacts
• Risk attitude and insurance flexibility and
  no-regrets
• Comparing different greenhouse gases GWPs and
  carbon dioxide equivalents
• Global climate change effect and local pollution
  effects of greenhouse gas abatement measures
  (ancillary benefits)

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Potential climate changes impact
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Types of adaptation to climate change
 
Source IPCC (2001b)
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• Greenhouse gas abatement measures
• National level
• general taxes, tradable quotas
• sector-specific direct regulation, environmental
  agreements (voluntary agreements)
• energy efficiency standards
• invest in researchdevelopment programs
• International level
• tradable quotas
• joint implementation
• clean development mechanism
• regional bubble (the European Union)

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Policy tools benefits and drawbacks
Policy tool Tax Emissions trading Joint
implementation and CDM
Benefits Cost-effectiveness Well-known policy
tool Replacement of other taxes may give
additional benefits Cost-effectiveness Emission
reduction target achieved with certainty Inexpen
sive projects in other countries
Drawbacks Uncertain emission reduction The state
may have fiscal objectives ? reduced
cost-effectiveness Unilateral use can lead to
migration and carbon leakage Uncertain quota
price Not much experience with use Could conserve
industry structure reduce rate of technological
progress? Unilateral use can lead to carbon
leakage Information and verification problems
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Illustration of emissions trading between two
countries
Emissions 2010
CO2 equivalents
Quotas purchased
Kyoto target for both countries
Quotas sold
Emissions 2010
Country ALow abatement cost
Country BHigh abatement cost
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• An illustration of emissions trading at national
  level. A tool for achieving cost-effectiveness
• Determine total national emissions climate
  policy target
• Divide into quotas of suitable size (1 ton of
  carbon dioxide equivalent)
• A plan and time schedule for introduction of the
  system who participates/sources to include what
  gases up-stream or down-stream, etc.
• Initial quota allocation auction/sale, or free
  quotas according to reference year/period
  emissions (grandfathering) or mixture
• Quota market companies and others buy and sell
  quotas
• Companies that can cheaply reduce their emissions
  sell and companies with high abatement cost buy

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Emission reduction costs

• Options that eliminate or reduce greenhouse gas
  emissions, and options that offset emissions, for
  instance through the enhancement of sinks.
• Bottom-up approaches and top-down modeling
  studies.
• Numerous studies and the cost estimates span over
  a wide range.
• The range of cost estimates has been narrowed.
• The cost estimates for Annex B countries depend
  strongly on the assumptions regarding the use of
  the Kyoto mechanisms, and their interactions with
  domestic measures.
• In the absence of emissions trade among Annex B
  countries, the majority of global studies show
  reductions in projected GDP of about 0.2 to 2 in
  2010 for different Annex II regions.
• With full emissions trading among Annex B
  countries, the estimated reductions in 2010 are
  between 0.1 and 1.1 of projected GDP. 

Source IPCC (2001c)
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• Climate negotiations and treaties since 1994
• The Climate Convention (UNFCCC), Rio de Janeiro,
  Brazil, June 92 entered into force in 1994
• COP1 Berlin, Germany, March/April 1995
  Berlin-mandate
• COP3 Kyoto Protocol (KP), Kyoto, Japan, December
  1997
• COP4 Buenos Aires, Argentina, November 1998
  Buenos Aires Plan of Action
• COP6 den Haag, Nederland, November 2000 failure
• March 2001 the USA pulls out
• COP6-2 Bonn, Germany, July 2001 agreement
• COP7 Marrakech, Morocco, Oct./Nov. 2001 KP
  finalized
• Per 17 June 2002 84 countries signed and 74
  countries ratified the Protocol (incl. Romania,
  Czech Republic, the EU, Iceland, Norway, and
  Japan) (35.8 of Annex B 1990 CO2 emissions)

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• The Kyoto Protocol
• The Kyoto Protocol is a historical treaty first
  legally binding climate policy treaty, but only a
  first small step in a process towards more
  ambitious targets later.
• Only a small step towards stabilization of
  greenhouse gas concentrations in the atmosphere
  at a level that would prevent dangerous
  anthropogenic interference with the climate
  system. (FCCC, Art. 2) the global warming is
  only reduced by some 0,1 degree C by the end of
  next century. Effect depends on reductions after
  2012.
• According to IPCC, greenhouse gas emissions must
  be reduced by some 70 to avoid a doubling of the
  atmospheric concentration of carbon dioxide.

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Main features of theKyoto Protocol

• Industrialized countries are to reduce their
  aggregate GHG emissions by 5.2 in the period
  20082012 compared to the base year 1990.
   Differentiated reduction targets ranging from
  8 to 10. Possibility to participate in a
  bubble to jointly reduce emissions. Six gases
  or groups of gases are included CO2, CH4, N2O,
  HFC, PFC, and SF6.  There is an opening for
  including sequestration of CO2 in forests and
  soils. Three flexible mechanisms are specified
  International emissions trading (IET), Joint
  Implementation (JI), and the Clean Development
  mechanism (CDM).

Source CICERO
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Differentiated reduction targets
Source CICERO
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Flexibility mechanisms and units for greenhouse
gas emissions trading
Source CICERO and Natsource (2001)
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Quota trading blocks
ET, JI orUS-ET, US-JI
The Kyoto block
The USAAmerican firms situated in the USA
OECD
ET, JI orUS-ET, US-JI
ET, JI
CDM or US-CDM
CDM
Economies in transition
G77/China
CDM
Source CICERO
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Harmonizing quota trading systems

• There are initiatives to launch quota trading
  systems before 2008 in the EU (from 2005),
  Denmark (from 2001), the United Kingdom (from
  2002), the Netherlands (from 2005), Norway (from
  2005), and Australia, Canada, Sweden and some
  other countries
• A number of features of the national and
  regional initiatives differ
• Harmonization of trading rules is required to
  reduce transaction costs between countries before
  2008 (e.g. linking national systems with the EU
  trading scheme)
• Transaction costs are lowest when all quotas and
  credits can be regarded as one commodity (i.e.
  high fungibility between emissions trading, the
  CDM, and Joint Implementation), and there is no
  need for risk adjustments of the price according
  to origin (i.e. seller liability)
• Source CICERO

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• Future energy challenges
• de-carbonization of our economy and energy
  system
• more energy-efficient equipment, technologies
  and systems
• renewable energy sources - reduce their costs
• water-based space heating systems for private
  homes, offices and public buildings, etc.
  flexibility w.r.t. energy source choice
• more energy- and GHG-efficient industrial
  processes
• less energy- and GHG-intensive products through
  design, etc.
• more efficient cars, buses, boat engines, and
  transport systems in general
• emphasis on climate-flexible systems and
  technologies when undertaking long-term
  investments in infrastructure and buildings

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Reserves, resources and emissions
Carbon in oil, gas and coal reserves and
resources compared with historic fossil fuel
carbon emissions 1860-1998, and with cumulative
carbon emissions from two SRES scenarios (B1 and
A1FI represent the two extremes) and three TAR
stabilization scenarios up until 2100. Data for
reserves and resources are shown in the left hand
columns. Unconventional oil and gas includes tar
sands, shale oil, other heavy oil, coal bed
methane, deep geopressured gas, gas in acquifers,
etc. Gas hydrates (clathrates) that amount to an
estimated 12,000 GtC are not shown. The scenario
columns show both SRES reference scenarios as
well as scenarios that lead to stabilization of
CO2 concentrations at a range of levels.
Source Modified from IPCC (2001c)
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Distribution of CO2 emissions in Annex I in 1990
Source The Kyoto Protocol
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Prospects for the Kyoto Protocol

• Will Australia, Canada, and Russia ratify the
  protocol?
• In the best case the protocol could enter into
  force late next year (the World summit Rio plus
  10 takes place in South Africa in September
  2002)
• The parties are to show demonstrable progress in
  meeting the protocol commitments by 2005 and
  they must engage in negotiations on targets for
  new budget periods by the same year
• Source CICERO