GHG Emissions & Policy Costs • • • • Today’s Agenda Review of concepts, terminology, issues Example using price only The use of MAC curves CGE models + sample applications – Trade effects (Kyoto) – Long-term stabilization (CCSP) • Technology costing approaches – Grass again – Auto example • Issues in the handling of technology – Endogenous change & “new” technology – Low-hanging fruit, free lunches, etc. Cost/Welfare Concepts • Emissions price • Area under marginal abatement curve • Simple macroeconomic aggregates (models with one non-energy output) – GDP – Consumption (e.g., Homework #2) • Equivalent variation (economic welfare) – Income compensation to restore consumers to pre-constraint level of welfare (≈ consumption) What to Include? • What greenhouse substances? – CO2 only? – CH4, N2O, HFCs, PFCs & SF6 – Aerosol precursors (e.g., SO2) – O3 precursors • Carbon sinks? • Ancillary benefits of GHG controls? – Urban air pollution – Other? Cost to Whom? • What unit of analysis? – Nation – Global, or Annex I vs. Non-Annex I – Other? • Issues of aggregation – Of nations – Of sub-national components Approaches to the Task Carbon price Shrt Long Trade Tech’n term term effects detail √ √ MAC curves √ Market-based (CGE) ≅√ Technology-Cost √ √ √ √ Hybrids MARKAL-Macro √ U.S. NEMS √ Others (e.g., EPPA) √ √ √ √ √ √ ≅√ Example Using Price Only 100 CO2 Price ($/t) 80 High CO2 Price 60 40 Low CO2 Price 20 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 Scenarios of Penalties on CO2 Emissions ($/t CO2 in constant dollars) 2050 Global Primary Energy Consumption under High CO2 Prices (Limited Nuclear Generation and EPPA-Ref Gas Prices) 1000 Energy Reduction from Reference Non-Biomass Renewables Commercial Biomass Nuclear Coal w/ CCS Coal w/o CCS Gas w/o CCS Ol w/o CCS 600 400 200 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Global Primary Energy Consumption under High CO2 Prices (Expanded Nuclear Generation and EPPA-Ref Gas Prices) 1000 800 Energy Reduction from Reference Non-Biomass Renewables Commercial Biomass Nuclear Coal w/ CCS Coal w/o CCS Gas w/o CCS Ol w/o CCS EJ/Year EJ/Year 800 600 400 200 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Exajoules of Coal Use (EJ) and Global CO2 Emissions (Gt/yr) in 2000 and 2050 with and without Carbon Capture and Storage* Limited Nuclear 2060 Business As Usual Expanded Nuclear 2050 2000 2060 With CCS Without CCS With CCS Without CCS 100 448 161 116 121 78 U.S. 24 58 40 28 25 13 China 27 88 39 24 31 17 Global CO2 Emissions 24 62 28 32 26 29 CO2 Emissions from Coal 9 32 5 9 3 6 Coal Use: Global * Universal, simultaneous participation, High CO2 prices and EPPA-Ref gas prices. Marginal Abatement Curve (MAC) Marginal Cost p How to Construct? Total cost O k j Abatement Aggregating Gases CO2 Other GHG or sink Total pOT pCOM pC O kC O kOT O kCOM Aggregating Sources Country A Country B Market pB pMKT pA O kAA O B kB O kMKT MACs and Banking 2004 2005 MAC MAC $20/ton $10/ton O 5% k04 Cut O Discount rate = 5%/year k05 Cut Shortcomings of MACs Marginal Cost p Trade effects Distortions in markets O k Abatement j CGE (EPPA): What Tradeoffs? • Multiple objectives in design – Analysis of policy cost, short and long term – Drive the climate portion of the IGSM • Characteristics – CGE model (market interaction vs. specific technologies) – Short-term detail vs. long-term structure – CO2 and non-CO2 GHGs gases all endogenous • Two versions – Recursive-dynamic (the workhorse) – Forward-looking (some simplifications) Factors Determining Results • • • • • • • • Population growth Labor productivity growth Energy efficiency change (AEEI) Substitution elasticities Vintaging assumption Costs of future technologies Non-CO2 gas assumptions Fossil energy resources Ã Toy Ã Toy Examples of Cost Analyses • Short-term mitigation targets – Trade effects Ã Kyoto Protocol – – – – Intensity vs. absolute targets Emissions trading Ã Cap-&-trade bills (3-21) Inefficient policies Multi-gas strategies vs. CO2 only • Long-term atmos. goals Ã CCSP study • Studies of particular technologies – Carbon capture and storage – Biomass, solar and wind, nuclear Effects Through Trade Annex I Constrains CO2, OPEC view) • Penalty on CO2 emissions in Annex I – Price of Annex I energy use rises – Æ oil world oil demand: Æ export volume – Å cost of manufacture of energy-intensive goods in Annex I • Change in the “terms of trade” & view from US? – Oil prices fall – Price of energy-intensive imports rises • Net of all Ä welfare effect Kyoto Example Figure 1. Reference and Kyoto Carbon Emissions 7000 6000 5000 Annex B MtC 4000 Non-Annex B Annex-B, Kyoto 3000 2000 1000 0 1995 2000 2005 2010 2015 2020 2025 2030 Time Transfer of Costs to LDC’s EET FSU OOE EEC JPN 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 -3.5 -4.0 USA EV% Figure 3. Welfare Effects of Kyoto Protocol: EV% (NT-D, 2010) Annex B 1.0 0.5 0.0 -3.0 -3.5 -4.0 Non-Annex B EV% SAF -2.5 RNF -2.0 RME -1.5 BRA VEN MEX IND CHN IDN -1.0 KOR -0.5 Cost of Long-Term Targets • Total reduction required – Reference emissions growth – Carbon cycle (ocean/land uptake) • The role of technological change – Ease of substitution – Autonomous change – Endogenous change (policy influenced) • Sources of endogenous change – AEEI, σ = f(carbon price) – Explicit modeling of R&D, and its effects – Learning by doing: Cost = f(∑Q) • Specification of a “backstop” technology (550 ppmv) Percentage Loss in Cross World Product 8% 7% 6% 5% IGSM_Level2 4% 3% MNCAM_Level2 2% MERGE_Level2 1% 0% 2000 2020 2040 2060 Level 2 Scenarios 2080 2100 -Why different? Technology Sum of emissions Ocean uptake Relation of Carbon Price to Percentage Abatement Price vs Percentage Abatement 2050 $2,000 Price vs Percentage Abatement 2100 $2,000 EPPA 2100 EPPA 2050 MINICAM 2050 MERGE 2050 $1,200 $800 MERGE 2100 $1,200 $800 $400 $400 $0 $0 0% 20% 40% 60% 80% Percentage Abatement MINICAM 2100 $1,600 Price ($/tonne C) Price ($/tonne C) $1,600 100% 0% 20% 40% 60% Percentage Abatement 80% 100% CCSP stabilization scenarios IGSM Scenarios IGSM_REF IGSM_Level1 IGSM_Level2 IGSM_Level3 IGSM_Level4 25 Gt C/yr 20 15 10 5 0 2000 2020 2040 2060 2080 2100 MERGE Scenarios 25 MERGE_REF MERGE_Level1 MERGE_Level2 MERGE_Level3 MERGE_Level4 25 20 15 10 15 10 5 5 0 MNCAM_REF MNCAM_Level1 MNCAM_Level2 MNCAM_Level3 MNCAM_Level4 20 Gt C/yr Gt C/yr MiniCAM Scenarios 0 2000 2020 2040 2060 2080 2100 2000 2020 2040 2060 2080 2100 IGSM Scenarios Ocean uptake 0 -2 Gt C/yr -4 IGSM_REF IGSM_Level1 IGSM_Level2 IGSM_Level3 IGSM_Level4 -6 -8 -10 -12 2000 2020 2040 2060 2080 2100 Figure by MIT OCW. MERGE Scenarios MiniCAM Scenarios 0 0 -2 -2 -6 -8 -10 -12 2000 -4 MERGE_REF MERGE_Level1 MERGE_Level2 MERGE_Level3 MERGE_Level4 Gt C/yr Gt C/yr -4 -6 -8 -10 2020 2040 2060 2080 2100 -12 2000 MNCAM_REF MNCAM_Level1 MNCAM_Level2 MNCAM_Level3 MNCAM_Level4 2020 2040 2060 2080 2100 Technology Costing Approach (Cutting Grass Again) Csis Conventional Oil Renewable Oil L, PL Cpush # Hectares Cpower GHGs E, PE K, PK Cride Cost With limited L, K—cost of cutting emissions GHG Reference Energy System Energy process model (MARKAL) Resource Extraction Refining and Conversion Transport Conversion Transmission and Distribution Renewables Nuclear Coal Electric He at Natural Gas Crude Oil Domestic Utilizing Device End Use Misc. Electric Aluminum Iron and Steel Agriculture Air Conditioning Space and Water Heat Solid Gas Liquid Process Heat Petrochemicals Automobile Bus, Truck, Rail and Ship Transport Demand Hybrid: EPPA & MARKAL Modal Split Models Fuel Prices Technology Data Base Transport Demand Structural Change EPPA (Economy) Mode Shares MARKAL (Technology) Substitution Elasticities, AEEI Technology Dynamics Alternative Auto Technologies Vehicle Measures Vehicle Fuel Use (MPG) Cumulative Annualized + gas cost Baseline 26.8 0 0 1 Packaging Improvements 27.2 -87 -32 2 Engine Management 27.9 -70 -38 3 Lower Drag Coef., Tire Roll Resistance 29.0 -13 -38 4 CVT 32.2 215 -12 5 Material Substitution, Interior 32.6 244 -8 6 High-Strength Steel Unibody 33.6 350 13 7 Higher Compression Ratio 43.1 404 24 8 VVLT and Cylinder Deactivation 36.0 694 91 PowTrn 9 Elec. Pow. Steering, Parasitic Losses 36.8 865 135 Alum 10 Aluminum Intensive Vehicle 42.1 2,102 460 10 VVLT & Cyl. Deactivate, No Brake Drive 45.2 2,719 624 11 ICE-Hybrid (≈Gas Fuel Cell) 53.6 4,342 1,063 95 Flt LoCost Hybrid Investments, US$ U.S. FTP-75 Driving Cycle. Capital recovery factor = 30%, gasoline price = $1.20 per gal., annual driving of 10,000 mi. Auto Technology Penetration (“Kyoto” + 20% by 2030) 5000 4500 Total Fleet (Reference Case) 4000 Billion Passenger-km Demand Loss 3500 Total Fleet (Kyoto+ Case) 3000 2500 95 Flt +PowTrn 2000 1500 1000 +Alum LoCost 500 0 1995 Hybrid 2000 2005 2010 2015 2020 2025 2030 Thinking about Technology • What is technology, and tech. change? • What leads to change? – Does change tend to economize on one factor or another, in response to prices? – What is the role of R&D expenditure? – To what degree is it ad hoc or random? • How to distinguish tech change from – Change in inputs (in response to price) – Economies of scale “New” Technologies • Carbon capture and storage – From electric power plants – From the air • Renewables – Wind & solar – Biomass – Tidal power – Geothermal What determines the likely contribution of each? • Fission and fusion • Solar satellites • Demand-side technology – Fuel cells and H2 fuel – Other? (lighting, buildings, ind. process, etc.) Explaining Why Technologies Are Not Used • Market failures: decision-makers don’t see correct price signals – Lack of information – Principal-agent problems (e.g., landlordtenant) – Externalities & public goods • Market barriers – Hidden costs (e.g., transactions costs) – Disadvantages perceived by users – “High” discount rates