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© OECD/IEA 2010 Combining carbon pricing with supplementary policies: the IEA’s approach Christina Hood, International Energy Agency 18 March 2013
© OECD/IEA 2010
Combining carbon pricing with supplementary
policies: the IEA’s approach
Christina Hood, International Energy Agency
18 March 2013
© OECD/IEA - 2010
Outline
Justifications for supplementing a carbon price
how supplementary policies interact with carbon pricing
Managing these interactions
To enable least-cost climate mitigation policy
© OECD/IEA - 2010
Price of CO2
€/tCO2e
MtCO2
P*
Emission
reduction goal
Q*
P
Supplementing with Energy Efficiency Policies
Emission
reduction goal
Q*
© OECD/IEA - 2010
Price of CO2
€/tCO2e
MtCO2
Conventional Technologies New
Technology
(a)
Price of CO2
€/tCO2e
MtCO2
(b)
Ambitious target
Carbon price
ambitious target
Modest target
Carbon price
modest target
Ambitious target
Carbon price
ambitious target
Modest target
Carbon price
modest target
Technology support can lower long-term carbon prices
© OECD/IEA - 2010
Price of CO2
€/tCO2e
MtCO2
Policies to unlock cost-
effective energy efficiency
potential that is blocked by
non-economic barriers
Carbon price mediates
action economy-wide
From MACC curves to policy packages
Technology support
policies to:
• reduce long-term costs
• Enable timely scale-up
Reduced long-term
marginal abatement
cost
Infrastructure, Financing
© OECD/IEA - 2010
Further supplementary policies?
There is a trade-off between the benefits of early action in reducing the cost of the decarbonisation transition, and the potential to undermine the carbon pricing policy.
Key issue: lock-in of long-lived infrastructure
© OECD/IEA - 2010
EMISSIONS CAP 30% BELOW BAU
BAU EMISSIONS
Reductions from: energy efficiency polices technology policies price response in trading scheme
10 %
15 %
SUPPLEMENTARY POLICIES UNDERACHIEVE
(a)
5 %
SUPPLEMENTARY POLICIES OVERACHIEVE
(b)
Policies interact, so design as a package
e.g. Carbon price level depends on supplementary policy delivery
© OECD/IEA - 2010
EU ETS CAP 2008-2020
EXPECTED BAU EMISSIONS 2008-2020
e.g. Carbon price level more sensitive to economic conditions with supplementary policies [2008 EU Package]
5 G
t A
BA
TEM
ENT
Domestic abatement in response to price ~0.9Gt
Renewables Directive ~2Gt
Energy Efficiency Directive ~0.5Gt
Offset entitlement ~1.65Gt
Data Source: Energy Efficiency, renewable energy and CO2 allowances in Europe: a need for coordination, CDC Climat ClimateBrief No18, Nicolas Berghmans
)
Renewables
Energy Efficiency
Offsets
ECONOMIC CRISIS
© OECD/IEA - 2010
Policy interactions with a carbon tax:
Policy interactions not as severe, as carbon price does not respond automatically to supplementary policy delivery or economic conditions
Cost-effective supplementary policies give:
More abatement for a given tax level, or
Lower required tax level for a given abatement target.
Can be strong interaction if carbon tax is adjusted to meet climate targets/carbon budgets
© OECD/IEA - 2010
Understand fundamentals:
-Abatement potentials, costs
-Macroeconomic impacts
Consider case for further supplementary policies
Assess wider economic effects
Assess interactions, adjust if necessary
REVIEW TO MAINTAIN COHERENCE OVER TIME
Bu
ild C
on
stitu
en
cy fo
r Clim
ate
Ch
an
ge
Re
sp
on
se
Establish Policy Core: Carbon price supplemented by
-Energy efficiency policies
-Technology policies
The Policy Process
KEY CONSIDERATIONS
•Efficiency: maintaining balance between priced and non-priced sectors, between present and future
•Lock-in: effect of carbon price level and price uncertainty on investment decisions
•Stability: to maintain confidence in
carbon price settings
© OECD/IEA - 2010
Lessons: Design carbon price and complementary
policies as integrated package Including impact of other regulations such as
for conventional pollutants
Give the carbon pricing policy room to
function
Design complementary policies for certainty of emissions reductions
Build in reviews/adjustment mechanisms
© OECD/IEA - 2010
Questions: How to balance maximising cost-effective abatement
vs. having a simpler, easier to manage package ?
Why only renewables – what other key technologies to bring forward (CCS)?
What kind of ongoing review or adjustment mechanism to keep package aligned over time?
Can the carbon price alone provide sufficient certainty for investment (and retirement) – and if not, what?
How to manage interactions between complementary policies and electricity markets?
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