JRC – Economic assessment of post-2012 global climate policies

The Institute for Prospective Technological Studies of the Joint Research Centre (an entity under the European Commission) has evaluated the economic aspects of greenhouse gas reduction policies from 2012 forward.  This uniquely informative study focuses on two analytical models to provide professionals, policy makers and other interested stakeholders with an understanding of the estimated direct greenhouse gas abatement costs, under the current EU 2 degrees target (which may be increased under current EC thinking.)  These costs are estimated to be approximately €175 billion by 2020.  In addition to addressing abatement costs, the technical report highlights the important role that energy efficiency projects must play in reducing both greenhouse gas emissions, and costs associated with that abatement.  Finally, it addresses the role that the global carbon market could play in cost effective environmental policy implementation.

An executive summary of the report, produced by the Institute for Prospective Technological Studies reads:

Policy background

The European Union agreed to limit the average global temperature increase to less than 2°C compared to pre-industrial levels. Several European Commission Communications have dealt with the required global climate policies to attain such temperature target before. Firstly, the March 2005 Communication ‘Winning the Battle Against Global Climate Change’ highlighted the need for a broad international participation in the efforts in tackling climate change.

The European Council of March 2005 acknowledged this and also requested the European Commission to further deepen its analysis. As a result, the European Commission adopted the January 2007 Communication on ‘Limiting Global Climate Change to 2 degrees Celsius – The way ahead for 2020 and beyond’, where global climate policy scenarios for 2030 and beyond were explored.

Following that Communication, in March 2007 the European Council endorsed a firm independent EU commitment to reduce greenhouse gases by at least 20 % by 2020 compared to 1990; this target will be extended to 30 % under a comprehensive international agreement that broadens global participation and if other developed countries commit themselves to comparable emission reductions. At the same time, the Council adopted an ‘Energy Policy for Europe’ supporting amongst others a 20% renewable energy target by 2020, improvements in energy efficiency and other low carbon sources which will help in achieving the required emission reductions.

The 2007 Bali Action Plan started a process in order to reach an international agreement on climate for the post-2012 period at the UN Conference to take place in Copenhagen in December 2009. In order to set out specific proposals for the climate agreement, in January 2009 the European Commission has adopted the third of the Communications, titled ‘Towards a comprehensive climate change agreement in Copenhagen’.

Objectives and approach

The objective of this report is to describe in detail the quantitative modelling work underlying the scenarios analysis of the 2009 Communication. The POLES world energy sector model and the multi-sector general equilibrium GEM-E3 model were used to assess the technological and economic effects of various scenarios that can meet the 2°C target.

The two models are complementary as they focus on different relevant aspects. While POLES provides a rich analysis of the technologies of the energy sector at a global scale, computing the direct cost of reducing emissions in the energy sector, the GEM-E3 model has a multi-sector perspective that permits to assess the economic consequences in the whole economy, therefore assessing the direct and indirect effects of the mitigation policies foreseen in the Communication.

One of the main purposes of the Communication has been to study the consequences of alternative targets by countries. This is certainly a key issue in the forthcoming negotiations for the post-2012 period because the distribution of mitigation costs across countries makes necessary to consider not only efficiency but also equity issues. In particular, four different criteria have been taken into account to prescribe alternative burden-sharing methodologies.

Firstly, GDP per capita has been chosen as an indicator of wealth, and therefore ability to pay for mitigation actions. Secondly, the greenhouse gas (GHG) intensity of the economy, defined as the GHG emission per GDP, is an indicator of the potential to reduce emissions. Third, the observed GHG emission trend is considered an indicator of ‘early action’: the steeper the reduction has been since 1990, the less ambitious can the future reduction target be, therefore rewarding early mitigation effort (for Kyoto Annex I countries). Population growth is the fourth of the indicators that allow relatively less demanding emission reduction targets to countries that have experienced higher population growth in the recent past.

Finally, a scenario that combines the four criteria, the ‘central scenario’, also consistent with the 2°C target, has been analysed using POLES and GEM-E3 models, as well.

Another key aspect for assessing global climate policies is the way the international carbon markets operate. Several cases have been analysed: perfect global trading of permits (full trading across all countries and sectors), imperfect trade (international trading gradually develops in time including more countries and sectors) and absence of global trading (a situation where countries reach the reduction targets only through domestic policies and measures). In the central scenario the imperfect case has been taken into account.

Results of the scenario exercise

Baseline

Global GHG emissions in the baseline scenario in 2020 are 71% higher above 1990 levels. Emissions increase much faster in developing countries than in developed countries. It is estimated that the resulting increase of temperature by 2050 is around 2°C above the preindustrial level. Moreover, the economic growth projections take into account the effect of the 2008/2009 financial crisis, following recent IMF economic forecasts.

POLES

Under the central scenario, all countries reduce their emission substantially below the baseline scenario in order to meet the EU two degrees temperature target. Developed countries reduce emissions by 30% in the 1990-2020 period, while developing countries only increase their emissions by 20% for the same period. Those reductions are achieved through an accelerated decommissioning of carbon-intensive technologies and their replacement by low-carbon, climate-friendly ones. Price signals via a carbon price play a large role to attain such technological transformation, together with energy efficiency and savings policies.

Concerning the contribution of the various technologies to reduce emissions, energy savings measures allow for substantial reductions compared to the baseline scenario in most sectors of the economy, notably in industry, transport, residential and services. Approximately such measures represent half of the global reduction in the 2020-2030 period, being close to 2/3 in the developing countries in 2020. In particular, a large potential for energy efficiency improvements in the power generation sector seems to be available at competitive costs. Fossil fuel switches towards less carbon intensive fossil fuels and cleaner technologies, together with renewable energies, nuclear and carbon sequestration are the other technologies absorbing the bulk of the reduction emissions worldwide. For instance, while in the year 2020 the carbon capture and sequestration is virtually absent in the baseline scenario, under the central scenario 18% of fossil fuel power generation employs this technology. As a consequence, from a sectoral perspective, the power generation sector captures half of the overall reduction in the 2020-2030 period, the contribution of the industrial sector comes second, while the role of the transport and residential sectors is less prominent.

The POLES model estimates that the annual global abatement costs, mainly in the energy and industrial sectors, are about €150 billion in 2020, being the cumulative global cost €666 billion over the 2013-2020 period. Approximately 55% of those costs arise in developed countries. Those figures do not include the financial flows generated by international carbon emission trading. In terms of aggregated costs, the study reports that, for the central mitigation scenario, most countries would face costs amounting between 0.4 and 1.2% of their respective GDPs.

GEM-E3

The overall effect of the central scenario on world GDP in 2020 is estimated to be a decrease of 0.9%, compared to the baseline. While some developed countries, such as the EU27 and the Commonwealth of Independent States (CIS), have higher GDP reductions than the world, other economies such as China, India and Brazil have lower GDP losses.

The GEM-E3 model has assessed the effects in developed countries of the allocation of targets according to the single criterion, instead of the combination of the four criteria (central scenario). Given that the single criterion lead often to disproportional costs or gains in single countries (e.g. for the case of the GDP per capita high income countries undergo very large GDP losses), it seems unlikely that the allocation of targets will be based on single criteria. The criteria used in the central scenario lead to smaller GDP changes in all developed countries, in the range of -0.6% to -2%, with the exception of the CIS, which undergoes a 3% GDP loss.

Carbon markets

The central scenario assumes an imperfect global carbon market for the sectors included in the EU’s Emission Trading System (ETS). The marginal abatement costs do not equalise across the sectors on a global scale, but instead these carbon prices vary across the various regions in the world because of differences in transaction costs. These costs are assumed to diminish over time, and the carbon prices tend to converge.

The last chapter of the study compares the costs of climate policy in the central case (with an imperfect global carbon market) to the cases with a perfect global carbon market and without a global carbon market. With a perfect carbon market, the GDP changes are lower, being around -0.5% for the world economy, whereas with no global carbon market it becomes -1%. Regarding the marginal abatement costs, according to the POLES model, in the central scenario the carbon price in 2020 is 43 €/tCO2, increasing to 72 €/tCO2 without global trade and falling to 22 €/tCO2 if there is perfect trade on global level. Therefore, these results underline the role of international trading in attaining a cost-efficient international agreement beyond 2012.

Read the full publication here in PDF format.

Citation: Economic assessment of post-2012 global climate policies, Peter Russ, Juan-Carlos Ciscar, Bert Saveyn, Antonio Soria, Laszló Szábó, Tom Van Ierland, Denise Van Regemorter, Rosella Virdis, European Commission, Joint Research Centre, Institute for Prospective Technological Studies, ISBN: 978-92-79-11361-1, ISSN: 1018-5593, DOI: 10.2791/7033

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