Carbon pricing and complementary mechanisms Christina Hood International

Carbon pricing and complementary mechanisms Christina Hood, International Energy Agency ECF Roundtable “From Roadmaps to Reality” Brussels 23 October 2012 © OECD/IEA 2010

Outline l From climate models to real-world policy: the case for policy packages in climate change l Policy interactions : mutually reinforcing, or undermining ? l Promoting investment under uncertainty © OECD/IEA - 2010

From MAC curves to policy packages Price of CO 2 €/t. CO 2 e Infrastructure, Financing Reduced long-term marginal abatement cost Mt. CO 2 Carbon price mediates action economy-wide Source: Summing up the Parts, 2011 Policies to unlock costeffective energy efficiency potential that is blocked by non-economic barriers Technology support policies to: • reduce long-term costs • Enable timely scale-up © OECD/IEA - 2010

What investments are we trying to drive? Source: Energy Technology Perspectives 2012 © OECD/IEA - 2010

Policy Interactions: Energy efficiency policies and carbon pricing can be mutually reinforcing. w Carbon price reduces rebound from energy efficiency policies w Energy efficiency policies keep carbon prices from being unnecessarily high © OECD/IEA - 2010

Technology support can lower long-term carbon prices Price of CO 2 €/t. CO 2 e (a) Carbon price ambitious target Carbon price modest target Conventional Technologies Price of CO 2 €/t. CO 2 e Modest target New Technology Mt. CO 2 Ambitious target (b) Carbon price ambitious target Carbon price modest target Mt. CO 2 Modest target Ambitious target Source: Energy Technology Perspectives 2012 © OECD/IEA - 2010

Policies interact, so design as a package e. g. Carbon price level depends on supplementary policy delivery BAU EMISSIONS (a) SUPPLEMENTARY POLICIES UNDERACHIEVE (b) SUPPLEMENTARY POLICIES OVERACHIEVE 15 % 10 % EMISSIONS CAP 30% BELOW BAU Source: Summing up the Parts, 2011 5% Reductions from: energy efficiency polices technology policies price response in trading scheme © OECD/IEA - 2010

e. g. Carbon price level more sensitive to economic conditions with supplementary policies Reductions from: energy efficiency polices technology policies price response in trading scheme BAU EMISSIONS BAU 5% LOWER THAN FORECAST (a) (b) 10 % 5% EMISSIONS CAP 30% BELOW BAU Source: Summing up the Parts, 2011 Adjust cap downward to restore scarcity in trading scheme? © OECD/IEA - 2010

Questions on policy interactions Policy packages can reduce costs and improve the feasibility of climate policy in the short and long term. But… 1. Can policy overlaps and interactions be adequately managed? … and if not, when is it better to choose a simpler policy package and sacrifice some mitigation potential? 2. How does the answer depend on whether policies are implemented at EU or member state level? © OECD/IEA - 2010

CO 2 emissions (gigatonnes) The door to 2°C is closing, but will we be “locked-in” ? 45 6°C trajectory 40 35 30 2°C trajectory 25 Delay until 2017 Delay until 2015 20 15 Emissions from existing infrastructure 10 5 0 2015 2020 2025 2030 2035 Without further action, by 2017 all CO 2 emissions permitted in the 450 Scenario will be “locked-in” by existing power plants, factories, buildings, etc Source: World Energy Outlook 2011, IEA © OECD/IEA - 2010

Question - how to best deliver investment in low-carbon despite current uncertainties? 1. Improve long-term certainty of domestic policy… ? … but until there is greater consensus internationally there will still be discounting … but mixed messages based on today’s political actions 2. Supplement with transitional policies to steer investment (e. g. UK CFDs) until there is greater international consensus on climate policy? Should this be explicitly acknowledged at EU level? © OECD/IEA - 2010