Raimund Bleischwitz

Projektseminar

Europäische Umweltpolitik:ökonomische Aspekte der Klimapolitik

BU Wuppertal 2008/09

Department of European Economic Studies

Heutige Agenda

Energieökonomie: Bedeutung von Energie Energieszenarien Energieeffizienz Erneuerbare Energie

Projektpräsentation: BenjaminEmmanuel „Erneuerbare Energien:EU und ein Entwicklungsland“

Energy Economics

Relevanceandsustainabilityissues

Drivers of Climate Change

Energy: burning fossilfuels in power, heatgeneration and transport

Land Use Agriculture The reference scenario of

the IEA’s World EnergyOutlook projects increase ofover 50% in global energyrelated CO2 emissions by2030

Agriculture accounts for14%, Land use change for18% and Energy for 61 % oftotal greenhouse gases

14%

61%

7%

18%

Agriculture

Change in Land Use

Energy

other(industrial processes, waste)

Energy and Economic Systems

Energy is fundamental to economic systems andall life.

Energy needs change in stages of development:early industrialisation usually is energy-intensive,but mature economies develop new needs thatgo along with decoupling energy use (e.g. leisureactivities.

Both, the stock of energy fuels and the flow of(solar) energy matter. Thermodynamics tells usthat energy can neither be created nor bedestroyed, but is subject to entropy (unavailableenergy). It is therefore crucial to manage energythroughput in order to minimize entropy.

Economic and thermodynamic efficiency may bein contradiction (mainly if prices are misleading)

The European Union:Energy-related objectives

2007EU Spring CouncilTriple 20% targets

• 20 % CO2 reductionby 2020

• 20 % share of RENby 2020

• 20 % Reduction ofprimary energyconsumptionby 2020

The necessary improvements inenergy productivity

Definitions: Energy productivity = GDP/energy; energy intensity = energy/GDP Carbon productivity = GDP/carbon; carbon intensity = carbon/GDP Carbon intensity of energy = carbon/energy

To achieve 450ppmv atmospheric concentration ofCO2, assuming ongoing economic and populationgrowth (3.1% p.a. real), need to increase carbonproductivity by a factor of 10-15 by 2050, or approx.6% p.a.

Compare current increase in carbon productivity of 0%p.a. over 2000-2006, i.e. global carbon emissions roseat 3.1% p.a.

Compare 10-fold improvement in labour productivityin US over 1830-1955, carbon policy must achieve thesame factor increase in carbon in 42 years!

Cost considerations

• Marginal damage costs (see previouscourse)

• Marginal abatement costs (see nextslide)

• Learning curves (see future slide)• Technical biases (e.g. of energy) ineconomic growth

• First movers/building export industries:environmental industries of the future

• Macroeconomic costs of decarbonisation8

Costs of abatement options

The (micro)economic cost: global cost curvefor greenhouse gas abatement

Source: A cost curve for greenhouse gas reductions, The McKinsey Quarterly, February 2007

Energy: Trends and Projections

Most energy scenarios show an upward trendof energy use, especially in emergingeconomies.

Gas is expected to become more important. GHG emissions are also likely to rise. EU dependence on imports likely to increase.

World energy consumption patterns

International Energy Agency, World Energy Outlook 2007http://www.worldenergyoutlook.org/

Oil is thedominant fuel ofthe energymarket, forelectricityproduction, coalis of utmostimportance.Renewableenergies do notyet play a majorrole.

Projected energy-related CO2 Emissions by Regions2030

Source: Harris 2008

Are Europeans using lessenergy?

Final energyconsumption in the EU-25 increased by almost12 % over the period1990 to 2003. Transporthas been the fastest-growing sector since1990 and is now thelargest consumer of finalenergy.

Decoupling of GDP and EnergyConsumption?

Economic growth isrequiring less additionalenergy consumption

However, total energyconsumption is stillincreasing.

EU has a target tobecome more energyefficient reduce energyuse by 20 % by 2020(against BAU) –equivalent to spending€60 billion less on energy Technical Potential:

40% reduction

Are Europeans switching toless polluting fuels?

Fossil fuels continue todominate total energyconsumption, butenvironmental pressureshave been reduced byswitching from coal andlignite to relatively cleannatural gas.

Though recently we seeagain a reverse switch dueto high oil and gas prices

Energy Prices

Will prices deliver?

The importance of prices Hotelling rule: = The price of an exhaustible

resource (Pt) must grow at a rate equal to therate of interest, both along an efficientextraction path and in a competitive resourceindustry equilibrium U-shaped price curve following rising

extraction costs when a resource becomesdepleted

Do the assumptions of Hotelling hold? Stern (2008: 23): „At the heart of good policy

will be a price for GHGs“MDC - MAC

Source: U.S. Energy Information Administration: World Crude Oil Priceshttp://tonto.eia.doe.gov/dnav/pet/hist/wtotusaw.htm

2000 Dollars calculated using price indices from the Department of Commerce (Bureau of Economic Analysis).

2008 Price Index calculated from the Bureau of Economic Analysis, National Economic Accounts

Crude Oil Price in 2000 Dollars/Barrel

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Source: Harris 2008

Figure 8. Gasoline Price versus Use in Industrial Countries, 2003

Note: Shaded area represents price/consumption range typical of West European countries.

Source: U.S. Department of Energy, 2004. Adapted from Roodman, 1997, with updated data.

Source: Harris 2008

Figure 9. Determination of a Carbon Permit Price

Figure 10. Carbon Reduction Options with a Permit System

Note: Marginal costs shown here are hypothetical.

Source: Harris 2008

Various barriers, different reasonsfor policy intervention...

concept of negative externalities

Rebound effect and Jevons paradox (Alcott 2005; Greening / Greene /Difiglio 2000; Herring 2008): Efficiency gains are thwarted at least partlyby higher demand.

information and adaptation deficits

user / investor dilemma

splitted incentives

distortions through depreciation rules

too short calculated payback periods

R&D risks for special facilities

path dependency at the replacement parts production of capital goods

misemployment of market power

Big billsleft on thesidewalk?

Management often is not aware of the full LCC impact of inefficiency. Cost accountingsystems are rarely suited to show these impacts fully.

Cause

costsunderestimated

"Nobody is perfect" is as valid for companiesas for individuals

Structural short comings

cost reduction= lay offs

Incentives notconveyed in …

… and betweencompanies

lack ofknow-how

obstacles tocontracting

Cost reduction is traditionally considered equivalent to reducing head count - in theextreme, head count is reduced at the “expense” of cost reduction.

Internal incentive systems tend to blend out cost impacts of inefficiency (e.g. Inpurchasing, production management, distribution).

2 billion €/a could be saved alone by using more cost effective motors and motorcontrols*. Product & real estate developers experience lack of client LCC-valuation.

University students typically graduate with inadequate command of the state of the art intheir field for improving energy efficiency.

Low degree of modularization of production systems (see logistics). Insufficientlyestablished measuring and contracting standards.

* Estimate of the German Association of the Electronics Industry

Reasons for downscaling policyintervention ...

...BUT: interest of businessregarding cost reduction forenergy, material and waterinput

positive externalities(Baumol/Oates, 1988)

=> Need to to overcome market failures, to lower negative

externalities, and to stimulate business and market

development

Directive on energyend-use efficiency

Directive on theecodesign of energy-using productsAction Plan forEnergy EfficiencyCOM(2006)545 final

Energy efficiency as ‚buying time‘strategy

Supply and Demand: the importanceof end use energy efficiency

Net energy ratio: one needs a quantity of energy to recoverenergy reserves - full life cycle costs are essential. A netenergy ratio less than 1 is uneconomic.

Energy intensity (energy use per GDP) usually falls becauseof rising efficiency.

However end use energy efficiency is faced with manybarriers: price distortions, information deficits, user-investor dilemma, implicit discount rates

EU emphasizes energy efficieincy (see e.g. recent climateand energy targets 3x20 % by 2020)

Development of primary energy

demand and energy savings (EC 2006)

Trends inOECD

industry’senergy

efficiency

Economist 2008, IEA (2006) Energy Balances of OECD Countries 2003-2004.IEA/OECD

• Japan’s superior performance inthe 1970-80s is reduced, withthe UK surpassing Japan in2004

UK fridge freezer market and energy labels

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Fridge Freezers Market Shares

0%

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80%

97 98 99 00 01 02 03 04 05 06

Financial Year Ending

Energy Label A

Energy Label B

Energy Label C

Energy Label D

Energy Label E

Energy Label F

Energy Label G

Course Discussion

What are main barriers to energyefficiency?

Discuss the implications of implicitdiscount rates and energy efficiency

Can a carbon price likely deliver theenergy productivity increasesnecessary (6 % / a)? If not, why?

Renewable Energy Consumption

The share totalenergy consumptionincreased over theperiod 1990-2003,but still remains at alow level.

Significant furthergrowth will beneeded to meet theEU indicativetarget of a 20 %share by 2020.

Dynamics of renewable energy

Source: Earth Policy Institute, 2007 Eco-Economy Indicators, http://www.earthpolicy.org/Indicators/Solar/2007_data.htm.

World Photovoltaic Production and Cost per Watt

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Cost evolution and learning rates forselected technologies

Source: IEA, 2000, Stern Review, Chapter 9

REN Scenarios (Martinot et al. 2007)

Global renewable energy scenarios show a 10% to 50%share of primary energy by 2050, with many policy-intensive scenarios projecting 40% to 50%.

European policy-intensive scenarios project 45% to 60%by 2030.

Wind and biomass power feature strongly in mostadvanced scenarios, but there are large differences inprojections for distributed solar PV, solar thermal power,solar and biomass heating, advanced biofuels, and therole of energy storage and electric vehicle technologies.

Scenarios differ in treatment of renewables depending ondegree of future policy action, fuel prices, carbon prices,technology cost reductions, aggregate energy demand,feasible power grid integration, and modeling approach,with resource constraints mostly significant only forbiomass and biofuels.

Course discussion

What are main barriers to the marketintroduction and dissemination of renewableenergies?

Can a carbon price likely deliver the rampingup of renewable energies up to, say, 50 % ofprimary energy production? If not, why?

Name a few outstanding drawbacks ofrenewable energies.

“Grey Energy”: Greenhouse gases associated with UKimports and exports, 1992–2006

Source: Helm et al. 2007, Figure 8, p.20

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UK greenhouse gas emissions on a consumption basis,1990–2003

Source: Helm et al. 2007, Figure 11, p.24

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Discussion: what you can do

Pay higher prices for electricity, gas and fuels? Drive a fuel efficient car and a bicycle? Invest in home insulation? Buy energy efficient light bulbs and refrigerator? Take your shower with a friend? Organic food? Drive an SUV in case there is a credible compensation

mechanism? Buy shares of energy utilities? Lobby your politicians? Set up a new company that turns climate change into a

business opportunity.

Overall conclusions Economies can reduce fossil fuel dependence

by energy efficiency and renewable energies.Ultimately, a shift to a solar-based economyseems to offer many benefits.

However, there are severe barriers todeployment of those potentials calling for in-depth analysis of industries and privatehouseholds and for a stringent policy.

Despite, weaknesses and uncertainties cannotbe overlooked (storage of electricity, energyfor motor vehicles, macreconomic costs, long-run energy perspectives).