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HARALD WINKLER

Economics of climate change Economics of climate change Context and concepts related to mitigationContext and concepts related to mitigation

Energy Research Centre University of Cape Town

Workshop at the 2009 Climate Change Summit

Wednesday 4 March 2009

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Climate change – an integrated frameworkClimate change – an integrated framework

Source: IPCC 2001

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Climate change economicsClimate change economics

Environmental issue, Environmental issue, rising emissionsrising emissions

Deeply economic issue Deeply economic issue – at heart of energy – at heart of energy economyeconomy

““Climate change presents a Climate change presents a unique challenge for unique challenge for economics: it is the greatest economics: it is the greatest and widest-ranging market and widest-ranging market failure ever seen” (Stern failure ever seen” (Stern Review 2006)Review 2006)

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History: minerals-energy complex History: minerals-energy complex

Complex comprising mining, minerals processing, the Complex comprising mining, minerals processing, the energy sector, and associated industries energy sector, and associated industries

(Fine & Rustomjee (Fine & Rustomjee 1996) 1996)

Coal Coal ¾ of TPES¾ of TPES > 90% of electricity> 90% of electricity ‘‘cheap’ and inefficientcheap’ and inefficient

Particular challenge for mitgation …Particular challenge for mitgation …

… … while increasing access to affordable eneryg while increasing access to affordable eneryg services services

Short-term: energy efficiencyShort-term: energy efficiency

Medium-term: change fuel mixMedium-term: change fuel mix

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Future: low-carbon future Future: low-carbon future

Redefine competitive advantageRedefine competitive advantage fromfrom attracting energy-intensive sectors attracting energy-intensive sectors toto building a new advantage around climate- building a new advantage around climate-

friendly technologies and systemsfriendly technologies and systems

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Towards climate policyTowards climate policy

LTMS strategic option of ‘Use the Market’LTMS strategic option of ‘Use the Market’

Polokwane resolution on climate changePolokwane resolution on climate change

Treasury work on environmental fiscal reform Treasury work on environmental fiscal reform Theme of ‘putting a price on carbon’Theme of ‘putting a price on carbon’ Question is ‘how?’ Question is ‘how?’

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Carbon and carbon markets Carbon and carbon markets

Markets are a means, not an endMarkets are a means, not an end May be efficient, but not good at equityMay be efficient, but not good at equity

Carbon cycle is global – problem of common property Carbon cycle is global – problem of common property managementmanagement

How to manage How to manage Multi-laterally – UNFCCC, but also other scalesMulti-laterally – UNFCCC, but also other scales Price vs quantityPrice vs quantity

Pure regulation – standardsPure regulation – standards

Pure price – taxPure price – tax

Combination – cap-and-trade Combination – cap-and-trade

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Conceptual distinctionsConceptual distinctions

Carbon taxGHG emission standardsCap and

trade

Economic instruments Regulatory instruments

Green or white certificates

Building standards

Direct

IndirectFuel input tax

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Some broad questions Some broad questions

1. What would the distributional implications of different economic instruments be?

2. What are the implications, including costs and benefits, of choosing to use an economic instrument for mitigation?

3. How could different instruments be combined

4. How responsive is the system (and its parts) to various economic instruments for mitigation? (elasticity)

5. What would a consistent and effective approach to energy-intensive sectors, in order to increase efficiency, encourage fuel switching and eventually diversify products

6. What are the key design elements that need to be considered to design the best instrument for mitigation in SA?

7. What supportive measures might be needed to implement a set of instruments? Implications of existing policy? What legal and institutional arrangements could we build on?

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Thank youThank you

Energy Research Centre University of Cape Town

www.erc.uct.ac.za

Environmental Policy Research Unit, University of Cape Town

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