Leakage Implications for climate policy

IFO-PIK Workshop: Transition towards global carbon pricing and fossil energy

markets

Karsten NeuhoffLeiter Abteilung Klimapolitik DIW Berlin

Technology „Leakage“ – example RE investment

Karsten Neuhoff, 22.3.20122Source: Bloomberg, New Energy Finance, Jan 2013

1

142.5

78.3

18.8

9.74.5 1.8 7.6

solar

wind

smart tech

biomass

biofuels

geothermal

small hydro

$ Billion Investment in 2012

16,3

8,36,25,5

5,34,3

2

80,6 Japan

Uk

Australia

South Africa

Brazil

France

Mexico

Other countries

67,7

China

44,2

US

22,8

Germany

Policy leakage - example feed-in tariff

Karsten Neuhoff, 22.3.20123Source: http://www.pv-tech.org/tariff_watch/list

2

Modernisation leakage – example slavery

Karsten Neuhoff, 22.3.20124

•accurate, publicly available information about the impact of slavery on lives - also against attempts by slavery's defenders

• the role of discounting the value of slave lives•gradually more ambitious action against slavery, penalties

£100/head in 1807 to the death penalty for traders in 1827•compensation for slave owners (£20 million in 1838)•not with a global treaty, but country by country

3

Co

st in

cre

ase

rel

ativ

e to

val

ue

ad

ded

Ce

me

nt

Ba

sic

iron

& s

tee

l

Lime

Fertilisers & Nitrogen

Alu

min

ium

Other inorganicbasic chemicals

Pulp &Paper

Malt

Coke oven

Industrial gases

Non-wovens

Refined petroleum

Household paper

Hollow glass

Finishing of textiles

Rubber tyres & tubes manufact.

Copper

Casting of ironImpact from direct emissions

Impact from indirect emissions (electricity)

Flat glass

Veneer sheets

0%

10%

20%

30%

40%

0.0% 0.2% 0.4% 0.6% 0.8%1.0%

4%2%

Starches& starch products

Preparation of yarn

Other textile weaving

Retreading/rebuilding tyres

Commodities with significant carbon cost

Share of GDP of UK

Production/Investment leakage – sectors potentially at risk4

Ist all about the detail in analysis, model and policy

Karsten Neuhoff, 22.3.20126Climate Policy after Copenhagen – The role of Carbon Pricing, Cambridge University Press

5

0%

10%

20%

30%

40%

50%

0 500 1000 1500 2000 2500 3000

Semi finished Hot rolled Iron and steel

Illustrative for UK

Cumulative gross value added (mio €)

Cos

t in

crea

se r

ela

tive

to v

alu

e ad

ded

(20

€/t

CO

2)

Total cost increase from higher electricity prices

Total cost increase from CO2 pricing

Cost increase from passed on CO2

pricing of first production stage only

Conditions for green paradoxon (I/II)

Increase production

Investment

5 years

Lower revenue for resource extraction due to carbon price

Strongcarbon price

Time frametoo short?

Uncertaintytoo high?

Demand Response too big?

Difficult to see how this should work

Conditions for green paradoxon (II/II)

Karsten Neuhoff, 22.3.20128

Requirement IScarce resource/increasing cost curve

Oil - Iran- Saudi - Russia- Stans

Requirement IIOptimizationhorizon

Requirement IIIAbility to control

Coal

No?

Gas Oil

No?

T&T NoAlgeria No

US No US No

Yes?

Difficult to find actor meeting requirements

Summary on leakage channels

9

6

Country A(with cap)

Country B

Fossil fuel channel• Oil (+)• Coal (0)• Gas (?)• Invest uncertainty(-)

Modernisationleakage

Product./investment leakage

(-)

(+?)

(?)

Climatepolicy

Direct Emission reductions

Potential leakage

Policy leakage

Technology leakage

(-)(-)

Dominant effect: Unilateral climate policy triggers additional international emission

reductions

Vielen Dank für Ihre Aufmerksamkeit.

DIW Berlin — Deutsches Institutfür Wirtschaftsforschung e.V.Mohrenstraße 58, 10117 Berlinwww.diw.de

RedaktionKarsten Neuhoffkneuhoff@diw.de