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How does the current EU climate policy mix perform? Insights from the CECILIA2050 project CECILIA2050 Mid-term conference Brussels, 6 March 2014 Benjamin Grlach Ecologic Institute, Berlin Project Coordinator Starting Point: low- carbon

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SLIDE 1

How does the current EU climate policy mix perform? Insights from the CECILIA2050 project

CECILIA2050 Mid-term conference Brussels, 6 March 2014

Benjamin Görlach Ecologic Institute, Berlin Project Coordinator

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SLIDE 2

Starting Point: low-carbon economy requires a radical transformation…

2 September 12, 2013 ENTRACTE-CECILIA2050 Climate Policy Workshop, Dublin | Benjamin Görlach, Ecologic Institute

  • 78-82%
  • 93-99%
  • 83-87%
  • 54-67%
  • 88-91%
  • 42-49%

Source: Roadmap Impact Assessment SEC(2011) 288

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SLIDE 3

… but current policies are not equipped to deliver this transformation

3 September 12, 2013 ENTRACTE-CECILIA2050 Climate Policy Workshop, Dublin | Benjamin Görlach, Ecologic Institute Source: “A Roadmap for moving to a competitive low carbon economy in 2050” COM(2011)112

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SLIDE 4

The policy challenge: how to manage the low-carbon transformation?

  • EU and MS already employ a variety of climate policy instruments – but current

instruments are not sufficient to drive the transformation to a low-carbon economy

  • Existing instruments need to be scaled up considerably, and new instruments added

to the policy mix

  • This raises a number of questions:
  • How is the current policy mix performing, and how far can it be scaled up? What constraints

need to be addressed? Which new instruments do we need?

  • How to manage the increasing interactions and overlap of policy instruments?
  • How to deal with uncertainties, where to be rigid and where flexible?
  • What does an “optimal” instrument mix for European climate policy look like – taking into

account the real-life constraints and barriers, and the lessons learnt from past successes and failures?

  • In particular – what is the role of pricing tools in this mix? How far will they get us?

4 September 12, 2013 ENTRACTE-CECILIA2050 Climate Policy Workshop, Dublin | Benjamin Görlach, Ecologic Institute

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SLIDE 5

Tackling the 2050 policy mix – the CECILIA2050 project

Choosing Efficient Combinations of Policy Instruments for Low-carbon development and Innovation to Achieve Europe's 2050 climate targets

5 6 March 2014 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix

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SLIDE 6

Who we are: 10 partners from 8 countries

Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

  • NL: Institute of Environmental

Sciences (CML) at Leiden University

  • NL: Institute for Environmental

Studies (IVM), VU Amsterdam

  • PL: WOEE, Warsaw
  • CZ: CUNI, Prague
  • IT: University of Ferrara (UNIFE)
  • ES: Basque Centre for Climate Change

(BC3), Bilbao

  • F: SMASH-CIRED, Paris
  • UK: University College London
  • DE: Institute of Economic Structures

Research (GWS), Osnabrück

  • DE: Ecologic Institute, Berlin

6

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SLIDE 7

The CECILIA2050 project: overview of the project structure

7 6 March 2014 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix

Defining “optimal” climate policy Taking Stock of the Current Instrument Mix Evaluating the current instrument mix (EU level, MS and sector case studies) International dimension (scenarios, interactions EU – rest of the world) Scenarios for the low-carbon transformation (Integration of models of various levels of detail) Pathways from status quo to a future policy mix “fit for 2050” (addressing constraints and bottlenecks) Conclusions: Short-term improvements and long-term strategies for policy instrumentation

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SLIDE 8

How has the current EU climate policy mix performed – and what lessons can be learned?

  • What was the aim again? Dealing with a multitude of targets
  • Impacts of current climate policies: are they actually making much difference?
  • The policy mix in different sectors: beyond carbon pricing – and beyond energy &

industry

  • Differences across countries: different starting points and their effect on climate

policy instrumentation

  • Planning for the future: the difficulty of anticipating surprises

8 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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SLIDE 9

What was the aim again?

9 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

  • Which is the relevant objective of EU climate policy –

given that climate and energy policies are becoming ever more intertwined?

  • Emission reduction should (logically) be the overriding
  • bjective of all climate policy efforts
  • EU climate and energy policy: Trias of objectives (GHG

emission target, renewables target, energy efficiency target, plus biofuels target in transport) with only implicit hierarchy

  • Energy policy: Triangle of security of supply, affordability/

competitiveness and environmental protection

  • Wider policy context (e.g. Europe 2020 strategy) –

competitiveness, jobs, innovation, equity, cohesion, rural development …

  • Policy objectives, or their hierarchy, or the expected link

between policy instruments and objectives often vague Reduce GHG emissions

GHG emissions Renewables Energy efficiency Security

  • f supply

Environmental sustainability Affordability & competitiveness Employment Structural change Investment Innovation Technological leadership Air quality Equity Cohesion etc …

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SLIDE 10

How has the current EU climate policy mix performed – and what lessons can be learned?

  • What was the aim again? Dealing with a multitude of targets
  • Impacts of current climate policies: are they actually making much difference?
  • The policy mix in different sectors: beyond carbon pricing – and beyond energy &

industry

  • Differences across countries: different starting points and their effect on climate

policy instrumentation

  • Planning for the future: the difficulty of anticipating surprises

10 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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SLIDE 11

Impact of selected climate policies: a macroeconomic view

  • Counterfactual simulation: how would GDP, employment

and CO2 have developed if currently existing policies (Environmental tax reform, EU ETS, renewable support) had not been implemented? What happens if you ‘assume away’ environmental policies since 1995?

  • Simulation carried out by GWS Osnabrück using the

GINFORS dynamic input-output model

11 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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Impact of selected climate policies: a macroeconomic view

12 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

Source: Meyer et al. 2013, CECILIA D2-2a

  • 5.00%
  • 4.00%
  • 3.00%
  • 2.00%
  • 1.00%

0.00% 1.00%

CZ DE NL UK

Impacts of Environmental Tax Reform

GDP Employment Emissions

  • 5.00%
  • 4.00%
  • 3.00%
  • 2.00%
  • 1.00%

0.00% 1.00%

CZ DE NL UK

Impacts of the EU ETS

GDP Employment Emissions

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SLIDE 13

Impact of selected climate policies: a macroeconomic view

13 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

Source: Meyer et al. 2013, CECILIA D2-2a

  • 10.00%
  • 9.00%
  • 8.00%
  • 7.00%
  • 6.00%
  • 5.00%
  • 4.00%
  • 3.00%
  • 2.00%
  • 1.00%

0.00% 1.00% CZ DE NL UK Impacts of Renewables Support (Scenario A) GDP Employment Emissions

  • 10.00%
  • 9.00%
  • 8.00%
  • 7.00%
  • 6.00%
  • 5.00%
  • 4.00%
  • 3.00%
  • 2.00%
  • 1.00%

0.00% 1.00% CZ DE NL UK Impacts of Renewables Support (Scenario B) GDP Employment Emissions

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Impact of selected climate policies: a macroeconomic view

  • Climate policies in Europe have achieved their main objective: to reduce emissions.

Without environmental tax reform, EU ETS and renewable support schemes, the EU’s CO2 emissions in 2008 would have been about 12-13% higher than they actually were.

  • Impacts on GDP have been modest overall: slightly negative for environmental tax

reform and ETS, probably positive for renewable support measures

  • Impacts on employment were equally modest: slightly positive for the environmental

tax reform, slightly negative for EU ETS, undecided for renewable support

  • Stronger effects can be observed at the sectoral level (in particular electricity

generation, mining, refinineries, chemicals)

  • On balance, if the analysed policies had not been implemented, we would probably

have lower – but certainly not higher – figures for GDP and employment

14 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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SLIDE 15

How has the current EU climate policy mix performed – and what lessons can be learned?

  • What was the aim again? Dealing with a multitude of targets
  • Impacts of current climate policies: are they actually making much difference?
  • The policy mix in different sectors: beyond carbon pricing – and beyond energy &

industry

  • Differences across countries: different starting points and their effect on climate

policy instrumentation

  • Planning for the future: the difficulty of anticipating surprises

15 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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SLIDE 16

The instrument mix in different sectors: beyond carbon pricing

  • Carbon pricing (and in particular the EU ETS) is considered as the flagship or the

cornerstone of European climate policies

  • Consequently, carbon pricing has also been the focus of much economic analysis,

particularly its effects on the power sector

  • But: carbon pricing is one element in the policy mix – and in many sectors eclipsed by
  • ther tools, including classical command-and-control regulation
  • Example of agriculture: 1/5th of European GHG emissions, but little in the way of climate

policy instruments – let alone carbon pricing. Significant emission reductions achieved in the last 20 years – but essentially as a by-product of other (non-climate) environmental legislation, as well as overall modernisation

  • Example of transport: features some of the highest implicit carbon prices – but impossible

to define how much of it is in fact climate-motivated. In addition, a wide array of other fees, charges, duties and taxes applies. In theory, fuel taxes should be the instrument of choice – in practice, distorting factors apply – and consumer behaviour is more complex than could be expected…

16 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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SLIDE 17

How has the current EU climate policy mix performed – and what lessons can be learned?

  • What was the aim again? Dealing with a multitude of targets
  • Impacts of current climate policies: are they actually making much difference?
  • The policy mix in different sectors: beyond carbon pricing – and beyond energy &

industry

  • Differences across countries: different starting points and their effect on climate

policy instrumentation

  • Planning for the future: the difficulty of anticipating surprises

17 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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SLIDE 18

Differences across countries: legal, institutional, political factors…

  • Legal and institutional factors influence the choice of policy instruments, shape the

conditions for their implementation, and affect their performance once implemented

  • Legal basis for policies, e.g. at the EU level: different mandates and decision-making rules

related to energy and climate policy, but also related to particular types of instruments (unanimity requirement on taxation)

  • Multi-level governance, esp. in Member States with a Federal System,

and dynamics emanating from the sub-national level

  • Regulatory tradition, e.g. traditional emphasis on command-and-

control-regulation vs. openness to more innovative instruments, willingness to experiment with new approaches

18 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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SLIDE 19

… and the legacy of past political choices & resource endowment

19 Duke Course "Green Germany" | Benjamin Görlach, Ecologic Institute February 19, 2014

Source: Agnolucci & Drummond 2014, CECILIA D2-1a

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SLIDE 20

… and the legacy of past political choices & resource endowment

20 Duke Course "Green Germany" | Benjamin Görlach, Ecologic Institute February 19, 2014

Source: Agnolucci & Drummond 2014, CECILIA D2-1a

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SLIDE 21

… and the legacy of past political choices & resource endowment

21 Duke Course "Green Germany" | Benjamin Görlach, Ecologic Institute February 19, 2014

Source: Agnolucci & Drummond 2014, CECILIA D2-1a

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SLIDE 22

… and the legacy of past political choices & resource endowment

22 Duke Course "Green Germany" | Benjamin Görlach, Ecologic Institute February 19, 2014

Source: Agnolucci & Drummond 2014, CECILIA D2-1a

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SLIDE 23

How has the current EU climate policy mix performed – and what lessons can be learned?

  • What was the aim again? Dealing with a multitude of targets
  • Impacts of climate policies: are they actually making much difference?
  • The policy mix in different sectors: beyond carbon pricing – and beyond energy &

industry

  • Differences across countries: different starting points and their effect on climate

policy instrumentation

  • Planning for the future: the difficulty of anticipating surprises

23 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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SLIDE 24

Planning ahead – the difficulty of anticipating surprises

24 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

ETS and the effects of the economic crisis: reminder how easy it is to run into problems with a system that fixes emission quantities ex-ante – and how difficult it is (legally and politically) to fix these problems

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SLIDE 25

Planning ahead – the difficulty of anticipating surprises

25 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

Solar PV: a phenomenal regression of costs per unit… … and a drastic loss of market share

  • f EU manufacturers

Source: Kuik et al. 2013, CECILIA D2-2c

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SLIDE 26

Planning ahead – the difficulty of anticipating surprises

  • More examples could be added:
  • effect of US shale gas boom on coal-gas-price spread,
  • effects of renewables on the profitability of power sector investments (and the business

model of some utilities), etc.

  • Long-term planning, credible commitments, clear guidance is necessary to direct

investments and trigger innovation – but how feasible is this in the face of the various political, technological, economic and socio-cultural uncertainties?

26 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

Plans are nothing. Planning is everything.

Dwight D. Eisenhower

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SLIDE 27

The five main lessons

  • 1. The mix matters.
  • Policy and academic discussion like to focus on carbon pricing, and in particular ETS – but
  • ther instruments have considerable impact, and in some sectors dominate pricing tools.

27 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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SLIDE 28

The five main lessons

  • 1. The mix matters.
  • 2. Pricing tools are not exploiting their full potential.
  • The existing pricing tools have had some effect – reducing emissions at negligible cost to

the economy, but they offer more potential to reduce emissions. Exploiting this potential requires not only a reform of pricing tools themselves – but also setting the right framework conditions, and remove contradictory incentives.

28 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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SLIDE 29

The five main lessons

  • 1. The mix matters.
  • 2. Pricing tools are not exploiting their full potential.
  • 3. There is plenty of diversity in European climate policies.
  • … and less harmonisation than one might expect. Market integration increases the pressure

to harmonise policies (electricity market, fuel tourism). Going forward, the challenge is to leave room for national and regional climate leadership, so that the diversity of European countries and regions can serve as a laboratory for new policy approaches.

29 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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SLIDE 30

The five main lessons

  • 1. The mix matters.
  • 2. Pricing tools are not exploiting their full potential.
  • 3. There is plenty of diversity in European climate policies.
  • 4. The focus on the power sector and industry is too narrow.
  • For other sectors, there is a lack of policy attention, lack of a coherent strategy, lack of

ambition, and a lack of innovative instruments.

30 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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SLIDE 31

The five main lessons

  • 1. The mix matters.
  • 2. Pricing tools are not exploiting their full potential.
  • 3. There is plenty of diversity in European climate policies.
  • 4. The focus on the power sector and industry is too narrow.
  • 5. Squaring the circle: Policy instruments that are both rigid and flexible
  • Policies need to be flexible to adapt – and yet rigid to send out a firm and credible long-

term signal, especially for sectors with a long investment horizon. Abrupt changes can choke off innovation and investment dynamics, but policies that are too rigid are ill- equipped to deal with the uncertainties and surprises ahead.

31 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

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SLIDE 32

32

Thank you for your attention.

Benjamin Görlach, Ecologic Institute

www.cecilia2050.eu

October 11, 2013 Symposium: Theoretical advances & empirical lessons on ETS | Benjamin Görlach, Ecologic Institute

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Impact of selected climate policies: a macroeconomic view

33 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

Source: Meyer et al. 2013, CECILIA D2-2a

  • 1.00%
  • 0.80%
  • 0.60%
  • 0.40%
  • 0.20%

0.00% 0.20% 0.40% 0.60% 0.80% 1.00% ETR EU ETS RES Scenario A RES Scenario B

GDP impacts of different instruments (% deviation)

CZ DE NL UK

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SLIDE 34

Impact of selected climate policies: a macroeconomic view

34 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

Source: Meyer et al. 2013, CECILIA D2-2a

  • 1.00%
  • 0.80%
  • 0.60%
  • 0.40%
  • 0.20%

0.00% 0.20% 0.40% 0.60% 0.80% 1.00% ETR EU ETS RES A RES B

Employment impacts of different instruments (% deviation)

CZ DE NL UK

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Impact of selected climate policies: a macroeconomic view

35 Benjamin Görlach, Ecologic Institute - Lessons from the current policy mix 6 March 2014

  • 10%
  • 9%
  • 8%
  • 7%
  • 6%
  • 5%
  • 4%
  • 3%
  • 2%
  • 1%

0% 1% ETR EU ETS RES A RES B

CO2 impacts of different instruments (% deviation)

CZ DE NL UK Source: Meyer et al. 2013, CECILIA D2-2a