Infrastructure Investment under Uncertainty The Role of EU ETS - - PowerPoint PPT Presentation

Infrastructure Investment under Uncertainty The Role of EU ETS

Karsten Neuhoff

Infraday Berlin October 8/9, 2007

www.electricitypolicy.org.uk/tsec/2

Version 1.10.2007

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• Carbon price is fundamental – transition is challenge
• Actors differ across sectors/organisations
• Low Carbon policy tailored for decision makers

Infrastructure Investment under Uncertainty

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Carbon price fundamental

Denmark Japan Norway Austria Italy Germany Luxembourg Switzerland Sweden Portugal France Finland Spain United Kingdom Netherlands Greece New Zealand Belgium United States Australia Mexico Turkey Hungary Korea Canada Slovakia Czech Republic Poland 200 400 600 800 1,000 1,200 1,400 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Average energy intensity (kg oil equivalent/$1995 GDP) Average energy price $/toe

Best fit constant price elasticity of -1.0 a

Source:Newbery, D. M. (2003) Sectoral dimensions of sustainable development: energy and transport. Economic Survey of Europe 2(73-93).

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The challenges for the transition

• Concerns about leakage
• Distributional impact from changes of relative prices
• Managing the transition:

“next 10 to 20 years …[until] carbon pricing is universal and is automatically factored into decision making” [The Stern Report]

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Perspective ‘Oil companies’ - the big picture

Historic data – Energy and Transport in Figures, 2006. Own projections for 20% Emission reductions by 2020 and 80% by 2050. CCS fraction 2% in 2020, efficiency 85% in 2020 and 80% in 2050, all emission reduction domestically

500 1000 1500 2000 2500 3000 1 9 9 1 9 9 3 1 9 9 6 1 9 9 9 2 2 2 5 2 8 2 1 1 2 1 4 2 1 7 2 2 2 2 3 2 2 6 2 2 9 2 3 2 2 3 5 2 3 8 2 4 1 2 4 4 2 4 7 2 5 EE Renewables Nuclear Gas Oil Solid fuels mio t oe

1 2 3

• 1. Early role of

energy efficiency

• 2. Long-term role for

renewables, but no time frame

• 3. Phasing out of

conventional coal

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Energy from renewable Energy 2020 Today 2050 Hydro

• 1. ‘Early’ role for

renewables

• 2. Long-term position of

technologies conditional on their performance

Biomass

Illustrative

M a r i n e / P V / S

• l

a r t h e r m a l

1 2

Wind

Perspective ‘Technology company’ - Renewable targets

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Perspective ‘Large utilities’ - Emission projections

Source: Emissions Projections 2008-2012 versus NAP II (2006) by Karsten Neuhoff, Federico Ferrario and Michael Grubb. Published in Climate Policy 6(5), pp 395-410.

500 1000 1500 2000 2500 2005 2008 2009 2010 2011 2012 MtCO2/year Verified Emissions NAP II + (JI/CDM range) Avg. 2008-12 Final NAP II*** Max projection Min Projection 20% projections 60% projections Adjustments for opt-in in Phase II 88 125 Other Adjustments* Proposed NAP II**

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Illustrative

Price CO2 allowances 2020 Today 2050

• 1. Short and not

representative history

• 2. Downside risk for

high Carbon assets main obstacle for coal investment

• 3. Difficult to quantify

downside risk for low Carbon investments 2 3 1 Banks and utilities look at Forward prices Everyone looks at price history Perspective ’Non-energy companies and banks’ - CO2 market prices

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Perspective ‘Small decisions’ - Regulation and standards

• In many decisions Carbon price insignificant
• Landlord tenant issues, habits, information failure
• > Carbon price alone can not tackle inertia
• Regulation against the price signal difficult to enforce
• > Regulation alone does not do the trick either

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Conclusion – and outlook

Enact national responsibility Renewable target Technology Make ministries responsible Current prices/standards Small decisions Reservation price in auction CO2 price projection Non-energy/ bank Strong caps, auctions, put options by government ETS cap Large utilities Consistent policy Credible emission target Oil majors Policy implication Decision based on ‘Stylised sector’ www.electricitypolicy.org.uk/tsec/2