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Quantifying Kyoto–workshop summary
Climate Policy 1 (2001) 141–144
Report
Quantifying Kyoto–workshop summary Christiaan Vrolijk, Michael Grubb, Bert Metz, Erik Haites 30–31 August 2000, Chatham House, London, UK
The Quantifying Kyoto workshop was held at the Royal Institute of International Affairs, in London, organised jointly by research institutes from several Annex I countries. 1 1. Aim of the workshop The aim of the workshop was to clarify the aggregate flexibility of the Kyoto Protocol, to quantify the different elements, and to estimate the potential impact of decisions to be taken at COP-6 in The Hague, November 2000. The flexibilities can reduce the cost of achieving the Kyoto targets and negotiations since COP-3 have been addressing the various elements, but a comprehensive overview of all these flexibilities has been lacking so far. This workshop brought together experts to try and produce a synthesis of the various flexibilities: two internal (the non-CO2 gases and sinks) and three external (the three Kyoto mechanisms). The tables summarises main quantitative results. Three main factors influence the costs of complying with the Kyoto targets: • Emission projections. These give the baseline of emissions that can be expected without further climate policies. However, baseline projections vary widely. • Marginal abatement cost curves. These cost curves show the amount of reductions that are possible at a given price in a country. These also vary greatly. • The flexibility regimes of emission reduction policies. The forms of flexibility that will be allowed under the Kyoto Protocol will have a large impact on the costs. 2. The ‘demand side’ 2.1. OECD reference emission projections Baseline emission projections vary widely between literature sources. The Emissions Modelling Forum (EMF) compares major energy models, with projections ranging from 20–38% CO2 increase above 1990 1 The Royal Institute of International Affairs, World Bank, the Netherlands National Institute of Public Health and the Environment, and the Japanese Institute for Global Environmental Strategies, with Erik Haites and Mike Toman jointly organised this workshop. It was financially supported by the Japanese Environment Agency, UK Department of Environment, Transport and the Regions, the Dutch Ministry of Housing, Spatial Planning and the Environment, the German Ministry of Environment, Natural Protection and Nuclear Safety, and the World Bank National Strategies Studies. We thank the sponsors for their support.
1469-3062/01/$ – see front matter © 2001 Published by Elsevier Science Ltd. PII: S 1 4 6 9 - 3 0 6 2 ( 0 0 ) 0 0 0 1 7 - 6
142
C. Vrolijk et al. / Climate Policy 1 (2001) 141–144
Table 1 Demand (MtC) Source
Low
High
Remark
OECD CO2 -only Other GHGs
600 0
1,200 200
National Communications at the low end, EMF average is 1000 MtC Substantially reducing overall costs of Kyoto targets, by up to 50%
Gross OECD deficit Domestic action on CO2 Dom. action O-GHGs
600 200 100
1,400 400 300
Before taking any domestic action 33% of the projected CO2 gapa Greater for higher emission projectionsa
“Net” OECD demand
300
700
a
This may correspond to marginal cost in range 25–50 $/tC but with wide uncertainties arising inter alia from uncertainties concerning the potential for ‘no-regret’, revenue recycling, and other co-benefits that would allow reductions at no net cost.
levels for the US, and a larger range for the EU and some others. In the absence of abatement measures, the OECD countries in aggregate are projected to be 600–1200 MtC above their Kyoto target in 2010. The average projections of EMF, just short of 1000 MtC over the Kyoto target, assumes an average growth of emissions of 30%. In aggregate such growth has not materialised so far: the latest inventory submissions for 1998 show aggregate emissions from Annex B countries to be slightly below the Kyoto target. Projections from the National Communications, prepared by the governments and submitted to the UNFCCC process, are substantially lower; National Communication projections for the OECD are at the lower end of the EMF range. Reasons for the difference could be that governments draw on more detailed national models and include some abatement; or alternatively, that these national projections are more politically influenced. The non-CO2 greenhouse gases comprise about 20% of the total Annex B GHG emissions. The projections for 2010 show a much smaller increase than for CO2 , or even a decrease, compared to 1990 levels, significantly reducing the percentage gap between projections and Kyoto Assigned Amounts when these other gases are included. 2.2. OECD domestic action Determining the likely domestic reduction efforts requires insight in the domestic abatement costs. However, the marginal cost curves vary widely between different economic models, and between top-down and bottom-up approaches. Even within the EMF comparisons, all energy sector based economic models, cost curves vary by a factor of about 5. The workshop focused mostly on top-down model results but it was noted that on the one hand top-down models do not capture a range of potential ‘no-cost’ opportunities, and on the other hand bottom-up models only incorporate project-type reductions. Furthermore, the non-CO2 gases are generally cheaper to control; including them has substantial impact on the marginal cost curves. For some countries, marginal costs are halved; for the OECD on average, the costs of domestic compliance is reduced by a quarter. The OECD countries are the main source of demand for the various flexibilities. The workshop discussions focused mostly on the ‘supply side’, but data reviewed at the workshop (projections, price responses, and potential ‘no regret’ measures including for non-CO2 gases) could combine as indicated in Table 1. This would suggest potential OECD demand for credits (i.e. after allowing for some domestic action) in the range 300–700 MtC/yr during the commitment period. 2 2
For further details see the full workshop report.
C. Vrolijk et al. / Climate Policy 1 (2001) 141–144
143
Table 2 Supply (MtC)a Source LULUCF art 3.3 + art 3.7 LULUCF art 3.4 EIT surplus EIT additional trading & JI CDM (without sinks) CDM sinks
Low 5 0 50 100 ? 50 40
High 50 90 300 350 ? 375 100
Remarks No/low cost (covered by current practise)4 No/low cost No/low cost (covered by current practise)3 No cost Additional potential not addressed in workshop discussions $10–40/tC $5–40/tC, conservative estimate?
Total supply 245 1265 a Details of the workshop, including papers, this summary and the full workshop report are available on the dedicated website: http://www.riia.org/Research/eep/quantifying.html.
3. Components of supply 3.1. LULUCF Using IPCC proposed-rules, the contribution of afforestation and deforestation under Article 3.3 could be small, only absorbing about 5–50 MtC/yr. Two Annex B countries, Australia and the UK, had net emissions from LUCF in 1990 and could, according to Article 3.7, count these emissions in their inventory, about 90 MtC in total. Halting deforestation in these countries could, therefore, count as a sink of maximum 90 MtC. The additional LUCF of Article 3.4, again using IPCC estimates, could add up to a sink of 50–300 MtC/yr. The proposed approaches by some countries could double or triple the top of this range, mainly due to bringing in a larger percentage of the land. Economies in Transition. Projected emissions from the Economies in Transition (EITs) vary between models and depends on the assumptions of domestic action, ceilings etc. The surplus of Assigned Amount over projected ‘business-as-usual’ emissions (so-called “hot air”), is estimated by various sources to be 100–350 MtC/yr, or even larger if restructuring of the Russian energy sector takes place 3 . Current (1998) emissions of EITs are about 500 MtC/yr below their Kyoto target on aggregate. This surplus is potentially available without adding to the total Annex B costs. Obviously a greater potential of reductions can be tapped with emissions trading – at a price: the models suggest that an additional 100–200 MtC/yr of credits could be transferred to the OECD countries, depending on market rules and the carbon price. 3.2. Clean Development Mechanism The CDM would generate credits from projects in developing countries. A range of models predict a CDM supply of 100–750 MtC/yr during the commitment period, based on national abatement cost curves. Top-down models generally estimate this through cost differences between the industrialised and developing countries only, leading to high estimates. The CDM, however, is a project-based mechanism, and much of the identified potential will be difficult to capture. In connection with the workshop, a study by ABARE comparing CDM supply curves with the results from detailed bootom up’ estimates sponsored by the World Bank’s National Strategy Studies Programs suggested that actual supply was likely to be less than half that predicted by the top-down supply curve models, giving the range indicated in Table 2. Two 3
Christiaan Vrolijk with Tobias Koch, “Russian Energy Prospects and Implications for Emissions and Climate Policy”, RIIA report, 1999. 4 Based on the IPCC Special Report on LULUCF.
144
C. Vrolijk et al. / Climate Policy 1 (2001) 141–144
additional issues have to be considered for the CDM: first the early start, which was already identified as important (suggested to add up to 80% to the 5-year total if projects start early), and second the likelihood of failure of (the start of) these projects. To a first approximation these two were assumed to cancel out. An additional flexibility concerning the CDM, is the possible inclusion of LUCF-activities. These activities have not been included in the above estimates, which are based on energy-sector models. This estimate, however, is highly uncertain. The IPCC’s estimate for LUCF in developing countries is up to over 1000 MtC, with huge uncertainties. However, the experts agreed that it would be of little use to take this as an upper limit, because it does not reflect the project basis of the CDM. Instead an estimate was made of easily identifiable projects with real and permanent saving for market prices. This (conservative) estimate ranged from 40–100 MtC. 3.3. Rules for the mechanisms The impact of the Kyoto Mechanisms overall will also depend upon upon the rules adopted. The main influences on the effectiveness of the mechanisms are the pre-2008 CDM supply, demand ceilings and supply restrictions. An analysis for the workshop suggested transaction costs and the level of the adaptation levy to be of much less importance. The liability rules are crucial. Weak liability, causing non-compliance, obviously lowers costs. Overly-strict liability rules, leading to virtually no trading, greatly increase costs. Liability rules can also be designed in such a way that the added costs are minimal, but compliance is virtually guaranteed. 4. Adding it all up The supply side options are summarised in Table 2. The most striking outcome is the great uncertainty of estimates, even with a room full of experts on the different elements. Negotiators are having to decide rules when the overall balance of demand and supply is extremely uncertain. Adding up all the different elements analysed here, however, it appears that if negotiators maximise all flexibility options, the potential supply at low cost could overwhelm demand, sending the price to very low levels: a preliminary version of a simple integrating model sponsored by the World Bank for the workshop suggested that under such conditions and assumptions, the price could be in the range 10 to 20 $/tC. Conversely, if the higher range of energy projections and more pessimistic estimates of abatement potentials are combined with strong constraints on use of the flexibilities, costs might become very high (figures over $100/tC are cited in some of the modelling literature, though these do not include all the dimensions of flexibility potentially available in the Protocol). The former situation would imply very little pressure for domestic action in OECD; the latter could involve costs too high for some Parties to ratify. Too much flexibility could jeopardise the longer-term objectives of the UNFCCC; too little could prevent entry into force; and expert judgement can only indicate what may be ‘too much’ or ‘too little’ within extremely wide bands. Far more work is needed, on all these dimensions, to start narrowing these huge uncertainties. Faced with such a degree of uncertainty, the most pragmatic approach for COP-6 may be to define clear rules where information seems sufficient (for example, some categories of land use and CDM projects where additionality can be clearly defined), and to accept that some other areas may have to be left for subsequent negotiation when better information on the issues, and on the likely balance of supply and demand, becomes available.
Report
Quantifying Kyoto–workshop summary Christiaan Vrolijk, Michael Grubb, Bert Metz, Erik Haites 30–31 August 2000, Chatham House, London, UK
The Quantifying Kyoto workshop was held at the Royal Institute of International Affairs, in London, organised jointly by research institutes from several Annex I countries. 1 1. Aim of the workshop The aim of the workshop was to clarify the aggregate flexibility of the Kyoto Protocol, to quantify the different elements, and to estimate the potential impact of decisions to be taken at COP-6 in The Hague, November 2000. The flexibilities can reduce the cost of achieving the Kyoto targets and negotiations since COP-3 have been addressing the various elements, but a comprehensive overview of all these flexibilities has been lacking so far. This workshop brought together experts to try and produce a synthesis of the various flexibilities: two internal (the non-CO2 gases and sinks) and three external (the three Kyoto mechanisms). The tables summarises main quantitative results. Three main factors influence the costs of complying with the Kyoto targets: • Emission projections. These give the baseline of emissions that can be expected without further climate policies. However, baseline projections vary widely. • Marginal abatement cost curves. These cost curves show the amount of reductions that are possible at a given price in a country. These also vary greatly. • The flexibility regimes of emission reduction policies. The forms of flexibility that will be allowed under the Kyoto Protocol will have a large impact on the costs. 2. The ‘demand side’ 2.1. OECD reference emission projections Baseline emission projections vary widely between literature sources. The Emissions Modelling Forum (EMF) compares major energy models, with projections ranging from 20–38% CO2 increase above 1990 1 The Royal Institute of International Affairs, World Bank, the Netherlands National Institute of Public Health and the Environment, and the Japanese Institute for Global Environmental Strategies, with Erik Haites and Mike Toman jointly organised this workshop. It was financially supported by the Japanese Environment Agency, UK Department of Environment, Transport and the Regions, the Dutch Ministry of Housing, Spatial Planning and the Environment, the German Ministry of Environment, Natural Protection and Nuclear Safety, and the World Bank National Strategies Studies. We thank the sponsors for their support.
1469-3062/01/$ – see front matter © 2001 Published by Elsevier Science Ltd. PII: S 1 4 6 9 - 3 0 6 2 ( 0 0 ) 0 0 0 1 7 - 6
142
C. Vrolijk et al. / Climate Policy 1 (2001) 141–144
Table 1 Demand (MtC) Source
Low
High
Remark
OECD CO2 -only Other GHGs
600 0
1,200 200
National Communications at the low end, EMF average is 1000 MtC Substantially reducing overall costs of Kyoto targets, by up to 50%
Gross OECD deficit Domestic action on CO2 Dom. action O-GHGs
600 200 100
1,400 400 300
Before taking any domestic action 33% of the projected CO2 gapa Greater for higher emission projectionsa
“Net” OECD demand
300
700
a
This may correspond to marginal cost in range 25–50 $/tC but with wide uncertainties arising inter alia from uncertainties concerning the potential for ‘no-regret’, revenue recycling, and other co-benefits that would allow reductions at no net cost.
levels for the US, and a larger range for the EU and some others. In the absence of abatement measures, the OECD countries in aggregate are projected to be 600–1200 MtC above their Kyoto target in 2010. The average projections of EMF, just short of 1000 MtC over the Kyoto target, assumes an average growth of emissions of 30%. In aggregate such growth has not materialised so far: the latest inventory submissions for 1998 show aggregate emissions from Annex B countries to be slightly below the Kyoto target. Projections from the National Communications, prepared by the governments and submitted to the UNFCCC process, are substantially lower; National Communication projections for the OECD are at the lower end of the EMF range. Reasons for the difference could be that governments draw on more detailed national models and include some abatement; or alternatively, that these national projections are more politically influenced. The non-CO2 greenhouse gases comprise about 20% of the total Annex B GHG emissions. The projections for 2010 show a much smaller increase than for CO2 , or even a decrease, compared to 1990 levels, significantly reducing the percentage gap between projections and Kyoto Assigned Amounts when these other gases are included. 2.2. OECD domestic action Determining the likely domestic reduction efforts requires insight in the domestic abatement costs. However, the marginal cost curves vary widely between different economic models, and between top-down and bottom-up approaches. Even within the EMF comparisons, all energy sector based economic models, cost curves vary by a factor of about 5. The workshop focused mostly on top-down model results but it was noted that on the one hand top-down models do not capture a range of potential ‘no-cost’ opportunities, and on the other hand bottom-up models only incorporate project-type reductions. Furthermore, the non-CO2 gases are generally cheaper to control; including them has substantial impact on the marginal cost curves. For some countries, marginal costs are halved; for the OECD on average, the costs of domestic compliance is reduced by a quarter. The OECD countries are the main source of demand for the various flexibilities. The workshop discussions focused mostly on the ‘supply side’, but data reviewed at the workshop (projections, price responses, and potential ‘no regret’ measures including for non-CO2 gases) could combine as indicated in Table 1. This would suggest potential OECD demand for credits (i.e. after allowing for some domestic action) in the range 300–700 MtC/yr during the commitment period. 2 2
For further details see the full workshop report.
C. Vrolijk et al. / Climate Policy 1 (2001) 141–144
143
Table 2 Supply (MtC)a Source LULUCF art 3.3 + art 3.7 LULUCF art 3.4 EIT surplus EIT additional trading & JI CDM (without sinks) CDM sinks
Low 5 0 50 100 ? 50 40
High 50 90 300 350 ? 375 100
Remarks No/low cost (covered by current practise)4 No/low cost No/low cost (covered by current practise)3 No cost Additional potential not addressed in workshop discussions $10–40/tC $5–40/tC, conservative estimate?
Total supply 245 1265 a Details of the workshop, including papers, this summary and the full workshop report are available on the dedicated website: http://www.riia.org/Research/eep/quantifying.html.
3. Components of supply 3.1. LULUCF Using IPCC proposed-rules, the contribution of afforestation and deforestation under Article 3.3 could be small, only absorbing about 5–50 MtC/yr. Two Annex B countries, Australia and the UK, had net emissions from LUCF in 1990 and could, according to Article 3.7, count these emissions in their inventory, about 90 MtC in total. Halting deforestation in these countries could, therefore, count as a sink of maximum 90 MtC. The additional LUCF of Article 3.4, again using IPCC estimates, could add up to a sink of 50–300 MtC/yr. The proposed approaches by some countries could double or triple the top of this range, mainly due to bringing in a larger percentage of the land. Economies in Transition. Projected emissions from the Economies in Transition (EITs) vary between models and depends on the assumptions of domestic action, ceilings etc. The surplus of Assigned Amount over projected ‘business-as-usual’ emissions (so-called “hot air”), is estimated by various sources to be 100–350 MtC/yr, or even larger if restructuring of the Russian energy sector takes place 3 . Current (1998) emissions of EITs are about 500 MtC/yr below their Kyoto target on aggregate. This surplus is potentially available without adding to the total Annex B costs. Obviously a greater potential of reductions can be tapped with emissions trading – at a price: the models suggest that an additional 100–200 MtC/yr of credits could be transferred to the OECD countries, depending on market rules and the carbon price. 3.2. Clean Development Mechanism The CDM would generate credits from projects in developing countries. A range of models predict a CDM supply of 100–750 MtC/yr during the commitment period, based on national abatement cost curves. Top-down models generally estimate this through cost differences between the industrialised and developing countries only, leading to high estimates. The CDM, however, is a project-based mechanism, and much of the identified potential will be difficult to capture. In connection with the workshop, a study by ABARE comparing CDM supply curves with the results from detailed bootom up’ estimates sponsored by the World Bank’s National Strategy Studies Programs suggested that actual supply was likely to be less than half that predicted by the top-down supply curve models, giving the range indicated in Table 2. Two 3
Christiaan Vrolijk with Tobias Koch, “Russian Energy Prospects and Implications for Emissions and Climate Policy”, RIIA report, 1999. 4 Based on the IPCC Special Report on LULUCF.
144
C. Vrolijk et al. / Climate Policy 1 (2001) 141–144
additional issues have to be considered for the CDM: first the early start, which was already identified as important (suggested to add up to 80% to the 5-year total if projects start early), and second the likelihood of failure of (the start of) these projects. To a first approximation these two were assumed to cancel out. An additional flexibility concerning the CDM, is the possible inclusion of LUCF-activities. These activities have not been included in the above estimates, which are based on energy-sector models. This estimate, however, is highly uncertain. The IPCC’s estimate for LUCF in developing countries is up to over 1000 MtC, with huge uncertainties. However, the experts agreed that it would be of little use to take this as an upper limit, because it does not reflect the project basis of the CDM. Instead an estimate was made of easily identifiable projects with real and permanent saving for market prices. This (conservative) estimate ranged from 40–100 MtC. 3.3. Rules for the mechanisms The impact of the Kyoto Mechanisms overall will also depend upon upon the rules adopted. The main influences on the effectiveness of the mechanisms are the pre-2008 CDM supply, demand ceilings and supply restrictions. An analysis for the workshop suggested transaction costs and the level of the adaptation levy to be of much less importance. The liability rules are crucial. Weak liability, causing non-compliance, obviously lowers costs. Overly-strict liability rules, leading to virtually no trading, greatly increase costs. Liability rules can also be designed in such a way that the added costs are minimal, but compliance is virtually guaranteed. 4. Adding it all up The supply side options are summarised in Table 2. The most striking outcome is the great uncertainty of estimates, even with a room full of experts on the different elements. Negotiators are having to decide rules when the overall balance of demand and supply is extremely uncertain. Adding up all the different elements analysed here, however, it appears that if negotiators maximise all flexibility options, the potential supply at low cost could overwhelm demand, sending the price to very low levels: a preliminary version of a simple integrating model sponsored by the World Bank for the workshop suggested that under such conditions and assumptions, the price could be in the range 10 to 20 $/tC. Conversely, if the higher range of energy projections and more pessimistic estimates of abatement potentials are combined with strong constraints on use of the flexibilities, costs might become very high (figures over $100/tC are cited in some of the modelling literature, though these do not include all the dimensions of flexibility potentially available in the Protocol). The former situation would imply very little pressure for domestic action in OECD; the latter could involve costs too high for some Parties to ratify. Too much flexibility could jeopardise the longer-term objectives of the UNFCCC; too little could prevent entry into force; and expert judgement can only indicate what may be ‘too much’ or ‘too little’ within extremely wide bands. Far more work is needed, on all these dimensions, to start narrowing these huge uncertainties. Faced with such a degree of uncertainty, the most pragmatic approach for COP-6 may be to define clear rules where information seems sufficient (for example, some categories of land use and CDM projects where additionality can be clearly defined), and to accept that some other areas may have to be left for subsequent negotiation when better information on the issues, and on the likely balance of supply and demand, becomes available.