Session 3: The economics of supply-side climate policy
Moderator: Mark Campanale
Panellists: Taran Fæhn, Ivetta Gerasimchuk, Franziska Holz, Frank Jotzo, Paola Yanguas-Parra
Implications of natural gas extraction in Western Australia for achieving climate targets
Bill Hare, Niklas Roming, Ursula Fuentes Hutfilter, Michiel Schaeffer
Western Australia has globally significant natural gas resources and reserves. By the end of 2018, its liquefied natural gas (LNG) export production drawing upon conventional resources is expected to account for around 11% of global capacity. Proposals exist to exploit much larger unconventional reserves. We analyse the impact of fully exploiting all of Western Australia’s gas resources on achieving domestic and international Paris Agreement climate goals compared to Paris Agreement-compatible carbon budgets at global, national and state (sub-national) level. In addition, we assess the global and national gas demand expected for energy system transition pathways consistent with the Paris Agreement long-term temperature goal (LTTG) Finally, we look at how Western Australia can avoid lock-in of a carbon intensive energy mix and with high levels of stranded assets by making make use of its vast renewable energy potential for both domestic and international use.
The carbon footprint of Western Australia’s total gas reserves (conventional and unconventional) is equivalent to 4.7-6.4% of a global energy system carbon budget consistent with the Paris Agreement LTTG. Domestic emissions (upstream and from direct use including LNG production) from the exploitation of conventional gas reserves are 40-75% above an Paris Agreement compatible carbon budget for WA’s energy sector. Unconventional gas resources are much larger, with a domestic carbon footprint about three times Australia’s national energy system carbon budget.
Domestic emissions from exploitation of Western Australia’s conventional gas reserves present major challenges for compliance with the Paris Agreement. National and state gas demand in a Paris Agreement energy system transition can be met without recourse to WA’s unconventional gas resources. In addition the global gas market will not need additional resources from unconventional gas in Western Australia, as gas demand will likely peak and decline within 10-15 years as the world implements the Paris Agreement
Coal taxes as an economic instrument for structural adjustment
Taxes on the production or export of fossil fuels have some useful features as an instrument of supply-side climate change mitigation policies. First, in contrast to quantitative constraints such as (non-tradable) production quota or rules of thumb such as ‘no new mines’, they can facilitate an economically efficient allocation of declining fossil fuel extraction. Second, they create a source of revenue which governments could use for purposes of their choice, including to facilitate structural adjustment in fossil fuel producing regions. Third, they have desirable features in distributing the gains from improved of terms of trade that accrue to fossil fuel producing countries: countries that implement coal taxes keep the revenue from their own taxes, thus creating an incentive to levy the tax rather than an incentive to cheat on agreements for OPEC-style production quotas. This could help to address, but is unlikely to overcome, the intrinsic challenges of coordination between fossil fuel producers and exporters.
This paper explores these theoretical and conceptual aspects of fossil fuel supply taxes, for the case of coal. It provides illustrative magnitudes for coal taxes, their revenues, terms-of-trade improvements resulting from supply-side taxes, and impacts on global coal consumption. These are inferred on the basis of parameters drawn from the energy economics literature.
Finally, the paper provides an exposition of the idea of using coal tax revenues to support structural adjustment in coal producing regions. The argument is that rather than subsidizing an industry that is in decline at the expense of growing parts of an economy, societies can achieve better long term outcomes by drawing additional revenue from declining fossil fuel industries and instead supporting alternative economic futures through investments in infrastructure and education.
Coal Phase-Out Implications for the International Steam Coal Market: The Risk of Asset Stranding in the COALMOD-World Model
Franziska Holz, Oliver Sartor, Thomas Spencer, Ivo Valentin Kafemann, Tim Scherwath, Roman Mendelevitch
Significant transition is occurring in the national energy systems of major coal-using economies. At the same time, on the exporter side, investments are being undertaken or planned that would potentially significantly raise coal supply capacities. The inconsistency between these two phenomena has become a recurring issue within national and international policy debate. They potentially amplify risks of a “hard landing” for coal market investors, workers and other affected stakeholders. Indeed, lessons from past coal phase-out experiences suggest that once underway, coal markets can move very quickly – if unanticipated, often with negative consequences for stakeholders who struggle to catch up. This paper sheds light on this issue by modelling the international steam coal market under a range of scenarios regarding the depth, speed, and drivers of transition in global and regional energy systems.
We investigate the effect of regional or global coal phase-out policies by using a holistic model of the world steam coal market, COALMOD-World. It calculates global steam coal production, trade, and prices as well as CO2 emissions from coal consumption. It features a detailed representation of domestic and international steam coal supply until 2050 and includes endogenous investment decisions in production, land transport, and export capacity, as well as an endogenous mechanism assessing production cost increase due to resource depletion.
Our results show that more stringent climate policies come with lower coal demand, despite assumptions on wide-spread use of Carbon Capture and Storage (CCS). We also find investments in the coal value chain closely related to the future demand prospects. We find more or less high investments in de-bottlenecking of transport and export capacities and mine mortality replacement in the different scenarios: the stronger the coal phase-out, the lower the total investments.
Carbon Entanglement in BRIICS: weaning government budgets off revenues from fossil fuel production
Ivetta Gerasimchuk, Kjell Kühne, Yuliia Oharenko, Vibhuti Garg, Richard Bridle, and David Braithwaite
The BRIICS countries (Brazil, Russia, India, Indonesia, China and South Africa) account for nearly 40% of the world’s proved fossil fuel reserves and extraction. The six economies illustrate what the OECD’s Secretary General Angel Gurria calls “carbon entanglement”. This term means that governments have major stakes in bringing fossil fuel to market and taking their share of the rents – through tax and non-tax revenue from the industry, including participation in state-owned enterprises (SOEs). Among BRIICS, the share of fossil fuel rents in government revenues varies from around 1% in Brazil and China to 40% in Russia. It is also high in certain fossil-fuel dependent regions at the subnational level. The intent of securing the flow of these revenues remains a key factor motivating BRIICS national and subnational government policies that prop the fossil fuel industry with subsidies, new rounds of licenses for exploration and production, and facilitation of export contracts. “Carbon entanglement” creates a conflict of interests for the BRIICS governments in delivering against their renewable energy and energy efficiency targets and the commitments under the Paris Agreement on climate change.
In a first-of-its-kind dataset, the authors sum up key numbers on the fiscal dependency of the BRIICS governments on fossil fuel revenues. They also highlight the risk of loss of these revenues and the risk of stranding for fossil fuel SOEs in a world switching to renewable energy. The presentation discusses opportunities for fiscal and economic diversification for the BRIICS economies. In particular, the analysis covers the use of earmarked fossil fuel revenues to support economic diversification and a just transition for workers. The authors underscore the importance of such analysis for BRIICS countries’ mid-century development strategies and the UNFCCC work on response measures.
The Paris Agreement and Supply-Side Policies
Taran Fæhn, Geir Asheim, Mads Greaker, Cathrine Hagem, Bård Harstad, Michael Hoel, Diderik Lund, Karine Nyborg, Knut Einar Rosendahl, Halvor Storrøsten
This paper discusses unilateral options for contributing to climate change mitigation by restricting own petroleum extraction – so-called supply-side policies – with Norway as an example, the main question being how ongoing changes in the international climate policy conditions surrounding the country might influence.
First, we find that the motives for supply-side policy look different as a consequence of the wide participation in the Paris Agreement. If all countries set binding targets, global emissions are capped and supply-side measures on top are ineffectual. However, the emission caps of many countries are so vaguely formulated or so high that there is still scope for climate effects of cutting petroleum production. Besides, a rationale for supply-side policies, particularly in a coalition, is that it can serve as insurance in case the Paris Agreement fails.
Second, the European ambitions of closer climate policy integration will affect the cost-effectiveness considerations of unilateral supply-side policies on top of the Paris pledges. The question is no longer whether Norway should add supply-side or demand-side measures, as in a flexible European system, the latter will only relocate, not reduce, European emissions. Rather, supply-side efforts must be balanced against other possible additional ambitions, such as funding research and development, rainforest protection or technology transfer.
Finally, this paper addresses the choice of supply-side policy instruments given the novel conditions. We give economic and strategic arguments for both quantity and price regulations.