Progress towards decarbonisation is lagging Rapid acceleration in global mitigation is needed IEA’s global emissions scenarios Temperature Rise by 2100
Gt CO2 40 35
15 10 5
60
Required emissions reduction until 2030
25 20
% 70
+2.6°C
30
Historical Stated Policies Scenario (STEPS)
+1.8°C
Announced Pledges Scenario (APS) - updated with COP26 pledges Net-Zero Emissions Scenario (NZE)
0 2000 Source: IEA, 2021
2010
2020
2030
2040
+1.4°C 2050
Distance from 2030 target differs across countries, depending on policies and level of ambition
Emissions increasing
% 70
Emissions decreasing
60
50
50
40
40
30
30
20
20
10
10
0
0
Max -10 possible emissions -20 increase
NZL NOR CAN USA JPN ARG EU GBR AUS BRA Source: Calculations based on UNFCCC National Inventory Submissions, 2021
-10 -20 KOR
RUS
CHE
Note – left figure: Orange arrows (upwards) identify countries whose emissions are increasing and green arrows (downwards) identify countries whose emissions are decreasing in the last 10 years. The figures represented by the blue bars are calculated as the percentage point differences between the level of emissions in 2019 or latest available year (ARG: 2012; BRA, CHL, KOR: 2016, MEX: 2013) and targeted level of emissions in 2030 (expressed with respect to the 1990 level). A positive blue bar shows the minimum required emission reduction for the country to meet its stated 2030 target. A negative blue bar shows the maximum possible increase in emissions for the country to meet its stated 2030 targets. For example, for the EU there is a 25 percentage point difference between the 2019 emission level and the 2030 estimated targets (height of blue bar). This results from the difference between the stated target of reducing emissions by 55% by 2030 relative to the 1990 level and the 30% reduction in emissions already achieved between 1990 and 2019. Left panel: Emissions and targets include land use, land-use change and forestry (LULUCF). Right panel: Emissions and targets exclude LULUCF.
CHL
A multi-step approach to cost-effective, inclusive and comprehensive decarbonisation strategies
Cross-country differences in economic structure call for country-tailored policy packages GHG emissions share (excluding land use, land-use change and forestry) for selected OECD countries
A mapping of OECD indicators: • GHG emissions and emissions intensities; • CO2 emissions from fuel combustion and CO2 emission intensities; • CO2 demand-based emissions (carbon footprint); • CO2 emissions from transports.
A comprehensive policy mix consists of three building blocks: Incentivise to reduce emissions
Emission pricing (explicit carbon price)
Standards and regulation (implicit carbon price)
Combination of policies depends on country characteristics, preferences, political constraints
Complementary policies Provide enabling conditions
(R&D subsidies, infrastructure)
• Lower the cost of achieving a certain reduction in emissions • Strengthen public acceptability
Pricing and non-pricing policies complement each other •
They can combine • emission pricing, • standards & regulations • enabling complementary economic, social and fiscal policies
•
Combination of emission pricing and standards and regulation depends on country-specific characteristics (e.g. social preferences, political constraints, abatement costs…)
•
Complementary policies (e.g. innovation support mechanisms and infrastructure investments) lower the costs of achieving a certain reduction in emission and strengthen public acceptability
Market failures contribute to excessive emissions • Negative externalities (pollution); • Private markets under-provision of research and technological innovation; • Unpriced co-benefits of reducing emissions, such as improved health and biodiversity; • Financial frictions; • Network effects and coordination failures in relevant industries (e.g. electricity, transport, recycling); • Lack of information about energy efficiency and products’ carbon content; • Demand-side ‘behavioural’ effects (e.g. hyperbolic discounting, status quo bias, dynamic inconsistencies)
Policy assessment criteria The effectiveness of policy options can be assessed through criteria as: Lowering abatement costs in the short term (i.e. static minimisation of abatement costs; Lowering abatement costs in the medium-long term (i.e. dynamic minimisation of abatement costs); Administrative costs; Capacity to deal with uncertainty; Reallocation and distributional effects; Public acceptability; Impact on public budget
Trade-offs and synergies across policies call for a comprehensive policy mix Assessment criteria Short-term minimisation of abatement costs
Long-term minimisation of abatement costs
High
High
Moderate
Subsidies to abatement Technology standards
Administrative costs
Ability to deal with uncertainty
Reallocation and distributional concerns
Political economy and acceptability
Fiscal revenues and expenditures
Moderate to High
High
Moderate
Low
Rev. raising
Moderate
Low
Low
Low
High
Neutral
High
Moderate
High
High
Moderate to High
High
Expenditure
Low
Low
Low
Low
High
High
Neutral
…
…
…
…
…
…
…
Policy instrument GHG tax Non-tradable performance standards
…
Enabling policies are key to accelerating the climate transition and lowering its costs • Favouring innovation and business dynamism – Technology-push: targeted support, basic long-term research – Framework policies: e.g. legal liability, IP protection and diffusion – Reallocation friendly policies
• Mobilising private capital – Improve the regulatory environment (securitisation of green infrastructure projects, fiduciary duties for green mandates, etc.) – Encourage transparent climate-related disclosure
• Green infrastructures – Electricity: investments in new (green) capacity – Transport: prepare for a long-term paradigm shift
Complementary policies: an example of infrastructure investment Norway: Investments in infrastructure network (fast and ultrafast EV chargers) significantly increased the share of EVs Vehicle-related tax revenue, billions NOK Billions NOK 80
Registration taxes
Annual taxes
CO2 tax
Electricity tax
Road usage taxes
70
Policies that encourage innovation and the upgrade of network infrastructures enable the emergence and adoption of promising low-carbon technologies, including those that are still far from the commercialisation stage, especially in the electricity and transportation sectors.
60
50
The experience of Norway suggests that the provision of fast charging infrastructure is a strong driver for EV uptake as users prefer fast and ultra-fast chargers for both inter- and intra-urban travel. However, there are challenges: • Lower revenues from vehicle-related excise duties • Generous incentives translate into high abatement costs • At current trends it will still take decades for EVs to fully replace combustion-engine cars
40
30
20
10
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Note: Adjusted for inflation, estimated 2022 NOK values. Source: OECD (2022) and Royal Norwegian Ministry of Finance.
2020
2021
2022
Climate policies can have unequal distributional impacts Policy type
Distributional impact
Carbon pricing: Transport / road fuel Carbon pricing: Electricity Carbon pricing: Heating Carbon pricing: Air transport Carbon pricing: Maritime transport
Mixed evidence Regressive Regressive Progressive Regressive
Subsidies on low-carbon technology (e.g. US tax credits for renewables)
Regressive
Public investment in low-carbon technology or infrastructure
Mixed evidence
Higher tariffs on high-carbon imports Energy and vehicle efficiency standards (e.g. the US CAFE)
Mixed evidence
Agriculture related policies (e.g., taxes or standards)
Regressive
Regressive
Three channels: •
‘Source-side’ income effects • Uneven remuneration of labour and capital; • Policy options: ALMPs, reskill and upskill, place-based policies, …
•
‘Use-side’ income effects • Change in relative prices of goods whose consumption vary across the income distribution; • Policy options: use revenues, transfers, investments, …
•
Non-pecuniary effects • Asymmetric effects on health, productivity, property values, etc.; • Policy options: target adaptation
Addressing distributional effects requires specific policies 1) Utilising revenues to balance distributional ‘use-side’ income effects: • Earmarking of excise fuel taxes revenues; • Fixed (i.e. lump-sum) transfers; • Targeted transfers; • Tax cuts; • Investments and social funds (e.g. ‘green’ social housing)
2) Addressing ‘source-side’ income effects through supporting workers in transition: • Active labour market programs (ALMPs) (e.g. job brokerage services, support to start-ups); • Targeted training and skill development programs; • Unemployment support and welfare benefits
Distributional effects of a carbon tax under different uses of revenue Percentage change in income across income quintiles, United States 2015
Applying the framework to formulate policy recommendations OECD Denmark Economic Survey (2021) recommends:
Implement a wellbalanced policy mix of: pricing, regulatory measures, investment and structural reforms
Use tax revenue from emissions pricing to offset distributional consequences
Strengthen supports to green innovation through technologicalneutral subsidies
Consult further with dealers and investors on the best model for green bonds
The rise in energy prices underscores the importance of a comprehensive transition strategy, including energy security • Over the past year (mid 2020 and forth), gas prices increased more than 170% in Europe for several reasons including: Constrained gas supply, low storage levels, rebound of energy demand…
The rise in energy prices is largely driven by fossil fuel costs – not carbon pricing
• Carbon pricing accounts for only a small share of gas price increases • Decarbonisation should strive to strengthen the resilience of energy systems to shocks
Note: The figure shows the impact of fossil gas price and EU ETS allowances price on the cost of electricity generation from combined cycle gas turbines power plants (EMBER 2021). Data is from Powernext for TTF fossil gas prices (day ahead), EEX for EU-ETS carbon prices (December contract). Costs are calculated using emissions intensity of 0.37tCO2eq/MWh and plant efficiency rate of 55%. Source: EMBER, 2021: https://ember-climate.org/commentary/2021/09/21/fossil-gas-uk-electricity-prices/ Climate Action Network, 2021: https://caneurope.org/high-electricity-prices-links-fossil-gas-need-shift-to-renewables/