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European and global energy and environment
The policy context
The world's economies need to reduce significantly their carbon intensities during the 21st century, if the consequences of global warming are to be averted. Economic growth and development will in future need to be associated with the production of goods and services that are less energy-intensive, whilst the energy supply mix moves towards low or zero carbon-emission sources. The introduction of the EU Emissions Trading System (ETS) in Europe represents a key step towards achieving a low carbon economy. By putting a price on carbon, the EU ETS creates a strong incentive for energy efficiency and investments that help cut carbon emissions. The challenge now for both European governments and the European Commission is to ensure that the revised Directive approved by the European Parliament and Council in December 2008 for the third phase of the EU ETS after 2012, develops into a credible long-term international framework for pricing carbon.
The Kyoto Protocol has set the EU a shorter-term challenge of meeting its legally-binding target of reducing greenhouse gas emissions (GHGs) by 8% on 1990 levels over the 2008-12 period. The Kyoto commitment period for 2008-12 is, however, only the first step and all major countries, including the US and developing countries such as China, India and Brazil, will need to be included as effective and committed participants in the future framework for action. The Bali roadmap adopted by the UN Climate Change Conference, in December 2007, was an encouraging development.
However the Copenhagen Climate Change Conference, that took place in December 2009, produced only modest progress towards global and immediate action on climate change, as reflected in the agreement of the non-binding Climate Change Accord. The Accord includes international backing for an overall limit of 2 degrees C on global warming, agreement that all countries need to take action on climate change, and the provision of immediate and longer-term financial assistance to those countries most at risk of climate change. By 1 February 2010, 55 developed and developing countries had submitted pledges to cut and limit GHG emissions by 2020, accounting for around 78% of global emissions from energy use.
There remains, nonetheless, a need for greater ambition that results in a political agreement that commits developed and developing countries to firm emissions targets and paves the way for the delivery of an effective, legally-binding post-2012 international agreement on climate change. The next annual UN Climate Change Conference, due to be held in Cancun, Mexico between 29 November and 10 December 2010, will be an important test of the ability of developed and developing countries to sign up to a post-Kyoto framework that delivers genuine global cuts in emissions and so increases the likelihood of the 2 degree target being achieved.
The coalition government, that was formed after the May 2010 general election, restated the UK's commitment to securing a global deal to ensure that global emissions start to decline by 2020 leading subsequently to a fall of at least 50% below levels by 2050, by providing funding for international climate finance to assist developing countries to grow in a low-carbon manner. The UK, in its response to the Accord, had already indicated its wish that the EU move to a target of a 30% cut in emissions by 2020, compared with the current 20% figure, though this depended on other countries moving to the top of their emissions reductions ambitions.
Given this international policy background, there is a clear need for authoritative and rigourous modelling to evaluate the impact of various policy options on economic activity and environmental emissions, both on a European and global scale, enabling policymakers and businesses to plan for the future.
Tools and competence
CE specialises in the application of energy-environment-economy (E3) modelling and research on the European and global scale to support the needs of clients in business and the European policy and research community. Specifically we offer:
- a long-standing reputation for understanding the interactions between the economy, energy and the environment, based on the development and application of modelling tools for Europe and the global economy that are discussed below.
- the E3ME model, our energy-environment-economy model for Europe, has been built by a European team under the EU JOULE/THERMIE programme as a framework for assessing energy-environment-economy issues and policies. E3ME is intended to meet an expressed need by researchers and policy makers for a framework for analysing the implications of long-term E3 policies, especially those concerning R&D and environmental taxation and regulation. The model is also capable of addressing the short-term and medium-term economic effects as well as, more broadly, the long-term effects of such policies.
- considerable experience in using E3ME to analyse many alternative forms of environmental taxation, including carbon and energy taxes at a sectoral, national and EU level. The model has also been used previously to evaluate the impacts of alternative forms of the EU ETS, including different permit allocations, and different methods of allocating permits, and also the interaction between different tax rates and emission trading schemes.
- our ability to analyse E3 linkages extends beyond Europe with the development of E3MG, a macro-econometric, sectorally-disaggregated economy-energy-environment model of the global economy. E3MG distinguishes 20 regions (including, as separate regions, China, Brazil and India). It has been developed specifically to assess the impact of climate change mitigation policies on energy consumption and greenhouse gas emissions and on economic performance.
- an innovative treatment of technology in the E3ME and E3MG models. The models require a specification of the technical characteristics (investment cost for a given capacity; energy input and output characteristics, by fuel; assumptions for reduction in unit cost as 'learning' (ie investment in greater global capacity) proceeds) of 28 generic types of energy transformation/electricity generation technologies, assumed to be available to all regions.
Our track record in energy-environment modelling at the global level ...
The development and application of E3ME has been at the heart of much of our work in the European energy and environment field. More recently, however, our ability to analyse these interactions at the global level has been strengthened by the development of E3MG as a modeller's tool. For example, E3MG was used for a project, undertaken in the context of the global economic downturn in early 2009, for the Foreign and Commonwealth Office to assess the impact of oil prices on the global economic recovery. The analysis, which focussed on a set of scenarios based on different energy prices and investment strategies, including a 'green new deal', informed the UK government's preparations for the G20 London summit in April 2009.
More recently, in 2010, we undertook analysis for the European Commission's Environment Directorate. This was based on the global model, in combination with detailed econometric, disaggregated industrial sector analysis (focussed on energy-intensive sectors or sub-sectors) to assess whether an international agreement might lead to high levels of carbon leakage, and if so, whether any such leakage could be offset by domestic EU policy, for example, through allowances in the EU ETS.
...and at the European level
At the European level we have undertaken a wide range of projects based on our E3ME model that demonstrate the depth of our experience. Key projects for the European Commission include:
- the revision of the Trans-European Energy Network Policy (TEN-E): the aim of the study was to provide a comprehensive assessment of Europe's future needs for energy infrastructure and how close current capacity would be to meeting these needs and the E3ME model was used to forecast energy demand and assess the impacts of future investments.
- the economic analysis of NOx and SO2 Emission Trading for Impact Assessment: the study required an economic analysis of the introduction of an emissions trading scheme for IPPC installations emitting NOx and SO2. We provided quantitative economic analysis at the sectoral level through the application of the E3ME model.
- a study on the impacts of implementing harmonised rules for free allocation in the EU ETS: this involved an assessment of the economic, environmental and social impacts of fully harmonising the rules for free allocation of CO2 allowances and also considered ways of developing ex-ante benchmarks. We provided expert advice on the possible methods of quantitative assessment of economic and environmental outcomes, including modelling techniques, and the assumptions that underlie these quantitative methodologies
- a review of the Energy Taxation Directive (ETD): the study sought firstly to develop various options to restructure the minimum levels of taxation for energy products and electricity as set out in the ETD leading to a development of various policy scenarios; and secondly to assess the economic, social, environmental and energy impact of such policy options for EU 27 member states. E3ME was used to model the Europe-wide economic and environmental impacts of different energy taxation regimes and also addressed the interaction of the ETD with the EU ETS and other EU instruments
- the economic, social and environmental impacts of possible changes to the EU Emissions Trading System (EU ETS): this study provided analytical and modelling support to the European Commission through an assessment of the economic, social and environmental impacts of possible changes to the EU ETS. Our role was to model through E3ME the Europe-wide economic and environmental impacts of different EU ETS regimes
- the competitiveness effects of environmental tax reforms (COMETR): this study assessed the short and long-term costs of environmental tax reform from an ex-post perspective based on actual experience rather than uncertain ex-ante expectations. Short-run impacts were examined by a conventional bottom-up modelling framework. E3ME was then used to examine both the short and long-term dynamic effects with particular emphasis on competitiveness. Inter-industry and other indirect effects were captured including those international competitiveness effects which cannot be readily accounted for using the bottom-up approach.
The breadth of our experience and expertise in this arena, including our ability to link with other models (notably the TIPMAC project), is also illustrated by other examples of projects that we have undertaken.
Examples of our work
For further information email:
Sudhir Junankar
Associate Director