Energy and Climate Change in China Carlo Carraro, University of Venice and Fondazione Eni Enrico MatteiEmanuele Massetti, Fondazione Eni Enrico Mattei and CMCC

Workshop on the Chinese EconomyBank of Italy and Venice International UniversityVenice, 25-27 November 2010

1

1. Introduction

1. Historical and Business-as-Usual trend in the economy, energy sector and emissions.

2. Analysis of the carbon intensity target pledged in the Copenhagen Accord.

3. Emissions taxes scenarios.

4. Analysis of a realistic Chinese climate policy commitment.

2

Historic data and the Business-as-Usual Scenario

3

3. GDP, CO2 and energy use: 1960-2009

0

5

10

15

20

25

30

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

Inde

x, b

ase

year

197

1

GDP CO2 EN

Data from WB Development Indicators

4

4. Energy intensity and carbon intensity

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007

Inde

x, b

ase

year

197

1

EN/GDP CO2/EN

Soviet Model: 1949-1980 The Classic Period: 1981-2001 Out-of-control growth: 2002-2005

Levine, Zhou and Price (2009); Data from WB Development Indicators

5

5. The WITCH model - www.witchmodel.org

WITCH: World Induced Technical Change Hybrid model

Hybrid I.A.M.:� Economy : Ramsey-type optimal growth (inter-temporal)� Energy : Energy sector detail (technology portfolio)� Climate : Damage feedback (global variable)

� 13 Regions (“where” issues)� Intertemporal (“when” issues)� Game-theoretical set-up (free-riding incentives)

� Bosetti, V., E. Decian, A. Sgobbi and M. Tavoni (2009). “The 2008 WITCH Model: New Model Features and Baseline.” FEEM Working Paper 85.09 .

� Bosetti V., E. Massetti, M. Tavoni (2007). “The WITCH Model, Structure, Baseline, Solutions”, FEEM Working Paper 10.2007.

� Bosetti, V., C. Carraro, M. Galeotti, E. Massetti and M. Tavoni (2006). “WITCH: A World Induced Technical Change Hybrid Model”, The Energy Journal, Special Issue. Hybrid Modeling of Energy-Environment Policies: Reconciling Bottom-up and Top-down, 13-38.

6

� Focus on energy sector

� Focus on technological change :

Learning-by-Doing in W&S

Energy intensity R&D

Breakthrough Technologies (two factors learning curves)

� Focus on channels of interactions among regions :

Technological spillover

Environmental externality

Exhaustible common resources

Trade of emission permits

Trade of oil

� Focus on strategic behaviour (open loop Nash game)

6 Distinguishing features of WITCH

7

0

10000

20000

30000

40000

50000

60000

70000

80000

1960 1975 1990 2005 2020 2035 2050

GD

P p

er c

apita

(20

00 U

S$)

China OECD World

7. Economic growth

GDP per capita (2000 US$)

� 1960-2005 14-fold expansion of GDP per capita� Gap with OECD: 19 times lower in 2005, 3.5 times lower in

2050

8

8. Energy use

� 25% of global demand of energy in 2050 from China� energy use per capita higher than global average, but lower

than in OECD economies

0

5000

10000

15000

20000

25000

1960 1975 1990 2005 2020 2035 2050

Ene

rgy

use

(Mto

e)

China OECD World

0

1000

2000

3000

4000

5000

6000

7000

1960 1975 1990 2005 2020 2035 2050

Ene

rgy

use

per

capi

ta (

kg o

f oi

l equ

ival

ent)

China OECD World

Energy use (MToe) Energy use per capita (MToe)

9

9. Energy intensity and carbon intensity

0

1

2

3

4

5

6

7

8

9

10

1960 1975 1990 2005 2020 2035 2050

t of

CO

2-eq

per

1,0

00 c

onst

ant

2000

US

$

China OECD World

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1960 1975 1990 2005 2020 2035 2050

t of

oil

eq.

per

1,00

0 co

nsta

nt 2

000

US

$

China OECD World

Energy intensity (toe/'000 US$) Carbon intensity of GDP (t Co2e/'000 US$)

� Strong energy efficiency improvements (back to "Classic period")� Politburo: -20% reduction energy intensity in 2010 wrt 2005� Energy intensity of GDP remains twice higher than in OECD� Carbon intensity of GDP is more than twice than in OECD

10

10. China's share of global CO 2 emissions

0%

20%

40%

60%

80%

100%

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Sha

re o

f W

orld

CO

2 E

mis

sion

s fr

om F

uels

Use

CHINA OECD ROW

� China: from 22% (2005) to 27% (2050)� OECD: from 48% (2005) to 35% (205)� Global emissions: from 29.4 (2005) Gt to 62.4 Gt (2050)

11

11. The Copenhagen pledge

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

Cha

nge

in c

arbo

n in

tens

ity in

202

0 w

rt 2

005

GTEM

FUND

SGM

ETSAP-TIAM

MiniCAM - Hi Tech

WITCH

MESSAGE

MERGE Optimistic

MERGE Pessimistic

POLES

ENVISAGE

GRAPE

IMAGE

IEA - WEO 2009

EIA - IEO 2009

� China pledged to reduce the emissions intensity of outputby 40/45% wrt 2005

� EMF 22 data shows that target in BaU for 9 out of 15 models, median at -40%

Tavoni (2010)

For a deeper analysis of Copenhagen Accord: Carraro and Massetti (2010), UNEP (2010)

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The emissions tax scenarios

13

13. The emissions tax scenarios

0

50

100

150

200

250

300

350

400

450

2020 2025 2030 2035 2040 2045 2050

US

$ pe

r T

on o

f C

O2-

eq (

cons

tant

200

5)

CTax1 CTax2 CTax3 CTax4

• CTax4 is coherent with 535ppm target at 2100 (median +2.5ºC)• Lump-sum domestic rebate of emissions taxes

14

14. GHGs emissions in China

0

5

10

15

20

25

30

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

GH

G E

mis

sion

s (G

tCO

2-eq

/yea

r)

BaU CTax1 CTax2 CTax3 CTax4

5.1 Gt

11.4 Gt

15

15. GHGs emissions wrt the BaU and 2005

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Con

trac

tion

of G

HG

s E

mis

sion

s

CTax1 - BaU CTax2 - BaU CTax3 - BaU CTax4 - BaU

CTax1 - 2005 CTax2 - 2005 CTax3 - 2005 CTax4 - 2005

� G8-MEF target for 2050: -50% global, -80% G8 (wrt 2005 ?)� Developing countries at least -25% wrt 2005.

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16. Two main directions for change

� Up-ward (down-ward) movement signals reduction (increase) of carbon intensity of Energy

� Right-ward movement signals reduction of energy intensity of GDP

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0% 20% 40% 60% 80% 100%

Energy efficiency improvement wrt 2005

Red

uctio

n of

car

bon

inte

nsity

of

ener

gyw

rt 2

005

BaU CTax1 CTax2 CTax3 CTax4

17

17. Total primary energy supply

COAL( NO CCS )

GAS OIL NUCLEARWIND

and SOLARTPES

2030-2005 ( average per year )

BaU 2.5% 3.9% 3.9% 4.6% 7.9% 2.7%CTax1 1.8% 4.0% 3.9% 5.7% 9.3% 2.3%CTax2 0.8% 3.9% 3.6% 7.4% 11.4% 1.7%CTax3 -0.8% 4.0% 3.6% 8.6% 12.8% 1.3%CTax4 -1.6% 3.4% 3.1% 9.0% 13.3% 1.1%

2050-2005 ( average per year )

BaU 2.2% 2.8% 2.9% 3.8% 7.8% 2.2%CTax1 1.3% 3.0% 2.7% 5.2% 9.6% 1.7%CTax2 -0.5% 2.7% 2.2% 6.7% 11.6% 1.2%CTax3 -1.2% 2.8% 1.8% 7.1% 12.2% 1.1%CTax4 -1.4% 2.1% 1.2% 7.5% 12.8% 0.9%

� Nuclear and renewables are the two fastest growing technologies in all scenarios

� Coal without Carbon Capture and storage has steepest decline

18

18. Marginal abatement cost curves

0

50

100

150

200

250

300

350

400

450

0% 10% 20% 30% 40% 50% 60% 70% 80%

US

$ /

tCO

2-eq

(co

nsta

nt 2

005)

China 2020 China 2030 China 2040 China 2050

OECD 2020 OECD 2030 OECD 2040 OECD 2050

� Abatement potential expressed in percentage of emissions reductions in the BaU for comparability.

19

19. The cost of reducing GHGs emissions

� Costs are expressed as the ratio between the discounted sum of GDP losses with respect to the BaU scenario and cumulative discounted GDP in the BaU scenario

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

China OECD China OECD

5% discount rate 3% discount rate

Per

cent

age

of c

umul

ativ

e G

DP

CTax1 CTax2 CTax3 CTax4

Bosetti and Frenkel (2009)

20

� China’s emissions are likely to grow substantially in the next decades.

� China will therefore be in the peculiar position of being the greatest emitter of GHGs but at the same time not rich enough to afford costly abatement measures.

� The Chinese Cop15 pledge seems already embedded in reference scenarios that include strong energy efficiency improvements: domestic concerns higher than international ones.

� Marginal abatement costs lower in China than in other economies.Higher aggregate costs.

20. Conclusions - 1

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21. Conclusions - 2

� A mild commitment to introduce some sort of emissions pricing inChina is much needed in a post-2020 climate architecture.

� If costs < 1%, China would accept only the lowest tax scenario.

� Emissions decline by 25% wrt BaU, but still increase by 60% with respect to 2005.

� Not compatible with G8 and MEF goal of -50% globally in 2050.

� A tax starting from 50 US$ per ton of CO2-eq in 2020 would be needed to deliver the 25 percent reduction of emissions, but toocostly for China (2.0/2.5 percent of GDP).

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