From Paris Agreement to recent EU carbon price forecasts

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From Paris Agreement to recent EU carbon price forecasts by Mind Map: From Paris Agreement to recent EU carbon price forecasts

1. 1) The Paris Agreement demonstrated that there is worldwide commitment to reduce greenhouse gases.

1.1. Last year 122 countries have ratified the Paris Agreement, which at its core aims to reduce the worlds CO2 emissions to a level that would keep global warming this century "well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius."

1.1.1. Guardian on Climate Change Impact

1.1.1.1. Last year, an estimated 6.9 million people were forced to leave their homes as a result of conflict and violence. Worst affected was the Democratic Republic of the Congo, where 922,000 were displaced, a 50% rise on the previous year. Close behind was Syria (824,000), followed by Iraq (659,000), Afghanistan (653,000), Nigeria (501,000) and Yemen (478,000). Disasters such as floods, storms and wildfires had an even greater effect, displacing 24.2 million people, more than three times the number uprooted by conflict. This trend was at its most acute in east Asia and the Pacific. In China, 7.4 million were forced from their homes, with 5.9 million affected in the Philippines and a further 2.4 million in India. Floods accounted for half of all people displaced by disasters

1.2. The Paris climate agreement aims at holding global warming to well below 2 degrees Celsius and to “pursue efforts” to limit it to 1.5 degrees Celsius. To accomplish this, countries have submitted Intended Nationally Determined Contributions (INDCs) outlining their post-2020 climate action. Here we assess the effect of current INDCs on reducing aggregate greenhouse gas emissions, its implications for achieving the temperature objective of the Paris climate agreement, and potential options for overachievement. The INDCs collectively lower greenhouse gas emissions compared to where current policies stand, but still imply a median warming of 2.6–3.1 degrees Celsius by 2100. More can be achieved, because the agreement stipulates that targets for reducing greenhouse gas emissions are strengthened over time, both in ambition and scope. Substantial enhancement or over-delivery on current INDCs by additional national, sub-national and non-state actions is required to maintain a reasonable chance of meeting the target of keeping warming well below 2 degrees Celsius.

1.3. The near-term mitigation targets set by countries for the 2020–2030 period are insufficient to secure the achievement of the temperature goal. An increase in mitigation ambition for this period will determine the Agreement's effectiveness in achieving its temperature goal.

1.4. Perspectives Analysis Paris Agreement

1.5. PWC

1.5.1. Despite the relatively rapid decarbonisation in 2015, countries still fall short of what’s needed. Based on expected GDP growth of approximately 3% each year and the remaining two degree carbon budget, on average, countries will need to reduce their carbon intensity by 6.5% every year from now to 2100. (PWC)

1.6. BlackRock

1.6.1. BlackRock

1.6.1.1. The price of Climate Change (Oct 15)

1.7. Barclays

1.7.1. 4 may presentation

1.7.1.1. Ratcheting up ambition every 5 years keeps the door to a 2°C world ajar

1.7.1.1.1. The Paris Agreement provides for such a mechanism, namely a monitoring-and-review process of all parties’ national emissions plans every five years. The Agreement states that there will be a ‘facilitative dialogue’ in 2018 to take stock of progress subsequent to Paris, with those countries that have submitted INDCs covering the period only as far out as 2025 then urged to communicate a new INDC by 2020 and to do so every five years thereafter, and those that have submitted INDCs for the period out to 2030 requested to communicate or update their plans by 2020 and to do the same every five years thereafter.

1.7.1.2. 4 may presentation

1.7.1.2.1. Ratcheting up ambition every 5 years keeps the door to a 2°C world ajar

1.7.2. climate change

1.8. EC GECO

1.8.1. GECO 2016 - Global Energy and Climate Outlook: Road from Paris

2. 2) Carbon pricing is the most cost effective policy instrument to reduce emissions and to channel investments into low carbon technology.

2.1. “There is a growing sense of inevitability about putting a price on carbon pollution,” said World Bank Group President Jim Yong Kim. “In order to deliver on the promises of the historic Paris climate agreement, a price on carbon pollution will be essential to help cut emissions and drive investments into innovation and cleaner technologies. Prices for producing renewable energy are falling fast, and putting a price on carbon has the potential to make them even cheaper than fuels that pollute our planet.”

2.2. Carbon Pricing Advocacy

2.2.1. Carbon Pricing Leadership Coalition

2.2.1.1. LEADERS UNITE IN CALLING FOR A PRICE ON CARBON

2.2.1.1.1. Convened by World Bank Group President Jim Yong Kim and the International Monetary Fund’s Managing Director Christine Lagarde, the Carbon Pricing Panel is calling on their peers to follow their lead and put a price on carbon. The call aims to spur further, faster action towards the necessary low carbon, productive, competitive economy of the future. They are joined in this effort by OECD Secretary General Angel Gurria. Members of the Carbon Pricing Panel include German Chancellor Angela Merkel, Chilean President Michelle Bachelet, French President François Hollande, Ethiopian Prime Minister Hailemariam Desalegn, Mexican President Enrique Peña Nieto, Canadian Prime Minister Justin Trudeau, Governor Jerry Brown of California, and Mayor Eduardo Paes of Rio de Janeiro. The panel provides political momentum to complement the voices of government and industry leaders in the Carbon Pricing Leadership Coalition – an action based platform set up on the back of support for carbon pricing from 74 countries and 1,000 companies at the United Nations Climate Summit in September 2014. Private sector support comes from US Institutional Investor Calpers, Engie of France, Mahindra Group of India, and Netherlands based Royal DSM who, with other leading businesses, work to link business needs with public policies through the Carbon Pricing Leadership Coalition. On the eve of the signing ceremony in New York of the Paris COP21 Agreement, the Panel challenged the world to: Expand carbon pricing to cover 25 percent of global emissions by 2020 – double the current level – and Achieve 50 percent coverage within the next decade.

2.2.2. Caring for Climate

2.2.3. Worldbank Carbon Pricing Initiatives

2.2.4. Partnership for Market Readiness: Building Readiness for Carbon Pricing

2.2.5. OECD

2.2.5.1. Carbon Rates Pricing CO2 through Taxes and Emissions Trading Systems

2.2.5.2. aligining policies for a low carbon transition

2.2.6. CLEW

2.2.6.1. Experts call for CO2 price to retain Energiewende’s credibility

2.2.6.1.1. An expert commission tasked with monitoring the progress of the German energy transition warned the country will probably miss its 2020 emission targets and other crucial Energiewende goals, threatening the entire project’s credibility. The commission suggested a number of steps, including a general price on carbon emissions, more action in the transport sector and fully exposing renewables to market mechanisms. [UPDATES quotes from environment minister and spokesperson, graphics]

2.3. PIK

2.3.1. RECIPE - Establishing a Price on Carbon

2.4. BP Energy outlook

2.4.1. For the given projected path of GDP, achieving anything close to the IEA’s 450 Scenario by 2035 would require an unprecedented pace of improvement in both global energy intensity and carbon intensity.

2.4.2. A meaningful global price for carbon is likely to be the most efficient mechanism through which to achieve these improvements.

2.5. “Carbon pricing is the most effective policy for reducing emissions, raises significant revenues, is administratively straightforward, and can have substantial domestic health benefits. It should be front and center as countries move forward on their mitigation pledges for the landmark Paris Agreement,” said IMF Managing Director Lagarde.

2.6. Agora Eneriewende

2.6.1. If the cost of a tonne of carbon dioxide (CO₂) is €50 or more, renewable energy power systems in 2050 are mostly cheaper than or approximately as expensive as a conventional lignite/hard coal/natural gas power system - largely independently of the assumed fuel prices (Figure S-1). Only when lower CO₂ prices or a combination of low energy prices and CO₂ prices of less than €50 are assumed for 2050, a lignite/hard coal/natural gas power mix leads to lower overall costs than a system based on renewable energy sources

2.7. "Continuing Momentum for Putting a Price on Carbon Pollution" (Worldbank)

2.8. CDP Report 2016

2.8.1. Industry leads new initiative to revolutionize carbon pricing for investors

2.9. Article

2.9.1. CDP forms panel to find right CO2 prices to meet Paris Agreement

2.9.2. Economists Stiglitz, Stern to chair high-level carbon pricing commission

2.10. Carbon Pricing

2.10.1. Ecofys / Generation

2.10.1.1. glass hal;f full or empty?

2.10.1.1.1. USD 100 carbon price needed to stay within 2 degree budget

2.10.2. The Economist

2.10.2.1. The Cost of Inaction

2.10.2.1.1. It is clear that government action is required to establish a firm, clear carbon price that reasonably reflects its externality costs. It is the responsibility of governments to correct market failures, and climate change is potentially the world’s most important market failure. Without an appropriately functioning pricing mechanism it is incredibly difficult for climate risks to be addressed and for capital to be effectively allocated. This requires rigorous carbon taxation or carbon trading schemes

2.10.2.1.2. “Reasonable assessments of the price needed to meaningfully address emissions have generally ranged above US$30 per tonne. However, the challenges of several current schemes have more to do with a tendency of governments to oversupply the market, concede free quotas or provide other loopholes than with inherent failures of cap-and-trade as a system.”

2.10.2.1.3. “The market is the most efficient way to allocate a rare resource, which is capital. If we think that’s the case, why is it not working?” asks Philippe Desfossés, CEO of ERAFP. “It’s not working because the market is not getting the right signals, and obviously we know that the problem is linked to the fact that this negative externality that is carbon is not priced.”

2.10.3. Harvard kenndey School

2.10.3.1. The Promise and Problems of Pricing Carbon: Theory and Experience

2.10.4. PRA

2.10.4.1. The impact of climate change on the UK insurance sector A Climate Change Adaptation Report by the Prudential Regulation Authority September 2015

2.10.4.1.1. 4.9 There is evidence from the academic community to suggest climate change and other environment-related factors are not properly integrated into financial or corporate decision-making71 and consequently not properly priced. 72 There is also a large and established literature on the size and distribution of environmental externalities, with one study estimating that the top 100 global environmental externalities cost the global economy US$4.7 trillion per year. 73 Pricing these externalities, even if only partially, could change the value of assets creating (positive or negative) environmental externalities. 74

2.10.4.1.2. 4.10 While – at least in an efficient market – one might naturally expect financial market prices already to reflect the risks presented by a transition to a lower carbon economy, this may not necessarily be the case. Market participants might question the political commitment to policies designed to reduce carbon emissions, or there may be insufficient information available to assess fully the impact of a 2°C climate scenario on asset prices.

2.10.4.1.3. Table 4.1

2.10.5. OECD

2.10.5.1. aligining policies for a low carbon transition

2.10.6. OECD

2.10.6.1. Carbon Rates Pricing CO2 through Taxes and Emissions Trading Systems

2.10.7. University of Delft

2.10.7.1. Increasingly higher carbon price “To attract investors’ interest in this enormous transition requires an initial carbon price of 40 euro per ton (current price: €6) and a further increase to around €100 in 2030, rising subsequently to €250 euro in 2050. This kind of hefty price tag on carbon emissions will lead to enormous shifts in demand for individual products and services, driving accelerated write-down of current investments (in fossil-based infrastructure, vehicle fleets, buildings, machines and production plant, among other things). At the same time it will mean profitability for investments in still expensive technologies like renewable energy and carbon capture and storage (CCS).”

2.10.8. Carbon Pricing Watch

2.10.8.1. As of May 1, 2016, 162 intended nationally determined contributions (INDCs), representing 190 Parties, had been submitted to the UNFCCC. These INDCs outline the intended national efforts toward reducing greenhouse gas (GHG) emissions and climate resilient development under the Paris Agreement. More than 90 of the submitted INDCs include proposals for emission trading systems (ETSs), carbon taxes and other carbon pricing initiatives. Parties stating in their INDCs that they are planning or considering the use of domestic or international market mechanisms account for 61 percent of global GHG emissions. Most of these Parties request financial and technological support through international carbon markets.

2.10.8.2. Among the Parties planning or considering the use of market mechanisms are three of the world’s five largest emitters.

2.10.8.2.1. China, India, Brazil

2.10.8.3. Carbon pricing is mentioned in paragraph 137 of the COP decision, which recognises the “important role of providing incentives for emission reduction activities, including tools such as domestic policies and carbon pricing.”

2.10.8.3.1. carbon pricing map

2.10.8.4. Carbon Pricing Watch

2.10.8.4.1. As of May 1, 2016, 162 intended nationally determined contributions (INDCs), representing 190 Parties, had been submitted to the UNFCCC. These INDCs outline the intended national efforts toward reducing greenhouse gas (GHG) emissions and climate resilient development under the Paris Agreement. More than 90 of the submitted INDCs include proposals for emission trading systems (ETSs), carbon taxes and other carbon pricing initiatives. Parties stating in their INDCs that they are planning or considering the use of domestic or international market mechanisms account for 61 percent of global GHG emissions. Most of these Parties request financial and technological support through international carbon markets.

2.10.8.4.2. Among the Parties planning or considering the use of market mechanisms are three of the world’s five largest emitters.

2.10.8.4.3. Carbon pricing is mentioned in paragraph 137 of the COP decision, which recognises the “important role of providing incentives for emission reduction activities, including tools such as domestic policies and carbon pricing.”

2.10.9. PIK

2.10.9.1. RECIPE - Establishing a Price on Carbon

2.10.10. Carbon Pricing readiness (Worldbank)

2.10.11. Caring for Climate

2.10.12. Instruments

2.10.13. Carbon pricing Watch

2.10.14. CLEW

2.10.14.1. Experts call for CO2 price to retain Energiewende’s credibility

2.10.14.1.1. An expert commission tasked with monitoring the progress of the German energy transition warned the country will probably miss its 2020 emission targets and other crucial Energiewende goals, threatening the entire project’s credibility. The commission suggested a number of steps, including a general price on carbon emissions, more action in the transport sector and fully exposing renewables to market mechanisms. [UPDATES quotes from environment minister and spokesperson, graphics]

3. 3) Carbon markets and carbon taxes are the two forms of carbon pricing. Major Carbon markets are operational in Europe, US, Canada. China is about to launch the world's biggest in Summer 2017.

3.1. Carbon Pricing

3.1.1. Worldbank

3.1.2. Instruments

3.1.3. Carbon pricing Watch

3.1.3.1. As of May 1, 2016, 162 intended nationally determined contributions (INDCs), representing 190 Parties, had been submitted to the UNFCCC. These INDCs outline the intended national efforts toward reducing greenhouse gas (GHG) emissions and climate resilient development under the Paris Agreement. More than 90 of the submitted INDCs include proposals for emission trading systems (ETSs), carbon taxes and other carbon pricing initiatives. Parties stating in their INDCs that they are planning or considering the use of domestic or international market mechanisms account for 61 percent of global GHG emissions. Most of these Parties request financial and technological support through international carbon markets.

3.1.3.2. Among the Parties planning or considering the use of market mechanisms are three of the world’s five largest emitters.

3.1.3.2.1. China, India, Brazil

3.1.3.3. Carbon pricing is mentioned in paragraph 137 of the COP decision, which recognises the “important role of providing incentives for emission reduction activities, including tools such as domestic policies and carbon pricing.”

3.1.3.3.1. carbon pricing map

3.1.4. PUTTING A PRICE ON CARBON, ONE JURISDICTION AT A TIME (p. 76ff)

3.1.5. GETTING SERIOUS WITH CARBON PRICING POLICY (p88-90)

3.2. Carbon Markets

3.2.1. Overview

3.2.1.1. Worldbank carbon Markets 2015

3.2.1.2. ETS around the world

3.2.1.3. worldbank networked carbon markets

3.2.1.4. IETA

3.2.1.4.1. GHG Market Report 2015/16

3.2.1.5. ICAP

3.2.1.5.1. Emissions Trading Worldwide: ICAP Status Report 2017

3.2.2. Non-EUETS

3.2.2.1. EDF: World carbon markets

3.2.2.2. ICAP: Worldwide Emission Trading Schemes Overview

3.2.3. EUETS

3.2.3.1. EDF: EU ETS

3.2.3.2. EXPLORING THE EU ETS BEYOND 2020

3.2.3.3. CEPS

3.2.3.3.1. State of the EUETS Report

3.2.3.4. Eureletric ICIS paper

3.2.3.5. EEA

3.2.3.5.1. Trends and projections in the EU ETS in 2016 — The EU Emissions Trading System in numbers

3.2.3.6. CLEW

3.2.3.6.1. Understanding the European Union’s Emissions Trading System

3.3. Ecofys

3.3.1. State and Trends of Carbon Pricing

4. 4) The theoretical "social cost of carbon" gives an idea of the - from an environmental policy perspective -necessary and desired price range to truly reflect and internalise the external costs of damages caused by GHG.

4.1. US EPA

4.1.1. EPA and other federal agencies use the social cost of carbon (SC-CO2) to estimate the climate benefits of rulemakings. The SC-CO2 is an estimate of the economic damages associated with a small increase in carbon dioxide (CO2) emissions, conventionally one metric ton, in a given year. This dollar figure also represents the value of damages avoided for a small emission reduction (i.e. the benefit of a CO2 reduction).

4.2. Washington Post Article

4.2.1. The social cost of carbon is an Obama-era metric first addressed by a federal working group in 2009. The basic premise is simple: Scientists agree that climate change will have all kinds of impacts on human societies, including natural disasters and effects on human health, productivity and agricultural output, all of which have economic consequences. The social cost of carbon, then, refers to the monetary cost of emitting a single ton of carbon dioxide into the atmosphere, given that these emissions will further contribute to global warming. The value has been used to aid in cost-benefit analyses for a variety of federal environmental rules. Currently, it’s set at about $36 per ton of carbon dioxide.

4.3. National Academy Press

4.3.1. Valauing Climate Damages. Estimation of the Social Cost of Carbon Dioxide (2017)

4.4. “There are a number of companies, after last year’s Paris Agreements, who are beginning to think about how to prepare for a world—not yet in place in the U.S. but in place in Europe—where there is a price on carbon,” he said. “Many large companies are thinking about what internal price for carbon they should use. The Social Cost of Carbon can be a rallying point for them, for investment planning and decisions on energy projects… the [$36 per ton] price can be taken up by companies in their internal analyses.”

4.5. Stanford University: The "social cost" of carbon dioxide emissions may not be $37 per ton, as estimated by a recent U.S. government study, but $220 per ton.

4.6. German Ministry report

4.6.1. The ministry warns of a “transitional shock” if the federal government were to decide to steer CO2-emission prices towards the true economic costs, instead of the current market price. These real economic costs were not taken into account in the evaluation of relevant financial assets, so many assets “would heavily lose in value”.

4.7. Carbonbrief

4.7.1. Q&A: The social cost of carbon

5. 5) In a carbon market, the price of carbon is set by supply and demand dynamics. If demand for CO2 emission allowances (i.e. emissions) is bigger than supply (ie CO2 budget), then the market has to "balance" by reducing enough emissions to get to equilibrium.

5.1. In an oversupplied market prices are set by the willingness of the marginal seller to offer his emission rights to the market. (Oversupply doesnt automatically mean liquidity. If none of the oversupply is offered, then -from a market perspective - the market might de facto be undersupplied (short)). (Example 2006)

6. 6) In Europe, supply of CO2 emission allowances is politically determined and allocated to the economy as a function of long term GHG reduction targets. Supply of emission allowances is fixed in form of multi-year strips, 5-10 year trading periods. For each trading period the *maximum* number of allowances in the system is known. Allocation happens via (daily) auctions and free allocation.

6.1. EUETS Cap to 2050

6.2. Because of the known maximum supply side, carbon market fundamentals can be modeled with a high degree of confidence (subject to the stability of the political framework and data availability).

6.3. EUETS cap to 2030

6.4. Trends and projections in the EU ETS in 2016 — The EU Emissions Trading System in numbers

7. 7) In addition to the theoretical maximum carbon budget, the EU has signed into law a "Market Stability Mechansim" which from 2019 onwards will annually remove 12% of the "oversupply" in the carbon market, thus - over time - erode the oversupply and lead to fundamentally driven equilibrium prices.

7.1. Market Stability Reserve develropment over time

7.2. EXPLORING THE EU ETS BEYOND 2020 COPEC Research Program: the COordination of EU Policies on Energy and CO2 with the EU ETS by 2030 November 2015

7.2.1. In depth description of MSR incl price forecasts see chapter 2 (page 33 onwards)

7.3. Each emission allowance withheld or removed from the market, prevents a ton of CO2 being emitted.

8. 8) Market forces will lead to reductions where it is least expensive first, before moving on to next best abatement and so forth. Prices will subsequently move along the "Marginal Abatement Cost Curve" (MACC). The MACC curve is determined by energy commodity prices as well as low carbon technology cost, and the expectation of their development in the future. The MACC curve is not linear as abatement cost grow exponentially once the lower cost options are exhausted. The largest low-cost emission reduction potential is the switch from coal to gas based power production.

8.1. TIMES PanEU

8.2. (Example eur 30 in 2008 pre-lehman. It took 10 yeRs to correct a design flaw)

8.3. McKinsey

8.4. EnerFuture MAC modeling

8.5. Ecofys Serpec

8.6. DECC paper EnerFuture

8.6.1. Emission reduction efforts from sectors included in the ETS sector provide cost-effective reductions due to permit trading between participating sectors; however, the relationship between reduction potential and abatement cost is non-linear. As the reduction target increases, cost per MtCO2 mitigated rises faster and faster. By shifting 5 percentage points of reduction effort from the NTS sectors to ETS sectors (that is, changing the targets vs. 2005 to 25% NTS and 50% ETS (including International Aviation, to achieve an overall reduction of 40% vs. 1990), overall costs rise fairly significantly. The total cost with the new ETS/NTS effort sharing is €45bn in 2030, approximately 33% higher than in the 40% Scenario

8.7. KU Leuven

8.7.1. Carbon Mitigation in the Electric Power Sector under Cap-and-trade and Renewables Policies

8.7.2. CO2 abatement costs in the power sector

9. 9) The difference between the maximum supply and expected demand under various scenarios can be modeled with a relatively high degree of certainty (due to fixed supply side). The resulting shortfall (if any) of allowances can be calculated and the resulting need for abatement can be translated into costs (ie carbon price) along the MAC curve.

9.1. One of the rare "official" price projections by the EU authorities themselves can be found in the European Commission’s latest extensive EU reference scenario (Sept 2016)

9.2. MIT - Beyond 2020—Strategies and Costs for Transforming the European Energy System

9.2.1. full paper

9.3. Different Modeling Scenarios (examples)

9.4. Hartree Carbon Price Gradients based on Fuel Switch

9.5. Monitoring, reporting and compliance obligations are strictly enforced within the EU ETS. A EUR 100.tCO2 penalty is levied for each non-compliant emission of CO2 and the EU entertains a "name and shame" policy, publishing names on non-compliant entities.

9.5.1. Enforcing the European Emissions Trading System within the EU Member States: a Procrustean bed?” (2015)

9.5.2. Aircraft operators rack up over $1 million in UK penalties for non-compliance with EU ETS

9.5.3. Example: List of participants or operators who have not complied with their legal requirements and received a penalty (in Scotland)

10. 10) Price Forecasts in Europe

10.1. Carbon Price Forecasts / MSR 24% impact

10.1.1. Platts video

10.1.2. BNEF

10.1.3. Thompson Reuters

10.1.4. Barclays

10.1.5. Goldman Sachs

10.1.6. ICIS Eurelectric report

10.1.6.1. Scenrio 5 is the MSR 24%