Long-term benefit to incentivising clean energy investments

September 27th, 2012 by Potsdam Institute for Climate Impact Research

Industrialized countries can profit from taking early action for climate change mitigation even if the rest of the world delays greenhouse gas emission cuts.

With the 2°Celsius target of limiting global warming, it pays in the long term to incentivise investments into clean energy instead of fossil fuels by adopting ambitious emission reductions.

This is one of the key findings of scientists exploring the economics of decarbonisation in an imperfect world, in a set of seven papers now published in a special issue of Climatic Change.

They will feed into the 5th assessment report of the Intergovernmental Panel on Climate Change.

“It pays for Europe to assume its role of a forerunner instead of tiptoeing around like many other countries do, our study shows,” says Ottmar Edenhofer, leader of the team of authors and chief-economist of the Potsdam Institute for Climate Impact Research.

“By acting early, countries can avoid expensive lock-ins in carbon-intensive infrastructure – this turns out to outweigh the costs that arise from higher overall greenhouse gas reduction commitments and from short-term losses of competitiveness in international markets,” Ottmar Edenhofer said.

If carbon pricing is suboptimal, technology policies promoting renewables can reduce mitigation costs substantially.

Still, even under a scenario of a general agreement of a 2°Celsius target, for some countries delaying mitigation under certain circumstances could be a rational strategy.

Nations that act as net sellers of permits, like India – in case of equal per capita emission rights – can possibly benefit from delayed action: The resulting higher future carbon prices lead to an increase of revenues from permit exports.

Without a global emission reduction target, however, in any case investors lack the necessary incentives to develop low-carbon technologies.

“As a result, costs for climate change mitigation would rise sharply,” said Gunnar Luderer, one of the co-authors.

“Early and credible climate policy is one crucial factor for limiting mitigation costs,” he said.

The availability of technology is a second factor. While emission reduction potentials are high in the power generation sector, which can be used by comparatively inexpensive rapid deployment of renewable energy technologies, like wind power for instance. In the transport sector, low-emission technologies are still very expensive. Efforts should therefore focus on energy efficiency improvements, as well as research and development.

“Second-best settings and their implications for climate policy have been an under-researched topic,” Edenhofer pointed out.

“Many scenarios of the economics of decarbonisation derive from cost estimates under unrealistic assumptions, that all relevant technologies are available, all countries participate in an agreement for climate change mitigation, and that they will implement without delay their greenhouse gas emission reductions.”  The new studies established a whole new approach.

The RECIPE Project (Report on Energy and Climate Policy in Europe) provides a range of scenarios that no longer assume a perfect world, intending to enhance the quality of academic research for decision-makers.

It uses three different computer simulations of energy markets, macro-economics and policies, so-called Integrated Assessment Models.

The model inter-comparison effort increases the transparency of uncertainties and underlying assumptions, thus making the results more robust.

It is a joint venture of the Potsdam Institute for Climate Impact Research (PIK), Germany, the Centro Euro-Mediterraneo per i Cambiamenti Climatici (CMCC), Italy, the Centre International de Recherche sur l’Environnement et le Développement (CIRED), France, and the University of Cambridge, UK.

 

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