Current European Union policy sets out targets and mechanisms to achieve a 20% reduction in greenhouse gas emissions from 1990 levels by 2020. In recent years however there have been strong calls for increasing this target to 30%, with deeper cuts beyond 2020.
The purpose of this report is to calculate the costs for the EU as a whole and each member state of moving to tighter emission reduction targets under different scenarios, taking into account the position of member states in the EU Emissions Trading Scheme. Importantly, the work does not attempt to quantify the benefits of reducing greenhouse gas emissions in Europe.
The analysis uses Bloomberg New Energy Finance‟s model of the European energy and emissions system, which assesses the first and second-order economic effects that arise through carbon markets, technology improvements and electricity prices. The model uses exogenous forecasts for individual sectors and simulates the uptake of low carbon technologies through the least cost option to achieve the emissions target for the EU as whole. The model assumes that abatement occurs when and where it is cheapest – subject to policy or regulatory constraints – so that Member States will only undertake abatement if the marginal cost of the abatement is less than the cost of purchasing allowances from elsewhere.
In the simplest scenario, we estimate that a change from a 20% to a 30% emissions reduction target for the EU as a whole would result in an additional cost of €3.5bn per year up to 2020.2 This figure represents the additional cost over and above existing policies that are in place, for example renewable energy targets and building standards, and assumes that both the Emissions Trading Scheme (ETS) and Non-Traded Sector (NTS) make maximum use of their allowances to import CERs under the 30% target. Costs vary significantly between Member States but remain a small proportion of GDP at only 0.03% for the EU-27.
Including the cost of meeting the renewable energy target, the average annual cost of meeting the 20% target is €23.3bn and €26.7bn for a 30% target. Our cost estimates include investment in clean technologies between 2011 and 2020 compared to a baseline business-as-usual (BAU) scenario with no emissions reductions targets. Our estimates also do not include any co-benefits of emissions reductions such as improvements in resource efficiency, energy security or air quality.
In general, the wealthiest fifteen Member States pay the vast majority of the costs of meeting targets. By selling emissions allowances, several of the lowest-income Member States are able to generate net profits.
Under the burden sharing assumption proposed by the European Commission (COM (2010) 265) which assumes some 65% of the burden of moving to a 30% target is placed on the ETS sector, abatement costs in the ETS increase more than those in the non-traded sectors NTS.
Emissions caps in addition to the renewable energy target cause the power sector to switch from carbon-intensive coal to efficient gas power, whose higher operating costs increase wholesale electricity prices. Countries with established and carbon-intensive power sectors will have to spend the most in order to meet the emissions target – in particular Germany, Italy, Spain and the UK. Higher electricity prices then cause abatement in other sectors, such as buildings, and a slight shift away from electrically powered vehicles. Without additional policy frameworks, vehicles and heating systems will remain largely dependent on fossil fuels until after 2020, though a modest rise in fuel efficiency is projected.
The renewable energy target alone is projected to deliver around 55% of the emissions reduction required for a 20% target. The remaining annual cost of meeting the 20% emissions target will be about €4.6bn, only 0.04% of GDP for the EU-27.4 The majority of this cost will be borne by the power, buildings and transport sectors.
The importing of carbon credits from outside Europe and purchasing of allowances from surplus countries is a significant part of the total costs of higher-income Member States, such as Germany, Italy, France, Spain and the UK. Lower-income Member States such as Romania, Bulgaria and the Czech Republic are likely to gain significant revenues from selling allowances to other States. Note that when the total trading costs are summed across the whole EU-27, the net value of allowances traded between countries is zero. At the EU level cost of emissions trading is only the value of imported CERs.
Under a 30% target the carbon price in the ETS rises to €33/t, from €11/t under a 20% target.5 The equivalent prices in the NTS are €8/t under both targets. The carbon price in the NTS is unchanged under the 30% target because an additional CER import limit for the NTS of 866Mt is assumed up to 2020. No additional CER import limit is assumed under the 25% target which increases the carbon price in the NTS in this scenario.
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