The role of capital costs in decarbonizing the electricity sector

Low-carbon electricity generation, i.e. renewable energy, nuclear power and carbon capture and storage, is more capital intensive than electricity generation through carbon emitting fossil fuel power stations. High capital costs, expressed as high weighted average cost of capital (WACC), thus tend to encourage the use of fossil fuels. To achieve the same degree of decarbonization, countries with high capital costs therefore need to impose a higher price on carbon emissions than countries with low capital costs. This is particularly relevant for developing and emerging economies, where capital costs tend to be higher than in rich countries. In this paper we quantitatively evaluate how high capital costs impact the transformation of the energy system under climate policy, applying a numerical techno-economic model of the power system. We find that high capital costs can significantly reduce the effectiveness of carbon prices: if carbon emissions are priced at USD 50 per ton and the WACC is 3%, the cost-optimal electricity mix comprises 40% renewable energy. At the same carbon price and a WACC of 15%, the cost-optimal mix comprises almost no renewable energy. At 15% WACC, there is no significant emission mitigation with carbon pricing up to USD 50 per ton, but at 3% WACC and the same carbon price, emissions are reduced by almost half. These results have implications for climate policy; carbon pricing might need to be combined with policies to reduce capital costs of low-carbon options in order to decarbonize power systems

Truncation Error Estimates in Process Life Cycle Assessment Using Input‐Output Analysis

Process life cycle assessment (PLCA) is widely used to quantify environmental flows associated with the manufacturing of products and other processes. As PLCA always depends on defining a system boundary, its application involves truncation errors. Different methods of estimating truncation errors are proposed in the literature; most of these are based on artificially constructed system complete counterfactuals. In this article, we review the literature on truncation errors and their estimates and systematically explore factors that influence truncation error estimates. We classify estimation approaches, together with underlying factors influencing estimation results according to where in the estimation procedure they occur. By contrasting different PLCA truncation/error modeling frameworks using the same underlying input‐output (I‐O) data set and varying cut‐off criteria, we show that modeling choices can significantly influence estimates for PLCA truncation errors. In addition, we find that differences in I‐O and process inventory databases, such as missing service sector activities, can significantly affect estimates of PLCA truncation errors. Our results expose the challenges related to explicit statements on the magnitude of PLCA truncation errors. They also indicate that increasing the strictness of cut‐off criteria in PLCA has only limited influence on the resulting truncation errors. We conclude that applying an additional I‐O life cycle assessment or a path exchange hybrid life cycle assessment to identify where significant contributions are located in upstream layers could significantly reduce PLCA truncation errors.EC/FP7/603864/EU/High-End cLimate Impacts and eXtremes/HELIXDFG, SFB 1026, Sustainable Manufacturing - Globale Wertschöpfung nachhaltig gestalte

The role of capital costs for decarbonizing the electricity sector

Low-carbon electricity generation, i.e. renewable energy, nuclear power and carbon capture and storage, is more capital intensive than electricity generation through carbon emitting fossil fuel power stations. High capital costs, expressed as high weighted average cost of capital (WACC), thus tend to encourage the use of fossil fuels. To achieve the same degree of decarbonization, countries with high capital costs therefore need to impose a higher price on carbon emissions than countries with low capital costs. This is particularly relevant for developing and emerging economies, where capital costs tend to be higher than in rich countries. In this paper we quantitatively evaluate how high capital costs impact the transformation of the energy system under climate policy, applying a numerical techno-economic model of the power system. We find that high capital costs can significantly reduce the effectiveness of carbon prices: if carbon emissions are priced at USD 50 per ton and the WACC is 3%, the cost-optimal electricity mix comprises 40% renewable energy. At the same carbon price and a WACC of 15%, the cost-optimal mix comprises almost no renewable energy. At 15% WACC, there is no significant emission mitigation with carbon pricing up to USD 50 per ton, but at 3% WACC and the same carbon price, emissions are reduced by almost half. These results have implications for climate policy; carbon pricing might need to be combined with policies to reduce capital costs of low-carbon options in order to decarbonize power systems

Towards a Better Understanding of Disparities in Scenarios of Decarbonization: Sectorally Explicit Results from the RECIPE Project

This paper presents results from a model intercomparison exercise among regionalized global energy-economy models conducted in the context of the RECIPE project. The economic adjustment effects of long-term climate policy aiming at stabilization of atmospheric CO2 concentrations at 450 ppm are investigated based on the cross-comparison of the intertemporal optimization models REMIND-R and WITCH as well as the recursive dynamic computable general equilibrium model IMACLIM-R. The models applied in the project differ in several respects and the comparison exercise tracks differences in the business as usual forecasts as well as in the mitigation scenarios to conceptual differences in the model structures and assumptions. In particular, the models have different representation of the sectoral structure of the energy system. A detailed sectoral analysis conducted as part of this study reveals that the sectoral representation is a crucial determinant of the mitigation strategy and costs. While all models project that the electricity sector can be decarbonized readily, emissions abatement in the non-electric sectors, particularly transport, is much more challenging. Mitigation costs and carbon prices were found to depend strongly on the availability of low-carbon options in the non-electric sectors.Decarbonization, Energy and Climate Policy

The effect of industry delocalization on global energy use: A global sectoral perspective

Sectoral production technologies differ largely across countries, so do sectoral energy intensities. Hence, shifts in production locations within global sectors, possibly caused by environmental regulations, are likely to have an impact on aggregated energy usage and emissions. Applying a Logarithmic Mean Divisia Index decomposition we decompose changes of sectoral energy use from 2001–2011 into three effects: (sectoral) value added, energy efficiency and delocalization, which in this paper is conceived as a structural effect within sectors, between regions. Our results show that although economic activity and technological progress dominate global energy use developments, for most sectors a delocalization towards less efficient production places is ongoing. It contributes to annual increases in energy use in the range of 1–6%. Especially, manufacturing sectors, which are among the most energy consuming sectors, reveal significant increases in energy usage due to delocalization since 2004. This development is accompanied by declining energy intensity improvement rates, indicating that delocalization induces second order effects.BMBF, 01LS1610B, Klimapolitische Maßnahmen und Transformationspfade zur Begrenzung der globalen Erwärmung auf 1.5°C (PEP1p5)DFG, SFB 1026, Sustainable Manufacturing - Globale Wertschöpfung nachhaltig gestalte

Distributional Impacts of Carbon Pricing: A Meta-Analysis

Understanding the distributional impacts of market-based climate policies is crucial to design economically efficient climate change mitigation policies that are socially acceptable and avoid adverse impacts on the poor. Empirical studies that examine the distributional impacts of carbon pricing and fossil fuel subsidy reforms in different countries arrive at ambiguous results. To systematically determine the sources of variation between these outcomes, we apply an ordered probit meta-analysis framework. Based on a comprehensive, systematic and transparent screening of the literature, our sample comprises 53 empirical studies containing 183 effects in 39 countries. Results indicate a significantly increased likelihood of progressive distributional outcomes for studies on lower income countries and transport sector policies. The same applies to study designs that consider indirect effects, demand-side adjustments of consumers or lifetime income proxies

Road to glory or highway to hell? Global road access and climate change mitigation

Transportation infrastructure is considered a key factor for economic development and poverty alleviation. The United Nations have explicitly included the provision of transport infrastructure access, e.g. through all-season road access, in their Sustainable Development Goal agenda (SDGs, target 9.1). Yet, little is known about the number of people lacking access to roads worldwide, the costs of closing existing access gaps and the implications of additional roads for other sustainability concerns such as climate change mitigation (SDG-13). Here we quantify, for 250 countries and territories, the percentage of population without road access in 2 km. We find that infrastructure investments required to provide quasi-universal road access are about USD 3 trillion. We estimate that the associated cumulative CO2 emissions from construction work and additional traffic until the end of the century amount to roughly 16 Gt. Our geographically explicit global analysis provides a starting point for refined regional studies and for the quantification of further environmental and social implications of SDG-9.1

Time to act now? Assessing the costs of delaying climate measures and benefits of early action

This paper compares the results of the three state of the art climate-energy-economy models IMACLIM-R, ReMIND-R, and WITCH to assess the costs of climate change mitigation in scenarios in which the implementation of a global climate agreement is delayed or major emitters decide to participate in the agreement at a later stage only. We find that for stabilizing atmospheric GHG concentrations at 450 ppm CO2-only, postponing a global agreement to 2020 raises global mitigation costs by at least about half and a delay to 2030 renders ambitious climate targets infeasible to achieve. In the standard policy scenario—in which allocation of emission permits is aimed at equal per-capita levels in the year 2050—regions with above average emissions (such as the EU and the US alongside the rest of Annex-I countries) incur lower mitigation costs by taking early action, even if mitigation efforts in the rest of the world experience a delay. However, regions with low per-capita emissions which are net exporters of emission permits (such as India) can possibly benefit from higher future carbon prices resulting from a delay. We illustrate the economic mechanism behind these observations and analyze how (1) lock-in of carbon intensive infrastructure, (2) differences in global carbon prices, and (3) changes in reduction commitments resulting from delayed action influence mitigation costs.ou

Clean up your own mess: an experimental study of moral responsibility and efficiency

Although market-based environmental policy instruments feature prominently in economic theory and are widely employed, they often meet with public resistance. We argue that such resistance may be driven by a feeling of moral responsibility where citizens prefer to tackle environmental problems themselves, rather than delegating the task to others by means of a market mechanism. Using a laboratory experiment that isolates moral responsibility from alternative explanations, we show that moral responsibility induces participants to incur a sizable cost on themselves as well as on other participants. We discuss the implications of this finding for the design and implementation of environmental policies

Reducing global CO2 emissions with the technologies we have

The energy intensities of the various industrial sectors differ considerably across countries. This suggests a potential for emissions reductions through improved accessibility to efficient technologies. This paper estimates an upper-bound CO2 emission mitigation potential that could theoretically be achieved by improved access to efficient technologies in industrial sectors. We develop a linear optimization framework that facilitates the exchange of sectoral production technologies based on the World Input-Output Database (WIOD), assuming perfect substitutability of technologies and homogeneity within economic sectors, while ignoring barriers to technological adoption and price driven adjustments. We consider the full global supply chain network and multiple upstream production inputs in addition to energy demand. In contrast to existing literature our framework allows to consider supply chain effects of technology replacements. We use our model to calculate emission reduction potentials for varying levels of access to technology. If best practice technologies were made available globally, CO2 emissions could theoretically be reduced by more than 10 gigatons (Gt). In fact, even second-tier production technologies would create significant global reduction potentials. We decompose sectoral emission reductions to identify contributions by changes in energy intensity, supply chain effects and changes in carbon intensities. Excluding the latter, we find that considering supply chain effects increases total mitigation potentials by 14%. The largest CO2 emission reduction potentials are found for a small set of developing countries.DFG, SFB 1026, Sustainable Manufacturing - Globale Wertschöpfung nachhaltig gestalte