sou · GWB3105EN · 2009-01-01 00:00:00 — Figure 6.2 Energy consumption per unit of GDP 1970–2006 Note: Primary energy per GDP (adjusted for purchasing power parity). Source: Budget [2007], the [2007], the [2007] and the [2007d]. Energy intensity growth in has been in line with global growth during the period studied, i.e. an annual decline of over 1 per cent. Compared with the as a whole, energy intensity has declined somewhat more slowly in . In the last decade, the reverse holds true. and carbon dioxide emissions show the same pattern Globally some changes in the composition of energy consumption have taken place in the last three decades. In particular, there has been a shift from oil to less carbon dioxide intensive energy sources such as gas and nuclear power. However, this shift has not been enough to result in a decline in global carbon dioxide emissions. Instead it has generally followed the same path as energy consumption. Carbon dioxide emissions per unit of energy in The Long-Term Survey 2008 Energy, Climate and Economic Growth countries have decreased by 9 per cent since 1980, which is somewhat more than the global decline. countries carbon dioxide emissions have still risen by about 0.8 per cent a year (figure 6.3). Swedish emissions of carbon dioxide increased sharply between the Second World War and the first oil crisis in the 1970s. Since then, emissions have been almost halved. If all six greenhouse gases regulated by the Kyoto Protocol are counted, Swedish emissions were equivalent to about 0.2 per cent of global emissions in 2005. Figure 6.3 Emissions of carbon dioxide 1971–2004 Source: [2008c]. Since 1980, carbon dioxide intensity (carbon dioxide emissions per unit of GDP) has declined much more rapidly in than in the rest of the world (figure 6.4). A large part of this reduction happened before 1984 when the expansion of nuclear power stations in was completed. The supply of energy from Energy, Climate and Economic Growth The Long-Term Survey 2008 renewable sources in has increased steadily since the 1980s, but the rate of increase has been relatively slow. Since 1990, carbon dioxide intensity in has only declined marginally more rapidly than in the countries as a whole.173 While Swedish industry is energy intensive, total greenhouse gas emissions per GDP are very low in international terms.174 Figure 6.4 Carbon dioxide emissions per unit of GDP 1980–2005 Note: Carbon dioxide emissions from the burning of fossil fuels. Source: [2007f, 2008c] and the [2007]. 173The reference here is to carbon dioxide emissions and more specifically, energy-related emissions. Swedish emissions intensity for all greenhouse gases regulated by the Kyoto Protocol decreased by over 8 per cent between 1990 and 2006. [2007]. 174Emissions intensity in the Swedish economy was about half that of the average emissions intensity in the EU 27 in 2005 and also the lowest of all countries. EEA [2007]. The Long-Term Survey 2008 Energy, Climate and Economic Growth 6.2.2Increasing importance of structural change in changing energy consumption A large number of studies have analysed the determinants of energy and carbon dioxide intensity growth. Lower energy inten- sity at the macro level is a result of, inter alia, improved efficiency and structural changes, which are in turn the result of energy price developments and energy policy instruments and to some extent, an underlying development that is independent of price changes and the policy pursued.175 Carbon dioxide intensity growth depends, as noted earlier, on changes in the fuel mix in the economy. High energy prices have previously led to reduced energy To assess the importance of the various components of energy consumption trends, the energy and emissions developments observed can be broken down into different components. The IEA () has analysed the extent to which different factors have contributed to trends in energy consumption and carbon dioxide emissions for an aggregate of industrial countries between 1973 and 1998.176 The result indicates that energy intensity in a number of industrial countries did indeed decrease but the rate of decrease moderated in the 1990s, despite their efforts to reduce the emission of greenhouse gases. This trend can be explained by the large energy efficiencies after the energy price shocks of the 1970s and the long period of low energy prices. The trend in energy consumption can be broken down into two components, a structural effect, i.e. the growth that occurs when the composition of industries in the economy changes, and an intensity effect, i.e. developments resulting from reduced energy intensity within industries.177 The intensity effect was most important in the 1970s and 1980s, i.e. the technological developments within indust- 175The reduction in energy intensity that is independent of policy and price may be due to such factors as technological improvements that result from accumulated knowledge or a structural change independent of price. Another explanation pointed out by IEA [2006] is the warmer temperature, which has reduced the need for heating in recent decades. 176IEA [2004]. 177See IEA [2004] for a description of the method used for this breakdown. Energy, Climate and Economic Growth The Long-Term Survey 2008 ries were most important for the decrease in energy intensity.178 However, after 1990 structural effects are most important. One explanation for the developments is that the high energy prices in the 1970s and 1980s affected both structural change and industry specific improvements. The stable or reduced energy prices of the 1990s had less effect on energy efficiency in specific industries at the same time that rapidly growing economic welfare shifted con- sumption to products with higher income elasticity, such as the consumption of services.179 The high energy prices in recent years may possibly increase the importance of reductions in energy intensity within industries, particularly if prices are expected to remain high. but the shift to less energy intensive industries is what matters most now In there are large differences in energy intensity among industries. There has been a sharp reduction in energy intensity in some industries such as the and telecommunication products industry while in others such as construction, energy consumption has increased more than production volume. At an aggregated level, energy intensity may decline even though some industries develop in a different way. A breakdown of trends in Swedish energy consumption since 1993 using the same method as IEA uses yields a result in accordance with the conclusions for industrial countries. Figure 6.5 shows the Swedish business sectors energy consumption from 1993 to 2005. The figure shows actual energy consumption, hypothetical energy consumption with no change in energy intensity (i.e. 1993 energy intensity levels) and hypothetical energy consumption with no change in either the industry structure or energy intensity. The analysis shows that during this period, structural change in the business sector was of 178Sue Wing, I. & Eckaus, R.S. [2007] break down US energy consumption over a longer period, between 1959 and 1995, with partially similar results. Before the 1970s oil price shocks, the effect of structural changes was predominant, but afterwards it was mostly intensity improvements within industries that took place. 179Lower energy prices after a period of high prices does not necessarily need to mean that energy consumption will increase again if energy efficiencies have been implemented. There may be some measure of irreversibility. For example, Dargay, J. & Gately, D. [1997] show that this effect likely was important in energy consumption in road transport after the oil price shocks of the 1970s. The Long-Term Survey 2008 Energy, Climate and Economic Growth major importance in reducing total energy intensity while develop- ments at the industry level have been less important. This is due to the rapid growth of less energy intensive industries such as tele- communications products, pharmaceuticals and the service indu- stry. The relatively low energy prices during the period should have contributed to the relatively modest intensity improvement at the industry level. Figure 6.5 Energy consumption in the business sector, by changes in structure and in intensity 1993–2005 Energy consumption with no change in intensity Energy consumption with no change in intensity and no structural change Note: The business sector includes industries SNI 1-39, 41-93. Source: Statistics [f] and calculations. A similar breakdown of the business sectors carbon dioxide emissions during the same period, i.e. classing changes in emissions by structural effect and intensity effect, shows that structural change in the business sector has also been the most important Energy, Climate and Economic Growth The Long-Term Survey 2008 factor in carbon dioxide emissions trends. The contribution made by the reduction in carbon dioxide intensity in this sector has been considerably smaller, despite the relatively large element of fuel conversion in some industries. Moreover, structural change has a greater impact on carbon dioxide emissions than on energy con- sumption, indicating that the energy efficiency improvements taking place in industry do not necessarily have a similar effect on carbon dioxide emissions. 6.2.3A global increase in energy consumption and carbon dioxide emissions is expected Most analysts are agreed that global energy consumption will increase in the long term. However, the rate of increase and the leading sources of energy in the years ahead are difficult to predict. They depend not only on economic growth and the price of fuel, but also on the measures taken to limit greenhouse gas emissions and possible technological advances. Fossil fuels will continue to dominate IEA predicts that the increased global demand for energy will primarily be met by fossil fuels, particularly coal and natural gas (figure 6.6). At the same time, hydroelectric and other renewable energy sources will increase in importance, with renewable energy sources generally expected to maintain their share of the supply up to 2030. The IEA anticipates that developing countries will represent over 70 per cent of the increasing demand for energy, which means that their share of global consumption will increase from about 40 to 50 per cent between 2004 and 2030. World energy intensity is simultaneously estimated to decline by 1.8 per cent a year, with the most rapid decline in non-OECD countries.180 The growth in energy prices, which is very difficult to predict, is an important factor in these estimates. The IEA predicts a crude oil price by 2030 of a barrel in 2005 prices, which is substantially higher than the price level in the 1990s. Other analysts such as the EU Commission and the Energy Information 180 IEA [2007]. The Long-Term Survey 2008 Energy, Climate and Economic Growth Administration () have made similar estimates for prices up to 2030.181 Global energy demand 1980 and 2005 and the forecast for 2015 and 2030 oil equivalents per year Source: IEA [2007]. According to the long-term forecast, Swedish energy consumption will increase by 15 per cent between 2004 and 2025.182 The increase primarily depends on increased demand in industry and the transport sector. Energy consumption in industry is expected to increase by about 25 per cent while industrial production is expected to continue to grow at a good pace. All in all, this means that energy intensity in the business sector will fall by 2.6 per cent annually during the forecast period. 181EIA [2008] and Commission [2008a]. 182Swedish and [2007b]. Energy, Climate and Economic Growth The Long-Term Survey 2008 Global carbon dioxide emissions will increase According to international analysts, global carbon dioxide emis- sions from energy consumption will increase substantially in the years ahead. In estimates with no climate policy measures or limited use of them, emissions will increase by more than 40 per cent by 2030.183 Swedish carbon dioxide emissions are expected to increase by more than 13 per cent by 2020 compared with the 2005 level. Emissions from the transport sector and industry in particular account for this increase. The basis for the estimates is that only the policy instruments decided by 2006 will be used during the period.184 In the base scenario in the Long-Term Survey, Swedish carbon dioxide emissions increase by about 13 per cent between 2005 and 2030. In these estimates, transport-related emissions in particular increase. Included in the assessments, however, are assumptions about future climate policy design that ensure that the increase in Swedish emissions will be offset by considerably larger reductions in other countries (see section 6.3.2). 6.3Climate policy affects economic development There are many goals and sub-goals within the climate policy framework and a number of policy instruments have been introd- uced and proposed aimed at meeting these goals. This has helped make it difficult sometimes to analyse and evaluate the policy. It is also difficult to isolate the effect of policy instruments from other factors such as relative energy prices, structural changes and fluctuations in the business cycle. At the same time, it is of great importance to design policy instruments in such a way that eco- nomic growth is not curbed more than necessary when climate 183The estimates that global carbon dioxide emissions will increase by 54 per cent between 2000 and 2030. The IPCCs assessment for the same period is an increase of 40–110 per cent. The IEA anticipates an increase of energy related carbon dioxide emissions equi- to 57 per cent between 2005 and 2030. The [2008a], IPCC [2007b] and IEA [2007]. 184Total Swedish emissions of all greenhouse gases covered by the Kyoto Protocol are estimated to be about 6 per cent higher by 2020 relative to 2005. and [2007b]. The Long-Term Survey 2008 Energy, Climate and Economic Growth policy targets are to be met, particularly if the climate targets need to be made more ambitious in the years ahead. 6.3.1The costs of limiting carbon dioxide emissions need not be high A great many studies have analysed the long-term economic consequences of limiting greenhouse gas emissions. At the global level, the estimates of the British economist have had a major impact on the debate.185 Analysts with the , () and the United Nations Intergovernmental Panel on Climate Change (IPCC) have also presented cost estimates of global climate policy.186 There have also been a number of assessments of the economic effects of Swedish climate policy, inter alia, in previous Long-Term Surveys.187 The large variations in the cost estimates indicate uncertainty in the estimates.188 A large number of assumptions, each of which can be debated, must be made, which means that the results of the estimates must always be interpreted with caution. At the same time, the estimates perform an important function in making clear how the policy should be designed in order to be highly cost- effective. Global climate targets can be met at limited costs Many estimates have indicated that ambitious global emissions targets can be achieved without too large an impact on the world economy. It was the opinion of the report that with well-targeted and effective measures, emissions can be limited so that the risk of serious human impact on the climate system can be markedly 185Stern, N. [2007]. 186OECD [2008a], IMF [2008] and IPCC [2007b]. 187See, for example, [1999], , G. [2003], , M. & Kriström, B. [2005] and , B. [2007]. 188Nevertheless, it is probably easier to estimate the economic consequences of climate policy measures than to estimate the economic effects of increased greenhouse gas emissions. Energy, Climate and Economic Growth The Long-Term Survey 2008 reduced.189 This could be achieved at an annual cost in 2050 equivalent to about 3 per cent of global GDP. The IPCC has estimated that the cost of stabilising the percentage of greenhouse gases in the atmosphere at about the same level will result in a 5.5 per cent lower global GDP in 2050 relative to its own base scenario.190 The has in turn estimated that the measures required to achieve the stabilisation target may result in a 2.5 per cent reduction in global GDP in 2050. The IMF expects that the cost of achieving a somewhat less ambitious stabilisation target will come to just under 4 per cent of GDP in 2050. To sum up, these estimates indicate a total cost of less than 5.5 per cent of global GDP in 2050. In terms of growth, this is equivalent to an average reduction in the rate of growth of less than 0.15 percentage points a year. A well-designed policy is a prerequisite for these results What these studies have in common is an effective policy base in the sense that there is international coordination ensuring that the cost of emitting a kilo of carbon dioxide (or any other greenhouse gas) is harmonised between sectors and participating countries. In this way, the limited scope for emissions is allocated where it does the most good. One way of achieving this is to use market-based instruments such as flexible mechanisms in the Kyoto Protocol or some other type of international emissions trading, or alternatively, an internationally harmonised tax on emissions. The estimates show that the more countries and industries that participate, the lower the total cost of achieving the targets will be. Higher ambi- tions for emissions reductions increase the need for international flexibility. To achieve the targets for stabilising greenhouse gas emissions at an acceptable level, it is estimated that the marginal cost of carbon dioxide emissions, for example, via a carbon dioxide tax or an emissions allowance price, needs to be between and 160 189That is to say, in order to meet the target of a maximum two degree temperature increase that, according to analysts, corresponds to emissions reductions consistent with a stabilisation of greenhouse gas concentrations of 450–500 ppm CO2e. 190IPCC [2007b]. The Long-Term Survey 2008 Energy, Climate and Economic Growth per ton of carbon dioxide equivalents in 2050.191 The estimated price is largely dependent on the assumptions made about techno- logical development and the time at which the measures become effective. Good progress in technological development reduces the price on carbon dioxide and a long delay in implementing the measures means a risk of a price increase in the future. The cost for various regions/countries may, however, vary. In order to put in place an agreement, some type of burden-sharing between regions or countries will therefore be necessary. One way of achieving this is in an international emissions trading scheme with an initial allocation of transferable emissions rights that brings about a desirable distribution of costs.192 Countries and activities with low allowances but a high capacity to pay and relatively high costs to reduce their own emissions can thus pay the other actors in order to be allowed to increase their share of emissions. In this way it may be possible to come to an agreement acceptable to many parties without undermining cost-effectiveness.193 The has made estimates in which the effect of a uniform carbon dioxide tax in all countries is compared with a global emis- sions trading scheme in which the emission allowances are used to harmonise the costs between countries.194 The simulations show that a uniform tax gives rise to clearly lower relative costs for countries than for developing countries. With an emissions trading scheme, emission allowances can be used to influence the distribution of costs. By giving countries a relatively lower emission allowance, the reverse cost picture is possible while achieving the same target in a cost-effective (figure 6.7). 191OECD [2008a] estimates that a global emissions tax would need to be raised to almost (2001 prices) per ton of carbon dioxide equivalents by 2050 in order to limit the temperature increase to 2 degrees. See also IPCC [2007a] and IMF [2008]. 192See fact box 6.2 on how this is accomplished at the EU level in the EU emissions trading scheme. 193See, for example, Bohm, P. & , B. [2002] and [2008a]. 194OECD [2008a]. Energy, Climate and Economic Growth The Long-Term Survey 2008 Figure 6.7 Examples of regional costs with emissions trading and with a carbon dioxide tax 2050 Per cent of GDP, 2050 Rest of the world Harmonised carbon dioxide tax Note: Estimated cost of emissions reductions to achieve a stabilisation of greenhouse gas concentrations of 450 ppm of carbon dioxide equivalents by 2050. , , and are included in BRIC. Source: [2008a]. The Long-Term Survey 2008 Energy, Climate and Economic Growth Fact Box 6.3 Scheme Scheme (EU ETS) was introduced in 2005 and currently covers about half of the greenhouse gas emissions in the EU. The trading scheme constitutes a key tool in the Communitys efforts to live up to its international commitments under the Kyoto Protocol. The scheme defines the maximum permissible emissions from various sources such as public incinerators, refineries, the industry, the iron and steel industry and the pulp and paper industry for a specified period. Under this ceiling, emissions can be reallo- cated freely among the polluters by each company handing over emissions rights corre- sponding to the emissions that they have given rise to. By establishing the quantity of emission rights available in advance of each new trading period, it is possible to ensure a specific reduction in emissions overall. Companies with emissions reduction costs that are less than the price of emissions rights have an incentive to further reduce emissions instead of burning an additional part of the limited quantity of emissions rights in the scheme. Given a well-functioning trading scheme, the price of emissions rights is determined by the total quantity of emissions rights and companies marginal costs of emissions reductions. Freely distributed emissions rights are worth as much on the market as the emissions rights sold at auction and the price is the same in every member country. This type of scheme (cap-and-trade) improves the predicta- bility of future emissions levels compared with such instruments as a carbon dioxide tax. The scheme does not include such emissions as transport, agriculture and individual heating. Expanding the scheme in various ways, has, however, been discussed. Beginning in 2012, emissions from air traffic will be included in the scheme. 6.3.2An effective Swedish climate policy To successfully implement the large emissions reductions that the IPCC and other analysts think are necessary globally, it is absolutely essential for the policy designed to be cost-effective. As discussed previously, the cost of reducing emissions may be modest, provided that there is some type of internationally coordinated policy with mechanisms that facilitate harmonising the reduction costs between both industries and countries. Such a policy is in turn of importance to in designing a climate policy that contributes to a cost-effective reduction of global emissions. Energy, Climate and Economic Growth The Long-Term Survey 2008 The base scenario has its roots in an internationally coordinated policy In the base scenario of the Long-Term Survey 2008 described in chapter 2, estimates are based on there being an international emissions trade in place by 2030 that includes all Swedish carbon dioxide emissions. All actors in are thus charged the same (international) price on their emissions equivalent to the price that a number of international analysts consider necessary in order to achieve the target of a stable climate at an acceptable level.