JEPA 2018

Policy mixes for long-term(2050) decarbonisation inEast Asia
Unnada Chewpreecha, Soocheol Lee

28/10/19

Overview••••Research and scenarios overview
Introduction to the E3ME-FTT model
Model results
Discussion

Research and scenarios overview

Research objective
Assess a range of climate policy options to achieve
long-term decarbonisation targets and to show that acombination of instruments is likely to produce the best
results for national economies in East Asia.

Decarbonisation targets
vs 2005 levels
China-70%

Japan-80%

Korea-80%

Taiwan-80%

These targets are our own values as the countries in
East Asia do not yet have formal targets for 2050 to beconsistent with 2°C.

Policy inputs in the scenarios
CarbonTax

Power sector
policies

EnergyEfficiency

Transport
policies

Heating policies

Others1

×××××A• feed-in-tariff• low• fuels tax• fuels tax

×B• feed-in-tariff• renewablesubsidies• moderate• fuels tax• registration tax• New vehicle
efficiencies• phase out
inefficient
vehicles• fuels tax• subsidies for
new heatingtechnologies×C• feed-in-tariff• renewablesubsidies• mandates toprevent newcoal power
plants being
built• ambitious takenfrom IEA’s
450PPM
scenario (IEA,2016).

• fuels tax• registration tax• phase out
inefficient
vehicles• biofuelmandate• new vehicle
technologies
boostedthroughprocurement• fuels tax• subsidies for
new heating
technologies• new heating
systems areadopted initiallyin publicbuildings.

• Coal phase out
in industries

Role of carbon tax in the scenarios• Tax rate get adjusted in each scenario so thenational emission reduction targets are met• Levied on all use of fossil fuels in relation tocarbon content• Additional to rates in the baseline• Linearly increase to 2050
• No exemptions• No revenue recycling but part of revenues getused to fund renewable subsidies and energy
efficiency investment

The E3ME-FTT modelWhat is E3ME?
A computerbased global
model for theeconomy,energy andenvironment,
covering 59
regionswww.e3me.com

The model
consists ofcollections of
econometricbehavioural
equations andaccounting
identities

Based on anaccounting
framework anddesigned for
projections forbusiness andpolicy analysis

E3ME: Key characteristics• Macro-econometric model
based on a post-Keynesianframework• Optimisation not assumed• Demand = Supply… but• Demand <= Potential Supply• Under the right conditions it
is therefore possible forregulation to increase output
and employment

What are the key dimensions & features ofE3ME?
Detailed Coverage

Comprehensive

Highly Empirical• 59 regions (33 European, 26World)• 70/44 economic sectors and42/28 consumption
categories• 23 fuel users of 12 fuels• whole energy, environment
and economy system• two way feedback between
each module• covers many policy
instruments• 1970-2016 database• 28 econometric equations• relationships validated fromdata• econometrics allows for
short-medium and long term
analysis

Consistent

Forward Looking

Modular• based on system of national
accounting• input-output tables• bilateral trade• annual projections to 2050
• behavioural equations witheffects from previous
outcomes• ex-ante scenario analysis(ex-post is also feasible)• E3: Energy, Environment,
Economy and materialmodules• power generation, transportand heat sub-modules• research can bedecentralisedwww.e3me.com

E3ME as an E3 model•

Each componentof the model isshown in its ownbox•

Exogenousfactors areshown on theoutside edge foreach component•

The linkages
between thecomponents areshown by arrows
that indicate
which values aretransmitted

Which macroeconomic models to use?
Simulations(econometrics)

Optimisation (computable
general equilibrium)• Facing with real world
policy options• Lack of perfectknowledge or foresight• People don’t always
behave rationally!
• Responses to policybased on real world
behaviours• Post-Keynesian school ofeconomic thinking• Starting from already
optimal outcome• Known-end point• Finding the least cost wayof getting there• Useful for resource
allocations• Neoclassical school of
economic thinking

Linking E3ME to technology sub-modules• Bottom-up model; econometric equations noappropriate for power generation because there istypically a small number of large plants and theeconometric approach is not well suited for thedevelopment of new renewable technologies• Current standard in energy systems modelling is bycost-optimisation/linear programminge.g. TIMES/MARKAL, MESSAGE, AIM, etc• Are optimal scenarios the answer to the question
asked?
• Is optimisation always what policy-makers finduseful?

FTT Theory• FTT:Power uses a decision-making core forinvestors wanting to build new electrical capacity,facing several options.
• The decision-making core takes place by pairwise
levelised cost (LCOE) comparisons, conceptuallyequivalent to a binary logit model, parameterised bymeasured technology cost distributions.

The FTT models of technology diffusion

Marchetti & Nakicenovic Tech. Rep. IIASA (1978)
See also Technology and Global Change by Grubler

FTT Theory (cont)• Costs include reductions originating from learning
curves, as well as increasing marginal costs ofrenewable natural resources (for renewabletechnologies) using cost-supply curves.
• Due to learning-by-doing and increasing returns toadoption, it results in path-dependent technology
scenarios that arise from electricity sector policies.

Model Linkages

Modelling resultsReminder..policy inputs in the scenarios
CarbonTax

Power sectorpolicies

EnergyEfficiency

Transportpolicies

Heating policies

Others

1



×××××

A



• feed-in-tariff• low• fuels tax• fuels tax

×B• feed-in-tariff• renewablesubsidies• moderate• fuels tax• registration tax• New vehicle
efficiencies• phase out
inefficient
vehicles• fuels tax• subsidies for
new heating
technologies

×C• feed-in-tariff• renewablesubsidies• mandates toprevent newcoal power
plants being
built• ambitious takenfrom IEA’s
450PPM
scenario (IEA,2016).

• fuels tax• registration tax• phase out
inefficient
vehicles• biofuelmandate• new vehicle
technologies
boostedthroughprocurement• fuels tax• subsidies for
new heating
technologies• new heating
systems areadopted initiallyin publicbuildings.

• Coal phase out
in industries

Can the targets be met?
CO2 reduction from 2005
China
TargetBaseline
S1 (C Tax)
SA (min)SB (med)SC (amb)

Japan-70
126
100-23-27-70

Korea
-80
-5-38-80-80-80

Taiwan-80
84
72-60
-80
-80

Max carbon tax rate = $1,500/tCO2-80
4-40-80-80-80And what carbon prices are required?
$/tCO2 (2018 prices)

China

Baseline
S1 (C Tax)
SA (min)SB (med)SC (amb)

Japan01,500
1,500
1,500321

Korea

01,5001,500482178

Taiwan01,500
1,500
1,179
2790
1,500
182
161
131

1,500
1,250
1,000
750
500
2500
China

Japan
Scen 1

Scen A

Korea
Scen B

Scen C

TaiwanGDP Impacts and Government Balance
GDP impact, % from base
2.00.0-2.0-4.0-6.0

China

Japan
Scen 1

Scen A

Korea
Scen B

TaiwanScen C

Change govt balance, % of GDP
20.0%

10.0%
0.0%
ChinaJapan
Scen 1

Scen A

Korea
Scen B

Scen CTaiwan

Impacts on sectoral output
S1SASBSC

Agriculture-2.1-2.3

-1.6

-0.8

Basic manufacturing

-1.2

-1.3

-0.7

0.1

Advanced manufacturing

-1.1

-1.1

-0.4

0.7

Energy extraction

-53.5

-44.8

-46.3

-66.1

Utilities

-7.4

-3.2

-3.5

-3.6

Construction

0.4

0.5

1.3

2.8

Services

-1.7

-1.9

-1.1

-0.3

% from baseline in 2050

Impacts on employment
ChinaJapan

Korea

TaiwanS1 (C Tax)

-0.8

-1.9

-1.8

-1.2

SA (minimum)

-0.8

-1.7

-2.0-0.3SB (medium)

-0.7

-0.4

-1.4-0.3

SC (ambitious)

-0.4

0.4

0.0-0.3% from baseline in 2050

Conclusions• The four countries can meet their long-term
decarbonisation targets• But a broad range of policies, across all sectors isrequired• Carbon pricing is a key element of the package but
is not sufficient (at feasible prices)• All of the other policies interact with carbon pricing,allowing emissions to be cut effectively• GDP impacts will improve if other policies areimplemented – or carbon tax revenues are recycledDiscussion Points• Each East Asian faces different challenges todecarbonise• Some policies are more effective than others• Power and road transport are key sectors:– in China, SA and SC are key (especially coal phase-out)– in Japan and Korea, all the policies have impacts– in Taiwan, FiTs can get much of the way there

JEPA 2018

Policy mixes for long-term (2050)
decarbonisation
Unnada Chewpreecha, Hector Pollitt, Soocheol Lee, Park
Seung-Joon, Taeyeoun Lee, Aileen Lam

Unnada Chewpreecha
uc@camecon.com
28/10/19

List of FTT References- FTT:Power: J-F Mercure, Energy Policy, 48 799-811 (2012)- FTT:Heat: Knobloch et al Energy Efficiency,
https://link.springer.com/article/10.1007/s12053-018-9710-0 (2018)- FTT:Transport: Mercure et al https://arxiv.org/abs/1702.04133 (2017)- Energy resources database: Mercure & Salas, Energy, 46 322-336(2012)- Consumption of non-renewable resources: Energy Policy, 63, 469-483(2013)- Economic impacts of decarbonisation: http://arxiv.org/abs/1310.4403- Macroeconomic impact of stranded fossil fuel assets: Mercure et al,
Nature Climate Change, Volume 8, pp 588–593 (2018).