Silviase/jgov_v1.4_full_ann huggingface dataset:
## PREFACE

In 1697, the Dutch explorer Willam de Vlamingh astonished colleagues in the Northern hemisphere, by reporting that he had sighted black swans in Australia. This unprecedented sighting was used by John Stuart Mill to caution against drawing conclusions from ‘the normal’ because the abnormal can and does happen. ‘No amount of observations of white swans can allow the inference that all swans are white…the observation of a single black swan is sufficient to refute that conclusion’.

And so ‘black swan’ has become shorthand for any improbable and entirely unpredicted phenomenon.

We live in times when the black swan of economic recession verging on depression is upon us. While some pundits and modellers were concerned about the financial system and associated property and other bubbles, none foresaw either the concatenation of events – falling investment, consumption, commodity and energy prices, stock values, exports and GDP, and rising unemployment and government debt – or in particular the speed and intensity with which it would occur. Business cycles are routine, but not since the Depression years of the nineteen thirties have we seen falls so sudden and sharp, and so universal. And uncertainties about the future and what it holds pervade: Donald Rumsfeld’s famous convolution about the unknowns seems somehow apropos:

There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we do not know we don’t know.

And it is in the nature of such an economic tsunami that the well managed, prudent and responsible get swept away with the feckless and the irresponsible. And we know from experience that economic dysfunction can quickly become social dysfunction, as the tendency to blame ‘the others’ become respectable, protectionism, racialism and sectarianism gain adherents, politics and democracy are perceived as part of the problem rather than part of the solution, and dogmatists and bullies take over from the informed and the careful. In Yeats’ words, ‘the best lack all conviction, while the worst are filled with a passionate intensity.’

This is highly relevant to the climate change agenda for a number of reasons: it is by its nature a global problem, and the ultimate solution must also be global. The tendency towards protection and isolation economically will make global solutions all the more difficult. Trading across frontiers, where country A in effect pays country B to reduce emissions because this is the cost effective solution, becomes difficult as unemployment grows and ‘exporting jobs’ becomes anathema. The combination of falling confidence and financial liquidity mean that there is likely to be less risk capital available to support innovation and the new solutions we must have, and less willingness by consumers to pay a premium for goods and services that impose less pressure on environment. Falling energy prices will reduce investment in exploration with fewer new
## EXECUTIVE SUMMARY

### A. THE EUROPEAN CLIMATE AND ENERGY PACKAGE, DECEMBER 2008

On 17 December 2008, the European Parliament agreed the climate change policy package that imposes legally binding obligations on Member States, enforceable by the European Court for the period 2013 to 2020. The obligations may be modified - made more demanding – depending on whether there is global agreement. The main objectives are: to extend all policy targets to 2020, reduce emissions by 20 per cent from 1990 levels, achieve a 20 per cent improvement in energy efficiency, and renewables to contribute 20% of final energy consumption. The mechanisms to deliver these objectives are noted below:

## Further development of the European Union Emissions Trading Scheme

The new features will include: central control by the European Commission; reduction in allowances by 21% by 2020; auctioning of all power sector allowance obligations from 2013; free allowances for those in other sectors who are assessed as being at risk of carbon leakage but if so, they must use best available technology; banking between the second (2008-12) and third (2013-20) periods. The depth and intensity of the recession –engineering orders in Germany fell by 29% in the last quarter of 2008, retails sales are shrinking everywhere – means that there is downward pressure on prices notwithstanding the fact that allowances can be carried forward into the third period. The allowance price on Feb 11 2009 was €8.50 per tonne, down from over €25 in quarter 2 of 2008. This is giving rise to concerns about the likely long-term price of allowances in a recession economy.

## Capping of Sectors (agriculture, residential, light industry, transport, waste) not in the Trading Scheme

This is a completely new policy strand, which means in effect that all of those emitting greenhouse gases in Europe do so in a context of legally binding obligations to be achieved by 2020.

## Promotion and funding of Carbon Capture and Storage

This has two main elements; revenue from the sale of 300 million allowances (€3-12 billion at allowance price of €10 and €40 respectively) from 2013 to fund demonstration projects, and credit via EU ETS – no need to buy allowances - for allowances captured and stored.

## Binding Emissions from the new car fleet

An interim obligation of 120g CO $ _{2} $ /km is set, with a target of 95g CO $ _{2} $ /km by 2020.
### B. THE EVOLUTION OF THE EUROPEAN UNION EMISSIONS TRADING SCHEME – KEY LESSONS

There was a lot of ‘learning by doing’ – the scheme in Phase 3 (2013-2020) is radically different from the pilot phase. As noted above, compared with the pilot phase, changes include centralisation of management, tightening of the cap to prevent the price collapse experienced at the end of the pilot period, auctioning of allowances, lengthening of the trading period. The tightening of the supply and the lengthening of the period explains in part the less extreme price swings being experienced in the second Phase (Figures 1 and 2).

Figure 1

Figure 2

The fact that some of the value of allowances in de-regulated markets was passed through to electricity consumers even though the utilities had not paid for most of the allowances was the
key political ‘enabler’ of auctioning in phase 3. The revenues thereby generated will be the key source of funding for the Carbon Capture and Storage policy, where demonstration of the technology is regarded as the key next step to move the technology and policy forward. Lower allowance prices than expected will limit the scale of such funding.

### C. THE EUROPEAN UNION EMISSIONS TRADING SCHEME - EX ANTE STUDIES AND THE EX POST REALITY

An analysis of the modelling studies that attempted to anticipate what would happen in comparison with what did happen generates some interesting insights. Key elements influencing ex ante model outputs include assumptions in regard to: abatement targets and baselines, structural features - handling of substitution possibilities, backstop sources of energy and technologies, technological change, inclusion (or not) of climate and non climate benefits – policy – extent of availability of flexibility mechanisms, auctioning and carbon tax, revenue recycling. In terms of outputs, modelling focused mainly on three categories of cost – marginal abatement cost of the equilibrium price of allowances (the most popular focus), average and total abatement costs, change in GDP in constant prices, change in welfare (producer and consumer surpluses). As regards ex post, it is of course possible to observe the reality of the allowance price an compare it with expectations. Ex post work has focused on assessing performance in the pilot phase, the extent of pass through of allowance value into electricity prices, and impacts on competitiveness and profitability for participating companies.

Figure 3

An assessment of the studies that attempted to predict the equilibrium allowance price and associated marginal cost shows a very wide distribution of estimates (Figure 3), but with a tendency for the more recent analyses – i.e. those closest to the actual initiation of the scheme –
to have estimates closer to what actually happened, as shown in Figures 1 and 2 above. There was less variation in the studies that attempted to estimate the $ CO_{2} $ abatement and total abatement costs, although Partial Equilibrium models predict 2.6 times lower average and total emission abatement costs than do the CGE models.

Table 1 Ex-ante cost estimates of the EU ETS: average costs

Reference	Model	CO2 abatement (million tonnes)	Total abatement costs (billion 2005 EUR)	Average costs (EUR/tonne)
Capros and Mantzos (2000)	PRIMES	372	7.7	21
IPTS (2000)	POLES	638	20.3	32
Sijm et al. (2002)	MARKAL-MATTER	773	22.2	29
COWI (2004)	GTAP-ECAT	689	55.4	80
Bohringer et al. (2005)	SIMAC	333	18.7	56
den Elzen et al. (2007)	FAIR-EU	1182	24.8	21
Stankeviciute and Criqui (2008)	POLES + ASPEN	840	20.1	24

Overall, if you want to get results that predict an outcome fairly accurately, understanding policy as it evolves, and knowing what is happening on the ground are important to incorporate into the modelling framework. For example, in the pilot phase, Member States themselves were mainly responsible for giving out the free allocations which inevitably led to 'over allocation' and downward pressure on prices; Poland was late in getting its Registry approved, which delayed a large block of supply coming into the system, which – while it lasted – operated in the opposite direction. Overall, the ex ante estimates of cost concluded that they were likely to be small, and this was supported by the ex post evidence and work. Likewise, the treatment of technology is an important influence on outcomes. Some models assume that technology is endogenous and that there are 'learning by doing' and other interactive effects. Since this reflects reality, it is likely to yield better results that if technology is assumed to be exogenous. However, where the time horizon is short, then this difference will be less salient.

### D. CARBON CAPTURE AND STORAGE (CCS)

The International Energy Agency recently released its 2008 World Energy Outlook and in the reference scenario, accounting for all current policies in place, world $ CO_{2} $ emissions from energy related (power generation and transport primarily) activities will rise by over 12 Gt $ CO_{2} $ .
Table 2. Energy-related (power sector and transport mainly) $ CO_{2} $ emissions, for selected countries and regions, in Gt.

Country	2006	2030	Change	% of World Emissions 2030
US	5.67	5.8	0.13	14
European Union	3.94	3.76	-0.18	9
Japan	1.21	1.06	-0.15	3
OECD	12.79	13.17	0.38	32
China	5.65	11.71	6.06	29
India	1.25	3.29	2.04	8
Middle East	1.29	2.61	1.32	6
Non OECD	14.12	26.02	11.92	64
World	27.89	40.55	12.66	100

Most of the increase in the reference scenario is expected to come from non-OECD countries: 97% of the increase in energy related $ CO_{2} $ emissions increases will come from non-OECD countries with China (6.1 Gt), India (2 Gt) and the Middle East (1.3 Gt) accounting for the majority of the growth (Table 2). By 2030, the US, European Union and Japan combined will account for 26% of all emissions, less than China at 29%.

The fossil fuel power plants generated 11.4 Gt CO $ _{2} $ in 2006 (41% of world total) and this is projected to rise to 16 Gt CO $ _{2} $ (44% of world total) in 2020 and 18 Gt CO $ _{2} $ (45% of world total) in 2030. And much of the power generation capacity under construction is fossil based:

Note: Includes power plants considered as under construction in 2007.

Source: Platt's World Electric Power Plants Database, January 2008 version.

Figure 3. Power plant capacity under construction, 2007.
Carbon capture and storage (CCS) is the most promising near to medium term technology that will allow for deep cuts in $ CO_{2} $ emissions by turning fossil fuel powered electricity generation plants into $ CO_{2} $ free energy sources. However, CCS is not a ready-made technology that is simply waiting to be deployed into the utility mix. Different aspects of the technology are proven at the commercial scale while others are in development stages. Deployment of CCS technology at the global scale is necessary if near to medium term emissions reductions are to be met, which may prove essential in avoiding crossing certain thresholds that would allow for non-linear damaging changes in climate systems. But with current technologies, CCS requires lots of energy, and is expensive to do. The IPCC analysis (Table 3) shows that the integrated coal gasification combined cycle power plant with enhanced oil recovery is the most attractive commercially, with a relatively modest uplift in electricity costs ensuing. All other options are very expensive with current technology, and there are major uncertainties at all stages, and in particular as regards storage.

Europe at present (2006) emits 1.4 billion tonnes of $ CO_{2} $ from power generation of which 1.059 billion is coal, and 0.418 billion is gas. The total is expected to stay stable up to 2030, but with gas emissions rising to 0.5 billion and coal falling to 0.9 billion. However, concerns about the reliability of supply from Russia are a further local incentive to shift the balance away from gas towards coal, if CCS would allow such a re-balancing at reasonable cost and reliability.

The key elements in European policy are the agreement to reform the London Protocol and OSPAR Convention to allow $ CO_{2} $ storage in international waters, the provision of revenue from the sale of 300 million allowances from 2013 up to 2015 to fund demonstration projects, encouragement for further funding for CCS by Member States from their share of auction revenues, and for companies to fund research and development and support for knowledge sharing platforms, and – most importantly – to exempt utilities from the requirement to purchase allowances which are captured.

Key questions relate to how this will work technically, whether there will be sufficient public support to allow projects to go ahead, whether the price of allowances will be sufficiently high to sustain the commercial viability of the CCS power plants, and to what extent and how the system should support the embedding of CCS internationally. The IEA has suggested that it be included as an allowable component of the Clean Development Mechanism or its successor. There may be scope to combine this with a sectoral approach to climate change abatement, as recommended by the Japanese government.
Figure 4. Transactions costs (Early implementation and Monitoring, Reporting and Verification (MRV) of Firms, Pilot Phase EU ETS, Ireland

A considerable portion of the MRV costs for some firms were the expense of hiring a certified auditor to independently validate the emissions, and some of the larger firms invested in capital equipment to facilitate emissions estimation, monitoring and reporting.

### F. RESPONSES BY FIRMS TO THE EU ETS – IRELAND AS A CASE STUDY

The information in this section came from the survey used also to address transaction costs - see above.

Firms were asked if they had taken action in the pilot period as a consequence of the fact that they were now in EU ETS and facing a price for $ CO_{2} $ . Their responses were complicated by the fact that energy prices rose over the pilot period (Figure 5), and the decisions they took to save energy also reduced emissions of $ CO_{2} $ and vice versa. In general, they indicated that the $ CO_{2} $ reduction was ‘icing on the cake’ and not the main reason for action, although some did take $ CO_{2} $ reduction specific actions.

Four categories of action where interrogated. For 20% of respondents, fuel switching was a ‘major $ CO_{2} $ reduction strategy’ while for another 20% it was a minor element, while for 53% it played no part in their decision. A third of firms performed in-house R&D with a little outsourcing, over half took measures to reduce energy use in combustion and over 40 per cent employed new equipment to do so. So there was a considered response, but as noted, probably mainly animated by relatively rising energy prices over the pilot period.
Figure 5. European Brent Spot Price ($/bbl)
## SOME IMPLICATIONS FOR THE JAPANESE POLICY PROCESS

These can be categorised as follows: insights for the design and operation of a Japanese Emissions trading Scheme (JETS); useful perspectives on modelling ex post and ex ante; innovation and business opportunities, and possible links to a sectoral approach to the power sector.

## I nsights for the design and operation of a Japanese Emissions Trading Scheme (JETS)

Japan is piloting its own scheme, and those involved will already know from experience what should characterise an effective scheme. The lessons from Europe are:

Create scarcity by limiting supply of allowances. All of the pressure from industry and its allies will be to be generous, but a zero price is no good to anyone, especially industry.

Include as many sectors – including transport – as possible. The division in Europe between trading and non-trading is inefficient and expensive, because the marginal costs differ, with generally higher costs at the margin in the trading sector.

Keep it simple, which includes avoiding the creation of a new entrant reserve. The EU ETS is relatively simple, but the new entrant reserve – free allowances for expansions and new entrants – complicated matters, and was environmentally ineffective

Stretch out the trading period and allow banking and borrowing. Short time periods guarantees large price swings.

Sell at least some of the allowances. If electricity markets are de-regulated, some of the value of the allowances gets passed through to consumers, and the utilities and their shareholders get some of the benefit. Selling captures some of this value for the public.

The income from the auction or sale can be used to support research and development or other activities, a valuable source of income when government budgets are constrained.

Transaction costs for large firms will be very low and will not inhibit trading. Exemptions for small firms should be considered, because the costs per tonne can be high and damage competitiveness.

Some firms will take action in response to the carbon price, but this will be accentuated and re-enforced if energy costs are rising also.

## Useful Perspectives for Modelling emissions trading markets ex ante and ex post

Model choice, structure and assumptions strongly influence estimates of marginal and total costs, impact on GDP and welfare (producer and consumer surpluses). For example, a model that has a short planning horizon, and therefore relatively little time for the system to adjust, assumes very
low price elasticities, and exogenous technology with no learning by doing, and does not estimate any benefits of abatement, will yield much higher costs than assumptions that are the opposite. In our sample, partial equilibrium models predicted 2.6 times lower average total emission abatement costs than CGE models. Modellers generally try to reflect reality as best they can. But those who use their models are often only interested in using the findings to promote their case. Models that produce high allowance prices and abatement costs will be favoured by those who want to show that trading is damaging, and promoters will chose models with the converse outcomes.

One area of difficulty in the European case was trying to understand the volume of allocation at a time when 27 different countries were more or less simultaneously developing their National Allocation Plan, with most attempting to ‘look after’ national emitters. Those who assumed tighter caps than the reality predicted higher marginal abatement costs and allowance prices than those who did the converse.

Japanese modellers know all of this, but it could be useful to interrogate the family of models used in the EU ETS case, and see if they can develop a ‘best practise’ approach based on lessons from European experience.

## Business Opportunities and the Sectoral Approach

European initiatives as regards climate change are predicated on two propositions; the first is that if we move, others will follow, what is known as the 'If you build it he will come' idea, from Field of Dreams (1989). The second is that, by forcing a demanding climate change policy ahead of the global pack, there will be first mover advantage based on the development of technologies needed to meet the new demands, which then provide commercial advantage when the rest of the world adopts the same policies.

A plausible case can be made that the Nordic countries in the use of biomass, Denmark in the case of wind, and now Germany with solar cell technology are examples where regulatory, pricing, tax and R&D policy all pushed the ‘green development’ envelope with some success. California promotes high environmental standards on the same premise, and is now in many minds converting Silicon valley into Green Tech valley. As traditional manufacturing goes into free fall, the interest in these alternative frontiers – and the regulatory and financial environment needed to foster them – becomes of great interest to the policy process. As regards carbon capture and storage, European policy is strong in the sense that it is likely to demonstrate over the next decade that CCS can be delivered at large scale, but only at a cost substantially above the ‘without CCS’ case. And of course there is major R&D being undertaken in China on this issue. The challenge then is to get this technology picked up by Chinese companies, where most of the growth in fossil fuel based power is found. This seems to make the case for a sectoral approach, where a combination of technology transfer and allowance transfer from EU ETS makes the option viable in China. Japan has been promoting a sectoral approach as the best means of
engaging with the rapidly growing Asian economies where most of the emissions growth arises. Fossil fuel electricity would seem to be a priority place to start. Because the rules of EU ETS explicitly ban the mandating of particular technologies, Japanese and other countries that have the technologies have an opportunity to take advantage of the European market opportunities in this area.
# LEARNING FROM THE EX-ANTE LITERATURE ON THE EU ETS

## Abstract

This paper reviews the ex-ante and the ex-post literature on the costs of the European Union’s $ CO_{2} $ Emissions Trading Scheme (EU ETS). An understanding of the diverse ex-ante literature in the context of the available ex-post outcomes is especially important for both modellers and policy makers: for modellers this analysis provides some lessons for undertaking further modelling work, while for policy makers this paper gives some insights for understanding the number of the diverse ex-ante outcomes and their reliability. A parallel analysis of the ex-ante and the ex-post literature distils some lessons and general principles to be learnt. The main implication of this analysis is that policy-making process is equally important for both the ex-ante and the ex-post analysis. Both strands of the literature can learn from each other’s outcomes and provide some useful guidance for policy makers and modellers.