Bridging Research and Policy in Energy Transition

A QUESTION

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OF DEVELOPMENT SYNTHESES OF AFD STUDIES AND RESEARCH

Bridging Research and Policy in Energy Transition1

http://librairie.afd.fr/filtres/?terms=1085

Modelling energy transition in developing countries The design of energy transition policies is a complex process in which the overarching goal is to modify the consumption and investment behaviour of a huge number of actors that have varying degrees of dependency on fossil energy. At the microeconomic level, these policies need to define economic, financial and regulatory incentives likely to trigger long-term behavioural change (carbon taxes, the phasing-out of fossil energy subsidies, etc.). At the macro-economic level, they need to minimise the aggregate cost of CO2 emissions whilst ensuring that this cost is shared fairly among the economic agents. For some categories of actors, given their direct exposure to the explicit/implicit cost induced by CO2 mitigation policies, the energy transition may have a highly negative impact on their real income. If these policies are to be socially acceptable over time, they must also integrate a redistributive dimension. This aspect raises a serious challenge for the emerging countries whose public policies often lack this social dimension.

The analyses presented are the result of research projects headed by AFD’s Research and Knowledge Division and technical cooperation programmes implemented by its Operations Division. The key findings were presented at the ‘Bridging Research and Policy in Energy Transition’ workshop, organised by AFD in March 2015.

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The growth model of the 20th century relied heavily on the exploitation of fossil energy and natural resources extracted at low cost. Yet, the depletion of these resources, the upward trend of their prices over the long term and the consequences of their use for the environment and climate are now challenging the sustainability of this model.

The notion of energy transition is directed at rethinking the use of energy resources and natural capital to reach an economic growth that mitigates negative environmental effects, without sacrificing the wellbeing of populations. Turning this idea into action is a challenging task.

AFD has designed and funded research and technical cooperation projects in order to inform decisions on the short-term cost and long-term impact of measures designed to accelerate the transition to low-carbon energy regimes.

Using tools for empirical economic analysis (particularly “economy-energy” models), these projects have been carried out in several intervention settings, including South Africa, China and Mexico, which are discussed below.

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CONTRIBUTING TO SHAPE ENERGY AND CLIMATE POLICIES THROUGH ECONOMIC MODELLING AND ANALYSES

In designing national strategies for energy transition, developing economies can be given support to orient their policy making towards incentive measures for efficient investment options and redistributive schemes. To achieve this, it is crucial to have a sound analytical framework that makes it possible to integrate technological, energy and environmental dimensions of national development strategies and to project how these will interact in the future. Today, this framework is very often absent in developing countries.

In light of this, AFD’s Research and Knowledge Division and Operations Division launched a multi-year research programme based on tools for the economic modelling of energy systems. Two objectives are targeted:

In this context, AFD, in partnership with the International Research Centre on Environment and Development (CIRED), launched a three-year study aiming to explore South Africa’s national green growth strategy with respect to what is at stake in terms of employment and economic growth (Schers et al., 2015). Using the hybrid model, Impact Assessment of Climate Policy in South Africa (IMACLIM-SA), the project compares, by the year 2035, the impact of six scenarios (R1 to R6) integrating the recycling of carbon tax proceeds against the reference projection (RP) on: economic growth; employment and the unemployment rate; and CO2 emissions.2 Two levels of tax are considered: (i) 100 ZAR2005 (18 USD2013)/tCO2 and (ii) 300 ZAR2005 (55 USD2013)/tCO2. The main results are as follows:

• From the operational angle, this involves ensuring support for partner countries with respect to the sustainable exploitation of their energy resources in order to reduce their exposure to the risk of fossil resources depletion, to improve their energy security and, as far as possible, to define an energy policy able to leverage endogenous growth.

• All the recycling scenarios analysed led to a slowdown of per capita GDP growth rate and an increase in unemployment, except for two scenarios assuming a carbon tax of 100 ZAR2005, where the redistributive scheme involves: (a) cutting sales tax (scenario R2); and (b) additionally redirecting part of the carbon tax proceeds into investment in education (scenario R2+). In R2+, the growth-enhancing impact is even more pronounced than in R2 given the positive effects of augmented labour and capital productivity, which in turn increase GDP per capita and lower the level of unemployment.

• From the strategic angle, this involves feeding an original vision into the international debate on energy transition, whilst ensuring that the economic and social development stakes are fully taken into account.

The three national projects described here aimed to inform policy makers, drawing on tools for empirical economic analysis able to quantify short-term costs and long-term impacts of different public policy measures. The variables explained by these “energyeconomy” models include, for instance, energy demand, greenhouse gas (GHG) emissions, (carbon tax) revenue recycling schemes, economic growth and employment.

• Also, the scheme for an equal lump-sum transfer to all classes of households (R6) leads to a reduction in the inequality of disposable income per capita compared to all the other schemes, indicating that a trade-off does exist between efficiency and policies to promote greater equity.

• In light of the expected growth in economic activity, a carbon tax of 300 ZAR2005/tCO2 implemented under the national Long-Term Electricity Investment Plan would make it possible to cut CO2 emissions from 42 to 46% compared to the RP (i.e., without a carbon tax) and thus reach the stabilisation objectives by 2035.

A carbon tax of 100 ZAR2005/tCO2 would not permit the energy savings necessary to meet the mitigation targets, as it has little effect on the (initially low) energy prices.

Green economy, employment and development in South Africa Among the emerging economies, South Africa has over the past ten years experienced growth that is largely not labour-intensive, and its unemployment rate is estimated at 25%. Unemployment is particularly high among people with low levels of educational attainment. Conversely, there is growing demand for highly qualified workers, which could jeopardise the political efforts seeking to narrow the country’s inequality gap.

Efforts to stabilise CO2 emissions in China This study is the result of a five-year collaboration on the China Energy & Climate Project (CECP) between

Several scenarios for recycling the carbon tax were analysed. In addition to those described hereafter, they include reducing the public deficit (R1), increasing public spending (R5) and various combinations of the other scenarios.

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AFD, the Massachusetts Institute of Technology (MIT) and Tsinghua University in Beijing. Thanks to this study, it was possible to estimate the impact of the “climate” measures proposed by the Government of China concerning the economy and CO2 emissions.

Based on the China-in-Global Energy Model (C-GEM), two scenarios projecting the development of China’s energy system were explored:

in 2030 and 58 USD/tCO2 in 2050. In the AE, emissions level off between 2025 and 2035 at a level of 20% above the current level. The price of carbon rises from 38 USD/tCO2 in 2030 to 115 USD/tCO2 in 2050 compared to the CE, but in the AE the emissions peak 10 years earlier.

Mexico’s energy transition: a double dividend is possible (i) A Continued Effort (CE) scenario, which assumes that the country stays on its pathway to curb the carbon intensity of its economy by 3% per year until 2050.

The CE also assumes the introduction of a carbon tax, a feed-in tariff for electricity generated by renewable resources, as well as an increase in hydroelectric and nuclear production capacities (under government planning). (ii) An Accelerated Effort (AE), which aims to achieve more CO2 reduction targets (of up to 4% per year) and integrates a carbon tax consistent with these targets. It assumes the same feed-in tariff scheme as the CE, but the cost of integrating intermittent renewable energies is lower. AE also includes the sustained deployment of nuclear energy after 2020.

In Mexico, the programme implemented by AFD involved collaboration with the Mexican National Institute of Ecology and Climate Change (INECC), a public body under Mexico’s Ministry of the Environment, and the French Economic Observatory (OFCE). The programme developed the Mexican version of the ThreeME , which was designed in France by the OFCE and ADEME and used for the Energy Transition Law. ThreeME/Mexico was used to assess the economic impact (on growth, employment and external accounts) of public policy measures consistent with the ambitious targets set by the Mexican Government’s climate policy: reduce GHG emissions by 30% by 2020 relative to the businessas-usual (BAU) scenario and by 50% by 2050 relative to the emissions level in year 2000.

FIGURE 1: CHINA’S CO2 EMISSIONS IN THE THREE DIFFERENT SCENARIOS.

Several energy transition scenarios were tested including: a carbon tax (S1A); a carbon tax and removal of fossil energy subsidies (S1B); and a carbon tax and removal of fossil energy subsidies coupled with a policy to redistribute carbon tax proceeds (S2). These three scenarios were compared to a BAU trajectory.

No Policy Continued Effort (CE) Accelerated Effort (AE)

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The analysis of these scenarios (see Figure 2) shows that an energy transition based on S1B would have a strong negative macroeconomic impact on growth, investment and employment. In fact, to reach the targets set out in the climate policy by 2050, the model shows that the necessary level of carbon tax is such that energy prices quadruple by 2050. One positive point, however: the introduction of a tax policy to redistribute the surplus of the Government’s carbon tax proceeds, on the one hand, and the removal of fossil energy subsidies, on the other hand, would have a growth-enhancing impact at macroeconomic level. The energy transition can thus produce a double dividend: economic growth and increased employment opportunities coupled with a reduction of GHG emissions on account of measures to decarbonise the country’s energy system.

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Sources : Zhang et al. (2014)

The results show that due to a fall in energy demand, the level of CO2 emissions associated with the CE is well below that of the reference projection, where no stabilisation policy is put in effect (see Figure 1). The carbon tax needed to reach this level is 26 USD/tCO2

FRANÇOIS-XAVIER BELLOCQ

FABIO GRAZI An AFD senior economist and Head of the Infrastructure Unit at the Hanoi country office, has designed and led the research projects outlined here.

A senior economist, Energy project manager at AFD, leads the Mexican project summarised here.

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FIGURE 2: MEXICO’S MACROECONOMIC INDICATORS IN THE DIFFERENT ENERGY TRANSITION SCENARIOS (S1A, S1B, S2) RELATIVE TO BAU (% OF BAU) GDP

CONSUMPTION

S2

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Sources : Landa et al. (2015).

Aligning research, policy and financing: lessons learnt from AFD’s approach to energy transition The analyses presented here offer insights into the complexity of energy transition strategies targeting decarbonised growth in the emerging economies.

The policy measures proposed under the national strategies aim to modify consumption and investment behaviour in highly uncertain contexts from the economic, institutional and technological standpoints.

By generating long-term scenarios of energy system development, “energy-economy” modelling tools bring a contribution that can inform policy making and show its implications for economic activity and the eventual need to offset some policy outcomes.

The ThreeME model constructed for Mexico will shortly be deployed in the Mexican Ministry of the Environment under a programme aimed at assessing the implications of the national energy transition policy.

The scenarios designed for the China project, as the CEPC lead X. Zhang explains, have helped “policy makers in China understand the challenges and opportunities that will accompany the country’s lowcarbon energy transformation” (Stauffer, 2015). This (along with other sources) may well have informed decisions leading to the formal pledges under the US-China climate agreement in November 2014 (Levi, 2014) and, hence, to the Intended Nationally Determined Contributions (INDCs) recently announced by the Chinese Government in the preparations for COP21.

REFERENCES Landa, G., F. Reynès, I. Islas, F.X. Bellocq and F. Grazi (2015), “Double Dividend of Low-carbon Growth in Mexico: A Dynamic General Equilibrium Assessment”, AFD Research papers series, N°9, November.

Levi, M. (2014), “Why the U.S.-China climate agreement is a big deal”, Washington Post, November 12, Washington, D.C. Schers, J., F. Ghersi and F. Lecocq (2015), “Green growth and its implications for public policy - The case of South Africa”, Etudes de l'AFD, N°4 (forthcoming).

Stauffer, N.W. (2015), “New Insights into Carbon Emissions in China”, MIT News, June 18, Cambridge, MA. Zhang, X., V.J. Karplus, T. Qi, D. Zhang and J. He (2014), “Carbon emissions in China: how far can new efforts bend the curve?”, MIT Joint Program Report Series 267.

A QUESTION OF DEVELOPMENT is an AFD Research Department publication which presents syntheses of studies and research initiated or supported by AFD. This series aims to summarize the questioning, the approach, the lessons and the prospects of the study presented. Thus, it intends to open new avenues for action and thinking. The analyses and conclusions of this document are formulated under the responsibility of its author(s). They do not necessarily reflect the point of view of AFD or its partner institutions • Publication director: Anne PAUGAM • Editorial director: Gaël GIRAUD • Agence Française de Développement: 5, rue Roland Barthes - 75598 Paris Cedex 12 • Copyright: November 2015 • ISSN: 2271-7404 • Conception: • Layout: Eric THAUVIN • Translation: Gill GLADSTONE •