Complementing carbon prices with technology policies to keep climate targets within reach

Abstract

Economic theory suggests that comprehensive carbon pricing is most e cient to reach ambitious climate targets 1 , and previous studies indicated that the carbon price required for limiting global mean warming to 2 • C is between US$16 and US$73 per tonne of CO 2 in 2015 (ref. 2). Yet, a global implementation of such high carbon prices is unlikely to be politically feasible in the short term. Instead, most climate policies enacted so far are technology policies or fragmented and moderate carbon pricing schemes. This paper shows that ambitious climate targets can be kept within reach until 2030 despite a sub-optimal policy mix. With a state-of-the-art energy-economy model we quantify the interactions and unique e ects of three major policy components: (1) a carbon price starting at US$7 per tonne of CO 2 in 2015 to incentivize economy-wide mitigation, flanked by (2) support for low-carbon energy technologies to pave the way for future decarbonization, and (3) a moratorium on new coal-fired power plants to limit stranded assets. We find that such a mix limits the e ciency losses compared with the optimal policy, and at the same time lowers distributional impacts. Therefore, we argue that this instrument mix might be a politically more feasible alternative to the optimal policy based on a comprehensive carbon price alone.To limit the mitigation costs and risks of achieving the 2 • C target, it is essential to start comprehensive climate policy as early as possible 3-7 . Recent studies have shown that pledged reductions are not consistent with cost-efficient emissions pathways reaching the 2 • C target 8,9 . Furthermore, a continuation of climate policy at the current ambition level will not lead to a stabilization of climate change 3,6,10,11 , and the delay of more stringent mitigation actions will significantly exacerbate the challenge of reaching longterm climate policy objectives 3-6 . Current policies fail to induce the transformation of the energy system to the extent required by long-term climate targets and lead to further lock-in into carbon-intensive infrastructure. Not only do too much emissions occur in the near term, but also mitigation later on is rendered more difficult 12,13 . It is an important question whether technology policies can reduce such lock-in and mitigate the impacts of delay. Although a few studies based on global energy-economy models have considered single packages of technology policies in their analysis of twenty-first-century mitigation pathways 3,11,14 , none of them explored this question.The environmental economics literature has also not focused on the scope of technology policies for overcoming deficiencies in carbon pricing. In this strand of scholarly work, technology policies have mainly been analysed as means to cure market failures 70 65 60 55 74% 50 45 0 10 Sub-optimal carbon pricing Optimal carbon pricing 20 Carbon tax: additional policies lower emissions Technology policies: no Tech Combined C&L Emissions gap Carbon tax Cap-and-trade Carbon pricing: Coal moratorium Low-c...

Drivers for the renaissance of coal

“…However, given their severe distributional impacts, these approaches are unlikely to be more politically acceptable than quantitative emission caps, than a carbon tax to curb emissions (combined with a transfer mechanism to compensate poor countries for their incremental abatement costs), or than incentivizing developing countries to participate in a global climate agreement. Integrating a coal moratorium in a mix of other policy instruments, including lower-than-optimal carbon prices and support for low-carbon technology, seems to be more promising in this respect (20). Although in the long and medium term lowcarbon technologies such as wind or solar energy might become competitive on the large scale (21), these longer-term trends are unlikely to influence investment decisions in countries that are rapidly increasing their energy-generation capacity today.…”

Demand-side approaches for limiting global warming to 1.5 °C

“…Carbon pricing mechanisms (cap-and-trade schemes or carbon taxes) are often cited as a key part of the policy mix in 1.5°C (or 2°C) mitigation pathways (e.g., Bertram et al 2015;Riahi et al 2017;Rogelj et al 2018;Rogelj et al 2013;Stiglitz et al 2017). In this particular case, stringent policy takes the form of carbon prices that are considerably higher than today.…”

Instrument Choice and Stranded Assets in the Transition to Clean Capital

“…For instance, Bertram et al (2015) and Pfeiffer et al (2016) propose to rule out investment in standard coal and gas power plants, and to mandate new power plants to be renewable power, nuclear, or fossil fuel plants equipped with carbon capture and storage.…”

“…In other words, empirical evidence suggests the optimal pathway to a stabilization of the climate at 2 • C involves decommissioning existing capital, but that we can still get there by only reducing the carbon content of new capital -in a recent numerical simulation, Bertram et al (2015) find that a mix between low carbon prices and technology mandates (in particular a moratorium on coal power plants and a minimum requirement for clean power investment) could indeed deliver the 2 • C while substantially limiting stranded assets. For some higher temperature target, feebates or standards and carbon prices are equivalent; while lower temperature targets, such as a 1.5 • C target, may now be out of reach if stranded assets are to be avoided -taking into account that since the study by Davis, Caldeira and Matthews (2010), investment in polluting capital has kept growing and adding to committed GHG emissions (Davis and Socolow, 2014).…”