The cost of meeting a 30% emission reduction target in Europe

Executive Summary

Current European Union policy sets out targets and mechanisms to achieve a
20% reduction in greenhouse gas emissions from 1990 levels by 2020. In
recent years however there have been strong calls for increasing this
target to 30%, with deeper cuts beyond 2020.

The purpose of this report is to calculate the costs for the EU as a whole
and each member state of moving to tighter emission reduction targets under
different scenarios, taking into account the position of member states in
the EU Emissions Trading Scheme. Importantly, the work does not attempt to
quantify the benefits of reducing greenhouse gas emissions in Europe.

The analysis uses Bloomberg New Energy Finance‟s model of the European
energy and emissions system, which assesses the first and second-order
economic effects that arise through carbon markets, technology improvements
and electricity prices. The model uses exogenous forecasts for individual
sectors and simulates the uptake of low carbon technologies through the
least cost option to achieve the emissions target for the EU as whole. The
model assumes that abatement occurs when and where it is cheapest –
subject to policy or regulatory constraints - so that Member States will
only undertake abatement if the marginal cost of the abatement is less than
the cost of purchasing allowances from elsewhere.

Main results

In the simplest scenario, we estimate that a change from a 20% to a 30%
emissions reduction target for the EU as a whole would result in an
additional cost of €3.5bn per year up to 2020.2 This figure represents
the additional cost over and above existing policies that are in place, for
example renewable energy targets and building standards, and assumes that
both the Emissions Trading Scheme (ETS) and Non-Traded Sector (NTS) make
maximum use of their allowances to import CERs under the 30% target. Costs
vary significantly between Member States but remain a small proportion of
GDP at only 0.03% for the EU-27.

Including the cost of meeting the renewable energy target, the average
annual cost of meeting the 20% target is €23.3bn and €26.7bn for a 30%
target. Our cost estimates include investment in clean technologies between
2011 and 2020 compared to a baseline business-as-usual (BAU) scenario with
no emissions reductions targets. Our estimates also do not include any
co-benefits of emissions reductions such as improvements in resource
efficiency, energy security or air quality.

In general, the wealthiest fifteen Member States pay the vast majority of
the costs of meeting targets. By selling emissions allowances, several of
the lowest-income Member States are able to generate net profits.

Under the burden sharing assumption proposed by the European Commission
(COM (2010) 265) which assumes some 65% of the burden of moving to a 30%
target is placed on the ETS sector, abatement costs in the ETS increase
more than those in the non-traded sectors NTS.

Emissions caps in addition to the renewable energy target cause the power
sector to switch from carbon-intensive coal to efficient gas power, whose
higher operating costs increase wholesale electricity prices. Countries
with established and carbon-intensive power sectors will have to spend the
most in order to meet the emissions target – in particular Germany,
Italy, Spain and the UK. Higher electricity prices then cause abatement in
other sectors, such as buildings, and a slight shift away from electrically
powered vehicles. Without additional policy frameworks, vehicles and
heating systems will remain largely dependent on fossil fuels until after
2020, though a modest rise in fuel efficiency is projected.

The renewable energy target alone is projected to deliver around 55% of the
emissions reduction required for a 20% target. The remaining annual cost of
meeting the 20% emissions target will be about €4.6bn, only 0.04% of GDP
for the EU-27.4 The majority of this cost will be borne by the power,
buildings and transport sectors.

The importing of carbon credits from outside Europe and purchasing of
allowances from surplus countries is a significant part of the total costs
of higher-income Member States, such as Germany, Italy, France, Spain and
the UK. Lower-income Member States such as Romania, Bulgaria and the Czech
Republic are likely to gain significant revenues from selling allowances to
other States. Note that when the total trading costs are summed across the
whole EU-27, the net value of allowances traded between countries is zero.
At the EU level cost of emissions trading is only the value of imported
CERs.

Under a 30% target the carbon price in the ETS rises to €33/t, from
€11/t under a 20% target.5 The equivalent prices in the NTS are €8/t
under both targets. The carbon price in the NTS is unchanged under the 30%
target because an additional CER import limit for the NTS of 866Mt is
assumed up to 2020. No additional CER import limit is assumed under the 25%
target which increases the carbon price in the NTS in this scenario.

Please download the full report for more detailed analysis.