Erik BerglofEBRD Chief Economist6 April 2011

Towards low carbon transition

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• The past - carbon performance over the first twodecades of transition

• The long term impacts and costs of climate change mitigation

• Policies to induce mitigation

• Political barriers to effective domestic climate policy

Economic growth without rise in CO2 emissions

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Index (1990=100)

0

20

40

60

80

100

120

140

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

GDP (PPP)

CO2 emissions (energy related)

Index (1990=100)

0

20

40

60

80

100

120

140

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

GDP (PPP)

CO2 emissions (energy related)

Index (1990=100)

0

20

40

60

80

100

120

140

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

GDP (PPP)

CO2 emissions (energy related)

Index (1990=100)

0

20

40

60

80

100

120

140

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

GDP (PPP)

CO2 emissions (energy related)

Substantially reduced carbon intensity

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EBRD region outperformed world average

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EBRDChina

…due to both lower carbon intensity of energy and improved energy efficiency

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What explains energy/carbon performance?

Firm level:

• Private and foreign-owned firms more efficient than state-owned• Large firms better than small• Energy pricing – a key driver of energy intensity of firms

Country level:

• Market oriented reforms and energy sector reform in particular• EU accession process• Kyoto commitments (smaller effect)

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Carbon intensity remains very high in some countries

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Ambitious climate policy: costs and benefits

Likely costs:

• Direct loss of the oil/carbon economy

• Adjustment costs associated with the shift away from carbon

• Cost of buying/benefits or selling carbon offsets

=> WITCH model to estimate costs of reaching global goal

Potential benefits:

• Accelerated technology spillovers

• Better competitiveness and growth prospects in the long-run

• Avoiding climate impacts and adaptation costs

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High gross costs of mitigation

Notes: all scenarios based on a global stabilisation at 500ppm. Diamonds refer to emissions reduction targets of 30, 40, 50 or 80 per cent for the energy exporters in the EBRD region. Delayed CCS refers to a 15 years delay in deploying CCS technology. Limited trade requires that all regions achieve at least 80 per cent mitigation

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domestically.

Percentage of business as usual GDP in net present value (2010-2050)

-16

-14

-12

-10

-8

-6

-4

-2

0

US WesternEurope

MiddleEast & N

Africa

Sub-Saharan

Africa

South Asia China LatinAmerica &Caribbean

EBRD WORLD

Source: WITCH and EBRD.500-30 500-40 500-50 500-80 500-80 delayed CCS 500-80 limited carbon trade Median cost

Sources of mitigation costs13

Costs vary across the sub-regions

Notes: EU-10 - the new EU member states. Energy exporters - Azerbaijan, Kazakhstan, Mongolia, Russia and Turkmenistan. Energy importers – all other transition countries.

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Median costs across all scenarios

-12

-10

-8

-6

-4

-2

0EU-10 Energy exporters Energy importers EBRD

Percentage of business as usual GDP in net present value (2010-2050)

Source: WITCH and EBRD.

The up-side of mitigationFaster growth: economies that

are not resource-based tend to grow faster

Competitiveness: retaining economic competitiveness in a low-carbon world requires decarbonisation

Faster technological progress: participation in global mitigation efforts is likely to accelerate technological spillovers

EBRD region to be part of green industrial revolution

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Average real growth rate 1981-2000

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

Major oil producers Other countries

per cent

Analysis of policy impact on the costs of different measures to reduce emissions

• Compare extra cost of each measure with high-emission alternative => marginal abatement cost (MAC)

• Do it from investors’ perspective – privately profitable

• Negative MAC => measure relatively profitable

• Do this for all available abatement measures

• Look how different policy mixes affect MAC => emissions reduction

• Compare: Russia vs. Turkey

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Policy packages can generate profitable abatement opportunities – an example

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On-shore wind

-60

-30

0

30

60

90

120

150

180

210relative abatement cost, €/t CO2

Status quo

Economic policies

+ Transaction costs

+Feed-in tariffs

+Carbon prices

Russia: Status quo vs. policy mix

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Russia: Carbon pricing very effective

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Turkey: Policies effective but not sufficient

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Political economy interactions

Measuring domestic climate policy - The CLIM Index• Covers 95 countries• Focus on Climate specific Laws, Institutions and Measures• No measurement of implementation and enforcement

Question: what determines domestic climate policy?

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Determinants of domestic climate policy• Political system not in itself a driver of policy

• Knowledge of climate change key driver

• Industrial lobby strong deterrent for policy

• EU membership and commitment under Kyoto Protocol strongly correlated with policies

• EBRD countries not significantly different from rest of the world in adoption of climate policies

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Climate change awareness - better policies

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Rising temperatures result of human activitySource: EBRD, GallupData: 2006-9

Conclusion: Towards Low Carbon Transition

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• Transition region: enormous achievements in reducing the carbon intensity and improving energy efficiency

• Transition to low carbon economy will be challenging, but makes economic sense

• Transition to market is an important driver of mitigation, but notsufficient

• Reducing the large costs will need policies and institutions tomobilise private sector investment in carbon abatement

• Political resistance can be overcome by raising public awareness