The transition of the electricity system towards decarbonization: the need for change in the market regime

The mainstream community of energy experts is not aware of the long-term impacts that carbon policies directly concerned with promoting the development of low-carbon technologies produce on the electricity market regime. Long-term market coordination should be replaced by public coordination with long-term arrangements. The current market coordination makes carbon pricing ineffective in orienting investors towards capital-intensive low-carbon technologies. Fossil fuel generation technologies are preferred because their investment risks are much lower in the market regime, even with a high but unstable carbon price. Thus, in order to avoid delaying investment that is aimed at the decarbonization of the electricity system, a number of new market arrangements that lower the investment risk of low-carbon technologies and provide output-based subsidization have or are being selected by governments. As the use of low-carbon equipment to produce electricity develops, long-term market coordination for other technologies (e.g. peaking units, combined cycle gas turbine) will fade away because they alter the market price setting. Thus it is likely that, in the future, public coordination and planning will replace the decisions of market players not only for low-carbon technologies but also for every other type of capacity development.

Policy relevance

The development of renewables as promoted by both feed-in tariffs and green certificate obligations, which answer to different market failures, is well known. Similar long-term arrangements, which both subsidize and de-risk low-carbon investments for every small-sized and large-sized technology, shift learning costs and risks onto consumers. Energy experts and regulators have ignored that the expansion and generalization of these arrangements are changing the coordination function of the electricity markets. Apart from those in the UK, they are still unaware of the impacts that such technology-focused policies produce on the electricity market regime. The transition from market coordination to public coordination, which is inconsistent with the market principles of European electricity legislation, and long-term contracting is inevitable and should be anticipated.     

Funding low carbon cities: local perspectives on opportunities and risks

There are compelling reasons for policy makers to be interested in the low-carbon agenda. More than half of the world's population lives in, and more than half of the world's economic output comes from, cities. Up to 70% of global carbon emissions can also be attributed to consumption that takes place in cities. Recent research has shown that cost-effective investments in low-carbon options could deliver a 40% reduction in GHG emissions from cities by 2020, while also providing wider economic benefits such as enhanced competitiveness and increased employment. As yet, however, investments in low-carbon cities have not been made at scale due mainly to the scale of the finance required, local government budgetary constraints, and perceptions about their costs and benefits. With a focus on the UK, a contemporary account is provided of what local authorities see as the major financial risks associated with funding low-carbon cities. Practical proposals – which also have more general relevance to the future financing of low-carbon cities around the world – are offered on how local authorities, in conjunction with central government, the private sector, and institutional investors, can effectively manage these risks.

Policy relevance

Cities house more than half of the world's population, generate more than half of the world's economic output, and produce between 40% and 70% of all anthropogenic GHG emissions. In the UK, 70% of such emissions are under the influence of its local authorities. Thus, one of the key public policy challenges for the low-carbon transition is how it should be financed. There are several obstacles and related risks to this transition, including financial and legal obstacles and the differing views and perceptions of stakeholders. These can be attenuated, somewhat, by national government support at scale, local authority leadership, and cooperation between other authorities and the private sector, and the development of tools and guidance to reduce transaction costs.     

Challenges in financing public sector low-carbon initiatives: lessons from private finance for a school district in British Columbia,Canada

Governments are major investors in climate change mitigation, but aversion to public indebtedness has led to reliance on private finance to deliver public assets. Compounding this challenge, financing through Energy Service Contracts is ruled out by accounting rules. With public and traditional private funding avenues closed, government departments have sought contracts that do not disclose the full cost of borrowing, such as the Public–Private Partnership (PPP) described in this case study. We unpack the utility contract filed with the provincial regulator to show that circumventing budgetary constraints cost the Delta School Board (DSB) 8.75% per annum on borrowed private funds while public finance would have cost 4%pa. All levels of the public sector are keen to play their role in climate mitigation. Climate policy is about not passing our burden of unbridled fossil fuel use and greenhouse gas emissions to future generations. If we do not exempt public sector capital investments for decarbonization from deficit regulations, we risk passing an unnecessary economic burden to future generations.

Key policy insights

• Transition to a low-carbon economy requires public sector investments that exceed budget deficit regulations and political aversion in many jurisdictions;

• Private–Public Partnerships are currently viewed as the solution to this self-imposed fiscal constraint;

• PPPs without clear performance targets or contractual templates will expose less experienced public sector investors to high costs and emissions above expectations.

     

A low-carbon society: global visions,pathways, and challenges

The feasibility of two low-carbon society (LCS) scenarios, one with and one without nuclear power and carbon capture and storage (CCS), is evaluated using the AIM/Enduse[Global] model. Both scenarios suggest that achieving a 50% emissions reduction target (relative to 1990 levels) by 2050 is technically feasible if locally suited technologies are introduced and the relevant policies, including necessary financial transfers, are appropriately implemented. In the scenario that includes nuclear and CCS options, it will be vital to consider the risks and acceptance of these technologies. In the scenario without these technologies, the challenge will be how to reduce energy service demand. In both scenarios, the estimated investment costs will be higher in non-Annex I countries than in Annex I countries. Finally, the enhancement of capacity building to support the deployment of locally suited technologies will be central to achieving an LCS.

Policy relevance

Policies to reduce GHG emissions up to 2050 are critical if the long-term target of stabilizing the climate is to be achieved. From a policy perspective, the cost and social acceptability of the policy used to reduce emissions are two of the key factors in determining the optimal pathways to achieve this. However, the nuclear accident at Fukushima highlighted the risk of depending on large-scale technologies for the provision of energy and has led to a backlash against the use of nuclear technology. It is found that if nuclear and CCS are used it will be technically feasible to halve GHG emissions by 2050, although very costly. However, although the cost of halving emissions will be about the same if neither nuclear nor CCS is used, a 50% reduction in emissions reduction will not be achievable unless the demand for energy service is substantially reduced.     

Transaction costs analysis of low-carbon technologies

Transaction costs (TCs) must be taken into account when assessing the performance of policy instruments that create markets for the diffusion and commercialization of low-carbon technologies (LCTs). However, there are no comprehensive studies on the development and application of transaction cost analysis to LCTs. In this meta-analysis, a wide-ranging evaluation of TCs associated with energy efficiency, renewable energy, and carbon market technologies is provided. There is a plethora of different definitions of, and measurement techniques to estimate, TCs. There is wide variation in the quantitative estimates, which can be attributed to factors such as the definition used, data collection, quantification methods, the type and size of technologies, the regulatory frameworks, the complexity of transactions, and the maturity of policy instruments. It is concluded that TCs are highly specific to both LCTs and policy instruments and that a common methodological approach is needed to avoid misleading policy analysis of the extant and future assessments.

Policy relevance

Transaction costs (TCs) accrued by, for instance, the search for information, due diligence, monitoring and verification (M&V) activities, must be considered in the design, implementation, and assessment of policy instruments. Such costs can have a negative effect on the performance of policy instruments aimed at the diffusion and commercialization of low-carbon technologies. It is shown here that TC analysis is mostly technology and policy context-specific and hence that it is not advisable to make generalizations about sources and estimates. The nature and scale of TCs are likely to differ due to a variety of endogenous determinants (e.g. size and performance of technologies), exogenous drivers (e.g. regulatory policy frameworks), and methodological aspects (e.g. quantification techniques). Several measures and strategies have the potential to reduce TCs, including standardized full cost accounting systems, an ex ante M&V approach, project bundling, and streamlining of procedures.     

Escaping the climate policy uncertainty trap: options contracts for REDD+

Climate policy uncertainty significantly hinders investments in low-carbon technologies, and the global community is behind schedule to curb carbon emissions. Strong actions will be necessary to limit the increase in global temperatures, and continued delays create risks of escalating climate change damages and future policy costs. These risks are system-wide, long-term and large-scale and thus hard to diversify across firms. Because of its unique scale, cost structure and near-term availability, Reducing Emissions from Deforestation and forest Degradation in developing countries (REDD+) has significant potential to help manage climate policy risks and facilitate the transition to lower greenhouse gas emissions. ‘Call’ options contracts in the form of the right but not the obligation to buy high-quality emissions reduction credits from jurisdictional REDD+ programmes at a predetermined price per ton of CO₂ could help unlock this potential despite the current lack of carbon markets that accept REDD+ for compliance. This approach could provide a globally important cost-containment mechanism and insurance for firms against higher future carbon prices, while channelling finance to avoid deforestation until policy uncertainties decline and carbon markets scale up.

Key policy insights

• Climate policy uncertainty discourages abatement investments, exposing firms to an escalating systemic risk of future rapid increases in emission control expenditures.

• This situation poses a risk of an abatement ‘short squeeze,’ paralleling the case in financial markets when prices jump sharply as investors rush to square accounts on an investment they have sold ‘short’, one they have bet against and promised to repay later in anticipation of falling prices.

• There is likely to be a willingness to pay for mechanisms that hedge the risks of abruptly rising carbon prices, in particular for ‘call’ options, the right but not the obligation to buy high-quality emissions reduction credits at a predetermined price, due to the significantly lower upfront capital expenditure compared to other hedging alternatives.

• Establishing rules as soon as possible for compliance market acceptance of high-quality emissions reductions credits from REDD+ would facilitate REDD+ transactions, including via options-based contracts, which could help fill the gap of uncertain climate policies in the short and medium term.

     

Investing in low-carbon transitions: energy finance as an adaptive market

The amount of capital required to transition energy systems to low-carbon futures is very large, yet analysis of energy systems change has been curiously quiet on the role of capital markets in financing energy transitions. This is surprising given the huge role finance and investment must play in facilitating transformative change. We argue this has been due to a lack of suitable theory to supplant neoclassical notions of capital markets and innovation finance. This research draws on the notion from Planetary economics: Energy, climate change and the three domains of sustainable development, by Grubb and colleagues, that planetary economics is defined by three ‘domains’, which describe behavioural, neoclassical, and evolutionary aspects of energy and climate policy analysis. We identify first- and second-domain theories of finance that are well established, but argue that third-domain approaches, relating to evolutionary systems change, have lacked a compatible theory of capital markets. Based on an analysis of electricity market reform and renewable energy finance in the UK, the ‘adaptive market hypothesis' is presented as a suitable framework with which to analyse energy systems finance. Armed with an understanding of financial markets as adaptive, scholars and policy makers can ask new questions about the role of capital markets in energy systems transitions.

Policy relevance

This article explores the role of financial markets in capitalising low-carbon energy systems and long-term change. The authors demonstrate that much energy and climate policy assumes financial markets are efficient, meaning they will reliably capitalise low-carbon transitions if a rational return is created by subsidy regimes or other market mechanisms. The authors show that the market for renewable energy finance does not conform to the efficient markets hypothesis, and is more in line with an ‘adaptive’ markets understanding. Climate and energy policy makers that design policy, strategy, and regulation on the assumption of efficient financial markets will not pay attention to structural and behavioural constraints on investment; they risk falling short of the investment levels needed for long-term systems change. In short, by thinking of financial markets as adaptive, the range of policy responses to enable low-carbon investment can be much broader.     

Prospects for steam coal exporters in the era of climate policies: a case study of Colombia

Continued global action on climate change has major consequences for fossil fuel markets, especially for coal as the most carbon-intensive fuel. This article summarizes current market developments in the most important coal-producing and coal-consuming countries, resulting in a critical qualitative assessment of prospects for future coal exports. Colombia, as the world’s fourth largest exporter, is strongly affected by these global trends, with more than 90% of its production being exported. Market analysis finds Colombia in a strong competitive position, owing to its low production costs and high coal quality. Nevertheless, market trends and enhanced climate policies suggest a gloomy outlook for future exports. Increasing competition on the Atlantic as well as Pacific market will keep coal prices low and continue pressure on mining companies. Increasing numbers of filed bankruptcies and lay-offs might be just the beginning of a carbon bubble devaluing fossil fuel investments and leaving them stranded. Colombia largely supplies European and Mediterranean consumers but also delivers some quantities to the US Gulf Coast, and to Central and South America. Future coal demand in most of these countries will continue to decline in the next decades. Newly constructed power plants in emerging economies (India, China) are unlikely to compensate for this downturn owing to increasing domestic supply and decreasing demand. Therefore, maintaining or even increasing mining volumes in Colombia should be re-evaluated, taking into account new economic realities as well as local externalities. Ignoring these risks could lead to additional stranded investments, aggravating the local resource curse and hampering sustainable economic development.

Key policy insights

• The climate policies of most of Colombia’s traditional trade partners target steam coal as the more emission-intensive fossil fuel, with many countries implementing or considering a coal phase-out.

• Coal exporters should re-evaluate their operations and new investments taking into account this new policy environment.

• To prevent a race to the bottom among coal producers that would favour weak regulation, climate policy makers should also consider the local social and external costs of coal mining, including on health and the local environment.

     

Policy incentives for carbon capture and storage technologies in Europe: A qualitative multi-criteria analysis

In this paper, we compare different policy incentives for overcoming investment uncertainties that are typical for low-carbon technologies prior to their commercialisation, some of which may be attributable to market failures. The paper focuses on the particular case of carbon capture and storage (CCS) technologies and conducts a qualitative multi-criteria analysis of different public policy support schemes for CCS demonstration to evaluate their suitability. The assessed schemes include mandatory CCS, emission performance standards and several different financial incentives (in addition to the European Union Emission Trading Scheme). Based on the available literature and on experience in the UK and Germany with promotion instruments for low-carbon technologies, the results of our analysis suggest that two alternative schemes, a CCS bonus incentive or a carbon dioxide (CO₂) price guarantee, perform best in comparison with the other assessed instruments. While they reduce the uncertainty of CCS investments in the face of low European Union Allowance prices, they also avoid significant adverse impacts on operational and investment decisions in electricity markets.     

Quantifying barriers to decarbonization of the Russian economy: real options analysis of investment risks in low-carbon technologies

Russia has significant potential for reducing its carbon emissions. However, investment in new low-carbon technologies has significant risks. Ambiguous energy and climate policy in Russia, along with deterioration of the country's investment climate, create investment barriers that are well described in qualitative terms in the literature. This paper attempts to provide a quantitative analysis of these barriers. For this numerical experiment, we apply the RU-TIMES model. Using a real options methodology, we estimate the risk-adjusted cost of capital in the Russian energy sector (including energy production and consumption technologies represented in the TIMES framework) to be approximately 43% (including a risk-free interest rate) and demonstrate the high risk of investment into energy-efficient and low-carbon technologies. Any future low-carbon emissions pathway depends on the ability of the Russian government to reduce climate and energy policy uncertainties, and to reduce financial risks through improvements of the general investment climate.

Key policy insights

• The high cost of capital investment into Russian energy production and consumption may prevent the adoption of new energy-efficient and low-carbon technologies.

• These investment risks, if not addressed, will delay Russia's low-carbon transition for the coming decades.

• Adopting a clear and unambiguous long-term climate and energy policy is important to reduce these risks and alleviate some of the barriers to the new technologies.

• The first step could be ratification of the Paris Agreement and adoption of a long-term emission target for the period up to 2050.

     

Which policy instruments attract foreign direct investments in renewable energy?

Reducing GHG emissions and mitigating climate change would require significant investments in renewable energy technologies. Foreign direct investments (FDI) in renewable energy (RE) have increased over the last years, contributing to the diffusion of RE globally. In the field of climate policy, there are multiple policy instruments aimed at attracting investments in renewable energy. This article aims to map the FDI flows globally including source and destination countries. Furthermore, the article investigates which policy instruments attract more FDI in RE sectors such as solar, wind and biomass, based on an econometric analysis of 137 Organisation for Economic Co-operation and Development (OECD) and non-OECD countries. The results show that Feed in Tariffs (FIT) followed by Fiscal Measures (FM), such as tax incentives and Renewable Portfolio Standards (RPS), are the most significant policy instrument that attract FDI in the RE sector globally. Regarding carbon pricing instruments, based on our analysis, carbon tax proved to be correlated with high attraction of FDI in OECD countries, whereas Emissions Trading Schemes (ETS) proved to be correlated with high attraction of FDI mainly in non-OECD countries.

Key policy insights

• Feed in Tariffs is the most significant policy instrument that attracts FDI in the Renewable Energy sector globally.

• Fiscal Measures (FM), such as tax incentives, show a significant and positive impact on renewable energy projects by foreign investors, and particularly on solar energy.

• Carbon pricing instruments, such as carbon taxation and emissions trading, proved to attract FDI in OECD and non-OECD countries respectively.

• Public investments, such as government funds for renewable energy projects, proved not as attractive to foreign private investors, perhaps because public funds are not perceived as stable in the long run.

     

Decarbonization and regulation of Germany's electricity system after Fukushima

Germany's current efforts to decarbonize its electricity system are analysed. As nuclear power and fossil power plants equipped with carbon capture and storage were ruled out in 2011, renewable electricity generation (RES) together with electricity savings are the primary focus for achieving decarbonization. Germany aims to have RES account for at least 80% of its electricity by 2050. Achieving renewable generation needs strong political support and regulatory provisions for its market integration. Four main technical and regulatory challenges are the maintenance of a steady and efficient expansion of RES, the provision of balancing capacities, the realization of the targeted electricity savings, and the smart adaptation of the transport and distribution grid. An overview of the existing and planned regulatory provisions for decarbonization are described, and some gaps identified, particularly with regard to the overall management of the process, the inclusion of electricity savings and the interference of Germany's decarbonization strategies with neighbouring countries. Policies that both accelerate grid expansion and direct RES expansion should immediately be put in place and can be supported by a targeted mobilization of balancing capacities. Electricity savings are a significant and cost-efficient strategy for low-carbon electricity.

Policy relevance

Germany is actively converting its national electricity system towards a fully renewable one. As renewable electricity has reached about a quarter of total consumption, a number of technical and regulatory challenges arise. Current discussions and plans are described for the four main challenges: maintaining and optimizing high investment rates into RES generation technologies, providing balancing capacities, reducing demand, and adapting the grid to the changing needs. Policy recommendations for these four tasks highlight the need to intensify electricity demand reduction and also consider the potential interactions between the German electricity system and its neighbouring countries.     

A practitioner's guide to a low-carbon economy: lessons from the UK

Drawing primarily on the UK experience, five practical lessons are identified for policy makers who seek to decarbonize their economies. First, decarbonization needs a solid legal basis to give it credibility and overcome time inconsistency problems. Second, putting a price on carbon is essential, but low-carbon policies also have to address wider market, investment, and behavioural failures. This in turn raises issues of policy complexity and coordination. Third, the low-carbon economy is likely to be highly electrified. Clean electricity could be a cost-effective way of decarbonizing many parts of the economy, including transport, heating, and parts of industry. Decarbonization therefore starts in the power sector. Fourth, the low-carbon transition is primarily a revolution of production and not consumption. Both supply-side innovation and demand-side adjustments in lifestyle and behaviour are needed, though the former should dominate. Fifth, the transition to a low-carbon economy is economically and technologically feasible. Achieving it is a question of policy competence and having the political will to drive economic and social change.

Policy relevance

Practically all major GHG emitters now have climate change legislation on their statute books. Given what is at stake, and the complexity of the task at hand, it is important that policy makers learn from each other and establish a code of good low-carbon practice. The main lessons from the UK are distilled and presented. Carbon policy is considered for key sectors, such as electricity, buildings, and transport, and possible decarbonization paths are also outlined. It is shown that the transition to a low-carbon economy is economically and technologically feasible. Achieving it is primarily a question of policy competence and political will. This in turn means that climate change action needs a strong legislative basis to give the reforms statutory legitimacy. Low-carbon policies will have to address a wide range of market, investment and behavioural failures. Putting a price on carbon is an essential starting point, but only one of many policy reforms.     

Encouraging clean energy investment in developing countries: what role for aid?

A large portion of foreign assistance for climate change mitigation in developing countries is directed to clean energy facilities. To support international mitigation goals, however, donors must make investments that have effects beyond individual facilities. They must reduce barriers to private-sector investment by generating information for developers, improving relevant infrastructure, or changing policies. We examine whether donor agencies target financing for commercial-scale wind and solar facilities to countries where private investment in clean energy is limited and whether donor investments lead to more private investments. On average, we find no positive evidence for these patterns of targeting and impact. Coupled with model results that show feed-in tariffs increase private investment, we argue that donor agencies should reallocate resources to improve policies that promote private investment in developing countries, rather than finance individual clean energy facilities.

Policy relevance

We suggest that international negotiations could usefully shift the focus of climate change finance towards adaptation in exchange for mitigation-improving policy reforms in developing countries. There is little evidence that mitigation-related financing is having broader effects on energy production, so new financial arrangements should be the focus of future negotiations. Additionally, international donors should focus efforts on reforming policies to attract private investment.     

Triggering the low-carbon transition in the aftermath of the global financial crisis

An assessment of the post-Kyoto climate change negotiations, and the altered role of climate finance post-financial crisis, is presented. First, the paradigm shift of the Cancun Agreements is examined from an historical perspective and it is shown that the impasse in the negotiations, caused by the underlying over-emphasis on burden sharing reductions in emissions, can be overcome. Second, using information from two modelling exercises, it is demonstrated how climate finance can encourage the decoupling of carbon emissions from economic growth and thereby help align the development pattern with global climate goals. Third, a framework to place carbon finance within current discussions is sketched regarding both the reformation of the world financial systems and the facilitation of a sustainable economic recovery that is beneficial for North and South while addressing the low-carbon transition. It is concluded that upgrading climate finance is the key to triggering the shift to a low-carbon society and a system is proposed in which an agreed social cost of carbon is used to support the establishment of carbon emissions certificates to reorient a significant portion of global savings towards low-carbon investments.

Policy relevance

Investments that align development and climate objectives are shown to substantially lower the social cost of carbon and deliver long-term carbon emissions reductions. These reductions are greater than those contributed by the sole carbon price signal generated by a world cap-and-trade system. Carbon finance, as a part of the broader reform of financial systems and overseas aid, can help overcome the dual adversity of climate and financial crisis contexts. The carbon certificate, with an upfront agreed social cost of carbon, can be used as its instrument. The portion of the banking system that intends to reorient a significant part of world savings towards low-carbon investments could thus issue such carbon certificates. By giving carbon assets the status of a reserve currency, the system could even respond to the need of emerging countries to diversify their foreign exchange reserves and trigger a wave of worldwide sustainable growth through infrastructure markets.     

What role for climate negotiations on technology transfer?

Little progress has been made in climate negotiations on technology since 1992. Yet the diffusion of climate change mitigation technologies to developing countries (non-Annex I) has increased dramatically over the last twenty years. The shift has mostly concerned emerging economies, which are now reasonably well connected to international technology flows. This is good news, as the bulk of emissions increases are expected to take place in these countries in the near future. In contrast, the least developed countries still appear to be excluded from international technology flows, mostly because of their negligible participation in the recent economic globalization. This article focuses on the policy implications of the contribution of climate negotiations to international technology diffusion.

Policy relevance

The discrepancy between the small amount of progress made in climate negotiations on technology since 1992 and the steady increase in the international diffusion of climate mitigation technologies leads to the perhaps controversial view that the diffusion of climate mitigation technologies does not need strong international coordination over technology issues under the UNFCCC. However, climate negotiations can play a key role in stimulating the demand for low-carbon technologies by setting ambitious emission reductions targets and policies.     

South East Europe electricity roadmap – modelling energy transition in the electricity sectors

One of the most important challenges for the South East Europe region will be replacing more than 30% of its presently installed fossil fuel generation capacity by the end of 2030, and more than 95% by 2050 if its age structure is considered. This requires a strong policy framework to incentivise new investments in a region currently lacking investors, but also presents an opportunity to shape the electricity sector over the long term according to the broader energy transition strategy of the EU and the Energy Community. The aim of this paper is to assess what type of long-term pathways exist for electricity sector development in the region if they follow the energy transition process of the EU. In this model-based scenario assessment, long term electricity sector futures are explored using a set of interlinked electricity models evaluating the level of renewable energy investment required in the region to reach a deep decarbonization target, assuming emission reduction above 94% by 2050 compared to 1990 in line with the long term market integration and climate policy goals of the EU. It also explores what are the most important system wide impacts of the high deployment of renewable energy concerning generation adequacy and security of supply.

Key policy insights

• Energy policies in the South East Europe (SEE) region, both at the national and regional level, should focus on enabling renewable energy integration, as this will be a key component of the future energy mix.

• EU and Energy Community policies should be incorporated into national energy planning to ensure that SEE countries embark on the energy transition process at an early stage.

• Stranded costs should be carefully considered in decision-making on new fossil-fuel generation and gas network investment in order to avoid lock-in to carbon intensive technologies.

• If consistent decarbonization policy prevails, with a significant and persistent CO2 price signal, the role of natural gas remains transitory in the region.

• The SEE region offers relatively cheap decarbonization options: the power sector can reduce GHG emissions above 94% by 2050 in the modelled scenarios.

     

Electric sector investments under technological and policy-related uncertainties: a stochastic programming approach

Although emerging technologies like carbon capture and storage and advanced nuclear are expected to play leading roles in greenhouse gas mitigation efforts, many engineering and policy-related uncertainties will influence their deployment. Capital-intensive infrastructure decisions depend on understanding the likelihoods and impacts of uncertainties such as the timing and stringency of climate policy as well as the technological availability of carbon capture systems. This paper demonstrates the utility of stochastic programming approaches to uncertainty analysis within a practical policy setting, using uncertainties in the US electric sector as motivating examples. We describe the potential utility of this framework for energy-environmental decision making and use a modeling example to reinforce these points and to stress the need for new tools to better exploit the full range of benefits the stochastic programming approach can provide. Model results illustrate how this framework can give important insights about hedging strategies to reduce risks associated with high compliance costs for tight CO₂ caps and low CCS availability. Metrics for evaluating uncertainties like the expected value of perfect information and the value of the stochastic solution quantify the importance of including uncertainties in capacity planning, of making precautionary low-carbon investments, and of conducting research and gathering information to reduce risk.     

Cost containment in climate policy and incentives for technology development

Safety valves, discretionary advisory boards, and other cost containment mechanisms enhance the political feasibility of stringent climate policy by limiting firms’ and households’ exposures to higher than anticipated costs associated with reducing greenhouse-gas emissions. However, cost containment comes at a price; it increases the risk of climate-related damages and simultaneously discourages investments to develop low-carbon technologies. A stylized model of the cost of climate policy is used to estimate that proposed cost containment mechanisms will increase emissions by 11–70% by 2030. Because these clauses limit the payoffs to innovation, they reduce our societal capacity to affordably mitigate climate change through technology improvement. If cost containment measures are to be employed at levels discussed in recent policy debates, then complementary policies to fund technology development will be needed; crucially, the two also need to be linked. One way to resolve the impasse between increased climatic damages and reduced incentives for innovation is to create a technology development fund with contributions indexed to the amount by which the market price for carbon exceeds the price cap.     

Top-down and bottom-up modelling to support low-carbon scenarios: climate policy implications

Bottom-up and top-down models are used to support climate policies, to identify the options required to meet GHG abatement targets and to evaluate their economic impact. Some studies have shown that the GHG mitigation options provided by economic top-down and technological bottom-up models tend to vary. One reason for this is that these models tend to use different baseline scenarios. The bottom-up TIMES_PT and the top-down computable general equilibrium GEM-E3_PT models are examined using a common baseline scenario to calibrate them, and the extend of their different mitigation options and its relevant to domestic policy making are assessed. Three low-carbon scenarios for Portugal until 2050 are generated, each with different GHG reduction targets. Both models suggest close mitigation options and locate the largest mitigation potential to energy supply. However, the models suggest different mitigation options for the end-use sectors: GEM-E3_PT focuses more on energy efficiency, while TIMES_PT relies on decrease carbon intensity due to a shift to electricity. Although a common baseline scenario cannot be ignored, the models’ inherent characteristics are the main factor for the different outcomes, thereby highlighting different mitigation options.

Policy relevance

The relevance of modelling tools used to support the design of domestic climate policies is assessed by evaluating the mitigation options suggested by a bottom-up and a top-down model. The different outcomes of each model are significant for climate policy design since each suggest different mitigation options like end-use energy efficiency and the promotion of low-carbon technologies. Policy makers should carefully select the modelling tool used to support their policies. The specific modelling structures of each model make them more appropriate to address certain policy questions than others. Using both modelling approaches for policy support can therefore bring added value and result in more robust climate policy design. Although the results are specific for Portugal, the insights provided by the analysis of both models can be extended to, and used in the climate policy decisions of, other countries.