ESRCEnergy Research Conference

Policy Studies Institute

Decarbonisation of Energy Systems

Dennis Anderson

Imperial College Centre for Energy Policy and Technology (ICCEPT)

March 31, 2003

Limits to the ‘Standard’ Framework

The Optimal Tax?

MarginalBenefits

Marginal

Costs

Abatement

Marginal Costs

and Benefits

> 50 years

X

Y

A

B

Case for Direct Support for Innovation

1 Creates Options -- and defines a path forward

2 Stimulates Innovation and Reduces costs

3 Reduces Uncertainties: -- an option value

4 Reduces the Size of the Pollution Taxes (actual or imputed) Required--less ‘hackles’

5 Environmental Problems Solved Sooner

6 Positive Externalities: --reduced pollution and costs

7 Points to new policies ‘beyond Kyoto’

Future Energy Systems

RenewablesNuclear

Coal

Biomass wastes

Gas

Biomass

Oil

Sequestration

PV’sEnd Use

Electricity

CHP

Direct Use

Transport

Hydrogen

Storage

H2 CCPlant

+ Hydrogen

Heat

Transport

FuelCells

+ Fuel cells

CO2

+ Carbon Sequestration

Areas for Economic and Social Research

1. Energy Market Regulation:

• Price volatility and problem of loss of vision

• Distribution: rational price structures and new metering technologies fundamental if new decentralised technologies are to emerge

2. Climate Change Policies: (a) National Level

• Post-evaluation and comparisons of experiences in OECD countries

Areas for Economic and Social Research—contd.

3. Climate Change Policies: (b) International Level

• Post-evaluation and comparisons of experiences in developing countries

• Beyond Kyoto: new forms of international co-operation based on trade, investment and financial mechanisms of the UN Framework Convention on Climate Change

4. Economic Modelling of Climate Change Policies

Current modelling efforts are lacking:

• Technology and innovation poorly represented (if at all)

• No allowance for non-linearities and threshold effects

• Developing countries poorly represented (if at all)

• Need capacity for independent assessments of IPCC’s scenarios

Possibility of new insights for innovation process and policy

Areas for Economic and Social Research—contd.

Threshold Effects in Technology Development(learning rates in percentages)

0

1

2

3

4

5

6

0 0.2 0.4 0.6 0.8 1

Market Share (fraction of 1.0)

Cost Ratio, relative to existing

technologies

Initial Costs, when markets are small

10%

20%

30%

2. Non-linear and threshold effects in substitution:

Effects of Relative Prices on Market Share

0.00

0.20

0.40

0.60

0.80

1.00

1.20

0 0.5 1 1.5 2 2.5

0

0.5

1

1.5

2

2.5

3

3.5

4

(St left scale)

Pt

Pt. dS/dP (right scale)

Chaotic Behaviour

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

0 2 4 6 8 10 12 14 16 18 20

St

Time (years)

Based on yearly intervals

Based on monthly intervals

Some results: with/without policies. T = 20% (permanently), G = 20%

T = 0 (permanently), G = 0%

0.0

0.5

1.0

1.5

2.0

2.5

0 20 40 60 80 100

Energy Demand (index)

Demand Met by Non-Carbon Technologies

Time

0.0

0.5

1.0

1.5

2.0

2.5

0 20 40 60 80 100

Energy Demand (index)

Demand Met by Non-Carbon Technologies

Time

• Social and environmental impact:

• Public reaction to renewable energy and new energy systems

• Health and safety issues (e.g. if hydrogen route is followed and with large development of offshore resources)

• Positive features: e.g. with architectural innovation and more decentralised sources of heat and power

Areas for Economic and Social Research—contd.