Personal CO2 quotas and their
techno-institutional context
Frede Hvelplund
2/6 2008
1. Two “economics” approaches
Neoclassical approach- start
position in optimum-only market tools
Price
Price
Supply
Supply
Market
tools:
Market
tools:
quota,Co2tax
quota,Co2tax etc.
etc.
Demand
Demand
Amount
Amount
Initial
institutional
conditions.
institutional
Initial
-conditions.
Tax structure
--Demography
Tax structure
--Time
budgets
Demography
Etc.
- Time budgets
Etc.
Initial institutional
conditions are
”Blackboxed” and
regarded as being
”optimum” and
producing
”optimum”
Institutional economy approach
(market and institutional policy)
Price
Supply
1. Market tools:
quota,Co2tax etc.
Demand
Amount
Initial institutional
conditions.
- Tax structure
- Demography
- Time budgets
Etc.
2. Institutional reforms
initial market conditions
2. CO2 emission from different sectors
PCA potential
1. Heat and electricity
11.7 mill tons CO2
2. Private transportation 6-10 mill. tons CO2
3. Sum
18- 22 mill. ton CO2 or
30% - 40% of total DK CO2 emission.
This share may be increased if increasing parts of
the CO2 emission from goods and services are
included.
3. The EU quota system and the concrete
institutional setting (Nordpool)
Price
Supply
1. Market tools:
quota,Co2tax etc.
Demand
Amount
Initial institutional
conditions.
- Tax structure
- Demography
- Time budgets
Etc.
EU quota
system
2. Institutional reforms
initial market conditions
Nordpool
construction
Power demand before (red) and after CO2 quota
(green)
Price 2
Price 1
Demand
Amount 2
Amount 1
Motivation of DONG,Vattenfall –
existing large actors
1. Make sure that coal plants remains at the market as they are
“producing” the high price level.
2. Avoid too much wind power , as it pushes the curve to the
right and lowers the price at Nordpool.
3. Establish “barriers to entry” that protects the high coal power
“produced” price.
A conclusion different from the anticipated
Price
Supply
1. Market tools:
quota,Co2tax etc.
Demand
Amount
“textbook” effects og the EU system.
Initial institutional
conditions.
- Tax structure
- Demography
- Time budgets
Etc.
2. Institutional reforms
initial market conditions
The EU quota system and its effects upon the
consumer
After quota
price p2
El price
Market place i.e.
Nordpool
Coal Power
Plant/company
Electricity
consumption
Electricity
sale
Here goes the
money from ”free
quotas”
Consumer
Payment
Payment
Co2
quota
El sold
GWh
Quota emitting
authority
Before ”quota”
price p1
Price
increase
300 – 600
Dkr annually
for all
electricity
consumed
Price increase and motivation for
conservation
1. Price increase of 10-15 øre/1.3- 2
Eurocent per kWh for all electricity
motivates for conservation.(7- 9 % price
increase.
2. A motivation that for an average
household amounts to 300-600 Dkr.
Annually.
4. PCA and CO2 from heat and
power production
PCA potential
1. Heat and electricity
11.7 mill tons CO2
2. Private transportation 6-10 mill. tons CO2
3. Sum
18- 22 mill. ton CO2 or
30% - 40% of total DK CO2 emission.
This share may be increased if increasing parts of
the CO2 emission from goods and services are
included.
Personal CO2 allowances and the Danish technoinstitutional structure
Institutional conditions in
cogeneration systems
1.Often high fixed tariffs. In Aalborg a heating bill for a
140 m2 house will be around 7.000 Dkr annually. Out of
which 3.000 will be fixed tariffs. So marginal heating
costs is only 5.000 Dkr. annually.
Result: Conservation motivation low
2. CO2 emission is the result of a mixture of coal and
incineration plant heat and industrial wast. The CO2 cost
is not a marginal cost in this system, but an average
cost:
Result: CO2 allocation lower than marginal CO2 costs.
Household CO2 emission linked to heat and power
Institutional economy approach
(market and institutional policy)
Price
Supply
1. Market tools:
quota,Co2tax etc.
Demand
Amount
Initial institutional
conditions.
- Tax structure
- Demography
- Time budgets
Etc.
2. Institutional reforms
initial market conditions
PCA plus institutional reforms
5. The car example
Two cars
Car
Km per liter Km per year
Econ Car A
24
20.000
Cons. Car B
12
20.000
Neoclassical approach- start
position in optimum-only market tools
Price
Price
Supply
Supply
Market
tools:
Market
tools:
quota,Co2tax
quota,Co2tax etc.
etc.
Demand
Demand
Amount
Amount
Initial
institutional
conditions.
institutional
Initial
-conditions.
Tax structure
--Demography
Tax structure
--Time
budgets
Demography
Etc.
- Time budgets
Etc.
Incentive for change to economy car at
200 Dkr/26.5 Euro/ton CO2 emission
Car
Annual
CO2 cost
at 200
Dkr/ton
Marginal
gasoline
and O/M
costs in Dkr
per km
CO2 cost
Dkr per km
Marginal
cost Dkr per
km after
CO2 tax
Marginal
cost
increase
in %
Econ A
400
0.6
0.02
0.62
3
Cons.
B
800
1.2
0.04
1.24
3
Extra cost
for
B/incentive
400
0.6
0.02
0.62
3
Institutional economy approach
(market and institutional policy)
Price
Supply
1. Market tools:
quota,Co2tax etc.
Demand
Amount
Initial institutional
conditions.
- Tax structure
- Demography
- Time budgets
Etc.
2. Institutional reforms
initial market conditions
Change of tax structure and 600 Dkr/tons
CO2
Car
Marginal
cost Dkr
per km.
Gasoline+
O&M
Change to
km
“Weight
tax” Dkr
per km
Km
insurance
payment
CO2 cost
Dkr per
km at 600
Dkr/tons
Margina
l cost
Dkr per
km
Econ A
0.6
0.03
0.25
0.06
0.6/
0.94
Cons.
B
1.2
0.15
0.35
0.12
1.2/
1.82
Extra cost
for
B/incentive
0.6
0.12
0.10
0.06
0.88
This is a change of marginal
costs without change of average
costs per km for a 20.000
km/year car.
6. Three Governance tools and
average price increases
Assumptions.
We want a marginal incentive of 600 Dkr per ton CO2.
1000 inhabitants in country A. Emission 9.000 ton CO2.
EU quota 6.000 ton CO2.
Three Governance ways:
1. CO2 taxation: The government gets the free quota)
2. Present EU quota system: The large companies gets
the free quota.
3. PCA system: The consumer gets the free quota.
Average price increase in the three
Governance methods
1. CO2 tax give price increase og 600 Dkr.
2. EU quota system gives price increase og
600. Dkr.
3. PCA gives price increase of 200 Dkr.
600 Dkr
1. and 2. average
price increase
3.PCA based price
average increase
200 Dkr
CO2
“Tax”
3 ton
Individual
quota
4.5 ton
Present
emission
7. Conclusion
1. Necessary to develop a good description of the
techno-institutional structure.
2. Develop PCA plus reforms of initial institutional
setting is a must. PCA´s does not “do” it alone.
3. PCA´s are important because they represent a
“taxation” of marginal use. In that way it makes
a high conservation incentive possible without
increases in average energy prices for an
average consumer.