pmr workshop, 25 september 2014, world bank

Strictly Confidential © 2013 Strictly Confidential © 2013

Grzegorz Peszko Lead Economist, Climate Policy Team,

Climate Change Group, The World Bank

Source: EBRD Analysis 2010-2012 (Grzegorz Peszko, Janina Ketterer)

based on the modeling by McKinsey & Company (Russia), Studies for EBRD by NERA

+ Bloomberg New Energy Finance (Kazakhstan, Turkey, Ukraine)

PMR Workshop, 25th September 2014, World Bank

Strictly Confidential © 2013

Rationale

▪ Frustration of practitioners that abatement measures

that look so profitable on the MAC curves are so difficult

to find and finance

▪ McKinsey reports and other MAC curves keeps

referring that several abatement options (e.g. EE) are

“profitable” although curves are welfare-economic, and

not financial.

▪ What may be “profitable” to society at large is not

necessarily profitable to economic agents (firms, public

entities, residents)

▪ What mix of policies can encourage actions to deliver

various emissions pathways and targets?

Strictly Confidential © 2013 3

▪ Russia study extends the McKinsey study “Pathways to

an energy and carbon efficient Russia”

▪ Turkey, Ukraine, Kazakhstan studies implemented with

NERA and Bloomberg-New Energy Finance (http://www.ebrd.com/pages/research/economics/publications/coolair.shtml)

▪ Goes beyond McKinsey MAC approach in three

dimensions

– Reflect market conditions (transaction costs, price

distortions, perceived risks and barriers, etc.).

– Allow analysis of policies that affect expected uptake

of abatement opportunities

– Plots emission reduction pathways for various policy

mixes

These studies

http://www.ebrd.com/pages/research/economics/publications/coolair.shtml


▪ Bottom-up, engineering marginal cost curves

▪ Illustrate economics of supply of emission

reduction measures

▪ Increasing average annual unit costs

(vertical axis) of discrete emission reduction

measures plotted against their abatement

potentials (horizontal axis)

▪ Abatement potentials estimated as

practically achievable technical/economic

potentials

The building blocks of the MAC curve

Abatement

measure

Abatement potential (tCo2e/a)

Un

it co

st (E

UR

/t)


Different perspectives = different costs = different uses

Welfare economic MAC curves

▪ None: Flat social discount rate

(Russia: WACC 8% = long-

term government bonds)

Risks, barriers:

Cost of capital

▪ None Transaction costs

Policy (financial) MAC curves

▪ Economic opportunity cost

i.e., export prices ▪ Market prices i.e., including

current subsidies and taxes

Energy prices,

subsidies, taxes

SOURCE: EBRD with modelling by McKinsey

▪ Market discount rate (20%-

30% tailored to individual

measures

Global benefits

and local co-

benefits

▪ None (recently shown in

NCE report) ▪ Included

▪ Estimated for different measures

and separately for policies

Technological

progress ▪ Included (learning curves) ▪ Included (learning curves)

Economy-wide

feed-backs,

rebound effect,

behaviour

▪ None ▪ Economic agents change investment

decisions in response to policy

impact on commercial viability of

abatement measures


SOURCE: McKinsey analysis

Transaction costs broken into 2 x 3 matrix (Russia study)

Planning Implementation Monitoring and

Verification

▪Search for vendors,

contractors

▪Negotiation

▪Engineering

feasibility studies

▪Business plan

▪Permits and licenses

▪Search for funding

information etc.

▪Registration

▪Baseline

determination

▪Approval

▪Validation

▪ Insurance

▪Bribery &

corruption

▪Overheads

▪Access routes

and site

preparation

▪Certification

▪Legal Fees

▪Enforcement

▪Review

▪n/a

▪Baseline

evaluation

▪Data collection

▪Reporting

▪Brokerage

▪Trading

‘Project’ transaction

costs, covering all costs

related to project

execution, incremental

to BAU

‘Policy’ transaction

costs, covering

all costs

associated with

applying for

‘green’ funding, FITs,

etc.

Large scale

emissions

trading, e.g.

JI

Government

subsidies

etc.


Transaction costs are found to average around 7 EUR/t but can be significantly higher for some measures

SOURCE: McKinsey analysis

2030 transaction costs* EUR/t CO2

Project

Trading & subsidy

300 200 1,400 1,300

125

35

30

25

20

15

120

115

10

0

900 800 700 600 500

Ø 7.1

1,000 100 0 1,100 1,200

55

5

45

50

60

400

40

Abatement potential Mt CO2

Building retrofit with ‘small’ project size

SME energy efficiency projects

Small scale apartment heat meters and thermostats

Retrofit small residential buildings

Retrofit medium residential buildings

Nuclear


Transaction costs are highest in energy efficiency

SOURCE: McKinsey analysis for EBRD

Transaction costs

per tonne

EUR/tonne CO2

Average

Non-energy

Low-carbon

energy

Energy efficiency

Project

Policy

Total cost

EUR bn, 2030

Abatement

potential

Mt, 2030

7.0

2.3

0.3

9.7

553

284

520

1358 7.1

4.8

2.3

0.6 0.1

0.5

8.3 6.4

1.9

12.7 8.4 4.3


Transaction costs and market discount rates (Turkey, Ukraine, Kazakhstan studies)


10

Societal internal perspective on GHG abatement costs (Russia)

SOURCE: McKinsey

2030 abatement cost, EUR/t CO2

567 Mt of abatement

profitable to

society

0

900 800 700 600 500 400 300 1,500 1,400 1,300 1,200 1,100 1,000 100 0 200

Abatement cost €/t CO2e

-90

-80

-70

-60

-50

-40

-30

-200

-20

-190

-180

-170

-160

-150

-140

-130

-120

-110

-100

-10

70

60

50

40

30

20

10

80

Cropland nutrient management

Retrofit building envelope, commercial

Increased share of cogeneration (CHP)

Retrofit building envelope, residential

Decrease of transmissions and distribution losses

Large hydro

Carbon Capture and Storage in downstream

CCS, retrofit

Aggregated new build efficiency package, residential

On shore wind

Biomass dedicated

CCS, new build

Retrofit building envelope, package 2 – residential

Nuclear

Cropland afforestation

Cropland Organic soils restoration of land in use

Agronomy practices

Degraded land restoration

Cultivation based reforestation

Pastureland afforestation

Protective afforestation

Installing apartment heat meters and thermostats

Aggregated new build efficiency package, commercial

LDV gasoline ICE

Improved insulation of heating

Distribution Maintenance

Retrofit HVAC controls, commercial

Retrofit HVAC, commercial

More energy efficient new builds in upstream

Energy efficiency (general)

CCS ammonia, retrofit

N2O Decomposition of Nitric acid, retrofit

N2O Decomposition of Nitric acid, new build

Recycling new waste

Tillage and residue management practices

Switch grass

Energy efficiency measures in other industry

Abatement potential

Mt CO2e


If current market conditions persisted for a long time, only few measures would be profitable to investors

SOURCE: EBRD based on McKinsey analysis

2030 Abatement potential, Mt CO2

2030 Abatement cost per lever, EUR/t CO2

-150

-100

50

350

250

800 100 200 300 400

400

0

500 600 700 900 1,000 1,100 1,200 1,300

150

0

200

300

-50

100

-200

426 Mt of abatement profitable to

investors

Retrofit building envelop, commercial

Cropland nutrient management

Transport


Cropland organic soils restoration

Large hydro

Retrofit building envelope, package 2 - residential

Nuclear

Retrofit building envelope, residential


Improved insulation of heating grid

On shore & geothermal

More CHP

Installing apartment heat meters

Retrofit HVAC, residential

Reduction of T&D loss

CCS levers


Integrated policy mix 1: Economic reforms

150

100

300

400

50

-100

-150

-200

-250

250

-50

350

0

200

1,200 1,000 100 0 -50

100

-200

-150

50

400

-250

350

300

250

200

150

0

900 800 700 600 500 1,100 400 300 200

-100

1,300

Lighting

Average Abatement Cost -8.59 € Profitable Incremental CAPEX 253953 €


Profitable Abatement 547.21 (Mt)

Energy efficiency buildings

Cost of capital Energy prices

Reduced transaction costs

Policy transaction costs

Carbon prices Feed in tariffs

Policy mix 1 = Economic reforms

9% Liberalized

û

û

û

û

Transport

Total surplus 39,291 M€


Nuclear

CCS Cropland afforestation

Large hydro



Biomass Energy efficiency, petroleum sector

Abatement cost per lever, EUR/t CO2


Integrated policy mix 2: Reduction of transaction costs Abatement cost per lever, EUR/t CO2



-250

50

-100

-150

-200

-50

200

150

250

0

100

400

350

300


200

150

100

0

900 100 700 600 1,200 400 300 200 0 1,300 1,100 1,000

-100

50

-50

-250

-200

-150

800

400

350

300

250

500



Energy efficiency buildings Transport



Nuclear

CCS





Policy mix 2 = 1 + EE support

9% Liberalized

ü

û

û

û

Reduction of T&D loss Energy efficiency, petroleum sector


Large hydro


Integrated policy mix 3: Feed-in-tariffs Abatement cost per lever, EUR/t CO2



800

100

300

250

300

1,100 1,300 100 0 1,200

200

900

0

200

150

400 500 600 700

400

-250

-100

350

50

-50

-200

-150

1,000

350

200

-250

250

0

50

300

-100

400

-150

-200

-50

100

150

Energy efficiency buildings Transport




Nuclear






Policy mix 3 = 2 + FIT

9% Liberalized

ü

ü

û

û


Large hydro

Biomass

On shore wind


Integrated policy mix 4: Carbon trading or tax Abatement cost per lever, EUR/t CO2






Policy mix 4 = 3 + carbon trading

9% Liberalized

ü

ü

ü

ü


350

100

-150

-100

50

400

0

300

200

150

250

-50

-250

-200

-150

350

-250

-50

250

0

100

150

200

300

-200

400

50

-100






Large hydro


CCS

Biomass


Improved insulation of heating grids


Pasture land afforestation

Distribution maintenance, petroleum sector

More CHP



Sensitivity of abatement cost to policy choices


17


18

Thank you

pmr workshop, 25 september 2014, world bank

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