4.3.1 Overview
Given the above body o f work’s support for the costs aud carbon hierarchy given in this thesis, Wiere have the views come from that emission reduction is inexpensive, beset with many negative cost opportunities, with demand side energy efficiency being the lowest cost option? Section 4.3 sets out some o f the studies that have made these arguments. Many elements o f these studies are criticised, in particular those studies that claim energy efficiency is a negative cost way to achieve carbon dioxide emission reduction (section 4.3.2).
Toi (1997 p. 134) states that all bottom up studies o f the US,
‘agree that it is possible to stabilise US carbon emissions at zero cost’.
For exanq)le, a National Academy o f Sciences study calculated that the United States could reduce its greenhouse gas emissions by between 10 and 40 per cent o f the 1990 level, at low cost or perhaps some net savings,
‘if proper policies were implemented’ (NAS, 1991, p. 106).
In the same year the (US) Congressional Office o f Technology Assessment (OTA, 1991) study argued that 20% o f emission reduction can be achieved at no cost and 55% at a cost o f 0.75% o f 1990 US GDP (Cline, 1992).
The US Department o f Energy’s bottom up derived carbon hierarchy (published in NfrUs et al 1991) envisages a great number o f negative cost emission reduction opportunities. The DoE reports that if US carbon emissions were unconstrained, annual emissions would rise by 13% between 1988 and 2000. By contrast, eleven policy strategies together would achieve an 11% fell at a cost reduction o f $85 billion per year. The lowest cost strategy, at -$530/tC, involves raising the Federal gasoline tax by 12 cents/litre within five years and spending part o f the revenue on mass transit and energy efficiency. The second lowest option at -$360/tC involves using white
sur&ces and planting urban trees to reduce air conditioning loads. The average saving for the eleven options is - $230/tC (Mills et al 1991, p531; costs read off graph). The eleven options are mostly demand side energy efficiency options. Crucially, these initiatives are policies not projects and are initiatives that only a government, and not a company, could introduce.
The National Academy o f Sciences calculated that building and vehicle energy efficiency options were negative cost emission reduction options; industrial energy efficiency and transport management were negative to low cost (^3 6 /tC ) and reforestation and fuel switching were medium to low to medium cost (> $0/tC but < $367/tC). In the same year the US Congressional Office o f Technology Assessment looked at the relative contributions o f different methods in meeting, in the lowest cost way, ‘moderate’ and ‘tough’ US emission targ ets.E n erg y efficiency measures make up 77% o f the response in meeting the moderate target, fiiel switching measures 15% and forestry 1%. To meet the tough target, energy efficiency makes up 67%, fuel switching 19% and forestry 8% (Cline, 1992, pp. 204-5). Given the proportion given to each emission reduction method, the assun^tion is that energy efficiency is the lowest cost option, fuel switching is the next cheapest and carbon sequestration is the most expensive option.
One study repeatedly quoted with reference to the developing world is the 1994 UNEP study (see UNEP 1992, 1993 and 1994, also Halsnaes 1994). One conponent o f this report concerned Venezuela and was discussed in section 4.2.2 above. Many conponents o f the UNEP report argue that negative cost carbon emission reduction opportunities by energy efficiency abound. This study’s emission reduction costs have been quoted in many influential p^>ers including Hourcade et al (1996, p. 329 and 331-335) as well as Toi (1997 p. 137). Yet this study was originally heavify criticised. One criticism was that costs for similar measures varied widely by countiy, for no ^>parent reason. The UNEP report argues that the long-run marginal abatement cost in India is $2,163/tC (Shukla, p. 681).
The moderate target sees a 31% fell in emissions frwn the 1987 level of 1.3 GtC emissions by the year 2015, the tough target a 76% fell.
On the other hand, the study reports a Zimbabwean cost o f -$l,123/tC for a zero tillage
13
option.
Shukla (1995, p. 681) found it ‘disturbing’ that the same energy conservation methods could have positive carbon emission reduction costs in India and Venezuela and negative costs in Egypt and Thailand. The seemingly random nature of cost variation ty country is probably the most worrying aspect of the UNEP report. This thesis, ly contrast, has detected a statistically significant positive relationshq) between emission reduction cost and GNP per capita of the host country for the cost of carbon sequestration in forestry projects. The UNEP study has probably been given more attention than it is due, sinçfy because its results filled a near vacuum
The second source o f negative emission reduction cost estimates is the laboratory style figures. Costs quoted for emission reduction via fuel switching in chapter 3 range fi*om $35.6/tC to $376.3/tC. Yet, according to Mills et al (1991), the price o f carbon emission reduction fi’om switching to wind energy will fell to -$33/tC by the year 2000; the price o f switching to solar power will fell to -$l/tC by the year 2000. Although
i
alternative energy technologies are becoming more conq^etitive, these figures are too low. If Mills et al were correct, in the year 2000 there would be a massive switch to wind power and, after the year 2000, no wind power generation could be additional as the baseline entailed wind power.
4JL2 Energy Efficiency
Where then does the evidence for the preponderance o f low cost energy efficiency opportunities come ft*om? At the heart o f the debate over the cost o f emission reduction via energy efficiency, lies the question o f how expensive it is to overturn market feilure. A methodological confusion lies at the heart o f the argument that energy efficiency offers many negative cost opportunities. An exanqjle o f the confused logic is evident in the IE A/OECD (1991) table below. The fifth column o f the table indicates possible energy savings from different economic sectors o f a generic OECD
" The greenhouse gas abatement in the Zimbabwe option accrues from stopping agriculture and saving energy used in commercial 6n n tractors; yet this option ignores the costs to the nation of stopping commercial agriculture (Shukla p. 681-682)!
economy. The sixth column attributes a score for barriers to energy efiBciency in those sectors. No time scale is given over which the energy efficiencies are to be made.
Table 4.5: Energy EfSciency O pportunities By Sector
Industrial Sector % Energy
Consump tion % of CO2 Emissions Energy Savings Possible Market and Institutional Barriers Industry Motors 5% 9% 10-30% 5= Steel 4% 5% 15-25% 5= Chemicals 8% 1% 10-25% 6=
Pulp & Paper 3% 1% 10-30% 5=
Cement 0.1% 1% 10-40% 4
Residential Heating & Air Conditioning
11% 11% 10-50% 3= 3=
Water Heating 3% 4% Mixed 3=
Refiigeration 1% 2% 30-50% 2= 4=
Lighting 1% 1% >50% 1 4=
Commercial Heating & Air Conditioning 6% 7% Mixed 3= Lighting 2% 3% 10-30% 5 3= Transport Passenger Cars 15% 14% 30-50% 2= 4= Goods Vehicles 10% 9% 20-40% 3= 2
(Source: a d ^ ted from IEA/0 'CD 1991)
The fifth column o f the table shows us, for exanq)le, that energy efficiencies o f 10-25% are ‘possible’ in the chemical sector and that energy efficiencies o f 30-50% are ‘possible’ in the passenger car category. Energy saving opportunities are ranked from 1, the greatest, down to 6, the least. Column six is the lEA/OECD’s ranking o f the magnitude o f barriers or restrictions preventing the achievement o f energy savings: 4 indicates the most restrictions, 1 indicates the least.
The crucial point to make about table 4.5 above is the correlation between sectors offering large potential energy savings and those feeing market and institutional barriers to energy efficiency: where large potential energy savings exist, barriers to achieving these savings are great. This correlation is not a coincidence: the existence of the institutional barriers explains why so many energy savings opportunities ‘exist’! The feet that these opportunities ‘exist’ does not make them inexpensive; they exist because barriers prevent them from being achieved and make their accomplishment expensive. It may indeed be cheaper to achieve energy efficiencies in the chemical sector where many efficiencies have already been made and wiiere relatively few energy efficiency opportunities ‘exist’, than in a sector with many emission reduction ‘opportunities’.
Recognising that the use of energy in Pakistan, for exanple, is less efficient than in Germany does not mean that Pakistani inefficiencies can costlessly be overcome and that Pakistan will instantly become like Germany. Great institutional, political and cultural obstacles may stand in the way of overcoming inefficiencies: this is what Pauchauri (1989) means when he says that lack of development in itself is a reason for energy inefficiency. The cost of energy efficiency may be independent of the country’s existing level of energy efficiency: low cost energy efficiency may be equally possible in rich and poor countries.
Energy efficiency studies frequently simply cite cases of market feilure in the energy*^ sector; the assumption is that once identified, intervention will overcome these fellings and will bring gains virtually at no cost (see Krause 1995). Market feilures are cited and the gross benefits of energy efficiency estimated, but the cost of achieving energy efficiencies is ignored. It is ironic that those who see so many feilures in the energy market do not see the possibility o f a government felling in its attendît to overturn market feilure. Demand side energy efficiency inq)rovements involve getting society to change its behaviour; this will be expensive, especially if this is to happen quickly. If benefits are to be spread widely throughout society, the gains to individuals will be small and the incentive to act limited. If many people have to act to achieve these gains, co-ordination costs may be large.
Energy efficiency bottom up studies do not only leave out costs, they frequently also overestimate the amount o f emission reduction achieved; these faults conqx)und each other, each serving further to underestimate the cost o f emission reduction. Mathur (1994) studied World Bank benefit cost analyses of energy efficiency projects. He concluded that energy conservation costs consistently are underestimated, even Wien a conscious effort has been made to be conqirehensive. Fuel switching and carbon sequestration studies are less likely to underestimate costs because transaction and information costs, costs that are difficult to identify and quantify, are less prevalent in fiiel switching and carbon sequestration projects than in energy efficiency projects.
Energy efficiency projects in part appear low cost because they are examined most frequently by bottom up studies, a methodology with a low cost bias. Rose and Lin (1995) by contrast use a general equilibrium model to study US mandatory energy conservation programmes. They find that the legislation has a slightly negative impact on GDP and employment, and they conclude that, as a means to reduce carbon dioxide emissions, energy efficiency,
‘should not be characterised as a ‘no regrets’ strategy’.
Might not energy efficiency policies achieve lower cost emission reduction than energy efficiency projects? Legislation on energy efficiency minimum standards can be effective: the average energy efficiency o f new refiigerators sold in the United States nearly tripled between 1972 and 1993, largely due to minimum efficiency standards adopted at the State national levels (Geller and Nadel, 1994). However, the cost o f government policies can also be underestimated. Mills et al (1991) argues that emission reduction costs from government in ^ s e d performance standards programmes are ‘negligible’. One could only come to this conclusion if you assumed that government officials discussing, designing and reworking policy had an opportunity cost o f zero. Even if that were the case, the time and expense o f business people involved in designing legislation would be great. Bates (1991, p. 34) argues that market feilures in the energy market are not sufficient to justify large scale government intervention to achieve emission reduction. Market imperfections do not
justify intervention, given the welfere arguments against intervention and the potential for resource misallocation.
Even if Bates is wrong, joint inqjlementation is not the right vehicle for the introduction o f energy efficiency policies, because o f the difficulty o f proving that energy efficiency projects have achieved carbon dioxide emission reduction.
Another argument against energy efficiency as a low cost method to achieve carbon emission reduction is the feict that even if energy efficiency in^rovements are made, the 611 in carbon emissions may be small. A difference between carbon intensity and energy efficiency in^rovements is that when new technology is brought in to reduce carbon intensity, energy efficiency improvements often are also achieved. By contrast, energy efficiency measures may not bring concomitant falls in carbon intensity because o f leakage through substitution and income effects. For exanq)le, an energy efficiency light bulb project resulting in low cost lighting would see people burning lançs longer each day, substituting lan^s with greater light output far lan^s with lower Ught output and increasing the number of lanps in the household. Each of these actions would reduce the emission reduction caused ty the project (R Anderson, 1995, p. 7).
This thesis has been critical of arguments that energy efficiency projects can achieve low cost emission reduction. Some energy efficiency emission reduction costs have been calculated, however, with the added assun^ion that a global carbon tax exists. Considered in this context, the costs are more reasonable. If a global carbon tax existed Wiere people were charged say $20/tC emitted, or if a tradable permit scheme were to operate where people could be awarded permits worth substantial sums far carbon emission reduction via energy efficiency, then the cost of energy efiBciency inqjrovements would fall People would readily turn their mind to avoiding the tax and would be happy to sign iq) far programmes hewing them to do this: the cost of achieving emission reduction via energy efiBciency would fall as the incentives to act rose.
The situation today, wben there is no carbon tax nor a tradable permit system, is different: fawer individuals want to act on energy efiBciency and those who want to do so are
confronted with high co-ordination costs in the frice of a general lack o f interest. If one is told to do something, one can often quite easily do it; if an act is presented as an option, then its realisation could be e^qjensive. If getting people to act is both urgent and a matter of public interest, then action can be ine?q)ensive. But people will only act if they believe that their action is inqx)rtant. At the same time people are being told that other matters require their urgent attention such as AIDS. Each conpeting matter o f public inqx)rtance reduces the time and attention devoted to energy efficiency and so increases the cost of effective action.
If we can envisage a world with carbon emission reduction permits, then there probably is a point at which people would gain interest in being awarded emission reduction permits via energy efficiency projects. At this price, the cost of achieving emission reduction via energy efficiency would fell Whatever that permit price is, that is the cost of emission reduction ly energy efficiency. It may be, particularly if methane emission reduction projects are sanctioned, that this price will never be reached.
4 3 3 Carbon Sequestration
Another view that seems to be gaining credence in the literature is that carbon sequestration is e?q>ensive. Evidence ft)r this stance is lacking. Toi, Wio devotes one and a half pages of his thesis to carbon sequestration and v\bo admits that his work does not address how emission reduction should be achieved, nevertheless argues that,
‘it is clear that improvenaent o f energy and carbon efficiency is to be preferred over afferestation' (Toi 1997, p. 196),
and that
‘Afforestation appears to be one of the more expensive options o f reducing climate change’ (Toi, 1997, p. 258).
Toi states as his sources ft)r this stance Hourcade (1996b) and Brown (1996), yet these studies merely report the wide range o f carbon sequestration costs presented in a number of studies.
Some of the carbon sequestration prices calculated in chapter 3 were less than $5/tC. Carbon sequestration costs are not high, but in practice they are not likely to be less than
$5/tC either. $15/tC may be the true cost of carbon sequestration. Reforestation as a concept has existed since long before joint implementation was thought o ( and many reforestation projects have &iled along the way. Joint implementation is a source of financing for reforestation; on its own it does nothing to lessen the problems that have plagued earlier reforestation projects.
Janzen, manager o f the Biodiversifix project, argues that ,$15/tC is the right price for the carbon that his project produces (Janzen 1995). In 1988, Janzen put together a proposal for carbon storage on the same she. The carbon cost written into that proposal was lower than the figure in his 1995 proposal, in part because o f inflation, but also,
‘because in 19881 was still learning about the true costs o f keeping carbon fixed once it is fixed....I did not know enough in those days to charge an adequate price’.
Korten’s (1994) report o f the $240 million Asian Development Bank/ Japanese Government Forestry Sector Programme Loan to the Philippine government provides a salutary lesson to anyone believing reforestation is simple and inexpensive. The financial sums involved in the loan were too large to be managed effectively. Officials disbursing the loan designated areas of land for reforestation that overlapped with other official uses. Contracts to plant trees were awarded to many people who knew nothing about planting trees; often these were fiiends or relatives o f those allocating the funds. Labourers would on occasion bum down the trees if they were not paid on time, or to prolong the project v^diich provided them with income. This poor performance only mirrored earlier fidlures. Reforestation as a concept was introduced into the Philippines in 1916. Between 1916 and 1987, 184 reforestation projects totalling one million hectares were attempted, but only 272,000 hectares were ever planted. Most damning o f all, by 1988, only 70,000 hectares still contained forestry. By 1988, only 26% o f the reforested hectares still contained forests, and only 7% o f all hectares that were designated for planting still contained forestry (Philippine German Forest Resource Inventory Project, 1988).
Toi may be picking up a general view that no matter what the cost of carbon sequestration, the wider concerns over the monitoring of such projects may block them (see section 4.5). Carbon sequestration projects 6ce the difficulty that if the joint inq^lementation community loses interest in carbon sequestration as an emission reduction method, no money will be