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ScienceDirect Energy Procedia 105 (2017) 3433 – 3439

The 8th International Conference on Applied Energy – ICAE2016

Using sectoral approach as complement to the INDC framework: an analysis based on the CGE model Yaqian Mua, Can Wanga,*, Wenjia Caib a State Key Joint Laboratory of Environment Simulation and Pollution Control (SKLESPC), and School of Environment, Tsinghua University, Beijing 100084, China b Ministry of Education Key Laboratory for Earth System Modeling, and Center for Earth System Science, Room S925, Meng Minwei Science Building, Tsinghua University, Beijing 100084, China

Abstract Although 169 Intended Nationally Determined Contributions (INDC) have been submitted up to June 2016, there is still around 1.2-1.7 Gillion tons’ CO2 emission gap in 2030 to realize the 2 ć target. The main objectives of this paper are to analyze the significance and feasibility of conducting a sectoral approach as complement to cover the emission gap on the base of INDC framework. The scenario analysis in this paper take three key sectors, electricity, iron and steel (IST) and cement, into consideration. The results affirmed the earlier judgment that additional sectoral reduction in the electricity sector could significantly reduce global CO2 emissions. As a result, this study suggests developing consistent sectoral targets for the electricity sector together with the pledged INDC targets. To conduct this sectoral approach, at least 4070.7 million dollars of extra expenditure are required from developed countries to cover the loss of developing countries, but the results of this investment could be as much as 154 million tons’ CO2 reductions. This paper also concludes with suggestions such as aggressive global mitigation pledges and deeper international cooperation on sectoral technology. © Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license ©2017 2016The The Authors. Published by Elsevier Ltd. (http://creativecommons.org/licenses/by-nc-nd/4.0/). Selection and/or peer-review under responsibility of ICAE Peer-review under responsibility of the scientific committee of the 8th International Conference on Applied Energy.

Keywords: INDC; Energy Policy; Sectoral Reduction; Technological Benchmark; CGE Model

1. Introduction The “Pledge and Review” framework emerged at the 2009 Copenhagen Meeting and was officially endorsed by the United Nations at the 2010 Cancun Meeting. It reflects the consensus that instead of a top-down approach for allocating global targets (such as in the Kyoto Protocol), a bottom-up approach should be taken to aggregate national reduction targets set by each country voluntarily based on their

* Corresponding author. Tel.: +86-010-62794115; fax: +86-010-62794115x8008. E-mail address: [email protected]

1876-6102 © 2017 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of the scientific committee of the 8th International Conference on Applied Energy. doi:10.1016/j.egypro.2017.03.785

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economic and technological potential[1][2]. Under this framework, the Intended Nationally Determined Contributions (INDC) formed the building blocks of the historic international climate agreement at 2015 Paris Meeting. Up to June 2016, 169 INDCs have been submitted as the guidance for global climate mitigation actions after 2020, which cover 98.8% of the current global emissions [3]. However, the INDC framework is still criticized for its weak power in stimulating reductions because countries are actually incentivized to give lower pledges than their actual abilities in order to ensure that they can achieve the targets with less risk and cost. Research from UNEP has shown that there is around 1.2-1.7 Gillion tons’ emission gap in 2030 compared with the requirement of 2 ć target[4]. The sectoral approach was also frequently discussed as a potential part of the post-Kyoto climate change mitigation framework, and could provide solutions to the emission gap caused by INDC framework due to a number of potential advantages [5][6][7][8]. Firstly, additional sectoral reduction in several most emission-intensive sectors could significantly reduce global CO2 emissions due to their high contributions. For example, the electricity and heat generation sector emitted 42% of global CO2 emissions from fuel combustion in 2011[9]. Secondly, reducing emissions in a given sector is simpler for implement and administration than reducing emissions in the whole economy. Then, there is less concern on competitiveness distortion since sectoral approach requires all the participants to make consistent pledges. Lastly, technology transfer, an indispensable part of most sector-based proposals, can also make contribution to increase the technological potential of reductions and promote countries to make enhancing pledges in the long-term. Unfortunately, there is still little achievement in the actually practice of sectoral approach mainly due to the fuzzy acknowledgement of the significance and feasibility of using sectoral approach as complement to the INDC framework. As a result, comprehensive quantitative research is needed to analyse how much CO2 can be reduced, how will the economic costs be distributed among different countries and how much extra expenditure is needed to conduct the sectoral approach on the basis of the INDC framework. This study aims to solve these problems using a global computable general equilibrium (CGE) model. Special attention is also paid to the traditional questions concerning which sectors should be selected to implement the sectoral approach. The paper is organized as follows: A brief introduction about the INDC and sectoral approach is given in the first section. The second section addresses the database and the GTAP-E model that will be used to conduct the quantitative analysis. The next section focuses on the design of the scenarios. In section 4 we will present the main calculated results. A thorough analysis and conclusion will be given in the last section. 2. Method and Data 2.1. GTAP-E model The GTAP-E model is an extension of a basic model constructed by the Global Trade Analysis Project (GTAP) team, which offers a static, global, multi-region, multi-sector general equilibrium model with a detailed treatment of international trade flows [10]. Compared with a standard GTAP model, the GTAP-E model has a similar structure, but adds a module for the substitution between different energies and an accounting module of CO2 emissions related to the use of emission-generating commodities in the production and consumption processes. The simple structure of GTAP-E is shown in Fig. 1. The structures of production functions are major features of different CGE models. As is shown in Fig. 2, energy factors are extracted from other intermediate inputs and treated as added value. Energy factors are combined with capitals to capital-energy composition first, and then combined with other production factors like land and labour to the final added value. The total output is determined by the amount of intermediate inputs and added value under the condition of zero economic profit. Moreover, energy factors are divided into electricity, coal, natural gas, oil and petrol layer by layer. The combination of

Yaqian Mu et al. / Energy Procedia 105 (2017) 3433 – 3439

different inputs is realized through the constant elasticity of substitution (CES) functions (Leontief function is a special case of CES function when σ=0) with the specific elasticity of substitution (σ).

Fig. 1. Structure of GTAP-E model

Fig. 2. Nesting structure of production in GTAP-E model In this way, energy-related factors or commodities are incorporated and the model is able to respond to all kinds of energy policies. Of course, the complete structures are much more complex than the figures

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given above, including the modules of carbon tax, emission accounting and international trade. The details about the GTAP-E model are available in related research [11]. To do this research, we improve the model and construct the relationship between the sectoral carbon tax and sectoral CO2 emissions so that we can give direct policy shocks to the sectoral emissions. Then, we adjust the standard GTAP-E model, with 57 sectors and 129 countries into a model with 13 sectors and 10 regions. Most of the data such as GDP, sectoral outputs and elasticity of substitution are provided by the GTAP database and the latest data available is for 2007. Other important data needed in our research will be presented in the following section. The model is solved by GEMPACK software. 3. Scenarios Two classes of scenarios are built here. The scenarios are set deliberately with very simple architectures to shed light on the differences between the sectors that are selected in the sectoral approach. The reference scenario is a simplified INDCs aggregation and reflects the precondition of additional international sectoral reduction in the future. Three main developed regions (EU27, USA, Japan) and BRICS (Brazil, Russia, India, China, and South Africa) are considered in this research, which accounted for 73.9% of global industrial CO2 emissions and 77.3% of global GDP in 2007. In order to simplify the analysis, only emission related targets in INDCs are set as constraints in the reference scenario as shown in Table 1. Table 1 National reduction targets in 8 main regions in INDC. Regions

EU27

USA

Japan

China

India

Russia

Brazil

South Africa

Base Year

1990

1990

2013

2005

2005

1990

2005

-

Target Year

2030

2025

2030

2030

2030

2030

2025

2030

26%

60%-65% (Intensity)

33% (Intensity)

37%

614 Mt CO2–eq

Commitments

40%

26%-28%

70%-75%

In the policy scenario, EU27, USA, Japan and BRICS take additional sectoral actions together with the pledged INDC targets as the reference scenario. The sectoral approach in electricity, IST and cement sector will be discussed individually. By comparing different sectors, we can find out which sector is more suitable for a sectoral approach. The sectoral targets will be set based on the sectoral technological benchmarks [12], which promotes all the participant countries to achieve a consistent, direct emission-intensity target (e.g. tons of GHG/ton of steel) or indirect technological efficiency target (e.g. gillion joule energy consumption/ ton of steel) in some specific energy and heavy industries. In order to simplify the analysis, we choose three efficiency indexes in Japan, widely acknowledged to have leading energy technologies, as benchmarks for electricity, IST and cement sectors respectively. The specific sectoral reduction targets are calculated by first comparing the current energy efficiency with its related benchmark. The gaps are shown in Table 2, according to which the constrains are set in the policy scenarios. Table 2 The comparison of energy efficiency of three sectors in different regions

Regions

Average energy efficiency in thermal power ˄%˅ ˅2006generation˄ 2008

Benchmark Gap

Primary energy consumption of steel ˄GJ/ton crude steel˅ ˅ 2008

Benchmark Gap

Thermal energy consumption for clinker production˄ ˄GJ/ton ˅2008 clinker˅

Benchmark Gap

USA

39.7

4.3

30

6.9

4.25

1.18

EU27

42.4

1.6

27.9

4.8

3.84

0.77

Japan

44

0

23.1

0

3.07

0

China

33.7

10.3

28.3

5.2

4.17

1.1

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28.5

15.5

28.9

5.8

3.31

0.24

Brazil

41.1

2.8

26.4

3.3

3.7

0.63

Russian

31.6

12.4

33.1

10

5.44

2.37

South Africa World’s average

37.7

6.3

25.6

2.472

3.91*

0.84*

36.8

7.2

28.4

5.3

3.91

0.84

Data source: Oda, 2012[13].

4. Results 4.1. Overall reduction of CO2 emissions caused by the sectoral approach Overall, if only INDC pledges are realized, the total reduction of CO2 emissions would be around 12.8% of global CO2 emissions. Improvements in emission reduction occur if sectoral approach is implemented in all the three sectors. However, the improvements are only about 1% for the IST and cement sectors, while it could be as large as 27.2% for the electricity sector. The results are shown in Fig. 3. As a result, the sectoral approach for the electricity sector can provide most significant improvements in the reduction of CO2.

Fig. 3. Change of global emissions 4.2. Change in GDP as a result of the sectoral approach The impact on GDP is the key factor that determines the attitude of each country towards a sectoral approach. There is not a consistent rule concerning how developed or developing countries will respond to the sectoral approach due to varied technological efficiencies, economic structures, and different responsibilities in the mitigation of climate change. In Fig. 4, we can see developed countries absorb most of the negative impacts in all of the scenarios. The impact on GDP is consistent to the pledges given in INDCs and the gap of sectoral efficiency. Among developing countries, India, Brazil and South Africa will always be winners no matter whether sectoral approach is conducted, while Russia and China will face GDP loss even without additional sectoral actions.

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Fig. 4. GDP change by countries 5. Discussion and conclusions The sectoral approach in the electricity sector brings obvious improvements in emission reduction, which can increase the CO2 reductions by as much as 154 million tons compared with the basal INDC framework in the given scenario. The additional actions in electricity sector can significantly cover more 10% of the emission gap in 2030. Fortunately, the negative impact on global GDP caused by additional sectoral actions in the electricity sector is only 0.1% more than the reference scenario and almost the same as the sectoral actions in the IST and cement sectors. As a result, considering both environmental effectiveness and economic impacts, the electricity sector is more suitable sector to conduct a sectoral approach compared with the IST and cement sectors. The economic costs of each country is the decisive factor whether the sectoral approach can be conducted. Based on our simulation, the specific number of sectoral output loss calculated from our simulation is 4174.4 million dollars in BRICS compared with reference scenario. Meanwhile, the outputs of the electricity sector in developed countries increases by 103.7 million dollars due to the change of relative product competitiveness in international trade. As a result, no more than 4070.7 million dollars’ net loss of sectoral outputs appear to push sectoral actions in the electricity sector. The average cost is only 26.4 dollars per ton of CO2 reductions under ideal condition, which is much cheaper than the average cost of INDC pledges in developed countries (53.9 dollars per ton of CO2 reductions). Considering both the principle of “common but differentiated responsibility” and the disadvantage of developing countries in terms of economic strength, developed countries are expected to take the main responsibility to cover the net loss of sectoral outputs through a suitably designed funding mechanisms. Based on the analysis above, there are still several problems and potential improvements to the sectoral approach. First, sectoral targets are set based on technology benchmarks, which asks all the participant countries to improve their energy efficiency to the required level. As a result, the transfer of technology from advanced countries to less advanced countries can make great sense to reduce the costs of sectoral reduction. Unfortunately, the transfer of technology is always a challenge in the practice of international cooperation. Secondly, apart from suitable funding support, more aggressive commitments are required from developed countries to encourage developing countries to take more responsibility for the mitigation

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of global climate change. Further research is needed to explore the design of detailed mechanism to cover the emission gap of INDC framework.

Acknowledgement This research was funded jointly by the National Natural Science Foundation of China (No. 71273153 and 71303133). Reference [1] Buhr K, Roth S, Stigson P. Climate Change Politics through a Global Pledge-and-Review Regime: Positions among Negotiators and Stakeholders. Sustainability. 2014, 6(2): 794-811. [2] Erickson P A, Lazarus M. Implications of international GHG offsets on global climate change mitigation. Climate Policy. 2013, 13(4): 433-450. [3] CAIT Climate Data Explorer. Paris Contribution Map, available online: http://cait.wri.org/indc/. [4] UNEP. The Emissions Gap Report 2015. United Nations Environment Programme (UNEP), Nairobi, 2015. [5] Akihiro S. A Sectoral Approach as an Option for a Post-Kyoto Framework. Discussion paper 08-23, University of Tokyo, 2008. [6] Caurla S, et al. Combining an inter-sectoral carbon tax with sectoral mitigation policies: Impacts on the French forest sector. Journal of Forest Economics. 2013, 19(4): 450-461 [7] Deetman S, et al. Deep greenhouse gas emission reductions in Europe: Exploring different options. Energy Policy. 2013, 55: 152-164 [8] Schmidt J, et al. Sector-based approach to the post-2012 climate change policy architecture. Climate Policy. 2008, 8(5):494-515 [9] IEA. CO2 Emissions from Fossil Fuel Combustion: Highlights. International Energy Agency, Paris [10] Hertel T W. Structure of GTAP, Global Trade Analysis: Modeling and Applications. Cambridge University Press, 1999. [11] Truong T P. GTAP-E. Incorporating Energy Substitution into GTAP Model. Technical Paper 16. Center for Global Trade Analysis, Purdue University, Purdue, 1999. [12] Lehmann A, et al. Baseline scenario selection for sectoral climate mitigation action in power generation: A case study on the grid emission factor as intensity benchmark in Thailand. Asian Institute of Technology. 2014, 1-7. [13] Oda J, et al. International comparisons of energy efficiency in power, steel, and cement industries. Energy Policy. 2012, 44:118129.

Can Wang Professor Can Wang is the chair of Department of Environmental Planning and Management School of Environment at Tsinghua University. He has active research interests in climate change economics and policies, energy system analysis and low-carbon cities..

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