Conjoncture

PDF
2
Conjoncture // January 2019  
economic-research.bnpparibas.com  
The Paris climate deal, concluded at the COP21 in 2015, pleads for keeping global warming below 1.5°C above pre-industrial levels.  
However, in its latest report, the IPCC (Intergovernmental Panel on Climate Change) warns that current mitigation policies are insufficient  
to obtain this objective. Investments in renewable energy and electricity infrastructure have to be stepped up. The power sector has to  
be decarbonised, the use of electricity increased, and energy efficiency improved. Low carbon policies are difficult to implement  
because of commercial interests and social impact, in particular concerning the increase in carbon prices. Nevertheless, to achieve  
substantial reductions in greenhouse gas emissions, a different approach is needed, including carbon pricing and trade sanctions.  
In its report “Global Warming of 1.5°C” published on October 2018, the States, Saudi Arabia, Russia and Kuwait. Important decisions, such as  
Intergovernmental Panel on Climate Change (IPCC), the UN setting procedures for tightening of climate objectives and the long  
organisation for climate analysis, warns that the earth is quickly promised mobilisation of USD 100 billion financial support per year for  
1
warming up. The increase in global mean surface temperature (GMST) climate adaption and mitigation projects in the developing countries  
since the period 1850-1900 is likely to be in the range between 0.75°C were once again delayed to the next COP, to be held in Chili. The  
and 0.99°C in the decade 2006-2015.  
COP24 only succeeded at the last moment in accepting rules on  
measuring, reporting and verifying carbon emissions.  
In general, land surfaces warm up considerably faster than sea surfaces.  
Temperature extremes greater than GMST are already experienced in  
many land regions. The organisation attributes the increase in GMST  
with high confidence to past and ongoing emissions of greenhouse  
gases in the atmosphere. Global temperatures are rising currently by  
around 0.2°C per decade. The IPCC expects that at this speed global  
warming could reach 1.5°C by 2030 and 3-4°C by the end of the  
century.  
CO emissions under different scenarios  
2
bn CO eq  
2
No policy  
80  
60  
40  
20  
0
NDC  
+2°C  
The report emphasises the importance of limiting global warming to  
1.5°C compared to 2°C, as the economic consequences of climate  
change should be more limited and would allow greater opportunities for  
adaptation.  
Nevertheless, the consequences of an increase by 1.5°C could already  
be substantial. Because of an increase of sea levels in the range  
between 0.26 and 0.77 meter by 2100, low lying coastal areas are likely  
to be flooded and some small islands could completely disappear. This  
is 0.1meter less than in the 2°C scenario, implying that 10 million fewer  
people would be exposed to related risks. Biodiversity might be  
impacted, including species loss. Poverty is expected to rise in  
particular among people dependent on agriculture and activities in  
coastal areas. Some of it is already visible, such as the increase in  
weather extremes. Whereas several regions experience repeatedly  
+1.5°C  
2010 2015 2020 2025 2030 2035 2040 2045 2050  
Chart 1  
Source: McCollum (2018), BNP Paribas  
heavy precipitations, other areas have been confronted with an increase The IPCC report underlines that achieving the transformation to a low  
in the frequency of droughts.  
carbon emission world requires major shifts in investment patterns away  
from fossil fuel investment toward renewal energy sources. Such a  
movement, albeit still modest, can already be observed.  
At the Conference of Parties in 2015 (COP21) held in December 2015  
in Paris, 196 parties (195 States plus the European Union) concluded  
that global warming should be limited to 2°C and efforts should continue In 2017, investment in low-carbon sources  including renewables and  
to limit global warming to 1.5°C. These objectives were confirmed at the nuclear  reached more than 70% of total power plant investment from  
COP24 in December 2018 in the Polish city of Katowice, but without less than 50% a decade ago. Nevertheless, energy investment is on a  
adopting the necessary measures to achieve it.  
declining trend, largely due to less investment in the power sector as a  
result of falling prices in particular for solar PV, which represents 8% of  
total energy investment. Solar PV projects commissioned in 2017 cost  
nearly 15% less per megawatt of capacity than in 2016 due to  
technology improvements and deployment in lower-cost regions, even  
The conference failed to endorse the IPCC report “Global Warming of  
1.5°C” because of opposition from four oil-producing nations, the United  
1
https://www.ipcc.ch/sr15/  
3
Conjoncture // January 2019  
economic-research.bnpparibas.com  
2
as capacity additions rose to record levels. In addition, fewer additions virtually all residual CO emissions are removed by equipping fossil fuel  
of coal, hydro, and nuclear power capacity were made.  
installation with Carbon Capture and Storage or by Land Use and Soil  
Carbon Sequestration.  
Nevertheless, much of world’s power generation continues to depend  
on fossil fuels. The share of fossil fuels, including thermal power  
generation, in total energy supply investment rose for the first time since  
Electricity capacity from renouvelable sources  
2014 to 59%. The sharp drop in investment in coal-fired power and coal  
supply was offset by heavy investment in the oil and gas industry, in  
particular in the US. This is not only related to the shale sector, but also  
to the downstream oil and gas industry. For the first time in recent  
decades, the US was the largest recipient of investment in  
00 % of total capacity  
1
+1.5°C  
+2°C  
80  
60  
40  
2
petrochemicals.  
NDC  
Current policies to reduce greenhouse gas emissions are insufficient to  
keep global warming below the 2°C. Model simulations show that the  
national climate objectives, or Nationally Determined Contributions  
No policy  
(
NDC) submitted before the COP21 in Paris, are rather timid compared  
20  
0
3
to a no-policy scenario (chart 1).  
Annual energy investment is set to be increased to USD 2.586 trillion  
per annum compared with USD 2.481 trillion in the base line. Moreover  
greenhouse gas emissions in the NDC scenario are likely to increase,  
albeit less than in a no-policy scenario . In order to limit global warming  
to 2°C or even 1.5°C, greenhouse gas emissions should start to decline  
around 2020. In the 1.5°C scenario, they should be close to zero by  
2
005 2010 2015 2020 2025 2030 2035 2040 2045 2050  
Source: McCollum (2018), BNP Paribas  
Chart 2  
Energy use virtually stable in a +1.5 C scenario  
2050. This requires much more investment in sustainable energy  
infrastructure. In the 1.5°C scenario energy investment has to be  
increased by more than one third compared to the NDC scenario to  
USD 3.183 trillion per year.  
Final energy, exajoule per year  
Final energy in no policy scenario  
6
5
4
00  
00  
00  
Industry Real Estate Transportation  
The IPEE report shows several pathways for achieving the low carbon  
objectives. The mitigation strategies combine three crucial elements.  
First, the power sector needs rapidly to be restructured to avoid further  
locking into fossil fuel capacities, and increase the capacity of  
renewable energy sources such as solar and wind. In the NDC scenario,  
the share of renewable energy sources in total electricity is projected to  
increase from just over 30% in 2015 to around 70% by 2050. In the  
300  
2
00  
00  
0
1
1.5°C and 2°C scenarios, the power sector will be almost fully  
2
010 2015 2020 2025 2030 2035 2040 2045 2050  
decarbonised by 2050 (chart 2). Second, energy efficiency has to be  
improved and the electrification in industry, transportation, and  
residential and commercial real estate stepped up. In the scenarios,  
energy efficiency, measured by the ratio between economic output to  
energy input, compared to the base run improves in all sectors. Even  
though in these scenarios GDP in purchase power parity (PPP) would  
increase by a factor of 3.3 from 2010 to 2050, final energy use hardly  
increases in the 1.5°C scenario (chart 3). Moreover, in the 2°C and  
Chart 3  
Source: McCollum (2018), BNP Paribas  
In the scenarios, carbon prices are the main policy instrument to get the  
economy on the low carbon pathway. By increasing the price for fossil  
fuels, the carbon tax should make carbon-intensive production and  
consumption more expensive and create incentives for economic actors  
to turn to low carbon alternatives. For example, instead of constructing  
coal-based power stations, one could consider the construction of wind  
farms. The (tax) receipts obtained in this way could not only be used to  
1.5°C scenario, the share of electricity in final energy use increases  
from 19% to 37% and 46%, respectively (chart 4). As electricity would  
be almost completely decarbonised in both scenarios, this would have a  
considerable impact on CO  
2
emissions. Finally, CO  
2
removal  
technologies have to be developed and upscaled. In the 1.5°C scenario,  
2
IEA,2018, World Energy Investment 2018, Paris.  
The model simulations are made by six global integrated assessment models. They  
pay for the necessary investment related to climate adaption but also to  
lower other taxes, such as income taxes. The macroeconomic effects  
should be close to neutral.  
3
are reported in McCollum, David L., et al. "Energy investment needs for fulfilling the  
Paris Agreement and achieving the Sustainable Development Goals." Nature Energy  
(2018): 1. In this study, we only use the averages of the six models. The results are  
summarised in Table 1 at the end of the article.  
4
Conjoncture // January 2019  
economic-research.bnpparibas.com  
The carbon tax level used in the simulation models is determined by the Since Mark Carney’s speech, financial institutions have also become  
4
policy goal. These vary substantially across models and scenarios and more aware of the risk of climate change for their operations.  
their value increases with the mitigation effort (chart 5). In the 2°C Institutional investors, such as investors and pension funds, increasingly  
scenario, carbon prices range from USD 33 to 186 (2010) per tonne incorporate environmental, social, and governance (ESG) factors into  
CO  
10 and 475 USD (2010). For comparison, the Report of the High-Level demand for green bonds. In France, article 173 of the energy transition  
Commission on Carbon Prices projects a price between USD 40 and law imposes extensive climate change-related reporting for asset  
2
in 2030. In the 1.5°C scenario, they would be in the band between their investment analysis. It is one of the factors behind the surging  
8
1
USD 80/tCO  
2
2
by 2020 and between USD 50 and USD 100/tCO  
2
by owners and asset managers. The objective is to reduce the carbon  
footprint of the institutional investors. In the UK, the Bank of England  
has suggested the risk arising from climate change should form part of  
its annual stress tests for banks in 2019.  
030 to be consistent with the Paris objectives.5  
Unfortunately, carbon or green taxes are not extensively used  
worldwide. Less than 20% of current global greenhouse gases are  
covered by carbon prices, and most prices are well below USD 40-  
Share of electricity in final* energy increases in a +1.5 C scenario  
2
USD 60 per tonne of CO , the level recommended by the High-Level  
Commission on Carbon Prices for 2017. The situation is only slowly  
improving. According to the OECD, the carbon pricing gap, which  
compares actual carbon prices and real climate costs estimated at  
% of total final energy  
Electricity Gas Oil Coal Biomass Heat Solar  
100  
EUR 30 per tonne of CO , was 76.5% in 2018, only slightly lower than  
the 79.5% gap reported in 2015. The carbon emission price gap is  
lowest for road transport (21%) and highest for industry (91%).  
2
8
0
6
60  
4
0
0
0
2
Simulations show that current pollution abatement policies are not  
sufficient for keeping global warming below 2°C. Moreover, the IPCC  
study shows that it would be much better if global warming would be  
limited to only 1.5°C. However, it is uncertain how investment flows can  
be increased and redirected to low carbon alternatives.  
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050  
Source: McCollum (2018), BNP Paribas  
Chart 4  
Final energy consumption is the total energy consumed by end users, such as  
households, industry and agriculture. It excludes energy used by the energy sector  
Although early signs of climate change have already appeared, many  
actors still deny the urgency for immediate action, as for most of them  
the catastrophic impacts will be felt well beyond the traditional planning  
horizons. As long as climate change does not seem a very pressing  
problem, it is very tempting to become free-riders and let the coming  
generations make most of the effort in cutting back greenhouse gases.  
The danger is that we get locked in a high carbon scenario, from which  
(
ex. processed fuel in power plants).  
Carbon prices  
USD, price 2010, per tonne CO2  
9
8
7
00  
00  
00  
+
1.5°C  
it is very costly to leave. Bank of England’s governor Mark Carney  
called it the tragedy of the horizons.7  
600  
5
4
3
2
1
00  
00  
00  
00  
00  
0
Normally, governments should have a responsibility in overcoming such  
market failures through developing policies and appropriate regulatory  
environment. The COP is an effort to combat climate change at a  
supranational level.  
+
2°C  
NDC  
2050  
For the corporate sector, the signing of the Paris climate deal was a  
signal to include the transition to a low carbon society in the business  
plans. Companies have started using an internal price of carbon for  
their business operations and investment decisions.  
2015  
2020  
2025  
2030  
2035  
2040  
2045  
Chart 5  
Source: McCollum (2018), BNP Paribas  
Nevertheless, in general, progress in designing and implementing the  
necessary rules and regulations to achieve the Paris goals is very slow  
as not all governments share the same long-term vision. Some are held  
back by commercial interests. Fossil fuel supply and thermal power  
investment are increasingly dominated by state-owned enterprises.  
4
It differs from the social costs of carbon, a concept used in cost-benefit analysis.  
This is the total net damages, monetised and discounted of the release of one extra  
2
metric tonne of CO .  
5
Stiglitz, J.E. and N. Stern (2017), Report of the High-Level Commission on Carbon  
Prices.  
6
OECD, 2018, Effective Carbon Rates 2018, Paris.  
Speech by Mr Mark Carney, Governor of the Bank of England and Chairman of the  
7
8
Raymond Van der Putten, 2015, Climate change: An unprecedented investment  
Financial Stability Board, at Lloyd’s of London, London, 29 September 2015.  
and financing challenge, BNP Paribas Conjoncture, October.  
5
Conjoncture // January 2019  
economic-research.bnpparibas.com  
Moreover, the electorate might not be convinced of the necessity of they would face the highest costs. According to the authors, the bottom  
taking active measures in particular if these are costly and may affect income deciles would experience the greatest net gains.  
their lifestyles. The US government is leaving the Paris climate  
A yet unsolved problem is the so-called carbon leakage. Carbon tax  
agreement as a substantial part of its voters doubts the veracity of  
hikes, might induce enterprises to move their most polluting activities to  
climate change and fear that it could put US industry at a disadvantage.  
countries with less strict environmental legislation. This would have a  
Finally, reducing global emissions by fixing national objectives has negative effect on industrial activity while at the same time hardly  
turned out to be very complicated. A global quantitative target is easily reducing global emissions. To solve the problem, William D. Nordhaus,  
translated in a global price target, as to each quantitative objective a the 2018 Nobel laureate in Economic Sciences suggests that countries  
9
could form coalitions, the so-called climate clubs. 11 These groups  
agree on a carbon price emitted within their borders. This could be done  
either by a domestic carbon tax or a trade-and-cap system.  
shadow price i.e. the optimal carbon price is associated.  
The difficulty is that a global quantitative target is not easily translated  
into individual targets for each country. In the negotiations, each country  
has an incentive to keep the NDC as low as possible. In this approach it The coalition would impose tariffs at their borders on imports from the  
is easy to become a free-rider. The result is a set of about 200 rest of the world, both to incentivise other countries to join and as a  
individual quantitative targets which do not add up to the global mean to restricting carbon leakage. Exporters to countries which do not  
objective.  
apply a carbon tax would receive a rebate. Two options are possible to  
determine the size of the tariffs. A first approach is to set tariffs in  
relation to the carbon contents of imports. Such a tariff would remedy a  
competition distortion caused by the fact that producers outside the  
coalition would not be affected by the carbon tax. Some precedents  
From an economic view, a price target, or an environmental tax, is  
preferable to a quantity target. It is accordance to the principle that  
individuals and firms should pay the full marginal costs of the emission  
of carbon. Once the global price is set, all countries are free to design  
policies to achieve the carbon price and to recycle the proceeds of the  
tax. However, the implementation of a sufficiently high carbon price is  
rather problematic. One of the problems is that increases in carbon  
prices, or more generally in fuel prices, might result in redistribution  
problems and are often resisted. Users cannot change quickly to  
cheaper alternatives without incurring heavy costs. In addition, carbon  
tax hikes may disadvantage disproportionally rural populations that do  
not have access to good public transport. Lastly, for the tax payer, the  
link between carbon taxes and climate objectives is not always clear.  
These taxes could be perceived as just another way to finance the  
budget.  
1
2
suggest that such tariffs would be legal under WTO rules. But there is  
a practical problem. It is impossible to work out the carbon contents of  
every import and some approximations are required. For this reason,  
Professor Dieter Helm suggests to concentrate on a small number of  
1
3
energy-intensive industries, such as steel and chemicals. Nordhaus is  
in favour of the second approach, a uniform border tax. The advantage  
is that such a tax is simple to implement. Moreover, by setting the tax  
rate sufficiently high, countries have a financial incentive to join the  
coalition. Both options are likely to be legally challenged. It might  
require a change in international law to make such import taxes legal.  
The major flaw of the COP and the Paris climate deal is that the process  
is rather non-committal. Countries can leave the deal without incurring  
sanctions, they are for the moment free to formulate their own  
objectives and there are no sanctions if these objectives are not met.  
Nordhaus concludes his above mentioned AEA lecture by noting that  
In 2018, a modest increase in French carbon taxes triggered off heavy  
street protests which forced the government in reversing the measure.  
Voters in Washington State also recently rejected a carbon tax. In this  
case, the tax would have been devoted to renewable energy projects  
and helping negatively affected workers. In order to gain the support  
from the trade unions, large industrial facilities would have been  
exempted. The full force of the measure would have fallen on oil  
refiners. In this context, it is not surprising that the refiners spent heavily  
to defeat the ballot proposal.  
without sanctions, there is no stable climate coalition other than the  
non-cooperative and low abatement coalition.” By contrast, “an  
international climate treaty that combines target carbon pricing and  
trade sanctions can induce substantial abatement”.14  
Completed on 24 January 2019  
A solution could be the better framing of climate policy. Recently,  
raymond.vanderputten@bnpparibas.com  
George Shultz and Ted Halstead have proposed the so-called Carbon  
1
0
Dividends Plan. The idea is quite simple. A carbon fee will be levied  
and the proceeds, the so-called dividend, should be returned directly to  
tax payers through equal lump-sum rebates. They argue that such a  
programme would be very popular in the US as over two-thirds of  
American households would be financial winners, as they receive more  
in dividend payments than they would pay in increased energy prices.  
As the wealthier households tend to pollute more in absolute terms,  
1
1
William Nordhaus, 2014, Climate Clubs: Designing a Mechanism to Overcome  
Free-riding in International Climate Policy, Presidential Address to the American  
Economic Association, 4 January 2014, published in American Economic Review  
2
015, 105(44): 1339-1770.  
2
Joseph Stiglitz, 2006, A New Agenda for Global Warming, The Economist’ Voice  
1
9
Raymond Van der Putten, 2011, Climate change policy after  
3(7).  
13  
Cancún, BNP Paribas Conjoncture, September 2011, page 21.  
Dieter Helm, 2010, A Carbon Border Tax Can Curb Climate Change, Financial  
Times, 5 September.  
1
0
George P. Shultz and Ted Halstead, 2018, The Dividend Advantage, The Climate  
1
4
Nordhaus (2014), op. cit. page 1368  
Leadership Council.  
6
Conjoncture // January 2019  
economic-research.bnpparibas.com  
Growth and energy projections (investment, capacity, consumption) 2020 to 2050  
Average annual growth 2020-2050 (%)  
No policy  
NDC  
2°C  
1.5°C  
World  
Population  
GDP  
Investment  
0.6  
2.7  
1.7  
1.9  
1.2  
2.3  
37.1  
-
0.6  
2.7  
1.8  
2.4  
1.1  
2.2  
55.9  
-23.2  
0.6  
2.6  
2.5  
4.9  
0.3  
2.2  
76.6  
-82.3  
0.6  
2.6  
2.9  
5.6  
-0.1  
2.6  
86.5  
-99.0  
-
of which in low carbon  
Final energy  
of which electricity  
Renewable energy capacity as % of total electricity capacity in 2050  
CO emissions in 2050 as % of no-policy scenario  
-
2
Africa and Middle East  
Population  
GDP  
1.5  
4.4  
3.0  
5.2  
2.2  
3.9  
27.2  
-
1.5  
4.4  
3.3  
5.4  
2.2  
3.9  
31.0  
-4.0  
1.5  
4.2  
3.8  
10.1  
1.1  
4.1  
58.0  
-80.8  
1.5  
4.1  
4.6  
12.0  
0.8  
4.6  
75.7  
-86.9  
Investment  
-
of which in low carbon  
Final energy  
of which electricity  
Renewal energy as % of total electricity capacity in 2050  
CO emissions in 2050 as % of no-policy scenario  
-
2
Asia (excl. Middle East, Japan, and former Soviet Union states)  
Population  
GDP  
Investment  
0.4  
4.0  
1.7  
1.0  
1.6  
2.8  
35.3  
-
0.4  
4.0  
1.8  
3.2  
1.5  
2.7  
56.4  
-22.8  
0.4  
3.9  
2.9  
5.9  
0.6  
2.6  
86.2  
-83.5  
0.4  
3.9  
3.5  
6.6  
0.4  
3.0  
97.2  
-97.0  
-
of which in low carbon  
Final energy  
of which electricity  
Renewal energy as % of total electricity capacity in 2050  
CO emissions in 2050 as % of no-policy scenario  
-
2
Latin America  
Population  
GDP  
0.5  
3.1  
2.6  
2.3  
1.5  
2.6  
51.6  
-
0.5  
3.1  
2.6  
2.6  
1.4  
2.5  
60.0  
-32.0  
0.5  
3.0  
2.8  
5.6  
0.7  
2.9  
66.1  
-100.6  
0.5  
2.9  
3.0  
6.1  
0.6  
3.4  
67.7  
-130.5  
Investment  
-
of which in low carbon  
Final energy  
of which electricity  
Renewal energy as % of total electricity capacity in 2050  
CO emissions in 2050 as % of no-policy scenario  
-
2
OECD(1990) & European Union  
Population  
GDP  
Investment  
0.3  
1.7  
1.3  
1.6  
0.5  
1.2  
40.6  
-
0.3  
1.7  
1.7  
2.6  
0.4  
1.2  
61.8  
-36.6  
0.3  
1.6  
2.4  
4.9  
-0.3  
1.5  
71.4  
-79.5  
0.3  
1.6  
2.9  
5.4  
-0.6  
2.1  
85.1  
-101.0  
-
of which in low carbon  
Final energy  
of which electricity  
Renewal energy as % of total electricity capacity in 2050  
CO emissions in 2050 as % of no-policy scenario  
-
2
Russian Federation & other ex-Soviet Union states  
Population  
GDP  
Investment  
0.0  
2.8  
2.4  
2.5  
0.8  
1.8  
24.7  
-
0.0  
2.8  
2.6  
2.6  
1.7  
2.8  
35.4  
-5.1  
0.0  
2.6  
2.1  
6.5  
-0.4  
1.4  
65.1  
-85.2  
0.0  
2.5  
2.1  
7.2  
-0.9  
1.8  
78.5  
-102.1  
-
of which in low carbon  
Final energy  
of which electricity  
Renewal energy as % of total electricity capacity in 2050  
CO emissions in 2050 as % of no-policy scenario  
Table 1  
-
2
Source: McCollum (2018), calculations BNP Paribas