Effective climate policy is important for a good summer break – ensuring predictable weather patterns for relaxing days, and avoiding risks of future climate chaos to make space for happy dreams. Integration is a key word characterizing successful climate policy – and is the theme linking the recent analyses of the Climate Policy Department at DIW Berlin. Here are a few suggestions for your summer reading list:
Industry emissions: Integrating climate and resource efficiency policy
The year 2018 started with studies of the German Energy Agency (DENA), and German Federation of Industry (BDI, English summary) showing that scenarios for respectively 80% and 95% emission reduction by 2050 are economically feasible for Germany. As for the 95% scenarios, both studies find that the major challenge for decarbonizing the production of basic materials like steel and cement, is either meeting the scale of renewable electricity demand for clean production processes or creating acceptance for CCS. This is no surprise – globally, more than 25% of CO2-emissions are linked to primary production of basic materials. Integrating climate and resource efficiency policies provides a solution that these studies do not consider – reducing the demand for primary materials by unlocking the potentials of material-efficient design, manufacturing, use and recycling of products (Material Economics).
This theme, together with other key elements for the policy design of the decarbonisation of basic industry, was focus of discussion in the meetings of our Climate Friendly Materials Platform bringing together policy makers, industry and experts (CFM Platform). Results are summarized and backed by detailed Annexes on individual policy instruments in the new report “Filling gaps in the policy package to decarbonise production and use of materials” (Climate Strategies Report, see also Review Article).
Carbon pricing: Integrating consumers in incentive schemes
In the industry sector, policy has traditionally focused on producers – most recently with the introduction of the Chinese national emissions trading system (Nature Climate Change). Concerns that stringent policy could trigger relocation of production and carbon leakage have, however, resulted in extensive exemptions like free allowance allocation, largely undermining the intended incentives.
Why does climate policy for the industry sector not integrate consumers, as has always been the case for the buildings and transport sector? In a review of global experiences with carbon pricing mechanisms directly addressing consumers, we identified many success stories (Climate Policy). We have in the past explored economic, administrative, legal and trade aspects of including the consumption of basic materials into the EU ETS (Inclusion of Consumption in ETS). The revised EU ETS Directive now creates the opportunity for the implementation – it mandates the Commission to review the effectiveness of the Directive, report in the context of global stock-taking, and propose amendments to replace, adapt or complement existing measures to prevent carbon leakage. National pilots may be one option for early progress (Annex 5). Among the biggest consumers of basic materials are cities and regions, who purchase infrastructure for instance. Cities and regions can formulate explicit environmental requirements or apply shadow carbon prices in their public procurement choices, according to EU guidelines. Our initial review points to barriers – including the issue of incremental costs and how they could be covered (Green public procurement).
Renewable energies: Integrating finance expertise in policy design
Declining costs of solar panels and wind turbines reduce the need for financial support. Do we still need dedicated renewable energy policies? An assessment of policy and market risks using cross-country comparisons and financial models shows that in the absence of long-term contracts with final consumers, costs per MWh of renewable electricity increase by 30% (DIW report). Retail competition and counter-party risks, however, severely constrain private long-term contracts with electricity consumers. Hence, publicly secured long-term contracts for wind and solar power are essential to hedge policy and market risk for renewable projects, facilitating access to low-cost finance, and allowing to pass on the full benefits from declining technology costs to end consumers.
In assessing different renewable remuneration mechanisms to reach Germany’s 65% national renewable electricity target by 2030, we find that a shift to contracts for difference results in annual savings in the order of magnitude of 0.8 billion Euro (DIW report).
Sector coupling: Integrating all sectors in power system
Shifting away from fossil fuels while accepting constraints on available biomass requires that buildings, industry and transport source most of their energy needs from electricity. Given the variability of wind and solar production, this will only succeed if, at the same time, flexibility and storage potentials in the sectors are realized. As part of the EU H2020 project Real Value, we explored how firms can build new business models around smart heating devices and thermal storage (Real Value) and how power-market design and technology developments shape the market (Real Value). As part of the Synergie Consortium (German Kopernikus Projekt), we investigated demand response potentials in the industry (Synergie).
As the electricity system moves into the center of the energy infrastructure, the capacity of wind and solar power and flexible demand connected to the system multiplies. Power-market design will have to evolve for an efficient system operation. In discussions of our Future Power Markets Platform (FPM Platform), we find that intraday auctions can enhance market depth, and facilitate broad participation of all actors – in particular if bidding formats allow for capability-based (multi-part) bids. To allow the demand side to respond to regional supply of power regional pricing is increasingly discussed as part of such an emerging system (Energy Journal).
Sustainable finance: Integrating long-term requirements in today’s investment choices
Following the report of the EU high-level expert group on sustainable finance (HLEG), the European Commission came up with an action plan on March 8 (Action Plan). It addresses three key themes: 1) Influencing the financing decision and managing financial risks; 2) Reorienting financial flows; and 3) Taxonomy and definition. To shape our research agenda and gear it towards key policy challenges, we organized a high-level sustainable finance conference in Berlin in co-operation with the European Commission and the Hub for Sustainable Finance (Proceedings).
Wishing you all a good read and a good summer break,
Karsten Neuhoff, Olga Chiappinelli, Ingmar Jürgens, Nils May, Carlotta Piantieri, Jörn Richstein, Puja Singhal, Jan Stede, Heiner von Lüpke, Vera Zipperer, Kerstin Ferguson, Olga Zhylenko