More aggressive carbon reduction goals in Europe are affordable

Raising Europe’s carbon reduction target for 2020 from 20% to 30% will
cost EU countries under 0.04% of GDP, with some member states getting a net
benefit

London, 26 April 2012. The European Union could be much more ambitious
about reducing carbon dioxide emissions between now and 2020 with minimal
economic costs, according to research published today by leading analysis
company Bloomberg New Energy Finance. The cost would be no more than the
equivalent of a few cups of coffee per person per year.

The research was undertaken to determine whether raising the EU’s target
for CO2 reductions to 30% by 2020, as advocated by some member states,
would be damaging to the European economy at a time when it is struggling
to emerge from recession. Current EU policy is to achieve a 20% reduction
in greenhouse gas emissions from 1990 levels by 2020.

Guy Turner, head of carbon and power research at Bloomberg New Energy
Finance, said: “Our analysis shows that increasing the 2020 target to 30%
from the current 20% would result in an additional cost of €3.5bn on
average per year for the EU as a whole, from 2011 to 2020. This is
equivalent to 0.03-0.04% of EU GDP, or €7 to €9 per inhabitant per
year. Clearly, a more ambitious policy would not be nearly as painful as
some countries fear.”

Some countries stand to receive an economic benefit from any move to a 30%
target, specifically Belgium, Bulgaria, Czech Republic, Estonia, Hungary,
Lithuania, Poland, Romania, Slovakia and Slovenia. These countries benefit
by being able to sell surplus carbon allowances to other EU countries that
are short of them. The first group will have those surpluses because its
members will be able to make use of more low-cost abatement opportunities,
such as energy efficiency improvements, and because of the structure of the
proposed targets that take into account differing levels of national income
across Europe. Some of these countries would benefit by up to 0.5% of GDP.

Countries facing the highest additional costs in absolute terms would be
France, Germany, Italy and the UK, with between €1.1bn and €2.5bn per
year of cost each. These costs would however represent a maximum of 0.05%
of GDP.

These estimates are made by comparing the incremental cost of implementing
a 30% target to a “business-as-usual” scenario with existing EU
policies. This business-as-usual scenario includes the EU Emissions Trading
Scheme with the current reduction target of 20% for 2020, the same
trajectory beyond, and aviation joining completely in 2012.
Business-as-usual also assumes implementation of the EU Renewable Energy
Directive with a target of 20% of energy coming from renewable sources, and
distributed between countries and sectors as per the announced National
Renewable Energy Actions Plans.

Current policies allow for the use by European emitters of credits imported
from outside the EU, for instance those issued in developing countries
under the UN’s Clean Development Mechanism. The research published today
estimates that, as a result, if a 30% target were imposed in Europe, actual
greenhouse gas emissions in the EU27 in 2020 would fall by 21% from 1990
levels, compared to an actual reduction of 17% under the 20% target.*

Raising the emission-reduction target to 30% would require additional
emission cuts from sectors covered by the Emissions Trading System,
including power generation, steel, cement and oil refining, and from those
outside the Trading Scheme, including agriculture, transport and buildings.

The report was independently researched and written by Bloomberg New Energy
Finance, and commissioned by the UK Department of Energy and Climate
Change.

ABOUT THE ANALYSIS

The analysis uses Bloomberg New Energy Finance’s proprietary model of the
European energy and emissions system. The model has been developed over the
last 10 years and covers all sectors of the economy and six greenhouse
gases: CO2, CH4, SF6, PFCs, N2O and HFCs. It is used by governments and
private companies to provide regular projections of carbon prices in the EU
and their economic impacts.

The model is built up from a detailed analysis of 50 economic sectors,
ranging from the key EU ETS industries of power, steel, cement and oil
refining to the less energy intensive sectors of agriculture, buildings and
transport. Across these sectors the model simulates the deployment of over
300 energy-consuming technologies, and how the use of these technologies
will change under different carbon and energy prices.

In simulating the adoption of these technologies the model incorporates
several constraints to reflect “real world” barriers and practical
decision-making. These include taking account of short-term investment
horizons in the private sector by assuming payback periods as short as
three years for some technologies, resource constraints for renewable
energy using GIS mapping of wind speeds and solar radiation across Europe,
lead times for building new plants, and localised fuel prices. The latter
is particularly important in some Eastern European countries with access to
low-cost sources of coal and lignite.

Several sensitivities are modeled in the analysis. These include varying
the “clearing date” for the Emissions Trading System (2020 or 2028),
different fuel prices (low, medium and high) and different burden-sharing
distributions (two alternatives as well as the EC’s Effort Sharing
Decision).

In conducting this analysis Bloomberg New Energy Finance used the latest
economic, emissions and market data, from a wide variety of sources. In
total over 100 different data sources have been used.

The report can be found here: http://www.bnef.com/WhitePapers/download/74

*The 17% reduction under the 20% target has been amended from initial
version of this press release published on 26th April which showed a 13%
reduction. 17% is the correct figure. We apologise for any confusion.

For more information please contact:
Guy Turner
Bloomberg New Energy Finance
+44 7801140 696
gturner10@bloomberg.net



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