Esercitazione Energy Economics and Climate Change Policy

Policy and Energy Security. In fact, to meet the EU target, EE is crucial, especially in those sectors where

Energy Intensity’s higher: Household consumption – energy for heating/cooling, first -, Transport Sector and

manufacturing sector – especially cement production. Energy Efficiency plays in two side: on the short run,

with a high expenditure for EE; on the long run, based on the expectations on the future energy savings. The

difference between those two timespans reveal the affordability of the investment.

Biofuels

The increasing interest around Biofuel became reality around the 70s, after the first oil crises. In fact, Biofuel

can represent an alternative to fossil fuels; actually, this source shows some important issues, in terms of

mitigation, energy security and a boost for the domestic farm production. In order to re-act to the high oil

volatility, some regions had implemented policy instrument to foster biofuels. But first, it is important to

make an introduction, to give substance to what I am going to write. In fact, Biofuels are conventionally

classified within first generation, that are made from food crops rich in sugar; second generation, made from

non – food residual of the current crops and third generation – from algae. Meanwhile the first generation

are commonly widespread all over the globe; the advanced generations (II, III, IV gen.) are still on the research

stage, a long way to the official commercialization. Indeed, on the first generation lies the main cons of this

alternative source: meanwhile, the algae biofuel could be the best clean substitute for fossil fuels, because

of its alternative land use. First generation biofuels could be one of the main causes of deforestation, then

in order to overproduce crops, this would destroy our carbon sinks. Then from one side, first generation

biofuels could give non-oil producers countries a chance in terms of agricultural development – different

from food production – and energy security; but still, it could reveal problems, like deforestation and land

overuse. However, the three main biofuels markets are: Europe, Brazil and USA. Brazil is one of the main

bioethanol producers: in 70s implemented an important public intervention, called “Pro-Alchool” program,

that pushed the Brazilian bioethanol market up. In 1997 the Brazilian fuel market was gradually liberalized,

extinguishing all price controls. Since 2002, the ethanol price relative to petrol price fluctuates freely, though

in several Brazilian States ethanol benefits from an excise-tax differential compared with petrol. In 2003 the

introduction of flex-fuel vehicles (FFVs) that can run on any given mix of ethanol and petrol gave a new boost

to the ethanol sector. Since FFVs in Brazil sell basically at the same price as conventional cars, around 90% of

all vehicle sales in Brazil today are FFVs. Brazil’s first National Biodiesel Production and Use Programme

(PNPB), introducing a 2% biodiesel blend in regular diesel, was only launched in 2004. Thanks to the

introduction of a 5% biodiesel mandate in 2008, this relatively small sector is set to grow. On the other hand,

the US market is one of the biggest one, with a production of biodiesel that was around 152 million gallons.

Even in this country, biofuels interest has raised since the first oil crises in 1973 and has gradually taken an

increasing role in the public policy agenda. Different is the European path to Biofuels. The EU biofuels policy

was designed primarily in order to meet obligations made under the commitment to the Kyoto targets of

GHG emissions and to meet a pressure from the EU population to address environmental issues. In 2003, the

EU introduced Biofuels Directive 2003/30, which set a target of 2% of biofuels to be used in the transport

sector by 2005 and 5.75% by 2010 at the EU level. The target of 2% by 2005 was not achieved since the share

of biofuels in fuel consumption amounted to 1.06% in the EU-27 in 2005, and it was 2.6% in 2007. Only

Germany and Sweden exceeded the 2005 target with 3.86% and 2.11% of biofuels use in total fuel

consumption, respectively. In 2009, the EU Renewable Energy Directive (2009/29) established a “20-20-20

Policy” post Kyoto period beyond 2012, which includes the targets on the biofuel consumption. The support

for bioenergy in the EU was also incorporated into the Common Agricultural Policy (CAP) in 1992. An example

of this policy is an introduction of energy-crop-premium of EUR 45/ha on a maximum of 2 million ha of set-

aside land. As a part of 2007 reform of CAP, the energy-crop premium and the compulsory set-aside have

been abolished from 2009 onwards. As a result of this change, no support for bioenergy production is

included in the first pillar of CAP. However, within the Rural Development policy, which constitutes the

second pillar of CAP, and through the modulation instrument, several measures supporting bioenergy

development have been reinforced.

In conclusion, Biofuels are steadily gaining recognition as an important part of agricultural and energy

sectors. They are still in early stages of technological development. The major technological challenges facing

biofuels are a cost-efficient commercialization of the second-generation biofuels and a successful

development and adoption of biotechnologies (especially genetically modified crops) for both the first and

the second-generation biofuels. While the expected graduation of the first generation biofuels to the second

and further generations may alleviate current debates about the use of basic food crops like sugarcane, corn

or oilseeds for non-food purposes of the biofuels generations, the ultimate questions of the use of land and

other scarce resources will still remain relevant. The patterns of land use for biofuel feedstocks will be

influenced by policy concerns and by advances in production technologies and in increased understanding of

environmental impacts of biofuels production and consumption.

Policy instruments for Clean Energy Technologies

Generation of electricity and heat is one of the main sources of GHG emissions, accounting around the 40%

of the global share of CO2. Then it is crucial to act in this domain to shift into a lower carbon emission

economy. In this way, can be important the role played by Clean Energy Technologies, or even “Eco-

innovations”: i.e. any innovation resulting in significant progress towards the goal of sustainable

development, by reducing the impacts of our production modes on the environment. But the very big issues

lie around the costs of those technologies: Clean Energy Technologies are on average more expensive than

the fossil fuel sources, then in this way, the role of public intervention can be crucial. Technology means

knowledge, research and the best way to asses the state of art is on the indicators of innovation output: the

patents. But before going deep into this field, a caveat is necessary: patents are an appropriate indicator of

the accumulated knowledge available to investors at any given time. However, patents are an imperfect

measure of technological innovation for a variety of reasons. First, the value of patented inventions varies

widely, because of the country’s propensity to patent: for example, Italy has a low propensity in this way,

having 1/7 of the Germany’s patents at the European Patent Office (EPO). But although those caveats,

patents are the best wat to assess the state of art. However, State have several instruments to foster Clean

Technologies: first, they can be divided into two groups – direct and indirect instruments. A State can

intervene into research with incentives on the R&D. In fact, if we take a look around the patent data, after

the ratify of the Kyoto Protocol, we can assess how R&D incentives gave a strong impulse to Clean

Technologies patents. But still, an indirect way to foster the Carbon-Free Energy Production can be

restrictions on fossil fuel power – a typical “Command and Control” instrument to hold back fossil fuels

growth. Or still, quantity instruments – like 2020 EU Targets – that give a specific target to Renewables

Production. This instrument gave a strong impulse on the production, especially on the EU framework.

Anyway, one of the main instruments used by EU countries was a price one: feed-in tariffs, especially – an

incentive tariff on the renewable energy self-production. In Italy, this is well known as “Conto Energia”, policy

that have been widely implemented over the years. This reduce cost and pricing-related barriers by

establishing favorable price regimes for renewable energy relative to other sources of power generation. But

beside the instruments, what really matters is the outcome, and in this way the main results were gotten

after the Kyoto Protocol. In fact, for those countries who ratified the Agreement, the share of patents on

Clean Tech had constantly increased – especially in EU countries like Germany and Denmark that described

a surprising trend in terms of Clean Tech patents. Although, in those countries where the Nuclear Power is

relevant – EU do not consider Nuclear as a Renewable source, even if it is actually a carbon free – like France,

the share of Clean Technologies described a lower trend. Finally, we can consider two important variables on

the Clean Technologies growth: the ratify of the Climate Agreements and the relevance of Nuclear Plants

on the Energy Mix.

European energy strategy

Someone said: “Future is uncertain, but end is always near”, for this reason it is crucial to set more and more

ambitious targets to wipe out the end - that’s what has been done by the EU. Forecasting future scenarios, it

is something hard, because all the variables may be crucial. And in this, uncertainty plays a central role,

especially for what it may concern investments. In Environmental Economics, all the investments have a long-

run timespan: if postponed, their revenue can strongly decrease, and can expand time.

Main EU target is decarbonization: 2050, carbon emissions will have to decrease by 80-90% with respect to

baseline, set on 1990 GHG emissions level. Therefore, the question lies on how we’ll get on that target. For

this reason, it has been settled several different scenarios:

- High Energy Efficiency Scenario

- Renewables based Scenario

- CCS Scenarios, based on the commercialization of the Carbon Capture and Storage Technologies –

the more uncertain

- Nuclear Energy Scenario

Then we can easily understand how in all those scenarios, the role played by generation of electricity is

crucial, in fact this area describes the lion’s share of the GHG emissions. This domain is where Policies should

actively work. Anyway, in all the future scenarios – High Energy Efficiency Scenario included – the primary

energy demand will increase. The difference is around the sources from which the energy will be provided.

Anyway, on the short-run energy costs will increase by about 16%; but around 2030, costs will constantly

decrease by 15% until 2050. This can figure out one big future issue, related to Energy Povert