5 Economic and administrative consequences
5.1 Economic consequences of international climate policy
A global climate agreement under which major emitters make substantial cuts in their emissions is an essential basis for effective mitigation of climate change. An agreement of this kind will also reduce the costs of loss and damage caused by climate change. For Norway, as a small and open economy, the way climate change influences global political and economic trends is also an important consideration. The longer the delay, the more difficult it will be to achieve the two-degree target. If current emission trends continue, the costs of climate change will exceed the costs of the action needed to achieve the two-degree target. A high and predictable price on emissions of greenhouse gases will create a market for mitigation options and thus promote a shift in production and consumption patterns and the development and deployment of new technology. To bring this about will require a credible global climate policy with a sufficient level of ambition.
Many different estimates have been made of the carbon price required to achieve the two-degree target. Official Norwegian Report NOU 2012:16 (Cost-Benefit Analysis) presents an overview of a range of modelling results from 2008–10 for carbon price paths that are consistent with the two-degree target (450 ppm). The mean estimated prices in 2020 and 2030 are EUR 43 and EUR 68 per tonne respectively, while the corresponding figure for 2050 is EUR 235. The modelled price paths vary, particularly further into the future. For 2050, the estimates vary from EUR 101 to EUR 394 per tonne, depending partly on differences in the assumptions made about technological advances. All the price paths show a fairly steep rise in the real price over time. Estimates of carbon price paths are based on the assumption that there is a uniform price for all emissions globally, and the estimates are sensitive to the assumptions on which they are based. The longer it takes before the world is on an emission trajectory in line with the two-degree target, the higher the estimated price on emissions of greenhouse gases, because the estimated remaining emission budget becomes steadily smaller.
5.2 Economic and budgetary costs of Norway’s commitment
The economic and budgetary costs of a given commitment by Norway will depend on a wide range of factors. An international climate agreement with universal participation would be the most effective instrument for mitigation of climate change. Since Norway is a small country, the costs of its own commitment will depend heavily on developments in the rest of the world. On the one hand, the international carbon price will need to rise as the international level of mitigation ambition is enhanced. On the other hand, an ambitious climate agreement and the ensuing high carbon prices will result in rapid development of new, climate-friendly technology.
Textbox 5.1 Assessments of mitigation measures and costs in the non-ETS sector
The potential for emission reductions and the associated costs can be assessed using several different approaches. One is macroeconomic modelling, which can provide information on the economic costs of using specific policy instruments. Another option is to make a technical analysis of mitigation costs and options. Both these approaches have their strengths and weaknesses.
In 2013, emissions in the non-ETS sector in Norway totalled 28.4 million tonnes CO2-eq. The largest emission sources are road transport (10 million tonnes CO2-eq), other transport (6 million tonnes CO2-eq) and agriculture (5 million tonnes CO2-eq).
Analyses of the potential for emission reductions based on macroeconomic modelling generally put a price on greenhouse gas emissions from all sectors. Based on a description of interactions within the economy and assumptions about the technology available, the effects on emissions are calculated. An analysis of this kind carried out by Statistics Norway suggests that there is a fairly modest potential for reducing CO2 emissions in the non-ETS sector in Norway up to 2030. The analysis is based on 2013 figures from the International Energy Agency . It concludes that if the carbon price path for emissions in Norway is in line with the two-degree target (NOK 550 per tonne in 2030), emissions in the non-ETS sector will be reduced by 4½ million tonnes, provided that the whole world adopts an ambitious policy in line with the two-degree target. If only Norway introduces the policy instruments needed for this, Norway’s non-ETS emissions will be reduced by 1½ million tonnes. The model only includes CO2, not the other greenhouse gases.
The Norwegian Environment Agency has carried out a technical analysis of the potential for emission reductions, published in the report Knowledge base for low-carbon transition in Norway. The report assessed a wide range of mitigation measures, using a 2010 report on measures and instruments for achieving Norway’s climate targets by 2020 as a basis (Climate Cure 2020). There has been a great deal of technological progress since the report was published. Given developments during the past five years, the Environment Agency considers that there is now a larger potential for emission reductions from some measures, particularly in the transport sector. The report presents the results of an analysis of mitigation potential for all greenhouse gases. The measures assessed were divided into three cost and three feasibility categories, and three mitigation packages were put together. Most of the measures in mitigation package 1 have an estimated cost of less than NOK 500 per tonne CO2-eq and are in the high feasibility category. The package also includes mitigation measures and targets that have already been adopted at political level, but that are not yet included in Norway’s reference scenario (for example the goal of using public transport, cycling and walking to meet the growth in the volume of passenger transport in the larger towns). The potential for emission reductions in the non-ETS sector from mitigation package 1 was estimated at 6.7 million tonnes CO2-eq in total, of which 5 million tonnes is in the transport sector. This corresponds to a 22 % reduction in emissions from 2005 in the non-ETS sector. Mitigation package 2 also includes measures that have an estimated cost of NOK 500–1500 per tonne CO2-eq and are in the medium feasibility category. This package is estimated to give a further 4.5 million tonnes CO2-eq of emission reductions. Mitigation package 3 includes almost all the measures that were reviewed, including high-cost measures and measures that are considered to be challenging to implement. Implementing measures will also be conditional on satisfactory sustainability criteria. Including the additional measures in mitigation package 3, which have an estimated cost of more than NOK 1500 per tonne, the total emission reductions are estimated at 12.7 million tonnes. This corresponds to a reduction of about 44 % from 2005 in the non-ETS sector. The costs associated with implementing these measures are uncertain. The emission reductions have been adjusted for overlap between the effects of different measures, but the costs of the transition process and ripple effects of the mitigation measures have not been considered. The analysis does not include an assessment of which policy instruments need to be introduced to trigger the emission reductions. The analysis of measures is based on the projections presented in the white paper Long-term Perspectives on the Norwegian Economy 2013.
The analyses discussed above can be useful for illustrating the potential of mitigation measures and their costs, but the estimates are generally uncertain and sensitive to the underlying assumptions, for example about technological developments and international climate policy. Further assessments of the consequences are needed to provide a basis for making decisions about specific measures and policy instruments.
Norway will undertake a commitment to reduce its emissions by at least 40 % by 2030 compared with the 1990 level regardless of whether or not it delivers its commitment jointly with the EU. Norway will fulfil its commitment through participation in the EU ETS, by reducing emissions in the non-ETS sector and through cooperation on emission reductions in other countries (flexibility). If Norway agrees on joint fulfilment with the EU, the flexibility in the system will be provided by the possibility of implementing emission reductions in EU countries; in the event of an individual commitment, it will provided by the possibility of implementing emission reductions in countries outside Europe. In either case, Norway’s commitment is conditional on flexibility on the same lines as EU member states. Given the current market situation, there is reason to believe that emission reductions within the EU will cost more per tonne than purchasing emission allowances from countries outside Europe, for example credits under the Clean Development Mechanism.
The EU has not yet decided how its commitment for 2030 is to be converted into an emission budget for the whole period, expressed in tonnes. Regardless of the outcome of the negotiations with the EU, Norway’s emission budget will be drawn up at a later date, and this adds to the uncertainty about the total costs.
The costs of participation in the EU ETS will not be directly influenced by the size of Norway’s commitment. However, there is some uncertainty as to how Norway is to be credited for its participation in the EU ETS if Norway and the EU do not agree on joint fulfilment (see the discussion in Chapter 3.3). This could entail budgetary costs.
The greater the emission reductions Norway makes in the domestic non-ETS sector, the higher the average cost per tonne of fulfilling the emission reduction commitment would be expected to be. The scope and mix of mitigation measures in Norway to fulfil the commitment will be decided at a later date. It can be assumed that achieving the commitment will require further action to reduce emissions in the non-ETS sector in Norway. The costs of emission reductions in Norway are very uncertain, and there is a considerable spread in the potential for emission reductions indicated by the analyses discussed in Box 5.1. The macroanalyses suggest emission reductions of the order of 1½–4½ million tonnes given a carbon price that is consistent with the two-degree target, whereas the mitigation analysis indicates emission reductions totalling 6.7 million tonnes using roughly the same price assumption. The spread of the results of the macroeconomic analyses is partly related to different assumptions about the availability of new climate-friendly technology. Both the macroeconomic analyses and the technical analysis are based on existing technology, but they use different assumptions about future technology price trends and thus about the extent to which new technologies are deployed. By way of comparison, the projections used in the 2015 budget, which are based on continued use of the same policy instruments as today, show only a marginal decrease in emissions from the non-ETS sector up to 2030. These projections assume that the carbon price of fuel remains at about NOK 300, and also assume that the vehicle stock continues to become more efficient.
The costs incurred through use of flexible mechanisms internationally or through flexible implementation within the EU will be included in the fiscal budget. In the case of domestic measures, the costs imposed will also have distributional effects. The way the costs are split between different actors will depend on the types of policy instruments used. The most cost-effective instrument is pricing of emissions, where those responsible for the emissions are required to pay the costs.
5.3 Administrative consequences
The proposal will have limited administrative consequences. More information on administrative consequences and costs, including the costs of an agreement with the EU on joint fulfilment of the emission reduction commitment, will be provided in future budgetary processes. If an agreement is concluded that is legally binding for Norway, the consent of the Storting will be requested.