Special Report on Climate Change About this report The EBRD is an international financial As the EBRD seeks to foster transition and promote entrepreneurship, it needs institution that supports projects from central to analyse and understand the process of transition. The purpose of this Special Europe to central Asia. Investing primarily in Report on Low Carbon Transition is to advance understanding of climate change private sector clients whose needs cannot fully mitigation and to share this analysis with partners. be met by the market, the Bank fosters transition The responsibility for the content of the towards open and democratic market economies. Special Report on Climate Change is taken by the Office of the Chief Economist at In all its operations the EBRD follows the the EBRD and the Grantham Research Institute. The assessments and views highest standards of corporate governance expressed in this report are not necessarily those of the EBRD. All assessments and and sustainable development. data in the Special Report on Climate Change are based on information as of early March 2011. The Grantham Research Institute on Climate Change and the Environment is based at the London School of Economics and Political Science (LSE). Established in 2008, the Institute aims to generate world-class, policy-relevant research on climate change and the environment for academics, policy-makers, businesses, non- governmental organisations (NGOs), the media and the general public. Carbon intensity of transition countries in 2008 (kg CO2 from energy use per US$ of GDP in 2000 prices and PPP exchange rates) 1 Uzbekistan 1.87 2 Kazakhstan 1.53 3 Mongolia 1.51 4 Turkmenistan 1.02 5 Russia 0.97 6 Serbia 0.96 7 Montenegro 0.96 8 Ukraine 0.91 9 Estonia 0.78 10 Moldova 0.77 11 Belarus 0.71 EBRD 0.71 5 12 Bulgaria 0.64 9 China 0.60 13 FYR Macedonia 0.59 29 14 Bosnia and Herzegovina 0.57 15 Kyrgyz Republic 0.56 28 5 16 Czech Republic 0.54 11 17 Poland 0.53 USA 0.48 17 18 Azerbaijan 0.42 19 Romania 0.41 20 Slovak Republic 0.38 16 8 21 Tajikistan 0.36 20 22 Slovenia 0.34 10 23 India 0.33 22 19 23 Hungary 0.33 24 Turkey 0.32 14 25 Croatia 0.31 25 6 7 12 26 Armenia 0.29 13 27 EU-15 0.28 30 26 18 27 Georgia 0.28 28 Lithuania 0.26 24 18 29 Latvia 0.24 30 Albania 0.22 Total greenhouse gas emissions (Mt CO2e) CO2 emissions per capita in 2008 (tonnes of CO2 from energy use) World EU-15 Central Europe South-eastern Eastern Europe Central Asia Russia Turkey and the Baltic Europe and the Caucasus and Mongolia World emissions States 30,181 31,112 33,090 37,636 4.39 7.94 6.95 4.84 5.55 6.12 11.24 3.71 7,530 5,658 5,190 5,394 EBRD region 1990 1995 2000 2005 Carbon intensity of transition countries in 2008 (kg CO2 from energy use per US$ of GDP in 2000 prices and PPP exchange rates) 2 3 1 15 4 21 CO2 emissions per capita in 2008 (tonnes of CO2 from energy use) World EU-15 Central Europe South-eastern Eastern Europe Central Asia Russia Turkey and the Baltic Europe and the Caucasus and Mongolia States 4.39 7.94 6.95 4.84 5.55 6.12 11.24 3.71 = 2 tonnes of CO2 (sustainable emissions target) Contents Special Report on Climate Change 2 Executive Summary 6 Chapter 1: Energy use and the carbon 4 Foreword performance of transition countries, 1990-2008 8 Trends in carbon emissions from energy use 10 Changes in carbon intensity in the global context 11 Carbon intensity of energy 12 Energy intensity of GDP 16 Emissions per capita and trade in virtual carbon 18 Conclusions 1 20 Chapter 2: The economic impacts 38 Chapter 3: Effective policies of climate change mitigation policy to induce mitigation 22 Economic analysis of climate 40 Introduction change mitigation 40 Climate policies and outcomes 25 Macroeconomic impacts on 40 Monitoring sustainable energy progress EBRD countries 42 Modelling the impact of climate policies 29 Impacts of mitigation policies 44 Effective mitigation policies in Russia by sector 50 Effective mitigation policies in Turkey 34 Social implications of climate 54 Conclusions change policy 36 Conclusions 2 3 56 Chapter 4: Political economy 72 Acknowledgements of climate change policy in the 73 Abbreviations transition region 74 Notes 58 How climate policies come about: a political economy approach 60 Measuring climate change policy 62 Determinants of climate change policy 66 Case studies: climate change policy in the transition region 70 Conclusions 4 1 Executive Summary 12 Energy use and the carbon The economic impacts of climate performance of transition change mitigation policy countries, 1990-2008 The EBRD region is the only major region in the world in which Compared to a “business-as-usual scenario”, mitigation policies carbon emissions have fallen substantially – by about 28 per consistent with global warming of no more than 2°C may entail cent – between 1990 and 2008. This decline, which occurred economic costs, through three channels: (1) structural change notwithstanding an increase in real GDP by about 22 per cent over toward less carbon-intensive production; (2) a reduction in the the same period, was a product of the transition from wasteful and international demand for carbon-intensive goods (such as fossil energy-intensive planned economies toward market economies. fuels) that will hurt exporters of such goods; and (3) in a world with Transition lead to both shifts to less carbon-intensive energy tradable carbon permits, the cost of purchasing (or revenues of sources – in particular, increased usage of gas instead of coal – selling) such emission rights. An “integrated assessment” model and most importantly lower energy usage per unit of GD P. The that analyses all three factors shows wide differences in mitigation latter resulted both from deep energy efficiency improvements costs within the EBRD region, with the lowest costs arising in within economic sectors and (to a lesser extent) from structural new EU member states and higher costs in energy exporters. For change, that is, a shift from energy-intensive activities such as the EBRD region as a whole, gross mitigation costs are halfway heavy industry to less energy-intensive activities such as services. between those expected for advanced countries and those expected in the large energy exporters in the Middle East. This said, there are large disparities both in changes in emissions between 1990 and 2008 – from a reduction of 56 per cent Although mitigation may be costly particularly for the energy in Eastern Europe and the Caucasus (EEC) to an increase in exporters in the region, it is in the best interests of these countries emissions by 108 per cent in Turkey – and in 2008 emission levels to undertake mitigation policies, in order to adapt production and per capita or per unit of GD P. Today, the region still includes some exports to the lower future global demand for fossil fuels and of the worst performers in the world in terms of carbon intensity to maintain economic competitiveness. The sooner this occurs, (for example, Uzbekistan, Kazakhstan and Russia), as well as the lower the costs of mitigation. Furthermore, decarbonisation some countries, such as Latvia and Hungary, which are close to is likely to offer significant benefits that are not fully captured the global leaders in carbon or energy performance. The majority by the models used to simulate mitigation costs. In addition to of the EBRD region remains carbon and energy intensive and there the obvious gains from reducing the risks of calamitous climate is much scope for further improvement. change, these benefits include higher long-run growth from lower resource dependence, technology spillovers associated with Statistical analysis at the firm level reveals that private and foreign- the development of alternative energy sources, and reduced owned firms tend to be more energy efficient than state-owned distortions from energy subsidies and inadequate regulation of enterprises, and large firms more energy efficient than small firms. energy production and distribution. It also shows that there is a strong impact of energy prices on energy efficiency, suggesting that subsidy and tax policies that Cost-effective climate change mitigation will entail structural affect prices can have a large impact on emissions. These results change in the EBRD economies. These will be largest in the energy are confirmed in country-level analysis, which also indicates that sector, where fossil-fuel production will have to shift away from oil, market-oriented reform and (for new EU members) the start of EU productivity will need to improve, renewable energy sources and accession negotiations have played important roles in accelerating technologies must be developed and carbon capture and storage the improvement in carbon performance. n needs to be deployed on a large scale. The industrial sector will need to reduce the share of the most energy-intensive industries. Elsewhere in the economy the pace of energy efficiency gains will need to be maintained or accelerated through improvements in the energy efficiency of industry and buildings and the carbon performance of transport. Analysis for selected transition countries suggests that climate policies will not significantly reduce the affordability of electricity and gas for the average household, but may have a higher impact on the poorest households. Hence, climate policies need to be developed hand-in-hand with adequate social s afety nets.n 2 Special Report on Climate Change 3 4 Effective policies The political economy to induce mitigation of climate policy in the transition region What policies are most likely to make emission reductions Implementing climate change policy, even if it is economically attractive to profit-seeking investors? This question is analysed by beneficial, poses difficult political economy challenges.