Effects of the Uncertainty about Global Economic Recovery on Energy Transition and CO2 Price

MIT CEEPR Working Paper No. 2011-005

28 Pages Posted: 27 May 2012

See all articles by Axel Pierru

Axel Pierru

King Abdullah Petroleum Studies and Research Center (KAPSARC)

Olivier Durand-Lasserve

Catholic University of Louvain (UCL)

Yves Smeers

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Date Written: March 2011

Abstract

This paper examines the impact that uncertainty over economic growth may have on global energy transition and CO2 prices. We use a general-equilibrium model derived from MERGE, and define several stochastic scenarios for economic growth. Each scenario is characterized by the likelihood of a rapid global economic recovery. More precisely, during each decade, global economy may - with a given probability - shift from the EIA's (2010) low-economic-growth path to the EIA's (2010) high-economic-growth path. The climate policy considered corresponds in the medium term to the commitments announced after the Copenhagen conference, and in the long term to a reduction of 25% in global energy-related CO2 emissions (with respect to 2005). For the prices of CO2 and electricity, as well as for the implementation of CCS, the branches of the resulting stochastic trajectories appear to be heavily influenced by agents’ initial expectations of future economic growth and by the economic growth actually realized. Thus, in 2040, the global price of CO2 may range from $21 (when an initially-anticipated economic recovery never occurs) to $128 (in case of nonanticipated rapid economic recovery). In addition, we show that within each region, the model internalizes the constraints limiting the expansion of each power-generation technology through the price paid by the power utility for the acquisition of new production capacity. As a result, in China, the curves of endogenous investment costs for onshore and offshore wind are all bubble-shaped centered on 2025, a date which corresponds to the establishment of a global CO2 cap-and-trade market in the model.

Keywords: CO2 price, uncertainty, economic growth, energy transition, environmental policy, general equilibrium

JEL Classification: C68, Q41,Q43, Q52

Suggested Citation

Pierru, Axel and Durand-Lasserve, Olivier and Smeers, Yves, Effects of the Uncertainty about Global Economic Recovery on Energy Transition and CO2 Price (March 2011). MIT CEEPR Working Paper No. 2011-005 , Available at SSRN: https://ssrn.com/abstract=1912589 or http://dx.doi.org/10.2139/ssrn.1912589

Axel Pierru (Contact Author)

King Abdullah Petroleum Studies and Research Center (KAPSARC) ( email )

Riyadh, Central Province
Saudi Arabia

HOME PAGE: http://www.kapsarc.org/

Olivier Durand-Lasserve

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

Yves Smeers

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

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