sectoral economic costs and benefits of ghg mitigation - IPCC

Ulrich Bartsch and Benito Müller
Figure 5
Differences in Fossil Fuel Prices
Differences between Coal, Refined Oil, and Gas Prices,
in Per cent of Gas Prices, per Energy Unit and per Unit of Carbon, 1995
400.00%
300.00%
200.00%
100.00%
REFOIL
COAL
0.00%
-100.00%
USA EUM JPN EIT
Price Index per Energy Unit
Price Index per Carbon Unit
The graph shows that adding a uniform carbon levy has very different relative effects on the
three fossil fuels: the relative increase in the price of coal is much greater than the relative
increase in the price of gas which in turn is much greater than the relative increase in the price of
refined oil. Fuel switching will therefore take place away from coal, as intended, but also away
from gas, which is not intended because gas has less carbon per energy unit than oil products.
The existing taxes on fuels therefore distort the intended effects of carbon instruments and we
should expect a stronger impact of climate change measures on gas and coal, than on oil.
In addition, oil serves the transport sector, which is often described as a captive market because
substitution possibilities away from oil are severely limited. In contrast, electricity generation
and energy intensive industries are the major markets for gas and coal, and at least in the latter of
the two oil products are competitive. Fuel switching can therefore be expected to be less
important for oil, than for coal and gas. Also, diverse industrial sectors can more easily substitute
away from energy, than transport or electricity generation. Again we would expect more impact
on gas and coal.
Finally, methane emissions from gas production and distribution are large. A large part of the
adverse impact of climate change policies on gas is therefore due to the methane leaks especially
in the EIT region. In fact, simulating Kyoto without taking methane into account, produces
projections of gas use of 55.2 mbl/d oe and 76.2 mbl/d oe in 2010 and 2020, 2.3 and 2.8 mbl/d oe
below BaU projections. The difference is particularly poignant in the EIT region: in the Kyoto
scenario, gas use is reduced from the BaU levels by 2.7 and 3.6 mbl/d oe in 2010 and 2020.
Without taking methane into account, gas use is reduced by 1.4 and 2.1 mbl/d oe. Instead of a
reduction from BaU levels by 6-7 per cent in the Kyoto scenario, this sensitivity analysis shows a
reduction by 3-4 per cent. Nearly half the impact of Kyoto on gas is due to methane leaks in the
EIT region.
Following this discussion, we can therefore expect to see large impacts on coal and in particular
on gas because of the methane leaks, but only small effects on oil demand in the simulation
results. As mentioned above, the total availability of liquid fuels (oil products plus non-carbon
fuel) in fact remains very nearly the same with an implementation of Kyoto. Nevertheless,
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