A report on International Energy Workshop (IEW)

(Stockholm 21-23 June 2010)

Mehdi Asali

1. Introduction

The International Energy Workshop (IEW) is a network of analysts actively working on

global, regional and national energy issues. The first IEW was organized by some of well
known energy economists and held in December 1981 at Stanford University, that Workshop
partly inspired by the Stanford Energy Forum. Since earlier years IEW has been continuously
supported by IEA, EPRI and other organizations.

The IEW publications, from 1981 to 1997, contributed to IPCC special report on emission
scenarios (SRES). As the threat of climate change continues, IEW role is more recognized
and its meetings put more emphasize on energy and climate change relations and modeling
complexity of energy planning and policy in a world of environmental and economic
constraints.

IEW 2010 that was held in Stockholm from 21st to 23rd of June included three plenary
sessions with keynote speakers, and parallel sessions presenting more than 110 papers
categorized in: Climate Changes-Mitigation and Adaption, Energy and Transport Modeling,
Economics of low Carbon Technologies, Climate negotiations, Modeling Uncertainty in
Climate change Analysis and Methodological Studies. Two separate workshops also were
held in connection to the IEW 2010: The OSeMOSYS Workshop and the ETSAP Workshop
on Thursday 24th of June (The Energy Technology Systems Analysis Program (ETSAP) is an
Implementing Agreement of the International Energy Agency (IEA), first established in
1976. It functions as a consortium of member country teams and invited teams that actively
cooperate to establish, maintain, and expand a consistent multi-country energy-economy-
environment-engineering (4E) analytical capability). To take part in this Workshop I had to
request the extension of my mission for one day. I took part in all plenary sessions (11
speeches) and the two separate Workshops mentioned above in addition to about 24 parallel
sessions, presentations of which seemed more relevant to my work at the Department. Papers
presented in these sessions together with other interesting papers of the Workshop are
acquired for further research in the future.
 2. Main Topics Discussed at the Workshop

The main themes of the Workshop were organized around the complex relations between
Economy, Energy and Environment and the technical nature of the Workshop lent itself,
rather nicely, to sessions of sophisticated discussions on different aspects of these relations
explored through the so called EEE models.

By EEE models mathematical and Statistical models that are developed to analyze
interactions of Economy, Energy and Environment (mainly mitigation of climate changes) is
meant. From economists point of view and in a very broad context these models are in fact
extension of economic growth models to account for energy and environment. A common
approach in these models is to view climate change in the framework of economic growth.
The capital stock of the conventional neoclassical growth model is extended to include
investments in the environment. Emissions reductions in the extended model are analogous to
investment in the mainstream model. That is concentration of GHGs is viewed as “negative
natural capital” and emission reduction as lowering the quantity of negative natural capital.

The history of EEE models goes back to mid 1970s when under the auspices of IEA the so
called MARKAL (Market Allocation) model was initiated at Brookhaven National
Laboratory (USA) and Kernforschungsanlage Julich (KFA) in Germany. Recent versions of
MARKAL have been developed in a cooperative multinational project over a period of
almost two decades by the Energy Technology Systems Analysis Programme (ETSAP) of the
International Energy Agency. The basic components in a MARKAL model are specific types
of energy or emission control technology. Each is represented quantitatively by a set of
performance and cost characteristics. A menu of both existing and future technologies is
input to the model. Both the supply and demand sides are integrated, so that one side
responds automatically to changes in the other. The model selects that combination of
technologies that minimizes total energy system cost. The Integrated MARKAL-EFOM
System (TIMES) is an evolved version of MARKAL with new functions and flexibilities.

In recent years the EEE models have taken various extensions. One important extension of
variety of the EEE models is MESSAGE–MACRO. This is the result of linking a
macroeconomic model with a detailed energy supply model. The purpose of the linkage is to
consistently reflect the influence of energy supply costs as calculated by the energy supply
model in the optimal mix of production factors included in the macroeconomic model. These
models could illustrate results of the feedback mechanisms of different global economic–
energy–environment scenarios. These scenarios would help comparing consequences of the
global atmospheric carbon concentration to 550 ppmv under alternative assumptions. The
scenarios are compared in terms of GDP, energy supply and demand, and energy prices.
 2.1. A Summary of the Workshop policy brief on climate change debate

A shift towards climate stabilization can occur along different pathways. The research
projects referred to in the previous have analyzed various possible climate control scenarios.
The six modeling groups mentioned above give six different integrated assessment models.
These scenarios combined long-term climate stabilization targets of 500 and 530 ppm-
equivalent (ppm-e) consistent with long term equilibrium temperature increase of 2.3 and
2.5o C respectively, under a central value for the climate sensitivity-with different strategies
regarding how to achieve these targets. In the modeling groups immediate and fully
cooperative action starting from 2012 were compared with “second best” solutions
characterized by different regional emission quotas.

Results of these modeling exercises indicate that emission reduction targets for 2050 are
relevant for the economics of long-term climate stabilization. Some results implies that
several scenarios with a 500 ppm-e climate target are unreachable, in particular those in
which some regions aim at initially mild reduction followed by more drastic reduction after
2050. Postponing abatement makes it impossible, or at least most costly, to avhieve climate
stabilization.

According to the modeling groups estimates achieving a climate target of 530 ppm-e is not
negligible. On average however, this cost stay below 1-2% of Gross World Product, with
wide variations across models. The 500 ppm-e target is much difficult to attain. In most cases
it is achievable, but at a significantly higher cost and on the condition that abatement actions
starts at full speed from 2012. This target, however, becomes infeasible, even with early
action, if high economic growth materialize. When second best quota systems are assumed,
the target is reachable only in the case of optimistic evolution of technology. The table below
summarizes these findings:

Greenhouse Gas Temperature Increase Global Macro-economic Costs

Concentration Target

2030 2050

530 ppm-e 2.5o C 0.3% - 2.6% 0.7% -6%

500 ppm-e 2.3o C 1% -3% 2% ->8%

Source: Planets project, Seventh Framework Programme, European Commission

These results indicate that even for climate policy less ambitious than 2o C target, the rapid
creation of a global coalition is a prerequisite for success. A relatively small extra
temperature reduction of 0.2o C implies significant additional global costs, or even potential
infeasibility, due to high non-linearity of abatement costs.

The energy exporting countries case in the mitigation levels balance out with differences in
emission reductions is considered together with developing Asia and the rest of the world.
The PLANETS project considered two different quota systems as an alternative to immediate
and global participation. In both these quota scenarios, the developed world takes immediate
stringent emission reduction action, while the developing countries postpone their abatement
effort by several decades. Both quota systems imply an overall global reduction of
greenhouse gas emissios in 2050 of about 28% with repect to emission in 2005. One of the
core differences between the two quota systems is that in one case the OECD reduces its
emission down to a level of 20% while in the other it decreases these emissions to a deeper
floor of 10% compared to 2005 levels. The problems emerge when different regions are
found to have varying costs depending on the quota allocation implemented as the two quota
systems generate significantly different results, especially in terms of regional costs.

The revenue resulting from permit trading typically have a large impact on both macro-
economic and regional costs. Non-enrgy exporting developing countries usually play the role
of permit sellers in all scenarios. They can therefore gain large benefits from an international
carbon market. Energy exporting countries (OPEC, Russia,…) on the other hand might face
large costs as a results of high expected baseline emissions and reduced revenues from the oil
market. The price of oil and behavior of OPEC may affect the possibility of ensuing climate
stabilization, though it is not expected to be amongst the main determinants.

2.2. Climate stabilization targets, carbon trade and the energy mix

Other important aspects of climate change control discussed in the 2010 IEW and presented in its
sessions were the carbon trading and its restrictions. It is believed that although access to emission
credit maximizes economic efficiency, but it may reduce domestic abatement efforts and adversely
affect the stimulation of innovation in low carbon energy technology. For this and other reasons, some
consider restricting the purchase of emission credit from third countries might have better results in
the long run. The adoption of a global trading limit, however, can have quite a significant impact on
the abatement cost in different regions.

The policy scenarios analyzed under the PLANETS project indicate that, to minimize overall climate
compliance costs, the most cost-efficient solution exploits a broad set of different mitigation options.
Based on economic considerations and environmental concerns for climate change, the models
developed and estimated in this project suggest that this set relies consistently on a combination of
nuclear power, renewable, and CCS applied to fossil fuels and biomass. Energy conservation has also
proved to be an important strategy, both in supply sector and in the end-use sector, especially when
the scope for technological substitution is limited. Some combination of these policies would have far
reaching impacts on energy and oil market developments and affect oil exporting countries revenue
significantly.

These studies confirm that Carbon Capture and Storage (CCS) has the potential to materialize large
emission reductions, particularly in the mid-term. Almost all EEE models developed in these projects
consider CCS an effective and efficient mitigation technology. In fact CCS is consider as appropriate
mitigation alternative until the next generation of carbon-free technologies become competitive,
because it fits the current energy system without the necessity for major infrastructure changes. It is
expected that after 2050, CCS becomes less important since it is not an entirely carbon free energy
technology, whereas renewable and nuclear power plants are.

Climate policy is believed to be a key determinant of the market share that CCS may obtain. Due to
its capital intensive nature long term investment and policy stability are fundamental for its success in
a region. Modeling results of PLANETS project reported to the 2010 IEW suggest that CCS is more
sensitive to policy uncertainty than to technology cost uncertainty, because CCS is competitive only if
the climate externality is internalized with a credible and stable carbon price.

3. Relevance of the EEE modeling projects to Oil Exporting Countries

The relevance of EEE models to oil exporting interest should be clear from the
aforementioned discussion. Oil exporting countries take part in multilateral negotiations
concerning climate changes and the related issues. On the other hand, in various major
research projects of energy-economy-environment, supported by Organizations that
safeguard major energy consuming nations interests, (EIA, IEA, OECD or European
Commission (EC) for example) supply of energy is modeled in very detailed manner, with
oil exporting countries playing a role in oil market development. As an example the PLANET
research project (WWW.feem-project.net/planet), that is funded by the EC comprises six
energy-economy-climate modeling groups (DEMETER, ETSAP-TIAM, GEMINI-E3,
PEM/TEAMS, TIAM-ECN, WITCH) to analyze the implications of several climate policies
under a wide set of assumptions about national commitments, supply of energy mix and the
use of international carbon offsets.

Although the focus of research in these modeling exercises are usually uncertainties
regarding the future of evolution of climate policies and the prospects of key carbon
mitigation technologies, however, supply of energy (and oil as an important component of
energy mix) and oil exporting countries as key player of oil market have their own sections in
most of these large and extensive models of energy-economy and environment. So these
countries decisions and actions are modeled in most of these models and the impacts of their
performance of emission targets are analyzed.
 4. Concluding remarks and suggestions

From what I have summarized above the main themes and locus of discussions held in the
IEW 2010 and their connection to oil exporting countries’ interests should be clear. It appears
that climate change policies, in conjunction with energy mix and economic growth, are going
to take prominent places in the future international and intergovernmental relationships.
Relevance of these debates to oil exporting countries interests should not be underestimated
and these would be wise to be prepared for a future when global warming and climate change
policies become tightly related to energy and oil supply security and demand uncertainties. A
convenient way to this end, for a major oil exporting country, such as Iran, is to become
involved with the research projects and to hold regular dialogue with organizations and
institutions that play a leading role in modeling, analyzing and recommending global climate
policies in conjunction with international economic growth and energy market developments.

Most EEE models are either in the category of dynamic linear (or non-linear) optimization
(LP or NLP) models or computable general equilibrium (CGE) models that are generally
compiled and solved by the powerful mathematical software called GAMS (General
Algebraic Modeling System). So a multi user license of the latest version of this software
with the components that are needed to develop and solve medium size models of operational
research and CGE variety is needed to develop an EEE model in a scale proper for an
economy like Iran’s. In light with the discussion above, benefits of developing and using EEE
models for oil exporting countries need no further elaboration. The sooner these countries
begin developing their own EEE models the better because they could equip themselves with
more sophisticated analytical tools which is imperative for their preparation for multinational
negations regarding carbon emission, climate change and all the international policies and
conventions pertaining energy supply that could have profound impact on the Iranian
economy.

M. Asali