Macro-economic analysis for Norway of the EU climate policy up to 2030

This report analyses the 2030 climate targets of the EU and Norway and, in particular, how the degree of flexibility across countries and across emission sources within and outside the EU Emission Trading System (EU ETS) affects the abatement costs, emission patterns and economic performance. The study is conducted by Statistics Norway and funded by the Ministry of Finance and the Ministry of Climate and Environment in Norway.

Flexibility is already ensured in the ETS sector, in the sense that the common target for Norway and the EU of 43 per cent reduction from 2005 can be met by allowance trading. The EU intends to increase flexibility for non-ETS sources, both across countries and vis-á-vis the ETS. Norway aims for joint action with the EU also for the non-ETS sector. EU’s common aim for the sector is a 30 per cent reduction from 2005, with country-specific targets varying between 0 and 40 per cent. The proposed effort-sharing, published in July 2016, assigns Norway a 40 per cent reduction target.

The implemented degree of flexibility will be pivotal for the Norwegian economic impacts of fulfilling its 2030 goal. We simulate four scenarios distinguished by the degree of flexibility – starting at no and increasing, via two medium cases, to full flexibility. The regimes are introduced simultaneously in the EU and Norway and the resulting marginal abatement costs and energy-related prices in EU impact the Norwegian economy. We have adopted a European energy market model (LIBEMOD) as well as a general equilibrium model for Norway (MSG-TECH) for the simulations.

We find that a fully flexible system both across sectors and across Norway and the EU (as an entity) yields a common allowance price (marginal cost) of 450 NOK/ton CO₂-equivalent. This is the cheapest way for Norway, and also for the EU as a whole, to comply with the emission targets. At the other extreme, with no flexibility mechanisms facing the Norwegian non-ETS sources, the necessary domestic uniform emission tax amounts to 4 800 NOK/ton CO₂-equivalent, implying a doubling of the welfare costs compared to the fully flexible scenario. For comparison, the corresponding marginal cost with a uniform emission tax in the EU non-ETS sector is simulated to 2 000 NOK/ton CO₂-equivalent. The Norwegian emissions are cut back by 10 million tons compared to the fully flexibility scenario, the major part taking place within transportation. The analysis shows that in addition to the costs of emission reductions, the Norwegian economy will suffer from reduced petroleum prices. The reduction is first of all seen for the gas price, which drops by 10 per cent. In all the flexibility regimes cost-effictive policies, e.g. allowance markets, are assumed. Otherwise, costs will be higher.