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Sensitivity of Ireland’s potential carbon budget pathways with
varying social discount rates in an energy system optimizat...
Ireland’s Carbon Budgets
Action 5 - Commence the process of forming
carbon budgets for 2021 to 2025, 2026 to 2030,
2031 to...
Carbon Budget Review
Methodology -
By Population
0.064%
2°C 66%
Probability
( 2020 - 2070 ) where exogenous
non-CO2 emissi...
Discount Rate Review
Discount rate - expresses the change in the value of
money over time. This is a critical part of a co...
Discount Rate Review
Large amount of variation in both the academic literature and
international practice with regards to ...
Methodology
Technology Specific Hurdle Rates (TSHR) sensitivity analysis also performed. TSHRs are used to reflect risk an...
Results – Budget Trajectory
The biggest difference in the 5 year carbon budgets is the total cumulative carbon budget quan...
376 MtCO2 - TSHR
Technology Specific Hurdle Rate Sensitivity Analysis
Results – 376 MtCO2 & SDR
376 MtCO2 – 2 Carbon Budgets
AGRI
2.0% BLD
18.8%
COMM
5.4%
ELEC
35.9%
IND
9.9%
TRAN
28.0%
AGRI
2.2% BLD
20.3%
COMM
5.9%
EL...
AGRI
2.2% BLD
17.4%
COMM
5.2%
ELEC
31.5%
IND
15.5%
TRAN
28.2%
AGRI
2.2%
BLD
17.4%
COMM
5.2%
ELEC
32.5%
IND
15.2%
TRAN
27.5...
AGRI
1.1%
BLD
18.4%
COMM
7.2%
ELEC
48.0%
IND
7.2%
TRAN
18.1%
AGRI
1.2% BLD
18.8%
COMM
7.8%
ELEC
53.0%
IND
8.9%
TRAN
10.2%
...
Summary
0%
5%
10%
15%
20%
25%
30%
CB1 (2021-
2025)
CB2 (2026-
2030)
CB3 (2031-
2035)
CB4 (2036-
2040)
CB5 (2041-
2045)
CB6...
v
Summary:
• The least cost Carbon Budget trajectory is not linear
• Technology Specific Hurdle Rates have only a small ef...
Thanks for listening.
Any Questions?
E-mail: jason.mcguire@ucc.ie
Twitter: @jayomacg
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Sensitivity of Ireland’s potential carbon budget pathways with varying social discount rates in an energy system optimization model

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Sensitivity of Ireland’s potential carbon budget pathways with varying social discount rates in an energy system optimization model
Mr. Jason Mc Guire, UCC

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Sensitivity of Ireland’s potential carbon budget pathways with varying social discount rates in an energy system optimization model

  1. 1. Sensitivity of Ireland’s potential carbon budget pathways with varying social discount rates in an energy system optimization model Jason Mc Guire, Fionn Rogan, Brian O Gallachóir & Hannah Daly Energy Policy & Modelling Group at MaREI, UCC IEA ETSAP Summer Workshop, 3rd July 2020
  2. 2. Ireland’s Carbon Budgets Action 5 - Commence the process of forming carbon budgets for 2021 to 2025, 2026 to 2030, 2031 to 2035 ahead of a new Climate Action (Amendment) Bill 2019 being enacted 58.4 MtCo2eq – • Transport 23.7 MtCO2eq • Built Environment 18.1 MtCO2eq • Agriculture 16.6 MtCO2eq Requires approx. a 2% GHG reduction each year up to 2030 and 7% after 2030 to achieve net-zero by 2050. {Source: Ireland Climate Action Plan 2019, Department of Communications, Climate Action and Environment} Non-ETS GHG Budget 378 Mt CO2eq 30% below 2005 levels
  3. 3. Carbon Budget Review Methodology - By Population 0.064% 2°C 66% Probability ( 2020 - 2070 ) where exogenous non-CO2 emissions are at the low end of the feasible global range. 66% Probability 1000 GtCO2 590 GtCO22°C 638 MtCO2 376 MtCO2 Why use Carbon Budgets? Transient Climate Response to cumulative Carbon Emissions (TCRE) is a robust metric relating cumulative carbon emissions to climate warming, this method can be used to achieve the Paris Climate Agreement. Cumulative carbon budgets for Ireland utilized in this analysis are 376 MtCO2 & 638 MtCO2 (Glynn, J. et al., 2019 ). ( 2020 - 2070 ) where exogenous non-CO2 emissions are at the high end of the feasible global range.
  4. 4. Discount Rate Review Discount rate - expresses the change in the value of money over time. This is a critical part of a cost- benefit analysis. This can be mathematically calculated as shown below. 100.0 54.9 30.1 16.5 9.1 5.0 69.1 47.7 33.0 22.8 15.7 0 20 40 60 80 100 120 2020 2030 2040 2050 2060 2070 Euro(2020€) YEAR 6% 3.70% “Social Discount Rate (SDR) is a rate of discount applied within the public sector to future streams of costs and benefits in order to determine a present value for a given investment project in an economic appraisal.” 𝑁𝑃𝑉 = ෍ 𝑟=1 𝑅 ෍ 𝑦∈𝑌 1 + 𝑑 𝑟,𝑦 𝑅𝐸𝐹𝑌𝑅−𝑦 × 𝐴𝑁𝑁𝐶𝑂𝑆𝑇 𝑟, 𝑦 TIMES objective function: {Source: Central Technical Appraisal Parameters Discount Rate, Time Horizon, Shadow Price of Public Funds and Shadow Price of Labour, Oct 2018, Department of Public Expenditure and Reform }
  5. 5. Discount Rate Review Large amount of variation in both the academic literature and international practice with regards to the discount rate applicable for any one country. The Social Discount Rate (SDR) can be calculated based on several different theoretical approaches including social rate time preference (SRTP) and the opportunity cost of capital (SOC). 4.5 3.5 4.0 3.0 4.0 6.0 8.0 7.0 0 1 2 3 4 5 6 7 8 9 SocialDiscountRate(%) Social Rate of Time Preference Opportunity Cost of Capital {Source: Central Technical Appraisal Parameters Discount Rate, Time Horizon, Shadow Price of Public Funds and Shadow Price of Labour, Oct 2018, Department of Public Expenditure and Reform } • Debate within the literature on the theoretical underpinning and calculation of the social discount rate. • 4% rate does not include an adjustment for risk and is for use across sectors. • It is appropriate for the discount rate to decline over longer time periods to reflect future uncertainty (4% to 2.5% after 100 years) .
  6. 6. Methodology Technology Specific Hurdle Rates (TSHR) sensitivity analysis also performed. TSHRs are used to reflect risk and finance in decision making across different economic sectors and specific technologies Irish TIMESCarbon Budgets 638 MtCO2 10 Scenarios/Budget Results 376 MtCO2 # Description Social Discount Rate Technology Specific Hurdle Rates 1 3% SDR, 0% TSHR 3% 0% 2 3% SDR, Default TSHR 3% Default 3 4% SDR, 0% TSHR 4% 0% 4 4% SDR, Default TSHR 4% Default 5 5% SDR, 0% TSHR 5% 0% 6 5% SDR, Default TSHR 5% Default 7 6% SDR, 0% TSHR 6% 0% 8 6% SDR, Default TSHR 6% Default 9 7% SDR, 0% TSHR 7% 0% 10 7% SDR, Default TSHR 7% Default
  7. 7. Results – Budget Trajectory The biggest difference in the 5 year carbon budgets is the total cumulative carbon budget quantity.
  8. 8. 376 MtCO2 - TSHR Technology Specific Hurdle Rate Sensitivity Analysis
  9. 9. Results – 376 MtCO2 & SDR
  10. 10. 376 MtCO2 – 2 Carbon Budgets AGRI 2.0% BLD 18.8% COMM 5.4% ELEC 35.9% IND 9.9% TRAN 28.0% AGRI 2.2% BLD 20.3% COMM 5.9% ELEC 39.9% IND 9.9% TRAN 22.0%
  11. 11. AGRI 2.2% BLD 17.4% COMM 5.2% ELEC 31.5% IND 15.5% TRAN 28.2% AGRI 2.2% BLD 17.4% COMM 5.2% ELEC 32.5% IND 15.2% TRAN 27.5% 376 MtCO2 – 3 Carbon Budgets
  12. 12. AGRI 1.1% BLD 18.4% COMM 7.2% ELEC 48.0% IND 7.2% TRAN 18.1% AGRI 1.2% BLD 18.8% COMM 7.8% ELEC 53.0% IND 8.9% TRAN 10.2% 638 MtCO2 – 3 Carbon Budgets
  13. 13. Summary 0% 5% 10% 15% 20% 25% 30% CB1 (2021- 2025) CB2 (2026- 2030) CB3 (2031- 2035) CB4 (2036- 2040) CB5 (2041- 2045) CB6 (2046- 2050) Range(%) Effect of SDRs on Ireland's Carbon Budgets – 376 MtCO2 Default TSHR 0% TSHR 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% CB1 (2021- 2025) CB2 (2026- 2030) CB3 (2031- 2035) CB4 (2036- 2040) CB5 (2041- 2045) CB6 (2046- 2050) Range(%) Effect of SDRs on Ireland's Carbon Budgets -638 MtCO2 Default TSHR 0% TSHR
  14. 14. v Summary: • The least cost Carbon Budget trajectory is not linear • Technology Specific Hurdle Rates have only a small effect on the Carbon Budgets. • Transparency of the Social Discount Rate is important, due to the effect on the Carbon Budgets ( First two carbon budgets ). • Further analysis of renewable energy & costs may provide further insights. • The most sensitive variable is the cumulative carbon budget ( 376 MtCO2 or 638 MtCO2 ). Questions: • What are the Technology Specific Hurdle Rates commonly used? • Discounting unjustly promotes the interests of people in the present above those of people in the future. Should decarbonization models consider human rights in the Social Discount Rate?
  15. 15. Thanks for listening. Any Questions? E-mail: jason.mcguire@ucc.ie Twitter: @jayomacg

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