Editing IPCC:AR6/WGIII/Chapter-12 (section)

==== 12.6.3.2 The Spillover Effects on the Energy Sector ====

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Cross-sectoral trade-related spillovers of mitigation policies include their effect on energy prices. Other things being equal, regulation of emissions of industrial producers decreases the demand for fossil fuels that would reduce prices and encourage the rise of fossil fuel consumption in regions with no or weaker climate policies ( ''robust evidence'' , ''med'' ''ium agreement'' ) ''.''

[[#Arroyo-Currás--2015|Arroyo-Currás et al. (2015)]] studied the energy channel of carbon leakage with the REMIND IAM of the global economy. They came to the conclusion that the leakage rate through the energy channel is less than 16% of the emissions reductions of regions who introduce climate policies first. This result did not differ much for different sizes and compositions of the early mover coalition.

[[#Bauer--2015|Bauer et al. (2015)]] built a multi-model scenario ensemble for the analysis of energy-related spillovers of mitigation policies and revealed huge uncertainty: energy-related carbon leakage rates varied from negative values to 50%, primarily depending on the trends in inter-fuel substitution.

Another kind of spillover in the energy sector concerns the ‘green paradox’: announcement of future climate policies causes an increase in production and trade in fossil fuels in the short term ( [[#Jensen--2015|Jensen et al. 2015]] ; [[#Kotlikoff--2016|Kotlikoff et al. 2016]] ). The delayed carbon tax should therefore be higher than an immediately implemented carbon tax in order to achieve the same temperature target ( [[#van%20der%20Ploeg--2016|van der Ploeg 2016]] ). Studies also make a distinction between a ‘weak’ and ‘strong’ green paradox ( [[#Gerlagh--2011|Gerlagh 2011]] ). The former refers to a short-term rise in emissions in response to climate policy, while the latter refers to rising cumulative damage.

The green paradox may work in different ways for different kinds of fossil fuels. For instance, [[#Coulomb--2018|Coulomb and Henriet (2018)]] show that climate policies in the transport and power-generation sectors increase the discounted profits of the owners of conventional oil and gas, compared to the no-regulation baseline, but will decrease these profits for coal and unconventional oil and gas producers.

Many studies also distinguish different policy measures by the scale of green paradox they provide. The immediate carbon tax is the first-best instrument from the perspective of global welfare. Delayed carbon tax leads to some green paradox but less than in the case of support for renewables ( [[#Michielsen--2014|Michielsen 2014]] ; [[#van%20der%20Ploeg--2019|van der Ploeg and Rezai 2019]] ). With respect to the latter, support for renewable electricity has a lower green paradox than support for biofuels ( [[#Michielsen--2014|Michielsen 2014]] ; [[#Gronwald--2017|Gronwald et al. 2017]] ). The existence of the green paradox is an additional argument in favour of more decisive climate policy now: any postponements will lead to additional consumption of fossil fuels and consequently the need for more ambitious and costly efforts in future.

The effect of fossil fuel production expansion as a result of anticipated climate policy may be compensated by the effect of divestment. Delayed climate policy creates incentives for investors to divest from fossil fuels. [[#Bauer--2018|Bauer et al. (2018)]] show that this divestment effect is stronger and thus announcing of climate policies leads to the reduction of energy-related emissions.

The implication of the effects of mitigation policies through the energy-related spillovers channel is of particular significance to oil-exporting countries ( ''medium evidence'' , ''medium agreement'' ). Emissions-reduction measures lead to decreasing demand for fossil fuels and consequently to the decrease in exports from major oil- and gas-exporting countries. The case of Russia is one of the most illustrative. [[#Makarov--2020|Makarov et al. (2020)]] show that the fulfilment by Paris Agreement Parties of their NDCs would lead to 25% reduction of Russia’s energy exports by 2030 with significant reduction of its economic growth rates. At the same time, the domestic consumption of fossil fuels is anticipated to increase in response to the drop in external demand that would provoke carbon leakage ( [[#Orlov--2017|Orlov and Aaheim 2017]] ). Such spillovers demonstrate the need for dialogue between exporters and importers of fossil fuels while implementing the mitigation policies.

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