Incorporating the long term risk for deep emission reduction in near term CO 2 mitigation strategies

Abstract

The future energy development of a country will differ substantially depending on the level of CO 2 emission reduction that is aimed at. To properly take the long term risk for drastic CO 2 emission reduction targets into account in the analysis of near term energy investment decisions, it is required to apply decision analysis methods that are capable to consider the specific characteristics of climate change (large uncertainties, long term horizon). Such decision analysis methods do exist. They can explicitly include evolving uncertainties, multi-stage decisions, cumulative effects and risk averse attitudes. The methods appear useful to select hedging strategies for CO 2 reduction. Hedging strategies for CO 2 reduction are sets of near term decisions which are most robust for various long term outcomes of climate change negotiations. The result of a hedging analysis gives a balance between the `present' risk for costly premature emission reduction (when CO 2 reduction appears not needed) and possible `future' risk for neglected CO 2 reduction in the past (when deep CO 2 reduction appears to be required). A stochastic version of a dynamic techno-economic energy model for the Netherlands was made. This model was used to quantify a CO 2 hedging strategy. Two outcomes of the climate negotiations were forecasted and probabilities were estimated for these outcomes. The results of the examples clearly showed that the calculated near term strategy differs from the results of conventional methods that do not have the capability to include uncertainty. The results of CO 2 hedging analyses indicate that it is better to take concrete action than to wait until uncertainty about CO 2 reduction targets is resolved.