Archive for April, 2009

Virtually in New Zealand

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Late last night by video conference from the basement of Shell Centre in London, with colleagues in New Zealand on hand locally, I spoke before the Parliamentary Select Committee that is currently reviewing the New Zealand Emissions Trading System.  This review comes following the passage of the legislation, but with a new government now in power. I am hopeful that this will be seen as an opportunity to tidy up a few issues, rather than start again – now is not the time for that to happen.

You may be interested in reading my speaking notes – it is pretty much what I said, although not word for word:

  • As a signatory of the UNFCCC and the Kyoto Protocol New Zealand has effectively made a long-term commitment to reduce emissions. This changes the operation of the economy and the investment opportunities available in New Zealand.
  • This change is real – technologies such as carbon capture and storage will feature in New Zealand’s energy future and must be considered by business, but today the tools to manage that change are not available to business in New Zealand.
  • The principal economic tool is a price for carbon dioxide emissions. Without a price on carbon, the targets that New Zealand now faces cannot be economically delivered.
  • A price for carbon is best delivered through the implementation of an emissions trading system, such as the one under review by this committee. Shell believes that emissions trading is the most efficient and effective tool for cascading the obligation of the New Zealand government into the broader economy.
  • Emissions trading is a policy instrument specifically designed to deliver the environmental objective that the government is seeking. Business prefers this approach because it delivers the outcome at lowest cost to the economy, with flexibility for business and offers the necessary regulatory certainty within which future investments can be made.
  • Today in the EU, where emissions trading is a reality and targets have been set through to 2020, business is responding to the new economic reality of a CO2 price. Let me give you some real examples:
    • In Shell we have developed a CO2 abatement curve for every installation in the EU and we are actively progressing a CCS project pipeline, screening potential projects and undertaking feasibility studies.
    • The electricity market is now CO2 optimised on a daily basis through fuel switching.
  • The proposed design of the NZ ETS is right for an economy the size of New Zealand in that it draws on the trading flexibility offered by the Kyoto Protocol and effectively transfers this to the business participants. Any other design would probably be overly restrictive for this economy. In utilising the Kyoto design, the ETS will allow NZ to fully link with other systems, such as the CPRS that is being designed in Australia and the EU ETS already in operation in the European Union.
  • One of the key design aspects of an ETS is the mechanism for the distribution of allowances into the economy. Shell supports a transition from free allocation of allowances to 100% auctioning in line with the progressive pass through of the carbon price into the goods and services provided to the consumer. This transition may be more rapid for some sectors than others. Any distribution of allowances that does not follow this approach results in an inequitable distribution of allowance value (capital) within the economy.
  • New Zealand is very dependent on both import and export markets, often with economies that do not currently have a price for carbon. This means that when exporting into an international market it is not possible to pass through the CO2 price. Similarly, when importing goods from such markets, New Zealand business may be at a competitive disadvantage due to the need to buy allowances for emissions associated with the manufacture of such goods. These imbalances can be corrected by continued free allocation of allowances until the imbalance no longer exists.
  • The ETS should not be the only element of the necessary policy framework to address climate change. There is another important dimension to this issue, that being the development of technology. As an example, CCS, although understood and well researched, has not been demonstrated at scale anywhere in the world. The EU has recognised this and in addition to the ETS, has put significant stimulus into the demonstration phase of this technology – the amount could be as high as €10 billion for 12 big projects. New Zealand also needs to support the large-scale demonstration of key low carbon technologies.
  • Secondly, an ETS may still fail to deliver reductions in some sectors. Shell believes this instrument is best suited for the power generation and industrial sectors, with a more standards based approach in the transport and buildings sectors – for example the use of stringent building codes and energy efficiency targets for vehicles.
  • Shell supports the proposed emissions trading scheme. But there is room for improvement – it is of particular importance to address the issue of free allocation of allowances. The current proposal makes certain assumption about trade exposure and reduction opportunities. A more quantitative approach should be implemented.

Offsets and Copenhagen . . .

As this year unfolds, most industry groups are turning their mind towards Copenhagen and the position they should take and they are running seminars for their members to help them understand what is happening. In addition, as the US starts to draw up the final (!!??) design of its cap-and-trade system, it cannot be oblivious to the shape of a future international agreement.

I was involved directly and indirectly in all such aspects this week. On Thursday I presented the Shell view of the key elements of the design required from Copenhagen to VNO-NCW (The Confederation of Netherlands Industry and Employers), on Friday I was at a meeting of the European Round Table of Industrialists in which the position that organisation should adopt for Copenhagen was discussed. Again on Friday a colleague in Shell Trading presented our position on cap-and-trade offsets at a Pew Center organised seminar on Capitol Hill.

The common link here that warrants further discussion (in this and future postings) is the role of international offsets in domestic cap-and-trade systems. This might seem somewhat arcane, but the implementation of this is pivotal to a successful international agreement. So first of all, a paragraph of background (some may wish to skip this bit in italics).

An offset in a cap-and-trade system is carbon instrument that can be obtained outside the capped sectors and used for compliance under the cap. These are typically generated by executing, outside the cap, a project that reduces emissions and having that reduction certified as valid. The best example of this practice is the Clean Development Mechanism (CDM) of the Kyoto Protocol. The CDM allows emission-reduction (or emission removal) projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2. These CERs can be traded and sold, and used by industrialized countries to meet a part of their emission reduction targets under the protocol.

There are two reasons that I can see for having offsets;

  1. As a mechanism to contain costs within the cap-and-trade system by offering an additional supply of compliance instruments (“credits“) over and above those issued by the government.
  2. As a mechanism to project the cost of carbon that exists within the cap-and-trade system to sectors outside the cap, such that they see it as an opportunity on which to act. The offset is effectively a proxy for the price of carbon that would exist had that sector also been covered –  possibly as a pre-cursor to real cap-and-trade being implemented.

Whilst I find that most people agree on this, divergence of opinion then occurs. Some see offsets as a route to low-cost reductions that aren’t available within the cap-and-trade system. At the same time, others complain about the ease with which reductions can be generated through CDM projects and then imported to Europe (into the EU-ETS) at higher prevailing prices, effectively arbitraging the system. So why should we have international offsets and how should the international offset system be designed?

First of all, let’s not forget that cap-and-trade is designed to put a market price on CO2 emissions and to therefore incentivise projects that reduce emissions. If we look at this from the perspecive of an abatement curve, the cap-and-trade system is designed to operate on the left hand side where a price for CO2 is actually needed – such as for carbon capture and storage, which would never be implemented without a price for CO2. Looking at the image below, cap-and-trade is designed for Zone B. 

 

Whilst energy needs (and hence emissions) can be reduced through Zone A type projects, they shouldn’t need a cap-and-trade system to encourage them to happen. Other policies might be needed to tease them out, but not cap-and-trade. Yet many projects being considered as potential for future offsets exist in this region of the abatement curve. It isn’t in the interests of a solid international agreement on climate change to simply encourage projects in non-capped sectors / countries to generate credits in Zone A for compliance in Zone B.

Rather, the international agreement should encourage all countries to act on Zone A of their own accord, since this is in the national interest anyway as it typically means energy savings. In addition, those countries without absolute reduction targets are also incentivised to operate in Zone B through an offset or project mechanism. This then generates an additional supply of compliance units for countries with absolute targets and begins the process of introducing specific low emission technologies into economies without targets in preparation for a future with targets.

Although this is generally the idea behind the CDM, it hasn’t quite functioned like this in practice, but I would argue that just having it has generated much experience and useful learning about offsets. The next generation of CDM will have to operate on a much larger scale, but also sit squarely in Zone B of the abatement curve.

Come on Aussies, come on

From a standing position some distance behind the start line, Australia has made remarkable progress in the “race” to implement a price for CO2 within the economy, driven by emissions trading as the principal policy instrument. Australia may well come in a creditable 2nd, given that New Zealand has seemingly slipped on the last obstacle and the US is just powering out of the blocks.

In the space of 18 months, we have seen the Garnaut Report, a Green paper, a White paper and now the Exposure Draft of the proposed legislation. But now the going is getting tough. The Australian Senate, in which the government does not command a majority, is holding an inquiry into the legislation and reviewing the very concepts on which it is built. What should Australia commit to? Should it use emissions trading? . . . . and so on.

No climate change legislation will ever be perfect, but what has been proposed in Australia looks pretty good. Like the EU-ETS it is bound to need revision at some point, but what is on the table today will set the ball rolling and most importantly will institutionalise carbon management across the economy. That is the first and most important step and it will never happen through voluntary action or mandatory reporting alone.  Rather, a real target that creates a scarcity (of allowances versus emissions) must come into play, such that market forces and competition begin to do their job.

The Senate Committee has called for submissions from the public and Shell has responded, as it has at each stage of the process when given the opportunity. I have been working with colleagues in Shell Australia on drafting our response, which you can access here (shell-australia-april-2009-senate-submission).

The submission covers three main areas;

  1. The benefits and advantages of an emissions trading approach
  2. The need for a comprehensive policy framework which goes beyond emissions trading.
  3. The need to protect emissions intensive trade exposed industries until such time as CO2 management has become a more global undertaking.

If you have followed this blog over recent months you may even recognise some of my text that now appears in the submission – particularly with regards the advantages of an emissions trading approach.

For business, the last point is an important one and inevitably is key to the political trade-offs that help build support for carbon management legislation. That has certainly been the case in the EU. From the perspective of an oil and gas company operating in Australia, two key areas are of concern;

  1. Australia has a number of relatively small refineries that compete with world-scale refineries in Singapore. When Australia was in the happy position of having all these refineries tied to pipelines with indigenous crude, the status quo was relatively easy to defend. Without the refineries crude would be exported and product would be imported, so costs all around.  But crude production near the refineries has fallen, so an alternative route forward could be to just import more product and shut some refining capacity, rather than importing the crude.  The refining industry in Australia doesn’t want that, so maintaining current capacity means watching the local costs against those in Singapore. The need to purchase CO2 allowances could tip that balance if implemented in one location but not the other.
  2. In the LNG business, Australia will be the only exporter in the region with the prospect of an economy wide CO2 price requiring additional cost to be added to each tonne of LNG against the purchase of allowances. But this cost is largely unrecoverable in the Pacific market as the principal competitors (Brunei, Qatar, Oman, Indonesia) don’t incur it. Whilst this won’t put Australian LNG out of business or anything dire like that, it does tip the playing field in the other direction, at least until CO2 management becomes more widespread in the region.

Unfortunately criticism of the Australian system is coming from all sides. Many say it lacks ambition, with the government target through to 2020 somewhere in the range 5 to 15% relative to 2000. So we are back to the tricky issue of targets and baselines, which I have written much on in recent weeks. If we assume Australia settles on 10%, at least from an energy CO2 perspective, this is about the same as a 20% reduction from recent (2006 IEA) levels. So that puts it on a par with the USA and the EU, but that issue is far from settled with the EU still on its 1990 high horse.

Could Australia reduce emissions by 20% in just 11 years? If we assume that the rest of the economy can keep emissions in check over that period (i.e. no rises, so not hugely ambitious), then within the energy sector this could be achieved by fitting out 10 big coal fired power stations with carbon capture and storage. This means converting most of the coal fired power stations in New South Wales, or alternatively all of the stations in Victoria and South Australia and still coming up a bit short. This would be a very big undertaking, but perhaps not impossible as many of these stations power Melbourne or Sydney and operate in clusters – so there is a potential economy of scale in terms of CO2 transport, storage and monitoring.

On the other hand, 10 big CCS projects in just a few years is about the same as the entire EU CCS Demonstration Programme – and that has an economy of nearly 500 million people to pay for it. So once again we are left with a hugely challenging undertaking coupled with a dose of realism in terms of what might come to pass.

Do oil and wind mix?

There has been quite some discussion in the press this week about the ability of the UK to meet its 2020 renewable energy targets, with a particular focus on the lack of progress in offshore wind. This highlights again the recent announcement by Shell that our main  “low carbon” focus will be in the areas of biofuel and carbon capture and storage (CCS) and not in areas such as wind and solar.

That announcement (and our pullout from the London Array offshore wind project last year) resulted in quite a bit of criticism – and a subject I almost always get questioned on when I speak at an event. As you have read in my posts, there is no question that wind and solar will be important in our global energy future, as will nuclear, biofuels and carbon capture and storage. We will need all the energy we can get to meet growing demand. In the energy space, there are in fact only four things the world can do to manage CO2:

  1. Use nuclear for electricity.
  2. Use renewable energy (winds, solar, bio, hydro, geotherrmal, wave, tidal).
  3. Use CCS in conjunction with fossil fuels.
  4. Use less energy for a given GDP output.

The flip side of this is that society has to do all of them, in very large doses, starting now,  not just to manage CO2 but also to deliver sufficient energy at reasonable cost to meet the needs of a growing global economy.

Oil companies are already big players in the global energy market, but they don’t typically sell electricity. They do supply gas and oil to the electricity sector, but their focus is much more on transport and chemical feedstock. Yet there is an expectation by many that oil companies such as Shell should rapidly transition to technologies like wind and solar. But both are outside their core competencies in terms of technology, which means the companies may struggle to add value and compete against others that can bring significant expertise to the table (e.g. Japanese electronics companies in solar).

Yet Shell and others must move forward as the new low CO2 emission economies are created. This then brings us back to areas where the oil industry may be more successful at adding value. Collectively, we are good at geology, drilling, gas handling, gas separation and compression, gas treatment, large scale chemistry and the distribution of flammable liquid and gas products. These are all technologies that sit behind CCS and bio as an energy source – important components in the short list of options we actually have.

In particular, CCS needs gasification (i.e. large scale chemistry that turns the energy feedstock into synthesis gas – carbon monoxide plus hydrogen), gas handling (both carbon dioxide and hydrogen), gas separation, gas compression, geology, drilling and well monitoring. The use of bio matter for energy may also utilise gasification, but also a range of other chemical processes and of course large scale flammable liquid distribution.

Perhaps the irony in all this is that as society moves to a more electricity based low CO2 emissions world, the oil and gas industry could end up, at least in my view, competing with the electricity sector anyway, but I don’t think solar and wind will be the pathway that takes us there. As gasification of coal and other energy feedstocks becomes more commonplace in power generation with CCS, the power companies will find themsleves handling synthesis gas and hydrogen. Synthesis gas can be a primary feedstock for all manner of chemical products, including synthetic transport fuels and hydrogen will almost certainly play a role as an energy carrier somewhere in the economy. The power generators will also be selling electricity directly to transport consumers for their plug-in hybrid cars. But the oil and gas industry won’t be just sitting on its hands whilst this happens (well I hope not). Not only will many of the technologies needed in the power sector come from the oil and gas industry, but the refinery of the future might look very much like a power station, taking in a range of energy feedstocks, gasifying them, using the syngas to produce certain liquid products such as synthetic fuels, storing CO2 underground, producing hydrogen . . . . and generating electricity. Need I say more.

Health check in Bonn

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The first of a series of United Nations Framework Convention on Climate Change (UNFCCC) meetings in the lead-up to Copenhagen took place in Bonn over the last ten days. The next meeting will also be in Bonn in June. In total there will now be five meetings prior to Copenhagen itself.

There are some observers who spend every waking moment over the whole period of a meeting attending every workshop (but many run in parallel), furiously taking notes and becoming completely absorbed within the process. I am not one of them, but if that is the sort of report you are looking for then I can highly recommend the Earth Negotiations Bulletin. I spent just a day in Bonn this time although one colleague was there for quite a bit longer. Nevertheless, with some targeted meetings and attendance at one or two of the formal gatherings it is possible to get a feeling for what is going on. Reading some of the excellent summaries on ENB helps as well.

Taking the pulse of the UNFCCC negotiations isn’t easy. To start with, it’s difficult to know exactly where to find it but when you do, the diagnosis is weak but racing. The first question to ask is “Where are the actual negotiations taking place?“. Whilst country after country will stand and make declarations of some sort or other in the formal meetings, outside of this some important bilateral meetings are underway. These discussions are perhaps paving the way for the difficult deals that have to be done, such as between the USA, the EU and China. But equally, these deals will probably not be consumated by the people attending this UNFCCC meeting – more powerful hands are going to have shake on these. These are the deals that will set the stage for the next 10-20 years;

  • What reductions will developed countries make and by when? See my previous posting for some thoughts on this.
  • How long before big developing countries start adopting real targets?
  • How much help (i.e. money) will developed countries have to put on the table to encourage the rapid global take-up of big play technologies such as carbon capture and storage?
  • What is fair and equitable when it comes to responsibility for emissions?
  • . . . . and a big one – how to combine the dual track discussions going on – Track 1 looking at the next round of commitments under the Kyoto Protcol, which the USA cannot participate in (as they are not a signatory) and Track 2 looking at the nature of the long term action that needs to take place, which the USA is now very much re-engaged in. Having the USA sign the Kyoto Protocol is almost certainly a non-starter (simply not deliverable domestically), but chucking the whole thing in the bin would undo years of work that needs to move forward – not in emissions reduction per se, but in the global institutions needed to support large scale reductions.

All this isn’t to say that meetings such as the one that has just finished in Bonn are a waste. They are not. Slowly but surely the infrastructure around which the big deal must operate is being agreed upon. The delegates are working hard on this, putting in long hours, hence the racing pulse.

So where to from here? The meeting in June will see the first real negotiating text put on the table, so the pace will quicken and the stakes will be raised even higher.

By year end we will have had a G8 meeting and possibly a second G20 meeting (mentioned by President Obama in his closing address at the G20 last week). Gordon Brown made a clear reference to a comprehensive deal in Copenhagen in his G20 statement. The Major Economies Meeting, initially a Bush side-show on climate change will almost certainly have new life breathed into it under Obama. This much smaller group of countries represent about 80% of global emissions, so the right people will be in the room. The next meeting is scheduled for April 27-28 in Washington.

So it remains a wait and see game. But if the G20 outcome is any guide, we might just have a set of leaders at the table at this particular moment in time who can pull this off.

Let’s hope so!

I will be in Bonn for part of this week where the first round of 2009 talks leading up to Copenhagen are taking place. So far, not much seems to be happening there, despite a week of talks. Whilst it is probably true that Copenhagen might be a bit like the G20 – i.e. general anticipation of not much then dramatic diplomacy at the 11th hour – some positions that are being discussed in the lead up are far from helpful.

Most notable is the expectation of emissions cuts that developing countries want to see developed countries make. I pulled the following sets of quotes from various media outlets as they seem to represent this line of discussion in Bonn against the stated aim of the US to bring 2020 emissions back to 1990 levels:

“We believe that by 2020 the [developed nations] should reduce their emissions by at least 40 percent below 1990 levels,” says Chinese delegate Xu Huaqing.

“It is not the point in time in 2020 that matters – it is a long-term trajectory against which the science measures cumulative emissions,” says Jonathan Pershing, head of the US delegation. “The president has also announced his intent to pursue an 80% reduction by 2050.”

Germany’s environment minister Sigmar Gabriel told a Berlin radio station that, “even under Barack Obama, the US has insufficient climate protection goals, at least as far as the international community is concerned”.

Perhaps it is time for a reality check on what the situation in the US actually is. I started discussing this back in February, but I think it is worth digging a little deeper on what the USA would actually have to do to reduce emissions to 1990 levels by 2020.

First of all some assumptions and data:

1. Population increases from 300 to 341 million (US Census Bureau projection)

2. Assume a lowish GDP improvement, say 1.5% p.a. from 2006 (most recent IEA data is for 2006 so that is the starting point) to 2020, given the current deep recession.

3. 1990 CO2 energy related emissions were 4.8 billion tonnes. Let’s assume this is the target for 2020 which means that non-energy CO2 and other GHG emissions must also drop by the same amount. In 2006 US energy CO2 emissions were 5.8 billion tonnes, or a 21% increase from 1990.

To achieve the target the US has slightly over 10 years to do the following:

  • Increase the annual improvement in energy efficiency (energy/GDP) to about 2.5% p.a. This is delivered by a 6 mpg jump in on-the-road vehicle efficiency (i.e. all vehicles, not just the new ones), a 10% drop in total residential energy demand despite a >10% rise in population and a 6% drop in industrial energy use. I have assumed that the commercial sector energy demand rises. Power generation efficiency must also improve.
  • Restart the nuclear industry and achieve a net increase in capacity of about 15 GW – i.e. no drop off in capacity as older stations are retired.
  • Install ~40,000 5 MW wind turbines, that’s about 10 every day. Each of these turbines is over 100 metres high.
  • Fit (or build new) 60 big coal fired power stations with carbon dioxide capture and storage. Not one large scale commercial plant exists today. It means the first round of demonstration facilities (say 10-20 units) must be agreed on in 2010 so that construction can start.
  • Install 30 GW of large scale solar, both photovoltaic and solar-thermal.
  • Shift the vehicle fuel pool to 10% advanced biofuels with a near-zero carbon footprint.

This is quite a list, but possibly not beyond the capacity of the USA to implement – although time is not on its side. But imagine a 40% reduction??

An alternative pathway forward is to spread much of the effort globally, through a project approach which generates carbon credits for use as offsets in the USA.  But this may be even more difficult to achieve, given the reluctance of a US Congress focussed on recovery to “export jobs”.

So the discussions will not be easy in Bonn, or beyond. Hopefully I can gain some further insight during my visit.

A final word and video on Antarctica . . .

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Getting back to work this week hasn’t been easy – too much on my mind, too much to contemplate about the trip. But Bonn awaits early next week as I head off to meet with some of the national delegations at the first formal meeting of 2009 leading to Copenhagen. More on that in subsequent posts.

This video was shot by Kyle O’Donoghue for 2041 and it brilliantly captures the trip in just a few minutes.


2041 Expedition to Antarctica from David Hone on Vimeo.

Finally, if you are interested in seeing where exactly we went, you can download a Google Earth kmz file and have a look. It doesn’t show the path of the ship, just all the land stops and my meanderings – as it was my Garmin GPS watch that collected it all.