Archive for May, 2009

A focus on CCS in Norway

Norway has long been the Carbon Capture & Storage (CCS) capital of the world, with its Sleipner offshore storage project and strong support for this nascent technology. This week the Norwegian Government put on a High-level Conference in Bergen, “Fighting Climate Change with Carbon Capture and Storage”. It was attended at Ministerial level and featured the likes of Dr. Rajendra Pachauri, head of the Intergovernmental Panel on Climate Change.

Frederic Hauge, President of The Bellona Foundation on the podium

Frederic Hauge, President of The Bellona Foundation on the podium



Most of the plenary content was on Thursday, focussing on the potential of CCS, experience with the technology, balancing energy needs with CO2 management globally and the necessary incentives for CCS. I was on the “Incentives” panel and gave a short presentation on that subject (see below).

In his opening remarks, the Norwegian Minister for Petroleum and Energy noted that CCS faced three particular questions, those being:

  1. How do we know the CO2 stays there?
  2. Who will be liable for the storage site in the long term?
  3. How can we be sure that spending money on CCS doesn’t crowd out technologies such as renewables?

I wasn’t quite sure why he asked these as it’s not as if CCS doesn’t face enough challenges. But I think the answers are clear – although he didn’t give them;

  1. At 3 kms below the surface in formations that have long held oil or gas, it just does [stay there]. There isn’t anywhere for the CO2 to go. Norway’s own Sleipner project has been storing one million tonnes of CO2 annually for ten years and there is no sign of it coming back.
  2. At least under the EU CCS Directive, government holds the long term liability, having been handed a closed storage site by the operator which has met a series of checks for permanence.
  3. It won’t – just to meet global energy needs and contain CO2 we are going to need to put lots of effort into all potential energy technologies.

We then heard from John Ashton, the UK Special Representative on Climate Change from the Foreign and Commonwealth Office. John made one point abundantly clear – “A lot of coal is going to burned between now and the end of this century, which means there is no credible climate strategy that does not include CCS in the coal fired power sector.”

He went on to point out that CCS isn’t some distant dream and that the issue today was not a technological one, but a cost discovery problem. Nobody really wants to be the first to do this at scale. He noted that we have had years to do this, but have now left it to the last minute to act – which means the mobilisation effort required is now huge.

He also challenged the audience with the view that if the Copenhagen deal doesn’t include a sizable CCS focus, then it isn’t a deal worth having and negotiators should be sent back to the table. In his view, the current status of CCS in the UNFCCC deliberations, particularly the brick wall it has hit with regards inclusion in the CDM, is “a scandal”.

A lot more was said during the day about progress, the status of funding and potential deployment strategies. What was abundantly clear is that despite the robust call for action from the IPCC, the UK and The Bellona Foundation [a Norwegian NGO heavily behind CCS] things are just not moving fast enough. The showcase of global action (Sleipner, Weyburn in Canada and In-Salah in Algeria) looks no different to the showcase a few years ago. Another “scandal”, given the gravity of the situation.

But maybe things are looking up for CCS. There are some real support packages appearing in the EU, Canada, Australia and the USA and both China and South Africa have promising development programmes – although neither see the rapid roll-out that is actually necessary.

My own presentation focussed on the incentive structures that are needed. In my view we need to find ways of replicating what has happened in the EU where all the necessary pieces of the puzzle are now on the table, i.e.;

  • An underlying price for CO2 must be in place
  • Recognition of the demonstration nature of the technology
    • Clear demonstration objectives in place
    • A timeline for action
    • Funding commensurate with the task at hand
    • A focus on delivery of fewer complete projects, rather than limited funding for many.
  • A robust approach to CO2 storage certification (and MRV) based on 2006 IPCC GHG Inventory Guidelines.



Going once, going twice . . . .

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As the American Clean Energy & Security Act (ACES) 2009 (i.e. Waxman-Markey) shows itself, it reveals some different thinking on emissions trading to that in Europe, notably in the area of allowance distribution.

An emissions trading system is designed to establish an alternative fiscal flow through the economy, favouring low carbon goods and services and directing investment towards low emission and emission reduction projects. It does this by establishing a price for emitting CO2 through the creation of emission allowances, with one allowance required for every tonne of CO2 emitted. A virtuous fiscal loop is created, which sees government auctioning a decreasing pool of allowances to emitters, the emitter pricing goods and services to reflect some portion of the cost of allowances (over time the emitter will only be able to pass through the CO2 cost of the best performer, as in any competitive market) and the consumers using their purchasing power to favour lower carbon footprint products, supported by a return of the government auction revenue through lower taxes. This return compensates for the overall general cost increase of most goods and services as a result of the CO2 price. The end result of this process is that the more carbon intense products become uncompetitive over time and emissions in the economy decline.

For example, in the building industry cement and steel are both carbon intensive products to manufacture. In the new cap-and-trade world the price of cement will again be set by the new lowest cost operator (but taking into account the CO2 price), but it may also turn out that steel becomes relatively more attractive to the architect as a building material, so there is also an overall drop in the use of cement – or vice versa. Of course the declining industry might find it can install carbon capture and storage and thus lower the price of its product, changing the competitive balance again.

So that’s the theory, but practice is turning out to be very different. Auctioning of allowances has become a political football, and as in the game itself, American and European varieties are very different.

Rule number 1 says that if you can pass the CO2 price through the value chain to the consumer, i.e. higher prices, then you must buy the allowances that you need. The flip side of this is that if you cannot pass some portion of the CO2 price along, for example if market prices are set by competitors not subject to a CO2 price for their emissions (e.g. importers), then the government will give you some number of allowances for free – at least until the imported product also falls under a CO2 pricing regime.

Rule number 2 relates to the value of the allowances themselves. If the government auctions allowances what should happen to the money? This is where the EU and US have diverged markedly. Although the EU Trading Directive says that some of the auction revenue should be used for clean technology development, the reality is that most EU governments will channel this money through their treasuries and then make annual spending decisions as part of the normal budget process. By contrast, ACES makes many of those decisions up front and distributes allowance value to states for energy efficiency measures, to low income consumers, to utilities (to protect consumers from rate hikes) and to trade exposed industries or instructs the government how to spend the auction revenue – e.g. international assistance to address deforestation.

Whilst these may be laudable uses of the money and in reality are perhaps necessary to ensure passage of the bill, arguably this process undermines the performance of the emissions trading system. For example, allocating for free with the express intent of limiting price-pass-through to the consumer (so as to protect them) means that one of the mechanisms which makes emissions trading work is removed, namely the increasing price of carbon intense goods and services (which in turn drives down demand for that service). This means that although the cap remains the same, the lowest cost outcome to achieve it is not delivered, as it may have been the case that the most cost effective route to emisssion reduction was to use less, rather than to install a more expensive upstream mitigation project.

A second issue that arises is that we may not be able to judge today how government money is most efficiently spent to address climate change in 10 or 15 years time. That is why there is a budget process each year. For example, ACES specifies that some money should be reserved for adaptation. It is certainly true that adaptation will be necessary and money will be required, but in a given fiscal year it may also be far from clear how that should be spent- but it will be spent because it is there.

Spending auction revenue on clean energy deployment initiatives may not be the most efficient way forward either. After all, the reason we have installed a cap-and-trade system in the first place is to let the market make those decisions, so why second guess it.

As ACES develops in the USA, these are some of the issues that are going to have to be grappled with. The revenue available from allowances is substantial and it is true that it may be much easier to fund certain critical initiatves via the allowance route than the annual budget process. A good example of this is the set aside of 300 million allowances in the EU expressly for funding the EU CCS Demonstration Porgramme (10-12 large scale projects). But in the process of trying to satisfy all parties, we should be careful not to undermine the very instrument we are putting in place to achieve the objective of reducing emissions at lowest cost to the economy.

Help is now at hand – perhaps?

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I mentioned in an earlier post that there are really only four things that can be done to reduce emissions from energy production, namely – using less, switching to renewables, switching to nuclear and utilising carbon capture and storage (CCS) in conjunction with fossil fuels.

The one we know least about is CCS, although much of the technology already exists. For example, if we start with coal as the fossil fuel, CCS may be easier if we gasify the coal first to make syngas (H2 + CO), which can then be chemically shifted and physically separated to give hydrogen and CO2. The hydrogen is then used to generate electricity [or the syngas can be sent directly to a gas turbine producing CO2 as a byproduct] and the CO2 is compressed to liquid form and pumped into storage sites, which could be two or more kilometres below the surface. Much of this technology exists today in South Africa, where coal is gasified as a precursor to liquid hydrocarbon manufacture for transport. The SASOL Secunda facility processes some 15+ million tonnes of coal per annum, much more than a 2 GW coal fired power station, so the scale is possible. Most of the CO2 is vented to atmosphere in nearly pure form – i.e. it is close to storage ready. But there is no CO2 storage happening anywhere on this scale – the best example today is in Norway where some one million tonnes of CO2 is stored annually in the Sleipner project.

So integrated large-scale CCS still needs to be demonstrated and governments around the world are finally putting together significant funding packages to get this to happen. Three significant funding packages are now on the table;

  1. Phase III of the EU-ETS sets aside 300 million allowances for the EU 10-12 project CCS demonstration programme. Depending on the prevailing CO2 price, this could be worth some EUR 6-9 billion.
  2. The Province of Alberta and the Federal Government of Canada have established funds totalling some CAN$ 3 billion for the large scale demonstration of CCS.
  3. This week the Australian Government announced AU$ 2 billion in funding for large scale demonstration projects.

This week also saw the American Clean Energy and Security Act of 2009 presented to the House of Representatives. In it there is a provision to collect US$ 1 billion per annum for 10 years from electricity suppliers for the demonstration of large scale CCS through five major projects. The Act also provides some 1 billion free allowances to underpin the cost of CCS deployment through 2014-2020, in lieu of the revenue that would otherwise be collected if the CO2 price is passed through in the cost of electricity (which the Act does not allow for – more on that another day).

So it appears that CCS is on its way. Or is it? In reality there still exists something of a chasm between the funds that are now on the table and the actual delivery of real projects. First will be the selection of projects – a process that could be very protracted. Second, there will be the temptation to spread the incentive widely, rather than a laser like focus on bringing a smaller number of projects rapidly to completion. The latter is essential, but it means very significant funding for single projects, which means that not all states, provinces, countries, sectors or technologies can be satisfied early on.

But even if funding decisions are focussed and rapid and therefore projects are accelerated, timescales will be challenging. The first generation of CCS facilities need to be operating by 2014, but that may not be possible. Going back to the SASOL technology above, the following comes from a posting on the SASOL website on October 22nd 2007:

Sasol said the order to construct a Sasol Advanced Synthol reactor, placed with the Hitachi Zosen Mechanical Corporation, will enable the company to increase capacity at its Secunda plant from the current level of 150 000 barrels per day by 20% to 180 000 barrels per day by 2015. . . Synthol reactors use either gas or coal as feedstock to produce synthesis gas . . . .  The reactor will be about 12 stories (38 metres) tall, eight meters in diameter and will weigh about 867 tons.

Whilst I don’t know the full context of this announcement, it does indicate that the timelines are long for large scale advanced technologies such as coal gasification. Shell has experience in this area as well, as gasification (of natural gas) is at the heart of our Pearl GTL project in Qatar. Again, timelines are long. Final investment decisions were announced in July 2006, with production anticipated to start in 2010. But in July 2006 much of the engineering design had been done, the decision was then the final trigger for firm equipment orders.

So we might see big CCS [linked to a coal fired power station] up and running in 2015. But it may not be in China or India, where arguably some of the early demonstartions need to be. The big funding announcements are so far focussed on developed countries with carbon markets either in place or on the drawing boards. Looking at developing countries, there is no mechanism for providing the CO2 price incentive (and little positive progress to have CCS included in the CDM) and no major clean technology funds ready to put down the billions that CCS will need for a demonstration programme of (say) 10 projects in China for example.

Before 2015 there is a good possibility of CCS projects linked to exisitng sources of nearly pure CO2, such as from exisitng gasifiers. Some of these projects may be quite large and will help build early industrial scale experience.

But the numbers struggle to add up. 20% or 30% reductions by 2020 are being asked for (and some say it needs to be 40% for developed countries by 2020), but not one big coal based CCS facility may be up and running until 2015. Yet CCS is likely to be an integral part of the solution to reducing emissions and I would argue is necessary just to meet the ambitious 2020 targets.

The USA steps in

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This week has seen the United States table draft negotiating text to the United Nations in the lead up to Copenhagen, or more formally “United States Input to the Negotiating Text for Consideration at the 6th Session of the AWG-LCA“. I should say that this text appears very preliminary at the moment, but it does recognise the key elements that most parties are now discussing.


Importantly, the text highlights the need for assistance to developing countries, with the paragraph;

The development of low-carbon strategies and the implementation of mitigation actions of developing country Parties will, as appropriate, be supported by financing, technology, and capacity-building, as set forth in Section 4 and Appendix 3.

At this early stage though, Section 4 and Appendix 3 don’t really contain much. The US negotiating team are also seeking input, particularly from business, given the expectation that private finance and project investment will play a significant role.

This then brings me to some ideas in this area. There are some useful lessons in the EU that can be applied more broadly. Rather than simply relying on the CO2 market to deliver reductions, the EU has also focussed on certain classes of technology and structured programmes and targets to promote and develop them. This is most apparent for carbon capture and storage where the EU has set a strong agenda;

  • Established a 10-12 project demonstration programme, with an incentive structure that stretches through to 2015.
  • Ensured that the CO2 market recognises CCS as a viable mitigation technology.
  • Implemented an incentive structure to augment the financing provided by the carbon market (the use of 300 million allowances from the ETS New Entrant Reserve). This additional funding is in recognition of the higher cost demonstration stage that now faces CCS as a new technology.

Whether it is CCS or some other technology area, the idea of establishing specific programmes of activity, setting timelines and ensuring adequate funding needs to make its way into the international agreement.

One idea which has been put forward by the World Business Council for Sustainable Development, repackages the original notion of sectoral agreements. They have proposed a large-scale sector-based approach introduced into the framework. The approach would give rise to agreements, each negotiated for a specific sector by a limited number of parties (i.e. governments), as “satellites” to the main agreement, but utilising the infrastructure (crediting mechanisms, clean technology funds, MRV etc.) offered by the overall framework. Each agreement would have a specific purpose and would operate by encouraging wide spread business-led project development in the target countries, incentivised by the mechanisms and the availability of targeted funding and financing. The projects would typically result in the introduction of infrastructure and new technologies into developing countries together with the capacity for ongoing operation and future expansion.

This then puts developing countries on a pathway towards substantial future action. Ideally, each agreement would lead to the sector within the developing country involved to then adopt a long term binding mitigation target. Importantly, the adoption of a target in a developing country is then specifically linked with the necessary funding and capacity building such that those countries can then realistically manage CO2 emissions going forward.

Such agreements would be structured as follows:

  • Each represents a quantifiable and manageable mitigation or adaptation action plan. Unlike developed economies that have the capacity for structures such as economy-wide “cap-and-trade” systems, a more clearly definable project based programme could be initially used to tackle developing country emissions.
  • Each would be negotiated separately, typically by a limited number of parties (e.g. parties to an agreement on emissions from coal fired power stations might include China, India and South Africa as those nations taking specific action and the USA, Japan, the EU and Australia as those gearing their emissions trading systems to accept credits as a funding mechanism) as a “satellite” to the main agreement.
  • Each agreement would have a clear purpose and end point. The scope would be clearly defined and the objectives would be agreed upfront.
  • Each agreement would be able to draw on the supporting “cocoon” for funding, such as the creation of credits (offsets) through a project mechanism, MRV capacity and so on.
  • Each agreement should include the eventual implementation of a long term binding target for the sector or sectors in question.


The approach has broad application and could be extended into areas such as avoided deforestation and afforestation (i.e. as envisaged under REDD).






Politics at play in Australia

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This week we have seen the announcement by the Australian Government that the emissions trading scheme (CPRS) will be delayed by 12 months, along with some other changes in the policy framework. This comes as the government finds itself with the challenge of building the necessary political support in the Australian Parliament, particularly the Senate, where it does not have a majority.

Many others will write about the politics, so I will stay out of this and focus on the implications of this delay. To do that, it is helpful to look at the Shell Energy Scenarios, which were released about a year ago.

Of the two futures set out, Blueprints (the other scenario being Scramble) showed a pathway forward that results in real and substantive global action on climate change. Despite this, the scenario falls short of the reductions that scientists now tell us are needed by 2050 – a 50% reduction against 1990. This is largely because of the time it takes to bring global emissions under control, resulting in an emissions peak some ten years too late (~2028 vs. 2018). Once the peak is passed though, Blueprints sees very rapid reductions.

The message from Blueprints is that what happens over the next few years is critical. A great deal of analysis went into the early years of the scenarios, the societal trends that would underpin change and of course the legacy emissions base that continues to be expanded upon every day – and that is a 30-50 year legacy. Delay now has serious impacts later – to the extent that we end up needing an infeasible reduction pathway post the peak, should that peak drift out. This finding was backed up by the McKinsey work on global abatement, which came to the conclusion that it is still just techncally feasible to deliver the 50% reduction, but with no scope for slippage.

Whilst it should be noted that the Australian Government has proposed a more challenging target for 2020, it is the delay that is problematic. Delays have a habit of compounding, as others see that the urgency is reduced.

To add to the issue, Australia is setting out as a leader in Carbon Capture and Storage – probably a must for its future given the abundance of coal. If this should also suffer a year or more delay as a result of a slower start to the development of the CO2 price that it needs, that may also lead to delay globally. A calculation that came from the model behind the Shell Scenarios indicated that for every year we delay the global roll-out of CCS, so we commit ourselves to a 1 ppm higher CO2 stablilization by the end of this century.