Archive for June, 2009

The MIT Joint Program on the Science & Policy of Global Change have long been advocates of cap-and-trade as an appropriate policy instrument to drive a reduction in national emissions. They also provide valuable insight into the economic impacts of such an instrument through the economic modelling tools they have at their disposal.

As Waxman-Markey races through Congress and might even become legislation this year, both sides of the debate are arming themselves with data to defend or attack the proposal. In recent weeks MIT have found themselves in the middle of this foray as their findings have been somewhat misquoted by those not in favour of a cap-and-trade approach in the USA.

In Rome this week the Joint Program is holding its 29th Forum and I am here for Shell as one of the program sponsors.  I have had the chance to interview the originator of the MIT study, Dr. John Reilly, Associate Director for Research.

An accumulating problem

The actual reason I went to Bonn last week was to participate in a side event run by The Oxford Institute for Energy Studies. They put forward the view that the real issue at hand is not the emissions in 2020 or 2050 or any other year, but the total additional GHG carrying capacity of the atmosphere in relation to a temperature objective. The full story on this appears in the 30th April edition of Nature.

To limit temperature rise to 2 deg.C, the number is about one trillion tonnes of Carbon, or 3.67 trilllion tonnes of CO2 (equivalent). That number is even smaller for a low risk (of exceeding 2 deg.C) scenario. The problem is, we have already used up about half this space, so we have 1.8 trillion tonnes of space left. Given our current usage patterns, 1.8 trillion tonnes doesn’t go far. I did some quick calculations and came up with the following;

  • Even without accounting for extra bio-CO2 being released into the atmosphere through landuse change or the impact of the non-CO2 gases, we have to be done with fossil fuels globally by about 2060. One interesting contributer to this which I assume for my calculation continues unabated through the whole century, is cement. The manufacturing process releases fossil carbon into the atmosphere as the calcium carbonate is processed. The cement industry is growing rapidly as developing country cities rise from the forests and plains. The result is that over the next hundred years that one industry uses up at least one hundred billion tonnes of the available space.
  • By contrast, if we can apply carbon capture and storage (CCS) to all our coal use by 2050, oil and gas can continue to support our energy needs until the end of century (albeit declining from 2020), which approximates to the complete use of current proven reserves (as per the BP Statistical Review of World Energy) – and of course there is still the cement.

The point here is that looking at the total space available is very instructive. It will help guide the policy process and clarify thinking on energy use and the application of technologies such as CCS. It also makes us aware of the cummulative impact of all the other things we do.

But again, there is no reference to anything like this in the negotiating text. The Oxford team have set themselves the task of making this happen, although given all the competing interests in the negotiating process, it represents a formidable challenge. I hope they succeed.

In search of missing text

At the end of last week I was in Bonn, where another round of UNFCCC negotiations was taking place in the lead-up to Copenhagen. I happened to catch the Greenpeace show, which involved the sounding of an incredibly loud air-raid type siren from within a locked steel cage on the back of a truck. The German police didn’t take kindly to this and proceeded to cut them out.


But the point made by Greenpeace isn’t without merit. My own “alarm moment” comes from looking at the text which the negotiators are deliberating over. Although much was apparently added during the Bonn talks, the starting point (the AWG-LCA text) says little about how to actually address this problem, but rather presents fifty three pages of arcane language about process. It talks of “appropriate action”, but doesen’t define what this might actually entail, other than in the loosest terms. Take a technology such as carbon capture and geological storage – it doesn’t even get a mention. The word “renewable” appears once, “nuclear” doesn’t appear at all and “energy efficiency” twice. Even the notion of a carbon market to drive large scale deployment is barely touched upon.

Short of a document which clearly spells out a forward emissons profile for every country, perhaps it is time to replace abstraction with clarity and focus. There are five, and only five things we can do to address the mitigation side of climate change. We have to do all of them, we have to do them at huge scale and we have to do them very quickly. They are;

  • Using energy much more efficiently;
  • Increasing the use of renewable and nuclear sources of energy;
  • Rapidly commercialising and deploying carbon dioxide capture and geological storage in tandem with the use of fossil fuels [or with the chemical conversion of fossil derived materials for the provision of various manufactured products];
  • Containment, destruction and reduced usage of greenhouse gases other than carbon dioxide;
  • Reducing emissions through land use, land use change and forestry, including reducing emissions from deforestation and degradation.

At the very least, the text should be driving these specific solutions forward, for example through properly funded large scale demonstration programmes and targeted mechanisms to hasten deployment. Carbon capture and storage provides a good example. Three policy initiatives are required to support this technology;

  • An underlying price for CO2 must be in place;
  • A clear recognition of the demonstration nature of the technology, which means funding, objectives, timelines and focus on delivery of projects;
  • A robust approach to CO2 storage certification (and MRV) based on 2006 IPCC GHG Inventory Guidelines.

The EU has nearly reached this point, but it has taken eight years to do so. Whilst this represents a landmark in policy creation, the rate at which it has happened is hardly commensurate with the gravity of the issue that we are trying to address. We need to focus our efforts on bringing this technology to developing countries, particulalry those with large coal reserves. A policy framework similar to that in place now in the EU is needed, but on an international scale. First and foremost, this means recognising CCS within the an international project mechanism. We will also need to underpin this with an internationally recognised CO2 storage certification, again based on the 2006 IPCC GHG Inventory Guidelines. Finally, we need a mechanism within which large clusters of projects can be identified, funded and implemented against defined deadlines. Most importantly, we need all this now, in Copehagen, with a view to starting implementation in 2010.

The cost of cap and trade?

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As Waxman-Markey starts to bed into the consciousness of the US, there has been a rush to calculate the “cost” of climate legislation – some with the view of destroying the bill and others to reassure us that it won’t impact us at all.

So it seems that this might be a useful subject to do some basic thinking about. But beware, I am not an economist, so I will be probably get roundly dumped on by those that are – but I am an engineer and engineers are quite good with envelopes and the back of them – or in my case this evening a pad of Post-It notes.

There is no doubt that reducing emissions in the USA will cost some money. But there will be benefits as well. For starters, have a look at the McKinsey abatement curve for the USA.

An batement curve for the USA

An abatement curve for the USA

There are two parts to this curve, the left hand side where no carbon price is actually necessary to deliver the reductions, and the right hand side where a carbon price is needed.

On the left hand side there are actions such as improved lighting, better domestic appliances and building insulation. All these actions improve energy efficiency and lower our costs – so we should just do them. But we don’t as a matter of practice (bad housekeeping really), so improved standards and building codes should be employed to force these changes into the marketplace and as a result the economy benefits.

On the right hand side we are using technologies such as Carbon Capture and Storage which will cost money. If CO2 didn’t have the impact that it does in the atmosphere we would never do this. Equally, we wouldn’t force offshore wind, certain solar technologies and perhaps new nuclear into the market quite as quickly. Earlier take-up of these technologies could cost us money overall.

Simply eyeballing the abatement curve, shows that the two blue areas are about equal, which means through to 2030 this is a zero sum game. What we gain on efficiency in the economy we spend on early technologies and CCS. But that doesn’t mean that cap-and-trade doesn’t cost anything, because it does. Cap-and-trade is only needed on the right hand side of the abatement curve, so let’s just focus on that bit alone.

First of all it shows that the CO2 price needed for these technologies ranges from a few dollars to about $50 per tonne, so lets say the average is $40 per tonne in the big industry and power sectors which is where the CO2 price is really needed. We run with this from 2012-2030 during which time emissions in the power and industrial sectors of the US economy are reduced by about 35% or 1.2 billion tonnes per annum.  So the total emission reduction is 1.2*18/2 = 11 billion tonnes (rounded up). At $40 per tonne, the total cost of abatement is $440 billion. There are about 90 million families in the USA (340 million people by 2030), so this means a cost to each family for much of the right hand side of the abatement curve of under a dollar a day (actually 75 cents).

This isn’t nothing, but it is hardly going to break the economy either (between 1945 and 1996 the USA spent at about double this rate just manufacturing and deploying nuclear weapons). In addition, Waxman-Markey skews the distribution of allowance value to low income families, so compensation is there for those who rightly need it.

There are other reductions on the right hand side of the curve as well, but much is in the agricultural and forestry sector and seems to come in at around $15 per tonne. So overall, I will go with the $1 per day per family from 2012 to 2030 for the real “cap-and-trade” bit. Don’t forget though that these same families also get the benefit of the left hand side of the abatement curve as well, because of improved appliances, home insulation programmes, new lighting standards and so on.

But what is the benefit of doing all this? That’s easy – Nick Stern did the calculations for us and put the social cost of CO2 at about $80 per tonne – i.e. the cost we leave to future generations if we just keep on emitting.

What next for Canada??

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This week I have been in Canada, talking with people in both Provincial and Federal government about Canada’s policy plans to reduce greenhouse gas emissions. There is a feeling of deja vu doing this, because it seems that Canada has been talking about such policy for years now – but almost nothing substantive has been implemented.

But now very substantive action is going to be needed – and needed fast. Its largest tading partner is on the move and will implement either an emissions trading system or succumb to the rigours of the Clean Air Act. As a developed country in a leadership position with G8 status, Canada will almost certainly have to sign up to something like a 20% reduction in emissions (or more) from 2005 to 2020 when it faces other nations across the negotiating table in Copenhagen.

But Canada has been here before, signing up to the Kyoto Protocol and agreeing to reduce emissions by 6% from their 1990 level of about 600 million tones. In 2006 GHG emissions were at 721 million tonnes, nearly 30% above the Kyoto target. However, emissions have fallen from a high of 743 million tonnes in 2004, perhaps driven by a variety of policy efforts at provincial level and some from the Feds.

Putting to one side the issue of how Canada will finesse complance with its Kyoto obligations (and these are real obligations irrespective of what happens to the Protocol), a formidable task remains to reduce emissions between now and 2020 (remember, that’s 4000 days). This is all the more challenging for Canada because the resources boom in Alberta is also putting upward pressure on emissions.

Getting back to my mission this week, it is clear that the political appetite for action has changed and that a cap-and-trade system is now the preferred way forward. But there are many hurdles to cross. Whatever is put in place has to be compatible with the expected US system. Waxman-Markey allows unrestricted flow of allowances from “equivalent systems”, but therein lies the first issue – what will be deemed equivalent. Whilst the idea of a trading approach is alive and well in Canada, so too is the idea of a buy-out option by putting money in the collection tin (the “Technology Fund”). Unfortunately this means it isn’t a cap-and-trade system any longer and it is hard to imagine any such construction being deemed equivalent.

Two other obstacles confront Canada in the design of a national trading system.

The first involves the concerns that wealth transfer may result between provinces arising from the flow of allowances between those needing to buy allowances due to substantial growth from those with a flatter emissions profile. This is a real issue, but it has been addressed in the EU and the approach adopted there may be applicable in Canada. In the EU a large New Entrant Reserve has been set aside from within the cap. Member states can draw on this as necessary, using the allowances for auction or grant to the new facilities in question. This helps countries like Poland experiencing rapid growth in that it limits the flow of funds leaving the country for compliance pruposes.

The second issue is also a wealth transfer one, but between Canada and the rest of the world. It is almost certain that Canada will have to buy international offsets or US / EU allowances to meet a potential 20% by 2020 reduction target. With the resources boom in Alberta, the best that Canada can probably achieve domestically is a 10% reduction by 2020. This means Canada / Canadian industry could need to purchase some 250 million tonnes of external compliance units between 2013 and 2020, perhaps costing as much as $10 billion. There really is no getting around this – it is the nature of an emissions trading approach built on environmental targets and strict compliance. It is also because there is no getting around the issue of climate change other than reducing emissions – the atmosphere doesn’t really have much use for our money, only our ability to manage what we emit to it.

So there is much to do to push Canada across the line and get cap-and-trade implemented. But there is also a great deal of willingness and drive to finally make something happen – hopefully enough to overcome some tricky obstacles along the way.