Archive for January, 2011

The focus turns to the 2020s

I made the point in my last post that many developing countries could be hard pressed to meet their 2020 emission reduction goals simply because the clock was now running against them. The reality is that from a major infrastructure point of view, the 2010’s are largely a done deal, at least in terms of new hardware. If projects are not already in the pipeline or at the very least represent an expansion of an existing, relatively mature business area, then they will not materially impact the emissions over this coming decade. Some variation in expected emission levels may come about from spurts or slumps in economic activity or through additional fuel switching, but this will largely be at the margin or be the result of initiatives already well underway (e.g. the growth in US shale gas).

At an industry meeting in London this week the CEO of the UK Climate Change Committee outlined their thinking on forward targets for the UK. This follows their release in December last year of The Fourth Carbon Budget report, which specifically covers the period 2023-2027, but also includes a clear indication of where UK emissions need to be in 2030 and the pathway that will therefore result in the period 2030-2050. There was almost no discussion about 2020 as the CCC clearly recognizes that major projects in their infancy today, such as the nuclear power stations now being considered, won’t even start up until 2018-2020 at the earliest. Although a shift in the existing EU target of a 20% reduction by 2020 to 30% remains a political discussion point, in reality the bureaucrats (at least in the UK) have moved on. Their sights are on the following ten years. This isn’t to say that we can relax now, quite the opposite. Sufficient impetus has to be given to the energy system now to ensure that the project activity that will deliver the reductions needed by 2030 actually starts in earnest. Delivering CCS, building new nuclear plants and so on not only have long single project lead times but also have much longer lead times required to see the necessary industrial, financial, political and civil society changes required to support them as an entire sector.

For the UK, the Climate Change Committee is proposing an indicative 2030 target to reduce emissions by 60% relative to 1990 levels (46% relative to 2009 levels). According to the report, an implication of this is a near zero emissions power sector by 2030, which represents a very considerable shift from the situation today. It also means that large scale project activity must accelerate from the current level.

The UK is thinking about much of this in terms of additional domestic policy, but the power sector in the UK is part of the EU-ETS, which is where the work should be done. For the EU this has important policy implications. It wasn’t that long ago that the Commission finished with the design of Phase III of the EU Emissions Trading System and in reality the finer points of areas such as benchmarking and auctioning are still being thrashed out. But waiting another four or five years to repeat this process for Phase IV (2021 and later) is no longer a tenable option. This is the year to develop Phase IV thinking and 2012 is the time to take it to the EU Parliament. The market needs the clear direction that such a move would give.

Cancun: Spending the money

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What started in Copenhagen as an aspiration for $30 billion in fast-start financing and up to $100 billion per annum by 2020 in North-South financing flow has been translated into the Cancun agreements as the beginnings of long term arrangements for specific funding purposes. In particular there is the Green Climate Fund in the AWG-LCA text;

 Decides to establish a Green Climate Fund, to be designated as an operating entity of the financial mechanism of the Convention under Article 11, with arrangements to be concluded between the Conference of the Parties and the Green Climate Fund to ensure that it is accountable to and functions under the guidance of the Conference of the Parties, to support projects, programmes, policies and other activities in developing country Parties using thematic funding windows;

Although the Green Climate Fund and the $100 billion per annum are not necessarily the same thing, many commentators quote them in the same breath. In reality, much of the $100 billion per annum will be delivered through the market and not as direct funding. But the Cancun Agreements do create a link at least to some extent in paragraph 100 of the AWG-LCA text, appearing in the Long-Term Finance section of the document;

Decides  that a significant share of new multilateral funding for adaptation should flow through the Green Climate Fund.

Given that this is mentioned just two paragraphs after the $100 billion reference, it at least establishes the notion that many billions of dollars will flow through the Green Climate Fund on an annual basis by 2020. But actually achieving this may be considerably more challenging.

Recent experience in the EU shows that even a highly focused, clearly defined funding mechanism for large scale mitigation takes many years to actually deliver real reductions. In 2007 the EU Council of Ministers agreed to the goal of 10-12 large scale CCS demonstration projects, although offered no insight at the time as to how this might be funded. Even then, with a carbon market in the range € 20-30 it was clear that the carbon price was insufficient to do this. So began the development of what is now the NER-300, a set aside of 300 million allowances in the EU-ETS for award to CCS projects. The mechanism itself was defined progressively throughout 2008 and eventually passed into EU law in December of that year. It then took two years (until December 2010) for the Commission to define the rules of operation of the mechanism to the extent that they could issue a call for projects, which has now been done. The closing date for project sponsors to submit application forms to their Member States is 9th February 2011. The deadline for Member States to complete an eligibility assessment and forward the application with the submission forms to the European Investment Bank is 9 May 2011. EIB will conduct its assessment of projects in 15 months (by October 9, 2012). Finally, the Commission will have to approve and submit projects to Member States. If all goes well, projects will be awarded funding by end 2012/early 2013.

From concept to first award, the above process will have taken 5-6 years and as noted that is for a very specific set of projects on a defined timeline. Concept to mitigation will therefore be at least 8 years.

In the LCA discussion, the Green Climate Fund is in its infancy. There is some description as to the makeup of the Board, the nature and responsibility of the trustee and an invitation to the World Bank to serve in that capacity for the initial years. But that is far from a going concern which is actively distributing significant levels of financing to very large scale projects. The Global Environment Facility (GEF) has been operating for 20 years now, yet large projects take many years to move from proposal to completion. For example, a $300+ million South African public transport project which first entered the GEF pipeline in January 2005 should be completed at the end of this year, a seven year process. Such a project would probably take even longer under the proposed Green Climate Fund because of the likely startup lag as terms of reference are developed, people appointed, rules agreed and implemented and finally projects called for.

This means that major developing countries (e.g. South Africa) could struggle to develop the necessary projects in time for their 2020 pledges to be met. In the case of South Africa, they have offered the following in a letter to the UNFCCC at this time last year:

South Africa reiterates that it will take nationally appropriate mitigation action to enable a 34% deviation below the ‘business as usual’ emissions growth trajectory by 2020, and a 42% deviation below the ‘business as usual’ trajectory by 2025,” said Environmental Affairs DDG Alf Wills in the letter to the UNFCCC. “The extent to which this action will be implemented depends on the provision of financial resources, the transfer of technology, and capacity building support by developed countries,” he added.

While the intention is to provide the necessary funding, the reality of doing so through a Green Climate Fund to facilitate the delivery of the 2020 pledges is very challenging. A stepped up approach under the existing Clean Development Mechanism offers an alternative, but is largely defeated by the lack of potential buyers for the credits that it would generate. There is now little medium term prospect of a market based approach to mitigation in the USA, which removes them as a significant potential buyer (there will of course be California and perhaps some scope for offsets under the EPA). If China or Japan were to step into the arena with new project mechanisms driven by domestic trading systems, a considerable lag would still exist before projects began, simply because of the time it will take to define the domestic systems and create the attached mechanisms. Even if all this happened to come together quickly, there would still be a lag as developing countries identify the necessary mitigation projects.

Dozens of large scale mitigation projects will be needed in South Africa (and similarly for other countries) to meet their 2020 pledge as well as many hundreds of smaller scale initiatives. The current likely timelines for the development of the necessary financing facilities, their start-up and then use give little room for optimism that this will happen in time to create the reductions necessary to meet the pledges. Nonetheless, the fund will no doubt be successful – in the end  – in terms of making available much-needed monies to mitigation projects.