Archive for February, 2011

A Carbon Price for Australia

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I am back home in Australia this week and by chance arrived on the day that the government announced its formal intention to implement a carbon price across the economy. This wasn’t exactly a surprise, given the issue is under review and a number of consultation processes between government and civil society, including business, are underway. At this early stage the outline is sketchy, but the scope is broadly as follows:

  • Starts on July 1st 2012
  • Will likely be allowance based – i.e. buy fixed price allowances from the Government for emissions compliance. This structure is important in that it then establishes the infrastructure for a later transition to cap-and-trade.
  • Transitions to a cap-and-trade in 3-5 years, but with an option to defer.
  • Will be a fixed price during this period, but rising on an annual basis. 
  • Wide coverage of the economy – but precise coverage wasn’t announced.
  • No international linkage during the fixed price period – i.e. this rules out the use of the CDM or similar instruments.
  • There is no indication of the price, although the Green party (which the government needs for passage in the Senate) wants to see it high enough to start to trigger change in the power sector where coal is the principal means of generation.

The announcement was widely covered, such is the very high profile of climate change and related legislation in Australia. Over the past 10 years the country has seen the worst drought, the worst flooding and highest temperatures in its short recorded history (about 120-150 years of records depending on the region). Many of these phenomena, including the recent severe floods, are part of natural cycles that Australia has always seen, but the severity is showing signs of change. The news media in all its forms from print and television to blogs featured the story as headline news and the Federal Opposition promptly accused the government of “the ultimate betrayal” given promises not to implement a carbon tax in the recent elections. The issue will likely be debated vigorously and that started in the weekend editions of various media outlets as the government began to defend its change of position.

While there will doubtless be many political battle lines drawn on this issue, the real discussion will likely be with Australian industry. Australia is a resource rich economy and much of which is drilled for, mined and grown is exported into the global commodity market where price is established based on global supply, demand and cost structure. As was the case when a full emissions trading system was under discussion in Australia, resource exporters remain nervous about the impact of the carbon price on their competitiveness, given that they cannot be sure of cost recovery through the international markets. In addition, as the scale of production for domestic use of certain products is relatively small when compared with the global picture, there is also nervousness that additional costs will tip the balance towards imports, thus undermining local capacity. Both of these issues were at the heart of the call for some portion of free allowance allocation in the CPRS (Carbon Pollution Reduction Scheme) discussion and they will certainly appear again as a call for price rebates under the proposed approach.

Key to this discussion will be determining the basis on which rebates might be given and then how the rebate could be structured so as to at least maintain the carbon price signal. The mechanism for determining trade exposure requires careful inspection of the prevailing market conditions – in the EU this was carried out by the Commission prior to their release of a list of trade exposed sectors which would then receive some portion of their allowances for free in Phase III of the ETS. In Australia, a similar analysis was performed for the CPRS so that work may well be valid.

In terms of the structure of the rebate itself, as long as it is based on historical emissions or a benchmark, the incentive at the margin to abate remains regardless of how big the rebate is. This is also how the free allowance allocation works in a cap and trade system (benchmarks are applied in the EU-ETS) and it can essentially be replicated under a carbon tax.

In a coal based economy such as Australia, a carbon price is potentially a powerful mechanism to drive the change to a lower carbon economy. It can trigger responses such as the implementation of CCS, the increased use of domestic natural gas for power generation or the development of newer technologies such as concentrated solar. Such choices cannot be easily made by dictate, rather they require the long term market signal that a carbon price gives for the most cost effective solution to develop.

Carbon Nation

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A new film is currently having it’s cinema release in the USA, aptly titled Carbon Nation. As the name suggests this is a story about carbon dioxide emissions, but not in the space occupied by Al Gore and the science discussion (although it briefly dips its toe in this water for context reasons), rather it talks about the energy issues we face today and how society might begin to tackle them.

 

The film has been around for over a year now, but at film festivals and special screenings. Throughout February and into March it is on general release across the USA. I saw it recently at a private showing in London, led by the incredibly motivated Director Peter Byck. Peter is pretty new on the directing scene but has been involved with such block-busters as The Matrix and King Kong. This is his first widely released film.

Carbon Nation doesn’t profess to offer the big solution, rather it shows through a series of interviews at community and individual level how progress is being made and could potentially be accelerated. The 82 minute film starts with a really excellent description of the sheer size of the energy system, which sets the scene nicely for the track it then follows. From a vast wind farm in Texas to a local community centre being fitted with solar panels, the film explores how a wide variety of people are making a difference. This includes major corporate players such as Virgin Atlantic owner Sir Richard Branson and his quest for a bio-fuel based solution in aviation. The film explores a wide range of CO2 technologies and energy alternatives, in transport, agriculture and electricity generation and also has a major focus on the potential for energy efficiency improvements across the economy. As with all the discussions, the film approaches all these avenues by example, rather than simply pontificating on the possibilities. This is its real strength in terms of delivery.

As a film to go and see, it is worth paying the money at the box office. I thought it had a first class script which sits between and nicely joins together the many interviews making up the bulk of the time. It also tells a good story. But in watching the film, some viewers might come to think that energy services are an entirely local issue and that therefore the problem of CO2 emissions can also be managed locally. This is perhaps the one drawback of the interview approach taken. But another way of interpreting this and hopefully the one that most leave the cinema with is that energy provision and use should in fact be an issue that individuals think about. This is not to say that everyone should climb on their roofs to fit solar panels, but to the extent that they engage with the political and information processes in our society, energy should at least be a part. That of course includes the ballot box. There are very real choices that can be made there and this film serves as a good point to start the journey to become a true energy citizen.

Last but not least, I should admit to a minor bias in all of this – I was one of the many people interviewed for this film and if you are patient and get to the end then you can hear me discuss the role of a carbon price in the economy. Thanks to Peter Byck for not leaving me on the cutting room floor.

100% Renewables in my Lifetime

Very recently WWF released a new report which argues the case for a near 100% renewable energy system by 2050 (I remain optimistic with regards my longevity) as a solution to the environmental issues and resource depletion associated with the current energy mix. This would also eliminate the need for a shift to nuclear and the use of CCS as potential means to reduce emissions. The report is supported by an analysis produced by Ecofys, a Dutch consultancy focusing on sustainable energy solutions.

A paper along similar lines by researchers based at Stanford and the University of California, Davis, was given media coverage in Wired Magazine on almost the same day. This paper looks at the feasibility of a renewable energy end-state, rather than tackling the timeline in which it could be implemented. A key focus of the paper is the grid interconnection required to support such an energy system. In the abstract the authors state;

. . . we discuss methods of addressing the variability of WWS [wind, water, sun] energy to ensure that power supply reliably matches demand (including interconnecting geographically dispersed resources, using hydroelectricity, using demand-response management, storing electric power on site, over-sizing peak generation capacity and producing hydrogen with the excess, storing electric power in vehicle batteries, and forecasting weather to project energy supplies), the economics of WWS generation and transmission, the economics of WWS use in transportation, and policy measures needed to enhance the viability of a WWS system. We find that the cost of energy in a 100% WWS will be similar to the cost today. We conclude that barriers to a 100% conversion to WWS power worldwide are primarily social and political, not technological or even economic.

Assuming that such an outcome is achievable (and I imagine that many would contest this, but not here, not now), then the real focus has to be on the timeline.

In a 2009 post I explored the impact of a “trillion tonne” carbon budget on the energy system. Today (mid-February 2011), according to the researchers who put forward the idea, we have consumed some 545 million tonnes of the budget. With emissions today from fossil fuel use, cement production and land use change running at some 10 billion tonnes carbon per annum and including a global plateau in emissions for the next 10 years before reductions really start in earnest, society would have to reduce this to zero by 2090 to come in on a trillion tonne budget, assuming a linear decline. To have a 75% chance of keeping within a 2°C temperature rise, the budget drops to 750 billion tonnes (from a trillion) and the end date becomes 2041. In the latter case, a 2050 goal becomes very important.

But 2050 presents an immensely challenging timeline to transform the global energy system. For example in 2005, for a World Business Council for Sustainable Development (WBCSD) publication called Facts and Trends to 2050, I developed a simple model to illustrate the rate at which alternative fuel vehicles would have to be developed and deployed to completely replace the global fleet by 2050. WWF/Ecofys have done this by shifting to an all-electric fleet in their study. We assumed the availability of a zero emissions vehicle from 2010, with 200,000 units produced in that year and growing at 20% per annum thereafter until all production globally is switched. That doesn’t occur until about 2040, with full substitution on the road being a 2055-2060 outcome. But it is now 2011 and although there is a potentially viable electric vehicle (the Nissan Leaf) available, production this year is set for a maximum of 4,000 units per month. We need five Nissan Leaf type production lines this year and adding 2 per annum through to 2015, then 3 per annum and so on to get to 30 major production lines by 2020 and 200 by 2030.

 

 The power sector will be equally challenging, but there is some room for optimism. The WWF / Ecofys report has global wind energy rising from 1.2 EJ/annum in delivered power in 2010 to 7.2 EJ/annum by 2020 and 15.6 EJ/annum by 2030. This means some 80,000 5 MW turbines will have to be added globally over the next 10 years, or about 40 GW per annum. According to the World Wind Energy Association, global capacity rose by nearly 40 GW in 2010. But as noted in the Stanford paper, grid development must match this as the interconnection requirements to overcome the problems of intermittency and supply / demand balance, especially in a world without fossil fuel backup, becomes essential. Storage development and deployment also becomes paramount as renewable energy use grows, yet this technology remains in its infancy, at least on a large scale. As noted in a December 2009 post, development and deployment of a new technology is a multi-decade effort and there is almost no evidence in history that gives confidence this can be otherwise. Many sectors of industry are supporting major effort to get CCS up and running, yet after 10 years of effort only a handful of modest projects exist globally and there is no single example of what is actually needed, a large scale CCS project linked with coal fired power generation.

A further major feature of the WWF report is the assumption that energy use peaks in 2020 then falls back to below 2000 levels by 2050, all while 9 billion people enjoy access to energy and an increasingly comfortable lifestyle. This is delivered through a massive improvement in energy efficiency in every sector of the global economy – one that far outstrips current year on year improvements. Not only will strict efficiency mandates be required, but society will also have to avoid the inevitable rebound effect (Jevons Paradox) that is bound to happen in many sectors that become super efficient.

As the report notes, all this requires a comprehensive global policy framework with high carbon prices, significant support for technology development, tough building codes, efficiency mandates and so on. The EU is perhaps the most developed in this regard, but the policy framework in place today has taken 10 years to implement and is not fully functional. With a carbon price at €15 its effectiveness is also being questioned. Gaps remain as well. Internationally, the Kyoto Protocol was agreed nearly 15 years ago with a framework that positively encourages carbon markets, a price on carbon and carbon price incentive instruments to help developing countries get going. Yet it is clearly faltering and almost certainly won’t be built on, rather, a more national based architecture is emerging. But allowing that to bed down over a further 15 years isn’t conducive to a 30-40 year timeline to actually complete the whole job.

The WWF / Ecofys report outlines a particular pathway forward for addressing global emissions – there are certainly many others. But all will require a focus on policy and social change that collectively we are not even close to reaching.

A focus on South Africa

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With COP 17 being held in Durban this year, there will be quite some attention paid to how South Africa responds to its own 2020 national pledge. This was articulated in a letter to the UNFCCC from the Department of Environmental Affairs on 29th January 2010 as follows;

 South Africa will take nationally appropriate mitigation action to enable a 34% deviation below “Business As Usual” emissions growth trajectory by 2020 and a 42% deviation below “Business As Usual” emissions growth trajectory by 2025. In accordance with Article 4.7 of the Convention, 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.

More recently, this goal was further described in the National Climate Change Response Green Paper, as follows;

 The prioritization of mitigation interventions that significantly contribute to a peak, plateau and decline emission trajectory where greenhouse gas emissions peak in 2020 to 2025 at 34% and 42% respectively below a business as usual baseline, plateau to 2035 and begin declining in absolute terms from 2036 onwards, in particular, interventions within the energy, transport and industrial sectors.

The second piece of text gives some insight into the South African view of “business as usual” which is otherwise missing from the Green Paper. According to the IEA, energy emissions in South Africa were 431 million tonnes in 2008, which represents a growth of about 2.5% p.a. from 1990 or 3% p.a. from 1971. Continuing at 2.5% p.a. until 2020 gives energy emissions of 580 million tonnes. A 34% reduction below this gives a 2020 target of 383 million tonnes, well below a peak. 3% growth from 2008 with a 34% reduction still represents an absolute fall in emissions, with emissions growth needing to be over 3.5% p.a. before a 34% reduction represents a plateau at current levels. Such a growth rate does not appear to be consistent with historical trends, although with strong commodity prices in operation globally driving a mining boom and SASOL expanding its coal-to-liquids operation there may be some step changes in the pipeline.

If we assume that the absolute emissions goal for South Africa for 2020 is equivalent to current levels, the scale of the challenge facing that economy becomes clear. The South African energy mix is nearly 85% coal, with the balance being crude oil derived products (vs. coal / gas derived oil products) for transport. There is currently no natural gas of consequence in the energy mix, with minimal local production, no LNG terminals and one import pipeline from Mozambique which directs gas to SASOL a gas-to-liquids plant. With growth almost certain in transport but no effective biofuel industry and residential emissions (from coal) growing at twice the rate of other sectors, reductions will have to come from the power generation sector or the SASOL coal to liquid plants.

Although there is an active renewable energy industry and 5% of electricity is delivered by two nuclear power plants, expansion in these areas will not create reductions until less coal is consumed for electricty production. Gas may also figure in the mix one day, but as noted that is not there today. That means efficiency gains in the power stations are the only immediate option as plant shutdowns seem unlikely given the tight electricity supply-demand situation in the economy.

If efficiency cannot be substantially improved that leaves the SASOL plants. Two major coal-to-liquids plants and a smaller gas-to-liquids plant emit some 60 million tonnes CO2 per annum, much of it as a nearly pure stream as a result of the chemistry of the conversion of coal to syngas followed by a Fischer-Tropsch reaction. Only one solution exists here, carbon capture and storage. A major project would not only demonstrate the immense potential of CCS and the scale to which single projects must aspire, but could balance the books in terms of the national target as renewable energy projects and energy efficiency measures limit the emissions growth in other sectors.

But such a project will require considerable financing and a carbon price. Although COP 16 in Cancun saw a major step  forward in terms of CCS eligibility within the Clean Development Mechanism, the state of the global offset market does not lead to the view that it could offer much support to a 10-20 million tonne per annum sequestration project starting up around 2020. Both the mechanism itself is struggling and the demand for credits is weak with only modest buying through the EU-ETS.

South Africa’s ambitions deserve praise, but the question now will be the ability of developed countries to help them deliver or do we all just wait for the government to call on its reduction caveat, i.e. “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”.