Archive for July, 2011

Could California suffer the EU-ETS problem?

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As I have noted in recent posts, the EU Emissions Trading System is suffering a decline in fortune. The price has been relatively low since the onset of the financial crisis, driven in part by a decline in industrial activity linked to the recession, but also to continuous overlaying of policy by both Member States and the Commission. Examples of the latter include the UK price floor proposal and the draft Energy Efficiency Directive from the Commission.

The next cab out of the ETS rank looks to be the California cap-and-trade system. Recently Point Carbon reported that:

 “California carbon allowances (CCAs) for 2013 delivery were bid at $16.75/t this week [NB: About 2-3 weeks ago] on news that companies would not have to surrender allowances to cover their 2012 emissions, market participants said.”

California emissions in 2008 (the last full GHG inventory) were as follows:

The total is 427 million tonnes against an allowance allocation in 2020 of 334 million tonnes. At least on first inspection there appears to be the necessary scarcity to ensure a robust carbon price

But California also has multiple policy approaches which operate in the same space as the cap-and-trade system. For example, by 2020 California is required to supply 33% of its electricity from renewable sources. In the transport sector, the Low Carbon Fuel Standard requires a 10% reduction in the carbon footprint of transport fuels by 2020, achieved through electrification, changes in the well-to-tank emissions of the fuel (e.g. through lowering refinery emissions) and substitution of gasoline with alternatives such as ethanol.

Many scenarios could play out here and the level of nuclear power will be critical, but these two policies alone could see emissions drop to 360-370 MT by 2020, removing much of the scarcity driving the carbon market.

Since the election of Governor Brown there is already talk of an even higher renewable energy requirement and there are other existing policies as well (Renewable Portfolio Standard, various energy efficiency standards, CHP requirements, vehicle efficiency measures).  In addition, what is not factored in here is California’s share of the overall drop in US emissions since 2008 as a result of the recession. But on the upside, at least from a carbon market perspective, is the compression of the whole trading period by one year as a result of the delay in implementation.

A back of the envelope analysis today indicates that the California system probably won’t see an allowance surplus through to 2020, nevertheless much of the apparent scarcity is removed by multiple policies operating within the cap-and-trade space. This means that the carbon market becomes a shorter term compliance mechanism rather than a longer term investment driver. It functions only as a check on the other policies.

Rather, investment is driven by mandates and standards on the back of a specific, predetermined design outcome for California’s future energy system – almost certainly a higher cost solution for the energy consumer, but with the same environmental outcome as the cap-and-trade would deliver if left to function on its own.

Korea and Australia dance to the same tune

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Apart from Australia announcing the details of its carbon pricing mechanism and eventual transition to an ETS, there was also news this week from a huge regional trading partner, South Korea. The South Korean cabinet has approved a plan to cut carbon emissions 30% below expected levels in 2020. In support of this, the government has submitted a bill to parliament that includes plans for an ETS from 1st January 2015. The bill also has a chance of passing, given that the ruling party enjoys a comfortable majority – but don’t expect this to be a walk in the park. The Korea Herald reported:

Korea outlined action plans to tackle climate change on Tuesday (12th July), breaking down reduction targets for high-emitting sectors in the medium term. The pan-governmental plan was devised to put the country’s low-carbon, green growth initiatives in motion, which President Lee Myung-bak launched in 2009 with a goal of cutting greenhouse gas emissions by 30 percent through 2020 from 2007 levels.

For the transportation sector, the target was set at 34.3 percent below business-as-usual levels. The government also aims to slash 26.9 percent from buildings, 25 percent from the public sector and 18.2 percent from industries, while saving 26.7 percent by switching to renewable electricity sources.

Under the plan, the government will multiply use of solar and wind energy, smart grid, as well as carbon capture and storage technology, which involves seizing carbon dioxide from power plants and other industrial facilities using coal and gas, compressing and sequestrating it underground or under the seabed.

It also plans to expand highly efficient facilities at residential and industrial complexes, and supplies of clean fuels such as liquefied natural gas, plastic scrap and biomass.

As for transport, the government will foster public transportation and electric and hybrid vehicles, while stepping up fuel efficiency standards for vehicles by 2015 to 140 grams per kilometer from the current 159 grams.

“We tried to draw up reasonable and fair measures to reduce emissions through collaboration between involved ministries, field research and public meetings,” the government said in a statement. “We’ll solidify Korea’s image as a leader in green growth.”

Green growth has been one of the key policies of the Lee administration as the country’s main economic force transitions from smokestack industries to high-tech.

Korea is the world’s No. 9 polluter, with annual emissions from Asia’s fourth-largest economy doubling between 1990 and 2007 to 610 million tons, slightly greater than Australia’s.

With the green growth vision, the government wants to stay at about 637 million tons through 2020, which is set to expand to 813 million tons.

By sector, the government expects the largest slice to come from industries with 56 percent of the total in 2020. Buildings came second with 22 percent, followed by transportation with 13.2 percent, agriculture, forestry and fisheries with 3.6 percent and public institutions with 2.3 percent.

To reach its goal, it has been promoting environmentally friendly investment and technologies, while establishing a comprehensive act on green growth.

But the government faced a setback as it postponed the adoption of a carbon trading scheme known as “cap-and-trade” after 2015 amid fierce opposition from industries that it would cost too much, thus hampering their growth.

Under the system, companies are required to release emissions above a government-imposed cap and to purchase extra credits from those that discharge below their quota.

“The government will strive to minimize negative impacts of emission-related regulations on the industry’s competitiveness and national economy,” it said.

Together with New Zealand, this raises the prospect of a significant carbon trading regime developing outside of Europe. What is perhaps more interesting though is how these schemes might link together in the 2020s and then how this linkage could be leveraged to generate emission reduction projects. Such an opportunity was highlighted in the recent WBCSD publication, Carbon Pricing, which I have mentioned in previous postings. In the WBCSD publication the example given was as follows:

 Today, Australia exports iron ore to Asia where it is smelted with coal to produce wrought iron and finally steel. In future years, a carbon price operating within Asian and Australian economies could encourage the development of the necessary process for the production of the steel in Australia using natural gas, where that fuel is prevalent, rather than coal, as is the case in Asia today. The transfer of allowances from Asia to Australia, assuming linked carbon trading systems, would underpin any additional emissions in that country, but overall emissions between the two would be lower, thus making the project an attractive proposition.

South Korea is one such economy that smelts iron ore from Australia and uses coal to do so. CO2 emissions from coal make up nearly half the emissions from the economy as a whole and fuel switching will be one of the early mechanisms implemented to reduce emissions.


The switch from coal to gas in steel making is technically possible by utilizing the DRI process (Direct Reduced Iron) and while South Korea may see such a move as a relocation of jobs, Australia would undoubtedly welcome the opportunity. Building a new plant in Australia with domestic natural gas and transferring allowances through a linked system offers an alternative to the fuel switching taking place in South Korea itself, which would require the gas to be delivered as LNG.

Don’t expect changes like this to happen just as these systems leave their respective starting blocks, but as linkages develop and international goals start to become recognized and delivered on, such optimization driven by the price of carbon becomes a real possibility.

Australia – the “Lucky Country”

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Australia has long been referred to as “The Lucky Country”, originally taken from the 1964 book of the same name by social critic Donald Horne.

I can only ever remember this being used in a favourable context, given the natural resources available to the country, the weather, the relaxed lifestyle and general high level of prosperity. But the origin of the title comes from the opening words of the book’s last chapter:

“Australia is a lucky country, run by second-rate people who share its luck.”

Horne’s statement was made ironically, as an indictment of 1960s Australia. His intent was to comment that, while other industrialized nations created wealth using “clever” means such as technology driven by relentless innovation, Australia did not. Rather, Australia’s economic prosperity was largely derived from its rich natural resources. Horne observed that Australia “showed less enterprise than almost any other prosperous industrial society.”

The greenhouse gas story in Australia has been an interesting analogy to this phrase. “Lucky” Australia has grown to become one of the most emissions intensive economies, by almost any measure. But the country has long ignored this given its relatively small contribution to total global emissions. Energy use in Australia results in about 400 million tonnes of CO2 emissions per annum, or just 1.3% of the global total – this is of course because of the very small population. 

Many will argue, and have done so, that irrespective of what Australia might or might not do, its actions will not change the prospects for this global issue, at least in terms of contribution to the concentration of CO2 in the atmosphere. In one sense this is true, but if such an argument is applied universally then we end up collectively doing nothing to reduce emissions. The same argument has also played out in very big economies such as the USA, where many will comment that the US acting alone will not solve the problem as China has become the largest emitter. It is equally prevalent in sectors who claim “exemption” based on the critical nature of the service provided or the benefit of the product or service in terms of its subsequent impact on emissions.

But last weekend, as a second attempt, Australia announced its intention to begin to reduce emissions and to introduce a policy framework that would steer it towards its goals. After much national debate which I have commented on in a number of previous postings (The nature of uncertainty, Tough times in Australia for carbon, Tough choices for Australia, A carbon price for Australia), a four part framework has emerged, consisting of a carbon price, renewable energy targets, energy efficiency programmes and a focus on land-use. Of these, the carbon price debate has probably been the most heated. The end result now proposed for legislation, is a fixed carbon price that will be introduced in 2012 with a gradual transition to full cap-and-trade starting three years later.

The proposal will also recycle most of its revenue back into the economy, through changes in the tax system and assistance to trade exposed industries. This is in alignment with the structure of a carbon pricing mechanism discussed in the WBCSD publication “Carbon pricing”, published earlier this year

Australia is now looking to change its luck, although there will certainly be more debate. The carbon price will focus minds, slowly driving Australia away from dependency on resources such as coal, requiring both the enterprise and innovation that Donald Horne advocated for back in the 1960’s.  So “the lucky country” moves on, but the more it moves in this particular direction, the luckier it will undoubtedly get.

Last week I had the privilege to attend an MIT forum and listen to the keynote address given by Nobel laureate Mario Molina. The subject of the address was the issue of conveying an understanding of the science of climate change to the general public. Professor Molina won the Nobel Prize and is best known for his work in identifying the role of chloro-fluorocarbons in the destruction of the ozone layer. Unlike the current state of paralysis that seems to be encompassing the international talks on climate change the Montreal Protocol, which underpins the global reduction in the use of CFCs, was negotiated with relative ease. But the nature of the problems are very different.

Turning back to the keynote address, Molina lamented on the poor job that scientists had seemingly done in conveying what is, in his view at least, a relatively simple and well understood physical phenomena governed by a set of known equations. In addressing the audience, he asked quite simply in his soft understated tone “What is it about Planck’s Law and the Boltzmann constant that is now in dispute?”. A similar question was asked for Kirchhoff’s Law and the other equations which can be used to calculate the observed temperature of the atmosphere, all of which have been developed over the last century and can be found in books such as Introduction to Atmospheric Chemistry, by Daniel J. Jacob, Princeton University Press, 1999. Most if not all of these physical laws were discovered for reasons unrelated to atmospheric chemistry, but of course can be applied to this discipline as they also can to explain a multitude of other physical phenomena on display in the world we inhabit.

In fact none of this basic physics and chemistry is in dispute – if it were then we shouldn’t be surprised that a multitude of the devices we use in everyday life, from iPad’s to microwave ovens, wouldn’t work as expected – or in reality wouldn’t exist in the first place. All depend on the same physical principles that also make up our understanding of the workings of the atmosphere and the impact of a change in its composition.

Yet time and again we are confronted by commentators claiming the issue is a hoax and the science is fraudulent. This played out again in Australia over recent days as British climate sceptic Christopher Monckton toured the country and delivered a series of lectures.

Professor Molina didn’t have a solution to this problem, other than to recall the successful transition from initial scepticism to eventual action and international agreement on CFCs. He noted that this was to some extent down to the role of business as new refrigerants were developed to replace CFCs. Unfortunately the climate problem is an order of magnitude or two more complex than the ozone layer issue, given our near total reliance on fuels and industrial processes which emit CO2. The issue also runs headlong into the sensitive issues of energy dependence, human development, economics and national security, further complicating the solution set.

But we could at least start by recognising that physics and chemistry are part of our lives and that the society we have built depends totally on the laws, constants and algorithms that have developed from these disciplines, which includes our understanding of the processes in the atmosphere. Then perhaps there is room for a more grown up debate on the way forward.