Archive for August, 2011

Given that the US Administration has lodged a commitment with the UNFCCC to reduce US emissions by 17% by 2020 (relative to 2005), the question remains as to how this might be accomplished. Clearly there is no overall national plan or legislative approach, which therefore means the Administration is largely relying on a range of existing serendipitious (from a CO2 perspective) policies, state action such as in California and possibly some good fortune (e.g. the dash to gas now taking place as shale gas production increases) to achieve the goal. In a recent post prompted by the remarks of the US Ambassador to Australia that it was “absolutely realistic” to believe the US would meet its target, I estimated that it was theoretically possible for this to be true, based primarily on natural gas backing out coal in the power generation sector and revised CAFE standards reducing consumer gasoline demand. 

Since then the Administration has reached agreement with the vehicle manufacturers on even tougher CAFE standards, as announced at the end of July.

 JULY 29th 2011, WASHINGTON, DC – President Obama today announced a historic agreement with thirteen major automakers to pursue the next phase in the Administration’s national vehicle program, increasing fuel economy to 54.5 miles per gallon for cars and light-duty trucks by Model Year 2025. The President was joined by Ford, GM, Chrysler, BMW, Honda, Hyundai, Jaguar/Land Rover, Kia, Mazda, Mitsubishi, Nissan, Toyota and Volvo – which together account for over 90% of all vehicles sold in the United States – as well as the United Auto Workers (UAW), and the State of California, who were integral to developing this agreement.

This therefore seemed like a good opportunity to do a bit more analysis of the third green bar on the diagram above which represents the potential drop in CO2 emissions in the transport sector. The focus below will only be  on cars and light trucks (i.e. largely households and small businesses), but of course further opportunity also exists with the recently announced proposal for trucks.

August 9th, 2011 Bloomberg – U.S. truck makers will improve tractor-trailer fuel economy by about 20 percent by 2018, saving $50 billion in fuel costs over five years and decreasing carbon- dioxide emissions, President Barack Obama said. The administration’s plan – the first attempt to regulate the efficiency of heavy-duty trucks, including city buses and garbage trucks — will save 530 million barrels of oil, according to a statement from the White House today.

Our model assumes the rigid application of the new CAFE standards through to 2025, but based on the EPA “Window Sticker” numbers which more closely reflect what a given vehicle might actually achieve when in service. For example, instead of using the CAFE standard for cars in 2025 which ranges between 46 and 61 mpg, we used 38.5 mpg and similarly for light trucks (30 mpg vs. CAFE range of 30-50 mpg). We have also assumed a total fleet growth over the period 2010 to 2025 from some 250 million to nearly 300 million vehicles, but have kept miles driven per vehicle a constant at just over 11,500 per annum. The model scraps at the oldest (and least efficient) end of the fleet and starts from 1990 where we assumed a homogenous fleet. The model does not currently include biofuels or the impact of electrification, so this is purely the impact of CAFE on a standalone basis.

Starting in 2009 with total fleet CO2 emissions at 100, the model shows that by 2020 emissions have fallen to 85, and then 75 by 2025. Our calculated fleet emissions for 2009 are 1.21 billion tonnes CO2 (vs. IEA 1.45 billion tonnes for all road transport, including trucks and buses, in 2008), so this change represents a reduction by 2020 of 180 million tonnes of CO2 per annum against a US total GHG emissions of some six billion tonnes per annum in 2005.

This matches well with the original assumptions in the chart above. As noted in the original post, this is an important contribution to US emission reduction efforts between now and 2020.

Thanks to my colleague Alex Ratcliffe for developing the supporting spreadsheet.

Six topics for the candidates

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As the US heads into the process of electing its next President, many subjects and issues will be debated. While climate change may not be the defining issue of the moment in the USA, given the long term importance of the subject it would be useful to understand how the various candidates for office might seek to shape the energy and climate policy landscape through this decade. The climate issue will almost certainly come back to confront a President in office through to 2017 and is probably inescapable for a  candidate with ambition to serve through to 2021.

Six areas of discussion and debate that could be on the agenda over the coming year would ensure both a better understanding of the subject and the range of potential policy directions that might be pursued by the next President;

Carbon pricing:

Many economists have said that the most effective way of beginning the long and complex task of managing carbon dioxide emissions is to put a price on the right to emit CO2 from power stations, industrial sources and transport. Although carbon pricing exists in some ares under regional and state based systems, a consistent national approach has yet to be developed.

Energy options:

Over the past decade the US has developed a major biofuels industry, become a leader in wind power deployment and significantly increased natural gas production. More recently new vehicle CAFE standards have been agreed. All of these offer real opportunity for significant emissions reduction, but need to be part of a broader energy policy framework that includes emissions management as an objective. The United States has already indicated its intention through the UNFCCC to reduce its greenhouse gas emissions by 17% by 2020 relative to 2005 and these options, if managed within the context of this goal, offer the possibility of success.

International positioning:

As a major current emitter and the largest cumulative historical emitter, it is important that the United States (with the EU, Canada, Australia, China, Japan and others) lead on the global task of managing CO2 emissions. But going it alone (or in a small club) isn’t a sustainable outcome. The USA will need to work with partners such as the EU and China to encourage and ultimately ensure global participation in the task of emissions reduction.

Technology policy:

Technology will play a long term role in the management of emissions. This will include scaled up use of technologies that the US already has experience with such as wind, biofuels and nuclear, together with new energy technologies such as solar and carbon dioxide capture and storage. New policies will be required to promote the development, demonstration and deployment of these and other technologies and to grow the technical skill base required to support this endeavor.

Looking beyond 2020:

With the 2020 energy picture now taking shape, longer term objectives need to be considered to ensure investment decisions made over the coming decade are compatible with the desired direction for 2030 and beyond. For example, should the USA have a recognized policy goal to reduce carbon dioxide emissions very substantially (this means something like an 80% reduction) over the first half of this century?

Adaptation:

Extreme  weather events of recent years and current heat and drought extremes have at least demonstrated that a considerable response effort would be required should  climate trends result in an increased frequency and / or intensity of such events. Sea level change may also pose a challenge for some areas as we head towards the middle of the century. Although the USA has a considerable response capacity, there is merit in beginning to fashion a more robust policy approach to physical climate change.

After a post-recession recovery to some €17, EU-debt driven jitters have hit the EU ETS and in recent days it has fallen close to €10 per tone of CO2. Some market watchers have praised this as indicative of a system which is responsive to the underlying condition of the economy as a whole, but the reality for investors and energy companies trying to develop low emission projects and strategies is a much more challenging business environment. Does this mean that the ETS is reacting as it should or failing to do it’s job?

There is no doubt that the ETS will deliver on its part of the EU 2020 goal to reduce emissions by 20% across the economy as a whole, so in that sense we should consider it to be a success. But arguably the system has a more important goal, namely the delivery of a power sector heading towards zero emissions – a fundamental part of an economy intent in reducing emissions by at least 80%. This means that the ETS should be driving fuel switching, encouraging the development of CCS and supporting the resurgent nuclear industry. At the moment it is struggling to do any of these things.

A few weeks back I put forward a case for setting aside allowances in Phase III of the ETS as a means of supporting the price. The first airing of this idea at the EU Council of Ministers wasn’t a great success, but it has appeared again within the recently proposed Directive on Energy Efficiency, although this time specifically linked with the impact of that particular Directive:

“. . . . . including recalibrating the emissions trading system by setting aside a corresponding number of allowances from the part to be auctioned during the period 2013 to 2020, should a corresponding political decision be taken.”

So it would appear that the notion of recalibration is alive, although its implementation in practice remains somewhat distant. In thinking further about the case for correction, it is worth looking back to a document which started much of the thinking about measurement and reporting on emission reduction pledges, the WRI / WBCSD Greenhouse Gas Protocol.

The Protocol has now been used by companies for over ten years as a guide for measuring and reporting on corporate emissions. It sets out the rules for the scope of a measured system and guides the user on correcting the baseline when changes occur. This latter practice ensures that emission reductions are real and constitute actual environmental improvement rather than simply being a result of a change in structure of the company reporting its emissions.

The issue of real environmental improvement now faces the EU ETS. The 2020 target now looks as if it will be met largely because of the result of a macro economic shock to the system. The recession has had the effect of changing the shape and structure of the covered sector, to the extent that compliance with the target is now almost a given. As noted above, reductions from major projects and real change will be limited.

This is where the GHG Protocol comes in. If the Protocol was the complete guide to managing this system, it would potentially call for a change in the original baseline emissions as a result of the changes seen in Europe over recent years. The only way of implementing such a change in the ETS is to withdraw or set aside some of the allowances in the system.

The challenge remains to provide a clear quantification of this, a task much more complex for the ETS than a company correction to its baseline. Current estimates argue for something over one billion allowances being removed from Phase III, although in the case of the ETS any actual set aside number will be as much a political agreement as anything else.

A correction will support the carbon price and more importantly give confidence to investors that the Commission is prepared to stand behind the market it has created, ensuring that it is the investment driver for emissions reduction in Europe and not just an annual compliance mechanism.