Archive for October, 2011

Where to now for aviation?

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Last week’s first commercial flight of the Boeing 787 Dreamliner potentially marks the beginning of a new era for the aviation industry. Its composite construction and 20% better fuel efficiency (than the 767) continues a long term trend of improvement by Boeing. But the numbers behind this essential global industry are daunting, albeit with impressive strides forward such as the 787.

Revenue Passenger Kilometres (RPK) have more than doubled since 1990 and the Boeing Current Market Outlook for the period 2011 to 2030 has RPK growth rates surging ahead in many parts of the world at well over 5% p.a. such that by 2030 RPK in the Asia Pacific area alone is nearly 4 trillion. Globally, 2030 traffic is forecast to be about triple that of today.

Total CO2 emissions (Source: IEA) have risen as well, but since 1990 the growth has been “only” 50%, compared with the more than doubling of activity. This points to the impressive jumps in fuel efficiency, with the Dreamliner delivering yet again.

The chart above gives an indication of the improvements achieved by plane type. I wasn’t able to locate actual efficiency figures, so the chart has been derived from the fuel capacity, passenger carrying capacity and range of various aircraft plotted against the year of release for the aircraft in question. Clearly the trend has been strongly down, starting with the Boeing 707 in the 1950s. But how much further can this impressive trend extend? Airlines are also pressing hard to increase efficiency of their legacy fleets by taking steps such as reducing weight, incentivizing passengers to do the same with their baggage, optimizing schedules and pushing air traffic control and airports to improve landing, takeoff and taxiing procedures.

But if air traffic is to triple in just 20 years, efficiency will have to jump by even more than it has to date to deliver any sort of sustainable service. Increasing Kerosene (Jet A1) demand will not only put pressure on crude oil demand, but will also pressure the yield of kerosene from the barrel. This will require refiners to become more inventive in the processing of crude oil and could well point to even higher energy demand by refineries to make more transport fuel from the barrels of crude available. It may also point to an even faster turnover of the fleet as airlines scramble to upgrade to the next generation of fuel efficient aircraft – planes such as the 787 Dreamliner, A380 and upcoming A350 series from Airbus.

Many airlines are now starting to experiment with biofuels and new production processes such as Fischer-Tropsch based Gas-to-Liquids with its high kerosene yields will add to the aviation fuel pool. But revolutionary step change airframes that might make up a future Boeing 800 or Airbus 400 series are unlikely to impact this 20 year picture, they just won’t be here in time or in sufficient numbers to make a difference (the Dreamliner was first mooted in the late 1990s). The2030 die is now largely cast with what we have and know about.

The challenge of an absolute reduction in CO2 emissions from aviation is also an unlikely prospect given the above figures. Yet by 2030 global emissions need to have peaked and be showing real falls. Although aviation may well continue to show impressive efficiency improvements and could have introduced biofuels into the mix by 2030, sheer demand will probably mean a rise in emissions. This then puts more pressure on other sectors to reduce, such as power generation and road transport.

Green growth or green confusion?

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I have just been at the inaugural Global Green Growth Forum (3GF) in Copenhagen. This was a high level event, opened by the Crown Prince of Denmark and the new Danish Prime Minister, then following the initial panel discussion there was an introductory keynote by United Nations Secretary General Ban Ki-Moon – in person. The venue was also around the corner from the Copenhagen Tesla dealership!! 

So the event got off to a flying start, but what then? One of the issues for me is that it wasn’t entirely clear what the conference was actually about. Green growth has become one of those new catch phrases that means many things, depending in large part on the listener. Perhaps the best articulation came in a coffee break discussion – “green growth” is the recognition of the type of growth in energy production and the provision of key goods and services that will be required over the coming decades as some three billion people move from a relatively low income status to middle class.

In fact this income shift is well underway and is placing stresses on a number of systems. Rising CO2 in the atmosphere is perhaps the early warning, but little has been done to mitigate that problem. Now there is concern about water, food, energy supply and general resource availability. Unlike the CO2 issue, there is little clarity as to what we might do about these issues. Faced with rising CO2 emissions, economists, the business community and much of civil society have been clear on the course of action to pursue – to put a price on carbon. We know how to do this, we know the timeframe within which it must be done and we have a reasonably clear notion of where it will lead (CCS, renewable energy etc.), but even this seems beyond our collective capacity to act. Instead, we are arguing about science, an otherwise solid bedrock of society.

At its root, the green growth agenda feels like a growing worry that the market structure we have created over the last two centuries isn’t sufficiently robust to take us forward and that somehow market fundamentals like supply, demand and ultimately price won’t work. It’s not exactly a surprise that we might be thinking this today, after all the financial markets have hardly done us any favours over the last two to three years. But does that mean markets in general will let us down? In the 1970s similar worries surfaced – then it was overpopulation, food supply and energy as the primary concerns. It was also a time of deep recession (1974), oil price shocks(1973) and a prevalence of floods (Australia 1974) and famine (Ethiopia 1973-74). But economies grew, the energy system adapted, amazing new technologies surfaced and food supply issues soon faded.

So back to the conference in Copenhagen and two days of leading figures talking about all things green. It was certainly interesting, but I don’t think it got very far. Leadership was identified as a key component, but there was no articulation as to where that leadership should take us. In fact, when one key panelist was answering a question on the agenda for Rio+20 he said that the agenda was currently lacking because there was no leadership. There was also a spattering of business bashing (e.g. “it is the fault of Japanese business that Japan won’t accept a second Kyoto commitment”) and even the assertion that government had sent a clear signal to business that it was serious about addressing climate change because of the agreement on the 2 °C target.

It looks like the green growth agenda is here to stay, even though we may just decide to take our chances with the market system that we have. But we shouldn’t do nothing. The CO2 issue represents a market failure, the Stern Report  made this clear in 2006. Arguably, deforestation is another. There are ways to address these failures within the existing market system, the application of a carbon price as discussed above is one. The development of REDD has the necessary ingredients to tackle deforestation.

A green growth agenda that can propose, clearly define and implement a limited number of such approaches is what we need. Hopefully the meeting in Copenhagen was a forerunner to this, rather than just a taste of more and more discussion forums.

The script of former Vice President Al Gore’s recent Climate Reality global web event started with the words, “Somewhere there may be an Earth where . . . . . . isn’t happening“ and went on to fill the blank with a series of climate events currently underway, then concluded, “But not here, not this Earth, we have to deal with reality.”

Reality was also an issue at two separate events that I attended this week in Europe, an IEA/IETA/EPRI Emissions Trading seminar in Paris and the annual Platts European Emissions Markets Conference in Brussels. I was also a keynote speaker at the latter. At the Brussels event the EU Commission spoke about the development of the EU Emissions Trading System, the progress towards Phase III and even noted that the current low carbon price in the EU was a suitable reaction to the recession and that the system had responded as necessary. In the Paris event, which was under the Chatham House Rule, we heard a similar story and a description of the expanding discussions between the EU and other governments with regards linkage of emissions trading systems. One might have come away from these thinking there is an Earth where rapid progress is being made in building carbon markets and using them to quickly and effectively reduce emissions on a global basis.

There may be an Earth which is doing this, but very unfortunately it isn’t this one. It should be, it needs to be, but we have to deal with reality.

The Brussels conference also heard from Mark Lewis of Deutsche Bank, who laid out a somewhat grim supply-demand picture for the ETS. Deutsche Bank estimate that the system is 400 million European Allowances (EUAs) long in Phase II, but with an additional potential for 800 million CERs (units from the UNFCCC Clean Development Mechanism) to enter the system, giving a total EUA equivalent length of 1.2 billion allowances going into Phase III (or the equivalent of 20 big coal fired power plants running continuously for the whole of Phase III). In addition, 200 million EUAs from the CCS support mechanism will be auctioned in the near future and 2012 will also see the early auction of some of the 2013 Phase III allowances. On the upside they do see that the system has the capacity to absorb all this over the coming years, to the extent that by 2020 there is a short position of 400 million allowances (i.e. reductions that will have to be found). They see this being largely absorbed by fuel switching (coal to natural gas), with existing gas turbine generation capacity allowing this to happen relatively easily. As such, they forecast a price of some €25 by 2015, with a cost of carry taking it to €28 by 2020. But there are a number of caveats to this, the two key ones being;

  • The assumption that neither the EU Energy Efficiency Target (the focus of the upcoming Energy Efficiency Directive) or the even higher profile Renewable Energy Target will be met. Of course if renewable energy supply surges as it has done in recent years thanks to the efforts in Spain (equivalent to 800 million allowances), the 400 million allowance short position will quickly evaporate.
  • The assumption that the aviation emissions trading proposal will go into full operation, with both incoming and outgoing flights covered by an expanded ETS. Their analysis reckons aviation to be some 400 million allowances short through to 2020, so if this important add-on to the ETS doesn’t happen or is significantly delayed, then the whole ETS is flat through to 2020. Although there is no final ruling by the European Court of Justice, this week the Advocate General did express the view in favour of ETS implementation in response to the court challenges from a number of international airlines.

In addition, despite the gathering storm clouds, Deutsche Bank have not factored in the possibility of a second major economic downturn.

So the reality is that although the ETS carbon price has potential upside, it could well remain very weak for a number of years on the back of a long supply-demand position. This is problematic. Although the allowance based system will always ensure that emissions are reduced to the level of the cap, if this happens with a carbon price in single figures, the system will not deliver on its further critical underlying objectives, which are:

  • Long term incentive to drive technology development, in particular carbon capture and storage (CCS) and renewable energy.
  • Early trigger to begin the major task of decarbonising the power sector with a particular need to guide investment into the 2020s.
  • Assisting developing countries in beginning the task of emissions reduction
  • Demonstrating the effectiveness of carbon pricing through an ETS with the goal of encouraging similar systems elsewhere.
  • Supporting the carbon market approach agreed under the Kyoto Protocol.

The combination of reduced emissions as a result of the recession in the EU and the impact of a plethora of Member State and Community wide supplementary policies operating in the ETS space has led to this overhang of allowances.

Over a number of recent blog postings I have set out the case for the removal of allowances in the ETS. At the Platts conference I spoke about the same thing using the linked presentation below. There is no challenge here to the ETS as such, it is a fully functioning, well designed emissions trading system, but it has been hit from all sides by a series of events.

The time to correct this is now. That is the new reality the EU Parliament and Commission must face up to.

Click here to see the presentation.