David Hone

The world is not on track to meet the target agreed by governments to limit the long term rise in the average global temperature to 2 degrees Celsius (°C).

International Energy Agency, June 2013

The International Energy Agency (IEA) is well known for its annual World Energy Outlook, released towards the end of each year. In concert with the WEO come one or more special publications and this year is no exception. Just released is a new report which brings the IEA attention back squarely on the climate issue, Redrawing the Energy-Climate Map. The IEA have traditionally focused on the climate issue through their 450 ppm scenario. While they continue to do that this time, they are also going further with a more pragmatic model for thinking about emissions, that being the “trillion tonne” approach. I have discussed this at some length in previous posts.

The report looks deeply into the current state of climate affairs and as a result fires a warning shot across the bows of current national and UNFCCC efforts to chart a pathway in keeping with the global goal of limiting warming to 2 °C above pre-industrial levels. The IEA argue that we are on the edge of the 2 °C precipice and recommends a series of immediate steps to take to at least stop us falling in. With the catchy soundbite of “ 4 for 2° “, the IEA recommend four immediate steps in the period from now to 2020;

1. Rapid improvements in energy efficiency, particularly for appliances, lighting, manufacturing machinery, road transport and within the built environment.
2. Phasing out of older inefficient coal fired power stations and restricting less efficient new builds.
3. Reductions in fugitive methane emissions in the oil and gas industry.
4. Reductions in fossil fuel subsidies.

These will supposedly keep some hope of a 2°C outcome alive, although IEA makes it clear that much more has to be done in the 2020s and beyond. However, it didn’t go so far as to say that the 2° patient is dead, rather it is on life support.

I had some role in all this and you will find my name in the list of reviewers on page 4 of the report. I also attended a major workshop on the issue in March where I presented the findings of the Shell New Lens Scenarios and as a result advocated for the critical role that carbon capture and storage (CCS) must play in the solution set.

As a contributor, I have to say that I am a bit disappointed with the outcome of the report, although it is understandable how the IEA has arrived where it has. There just isn’t the political leadership available today to progress the things that really need to be done, so we fall back on things that sound about right and at least are broadly aligned with what is happening anyway. As a result, we end up with something of a lost opportunity and more worryingly support an existing political paradigm which doesn’t fully recognize the difficulty of the issue. By arguing that we can keep the door open to 2°C with no impact on GDP and by only doing things that are of immediate economic benefit, the report may even be setting up more problems for the future.

My concern starts with the focus on energy efficiency as the principal interim strategy for managing global emissions. Yes, improving energy efficiency is a good thing to do and cars and appliances should be built to minimize energy use, although always with a particular energy price trajectory in mind. But will this really reduce global emissions and more importantly will it make any difference by 2020?

My personal view on these questions is no. I don’t think actions to improve local energy efficiency can reduce global emissions, at least until global energy demand is saturated. Currently, there isn’t the faintest sign that we are even close to saturation point. There are still 1-2 billion people without any modern energy services and some 4 billion people looking to increase their energy use through the purchase of goods and services (e.g. mobility) to raise their standard of living. Maybe 1-1.5 billion people have reached demand saturation, but even they keep surprising us with new needs (e.g. Flickr now offers 1 TB of free storage for photographs). Improvements in efficiency in one location either results in a particular service becoming cheaper and typically more abundant or it just makes that same energy available to any of the 5 billion people mentioned above at a slightly lower price. Look at it the other way around, which oil wells, coal mines or gas production facilities are going to reduce output over the next seven years because the energy efficiency of air conditioners is further improved. The fossil fuel industry is very supply focused and with the exception of substantial short term blips (2008 financial crisis), just keeps producing. Over a longer timespan lower energy prices will change the investment portfolio and therefore eventual levels of production, but in the short term there is little chance of this happening. This is a central premise of the book I recently reviewed, The Burning Question.

Even exciting new technologies such as LED lighting may not actually reduce energy use, let alone emissions. Today, thanks to LEDs, it’s not just the inside of buildings where we see lights at night, but outside as well. Whole buildings now glow blue and red, lit with millions of LEDs that each use a fraction of the energy of their incandescent counterparts – or it would be a fraction if incandescent lights had even been used to illuminate cityscapes on the vast scale we see today. The sobering reality is that lighting efficiency has only ever resulted in more global use of lighting and more energy and more emissions, never less.

An analysis from Sandia National Laboratories in the USA looks at this phenomena and concludes;

The result of increases in luminous efficacy has been an increase in demand for energy used for lighting that nearly exactly offsets the efficiency gains—essentially a 100% rebound in energy use.

 I don’t think this is limited to just lighting. Similar effects have been observed in the transport sector. Even in the built environment, there is evidence that as efficiency measures improve home heating, average indoor temperatures rise rather than energy use simply falling.

The second recommendation focuses on older and less efficient coal fired power stations. In principle this is a good thing to do and at least starts to contribute to the emissions issue. This is actually happening in the USA and China today, but is it leading to lower emissions globally? In the USA national emissions are certainly falling as natural gas has helped push older coal fired power stations to close, but much of the coal that was being burnt is now being exported, to the extent that global emissions may not be falling. Similarly in China, older inefficient power stations are closing, but the same coal is going to newer plants where higher efficiency just means more electricity – not less emissions. I discussed the efficiency effect in power stations in an old posting, showing how under some scenarios increasing efficiency may lead to even higher emissions over the long term. For this recommendation to be truly effective, it needs to operate in tandem with a carbon price.

The third and fourth recommendations make good sense, although in both instances a number of efforts are already underway. In any case their contribution to the whole is much less than the first two. In the case of methane emissions, reductions now are really only of benefit if over the longer term CO2 emissions are also managed. If aggressive CO2 mitigation begins early, and is maintained until emissions are close to zero, comprehensive methane (and other Short Lived Climate Pollutants – SLCP) mitigation substantially reduces the long-term risk of exceeding 2˚C (even more for 1.5˚C). By contrast, if CO2 emissions continue to rise past 2050, the climate warming avoided by SLCP mitigation is quickly overshadowed by CO2-induced warming. Hence SLCP mitigation can complement aggressive CO2 mitigation, but it is neither equivalent to, nor a substitute for, near-term CO2 emission reductions (see Oxford Martin Policy Brief – The Science and Policy of Short Lived Climate Pollutants)

After many lengthy passages on the current bleak state of affairs with regards global emissions, the weak political response and the “4 for 2°C “ scenario, the report gets to a key finding for the post 2020 effort, that being the need for carbon capture and storage. Seventy seven pages into the document and it finally says;

In relative terms, the largest scale-up, post-2020, is needed for CCS, at seven times the level achieved in the 4-for-2 °C Scenario, or around 3 100 TWh in 2035, with installation in industrial facilities capturing close to 1.0 Gt CO2 in 2035.

Not surprisingly, I think this should have been much closer to page one (and I have heard from the London launch, which I wasn’t able to attend, that the IEA do a better job of promoting CCS in the presentation). As noted in the recently released Shell New lens Scenarios, CCS deployment is the key to resolving the climate issue over this century. We may use it on a very large scale as in Mountains or a more modest scale as in Oceans, but either way it has to come early and fast. For me this means that it needs to figure in the pre-2020 thinking, not with a view to massive deployment as it is just too late for that, but at least with a very focused drive on delivery of several large scale demonstration projects in the power sector. The IEA correctly note that there are none today (Page 77 – “there is no single commercial CCS application to date in the power sector or in energy-intensive industries”).

Of course large scale deployment of CCS from 2020 onwards will need a very robust policy framework (as noted in Box 2.4) and that will also take time to develop. Another key finding that didn’t make it to page one is instead at the bottom of page 79, where the IEA state that;

Framework development must begin as soon as possible to ensure that a lack of appropriate regulation does not slow deployment.

For those that just read the Executive Summary, the CCS story is rather lost. It does get a mention, but is vaguely linked to increased costs and protection of the corporate bottom line, particularly for coal companies. The real insight of its pivotal role in securing an outcome as close as possible to 2°C doesn’t appear.

So my own “ 2 for 2°C before 2020“ would be as follows;

1. Demonstration of large-scale CCS in the power sector in key locations such as the EU, USA, China, Australia, South Africa and the Gulf States. Not all of these will be operational by 2020, but all should be well underway. At least one “very large scale” demonstration of CCS should also be underway (possibly at the large coal to liquids plants in South Africa).
2. Development and adoption of a CCS deployment policy framework, with clear links coming from the international deal to be agreed in 2015 for implementation from 2020.

But that might take some political courage!

As Australia struggled through the ill fated CPRS legislation and finally landed with its carbon pricing mechanism, I often thought that it would be much simpler if they just joined the EU ETS. Governments don’t tend to do simple practical things like that, perhaps it makes them feel they are giving away some portion of national sovereignty or that they aren’t doing the job they were elected for (i.e. “we must invent it here” syndrome). But despite all this and having gone the very long way around to get there, Australia has, in effect now joined the EU ETS (or perhaps the ETS has joined the Australian trading system).

Last week the Australian Government and the European Commission announced that their respective emission trading systems would link up progressively over Phase III of the EU system, but for Australian entities from the start of full carbon allowance trading in 2015. This is a bold move by both parties and quite possibly one that will make others with nascent trading systems sit up and think about where they want to go. For Australia, provided the changes can be implemented by a parliament that isn’t exactly friendly towards carbon pricing (but a wafer thin majority currently is), the move cements the system into place even further, in that undoing it would likely cause some embarrassment on the international stage. For the EU, it puts the ETS back in the frame and maybe introduces some additional demand at a time of allowance oversupply, depressed prices and a consequent lack of confidence in the system. Let’s hope this move helps both sides to deliver confidence and stability in their respective systems.

A full two-way link between the two cap and trade systems will start no later than 1 July 2018. Under this arrangement businesses will be able to use carbon units from the Australian emissions trading scheme or the EU Emissions Trading System (EU ETS) for compliance under either system. To facilitate linking, the Australian government will make two changes to the design of the Australian carbon price:

• The price floor will not be implemented;
• A new sub-limit will apply to the use of eligible Kyoto units. While liable entities in Australia will still be able to meet up to 50% of their liabilities through purchasing eligible international units, only 12.5% of their liabilities will be able to be met by Kyoto units.

In recognition of these changes and while formal negotiations proceed towards a full two-way link, an interim link will be established enabling Australian businesses to use EU allowances to help meet liabilities under the Australian emissions trading scheme from 1 July 2015 until the full link is established.

Various Australian, EU and other websites cover all the details, so I won’t repeat them here. Rather, let me spend some time on a key issue that this move raises, namely the future design of any international framework via the UNFCCC (or other process). Both Australia and the EU have stressed that this is a bilateral linkage, to the extent that the allowance transactions will not be processed through the International Transaction Log (ITL), but CER transactions will be. However, there will still be a Kyoto AAU balancing at various times to ensure compliance in that system (although there remains considerable uncertainty with regards the issuance of Kyoto Second Period AAUs as there has been no firm agreement on the full nature of that period).

Despite this apparent distancing from the Kyoto based ITL, it must still be the case that the overarching Kyoto framework has helped this linkage – I might even go a step further here and say “allowed this linkage to happen”. Thanks to the UNFCCC architecture, these two systems grew up with enough harmony to make a linkage possible.  They “count” the same way, “track” the same way and “comply” the same way.  Both the systems have common offset arrangements through CERs under the Kyoto Clean Development Mechanism and the units created under the Australian Carbon Farming Initiative are also Kyoto compliant. This means we have the makings of a linked system with global reach.

This could be the primary goal of a new international framework, i.e. to provide sufficient tools, rules and mechanisms which countries can use in developing their carbon trading systems, thus facilitating linkage at a convenient time for those interested in doing so. Such a linkage framework could deliver the global market that we need, as shown in my illustration below (which by the way has been around for about 5-6 years now, so for me it is great to see that one of my linkage lines has finally been filled in!!).

The opportunity to devise such a framework now exists under the Durban Platform for Enhanced Action, which aims to see a new international agreement in place by 2015, for commencement not later than 2020. The agreement between Australia and the EU should be seen as a catalyst for the thinking behind what is to come.

Finally, as something of an aside, one of the major complaints by Australian companies has been that the current $23 fixed price and the future market floor price put the Australian price of carbon “out of line with the international price”. I challenged this notion in a recent post, but irrespective those who called for such alignment have pretty much got what they wanted, although obviously not in the very short term. There may be eventual irony in this, should the EU system go through something of a recovery in its fortunes. While every indicator today points to a continued depressed price through to Phase IV, stranger things have happened in commodity markets.

P.S. I still think that the simplest approach for Canada, which has been putting off economy wide carbon pricing legislation for years, would be to join the EU ETS.

Next week the carbon pricing mechanism gets going in Australia, starting at a fixed price of AU$23 per tonne of CO2 in the first year, but later on shifting to a full cap-and-trade (probably around 2015). Early on the system will behave more like a carbon tax, in that the government will make available as many allowances as are required at the fixed price, but the infrastructure for the market based system will begin to appear, i.e. allowances, registries, compliance by surrender of allowances etc. A full description of how the Australian Carbon Unit works (the allowance) can be found here.

Apart from the side issue (although not so for some) as to whether Australia should be acting to reduce emissions, the debate has now shifted to whether or not the selected price of $23 is the right one. Many argue that as the “prevailing global price” of carbon is much lower, then Australia is out of step and therefore undermining its own competitiveness. The call seems to be for a price closer to $10, rather than $23.

The problem with this argument is that there is no prevailing global carbon price. Rather there are pockets of carbon pricing in many different jurisdictions. The largest of course is the EU, where the price is currently €8, low by historical standards. But this is a market responsive mechanism and has traded as high as €30 back in 2008 to €6 very recently. In Australian dollar terms, the high coincided with an exchange rate of $2 per €, so the price briefly touched AU$60. The average cost of compliance for Phase II of the ETS (i.e. 2008-2012), assuming purchasing throughout, has been very close to €17. The average exchange rate over the same period has been about 1.5 $/€, so that cost in Australian dollar terms is $25.50. As little as a year ago the ETS price was €15 at an exchange rate of 1.35, or just over AU$20, but the move down started shortly after that. There is something of an upward trend underway at the moment, perhaps in response to moves by the European Commission to support the market through backloading or a set aside of allowances. A look at the forward prices for EU allowances shows a 2020 contract at about €11-12 per tonne of CO2.

Other jurisdictions show variability as well, but in a different way. Canada does not have a Federal carbon pricing scheme, but provinces are beginning to act. Resource heavy Alberta has had a baseline and credit system up and running for a few years now which imposes a carbon price of CAN$15 per tonne on industrial emitters. British Columbia has had a carbon tax in place for some time, which is currently at CAN$25 per tonne, but rising this year to $30. This is about the same in Australian dollars.

The USA currently has two carbon pricing systems, the cap-and-trade system due to start in California in 2013 and the existing RGGI system in the North East States. California allowances currently trade at around US$16-17 (so about the same in Australian Dollars), but the RGGI price has always been relatively low, trading between $2-$4 since 2008. What is not apparent in the USA is the underlying implied CO2 price that will result from the regulatory approach through the Clean Air Act.

A variety of other carbon prices also exist around the world. The UK is introducing a domestic carbon price floor in the electricity sector, initially at £15.70 per tonne of CO2, or about AU$23.55 (at an exchange rate of 1.5 AU$/£). Norway has had a carbon tax in operation since 1991, with the price varying by sector. The average price is about AU$22 per tonne of CO2. In Sweden it is even higher, with the price around $AU100 per tonne of CO2. Switzerland has had a carbon tax in operation from 2008. The current price is up to CHF 36 per tonne, or about AU$37 per tonne.

Finally, there is the one price that could be argued to be global, which is the price of CERs in the Kyoto Protocol’s Clean Development Mechanism. This is currently very low (€4) due to lack of demand from its one main market, the EU ETS.

The price being imposed in Australia is the decision of the government and has been reached on the basis of some objective that it wants to meet. Whether or not this is “right” in terms of emission reductions remains to be seen, but the argument that Australia is “out of line” with the rest of the world is questionable at best. The rest of the world is all over the place, with carbon prices ranging from just a few dollars to over one hundred Australian dollars. On that basis, the Australian price is probably about “right” in terms of starting the system, giving it some grit and getting everybody going. Full cap-and-trade isn’t far off with allowance auctions due to begin as early as 2014, after which a floating price will prevail.

This week in Australia the carbon pricing mechanism (no, it isn’t a tax, despite some similarities) is back in the news as the government releases it’s budget for the coming fiscal period. The fixed price period of $23 per tonne (and rising) represents a significant new source of income for the government, although when the mechanism was announced so too were a number of cost offset measures for the consumer and trade exposed industries. As such, the system is largely revenue neutral, but this has done little to quell the noisy opposition to the policy package. On Wednesday, the day after the Budget was released, many newspapers again raised the issue of increasing prices related to the carbon pricing scheme and therefore falling living standards, despite statements by the government over recent months that the system recycles its revenue back through the economy. Unfortunately, public perception appears to be on the side of those who argue that this is a new and unnecessary cost burden.

This isn’t the only negative view that the public have of climate change policy. The other is that energy austerity is the mechanism we must adopt to reduce emissions. The source of this is many and various, including the government itself, some NGOs and even a few business organisations. “Turn out the lights to save the planet” has become a common rallying cry and is amplified by campaigns such as Earth Hour which calls for cities to be blacked out for one hour a year to highlight the issue of energy use and climate change.

So the public are left with the view that energy austerity and extra cost are the two routes to follow if climate change is to be robustly addressed. Little wonder it is an uphill battle gaining political traction on this issue. Perhaps some new and more accurate messaging should be formulated to help sell the need for policy action.

The energy austerity issue is one that can and should be tackled. Reducing energy use and improving energy efficiency are both good things to do, but should be advocated for on the basis of managing energy costs, not attempting to address climate change. For reasons discussed in an earlier posting, local energy austerity may not even be an effective emissions reduction strategy at all. At issue with energy is the emissions from our current sources, not necessarily how much we use. After all, energy availability is almost unlimited, it’s just harnessing it economically that is the challenge.

The austerity message has its roots in various social agendas, but has kept into the environmental agenda as well. It is easy to see why this has happened, given the clear link between ecosystem welfare and overuse (e.g. logging in tropical rain forests), but for the climate change debate this particular approach may not be helping the issue at all.

The climate change issue needs to return to its roots, which is managing, reducing and ultimately eliminating anthropogenic CO2 emissions. This is done by changing the primary energy mix, implementing upstream CCS and shifting final energy use in homes and transport (where emissions are very to capture) to carriers such as electricity, hydrogen and bio.

Such a change won’t come at no cost, but elements of it can be conveyed to the public more easily. For example, running a home entirely on electricity is very doable today, both in hot and cold climates. The option of electric, hydrogen fuel cell or bio mobility is also becoming a reality – and potentially an attractive one as oil prices remain in the realms of $100 per barrel. These are very different value propositions to the austerity message.

The emphasis then shifts to the upstream and the use of renewable energy in the electricity sector together with technologies such as CCS in combination with natural gas. Here costs can be managed and change implemented over time as the grid is renewed and expanded. This can be achieved through carbon pricing, either directly in a cap and trade system or indirectly through emission performance standards. Although the scale of change is less, over the last thirty years many countries have managed to almost eliminate sulphur emissions from both the electricity and transport sectors and have done so without great public rancour. Costs have dropped and the job has just been done.

Getting the message right is essential if we want to make progress on this issue. Pedalling austerity and high cost is neither helpful or even correct.

Energy policy development over the last decade has shown one thing for certain, governments the world over are persistent in their desire to alter the energy mix and/or at least begin to manage emissions. Whether this is purely for environmental reasons or for concerns about energy security or perhaps for long term fiscal security almost doesn’t seem to matter, energy policy development and emissions management continues to be a high priority. This then opens up the question as to how business should best respond to this trend and what role it should play?

Recent developments in Australia present a useful case study. When the CPRS (Carbon Pollution Reduction Scheme – a national cap-and-trade system) was proposed in 2008, an unintended coalition of certain business interests, the Federal Opposition and Green Party opponents eventually managed to see the bill fail. Many businesses actually supported the bill at the time, but seemingly the planets were not suitably aligned for passage. Had things been different, Australia would now have been in the late implementation phase of a relatively benign approach to managing emissions with a carbon price very likely around AU$10 per tonne, trading on the back of the global price for a Certified Emission Reduction (the UNFCCC offset mechanism) and its link to the EU ETS. Instead, events have resulted in a very different outcome. A fixed carbon price of $23 per tonne will be implemented from July, albeit transitioning to a market related price in a few years time. Recent media reports tell of a heated national debate now underway, with many arguing that the price is out of line with the “prevailing global price” and therefore leaving Australia competitively exposed. Not surprisingly, those that first opposed the CPRS and those concerned about the current price are in many cases, one in the same. The first offer in the form of the CPRS was arguably the better deal, yet it was turned down.

At least two offers have been made in the USA. In 2001 the Bush Administration offered a science and technology based approach which has delivered some results, but given a general lack of enthusiasm for implementation by the NGO community in particular with some business groups as unintended allies, the initiative failed in key areas such as the development of carbon capture and storage. Had real progress been made, rollout of the technology might have been underway today. Eight years later the second offer came from the Obama Administration in the form of a national cap-and-trade approach in combination with technology incentives, but this was also declined. Both of these were also relatively benign, the first because it represented an early start and would had been largely government funded and the second because the overall structure of the deal offered significant competitive protection for key industries and included both a long lead time for implementation and a soft start. The Clean Air Act offer now on the table appears to be the least palatable of all these and could well prove to be less effective in terms of actually reducing emissions. Given that it will require specific actions of large emitters, the implied carbon price for some facilities may be very high. In addition, the approach will address individual sources but may not result in a real reduction of national emissions because no overall cap will be in place.

Canada has also followed a fairly tortuous path in recent years. No substantive national programme to manage emissions has emerged, yet various forms of market based policy have been tested and rejected. Although carbon pricing mechanisms now exist in some provinces, a national standards based regulatory approach may well emerge, keeping pace with the Clean Air Act developments now underway in the USA. This is bound to be more complex and almost certainly more costly for business than the cap-and-trade approach that was first proposed back in about 2003. In 2005 a North American cap-and-trade approach was even studied by a combined EPA / Environment Canada Task Force.

 The increasing number of standards based or fixed price approaches that are now “on offer”, bring into question the wisdom of defeating “cap-and-trade”. The latter offers compliance flexibility through offset mechanisms, banking and limited borrowing, competition protection through free allocation in the early phases of implementation and even technology incentives through constructions such as the NER300 in the EU-ETS. By contrast, a standard has limited flexibility, no price transparency and potentially onerous penalties. This would appear to represent something of an “own goal”.

The EU faces a related issue today. Despite some initial grumbling, businesses in Europe actually accepted the first offer of the EU ETS (cap and trade). But its effectiveness has slowly eroded over time. This is partly due to the recession but there is also a policy design cause arising from the superimposition of multiple layers of policy, such as specific renewable energy targets, nuclear build rates, efficiency mandates and more. These policies are well meaning but often misaligned. As the ETS has weakened, this process has accelerated therefore compounding the problem. The business community is split over what to do about this with various proposals involving the set aside of allowances favoured by some, but others arguing that the system is naturally responding to events and should be left to find its own way. The problem with the latter position is that it could result in an ETS that becomes politically and economically irrelevant, leaving a standards based approach as the way forward in Europe as well. Another “own goal” in the making!

Depending on your take on events the toll has been as high as two Prime Ministers and one Leader of the Opposition, but Australia now has a carbon pricing mechanism operating in the economy (I say “now” in that even though it doesn’t formally start until July, the price exposure for companies was there the instant the law was officially passed). There does remain some uncertainty given the “blood oath” made by the current Opposition Leader to repeal the law, but at least for now the business playing field in Australia has changed.

The mechanism starts next July and is structured such that it transitions to an emissions trading system a few years later. This means that from the outset the approach is allowance based, with the government selling allowances at AU$23 per tonne of CO2 and then the same allowances being returned to government for emissions compliance. Somewhere around 2015 this will change in that the number of allowances available for distribution will be capped and banking of allowances, together with an opportunity to use offsets, will be allowed.

Australia has followed a near text-book approach to implementation as it has decided to recycle the funds collected directly back to consumers affected by the carbon price in the form of tax changes, with a bias towards those on lower incomes. Trade exposed industries will also see a direct recycle back, thus minimising the change in their international competitive positioning. The approach adopted by the government follows the cycle discussed in the WBCSD publication Carbon Pricing released earlier this year.

 The goal of a carbon price is to create a change in the economy such that the market begins to differentiate between goods and services on the basis of their carbon footprint.

In its generic realization, the carbon price, initially experienced by the emitter or fuel provider (e.g. by paying a tax, purchasing allowances from the government or implementing a required project), is passed through to the consumers of the product. The result is a change in the relative cost of most goods and services based on their carbon footprint, and the emergence of a new cost ranking within the economy. This will influence the purchasing decisions of consumers.

Products with a high carbon footprint will be less competitive, either forcing their removal from the market, or driving manufacturers to invest in projects to lower the footprint. Any revenue raised by the government from carbon pricing, will be typically directed to the treasury as part of the overall national budget process. It should be used efficiently; for example, to offset any net change in costs to the consumer by reducing taxes.

A transparent pass-through of operating costs to the consumer is an important feature of any market. It allows the manufacturer to adjust the sales price to maintain profitability, as new costs enter a process, or existing costs change. An increase in the sales price could only occur to the extent that the market allows the change to take place, due to competition from manufacturers with a different cost structure that may limit the potential for cost pass-through. This gives rise to one of the principal challenges of introducing carbon pricing into an economy.

Carbon pricing is being introduced piecemeal throughout the world. Some manufacturers incur the cost of carbon, while others do not, although they may be competing in the same market. A manufacturer incurring the cost of carbon is penalized, as the market price is set by a lower cost provider without the carbon price. This can result in “carbon leakage”, where a higher cost manufacturer struggles to compete, and market share is gained by a producer not subject to the carbon price. Consequently, the environmental integrity of the approach can be undermined and economic distortions introduced. A global carbon price is therefore important in order to gain a level playing field. Another challenge arises in heavily regulated markets where the producer may not be able to raise prices, and therefore cannot recover the carbon cost.

The design of a carbon pricing policy must recognize these issues.

Back in February when all this started, an observer might have thought that the economic roof had caved in.

But despite the difficult politics that have surrounded the proposal (now law), the government should be applauded for persisting. Regearing the economy and creating a different set of winners (and losers) somewhere down the road is not an easy task, but it has to be done.A command and control policy set which might appear as an alternative is both more expensive for consumers and far less flexible for business.

I happen to be in South Africa this week and a similar set of proposals is under discussion, although more likely implemented as a straight carbon tax. Australia and South Africa are similar in many respects – both are heavily dependent on coal and both are major resource based economies. South Africa will need to be even more thoughtful than Australia regarding recycle back into the economy, given the different income distribution in this country and the pressing need of access to electricity for all the population, but the principles which guide them should be the same. There is also the additional complication of having a state run monopoly providing electricity to the country, but even that is starting to change as the government looks at the introduction of independent renewable energy suppliers. As was the case in Australia, the battle lines are being drawn, at least according to the Cape Times today.

That part of the global economy exposed to a direct carbon price remains small, but it is rising and Australia is an important step, as will be South Africa. So far this isn’t enough to change the terms of the global energy mix, but it is having regional impacts. A similar move in China and / or the USA would change all that though.

Over recent weeks one of the major Australian newspapers (The Melbourne Age) has asked readers to submit questions on climate change and at the same time opened a poll so that all readers could vote on the questions they most wanted to see answered. The newspaper pledged to investigate and attempt to answer the top ten questions. The poll closed last weekend and the questions are now in. As promised, The Age has started to answer them. Without getting too lengthy and also drawing on many previous postings (so excuse the links), here are some thoughts from me on the ten questions (with abbreviated questions as headings – but click here to see the full questions: 

1. Can Australia make a difference by taking action?

While it is true that Australian emissions are small on a global scale and that therefore even reducing them to zero wouldn’t be sufficient to affect levels of CO2 in the atmosphere, this isn’t a reason not to take action. Climate change is a collective issue, a tragedy of the commons, which requires collective action to solve. No one country, region or industrial sector can solve this unilaterally. Even if the big three, China, the USA and the major EU economies acted alone (with China reaching a plateau in the short term and then reducing by 50% by 2050 and the US and EU reducing by 80% by 2050), global emissions would plateau at best assuming that the rest of the world emissions grew by no more than 1.5% per annum over the next 40 years (in fact they have been growing at well over 2% p.a. over recent decades). So this issue needs a response from all nations, including Australia.

Will Australia inspire other nations? This isn’t the primary motivation of acting and in any case many nations around the world are beginning to move on this issue and take action. The responses still vary widely, but they are underway. For example, Canada is developing legislation to stop the further construction of coal fired power stations, unless carbon capture and storage is utilised. China is now very close to introducing a carbon price into some parts of its economy and California is starting up a cap-and-trade system. The list is long and growing, even though the sum total of global efforts fall short of the necessary level of ambition.

2. What about agricultural emissions?

There is no doubt that agricultural emissions are important. As such, they featured in some detail in a recent study released by WWF and Ecofys which looks at the feasibility of a near zero emissions world by 2050. Although the primary focus of the report is energy, there is much said about agriculture because of the growing interaction with the energy system. For example, see page 62 of the report for a series of recommendations that relate to food and agriculture.

3. Isn’t it true that the magnitude of future warming is not “settled science”, but in fact highly uncertain?

Climate change is all about uncertainty, but a great deal of work has been done in this field. The MIT Joint Program on the Science and Policy of Global Change focuses considerable effort on communicating the risk and uncertainty (The Greenhouse Gamble) related to climate change. But importantly it also demonstrates that a policy led approach to managing emissions can shift the risk and offer benefits over the long term.

4. Shouldn’t we just go nuclear?

At least for the time being, there is no single solution to this issue. We will need a broad range of solutions. Even in France where nuclear has grown to dominate (~80%) the electricity sector over the last 40 years, emissions have only fallen by 14% (from 435 MT to 374 MT from 1971 to 2008 according to the IEA).

5. Are climate skeptics funded by industrial concerns so as to maintain the status quo?

The origins of climate skepticism and the driving force behind it is examined in great detail by Naomi Oreskes and Erik Conway in their book “Merchants of Doubt”. This is an excellent read and turns up some surprising answers, linking those who question and challenge the issue of climate change with the same people and groups who challenged tobacco as a cause of cancer, acid rain and the destruction of forests, chlorofluorocarbons and the thinning of the ozone layer and so on.  

6. Why is there so little investigative journalism into the science and its flaws.

This is because the science isn’t flawed. Yes, there remains uncertainty, but new research is refining and improving our knowledge of the Earth’s climate system and how it is expected to respond to increasing levels of CO2. I discussed the science in some detail in a recent post.

7. Renewables are viable now, so why do we need coal and uranium for baseload power?

A number of renewable technologies offer a great deal of potential and some are being widely deployed, such as onshore wind. But there are limits to the rate at which these new technologies can be fully developed and deployed. As such, we will need a broad range of energy technologies for a long time to come. My colleagues in the Shell scenarios team wrote about these limits in an article published in Nature late in 2009 and I discussed it in a posting at that time.

8. Is it possible to have a fruitful debate on the science given existing belief structures?

As mentioned above, I discussed the science at some length in a recent posting. But we do seem to live in a world today that is becoming detached from science, despite our increasing dependency and love of technology. I wrote a post on this last year. Perhaps belief structures are getting in the way, an issue which is also discussed by Naomi Oreskes in the book mentioned above.

9. How do the Liberal Party’s policies compare with other centre-right policies around the world?

I don’t think there is such a strong link between political leaning and climate policy, despite the rhetoric on this subject. Policy approaches vary widely around the world as do the governments that set them. For example, in the EU where there are 27 Member States with governments covering a broad range of the political spectrum, including many centre-right governments, there is a comprehensive climate change policy framework now in place which includes emissions trading, long term targets and tough energy efficiency goals. This policy framework goes beyond any of the party proposals under consideration in Australia today, but equally it has been in development for nearly ten years. It started out very modestly. In North America where there has been little progress on climate legislation at the federal level, many US States and Canadian Provinces, again covering a broad range of the political spectrum, have implemented far reaching emissions management policies. In the United States it was the Republican Party (centre-right) which introduced cap-and-trade (emissions trading) to the world when they decided to use that policy instrument to manage sulphur emissions from power stations in the 1980s.

10. Why should we believe the science when there is no observed relationship between climate and atmospheric CO2?

There is really no question of a relationship between climate and atmospheric CO2. This was shown over 100 years ago and explains very clearly and without challenge why the surface of the planet is temperate where a simple heat / radiation balance calculation shows that it should be frozen. The issue is therefore how much more change will occur as we double or triple the level of CO2 in the atmosphere.

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 1^st 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 (12^th 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 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.

By many accounts 2011 has been a year of weather extremes and some commentators have used certain events to highlight the risks associated with climate change. While there is increasing evidence of unusual global weather events, should we just assume that every disaster is a sign of things to come? I find, given my job title, that people do ask me about these associations, so it is perhaps time to put some thought to this and at least give my perspective on the issue.

For me, two particular series of events have stood out in 2011, the very extensive flooding in my home country of Australia and the recent upsurge in tornado activity in the USA.

There are also plenty of other events in recent times – for example, “Snowmaggedon” in the US North East in January 2010, the Australian bushfires of 2009 and the intense heat wave of the same period and going back a bit further the European  heat wave of 2003 during which all-time record temperatures were reached in many cities. Although Australia has a long history of bushfires, much of that part of Southern Australia also broke all-time temperature records in the days prior to the fires.

As the world warms the convective processes in the atmosphere could be expected to increase simply because of the additional energy into the system. Similarly, global precipitation (rain, snow, ice) should increase as the hydrological cycle speeds up given the overall higher level of moisture held in the atmosphere. Estimating global precipitation is a relatively new field of science, but there is some evidence that precipitation levels may be increasing. The US National Climate Data Centre said early this year that 2010 equaled the hottest on record – less noticed was their calculation that global rainfall levels were the highest since at least 1900. 

 Returning to the events of 2011, it is perhaps too easy to assume that this is climate change on show. In fact it probably isn’t. Severe tornadoes have been recorded in the USA since regular records were first kept and even the coincidence of floods in Australia and bumper tornado years in the USA isn’t a one-off event:

2011

• February 2011: Record flooding across much of Queensland.
• April/May 2011: Super Outbreak of tornado activity in the USA, with high death tolls in Tuscaloosa and Joplin in particular.

 1974

• January 1974: Widespread major flooding occurred in almost all areas of the State during this month. Few areas had no flooding at all. One of these was the Dumaresq River upstream from Goondiwindi , where at one stage during the month , water was released for irrigation. Record flooding occurred in the Bulloo , Paroo , middle and lower reaches of the Flinders , Norman , Gilbert , Cooper , Diamantina , Georgina and Eyre rivers and creeks as well as Nerang, Brisbane City metropolitan , upper Brisbane, Bremer , Warrill and Logan rivers and creeks, the latter associated with Cyclone “Wanda”.
• April 1974: The Super Outbreak of tornadoes of 3–4 April 1974 remains the most outstanding severe convective weather episode of record in the continental United States. The outbreak far surpassed previous and succeeding events in severity, longevity and extent. The death toll was over 300.

 1936

• January – March 1936: In the period 6th to 15th January many western rivers flooded, especially in the north-west and south-west. Flooding was heavy in the Cloncurry-Mt Isa districts. The Cloncurry River reached the highest known level and the Leichhardt River was the highest for 20 years. There were big floods in the Burke River at Boulia where homes were partly submerged and stock losses reported. The Barcoo River was over the bridge at Blackall. Rail lines were submerged in several districts and traffic seriously disorganised. Local flooding occurred in a few eastern districts. Rail wash outs occurred between Bowen and Proserpine. A man drowned near Charters Towers and another in the Bell district. From February 14th and 20th there was extensive flooding in coastal areas between Cooktown and Mackay. Some serious inundations occurred especially in the Innisfail district where considerable damage was reported to crops and roads, and a lad drowned.
• April 1936: The 1936 Tupelo–Gainesville tornado outbreak was an outbreak of seventeen tornadoes that struck the Southeastern United States from April 5 to 6th, 1936. Approximately 436 people were killed by these tornadoes. Although the outbreak was centered around Tupelo, Mississippi and Gainesville, Georgia, other destructive tornadoes associated with the outbreak struck Columbia, Tennessee, Anderson, South Carolina and Acworth, Georgia. Severe flash floods from the associated storms also produced millions of dollars in damage across the region.

1936, 1973-74, 2010-2011 all correspond to a strong La Nina phenomena in the Pacific Ocean. There are probably other such combinations, the above is not meant to be a comprehensive analysis.

With regards tornadoes in particular, a colleague of mine who is very well versed in climate science offered a useful perspective. Tornadoes are the result of two interacting phenomena – which perversely are trending in opposite directions.  First, there is convective energy (which is increasing as the atmosphere warms) – the major source in this case being the warm sea water in the Gulf of Mexico.  But more is needed to form tornadic super cell thunderstorms – so second is sufficient wind-shear, giving rise to local rotation (meso-cyclone formation). This wind-shear is connected to the winds aloft, i.e. the strength of the polar jet-stream, which in turn is tightly connected to the temperature contrast along the polar front (at it is greatest in winter and spring).  In all climate models this temperature gradient declines over time because polar areas warm up faster than the (sub)tropics. How the combination of these two drivers will end up is highly uncertain. The same also applies to mid-latitude storms in general.

What caused the mayhem in the US?  The combination of a warmer than average Gulf of Mexico and a relatively cool spring in southern Canada and the Northern US created ideal conditions for violent tornado activity.   Secondly there was awful luck – Tuscaloosa and Joplin received the direct impact of EF4/EF5 tornadoes.

Meanwhile, the more clear-cut effects of a warming world are progressing. Arctic and Antarctic ice is declining and sea level is rising. Perhaps the Roman analogy is that while we are distracted by Tempestas flying overhead, Neptune has been knocking at the door and is now in the building.