Archive for the ‘Australia’ Category

The Australian Prime Minister, Tony Abbott, turned up in Queensland very recently to open a coal mine (the $US3.4 billion Caval Ridge Mine in Central Queensland, a joint venture between BHP and Mitsubishi which will produce 5.5 million tonnes annually of metallurgical coal and employ about 500 people). In a TV interview he managed to inflame a number of commentators around the world with his quote that “Coal is good for humanity, coal is good for prosperity, coal is an essential part of our economic future, here in Australia, and right around the world . . . . . “.

In this world in which it is difficult for politicians to say anything without getting criticised, he was perhaps in a losing situation before he spoke, simply because of the critical role that coal happens to play in the global economy cast against the reality that its cumulative carbon footprint is the single largest contributor over time to the build-up of CO2 in the atmosphere. More recently, increased coal use has also contributed most to the rapid rise in global emissions.

In one sense Abbott is correct in that over and over again coal has been the starting point for industrial development. I explored this in more depth a few months ago. Coal is an inexpensive fuel, but perhaps most importantly it requires only minimal technology to utilize. There is no need for pipelines, leakage monitoring or sophisticated storage facilities. One could argue that the most important piece of technology is a shovel. This was true in Victorian England, it is still true in parts of China today and it may well be the case as Africa begins to industrialize on a large scale. Of course, the development of Africa on the back of the vast coal resource that sits in that continent (200 billion tonnes in Botswana alone) will send emissions to levels that are hard to contemplate and even more difficult to reduce. That is highly unlikely to be good for humanity.

Contrast this with the latest offering from activist and author Naomi Klein, who has recently published a book on the climate issue; This Changes Everything. I am about a quarter of the way into this and try as I may to be objective, I am already wondering if I will ever finish it. I feel that I have already been vilified a hundred times over, not just as part of the fossil fuel industry that she likens to an evil empire, but also as a shareholder daring to expect a return on my investments (“. . . . pour their profits into shareholder pockets . . .” ). Ms. Klein seems to believe that nothing short of a return to collective ownership, community living, local production and simple lifestyles will be sufficient to reduce carbon dioxide emissions. She blames anybody and everybody for the problem of rising emissions and lands the issue squarely at the feet of the economic system that has served us pretty well for centuries. Apart from her argument for the need to change everything, it looks as if I will have to plough through another 300 pages to find out how she imagines this might actually happen. My guess is that it could be more wishful thinking than practical policy advice. Should I ever get to page 533 (!!) I will let you know, but I don’t know if I have a thick enough skin for that.

One reviewer did manage to make it to the end and his views can be found here.

In the midst of this cacophony of criticism, the rational middle continues on without much of a voice. But some of us are at least trying. My new book, Putting the Genie Back: 2°C will be harder than we think, hasn’t attracted the talk shows or celebrity endorsements yet, but I have at least had some good feedback from readers and that is very gratifying. I wrote it to try and present a more balanced view of the climate issue and it does seem to be succeeding in that regard.

There is a well-known saying that “Politics makes strange bedfellows”. In recent weeks, carbon pricing has seen its share of media exposure and strange bedfellows, although this shouldn’t come as a surprise given that it is all about politics anyway. The good news is that this much maligned and misunderstood subject is finally getting some solid airtime, albeit from some interesting supporters.

The re-emergence of this subject has been building for some time now, but perhaps was highlighted by the June 21st op-ed by Hank Paulson in the New York Times. Paulson served as Secretary of the Treasury during the recent Bush administration, following many years at the helm of Goldman Sachs. Although his article was in part directed at the launch of the recent Risky Business report, Paulson used the opportunity to reach out to the Republican side of the political spectrum in the US and argue that a carbon price (a tax in this case) was “fundamentally conservative” and “will reduce the role of government” rather than the opposite which many opponents argue. At least in my view, he is right. Intervening in the energy mix, forcing certain technology solutions, requiring a given percentage from a particular energy source and so on are all big government steps towards addressing emissions. A carbon price is clean and simple and can get the job done.

On the opposite page of the New York Times was the reality check from Nobel Prize winning economist Paul Krugman. While Krugman made it clear that Paulson had taken a “brave stand” and that “every economist I know would start cheering wildly if Congress voted in a clean, across-the-board carbon tax”, the sobering reality from Krugman is “we won’t actually do it”. Rather, he imagines a set of secondary measures, the “theory of the second best” as he calls it, including vehicle efficiency standards, clean energy loan guarantees and various other policy measures. My view is that while all of these are important parts of a coherent energy policy, they are approaching third best when it comes to CO2 emissions.

Meanwhile, another strong advocate of carbon pricing has emerged, namely the World Bank. They have never been silent on the issue and indeed have pioneered policy approaches such as the Clean Development Mechanism of the Kyoto Protocol, but this time they have gone much further and are being considerably louder and bolder. The World Bank have produced a statement, “Putting a Price on Carbon” and have called on governments, companies and other stakeholders (e.g. industry associations) to sign up to it. The statement calls for:

. . . the long-term objective of a carbon price applied throughout the global economy by:

  • strengthening carbon pricing policies to redirect investment commensurate with the scale of the climate challenge;
  • bringing forward and strengthening the implementation of existing carbon pricing policies to better manage investment risks and opportunities;
  • enhancing cooperation to share information, expertise and lessons learned on developing and implementing carbon pricing through various “readiness” platforms.

This is all good stuff, but of course now it needs real support. A further look at the World Bank website illustrates the growing patchwork of activity around carbon pricing. It’s quite heartening.

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To finish where I started, the strange bedfellows, perhaps nothing could be closer to this than seeing Australian mining magnate and now Member of Parliament, Clive Palmer, on the same stage as climate crusader Al Gore. Only weeks before Mr Gore had made the very clear statement that “We must put a price on carbon in markets and a price on denial in politics”, but nevertheless stood with Palmer as he announced that he would support the Government’s decision to repeal the Carbon Pricing Mechanism (there isn’t a colour for repeal on the World Bank map). I don’t think Mr Gore was particularly happy about that bit, but hopefully was there for the follow-on, where Palmer announced that his party would require a latent ETS to be established in Australia for use once Australia’s main trading partners were also pricing carbon. Given PUP’s (Palmer United Party) hold on the balance of power in the Australian Senate, this might at least mean that Australia will stay in the ETS club and emerge again as a player in the years to come. However, considering the fact that New Zealand, the EU, parts of China, Pacific North America (i.e. California, British Colombia), Japan and (soon) South Africa all have some sort of carbon price, latency may indeed be short lived.

With the USA (at a Federal level) going down the regulatory route instead, the Australian Prime Minister touring the world arguing against it and the UNFCCC struggling to talk about it, perhaps it is time to revisit the case for carbon pricing. Economists have argued the case for carbon pricing for over two decades and in a recent post I put forward my own reasons why the climate issue doesn’t get solved without one. Remember this;

Climate formula with carbon price (words)

Yet the policy world seems to be struggling to implement carbon pricing and more importantly, getting it to stick and remain effective. Part of the reason for this is a concern by business that it will somehow penalize them, prejudice them competitively or distort their markets. Of course there will be an impact, that’s the whole point, but nevertheless the business community should still embrace this approach to dealing with emissions. Here are the top ten reasons why;

Top Ten

  1. Action on climate in some form or other is an inconvenient but unavoidable inevitability. Business and  industry doesn’t really want direct, standards based regulation. These can be difficult to deal with, offer limited flexibility for compliance and may be very costly to implement for some legacy facilities.
  2. Carbon pricing, either through taxation or cap and trade offers broad compliance flexibility and provides the option for particular facilities to avoid the need for immediate capital investment (but still comply with the requirement).
  3. Carbon pricing offers technology neutrality. Business and industry is free to choose its path forward rather than being forced down a particular route or having market share removed by decree.
  4. Pricing systems offer the government flexibility to address issues such as cross border competition and carbon leakage (e.g. tax rebates or free allocation of allowances). There is a good history around this issue in the EU, with trade exposed industries receiving a large proportion of their allocation for free.
  5. Carbon pricing is transparent and can be passed through the supply chain, either up to the resource holder or down to the end user.
  6. A well implemented carbon pricing system ensures even (economic) distribution of the mitigation burden across the economy. This is important and often forgotten. Regulatory approaches are typically opaque when it comes to the cost of implementation, such that the burden on a particular sector may be far greater than initially recognized. A carbon trading system avoids such distortions by allowing a particular sector to buy allowances instead of taking expensive (for them) mitigation actions.
  7. Carbon pricing offers the lowest cost pathway for compliance across the economy, which also minimizes the burden on industry.
  8. Carbon pricing allows the fossil fuel industry to develop carbon capture and storage, a societal “must have” over the longer term if the climate issue is going to be fully resolved. Further, as the carbon pricing system is bringing in new revenue to government (e.g. through the sale of allowances), the opportunity exists to utilize this to support the early stage development of technologies such as CCS.
  9. Carbon pricing encourages fuel switching in the power sector in particular, initially from coal to natural gas, but then to zero carbon alternatives such as wind, solar and nuclear.
  10. And the most important reason;

It’s the smart business based approach to a really tough problem and actually delivers on the environmental objective.

Scaling up for global impact

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A visit to Australia offers a quick reminder of the scale to which Liquid Natural Gas (LNG) production has grown over recent years. This was a technology that first appeared in the 1960s and saw a scale up over the 1970s and 1980s to some 60 million tonnes per annum globally. As energy demand soared in the 1990s and 2000s, LNG production quickly rose again to around 300 million tonnes per annum today and could reach 500 million tonnes per annum by 2030 (see Ernst & Young projection below).

2012OGJcolors

Flying into Australia we crossed the coast near Dampier in Western Australia, which is currently “Resource Central” for Australia. The waters were dotted with tankers (I counted 14 on the side of the plane I was sitting on) waiting for loading, many of which had the distinctive LNG cryogenic tanks on their decks. Two days later the first shipment of LNG from the new Papua New Guinea project took place and this received considerable coverage in the Australian media. Clearly LNG is booming in this region, with even more to come. Most major oil and gas companies have projects in development and there are several LNG “startups” considering projects.

This is a great example of technology scale up, which is going to be key to resolving the climate issue by progressively shifting energy production and use to near zero emissions over the course of this century. Carbon capture and storage (CCS) is one of the technologies that needs to be part of that scale up if we are serious about net zero emissions in the latter part of the century.

There are many parallels between LNG production and CCS which may offer some insight into the potential for CCS. Both require drilling, site preparation, pipelines, gas processing facilities, compression and gas transport, although LNG also includes a major cryogenic step which isn’t part of the CCS process.

LNG production and CCS are both gas processing technologies so the comparison between them needs to be on a volume basis, not on a tonnes basis. CO2 has a higher molecular weight than CH4 (methane), so the processing of a million tonnes of natural gas is the same as nearly 3 million tonnes of CO2. As such, the production scale up to 500 million tonnes of LNG by 2030 could be equated to nearly 1.5 billion tonnes of CO2 per annum in CCS terms, which is a number that starts to be significant in terms of real mitigation. The actual scale up from today to 2030 is projected to be 200-250 million tonnes of LNG, which in CCS terms is about 700 million tonnes of CO2.

This is both a good news and bad news story. The scale up of LNG shows that industrial expansion of a complex process involving multiple disciplines from across the oil and gas industry is entirely possible. LNG took two to three decades to reach 100 million tonnes, but less than ten years to repeat this. In the following ten years (2010-2020) production should nearly double again with an additional 200 million tonnes of capacity added. These latter rates of scale up are what we need now for technologies such as CCS, but we are clearly languishing in the early stages of deployment, with just a few million tonnes of production (if that) being added each year.

What is missing for CCS is the strong commercial impetus that LNG has seen over the last fifteen years as global energy demand shot up. With most, if not all, of the technologies needed for CCS already widely available in the oil and gas industry, it may be possible to shorten the initial early deployment stage which can last 20 years (as it did for LNG). If this could be achieved, CCS deployment at rates of a billion tonnes per decade, for starters, may be possible. This is the minimum scale needed for mitigation that will make a tangible difference to the task ahead.

The commercial case for CCS rests with government through mechanisms such as carbon pricing underpinned by a robust global deal on mitigation. That of course is another story.

For a country that has been so polarised on the climate issue and has struggled to make progress implementing effective mitigation policy, it is surprising how often the subject appears on the front pages of the national newspapers. I am in Australia for a couple of weeks visiting friends and relatives and seemingly on cue the carbon issue is front and centre of The Australian [$$] on the day I arrive. A previous visit timed itself perfectly with the announcement by then Prime Minister Julia Gillard that the country would have a carbon tax (now in the process of being repealed).

This time, the story headline is “Heartache as carbon credits turn to debt” and it discusses the challenge that one particular farmer is having banking his soil carbon credits. This may sound a bit obscure for the front page of a national daily, but such is the issue in Australia that a story like this becomes national news. Soil carbon is now at the heart of the national mitigation effort, with the government implementing an Emission Reduction Fund to encourage farmers to change their tilling, land management and crop growing practices to build up carbon in the soil. The increase in soil carbon can be converted to carbon credits and sold to the government.

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In the case of the farmer in this story, the stored carbon on his property and its potential for credit issuance is not being recognised as an asset by his bank and therefore his farm is under threat due to debt issues (unrelated to the credits). The problem the bank has is that under the current rules soil carbon credit issuance requires a guarantee of permanence that stretches out 100 years. This in turn ties up the land for that period, which potentially impacts on the bank should it end up with the property due to mortgage default.

There are plans by the current government to change the permanence requirement to 25 years, which may help solve the problem above and others like it, but in turn raises a new problem related to the mitigation potential of soil carbon. The point about carbon sequestration, whether it be via CCS, reforestation, soil carbon buildup or other means is that it should be permanent because of the cumulative nature of carbon emissions to the atmosphere. Simply reducing the flow of carbon to the atmosphere in a given year isn’t good enough if that same carbon eventually makes its way into the atmosphere later on.

While a 100 year permanence requirement doesn’t guarantee true sequestration either, it does at least shift any future release of that carbon into a time when the energy system should have substantially changed and other anthropogenic emissions are therefore much lower or even approaching zero. This can’t be said for a 25 year requirement. In such a relatively short space of time the energy system will still look largely as it does today, even if big change is underway. We need to be able to store carbon well beyond the fossil era or ensure that permanence actually means permanent.

With soil carbon now so important to Australia, these and other issues related to its implementation and most importantly, effectiveness and therefore recognition internationally are bound to continue to make news. While resource development is now the primary generator of national wealth, the country is nevertheless turning again to its rural sector to make ends meet.

One of the best books I have read in recent years is the Steve Jobs biography by Walter Isaacson. It’s also a great management book, although I don’t think that it was really intended for that purpose. In discussing Jobs’ approach to life and business management, Isaacson goes to some length to describe the concept of a Reality Distortion Field (RDF), a tool used on many occasions by Jobs to inspire progress and even bet the company on a given outcome. The RDF was said to be Steve Jobs’ ability to convince himself and others to believe almost anything with a mix of charm, charisma, bravado, hyperbole, marketing, appeasement and persistence. RDF was said to distort an audience’s sense of proportion and scales of difficulties and made them believe that the task at hand was possible. This also seems to be the case with a number of renewable energy, but most notably the Solar PV, advocates.

The Talosians from Star Trek were the first aficionados of the RFD

It is always with interest that I open the periodic e-mail from fellow Australian Paul Gilding and read the latest post from him in The Cockatoo Chronicles. But this time, the full force of the Renewables Distortion Field hit me. Gilding claims that;

 I think it’s time to call it. Renewables and associated storage, transport and digital technologies are so rapidly disrupting whole industries’ business models they are pushing the fossil fuel industry towards inevitable collapse. Some of you will struggle with that statement. Most people accept the idea that fossil fuels are all powerful – that the industry controls governments and it will take many decades to force them out of our economy. Fortunately, the fossil fuel industry suffers the same delusion. In fact, probably the main benefit of the US shale gas and oil “revolution” is that it’s keeping the fossil fuel industry and it’s cheer squad distracted while renewables, electric cars and associated technologies build the momentum needed to make their takeover unstoppable – even by the most powerful industry in the world.

My immediate approach to dealing with a statement like this plays into the next paragraph by Gilding, where he says;

How could they miss something so profound? One thing I’ve learnt from decades inside boardrooms, is that, by and large, oil, coal and gas companies live in an analytical bubble, deluded about their immortality and firm in their beliefs that “renewables are decades away from competing” and “we are so cheap and dominant the economy depends on us” and “change will come, but not on my watch”. Dream on boys.

But the energy system is about numbers and analysis, like it or not. Perhaps Gilding needs to at least look in his own back yard before reaching out for global distortion. In a number of posts over the last year or two he was waxed lyrical about the disruption in Australia and consequent shift in its energy mix. Yet the latest International Energy Agency data on Australia shows that fossil fuel use is continuing to rise even as residential solar PV is becoming a domestic “must have”. There is no escaping these numbers!

Australia primary energy to 2012

It is true that solar PV is starting to have an impact on the global energy mix and that at least in some countries the electricity utilities are playing catch-up. But the global shift will likely take decades, even at extraordinary rates of deployment by historical standards. The Shell Oceans scenario portrays such a shift, with solar deployment over the next 20 years bringing it to the level of the global coal industry in 1990 and then in the 30 years from 2030 to 2060 the rate of expansion far exceeds the rate of coal growth we have seen from 1990-2020 (see chart).

Solar growth in Oceans

I would argue that this is a disruptive change, but it still takes all of this century to profoundly impact the energy mix. Even then, there remains a sizable oil, gas and coal industry, although not on the scale of today. Of course this is but one scenario for the course of the global energy system, but it at least aligns in concept with the aspirations of Paul Gilding. I don’t imagine he would be particularly impressed by our Mountains scenario!!

 Solar in Oceans

Many will of course argue that the proof of the RDF is in the Apple share price and its phenomenal success. But this didn’t come immediately. Apple and Jobs had more ups and downs than even the most ardent follower would wish for, with the company teetering on the brink more than once (read the Isaacson account). But it persisted and nearly forty years on it is a global behemoth. However, forty years isn’t exactly overnight and IT change seems to take place at about twice the rate of energy system change. Does that mean new energy companies won’t become global super-majors until much later this century?

 

Emissions Trading via Direct Action in Australia

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The Australian Government recently released a Green Paper describing in more detail its proposal for an Emission Reduction Fund (ERF), the principle component of its Direct Action climate policy. The ERF will sit alongside renewable energy and reforestation policies, but is designed to do the bulk of the heavy lifting as the Government looks for some 430 million tonnes of cumulative reductions (see below) over the period 2014 to 2020. The ERF will have initial funding of about AU$ 1.55 billion over the forward period, with the money being used to buy project reductions (as Australian Carbon Credit Units or ACCUs) from the agriculture and industrial sectors of the economy by reverse auction. These reductions will be similar to those that are created through the Clean Development Mechanism (CDM) available under the Kyoto Protocol.

 Australia Reduction Task to 2020

Although the fund and reverse auction process are discussed in some detail and appear as central to the policy framework, this may not be the case as the system is rolled out and the full framework developed. The issue that comes from such an approach to emissions reduction is that despite buying project reductions from the economy, the overall emissions pathway for the economy as a whole still does not follow the expected trajectory. The ERF may also encounter a number of issues seen with the CDM, all of which are some form of additionality;

  1. Determining if there would have been higher emissions had the project not happened. Perhaps the reduction is something that would have happened anyway or the counterfactual position of higher emissions would never have actually happened. For example, an energy efficiency gain is claimed in terms of a CO2 reduction but the efficiency gain is subject to some amount of rebound due to increased use of the more efficient service, therefore negating a real reduction in emissions. Further, the counterfactual of higher emissions might never have existed as the original less efficient process would not have operated at the higher level.
  2. Double counting – the project presumes a reduction that is already being counted by somebody else within the economy as a whole. For example, an energy efficiency gain in a certain part of the supply chain is claimed as an emissions reduction, but this is already intrinsic to the overall emissions outcome for another process.
  3. Rent seeking – project proponents seek government money for actions already underway or even construct an apparent reduction.

The Australian emissions inventory will be measured bottom up based on fuel consumption, changes in forest cover and land use and established estimates / protocols for agriculture, coal mine fugitive emissions, landfill etc. It will not be possible to simply subtract the ERF driven reductions from such a total unless they are separate sequestration based reductions, e.g. soil carbon. This is because the ERF reductions are themselves part of the overall emissions of the economy.

The Green Paper clearly recognizes theses issues and proposes that the overall emissions pathway through to 2020 must be safeguarded. In Section 4 it discusses the need for “An effectively designed framework to discourage emissions growth above historical levels . . . “, with associated terminology including phrases such as “covered entities”, “baseline emission levels”, “action required from businesses” and “compliance”.  The safeguarding mechanism, rather than being a supplementary element of Direct Action, could end up becoming the main policy measure for decarbonisation if significant CO2 reductions are not achieved under the ERF. While this may not be the objective that the Government seeks, it does mean that the implementation of the safeguard mechanism needs to incorporate the design thinking that would otherwise be applied to the development of intended emission trading systems, such as the Alberta Specified Gas Emitters Regulation.

As currently described, the safeguarding mechanism looks like a baseline-and-credit system, with the baseline established at facility level either on an intensity or absolute emissions basis (both are referred to in the Green Paper). Should a facility exceed the baseline it could still achieve compliance by purchasing ACCUs from the market, either from project developers or other facilities that have over performed against their own baselines. Although the Government have made it very clear that they will not be establishing a system such as cap-and-trade that collects revenue from the market, facilities will nevertheless face compliance obligations and may have to purchase reduction units at the prevailing market price.

The level of trade and the need for facilities to purchase ACCUs will of course depend on the stringency of the baselines and this remains to be seen, however in setting these the Government will need to be mindful of the overall national goal and its need to comply with that. The development of a full baseline and credit trading system also raises the prospect of the market out-bidding the Government for ACCUs, particularly if the Government sets its own benchmark price for purchase, as is indicated in the Green Paper.

As Australia moves from a cap-and trade system under the Carbon pricing Mechanism (CPM) to the ERF and its associated safeguarding mechanism, the main change for the economy will be distributional in nature, given that a 5% reduction must still be achieved and the same types of projects should eventually appear. However, the biggest challenge facing any system in Australia could be around speedy design and implementation, given that the time remaining before 2020 is now very limited and the emission reduction projects being encouraged will themselves take time to deliver.

What to make of 2013?

It’s difficult to sum up 2013 from a climate standpoint, other than to note that it was a year of contrast and just a little irony. Overall progress in actually dealing with the issue of global emissions made some minor gains, although there were a few setbacks of note along the way as well.

  • The IPCC released the climate science part of their 5th Assessment Report and that managed to keep the media interested for about a day, after which it was back to issues such as health care, economic growth, Euro-problems and assorted regional conflicts. Importantly, the report introduced into the mainstream the much more challenging model for global emissions, which recognizes that it is the long term accumulation that is important, rather than emissions in any particular year.
  • The global surface temperature trend remained stubbornly flat, despite every indication that the heat imbalance due to increasing amounts of CO2 in the atmosphere remains in place and therefore warming the atmosphere / ice / ocean system somewhere, although where exactly remained unclear. The lack of a clear short term trend became a key piece of evidence for those that argue there is no issue with changing the concentration of key components of the atmosphere, which further challenged the climate science community to provide some answers.
  • The UNFCCC continued to put a brave face on negotiations that are being seriously challenged for pace by most of the worlds declining glaciers while the world’s largest emitter, China, often thought of as blocking progress at the international level kicked off a number of carbon pricing trial systems in various parts of the country.
  • Australia elected a government that proudly announced on its first day in office that the carbon pricing system which was finally in place and operating after eight years of arguing would be dismantled, only to be confronted by the fact that the country sweltered under the hottest annual conditions ever recorded in that part of the world.
  • Several very unusual global weather extremes were reported, including what may be the most powerful ever storm to make landfall, yet there was a distinct lack of desire by scientists and commentators to attribute anything to the rising level of CO2 emissions in the atmosphere, except perhaps for the UNFCCC negotiator from the Philippines who went on a brief hunger strike in response to devastation that hit parts of his country.
  • The EU carbon price remained in the doldrums for the entire year, although did show a few signs of life as the Commission, Parliament and various Member States teased, tempted and taunted us with the prospect of action to correct the ETS and set it back on track. In the end, the “backloading” proposal was passed by the Parliament and will likely be adopted and implemented, but the test will be whether or not the Commission now has the backbone to propose and unconditionally support the necessary long term measures to see the ETS through to 2030 as the main driver of change.
  • For the first time that I had seen, a book was released that finally got to grips with the emissions issue, yet somewhat alarmingly failed to find any clear route out of the dilemma we collectively find ourselves in. “The Burning Question”, by Mike Berners-Lee and Duncan Clarke recognized how difficult the emissions challenge has become and questioned those who trivialize the issue by arguing that more renewable energy and better efficiency is all that is needed to solve the problem. Clearly a book for those who designed the hallway posters [Link] at COP19 in Warsaw to read. Closer to home, new Shell Scenarios released in March [Link] 2013 did chart a pathway out of the emissions corner that Mike and Duncan painted themselves into, but the much discussed 2°C wasn’t quite at the end of it.
  • The IEA put climate change back in the headlines of their World Energy Outlook, with a special supplement released in June outlining a number of critical steps that need to be taken to keep the 2°C door open. Unfortunately they hadn’t taken the time to read “The Burning Question” and consequently positioned enhanced energy efficiency as a key step to take over this decade.
  • In North America both the US and Canadian Federal governments continued to head towards a regulatory approach to managing emissions, while States and Provinces respectively continued to push for carbon pricing mechanisms. California and Quebec linked their cap and trade systems to create a first cross border link in the region.
  • The World Bank Partnership for Market Readiness continued its mission of preparing countries for carbon markets and carbon pricing, with numerous “works in progress” to show for the efforts put in to date. But the switch from early trials and learning by doing phases to robust carbon trading platforms underpinning vibrant markets remains elusive.

 These were all important steps, particularly those that tried to broaden or strengthen the role of carbon pricing. On that particular issue, 2013 saw both positive and negative developments, with progress best described as “baby steps” rather than anything substantial. With a change in the European Parliament, mid-term elections in the US and Australia in the process of unwinding, it is difficult to see where the big carbon pricing story in 2014 will come from. Perhaps the tinges of orange (see below) now beginning to appear in South America will flourish and green with COP20 being held in that region towards the end of the year.

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Linking discussions continue

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With the election of a new government in Australia and their promise to discontinue the “carbon tax”, the much discussed link between the Australian ETS and the EU ETS looks to be in doubt. As this is the highest profile example of bilateral linking, one might then think that the subject would die. Quite the contrary if you attended Carbon Forum North America last week, where linking continues to be a major preoccupation with carbon market aficionados.

The scene was set at CFNA when the Quebec Environment Minister used the conference to officially announce the link between cap-and-trade systems in California and Quebec. Although this has clearly been in the works for a while, the deal is now done. There were various other discussions about linking, but a particularly interesting panel session involved the World Bank where they tabled a completely new idea that could either be impossibly difficult to implement or could revolutionise the global carbon market – at this stage it is hard to assess which end of the spectrum we might be at. Nevertheless, it is an idea with real merit and worth thinking about or even piloting.

The World Bank takes the view that despite the best of intentions, market based emissions management systems (such as cap-and-trade or baseline-and-credit) will only rarely be close enough in design and underlying ambition to cleanly link and that as countries with existing bilateral links try to link with others (and therefore link the system that they are already linked with to another one by default), progress will grind to a standstill. Therefore, something else is needed. Their idea is to introduce a ratings system into the mix, with individual market based instruments being rated in a similar way to sovereign ratings by the likes of Standard and Poor’s.

For example, a tight cap-and-trade system with limited offset use and high ambition (i.e. a sharply declining cap) might have its allowances rated at 0.9 (like a national AAA  or AA+ rating), compared with a baseline-and-credit system with credits rated at 0.3 because such a system is not as environmentally tight due to its inherent intensity basis. Trade between the two would be possible, but three external credits would be needed for compliance instead of one internal allowance in the cap-and-trade system. Many different systems could then link without the need for perfect design alignment. Ratings applied in this way could solve the problem that the EU Commission has had with its on / off approach to CERs from the Clean Development Mechanism.

In the World Bank model the ratings would be handled by a private agency and the decision to use them would be a sovereign one, both by the country hosting a market based system that wishes to import other instruments for compliance and by any country that creates carbon instruments deciding that they can be exported for external use.

The World Bank proposed two other legs to a three part system, a settlement platform and an international carbon reserve. The latter would be a pool of carbon instruments that could be drawn on by any participating nation and would be created by a standardised contribution by all participants. This latter point is important in that if a nation’s carbon market compliance instrument is downgraded, they would need to contribute more of them to the pool to maintain the same standardised amount within it.

This idea was proposed as something that could commence today, outside the UNFCCC process. The alternative of waiting for some 190 countries to agree a common methodology when some don’t even recognise the idea of a market based approach has a high risk of failure (at least to the extent that it would deliver the infrastructure required for a global carbon market).

A lot of water will pass under the bridge before something like this gets going, but it was good to see new and original thinking in this area.

Redrawing the Energy-Climate Map

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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 reviewedThe 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.

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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!