Archive for the ‘California’ Category

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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Two steps forward, one back

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2011 turned out to be a busy year for the development of carbon pricing. Long the cornerstone of EU climate policy, the approach continues to find favour with governments focused on the issue of managing emissions, rather than those trying to manage the shape of the entire energy mix. Since the EU system was introduced in 2005, carbon pricing has appeared in Alberta and British Columbia in Canada, in the North Eastern US states and remains under consideration in South Korea. Several other governments have raised the possibility of a carbon pricing system of some sort.

At the outset of the year there appeared to be little prospect for much movement forward, with some worrying signs that a retreat was possible. Proposition 23 may have been defeated in California, but other legal challenges had surfaced and the new Australian government was not expected to raise an issue that had only a few months earlier led to the fall of the Prime Minister.

But by year end Australia had a carbon price mechanism in place, South Africa had announced its intention to implement a carbon tax, China was apparently moving forward with a variety of pricing mechanisms and California was finalizing the details of its cap-and-trade system. In addition the inclusion of aviation in the EU-ETS had withstood numerous legal challenges and looked likely to go ahead in 2012.

While this is a positive set of developments, it can’t counter the fact that there was a major step backward during the year as well. The price weakness in the EU-ETS at the end of the year and the related difficulties facing the Clean Development Mechanism (CDM) are worrying developments. Although COP 17 in Durban saw a lifeline of sorts thrown to the Kyoto Protocol (and therefore the CDM) and a key committee of the European Parliament voted in favour of a mechanism to bolster the ETS price, both these mechanisms remain in the balance.

2011 also saw a number of US States pull out of the Western Climate Initiative and New Jersey pull out of RGGI.

2012 could well be a pivotal year for a market-based approach to managing emissions.But with the prospect of new negotiations for an international agreement, the possibility of giving new life to carbon pricing is also with us.

 

Could California suffer the EU-ETS problem?

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

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

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

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

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

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

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

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

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

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