Archive for the ‘Cancun’ Category

Fifty shades of grey?

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The tension was building throughout the week, but finally just before Valentine’s Day weekend the negotiators in Geneva completed the first draft of a Paris negotiating text and released it at the end of the eighth part of the second session of the Ad Hoc Working Group on the Durban Platform for Enhanced Action (ADP). Contained within this 86 page document, replete with perhaps 400 or so carefully worded options to select from and 1,234 square brackets, is supposedly the necessary political recipe for addressing the climate issue over the coming decades. Or were we presented with the greyness of diplomacy and compromise, which may be the best that can be managed for now, but doesn’t incorporate the necessary toolkit to drive down emissions in the decades to come?

The text certainly contains sufficient versions of one important overarching requirement; that being the need to reach net zero emissions at some point in the future. In the context of the level of greenhouse gas emissions, the word zero appears in the text seven times, from a non-specific reference of “net zero greenhouse gas emissions in line with the ultimate objective of the Convention“, to the highly ambitious proposal for “zero emissions of CO2 and other long-lived greenhouse gases in the period 2060–2080“. I discussed this at some length in my previous post, with the conclusion that an end of the century net zero emissions objective is perhaps achievable, but much earlier than this looks unlikely. Even a timeframe of 85 years will require enormous effort, including extensive use of carbon pricing and the widespread deployment of carbon capture and storage (CCS). This view received quite a number of comments on The Energy Collective. My post wasn’t to argue that nothing would happen or that no progress could be made, but to point out the difficulty of rapidly slowing down and turning a system that has such enormous momentum. All of the suggested technologies that filled the comments section will almost certainly play a role, but the challenge is the time it takes to do all this. My own experience in the energy industry tells me the timeframe is decades, not years. In my view, the text now taking us forward to Paris doesn’t present the necessary conditions for a strong response, but it is only part of the story and much more will be revealed over the coming weeks and months as the INDCs (Intended Nationally Determined Contributions) are also published. This text seems to be more about achieving some diplomatic harmony around the climate issue and at least trying to get everyone marching to the same tune.

But returning to the text itself, the other area that needs considerable support and diplomatic effort is seeing a carbon price emerge within the global energy system. The phrase “carbon pricing” gets two mentions in the 86 pages of text, but there are many options presented on the “use of markets”. To some extent, “markets” is UNFCCC code for a carbon price, but not in all cases. It can also mean the further development of market mechanisms (such as the CDM) and the ability for developing countries to sell credits from these mechanisms to developed countries as a means of securing clean energy investment. While many variations around this theme are presented, there is no proposed language in the current text that really sets out to establish a full global carbon pricing regime – although Option 4 on page 17 perhaps comes closest by trying to resurrect something that operates along the lines of the Kyoto Protocol. A global carbon market seems to be a step too far for most countries at the moment, even though it is an essential part of the solution set. Rather, a proxy based approach is being proposed through multilateral institutions such as the World Bank, which hopes to see a global market develop over time through the linkage of various national and sub-national emissions management approaches and the interchange of the domestic units, quotas and allowances on which they are based. In the World Bank model, this would be governed by an exchange rate mechanism. This week also saw the UK House of Commons Energy & Climate Change Committee launch a report on the linking of emissions trading systems. The report concluded that;

Any agreement reached at the UNFCCC COP 21 in Paris at the end of 2015 should promote the use of carbon markets and facilitate the future linking of emissions trading systems.

One final reality check on the paris text is that nowhere in the 86 pages is CCS mentioned. While the UNFCCC is always very careful about featuring a specific technology and understandably so, the clear advice from the IPCC 5th Assessment Report was that 2°C cannot be reached without it, at least not within reasonable cost bounds. The IPCC does get mentioned 23 times.

In contrast with the events in Geneva, BP published their Energy Outlook 2035 which showed both overall energy demand and demand for fossil fuels rising in the outlook period (see chart; source: BP). The corresponding rise in energy system emissions is also given, reaching some 40 billion tonnes per annum by 2035. This is in contrast to the IEA 450 Scenario which argues for a fall in emissions to nearly 20 billion tonnes by 2035. However, the outlook does include a rising carbon price through to 2035, when it reaches some $40 per tonne CO2. Judging from the data presented, the main impact of this seems to be to bring coal growth to a near halt, but that’s all. The BP analysis presents a very different outlook to the one we need to stay within the 2°C threshold agreed by governments at the Cancun COP back in 2010. It also argues for a clear and robust outcome from Paris, although the current text doesn’t point in that direction.

BP Demand to 2035

BP Emissions to 2035

Targeting 2°C

There is now something of a religious fervor around the international goal of 2°C, to the extent that it is almost impossible to discuss other trajectories or outcomes. The only contrast that seems possible with 2°C is something that nobody wants, which is the “do nothing” scenario of 4°C or more.

Yet the 2°C pathway is hardly clear cut in itself. A recent series of discussions in a business group I attend has highlighted the range of myth, confusion and misinformation that surrounds the current goal. Given that this is an international goal that most nations subscribe to, exactly where are we headed? The number itself has been around for a while, but it was finally agreed at the Cancun COP16 after first appearing in the text emanating from Copenhagen. The Ad-hoc Working Group on Long Term Cooperative Action agreed the following in Cancun:

Further recognizes that deep cuts in global greenhouse gas emissions are required according to science, and as documented in the Fourth Assessment Report of the Inter- governmental Panel on Climate Change, with a view to reducing global greenhouse gas emissions so as to hold the increase in global average temperature below 2 °C above pre- industrial levels, and that Parties should take urgent action to meet this long-term goal, consistent with science and on the basis of equity; also recognises the need to consider, in the context of the first review, as referred to in paragraph 138 below, strengthening the long-term global goal on the basis of the best available scientific knowledge, including in relation to a global average temperature rise of 1.5 °C;

The text itself lays out an intention, but translating this into something tangible is easier said than done. It also turns out to be quite a divisive process and requires a deep dive into some reasonably complex statistics. This was perhaps best highlighted by the paper Greenhouse-gas emission targets for limiting global warming to 2°C, Malte Meinshausen, Nicolai Meinshausen, William Hare, Sarah C. B. Raper, Katja Frieler, Reto Knutti, David J. Frame & Myles R. Allen, Nature Vol 458 / 30 April 2009 (a copy is currently available here). Meinshausen et. al. showed that the uncertainty of the climate response combined with a variety of emission pathways delivers given probabilities for staying below 2°C, depending on the cumulative emissions over the period 2000-2049, with some indication of eventual outcome also given by emissions in 2020.

Excerpts from the table in the paper, giving probabilities of exceeding 2°C are shown below:

2 degree probabilities


This is all very well, but the next step is the tough one. The call at Cancun was to “hold the increase below 2°C”, but this means different things to different people. At the meeting I attended recently, some interpreted this as meaning a “reasonable probability”, which was then interpreted as 75%. The table above shows that this means a limit on cumulative emissions between 2000-2049 of 1,000 Gt CO2. But with emissions from 2000-2013 already totalling about 470 billion tonnes, that leaves a remaining budget until 2050 of just 530 billion tonnes. That’s about 14 years of full on emissions, or for example, a trajectory that requires an immediate peak in emissions followed by year on year reductions of about 1.2 billion tonnes until emissions are near zero. Delaying the peak until 2020 pushes up the reduction rate to nearly 3 billion tonnes per annum.

By contrast, accepting a 50% probability gives a very different outcome. Emissions can peak in 2020 and a reduction pace of 1 billion tonnes per annum is then required. Alternatively, should emissions plateau in 2020 and start reducing in 2025, the annual effort rises to 1.5 billion tonnes. These are still very challenging numbers, but almost a world apart from the 75% probability case. The 75% case is most likely unachievable given where the world is today.

What was clear from the meeting I attended was that two people who may both talk about 2°C have very different perspectives on likelihood, usually without any thought as to the reduction implications behind their assumption. The EU is at least clearer on this in its main publication on the 2°C Target, where it notes in the key messages, “In order to have a 50% chance of keeping the global mean temperature rise below 2°C relative to pre-industrial levels . . . . .”.

The USA on target? Yes, according to the Administration!

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It has been an interesting week for climate change news, with the IPCC releasing its full report on renewable energy, the European Commission moving ahead with energy efficiency legislation, very little happening at the UNFCCC talks in Bonn and of course the battle over carbon pricing continuing in Australia. In scanning the Australian media I spotted an insightful interview with the United States Ambassador to Australia. In the interview, Ambassador Bleich argues that the USA is on track to meet its 2020 greenhouse gas target (17% below 2005 levels) because of the breadth of activity across the economy in transforming the energy system.

 THE US ambassador to Australia says America is pulling its weight in international efforts to reduce greenhouse emissions, contrary to suggestions a carbon tax would see Australia acting ”ahead of the rest of the world”. In an interview with the (Sydney Morning) Herald, Ambassador Jeff Bleich said the idea that America was lagging was “not accurate at all” and it was “absolutely realistic” to believe the US would meet its target of a 17 per cent reduction in emissions by 2020, based on 2005 levels.

“The US is taking dramatic action, if you look at the largest investment in history in energy transition, the major regulatory reforms for the largest emitters and consumers of energy, the focus on the dirtiest emission technologies used by power plants and vehicles … we are moving on a very aggressive regulatory effort,” he said. “… there’s absolutely no question the United States has been doing a tremendous amount over the last two years … and going forward the President has said we need to double what we are doing because that is good for our economy.”

The Californian emissions trading scheme, due to start next year, could also have “dramatic effects”, for that state and potentially on a broader scheme for the western states of the US and Canada, he said. Although President Obama had been clear he preferred a national cap and trade scheme, when that was not successful in Congress he had moved to different approaches. These had not put the United States at a competitive disadvantage with major trading partners because China, Europe and others were taking action as well, nor had US companies in Australia expressed concern that a carbon tax would disadvantage their business here.

The Australian Industry Greenhouse Network has cited figures from the US showing that because of the impact of the financial crisis, US emissions were not scheduled to return to 2007 levels until 2027, suggesting that the US emissions reduction target was now easier and no longer required an “equivalent effort” to Australia’s emissions reduction target of a 5 per cent cut based on 2000 levels.

Ambassador Bleich said that while the financial crisis may have had an impact on emissions, the measures being taken by the administration were also having a real impact.

The recent Productivity Commission report said the US was spending a little less than Australia on reducing emissions as a percentage of GDP and was abating less from its electricity sector, but Ambassador Bleich said the report had provided more evidence that major emitters were all acting.

I have discussed this before, but it is worthy of a revisit. There is no question that US emissions have fallen in part as a result of the recession, but the increasing availability of natural gas and generally higher energy prices causing consumers to think about energy use are also having an impact. Furthermore, a variety of renewable energy programmes (but mainly wind) are filling in capacity gaps in the power market and the Bush Administration bio-fuel mandates are having an impact in the road transport sector.

I recently revised my own analysis of US emissions for a conference and developed the following summary picture:

In terms of progress from today, the two big ticket items remain natural gas substitution for coal and the impact of CAFE standards in the transport sector. Emission and water regulation (not including GHGs) under the Environmental Protection Agency (EPA) could result in a substantial portion of US coal fired power generation shut down by 2020. The displacement of up to 70 GW of coal fired generation capacity would require about 7.8 Bcf/day of natural gas or some 4 years of production increase, assuming the current production trend is maintained. Even if the annual increase was half the current trend, sufficient additional production would be available for such large scale substitution over the period 2012-2020.

The real unknown of course is the possibility of an emissions upswing over this decade as the economy shifts back into full gear.

US success in meeting the 2020 target could profoundly affect the broader discussions on reducing CO2 emissions, both in the USA and more widely. After 2020 we might we see more acceptance of CO2 measures on the basis that emissions had fallen, it hadn’t damaged the economy or society, so “we can then do more”. But it could be a double edged sword, with complacency creeping in on the back of the argument that the market has responded and CO2 is taking care of itself, so there is no need to worry about it.

Cancun: Spending the money

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What started in Copenhagen as an aspiration for $30 billion in fast-start financing and up to $100 billion per annum by 2020 in North-South financing flow has been translated into the Cancun agreements as the beginnings of long term arrangements for specific funding purposes. In particular there is the Green Climate Fund in the AWG-LCA text;

 Decides to establish a Green Climate Fund, to be designated as an operating entity of the financial mechanism of the Convention under Article 11, with arrangements to be concluded between the Conference of the Parties and the Green Climate Fund to ensure that it is accountable to and functions under the guidance of the Conference of the Parties, to support projects, programmes, policies and other activities in developing country Parties using thematic funding windows;

Although the Green Climate Fund and the $100 billion per annum are not necessarily the same thing, many commentators quote them in the same breath. In reality, much of the $100 billion per annum will be delivered through the market and not as direct funding. But the Cancun Agreements do create a link at least to some extent in paragraph 100 of the AWG-LCA text, appearing in the Long-Term Finance section of the document;

Decides  that a significant share of new multilateral funding for adaptation should flow through the Green Climate Fund.

Given that this is mentioned just two paragraphs after the $100 billion reference, it at least establishes the notion that many billions of dollars will flow through the Green Climate Fund on an annual basis by 2020. But actually achieving this may be considerably more challenging.

Recent experience in the EU shows that even a highly focused, clearly defined funding mechanism for large scale mitigation takes many years to actually deliver real reductions. In 2007 the EU Council of Ministers agreed to the goal of 10-12 large scale CCS demonstration projects, although offered no insight at the time as to how this might be funded. Even then, with a carbon market in the range € 20-30 it was clear that the carbon price was insufficient to do this. So began the development of what is now the NER-300, a set aside of 300 million allowances in the EU-ETS for award to CCS projects. The mechanism itself was defined progressively throughout 2008 and eventually passed into EU law in December of that year. It then took two years (until December 2010) for the Commission to define the rules of operation of the mechanism to the extent that they could issue a call for projects, which has now been done. The closing date for project sponsors to submit application forms to their Member States is 9th February 2011. The deadline for Member States to complete an eligibility assessment and forward the application with the submission forms to the European Investment Bank is 9 May 2011. EIB will conduct its assessment of projects in 15 months (by October 9, 2012). Finally, the Commission will have to approve and submit projects to Member States. If all goes well, projects will be awarded funding by end 2012/early 2013.

From concept to first award, the above process will have taken 5-6 years and as noted that is for a very specific set of projects on a defined timeline. Concept to mitigation will therefore be at least 8 years.

In the LCA discussion, the Green Climate Fund is in its infancy. There is some description as to the makeup of the Board, the nature and responsibility of the trustee and an invitation to the World Bank to serve in that capacity for the initial years. But that is far from a going concern which is actively distributing significant levels of financing to very large scale projects. The Global Environment Facility (GEF) has been operating for 20 years now, yet large projects take many years to move from proposal to completion. For example, a $300+ million South African public transport project which first entered the GEF pipeline in January 2005 should be completed at the end of this year, a seven year process. Such a project would probably take even longer under the proposed Green Climate Fund because of the likely startup lag as terms of reference are developed, people appointed, rules agreed and implemented and finally projects called for.

This means that major developing countries (e.g. South Africa) could struggle to develop the necessary projects in time for their 2020 pledges to be met. In the case of South Africa, they have offered the following in a letter to the UNFCCC at this time last year:

South Africa reiterates that it will take nationally appropriate mitigation action to enable a 34% deviation below the ‘business as usual’ emissions growth trajectory by 2020, and a 42% deviation below the ‘business as usual’ trajectory by 2025,” said Environmental Affairs DDG Alf Wills in the letter to the UNFCCC. “The extent to which this action will be implemented depends on the provision of financial resources, the transfer of technology, and capacity building support by developed countries,” he added.

While the intention is to provide the necessary funding, the reality of doing so through a Green Climate Fund to facilitate the delivery of the 2020 pledges is very challenging. A stepped up approach under the existing Clean Development Mechanism offers an alternative, but is largely defeated by the lack of potential buyers for the credits that it would generate. There is now little medium term prospect of a market based approach to mitigation in the USA, which removes them as a significant potential buyer (there will of course be California and perhaps some scope for offsets under the EPA). If China or Japan were to step into the arena with new project mechanisms driven by domestic trading systems, a considerable lag would still exist before projects began, simply because of the time it will take to define the domestic systems and create the attached mechanisms. Even if all this happened to come together quickly, there would still be a lag as developing countries identify the necessary mitigation projects.

Dozens of large scale mitigation projects will be needed in South Africa (and similarly for other countries) to meet their 2020 pledge as well as many hundreds of smaller scale initiatives. The current likely timelines for the development of the necessary financing facilities, their start-up and then use give little room for optimism that this will happen in time to create the reductions necessary to meet the pledges. Nonetheless, the fund will no doubt be successful – in the end  – in terms of making available much-needed monies to mitigation projects.

Cancun: A reason for optimism?

Looking at a set of newspaper headlines earlier this week one might get the impression that nobody was quite sure whether progress had been made in Cancun or if it was another UN standoff. At least in the media clippings I had, the sense of achievement ranged from “Cancun Agreements put 193 nations on track to deal with climate change” through “Climate talks end with modest deal on emissions” to “Climate deal decades away as dysfunctional US delays cap”.

Certainly the various texts that were adopted, thanks to the diplomacy skill of the Mexican hosts, have moved the debate forward and opened up a number of new work streams. The next twelve months could see proposals for new market mechanisms, the design of a future structure to support technology transfer and the creation of a measurement, reporting and verification framework for emission reduction activities. But all of this is peripheral to the core issue of emission reduction targets, timetables and responsibility. In that regard the various texts are non specific and the issue has been largely deferred. So should we just be pessimistic about what is to come?

Much of what has been agreed has found its way out of the Copenhagen Accord and into the formal Convention by way of the AWG-LCA work stream. Importantly, the Cancun LCA Agreement, mirroring the 2009 Accord, does call for a reduction in worldwide greenhouse gas emissions so as to hold the increase in global average temperature below 2˚C and that parties should take urgent action to do this. There is even mention that 1.5˚C might be considered. But while both the Cancun LCA and KP texts urge, request and encourage both Annex I and non-Annex I parties to make reductions in pursuit of the temperature goal, neither attempt to clarify what is actually needed. This leaves the same problem going into Durban in twelve months time as was faced by delegates arriving in Cancun, i.e. what happens to the compliance based Kyoto Protocol which can only function with national targets?  Further, if it is not agreed how can there be a cooperative action agreement which in effect assumes (at least from the perspective of many developing countries) that most developed countries are covered under the Kyoto Protocol?

The fact that no real progress has been made on this question raises the spectre of failure in Durban which then results in the real collapse of the process. But there may be signs that a different outcome could prevail. Without wanting to clutch at straws, there are three areas of interest in the Cancun texts:

  1. Both the LCA and KP documents take note of the various Annex I Parties national reduction targets which arose from the post Copenhagen process and similarly the LCA text refers to the non-Annex I Parties NAMA pledges from the same process. Although indirectly, it does at least provide some additional linkage between these separate negotiations.
  2. As noted above there is considerable effort outlined within the LCA text to establish a number of work streams aimed at identifying and defining new mechanisms, tools and practices. Paragraph 83 of that text links the development of any new market mechanisms with the existing mechanisms under the Kyoto Protocol.
  3. The LCA text invites the World Bank to serve as interim trustee of the Green Climate Fund, but subject to longer term review.

This paints the prospect of a very different way forward, but one which could have longer staying power than the entirely top down Kyoto structure. In this approach, the UNFCCC becomes the effective guardian of all the tools and practices required to manage carbon emissions under a variety of different circumstances. This includes the CDM, a Technology Mechanism and an MRV framework to name a few. It devolves the setting of targets and creation of NAMAs back to national governments but in the context of a clear science based global emissions pathway. The need to define a global 2050 target and a peak emission year is agreed in the LCA text which effectively offers a route to define that pathway (and maybe even offers the possibility of a pathway agreement at Rio+20 in 2012). Finally, it leaves the financing requirements to support all of this to the World Bank where the expertise and experience currently lies.

This is a much more devolved, less centrally managed approach and could also require new thinking on governance, but it may be more sustainable in the long term. None of this will be easy and many hurdles remain, but there is at least more room for optimism post Cancun than we all felt after Copenhagen.

Cancun: A tale of two cities

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Irrespective of the final outcome in Cancun this week, one issue that has become glaringly apparent over the last 12 days, at least as far as the international negotiations go, is that the opportunity for dialogue and interaction between government and business remains insufficient and that much more needs to happen in this space. After all, the job of managing emissions globally is going to fall broadly on the business community through the delivery of major projects and new products.

UNFCCC meetings have been going on for nearly twenty years and at least for the many that I have attended there was the feeling of one big collective action slowly moving forward. Everybody frequented the same convention centre and it was quite common to see national delegates in your hotel lift or perhaps even a familiar face from a major delegation at the next table at breakfast. There was plenty of opportunity for interaction, hence the feeling of a joint initiative where business at least had a voice. But was it all an illusion?

At this COP, the logistics of the event have severely limited the opportunity for interaction. The negotiations are taking place in a vast hotel complex in Cancun called the Moon Palace and many of the delegations are staying there as well – there are 2457 rooms. It has a campus style layout and the hotel even provides bicycles for getting around the site. At a separate location some 5+ kilometres away is the UNFCCC staging point for entry, registration, security checks and side events (presentations put on by business and civil society, ideally with members of the delegations, which serve as a learning platform for all concerned). The staging point is really only accessible by special COP buses from the hotel strip in Cancun and the only way to get in and out of the Moon Palace is by a second set of buses which link that site with the staging post (and this is also true for the delegates when they wish to leave). As such, a visit to meet a delegate or to one of the very few side events in the Moon Palace involves catching the hourly shuttle from your hotel to the staging point, going through security, catching a second bus, walking through the vast Moon Palace site to a room in a distant corner of the hotel, having the meeting or listening to the side event and then repeating the entire process, making sure that the timing is right so as not to have to wait 59 minutes at the staging point for a bus. In one well timed visit to a meeting in the Moon Palace, all that took me 4 hours 20 minutes and I didn’t even stay for the entire event having heard the presentation I was actually interested in.

The staging site is a sorry place, not from the perspective of the facilities offered which are excellent, but because of the complete lack of attention being given to the legion of well meaning and pamphlet bearing NGOs manning their cubicles, all decked out with posters, video screens and other display material. Most people are simply intent on rushing through this building to get from one bus to another. Some side events are well attended but in many instances the audience is simply made up of business people and NGOs attending each others presentations. There aren’t very many pink badges (a Party) to be seen at all. This is quite a departure from previous COPs.

 Meanwhile, organisations such as IETA and WBCSD held their own events in Cancun itself. As usual the quality was high and attendance was good but pink badges were few and far between. One key appearance at the WBCSD Business Day was by Christiana Figueres, the Executive Secretary of the UNFCCC, who repeated the mantra of the need for business involvement in the process but also went one step further and accused some parts of business of deliberately attempting to put a handbrake on the proceedings.

In fairness to the Mexican Government, they have made a real effort to broker a discussion between business and government on the potential shape and key elements of an international agreement. This all took place in the lead-up to COP 16 but government attendance was modest, at least in my experience. The key output was presented back to the business audience at the WBCSD Business Day.

All of this isn’t to say that there is no interaction because there clearly is. But the physical gap between government and everybody else at this COP did highlight what is in broad terms still a fairly limited dialogue between the two. They went about their business in the Moon Palace and everybody else attended a trade fair spread out across the rest of Cancun. In reality, this has always been the nature of a COP, but somehow sharing a lift with the lead negotiator for the United States or saying hello to Yvo de Boer in the coffee lounge perhaps made us all think that more was happening. More does need to happen if this process is going to work.

Cancun and Beyond: Financing the Energy Future

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Pick up almost any article on climate change today and it won’t be too long before your attention is turned towards the subject of financing. There are also many conferences, seminars and workshops on financing, not to mention the UN High Level Advisory Group on Climate Change Financing. The Copenhagen Accord sets the ambition of $100 billion per annum in climate financing for developing countries by 2020.

But what exactly will be the target of such financing, what will it pay for and how might it be raised? Developed country national budgets are probably not the place to start given the deep deficits and consequent desire to enact spending cuts. Rather, the action needs to be in the carbon markets. 

The Reference Scenario in the IEA 2009 World Energy Outlook provides a useful starting point for this discussion. It shows that in non-OECD countries over the period 2010 to 2020 some 1000 GW of electricity generation will be constructed, of which 500 are coal, 200 are natural gas and the rest non-emitting (hydro, wind, solar, nuclear). Together with increasing energy use in transport, industry and buildings (direct consumption), total non-OECD emissions could rise by nearly 5 billion tonnes in the coming decade.


In a post shortly after Copenhagen, I showed the level of emissions actually needed in non-OECD countries to put the world on a 2 deg.C pathway, assuming developed countries were on an 80% reduction by 2050 pathway. Drawing on the data from that, it suggests that non-OECD emissions should be limited to a rise of something like 2+ GT over the period 2010 to 2020 and not the 5 GT in the IEA reference scenario. This suggests that two things have to happen;

  • Some 300 GW of the coal fired power stations planned for the next decade have to include CCS or be something else (e.g. wind, nuclear, CHP natural gas)
  • The increase in direct consumption of fuel needs to be curtailed through efficiency programmes in road transport, industry and buildings.

Arguably, much of the second bullet could be achieved through standards – for appliances, for buildings and vehicle efficiency. This doesn’t necessarily have to cost the countries in question any additional money, or at least not very much. It really requires a strong desire to tackle the issue, something that has become the norm in China today.

But changing the power generation mix or capturing the CO2 emissions will require the input of additional money. For example, while it is still early days for CCS, indications are that this is a ~$50 per tonne of CO2 technology. Any additional costs (vs. standard coal) for other generation technologies depend on a variety of factors such as the specific technology chosen, supply access (e.g. for natural gas) and even geography (e.g. for wind). Nevertheless, at $50 per tonne of CO2 much can be done (albeit recognising that carbon market policy will have to mature significantly for such levels to be reached). The proposed Copenhagen Accord financing is also quite substantial. With $30 billion committed for the period 2010-2012 rising to $100 billion per annum by 2020, it could be as much as $0.5 trillion in total (but for adaptation and mitigation – including forestry).

Switching 300 GW of coal (or capturing the emissions) as discussed above would likely account for a significant portion of this half trillion, but could reduce developing country energy emissions by as much as 1-1.5 GT per annum by 2020. Utilizing a “green bond” structure such as that currently proposed by IETA (International Emissions Trading Association) in combination with an active carbon market to take the flow of credits in the years following construction could deliver the necessary financing for such a shift. A very simple Discounted Cash Flow (DCF) shows that if each $1 billion invested realizes a reduction of 3 million tonnes of CO2 per annum at $50 per tonne over the subsequent 15 years, then the Internal rate of Return (IRR) is 12%.

But this means that the carbon markets in the late 2010s and through the 2020s must be capable of absorbing some 1-1.5 billion credits per annum from power sector projects in developing countries for this to work. Even more importantly, the existence and stability of these markets must be apparent to the investors by 2015 at the very latest and probably much sooner than that. It also means that the CDM, currently the only viable crediting mechanism available, needs to be substantially reformed, not only in scale such that it can tackle such a transformational change, but also in scope such that it recognizes a technology such as CCS and is more targeted at those parts of the abatement curve where this shift will take place.

The task above is very substantial and time is not on the side of it happening, but it almost certainly won’t happen if the negotiators in Cancun cannot begin to deliver in three key areas;

  1. Building on the carbon market architecture which underpins the Kyoto Protocol as they work towards a new international agreement. This in turn drives domestic legislation to a similar solution set.
  2. Reforming the CDM in both scale and scope, including access to technologies such as CCS.
  3. Recognising that private financing through carbon markets and supporting finance structures have the potential to transform the energy infrastructure that will be built in the coming decades.

But it isn’t just up to those in Cancun to get this going, much also has to happen on many domestic fronts in terms of carbon market development.

Looking towards Cancun

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The unusual end-point to the Copenhagen climate conference last December and the rounds of UNFCCC negotiations that have followed in 2010 could lead even the most optimistic observer to the view that the international climate process is struggling. There is a growing consensus that Cancun is now a stepping stone to a potential agreement at COP 17 in South Africa in 2011 or perhaps at the Rio+20 Summit in 2012. But this feels increasingly like the state of play following the Bali Roadmap and the many meetings throughout 2008 and 2009 for the much anticipated agreement in Copenhagen. Perhaps in two years time we will all be looking towards COP 19 (2013) and COP 20 (2014) with the hope of the agreement coming then – although third time lucky is hardly a basis for solving a tough issue like climate change.

As noted in my posting in January, the national pledges made in Copenhagen, while representing a solid start, also demonstrate that reducing emissions globally to a level compatible with 2 degrees C is very challenging.

The current process is also somewhat arcane, focusing on issues such as technology transfer, climate funds, common but differentiated responsibilities and methodology templates and much less on the actual job at hand which is how best to reduce emissions. Is it time therefore to refocus the tremendous energy and persistence of the negotiators into a more pragmatic approach which might actually deliver a mitigation pathway to follow?

Changing tacks now could be very disruptive, but it is at least worth considering how else this particular problem might be addressed. One route forward would be to disassemble the issue into several component parts (remember the wedges), each of which could then be progressed, rather than seeking the all encompassing solution. Within each of the components, smaller agreements and clear milestones would define progress. Of course some chunky issues would remain, notably the financial one, but with a clearer plan of action these may become much easier to resolve.

Looking at the issue of emissions mitigation (adaptation remains another chunky part), there are really only five key components. They are (in no particular order):

  • Using energy more efficiently such that we consume less;
  • Using lower or zero carbon forms of energy;
  • Capturing and geologically storing CO2 emissions;
  • Managing the emissions of gases such as methane, HFCs and SF6;
  • Managing the carbon emissions impact of land use.

Breaking the problem up in this way also leads to potential solution sets and policy instruments.

One doesn’t have to look far to find a government grappling with the concept of energy efficiency, in fact pretty much every government on the planet has embraced the idea. Coordination of objectives, standardization and some application of targets could be a powerful enabler to accelerate action in this area. For example, it might well be much simpler for the United States and China to agree on a common approach to lighting and the switchover of technologies (e.g. incandescent to LED) than an acceptable set of targets for emission reduction in their economies. With a timetable agreed, other markets would doubtless follow and issues such as financing and technology transfer would become much more tangible. Say for example a smaller developing country agrees to adopt the same lighting timeline as China but wants to do a certain amount of the manufacturing locally. With a national timetable in place therefore underpinning demand, a major lighting technology provider would see a powerful incentive to build a facility in that country (technology transfer), even more so if an international loan guarantee or grant was on offer (financing).

Looking further down the list, the emissions of other greenhouse gases could be tackled more in the style of the Montreal Protocol. Certainly for HFCs, SF6 and similar gases a timetable approach is practical. This is more problematic for methane and N2O, particularly given the link with land use and agriculture, but at least in industrial instances a defined pathway could be set out. This has happened already to address the pre-1990s practice of venting methane at crude oil production facilities and similar changes have taken place in the chemicals industry to sharply reduce emissions of gases such as N2O.

Land use is increasingly being addressed as a separate issue anyway, simply look at the REDD+ discussions to see that taking place. Issues such as agricultural methane emissions could be included within this category.

That then leaves energy substitution and the application of carbon capture and storage as areas to be tackled. These can both be very effectively driven by a price of carbon, typically delivered directly through a cap and trade approach (notably in the power generation and large industrial sectors) or indirectly via a project mechanism linked to a cap and trade system. Focusing the project mechanism on substitution and CCS also makes it a much more effective instrument and largely addresses issues such as arbitrage (delivering credits into the market at vastly lower cost than the prevailing market price) and competitiveness (improving a competitors energy efficiency by paying it to do so) that hinder the existing structure of the CDM.

A word about CCS as well – some might argue that this is “just another technology” and therefore shouldn’t have any special mention. After all, why not mention wind or nuclear in the same section. The difference is that CCS is the only technology available to remove CO2 (carbon) from the atmosphere on a large scale in a short time and put it back where it was found. If you think about it, this is really what the whole climate change issue boils down to. Have a read of Jim Hansen’s latest book and you will see why – it is very likely that we have, collectively, already emitted too much. CCS can be applied directly at a coal fired power station to remove emissions before they occur or perhaps in a biomass power station which then gives an indirect draw down of emissions already in the atmosphere. Although not feasible today, CCS may eventually even be employed in the direct removal of CO2 from the atmosphere, but the thermodynamics of such a process don’t look very good at the moment.

Even if tools such as cap-and-trade aren’t in vogue, governments could still agree on measures that incentivize low carbon energy and trigger investment in CCS (e.g. an emissions performance standard).

All of this isn’t to imply that somehow the international discussion becomes easy, but it does at least offer the opportunity for segmented progress. A meeting such as Cancun may have little chance of a comprehensive global agreement, but there would doubtless be a great feeling of satisfaction and real progress if the negotiators left with, say, an international agreement on lighting and SF6 emissions in place and a pledge by three or four major economies to each sequester at least 50 million tonnes of CO2 by 2020.