Archive for the ‘Carbon price’ Category

Last week turned out to be a busy one on the climate calendar, with multiple events across Europe and North America. In the case of the latter, Climate Week in New York, coinciding with the UN General Assembly, was the largest. In Canada the Pembina Institute held their annual Alberta Climate Summit with over 500 people packing out a conference centre in Calgary. Back in the UK, a broadly attended conference in Oxford was held on the issue of meeting the stretch goal of the Paris Agreement, i.e. limiting warming of the climate system to 1.5°C. This conference is part of the process leading up to the special report by the IPCC on 1.5°C, requested as part of the Paris Agreement and due in 2018.

In Canada and at Climate Week I was able to make good use of the new Net Zero Emissions publication from the Shell Scenarios team and there was considerable interest in the material. A colleague did the same in Oxford. In the run-up to the conferences, we put together a new look at the existing scenarios outcomes in the form of a potential timeline to net-zero emissions and this was well received (click on the image to expand).

new-lens-timeline

The timelines show a plausible course of events for each of the two New Lens Scenarios, with an end point in both cases of net-zero emissions. But the scale of deployment, both for physical energy related infrastructure and policy initiatives points to the urgent need for action at national level and through the Paris Agreement.

For example, in the Oceans scenario, carbon pricing is being applied almost globally by 2036 at a level above $30 per tonne of CO2. This compares with about 20+ % of the world today at between $5-$15 and a couple of outliers at $30 (e.g. British Columbia). It has taken nearly 20 years to get this far (with the Kyoto Protocol as a notional starting point).

The Mountains scenario features a very early start for CCS, such that by 2033 there is about 1 Gt CO2 storage per annum – this equates to some 1,000 Quest projects, the large scale Shell project in Alberta. But such a deployment rate is still feasible, although it requires CCS deployment to quickly scale to the rate at which LNG is currently under construction. I looked at the numbers behind this back in 2014.

Oceans sees a very rapid rate for solar deployment, to the extent that by 2044 there is 10,000 GW capacity globally. Solar deployment stands at about 250 GW capacity today. Nevertheless, the power sector isn’t completely decarbonised until 2089. By contrast, the more natural gas / CCS world of Mountains has power sector decarbonisation by 2061.

An interesting feature of both scenarios is that it takes until at least mid-century before global CO2 emissions fall below 30 Gt per annum. While some commentators and energy system observers are calling for net-zero emissions by 2050, an analysis based on real potential  deployment rates of major new energy systems does not support such an outcome.

A further important milestone is the near doubling of the size of the energy system to 1000 EJ (from 500 EJ today), reaching such a level in both scenarios in the 2070s. Today we have about 7+ billion people with an average per capita energy demand of about 70 GJ per annum, although the range extends from some 20 GJ in parts of Africa through to 300+ GJ in North America. A global average of 100+ GJ is likely to be necessary for widespread access to clean water, good sanitation and a range of energy services (e.g. refrigeration), but with a more narrow range across countries.

A complete description of the net zero emissions world can be found on the Shell Scenarios website.

 

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“The New Lens Scenarios” and “A Better Life with a Healthy Planet” are part of an ongoing process – scenario-building – used in Shell for more than 40 years to challenge executives’ perspectives on the future business environment. We base them on plausible assumptions and quantification, and they are designed to stretch management thinking and even to consider events that may only be remotely possible. Scenarios, therefore, are not intended to be predictions of likely future events or outcomes, and investors should not rely on them when making an investment decision with regard to Royal Dutch Shell plc securities.
It is important to note that Shell’s existing portfolio has been decades in development.  While we believe our portfolio is resilient under a wide range of outlooks, including the IEA’s 450 scenario, it includes assets across a spectrum of energy intensities including some with above –average intensity. While we seek to enhance our operations’ average energy intensity through both the development of new projects and divestments, we have no immediate plans to move to a net-zero emissions portfolio over our investment horizon of 10-20 years.

Revisiting global emissions accounting

As COP 22 approaches and negotiators face the task of implementing the Paris Agreement, they will be required to interpret, expand on and operationalize the various Articles of the Paris text. One such piece is Article 6, which offers a framework that can support the establishment of a global carbon market. But the rules of that market may be very different to ones that have preceded it.

The design of the Kyoto Protocol resulted in a particular emissions accounting architecture that is a mixture of allowance allocation against a cap, combined with a provision for project based credits originating outside the cap (supplied by developing countries in the case of the Kyoto Protocol, i.e. non-Annex 1). These credits effectively raise the cap when they are imported into a covered system such as the EU ETS.  Within the Kyoto Protocol, allowance allocation was handled through the Assigned Amount Unit against targets agreed by developed countries (Annex 1) and the most widespread crediting or offset system is the Clean Development Mechanism (CDM) which operates on a project by project basis in developing countries. This basic design has been translated into many jurisdictions, including locations such as California which is not covered by the Kyoto Protocol.

A feature of these systems is that the accounting normally handles the entities within the cap and the project outside the cap, but no attempt is made to account for the total greenhouse gas impact on the atmosphere or against a global goal to reduce overall greenhouse gas emissions. There is an implicit assumption that the sum of the various parts adds up such that the overall outcome is better than not having conducted the exercise at all. This happens because only a small percentage of the global economy sits under a cap, so there is no mechanism available to account for the total impact.  This is one reason why some Parties challenged the appropriateness of the Kyoto Protocol itself.

A further issue related to the current structure is the macro accounting of the external credit. Projects vary in type, ranging from clearly measurable emission reductions (e.g. capturing land-fill methane) to notional reductions (e.g. a wind turbine is built, but the alternative might have been more coal). Particularly in the case of the latter example which is an energy mix question, there is normally no resolution between the local project and the overall energy mix direction of the host country. A key question is typically left unanswered; if the import of credits into a cap-and-trade system raises the cap, has there been an equivalent, albeit probably notional, decline elsewhere.

But as the Paris Agreement starts to take hold, this will likely change. The Durban Platform, established at COP17 to create a global climate agreement applicable to all to replace the Kyotol Protocol, was designed to address these issues.

The Paris Agreement is built on the concept of Nationally Determined Contributions (NDC). These are set at national level and offer a direction of travel for a given economy in terms of its energy mix and/or greenhouse gas emissions. Although the first set of NDCs offered in the run-up to COP21 were varied in nature and in some cases only covered specific activities within the economy, over time they will likely converge in style and, for the Paris Agreement to deliver, must expand to cover all anthropogenic greenhouse gas sources.

The NDCs also lead us down another path – that of quantification. The first assessment of NDCs conducted by the UNFCCC in October 2015 and then refreshed in May 2016 required the quantification of all NDCs in terms of annual emissions and cumulative emissions through to 2030. This was necessary to establish an equivalent level of warming of the climate system, which is driven largely by the cumulative emissions of carbon dioxide over time. Without such an assessment, the UN cannot advise the Parties on progress towards the aim of the Paris Agreement.

The UNFCCC didn’t have a full emissions inventory on which to base this calculation, so they established one from the best data available. But Article 13 of the Paris Agreement introduces a transparency framework and calls on Parties to regularly provide;

  • A national inventory report of anthropogenic emissions by sources and removals by sinks of greenhouse gases, prepared using good practice methodologies accepted by the Intergovernmental Panel on Climate Change and agreed upon by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement;       
  • Information necessary to track progress made in implementing and achieving its nationally determined contribution under Article 4.

The foundation for transparency is measurement and reporting, which further implies that emissions quantification is a foundation element of the Paris Agreement. Although nationally determined and always voluntary, the Agreement effectively establishes a cap, albeit notional in many cases, on national emissions in every country. The caps are also effectively declining over time, even for countries with emissions still rising as development drives industrialization.

Article 6 introduces the prospect of carbon unit trading through its internationally transferred mitigation outcomes (ITMO) and emissions mitigation mechanism (EMM). Text in paragraphs 6.2 and 6.5 is included to avoid any possibility of double counting;

. . . internationally transferred mitigation outcomes towards nationally determined contributions. . . . . shall apply robust accounting to ensure, inter alia, the avoidance of double counting,

Emission reductions resulting from the mechanism referred to in paragraph 4 of this Article shall not be used to demonstrate achievement of the host Party’s nationally determined contribution if used by another Party to demonstrate achievement of its nationally determined contribution.

These provisions, in combination with the progressive shift towards quantification of all emission sinks and sources, means that full national accounting for offset crediting must take place for both the recipient and the source of the units. For the recipient, there will be no change in their procedures in that the introduction and counting of outside units is already built in to the inventory processes underpinning the trading systems. But the source country will be required to make an equivalent reduction (also referred to as a “corresponding adjustment”) from their stated NDC, therefore tightening their contribution. This was a feature of the Joint Implementation (JI) mechanism under the Kyoto Protocol, but was not the required practice in the CDM.

The example shown in the box below illustrates this through a hypothetical case for a nature based transfer (NBT) from Kenya to Canada, utilizing the EMM as a means to acquire the necessary funding. The impact on the Kenya NDC implies a shift from a stated reduction of 30% from Business as Usual (BAU) in 2030, to some 37% below BAU. This ensures there is no double counting of the transferred amount and maintains the full integrity of the overall NDC approach such that the implied global cumulative emissions goal of the NDCs is maintained. However, Kenya will need to find further reductions in its economy as a result. One implication of this is that the price of carbon units may rise due to the additional demand that an overall emissions cap, even a notional one, places on the global economy.

Article 6 of the Paris Agreement offers great potential for carbon market development and emissions trading, therefore driving a lowest cost mitigation outcome and directing funding and financing to low emission technologies. But over time, it should also introduce an accounting rigor that has only featured in some quarters to date. This may well change the supply demand balance, leading to a more robust and enduring carbon market.

Kenya and Canada

Being a climate change adviser

Shell is often cited in climate change discussions, sometimes disparagingly simply because it is an oil and gas company, but increasingly as a company that has recognised that major changes in both the provision and use of energy across the globe will be needed to both meet demand and significantly reduce greenhouse gas emissions. Following from the Paris Agreement, it is hard to see how this won’t be the case. The leadership in Shell regarding climate change has always come from the top. The first major steps were taken in the period 1997 to 2001 when the foundations for change were established by former Chairman Sir Mark Moody-Stuart. He catalysed the necessary focus on the climate issue and had the foresight to establish a carbon trading desk within Shell Trading, just as the Clean Development Mechanism and the EU Emissions Trading system were in their early design stages. In 2005, then CEO Jeroen van der Veer created our CO2 team and gave it high visibility within the company. This eventually led to developments such as the Quest carbon capture and storage project in Canada. Today, we have a new energies business starting up. Our current CEO Ben van Beurden has also championed our position on issues such as government implemented carbon pricing and Shell has recently published scenario thinking on a net-zero emissions energy system of the future.

Within this journey of change, one question I am often asked is how I came into my job in Shell as Chief Climate Change Adviser and what it is like to perform such a role in the oil and gas industry. Some think that I might be a climate scientist, others picture the role as something of a fig leaf. In reality, neither is the case.

I started in Shell like many others, as a chemical engineering graduate in one of the 30+ refineries that Shell had back in 1980. The year in which I interviewed was one where all new chemical engineers were spoilt for choice – graduating classes had shrunk and demand was booming. But Shell offered a great value proposition – a global company with the very real prospect of a global career. My job offer was as a technologist in Geelong Refinery, a ~100,000 bbl/day facility just outside the city of Geelong, Australia and some 70 kms south-west of Melbourne. It was a complex refinery, with reforming, cracking, lube oil manufacturing, chemicals and various hydrotreating units. In the subsequent decade in the Downstream business I also worked in the global offices in The Hague and at Clyde Refinery in Sydney. Towards the end of this time I moved into the supply side of refining where the crude oil purchasing and refinery operating mode decisions are made based in part on linear programme models of the operation and the market it faces. This in turn led me to Shell Trading in London where I spent a decade trading Middle East crudes and managing the chartering of all the crude oil shipping that Shell required. Trading and shipping are at the very core of Shell, not just in terms of its operation as an oil and gas company, but in its DNA as well. After all, only a few hundred metres from where I live today, Marcus Samuel started his own trading business by procuring shells from sailors in the Port of London and making trinkets for people to buy when they visited English seaside towns such as Brighton and Torquay. This tiny enterprise, along with a similar entrepreneurial company in the Netherlands, eventually became the Royal Dutch Shell plc of today.

So twenty years after graduating I found myself with a solid background in what the company did, how the economics of the industry worked and perhaps most importantly how a critical component of the global energy system actually operated. What should I do with this expertise? I had my eye on the various functions in the Corporate Centre of the company and one in particular came up in mid-2001 which looked interesting. It was the role of Group Climate Change Adviser, a relatively new position that Shell had created in 1998 as it took its first steps to manage the business risk presented by climate change. In my interview for the position, my soon to be boss was pleased to meet someone who had worked in the refining business and had a good knowledge of the energy markets and trading. Even then it was clear that the development of policy would involve markets, and pricing, and present a real challenge to the incumbent businesses.

Like most in the company, I had imagined that this would be another 3-4 year assignment, but 16 years later I remain immersed in the climate change issue at Shell, although the role I originally took and the one I have now are worlds apart. Much has happened in that time externally, culminating in the Paris Agreement last December; internally the journey for the company has similarly progressed, although not without some tough questions along the way. Being part of all this over such a long period has been rewarding, a huge privilege and very challenging. It perhaps isn’t where I expected my career to go, but I can only look back and say that I am glad that it did. Some may think that a large corporation means a very restrictive and bureaucracy bound office life, but this is far from reality. I have a broad mandate and considerable freedom to engage externally on climate change, to publish my thinking on the issues that the world faces as it strives to manage emissions, but also to take all this back to colleagues within the company and challenge them as they try to run their businesses. Over time, I have also had considerable opportunity for travel, which has included every continent (yes, Antarctica as well) and over 30 countries.

Glacier calving

From time to time, people considering a career in environmental management ask me where they should start and what steps they might take. I almost never recommend that they start in an environmental role. Rather, building real experience developing new projects, troubleshooting problems in existing facilities and understanding the economics of the energy industry is my steer. My own experience has led me to believe that such a grounding is essential in tackling major issues such as climate change. As a new graduate considering an energy career, these are the sorts of jobs that a company such as Shell will most likely offer. My advice would be to take one, and then look towards the longer journey of change.

Solar deployment rates

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There is no doubt that solar PV is deploying rapidly, with 50+ gigawatts of capacity now being added each year to the global energy system. A recent article in the Financial Times discusses the “Great Resource Shift” as it calls the visible energy transition and notes the following for solar in particular;

The amount of solar power installed over the past few years, for example, has exceeded experts’ optimistic predictions . . . . . “It’s a lesson in disruption, in that things can happen very quickly . . . . . And it’s quite difficult to build into most traditional forecasting. We’re now in a situation where the cleaner, alternative technologies are actually comparable or in some cases cheaper than the incumbent technologies so that’s a dramatic change from a few years ago.”

It is certainly the case that when returning to the IEA World Energy Outlook published in 2006, current solar deployment far exceeds their forecast. In that year, IEA expected 2015 solar to generate some 34 TWhrs of electricity, rising to 238 TWh by 2030. A look at the most recent version of the BP Statistical Review of World Energy shows solar in 2015 at 253 TWh against a global total of 24,100 TWh, i.e. 1%. While this remains low, it is nevertheless nearly an order of magnitude larger that the IEA number for 2015, even though IEA were close with their 2015 total electricity forecast (23,682 vs. 24,098 from BP). The difference in wind generation was only a factor of two, with IEA expecting 449 TWh and the BP 2015 actual coming in at 841 TWh.

IEA WEO 2006 APS Electricity

But not all outlooks took the same view. Back in 2006 Shell was preparing data for the formulation of its previous round of energy scenarios, Blueprints and Scramble. These were released in 2008, but the data is from the same period as the 2006 IEA World Energy Outlook. The Blueprints scenario imagined very rapid deployment of solar, resulting in some 500 TWh in 2015, about double the BP number. Based on current growth rates in solar (~30% per annum but declining in relative terms as the base gats larger) the world may be at this level by 2018.

This rapid deployment has given rise to great optimism regarding the future of solar, yet a deeper look at Blueprints and more recently the solar based Shell scenario Oceans, shows a familiar pattern. In the early years of deployment the relative rate of change is often extraordinarily high, but as the energy source becomes material within the mix this slows, even as absolute deployment rates are maintained. Exponential growth doesn’t continue. Looking back at Blueprints and an article on energy system growth that was published in Nature and written by two members of the Shell Scenario team, we see a potential route forward for solar. The chart below was prepared for that Nature article, but overlaid is the observed growth in solar from 2007 to 2015.

Blueprints solar

A key observation from the chart is that growth becomes more linear as the given energy source becomes a material part of the energy system. By 2050 in the Blueprints scenario solar is around 74 EJ, or nearly 10% of primary energy. By 2100 in the Oceans scenario this has risen to nearly 300 EJ, or about 30% of primary energy. 300 EJ is about 80,000 TWh, which means a 300 fold increase on current solar generation or the equivalent of solar producing over three times the current global electricity consumption. But this takes another 84 years to materialize.

One interesting observation looking back at IEA WEO 2006 is that global emissions of carbon dioxide were forecast at 31.6 billion tonnes in 2015, which is very close to the current data (BP at 33.5 Gt, IEA at 32.1 announced in March). As noted above, total 2015 electricity generation was about 400 TWh above the 2006 IEA projection, with IEA falling short on wind and solar by 611 TWh. One worrying conclusion from this is that while the rapid expansion of wind and solar has certainly added to global electricity production and likely helped many people gain access to electricity before they might have without it, the deployment hasn’t impacted CO2 emissions. This supports the argument that CO2 emissions will really only be impacted through the introduction of government led carbon pricing and not by simply trying to outcompete fossil fuel use with rapid deployment of something else. The latter strategy might result in an energy system that has significant solar and wind, but without significant curtailment of emissions.

IEA WEO 2006 APS CO2

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Scenarios are part of an ongoing process used in Shell for more than 40 years to challenge executives’ perspectives on the future business environment. They are based on plausible assumptions and quantification and are designed to stretch management thinking and even to consider events that may only be remotely possible.

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Within the Paris Agreement sits Article 6, a carefully crafted set of provisions to foster, in the parlance of the UNFCCC and the Parties to the Agreement, cooperative approaches. This includes a provision for cross border transfer of mitigation outcomes and a mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development. But for those outside the negotiating process (and hopefully those inside as well), this Article is seen as the foundation for carbon market development. There was a great deal of advocacy effort behind the Article, particularly from the International Emissions Trading Association (IETA) who argued strongly that such a construction within the Paris Agreement was essential to see accelerated adoption of government implemented carbon pricing; widely recognised as a critical policy instrument for managing carbon dioxide emissions.

The wording of Article 6 needs some deciphering and for those now assembling in Bonn to begin the process of implementation of the Paris Agreement, some steer from the private sector will hopefully be helpful. After all, if the provisions do enable the development and expansion of carbon markets then it will almost certainly be the private sector that is most deeply involved. To that end, IETA have now published a first thought piece on Article 6, setting out a vision for its implementation.

IETA Article 6 Brochure

The IETA vision for Article 6 is built on the need for governments to implement carbon pricing, ideally through market based approaches such as cap-and-trade or baseline-and-credit. This starts with the internationally transferred mitigation outcomes (ITMO), described in 6.2 and 6.3. These transfers are effectively carbon market trades between governments or private entities operating through emission trading systems. One example is the link between California and Quebec, which effectively ties parts of the Nationally Determined Contributions (NDCs) of Canada and the United States together. Similarly the link between Norway and the EU ETS is doing the same for their respective NDCs. IETA argues that for clean and simple accounting and the avoidance of double counting, that the concept of exchange of carbon units, either notional or real, should be an underpinning feature of any ITMO. That means the basis for cooperative approaches is, for the most part, a market based one. For governments to access the economic benefits and cost effectiveness of a cooperative approach, they will need to implement carbon unit based emissions management systems within their economies.

IETA also recognises that not all governments may be ready or able to implement trading based systems, so its vision draws on another aspect of Article 6 to enable this. Paragraphs 6.4 (a) – (d) describe an emissions mitigation mechanism (which IETA have given the designation EMM). While some commentators are already arguing that this is a future version of the Clean Development Mechanism of the Kyoto Protocol (i.e. CDM 2.0), IETA makes the case for a much broader interpretation and use of this mechanism. Such implementation could see the EMM offering both universal carbon allowance and crediting units for those countries that choose to use them, facilitating trade between NDCs (i.e. ITMO), providing registry accounting and offering the prospect of carbon pricing in many economies.

The EMM could also be designed to establish sector baselines and issue sovereign credits for performance in excess of those baselines, which might then be purchased by external climate funds to channel investment. In this way it would function more like the CDM. But as IETA notes in its thought piece, the world in which crediting from one country acting as a direct offset in another is coming to an end. Under the CDM this was possible because the project host country had no quantified emissions management goal. As such, national accounting effectively took place on one side only, although the project itself had to have a credible baseline against which it operated. But as NDCs progressively expand to cover all national emissions (if they don’t then the Paris Agreement can’t claim to manage global emissions), paragraph 6.5 prevents such one sided accounting;

Emission reductions resulting from the mechanism referred to in paragraph 4 of this Article shall not be used to demonstrate achievement of the host Party’s nationally determined contribution if used by another Party to demonstrate achievement of its nationally determined contribution.

This means that the transfer of credits from a project across a national border (in the style of the CDM) will impact the national inventory reports of both parties. IETA argues that these transfers will then have to be executed in the style of Joint Implementation (JI) of the Kyoto Protocol, which effectively required an adjustment to the project host country’s national goal if the crediting unit was to be used by another Party to meet their goal.

The Paris Agreement introduces a very different world of international emissions trading to the one that exists today and has operated in recent years. The IETA paper concludes with a visualisation of how this might end up.

Article 6 Evolution

Some post-Paris diplomacy

President Obama and Canadian Prime Minister Justin Trudeau met last week for their first formal bilateral meeting since the latter was elected. With the success of the Paris Agreement behind them, the two leaders made their first steps together towards implementation with the announcement of a number of actions. A greater focus on methane emissions figured high on the list of things to do, but perhaps even more important than this was the recognition that co-opoerative action is required to implement the provisions within the Paris Agreement that are aimed at carbon market development. The joint statement released during the meeting made a very specific reference to this work;

Recognizing the role that carbon markets can play in helping countries achieve their climate targets while also driving low-carbon innovation, both countries commit to work together to support robust implementation of the carbon markets-related provisions of the Paris Agreement. The federal governments, together and in close communication with states, provinces and territories, will explore options for ensuring the environmental integrity of transferred units, in particular to inform strong INDC accounting and efforts to avoid “double-counting” of emission reductions.

The reference here is to Article 6 of the Paris Agreement, which allows for “internationally transferable mitigation outcomes” (ITMO) between Nationally Determined Contributions. Article 6 also establishes an emissions mitigation mechanism (EMM) which could well support the ITMO by becoming, amongst other things, a standardised carbon unit for transfer purposes. These are the sorts of areas where considerable thought will be required over the coming months.

The statement represents a big step forward for the United States and for the further development of carbon markets. The USA was amongst the very first countries to release its INDC, within which can be found the statement;

Use of markets:
At this time, the United States does not intend to utilize international market mechanisms to implement its 2025 target.

This was not a big surprise at the time. It was still early days for the resurgent political interest in the importance of government implementation of carbon pricing and therefore the supporting role that international carbon markets can play in helping optimise its use. But a great deal has happened in a year (the USA released its INDC on March 25th 2015), topped off with Article 6 in the Paris Agreement. This time last year that looked like an almost impossible dream, although several of us in the carbon pricing community dared to talk about it.

But perhaps it is the developments in North America itself that have raised the profile of cross-border carbon unit trade with the respective national governments. Although the California-Québec linked cap-and-trade system got going in 2014, it wasn’t until 2015 that Ontario showed a sudden interest in joining the system. At the April 2015 Québec Summit on Climate Change, Ontario announced its intention to set up a cap-and-trade system and join the Québec-California carbon market. The following September, Quebec and Ontario signed a cooperation agreement aimed at facilitating Ontario’s upcoming membership in the Québec- California carbon market. To add to this, during COP21 Manitoba announced that it would implement, for its large emitters, a cap-and-trade system compatible with the Quebec-California carbon market. Québec and Ontario then committed in Paris to collaborate with Manitoba in the development of its system bysigning a memorandum of understanding tothat effect.

Others US states and Canadian provinces may join, with Mexico also looking on in interest. This could in turn lead to a significant North American club of carbon markets; perhaps one even starting to match the scale and breadth of the 30 member EU ETS. Clubs of carbon markets are seen by many observers as the quickest and most effective route to widespread adoption of carbon pricing. The Environmental Defence Fund based out of New York has written extensively on the subject with their most recent paper being released in August last year.

With parts of the USA members of a multi-national club of carbon markets, the Federeal government is then effectively bound to build their use into their NDC thinking. There may be a significant flow of units across national borders, which will make it necessary to account for them through Article 6 and the various transparency provisions of the Paris Agreement.

But most importantly there is the economic benefit of doing this; a larger more diverse market will almost certainly see a lower cost of carbon across the participating jurisdictions than would otherwise have been the case. This could translate into a lower societal cost for reaching a given decarbonization goal or open up the possibility of greater mitigation ambition.

A focus on the Philippines

Last week I was in Manila participating in the opening panel session of the Shell sponsored energy event, Powering Progress Together. The panel included IPCC WG1 Co-chair, Dr. Edvin Aldrian from Indonesia; Philippine Department of Energy Secretary, Hon. Zenaida Y. Monsada; and Tony La Vina, a former Undersecretary of the Department of Environment and Natural Resources, but currently Dean of the Ateneo School of Government. With the focus of our panel being the energy transition and climate challenge it didn’t take long to get to the situation faced by the Philippines and the Intended Nationally Determined Contribution (INDC) it submitted to the UNFCCC in the run-up to COP21.

The Philippines has seen energy sector emissions rise sharply in recent years (see chart) with coal use doubling between 2007 and 2014, while natural gas and oil demand remained almost static. Although oil use for transport increased, this was offset by a drop in oil based power generation.

Philippines Energy Emissions

Against this backdrop the Philippines submitted an INDC which calls for a 70% reduction in emissions for 2030 against a business as usual projection which sees increasing coal use in the power sector. The charts below were prepared by the Department of Energy. By 2030, full INDC implementation would see only a modest change in coal capacity from current levels, but a significant increase in natural gas and growth in wind and solar such that they become material in the overall power generation mix.

Philippines Electrcity Capacity

The government also has big plans for the transport sector, with major electrification of the popular Jeepney (small buses) and tricycle (motorcycle based carriers) fleet. These are everywhere in Manila.

But as the Secretary pointed out in the panel discussion, this shift is dependent on outside financial help. The reduction goal represents at least 1 billion tonnes of cumulative carbon dioxide over the period 2015 to 2030 and although an anticipated cost of implementation isn’t given, it may well run into tens of billions of dollars. However, the immediate benefits should be considerable, particularly for health and welfare in cities such as Manila itself as roadside air quality improves with an alternative bus fleet. The INDC specifically notes (one of several mentions);

The mitigation contribution is conditioned on the extent of financial resources, including technology development & transfer, and capacity building, that will be made available to the Philippines.

The Philippines have certainly felt the sharp end of the global climate in recent years, but particularly with Typhoon Haiyan, a Category 5 Super Typhoon, in November 2013. That event led to a member of the Philippine delegation pledging to fast for the duration of COP 19 in Warsaw. The INDC is an ambitious start on their mitigation journey, but also highlights the challenges faced by many countries at a similar stage in their development. As the Philippine economy develops it will need much more energy than currently supplied; the surge in coal use as a response is also seen in many other national energy plans. Limiting the early growth of coal in emerging economies is one of the big global issues that the Paris Agreement and related INDCs must address as they are implemented. The provisions within Article 6 of the Agreement can help; ideally by channelling a carbon price into those economies with the necessary climate finance to change the energy outlook.

Solar thermal by the numbers

Early in February the King of Morocco, HE Mohammed VI, opened the first phase of what will eventually become a major solar energy facility in the centre of the country. On the same day, the King also laid the foundations for Phase 2. The project is a remarkable piece of engineering, with tracking parabolic mirrors reflecting and concentrating sunlight into a heating loop, which then transfers the energy into steam and ultimately electricity from turbines. The system also includes a molten salt energy storage system which provides 3 hours of turbine operation once the sun has set.

Noor Solar

The Noor Ouarzazate Concentrated Solar Complex is being developed 10 kms north-east of the city of Ouarzazate at the edge of Sahara Desert about 190 kms from Marrakesh. Phase One of the project involves the construction of a 160MW concentrated solar power (CSP) plant named Noor I, while Phase Two involves the construction of the 200MW Noor II CSP plant and the 150MW Noor III CSP plant. Phase Three will involve the construction of the Noor IV CSP plant.

The original cost of Noor I was estimated at about $1.1 billion, but various reports show that upwards of $2 billion has been spent, although a proportion of this must be for overall site development, roads, infrastructure etc. which will benefit all of the phases. A description of Phase II can be found on the World Bank website, with an estimated cost of $2.4 billion for construction and $300 million as a cost mitigation mechanism (i.e. to lower the cost of the electricity produced during the initial years of operation).

The initial 160 MW project has a net capacity of 143 MW, producing some 370 GWh of electricity output. This equates to a capacity factor of nearly 30% which is high for solar, but reflects the nature of the location and the energy storage mechanism using molten salt. Nevertheless, in terms of total annual output, this is similar to building a 60 MW gas turbine, although the gas turbine would always be limited to 60 MW, whereas the solar facility can output at higher levels through much of the day when businesses are open and drawing on the grid.

By the end of Phase 2, total capacity of the facility will be over 500 MW, at a capital cost of some $5 billion (although The Guardian puts this at $9 billion). Annual generation will amount to some 1500 GWhrs per annum. The per capita consumption of electricity in Morocco is around 1 MWhr, so this represents electricity for 1.5 million people. In the case of the USA, it would offer power to only 130,000 people. Phases 1 and 2 will occupy a land area of some 1900 hectares (about 4.4 by 4.4 kms)

The justification for the project is interesting and can be found in one of the documents on the World Bank project site. Carbon pricing figures strongly although there are no immediate plans for a robust carbon pricing system to be implemented in Morocco. The report concludes that Concentrated Solar is not economic on the basis of conventional cost-benefit analysis (the economic rate of return is negative over the anticipated 25-year horizon of the project); the economic benefits are taken as the avoided costs of the next best thermal alternative, which is CCGT using imported LNG. To be economic at the (real) opportunity cost of capital to the Moroccan government, the valuation of CO2 would need to be US$92/ton of CO2 (calculated as switching value, i.e. NPV of zero), or US$57/ton of CO2 when calculated as the Marginal Abatement Cost (MAC). The justification for the project is largely on the basis of macro-economic benefits for Morocco (jobs, technology transfer etc.) and global learning curve benefits.

The project is situated near a reservoir and is quite water intensive. Phase 1 is water cooled, but this is not the case for the later phases. However, there is ongoing water use for cleaning of the solar reflectors. For Phase 1 alone, the water use during operation represents 0.41% of the average yearly contribution to the Mansour Ed Dahbi Reservoir in the wet years, and 2.57% of the lowest recorded yearly contribution to the reservoir. The estimated total wastewater flow to be discharged to the evaporation ponds (visible in the foreground of the picture) is 425,000 m3/year.

Finally, there is the important aspect of emissions reduction. The Noor I CSP plant is expected to displace 240,000 tonnes a year of CO2 emissions. Based on the generation of 370 GWhrs per annum, this assumes an alternative energy mix of natural gas, some oil generation and a proportion of coal. For natural gas alone with its lower carbon footprint, the displacement could fall well below 200,000 tonnes. But like all such projects, this is displacement of CO2 which may result in a lower eventual accumulation. It is not direct management of CO2 such as offered by carbon capture and storage.

The Moroccan CSP is a fascinating project, but even more so as the numbers are put down on paper. With COP22 taking place in that country in November we are bound to hear more about it.

Developing Article 6

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Article 6 of the Paris Agreement contains a number of bolt holes for the development of market and non-market mechanisms to drive future mitigation.

Within these, paragraph 6.2 pertains to any linkage that might exist between Nationally Determined Contributions (NDCs), such as could occur between cap and trade systems residing in different countries. For example, Canada and the United States have such a linkage between the California and Quebec systems, with other states and provinces likely to join. Presumably when Canada presents the result of its NDC efforts to the UNFCCC at various stock takes, the transfer that has occurred between these two systems will need to be accounted for, with this paragraph leading to a clear set of modalities for the necessary accounting of the transfer. The longer term hope is that this paragraph provides additional impetus to such activities, catalysing both the use of such trading systems and the creation of links between them. This is an important step towards the formation of a globally traded carbon market.

Paragraph 6.4 is also a formative proposition, potentially containing within it the means to drive new investment and markets. It states;

A mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development is hereby established under the authority and guidance of the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement for use by Parties on a voluntary basis. It shall be supervised by a body designated by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement, and shall aim:

  1. To promote the mitigation of greenhouse gas emissions while fostering sustainable development;
  2. To incentivize and facilitate participation in the mitigation of greenhouse gas emissions by public and private entities authorized by a Party;
  3. To contribute to the reduction of emission levels in the host Party, which will benefit from mitigation activities resulting in emission reductions that can also be used by another Party to fulfil its nationally determined contribution; and
  4. To deliver an overall mitigation in global emissions.

Almost from the moment the gavel came down in Paris, commentators have been referring to this as the Sustainable Development Mechanism. This has become so embedded that when I returned to this part of the Agreement to write this post I was surprised that it isn’t actually called that. Rather, the mechanism is an EMM (Emissions Mitigation Mechanism) which supports sustainable development, not a sustainable development mechanism that happens to result in emissions reduction.

It is very early days, although Paragraph 6.7 gives the negotiators just this year to sort out the modalities and procedures of the mechanism. At a conference in London this month, a first discussion around Article 6 and particularly the mechanism within it took place. Although the meeting was more of a post-Paris stocktake, it offered an opportunity to get some thoughts and ideas onto the table.

One of the first of these was a presumption that the mechanism is simply the Clean Development Mechanism of the Paris Agreement, i.e. CDM 2.0. While it may eventually offer such a service, to limit it to this and no more may turn out to be very short sighted. In the first instance, the text above does not mention project activity or identify developing countries as the beneficiaries of the activities undertaken. This is in contrast to Article 12 of the Kyoto Protocol which clearly identified such a role for the CDM.

Rather, paragraph 6.4 is defined more broadly as a mechanism to contribute to the mitigation of greenhouse gases while fostering sustainable development. This means that it could have very wide scope and operate on many fronts or alternatively be specified quite narrowly but operate universally as a carbon trading unit. Other definitions or uses may also be considered.

Within a broad scope the mechanism could operate down to a single project, as was the case under the CDM, or become a crediting unit within a baseline system that operates across an entire NDC or within a sector covered by an NDC. Such a unit might be traded between systems, acting as the agent to link baseline-and-credit designs or even cap-and-trade designs. It could become a carbon reduction bought through a financing mechanism such as the Green Climate Fund, establishing that fund as a buyer of reductions as a means of driving mitigation activity. Other possibilities include linking it to technology demonstration or climate finance requirements.

The ambition embedded within the Paris Agreement is going to require change on a very large scale and at a very rapid pace; certainly much faster than could be envisaged through a project by project approach, as was the case with the CDM. While the CDM was very successful in what it did, the scale was hardly measurable against the size of the global energy system. This also argues against an early narrow use of Paragraph 6.4.

At this stage the possibilities are wide open and we need to keep them that way. In the months leading up to the Bonn intercessional meeting in late May, the opportunity exists to explore these options and think through the possible applications of a broadly defined mitigation mechanism. A rush to create CDM 2.0 would be a mistake, even if there is early recognition that the mechanism will need to fulfil this task as part of its overall definition.

Carbon pricing in 2015

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Perhaps more than any other aspect of the climate agenda, carbon pricing took a major step forward in 2015. This was supported by many initiatives, but most notably by the creation of the Carbon Pricing Leadership Coalition under the auspices of the World Bank. This in turn encouraged a variety of private sector interventions, such as the mid-year letter on carbon pricing from six oil and gas industry CEOs to the UNFCCC. All these actions urged governments to implement carbon pricing policies within their economies as the principle mechanism for advancing climate change action.

In terms of real policy developments, the January 2016 map (below) doesn’t look radically different to the January 2015 map, but a number of important changes took place;

  1. China confirmed the implementation of a nationwide ETS, with a proposal that would see such a system up and running over the coming 2-3 years.
  2. The fledging California-Quebec linked market is likely to see both Ontario and Manitoba join on the Canadian side.
  3. Alberta announced its intention to implement a comprehensive carbon tax from 2017.
  4. The US Clean Power Plan has elements within it that could (but not a given) lead to widespread adoption of a trading model, which in turn implies a carbon price developing in the US power sector.
  5. India again doubled its coal tax in the middle of the year, now at 200 Rupees per tonne of coal. While not a strict carbon price, it will have a similar impact. However, the level is very modest (<$2 per tonne CO2), even compared to the current low price of coal (~$40 per tonne).
  6. The aviation industry is moving closer to a voluntary carbon pricing system.
  7. South Africa moved forward with its carbon pricing legislation.
  8. The EU introduced the Market Stability Reserve as a mechanism to begin to manage the allowance surplus in the EU ETS.

The year ended with what may become the most important element of all, Article 6 of the Paris Agreement. While this doesn’t mention carbon pricing at all, it nevertheless provides fertile ground for its development through international trade of allowances and various other carbon related instruments. It also seeks to create a new global mechanism to underpin emissions reductions and promote sustainable development.

2016 will need to build rapidly on these developments if a government implemented carbon price based approach is to become the global model for reducing emissions. The ambitious goal of the Paris Agreement will need much wider and faster uptake of carbon pricing policy than is apparent from the charts below.

Carbon pricing 2016

Carbon pricing 2015Carbon pricing 2014

Carbon pricing 2013