Archive for the ‘Carbon price’ Category

As we head towards COP21 in Paris at the end of 2015, various initiatives are coming to fore to support the process. So far these are non-governmental in nature, for example the “We Mean Business”  initiative backed by organisations such as WBCSD, CLG and The Climate Group. In my last post I also made mention of the World Bank statement on Carbon Pricing.

2 C Puzzle - 3 pieces

This week has seen the launch of the Pathways to Deep Decarbonization report, the interim output of an analysis led by Jeffrey Sachs, director of the Earth Institute at Columbia University and of the UN Sustainable Development Network. The analysis, living up to its name, takes a deeper look at the technologies needed to deliver a 2°C pathway and rather than come up with the increasingly overused “renewables and energy efficiency” slogan, actually identifies key areas of technology that need a huge push. They are:

  • Carbon capture and storage
  • Energy storage and grid management
  • Advanced nuclear power, including alternative nuclear fuels such as thorium
  • Vehicles and advanced biofuels
  • Industrial processes
  • Negative emissions technologies

These make a lot of sense and much has been written about them in other publications, except perhaps the second last one. Some time back I made the point that the solar PV enthusiasts tend to forget about the industrial heartland; that big, somewhat ugly part of the landscape that makes the base products that go into everything we use. Processes such as sulphuric acid, chlorine, caustic soda and ammonia manufacture, let alone ferrous and non-ferrous metal processes often require vast inputs of heat, typically with very large CO2 emissions. In principle, many of these heat processes could be electrified, or the heat could be produced with hydrogen. Electrical energy can, in theory, provide this through the appropriate use of directed-heating technologies (e.g. electric arc, magnetic induction, microwave, ultraviolet, radio frequency). But given the diversity of these processes and the varying contexts in which they are used (scale and organization of the industrial processes), it is highly uncertain whether industrial processes can be decarbonized using available technologies. As such, the report recommends much greater efforts of RD&D in this area to ensure a viable deep emission reduction pathway.

Two key elements of the report have also been adopted by the USA and China under their U.S.-China Strategic and Economic Dialogue. In an announcement on July 9th, they noted the progress made through the U.S.-China Climate Change Working Group, in particular the launching of eight demonstration projects – four on carbon capture, utilization, and storage, and four on smart grids.

Reading through the full Pathways report I was a bit disappointed that a leading economist should return to the Kaya Identity as a means to describe the driver of CO2 emissions (Section 3.1 of the full report). As I noted in a recent post it certainly describes the way in which our economy emits CO2 on an annualised basis, but it doesn’t given much insight to the underlying reality of cumulative CO2 emissions, which is linked directly to the value we obtain from fossil fuels and the size of the resource bases that exist.

Finally, Sachs isn’t one to shy away from controversy and in the first chapter the authors argue that governments need to get serious about reducing emissions;

The truth is that governments have not yet tried hard enough—or, to be frank, simply tried in an organized and thoughtful way—to understand and do what is necessary to keep global warming below the 2°C limit.

I think he’s right. There is still a long way to go until COP21 in Paris and even further afterwards to actually see a real reduction in emissions, rather than reduction by smoke and mirrors which is arguably where the world is today (CO2 per GDP, reductions against non-existent baselines, efficiency improvements, renewable energy goals and the like). These may all help governments get the discussion going at a national or regional, which is good, but then there needs to be a rapid transition to absolute CO2 numbers and away from various other metrics.

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

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

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

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

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

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

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

cq5dam_resized_735x490!

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

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

Climate formula with carbon price (words)

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

Top Ten

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

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

Steps towards Paris 2015

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National climate negotiators and a number of Energy/Environment Ministers are currently meeting in Bonn as the global climate deal process slowly edges forward. Whether the steps being taken are big or small remains to be seen, but there are at least steps, so that is a start. The most well publicized have been those of the United States and China who are both active domestically with action on emissions. In the case of the USA this is the EPA rules that gained heavy media coverage and for China it is the notion that they will peak their coal use at some point in the reasonable future, perhaps as early as 2020. The idea of peak coal in China is also starting to appear in government conversations and is not just something emanating from the Chinese academic community.

But another step was also taken in Bonn last week when Ministers were in town as part of an ADP Dialogue; a new business coalition reared its head. Called “We Mean Business”, this is a coalition of a number of existing business linked organizations and has been established to demonstrate to government that a broad business base sees the need for action on climate change and is prepared to support their actions in creating the necessary policy frameworks under which emissions can then be reduced. “We Mean “Business” has started life with seven supporting organizations;

We Mean Business
The question that needs to be answered is how important is this and can such a group exert any influence over the process at all. Looking back, one parallel that comes to mind is USCAP (Unites States Climate Action Partnership), a group of some 25 companies and NGOs that coalesced around the 2007-2009 US process to implement climate legislation, but most notably a cap-and-trade bill. This was a detailed federal legislative process and USCAP certainly got into the weeds of it, with a comprehensive manifesto of requirements. When the Waxman-Markey Bill did eventually pass through the House there were many elements within it that aligned with the USCAP manifesto, so arguably that organization did have some influence on content. More importantly perhaps, the very existence of USCAP helped create the political space in which comprehensive legislation could be considered, even though the process eventually stalled and ultimately failed in the US Senate.

But Waxman-Markey was a specific piece of national legislation; at the international level the process is more complex. While a cap-and-trade system is a very tangible policy outcome with a set of well understood rules and metrics, the likely outcome from Paris may be far less defined. One aspect that is common to both is the need for political space in which to act. While the majority of this will come from the Parties themselves, business can play a role here. However, such a business coalition will have to act at both national and international levels to be truly effective, in that delegations are most likely given a certain negotiating mandate within which they can operate before they leave for the COP. As such, simply showing that business supports the process at the international level will probably not be enough.

The second area for business advocacy comes in terms of content. This is more difficult in that the business coalition will be made up of a broad range of constituents acting in many different sectors of the economy. While a cap-and-trade system may be ideal for one company in a given sector in a particular country, another company might prefer financial incentives to help it develop a particular technology. Further, the nature of the international agreement won’t include specifics such as cap-and-trade, but will be much more about the process of establishing suitable national contributions and commitments. However, a business coalition could at least ask for some basic building blocks to be included, such as the use of market instruments and the ability to transfer some or all of a national contribution between Parties , both necessary precursors to the longer term development of a global carbon market.

It is early days for “We Mean Business”, but it at least exists and is starting to mobilize resources and interest. But the hard work hasn’t started; what it will actually do and how it might positively influence the process and eventual outcome is for the days and months ahead.

Scaling up for global impact

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

2012OGJcolors

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

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

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

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

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

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

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

In the lead up to the UN Climate Summit in September this year, the Abu Dhabi Ascent was held on May 4-5th as the only preparatory event. Former Vice President Al Gore was one of the keynote speakers and perhaps got the most tweeted line, which came in response to a question from the moderator regarding the single policy he would ask for if he had only one choice. He said, “. . . . put a price on carbon in markets and put a price on denial in politics”. In fact this is two things, but I wouldn’t expect anything less of Al Gore.

This comment set the scene for Rachel Kyte of the World Bank to launch their call for countries and companies to put a price on carbon. This isn’t the first time such a call has been made, but it is perhaps the first time such a call has been made directly to governments at a forum designed for governments by a multilateral agency linked with governments.

The call is a relatively simple one at this stage and fills a glaring gap in the UNFCCC agenda as it has been developing over recent years. Arguably the UNFCCC started the multilateral process back in the 1990s with a carbon pricing approach, in that the Kyoto Protocol is in part built around the idea of allowances, offsets and trading which in turn implies a price on carbon. Over time as the Kyoto Protocol has waned, talk of carbon pricing at the international level has gone in a similar direction. By the end of the Warsaw COP last year, all talk of markets and carbon pricing had been largely put to one side in favour of the efforts just to get everybody around the table and talking about contributions.

“Contributions” may be the political language of the day, but they will do little to stem emissions if carbon pricing isn’t core to the national effort underpinning said contributions. Some countries seem to have figured this out, but the actual price on carbon that currently prevails in those economies that have tried to create it is a far cry from anything that might actually make a difference. While the efforts to date may be a good start from the perspective of building the necessary national institutional capacity for carbon pricing, there is little evidence that governments, business and consumers are actually prepared to accept a carbon price that will deliver a tangible change in energy investment.

I would suggest that this  is where The World Bank most needs to focus its attention. If not, I believe that we may end up with a complex system of carbon markets, linkages, trade and compliance all operating at under $10, which will look impressive on paper but in reality won’t make a difference to global emissions. The acid test for a carbon pricing system is its ability to deliver carbon capture and storage (probably with some additional fiscal support for the first generation of projects). At least for the next few decades, carbon pricing below this point may put a dent in the profitability of fossil fuels, but it won’t make them go away. This will inevitably lead to one thing – regulation. That might sound like the answer for some, but the reality will be a much higher cost for economies to bear for the same mitigation effort.

World bank Carbon pricing Cliff

Revisiting Kaya

Today we see a huge focus on renewable energy and energy efficiency as solutions for reducing CO2 emissions and therefore addressing the climate issue. Yet, as I have discussed in other posts, such a strategy may not deliver the outcome people expect and might even add to the problem, particularly in the case of efficiency. I am not the only one who has said this and clearly the aforementioned strategy has been operating for some 20 years now with emissions only going one way, up.

Kaya Yoichi

A question that perhaps should be asked is “why have many arrived at this solution set?”. Focusing on efficiency and renewable energy as a solution to climate change possibly stems from the wide dissemination of the Kaya Identity, developed in 1993 by Japanese energy economist Yoichi Kaya (pictured above). He noted that:

 Kaya formula

 Or in other words:

Kaya formula (words)

Therefore, by extension over many years (where k = climate sensitivity): 

Climate Kaya formula (words)

In most analysis using the Kaya approach, the first two terms are bypassed. Population management is not a useful way to open a climate discussion, nor is any proposal to limit individual wealth or development (GDP per person). The discussion therefore rests on the back of the argument that because rising emissions are directly linked to the carbon intensity of energy (CO2/Energy) and the energy use per unit of GDP (Energy/GDP or efficiency) within the global economy, lowering these by improving energy efficiency and deploying renewable energy must be the solutions to opt for.

But the Kaya Identity is just describing the distribution of emissions throughout the economy, rather than the real economics of fossil fuel extraction and its consequent emissions. Starting with a simple mineral such as coal, it can be picked up off the ground and exchanged for money based on its energy content. The coal miner will continue to do this until the accessible resource is depleted or the amount of money offered for the coal is less than it costs to pick it up and deliver it for payment. In the case of the latter, the miner could just wait until the price rises again and continue deliveries. Alternatively, the miner could aim to become more efficient, lowering the cost of pickup and delivery and therefore continuing to operate. The fossil fuel industry has been doing this very successfully since its beginnings.

The impact on the climate is a function (f) of the total amount delivered from the resource, not how efficiently it is used, when it is used, how many wind turbines are also in use or how many people use it. This implies the following;

Climate formula (words)

This may also mean that the energy price has to get very low for the miner to stop producing the coal. Of course that is where renewable energy can play an important role, but the trend to date has been for energy system costs to rise as renewable energy is installed. A further complication arises in that once the mine is operating and all the equipment for extraction is in place, the energy price has to fall below the marginal operating cost to stop the operation. The miner may go bankrupt in the process as capital debt is not being serviced, but that still doesn’t necessarily stop the mine operating. It may just get sold off to someone who can run it and the lost capital written off.

This doesn’t have to be the end of the story though. A price on the resultant carbon emissions can tilt the balance by changing the equation;

Climate formula with carbon price (words)

When the carbon price is high enough to offset the profit from the resource extraction, then the process will stop, but not before. The miner would then need to invest in carbon capture and storage to negate the carbon costs and restart the extraction operation.

What this shows is that the carbon price is critical to the problem. Just building a climate strategy on the back of efficiency and renewable energy use may never deliver a reduction in emissions. Efficiency in particular may offer the unexpected incentive of making resource extraction cheaper, which in turn makes it all the more competitive.

 

Emissions Trading via Direct Action in Australia

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

 Australia Reduction Task to 2020

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

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

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

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

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

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

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

The US Submission on Elements of the 2015 Agreement has recently appeared on the UNFCCC website and outlines, in some detail, the approach the US is now seeking with regards “contributions”. Adaptation and Finance are also covered, although not to the depth of the section on Mitigation.

The submission makes it very clear that the US expects robust contributions from Parties, with schedules, transparency, reporting and review. There is also a useful discussion on the legal nature of a contribution. None of this is surprising as the US delegation to the recent COPs and various inter-sessional meetings has made it very clear that real action must be seen from all parties, not just those in developed countries.

But the submission makes no reference to the role of carbon markets or carbon pricing. Only in two locations does it even refer to market mechanisms and this is only in the context of avoiding double counting. This is coming from the Party that gave the world the carbon market underpinning of the Kyoto Protocol, which in turn has given rise to the CDM, the EU ETS, the CPM (in Australia) and the NZ ETS to name but a few, so perhaps reflects the current difficulty Parties are having keeping carbon price thinking on the negotiating agenda. 

I would argue that without a price on carbon emissions, the CO2 emissions issue will be much more difficult to fully resolve. Further to this, while individual countries may pursue such an agenda locally, the emissions leakage from such systems could remain high until the carbon price permeates much of the global energy system. This then argues for an international agreement that encourages the implementation of carbon pricing at a national level. The Kyoto Protocol did this through the Assigned Amount Unit, which gave value to carbon emissions as a property right. While there is no such “Kyoto like” design under consideration for the post 2020 period, the agreement we are looking for should at least lay the foundations for such markets in the future. The question is, how??

In the post 2020 world, carbon pricing is going to have to start at the national level, rather than be cascaded from the top down. Many nations are pursuing such an agenda, including a number of emerging economies such as China, South Korea, South Africa and Kazakhstan. Linkage of these carbon price regimes is seen as the key to expansion, which in turn encourages others to follow similar policy pathways and join the linked club. The reason this is done is not simply to have carbon price homogeneity, but to allow the transfer of emission reduction obligations to other parties such that they can be delivered more cost effectively. This allows one of two things to happen; the same reductions but at lower cost or greater reductions for the expected cost. The latter should ideally be the goal and is apparently the aspiration the USA has, given it states that the agreement should be “designed to promote ambitious efforts by a broad range of Parties.” The carbon price is simply a proxy for this process to allow terms of trade to be agreed as a reduction obligation is transferred.

All of this implies that the post 2020 agreement at least needs a placeholder of some description; to allow the transfer of reductions to take place between parties yet still have them counted against the national contribution. As it stands today, it is looking unlikely that explicit reference to carbon pricing or carbon markets will make its way into the agreement, but perhaps it doesn’t need to at this stage. On the back of a transfer mechanism, ambition could increase and a pricing regime for transfers could potentially evolve. If that happens to look like a global carbon market in the end, then so be it.

What to make of 2013?

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

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

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

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