David Hone

Late last week saw the public release of the new Shell energy scenarios, under the heading “New Lens Scenarios”. This is always a much anticipated moment in Shell, a bit like the Olympics as it only happens every few years – the last ones were released in 2008. In the interim many people across the company get involved in the scenario process through workshops and meetings, but the core team manages to keep the final product under wraps until the big day. While we might get an early sniff of the story, the final product always contains new themes and ideas, designed not to recast the status quo paradigm, but to challenge and surprise where possible.

So it is with Mountains and Oceans, the two new scenarios that look out to the very end of this century, a first in terms of “viewing distance”. I won’t attempt to tell the whole scenario story here, better to direct you to the website, here. But the climate stories buried within them are of real interest and should act as a wake up call for governments around the world.

In my post last week I discussed the idea that the CO2 issue is best thought of as a stock problem, in other words fossil CO2 released from the “geosphere” is accumulating in the ocean/atmosphere system and adding to the background greenhouse warming that makes this planet habitable. Roughly, each additional trillion tonnes of carbon that is released makes the planet another 2°C hotter. 

This has been shown by Allen et. al., Warming caused by cumulative carbon emissions towards the trillionth tonne, Nature Vol 458, 30 April 2009. The key chart is shown below. 

This means that the focus of policymakers should be on the cumulative emissions of carbon over the long term, rather than on actual emissions on any given date. As such, climate policy needs to focus on limiting the accumulation, rather than simply slowing down the rate of emissions. For example, using energy more efficiently for the same level of production or GDP or supplementing the energy mix with renewable resources could well reduce annual emissions, but may do nothing to limit the accumulation over time. More renewable energy also gives policy makers a sense that they are addressing the problem of how to meet the surging demand for energy and also manage emissions, but over the long run it will just take a little longer to reach the same accumulation of carbon. Using up current proven reserves of oil gas and coal (about 900 billion tonnes of carbon), whether over 50 years, 60 years or 90 years, still delivers the same climate result.

By contrast, deploying carbon capture and storage (CCS) and eventually linking it with any use of fossil resources resolves the accumulation issue. The New Lens Scenarios demonstrate this point very well.

In the Mountains scenario, which sees natural gas use grow to become the backbone of the world energy supply, the politics of the day allows CCS to start serious deployment in the 2030s and rapidly increase to peak deployment in the 2060s. As the energy mix shifts later in the century, CCS use declines somewhat. By 2100, emissions are effectively zero, with the prospect of some drawdown of atmospheric CO2 in the 22^nd Century as CCS is combined with the use of biomass for energy. Importantly, cumulative emissions are capped and the amount of warming is limited, albeit not at 2°C.

The Oceans scenario tells a different story. The underlying politics and social trends see more focus on renewable energy early on, with CCS not seriously deployed until 20-30 years later than Mountains and never growing to the same level. Although solar PV becomes very substantial in the energy mix, the time it takes to win the day allows cumulative carbon emissions to grow well past the Mountains scenario, adding to the potential warming by the end of the century. Oceans also caps the accumulation by 2100.

Both scenarios make extensive use of CCS, but delaying deployment while lured by the attractiveness of a high renewable energy future has a real downside, more warming. 

We can see the evidence of government focus on renewable energy in the recent NER 300 funding in Europe. Despite the goal of establishing a CCS demonstration programme, no funds were delivered to CCS projects in Europe and the money was granted to renewable energy projects.   Green politics is fast becoming a distraction from the real climate priority of managing cumulative emissions, which requires CCS.

The scenarios are designed to tell stories and get us to think about the implications of the energy choices that we make. They are not forecasts or predictions, but they do represent viable alternative pathways which are economically, socially and technologically feasible. Enjoy the challenges posed.

For regular readers, this may seem like a repeat of recent themes, but there is a point which will become clearer as the new Shell scenarios are released later this week.

Over recent years, the focus for managing rising CO2 emissions has been a combination of targets, energy mix mandates, efficiency drives and various attempts at carbon pricing. The climate lexicon is full of phrases such as;

• “We need to reduce global emissions by 50% by 2050 (relative to 1990 / 2000 / 2005 . . .)”
• “We will reduce the CO2 intensity of the economy by 30%.
• “By 2020, renewable energy will make up 20% of the energy supply”
• “We must first improve energy efficiency, that can have a significant impact on emissions”
• The “Green Economy”
• “We must stimulate clean energy investment”
• “We need more clean energy for development”

The question is, are these the right types of policies for solving the CO2 problem? There is no doubt that such approaches have gained traction and wide support from policy makers, but in many instances they are the result of a desire to solve a broad range of topical issues, ranging from energy security and energy access to jobs and economic growth. There is apparently then an underlying assumption that because each of these has a link with reducing emissions or low emissions that this must also be a solution to the real elephant in the room, the rising levels of CO2 in the atmosphere. This may not be the case.

All of the above approaches appear to rest on the assumption that responding to climate change depends on managing the rate of emissions from the global economy, sometimes on an absolute basis but often on a relative basis, e.g. relative to GDP. But this doesn’t correspond with how the atmosphere sees our emissions of CO2. Rather, the rising level of CO2 in the atmosphere is ultimately a stock problem, meaning that what really matters is the total cumulative amount of CO2 that is released over time from fossil sources and land use change. Additional CO2 is accumulating in the ocean / atmosphere system at a much faster rate than it is being removed. The difference is several orders of magnitude when compared with its return to geological storage through processes such as weathering and ocean sedimentation, which is why in the context of managing the problem we can treat it as a stock issue or liken it to the rising level of water in a bathtub (where even a dripping tap will eventually result in overflow). By contrast, many other emissions to atmosphere don’t accumulate, they disperse, break down or drop out very rapidly.

Over the last 250 years since the beginning of the industrial era, some 570 billion tonnes of fossil and land-fixed carbon (over 2 trillion tonnes of CO2) has been released, which in turn has led to a shift in the global heat balance and a likely 1°C of warming before the ocean / earth / atmosphere system reaches a new equilibrium state. An accumulation of a trillion tonnes of carbon equates to the 2°C temperature goal, but as a median within a broad distribution of outcomes, both higher and lower (Allen et. al., Warming caused by cumulative carbon emissions towards the trillionth tonne, Nature Vol 458, 30 April 2009). As long as the total fossil / fixed carbon released remains less than this amount over, say, a 500 year period, the climate problem is contained, at least to some extent.  

Thinking about climate change as a stock problem then changes the nature of the solution and the approach. Although emissions in 2020 or 2050 may be useful markers of progress, they do not necessarily guarantee success as they are measures of flow, not stock. For example, meeting a 2050 global goal of reducing emissions by 50% relative to 1990 would be a remarkable achievement, but of only modest value if emissions then stayed at this level and the stock accumulated well beyond the trillion tonne level, albeit at a later date than might have otherwise been the case.

Current global proven reserves of hydrocarbons (BP Statistical Review of World Energy) will release some 0.9 trillion tonnes of carbon when used, irrespective of how efficiently we might use them, how many wind turbines are built in the interim or even how many green jobs are created in the process. In combination with cement production and continued land use change, this will then take the cumulative carbon towards two trillion tonnes, with the likelihood of a temperature increase of well over 2°C.

Not using these reserves and leaving them in the ground permanently (i.e. forever) so as not to contribute to the ocean / atmosphere stock will only happen if we develop alternative energy sources that out compete them, without subsidy or support, 24/7 365 days a year. Another way forward  is to recognize that many economies around the world will choose to continue using the resources that they have, and therefore the focus should be on the development and deployment of carbon capture and storage (CCS), which returns the carbon back to the “geosphere” instead of allowing it to accumulate in the biosphere.

CCS has the potential to address CO2 emissions on a scale equal to its production and at a cost that appears more than manageable by society. Most importantly, it fits the “stock model” thinking, which means that this particular solution matches the nature of the problem itself, rather than being a derivative of it. But as I have noted in previous posts, CCS is struggling politically to gain the necessary funding and momentum. There are no large scale CCS power generation plants operating in the world today, but only a tiny handful of industrial emission CCS facilities, with most under construction. New thinking and impetus will need to emerge to ensure that CCS becomes central to climate policy development, rather than it having to compete with the long list of other objectives that seem to prevail.

The issue of accumulating CO2 in the atmosphere is a relatively simple one, which can’t be addressed by energy efficiency standards, renewable directives or similar such measures. They may impact on the short term consumption of fossil fuels in one region for a limited period of time, but they offer no guarantee of permanent reductions nor do they deliver a guarantee of a lower cumulative stock of CO2 over time – in other words, the fossil fuel that they displace locally simply gets shifted geographically and / or temporally (used later) such that the same accumulation of CO2 results. The CO2 issue is only addressed by two approaches – either leaving the fossil fuel in the ground forever or using the fossil fuel and returning the CO2 to the ground via CCS.

The EU Emissions Trading System (ETS) is facing tough times. Last week saw the price fall to below €3 after the European Parliaments’ Industry & Energy (ITRE) Committee voted against the Commission proposal to amend the ETS Directive to allow for backloading of ETS allowances (a compromise mechanism which will shift the auction profile in Phase III to remove allowances in the short term). At such a price level the system isn’t really functioning, rather it is little more than a short term compliance accounting system for reporting on CO2 emissions.

In effect, this means that the EU doesn’t currently have an explicit carbon price to drive change in energy and infrastructure investment, despite 10 years of policy in place designed with that single goal in mind. The very low price level also implies that there is no expectation for a real carbon price ever developing. In theory these allowances could be bought and banked through to Phase IV. Assuming a cost of capital of 5% (and of course availability of capital to do so), a €3 allowance would only need to fetch €7 in 2030 to cover this, which would be well below the price of a market which is presumably driving investment in carbon capture and storage, surely a technology being seriously considered by then. So what is the thinking that might lead to an ~80% discount in market value? Three possible scenarios could lead to such an outlook;

1. The ETS has been stopped and the market doesn’t exist in the 2020s. In this case Phase IV would never be agreed and although there is formally no sunset clause in the system, it would effectively cease if no allowances for the 2020s were ever issued.
2. The surplus cannot be removed by then, even with tougher targets. New crediting mechanisms continue to flood the system.
3. Other policies will be doing the heavy lifting, leaving the ETS as a ”do nothing” policy instrument. The dominant policies will be ongoing renewable energy targets, CCS mandates, Emissions Performance Standards etc.

All of these are plausible, but I tend to think that the third one will be the ongoing problem. It is the problem today, as shown in the abatement curve chart below (an indicative CO2 price is shown on the vertical axis and the cumulative sum of reductions is shown on the horizontal access). The Renewable Energy Directive has brought projects forward which probably would not have happened until much later in the 2020s. This has had multiple effects within the EU energy system because of the presence of the ETS and its allowance based compliance. Whereas the 2020 goal might have been met through improvements in efficiency, fuel switching and the initial phase in of mature renewable energy technologies (all driven by the CO2 price), it has instead been met through a much less cost effective approach which forces the implementation of renewable energy projects first (including the less cost mature technologies), delays energy efficiency implementation and has the effect of pushing fuel switching and CCS into the 2020s and 2030s. The visible carbon price falls as a result, but the hidden carbon price operating in the economy is much higher.

 On top of this there was also the reduction in emissions as a result of the recession. This has had no real impact on the implementation of the renewable energy projects, but it further delays energy efficiency and pushes fuel switching and CCS into the 2030s and beyond. The resultant short term visible carbon price is near zero, but the same high hidden carbon price remains.

With a near zero carbon price, no visible sign of CCS and delays in implementing energy efficiency, policy makers may then turn to further mandates, such as the case with the Energy Efficiency Directive. This, in combination with yet another round of renewable energy targets, exacerbates the situation, leading carbon market traders to take the view that their allowances will have minimal value no matter how long they wait.

Very little of this is being discussed in the context of the backloading proposal. Rather, an emotive discussion about trade exposure, the cost of carbon for energy intensive industries and the right or not of the Commission to intervene in the market is dominating the airwaves.

The real discussion needs to be around the role of mandates when an emissions trading system is in operation. As the charts above show, backloading will have very little impact if the mandate issue is not addressed as well. Nevertheless, structural reform needs to start somewhere, so let’s hope the EU Parliament Environment Committee and the Member States will take a more positive view of the importance of the ETS and therefore the backloading proposal, when they vote in February and April respectively.

This week the organisation known as GLOBE (The Global Legislators’ Organisation supports national parliamentarians to develop and agree common legislative responses to the major challenges posed by sustainable development) met in London and launched its biannual review of national climate legislation. The GLOBE Climate Legislation Study is up to its third edition and covers the ongoing efforts in 33 countries. Of these, GLOBE claims that 18 countries have made substantial progress, 14 have made limited progress and one country has been singled out for taking a backwards step, Canada, but more on that later.

In their press release, GLOBE state that:

“The tide is beginning to turn decisively on tackling climate change, the defining material challenge of this century. In the past year alone, as described in this latest study by GLOBE International and the Grantham Research Institute, 32 out of 33 surveyed countries have introduced or are progressing significant climate-related legislation. In 2012 alone, 18 of the 33 countries made significant progress. This is a game-changing development, driven by emerging economies, but taking place across each and every continent. Most importantly it challenges how governments look at the international negotiations up to 2015 requiring much greater focus by governments to support national legislation.”

The report is a substantial piece of work and it steps through the programmes in each country in considerable detail, although the pages of tables raise the question as to what exactly is “climate legislation”. Legislation is categorised under the headings “Pricing carbon”, “Energy Demand”, “Energy Supply”, “Forests/Land Use”, “Adaptation” and so on. Of these, “Energy Demand” is largely energy efficiency measures and “Energy Supply” focuses principally on renewables (and nuclear in some countries). These two categories alone cover all but one of the countries (Nepal) surveyed, yet for the most part none of this is “climate legislation”. Rather, this is legislation that impacts the energy mix, but this does not necessarily translate into a reduction in emissions on a global basis and in many instances does not even lower national emissions. It simply augments the energy mix or lowers the energy and CO2 intensity of certain processes, which in turn can lead to greater overall use of energy and therefore increased emissions over the longer term. I have explored both these issues in previous postings, here and here.

This is not the case for the carbon pricing category, which GLOBE link to 11 of the 33 countries covered. But 4 of these are part of the EU and of the remaining countries only Australia has actually implemented the carbon price (arguably so has Japan, but the level is close to insignificant at about $1.50 per tonne). GLOBE also claim India has carbon pricing, but there is no such mechanism within the economy (there is a heavy focus on efficiency and a certificate trading system to drive it). Others include Mexico, South Africa, South Korea and China, all of which are in various stages of developing carbon pricing but none actually have.

Finally, there is the story around Canada. They are singled out as the only country to take a step backwards because of their decision to abandon the Kyoto Protocol (the same treatment is not given to Japan and Russia though) and the absence of a nationally implemented policy framework. Perversely, Canada is one country that made real and tangible advances last year, although emissions continue to rise in this resource rich economy. Quebec implemented its cap-and-trade system, carbon pricing continued in British Columbia and Alberta and the Federal Government did introduce its carbon standards for power stations, which will mean no new coal plants (without CCS) –  even the EU cannot claim such an achievement. Most importantly, Canada managed to get a large scale CCS project approved and construction started – similar attempts in the EU failed disastrously in 2012. This point is worthy of note, although GLOBE don’t mention it, given the critical role that CCS needs to play in mitigating emissions throughout this century.

The steps being taken in many countries to better manage energy supply, demand and mix are welcome, but to argue that this marks a “decisive turn” on tackling climate change and is “game changing” seems to be overly optimistic. BP released their latest Energy Outlook 2030 this week as well, which sees CO2 emissions rising sharply to 42 billion tonnes per annum by 2030, this despite non-hydro renewable energy nearly quadrupling over that time period. In total, nuclear/hydro/renewables/bio moves from 16% to 23% of the energy mix.

Finally, a P.S. to my previous post on the observation by many that “global warming has stopped”. James Hansen has just published a good analysis of this  and finds that a number of factors are contributing to the lack of change in overall global average temperature. This includes the behaviour of the El Nino/La Nina system (ENSO) and aerosol loading in the atmosphere. But he also concludes that natural variability must be playing a role. Worth a read.

Late last week Point Carbon reported that the Executive Board of the UNFCCC’s Clean Development Mechanism has (re)agreed to allow energy efficient coal fired power plants to be included under the mechanism. Point Carbon said:

The governing body of the U.N’s Clean Development Mechanism (CDM) has agreed to allow the most energy efficient coal-fired power plants to earn carbon credits under the scheme, causing outcry from green groups who claim the carbon market could be overrun by millions of low-quality offsets. The CDM Executive Board’s decision to lift its ban that prevented coal plants from seeking credits could allow some 40 projects, mostly based in China and India, to earn Certified Emission Reductions (CERs).

The credits are awarded to projects that cut emissions of greenhouse gases and can be used by companies and governments to meet carbon reduction targets.

. . . . .

. . . . .

The Board approved six coal plants for CDM registration before agreeing in November 2011 to suspend and review the methodology that outlines how many credits the schemes could earn, effectively stopping new projects from earning credits.

While it is always good to use a resource more efficiently, this move has potentially negative consequences for the very issue it is setting out to address, a reduction in the total emissions of CO2 to the atmosphere.

In this instance the CDM is not acting as a carbon pricing mechanism, rather it is simply incentivizing energy efficiency. In a recent paper written by a colleague (featured in a July posting), the secondary impacts of energy efficiency policy as a climate change response are explored. This particular action by the CDM Executive Board falls right into one of the problem areas.

The paper presented the argument that energy efficiency action on its own could actually result in an increase in CO2 emissions. The diagram below explains this. On the vertical axis is the cost of providing an energy service, such as electricity. At the margin, this may be driven by non-fossil provision operating within the economy, such as a wind farm or the like. On the horizontal axis is a measure of the available carbon resource base. As the price of non-carbon alternative energy rises or falls, so too does the long term availability of the fossil alternative for a given technology set. At high alternative prices, more money is available to spend on expanding the fossil resource and vice versa. As the fossil resource expands, the cumulative number of tonnes of CO2 emitted will also grow, even if it takes longer for this to happen.

Assuming a given alternative cost of providing electricity (p_non-fossil), the more efficient the power stations that burn coal, the more the electricity provider can ultimately afford to pay for the coal that is used. As more coal is used and the price rises (all other things being equal), so the resource base expands (from UC₁ to UC₂ in the figure above) and so does cumulative CO2 in the atmosphere. Further, as the CO2 issue is basically an atmospheric stock problem, this then drives up long term warming, even if the rate at which CO2 is emitted happens to fall in the short term.

From a climate finance perspective the CDM has been a successful mechanism, albeit with some significant operational difficulties. It has paved the way for carbon pricing in many countries and has been an important catalyst for change in some areas (e.g. landfill methane). But subsidizing more energy efficient coal fired power plants, while well intentioned, may in fact have negative environmental consequences. The CDM needs to act in its purest sense, which is as a carbon price in the energy system of true developing economies.

N.B. Just prior to posting this, a colleague noted that the Executive Board may have only allowed the issuance of CERS against already approved projects to proceed, rather than allowing future projects to apply by releasing the current hold on the underlying methodology. Hopefully this is the case, but in any case the argument still stands.

With the recent passage of the Energy Efficiency Directive through the key EU parliamentary committee on Industry, Research and Energy (ITRE), it is clear that the idea of managing emissions, improving energy security and increasing the competitiveness of the economy through managing energy efficiency remains a key policy objective. The Directive has only one more stage to pass: a vote in the whole plenary in September. The Directive obliges Member States to prepare a long-term strategy to increase the energy efficiency of their entire building sector by 2050 and to set up an energy efficiency obligation scheme that ensures that utilities reach 1.1 – 1.5% energy saving of their end-users. In addition, the Directive aims to stimulate technologies such as Combined Heat and Power in the utilities sector.

In fact many commentators and policymakers continue to believe that energy efficiency alone can address much of the CO2 problem – and that it can do so at very low cost (or even negative cost), at least compared to a ‘do nothing case’.  But  any successful policy toward mitigation of CO2 emissions must centre on CO2 pricing. Energy efficiency can only be a contributory factor and, in some circumstances, can even have a negative long-term impact if the centrality of CO2 pricing is not recognised.

The impact of energy efficiency policy on CO2 emissions is explored in a paper by a Shell colleague, Jonathan Sample and was recently published in The European Energy Review, but also attached here [The Limits of Energy Efficiency]. The paper looks at the issue of energy efficiency and examines some of the established beliefs about its benefits and impacts. It highlights some important missing nuances in the logic linking efficiency improvements with reductions in CO2 emissions and argues that in the absence of a credible price on CO2 emissions, the effectiveness of energy efficiency measures is greatly reduced. In fact, in some cases they may even make the problem of CO2 emissions worse in the long term.

The key to understanding the impact of energy efficiency on CO2 emissions lies in the long-term competition between the costs of using fossil fuels on the one hand, and of using non-fossil fuels (the latter of which, in this paper, includes fossil-based fuels using CCS technology) on the other. Specifically, innovations that improve the efficiency with which fossil fuel is converted into energy service, but which don’t do the same for non-fossil fuels,  make fossil fuels fundamentally more affordable compared to non-fossil fuels, even though they reduce the rate of consumption in the short term. An example of this is a policy which encourages improvements in (internal combustion) vehicle efficiency. In the paper, this is referred to as a “carbon-augmenting” policy (versus a carbon-neutral policy).

Consider the example of a driver who initially uses a 30 mpg (miles per gallon) car to drive 300 miles per week when gasoline costs $4/gallon. If at some point in the future, that same driver acquires a car that achieves 60 mpg, he can carry on driving the same distance per week even if the price of gasoline were to rise to $8/gallon (all other things being equal).

At first sight, the improvement in efficiency seems a good thing: after all, there has been an immediate improvement in the driver’s living standards, as driving is now cheaper than it was before. So how might there be a problem? The greater affordability of fossil fuels caused by such improvements in energy efficiency serves to increase the future supply of fossil fuels – again a matter that Jevons brought up. The increased efficiency of the car effectively has made it profitable to produce oil with higher extraction costs without causing the driver to drive fewer miles. In the short term, the increase in productivity, net income and wealth, which is brought about by higher efficiency, contributes an additional boost to energy affordability (this ‘income effect’ will not be considered further in this paper, however).

In the long run, then, the initial halving in the rate of consumption from replacing a 30mpg car with a 60mpg car does not represent a reduction in CO2 emissions: instead of avoided emissions, it may represent only a postponement, plus a long-term addition to the stock of economically extractable resources.

CO2 pricing (through measures such as cap-and-trade or taxation) is the key to unlocking the full potential of energy efficiency to reduce CO2 emissions. In the absence of an offsetting price on CO2 emissions, measures to encourage (specifically carbon-augmenting) energy efficiency can lead to higher ultimate/potential emissions. However, where an offsetting CO2 price is applied, this can be avoided. Importantly, where there is an increase in carbon-augmenting efficiency, it is the price placed on CO2 emissions that leads to the offsetting reduction in economically extractable fossil fuels. In other words, it is the CO2 price, which does most of the work to avoid emissions, and not the efficiency increase. Unless such a price on CO2 emissions is established, carbon-augmenting energy efficiency increases should not be viewed as an “alternative” or equivalent means of reducing CO2 emissions.

In the short term, more effective and less risky options than energy efficiency measures are available in the form of transitions such as coal-to-gas switching. The effectiveness of energy efficiency measures (particularly in their carbon-augmenting form) will be greatly constrained until a CO2 pricing system is in place. Before this comes about, it is necessary to pursue more realistic, yet cost-effective alternatives.

This week in Australia the carbon pricing mechanism (no, it isn’t a tax, despite some similarities) is back in the news as the government releases it’s budget for the coming fiscal period. The fixed price period of $23 per tonne (and rising) represents a significant new source of income for the government, although when the mechanism was announced so too were a number of cost offset measures for the consumer and trade exposed industries. As such, the system is largely revenue neutral, but this has done little to quell the noisy opposition to the policy package. On Wednesday, the day after the Budget was released, many newspapers again raised the issue of increasing prices related to the carbon pricing scheme and therefore falling living standards, despite statements by the government over recent months that the system recycles its revenue back through the economy. Unfortunately, public perception appears to be on the side of those who argue that this is a new and unnecessary cost burden.

This isn’t the only negative view that the public have of climate change policy. The other is that energy austerity is the mechanism we must adopt to reduce emissions. The source of this is many and various, including the government itself, some NGOs and even a few business organisations. “Turn out the lights to save the planet” has become a common rallying cry and is amplified by campaigns such as Earth Hour which calls for cities to be blacked out for one hour a year to highlight the issue of energy use and climate change.

So the public are left with the view that energy austerity and extra cost are the two routes to follow if climate change is to be robustly addressed. Little wonder it is an uphill battle gaining political traction on this issue. Perhaps some new and more accurate messaging should be formulated to help sell the need for policy action.

The energy austerity issue is one that can and should be tackled. Reducing energy use and improving energy efficiency are both good things to do, but should be advocated for on the basis of managing energy costs, not attempting to address climate change. For reasons discussed in an earlier posting, local energy austerity may not even be an effective emissions reduction strategy at all. At issue with energy is the emissions from our current sources, not necessarily how much we use. After all, energy availability is almost unlimited, it’s just harnessing it economically that is the challenge.

The austerity message has its roots in various social agendas, but has kept into the environmental agenda as well. It is easy to see why this has happened, given the clear link between ecosystem welfare and overuse (e.g. logging in tropical rain forests), but for the climate change debate this particular approach may not be helping the issue at all.

The climate change issue needs to return to its roots, which is managing, reducing and ultimately eliminating anthropogenic CO2 emissions. This is done by changing the primary energy mix, implementing upstream CCS and shifting final energy use in homes and transport (where emissions are very to capture) to carriers such as electricity, hydrogen and bio.

Such a change won’t come at no cost, but elements of it can be conveyed to the public more easily. For example, running a home entirely on electricity is very doable today, both in hot and cold climates. The option of electric, hydrogen fuel cell or bio mobility is also becoming a reality – and potentially an attractive one as oil prices remain in the realms of $100 per barrel. These are very different value propositions to the austerity message.

The emphasis then shifts to the upstream and the use of renewable energy in the electricity sector together with technologies such as CCS in combination with natural gas. Here costs can be managed and change implemented over time as the grid is renewed and expanded. This can be achieved through carbon pricing, either directly in a cap and trade system or indirectly through emission performance standards. Although the scale of change is less, over the last thirty years many countries have managed to almost eliminate sulphur emissions from both the electricity and transport sectors and have done so without great public rancour. Costs have dropped and the job has just been done.

Getting the message right is essential if we want to make progress on this issue. Pedalling austerity and high cost is neither helpful or even correct.

The World Business Council for Sustainable Development (WBCSD) held its annual company delegate conference in Switzerland this week. For the WBCSD Energy and Climate team the event marked the launch of the latest WBCSD publication “The Energy Mix”. This is a document that started life back in the middle of last year, originally as a response to the reaction from a number of governments to the events in Fukushima. The initial aim was to inform policy makers on the implication of sudden changes in energy policy, such as the decision by the German government to rapidly phase out the use of nuclear power. But as the work got going, the document took on a number of additional dimensions. Many have been covered in previous postings on this blog, but the document does a nice job of bringing a lot of information together in a crisp fold-out brochure format (at the moment the PDF is in regular page format, so the fold-out aspect is rather lost through this medium).

Sitting behind this effort is the WBCSD Vision 2050 work which charts the necessary pathway to a world in 2050 which sees “Nine billion people living well within the means of one planet”. A number of key themes are explored in “The Energy Mix” brochure:

1. The risk of carbon lock-in, in other words current and “on the drawing board” infrastructure and related emissions being sufficient to consume the remaining global carbon budget (related to a 2°C temperature goal) within the normal remaining lifespan of those assets.
2. The need for clear energy policy framework to guide the necessary changes over the coming decades.
3. The importance of carbon pricing within that framework.

The document uses some fifteen vignettes to illustrate a variety of points. For example, to illustrate a) that policy can make a difference and b) it takes a long time, but c) its still very hard to reduce emissions by a big amount, take the case of France. Back in the 1970s the government intervened in the energy system and have progressively forced the construction of substantial nuclear capacity and a national high speed rail network, operating in combination with (like the rest of the EU) high transport fuel taxes. While these measures were not originally intended to reduce CO2 emissions, they are nevertheless compatible with such a goal and could just as easily be the route forward for a country. France now gets about 80% of its electricity from nuclear and has one of the best rail systems in the world, yet emissions have only fallen by 28% in 40 years. Economic growth and population growth continue to eat into the gains made, which might argue for yet further measures in the longer term. However, French emissions on a CO2/GDP basis are about 60% less than in the USA. With a very low CO2 per kWh for power generation, France would be in an excellent position to further decarbonize if electric cars entered the vehicle population in significant numbers. Interestingly, the car company with perhaps the worlds most progressive electric vehicle production programme also happens to be French. 

 The key message on the required policy framework is a pretty simple one – cover the key sectors and focus on the elements of the technology development pathway (Discover, Develop, Demonstrate, Deploy). The resulting grid looks like this:

 Filling in the boxes results in something that looks like this:

The framework shouldn’t be a big surprise, many of the elements are alive in the EU (but not so well in all cases- such as the carbon price).

The new WBCSD Energy Mix document can be downloaded here.

The IEA’s World Energy Outlook (WEO) is an annual tradition, the result of much work, data analysis and presentation. A formative volume is produced for all to read and digest, but few of  us have the time to do so in the detail required. As such we rely to some extent on IEA presentations and summary documents. One such presentation was given by IEA Chief Economist Dr. Fatih Birol in Shell Centre last week, not for Shell but for the British Institute of Energy Economics. Rather than a WEO “tour de force”, the format was closer to storytelling, or more correctly short stories. Here are five pearls that emerge from the most recent WEO:

1.  A new trend in energy efficiency

Much emphasis is placed on the need for energy efficiency from policy makers and business leaders. We hear about how well certain enterprises are doing and how we need to replace our domestic boiler, insulate our homes and use public transport. Some leaders have even argued that energy efficiency is close to a single solution to energy prices, emissions and access in developing countries. But the stark reality of energy efficiency trends at the global level is the opposite to that which is desired. There is doubtless an impact here related to the financial crisis, but even before that the trend had started shifting.

2.  Oil security concerns shift

Perhaps since the gasoline lines of the 1970’s but certainly since 9/11 in 2001, a focus of US foreign policy has been security in the Middle East and by implication oil supply security. Although Europe has long been a significant importer of oil its attention has been more focused on Russian gas supplies. But all that is due to change. In the timeframe of the WEO (to 2035) China will become the world’s largest oil importer and the US dependence on oil from outside North America will decline. With increased domestic (NA) production from oil sands and light tight oil (using a similar extraction technology to shale gas), in combination with much tougher energy efficiency standards for cars, light trucks and trucks, US import demand will fall. This could have an eventual impact on global governance as China starts to look at Middle East supply and worries about its security. 

3.  The winner was coal

In the first decade of this century, coal accounted for nearly half of the increase in global energy use, with the bulk of the growth coming from the power sector in emerging economies. Next was natural gas, then oil and after that renewable energy. Nuclear was a distant fourth. That’s an order which is almost the opposite of where we should be going with emissions reduction as a high priority.

4.   Modern energy for all

Basic energy services are an essential part of life today, yet 1.3 billion people in the world live without electricity and 2.7 billion live without clean cooking facilities. The need to correct this has become a global imperative and remarkably this could be done with almost no impact on global energy demand and global emissions.

The flip side to this story is the point that I raised back in December when the UNFCCC declared that alleviation of poverty and energy access would become a key priority with mitigation and adaptation. Although “energy for all” is a critical issue, arguably it shouldn’t be on the agenda of the UNFCCC. Their focus needs to be squarely on the other 99.3% of emissions. “Energy for all”, as the IEA have clearly demonstrated, is not a climate change issue.

5.  The weight of a world issue shifts to Chinese shoulders

One of the longstanding arguments in the global debate on climate change has been that the burden rested with developed countries in that they had created the problem during their long industrial development era. But that situation is rapidly changing. By 2035 cumulative emissions from China will have exceeded the EU and will be rapidly approaching the US. China’s per capita emissions will also match the OECD average by then. This by no means puts the USA and EU in the clear, but it does shift the burden solidly to a tripartite response. 

Thanks to Dr Birol and the IEA for a stimulating presentation.

As I noted last week, there are intense negotiations underway in Brussels and Strasbourg as the EU Parliament heads towards a key committee vote on the Energy Efficiency Directive at the end of this month. All this has come about because of concerns that Europe will not meet the third leg of its well known 20-20-20 by 2020 target, i.e.;

• A reduction in EU greenhouse gas emissions of at least 20% below 1990 levels
• 20% of EU energy consumption to come from renewable resources
• A 20% reduction in primary energy use compared with projected levels, to be achieved by improving energy efficiency.

 Understanding what the energy efficiency target actually is and what it means turned out to be much harder than I imagined. The third bullet above, after some Google searching, led me to COM(2006)545 final, COMMUNICATION FROM THE COMMISSION, Action Plan for Energy Efficiency: Realizing the Potential, within which was to be found:

This Action Plan outlines a framework of policies and measures with a view to intensify the process of realizing the over 20% estimated savings potential in EU annual primary energy consumption by 2020 (compared to baseline – see COM(2005)265 final of 22.06 2005). 

The last part of the above which pointed to a further communication was a footnote within the text. This next document (Green Paper) proved to be relatively easy to find (although the EU Commission link to it no longer functioned, but it was in EUR-Lex), but the baseline information was in an Annex, with the key assumption on GDP in a footnote within the Annex. In any case, the Annex provided the following information:

From the early 1970s until 2002, energy consumption in EU-25 rose by almost 40% – or 1% per year – while GDP doubled, growing at an average rate of 2.4% per year. Energy intensity, the ratio of GDP to energy consumption, therefore decreased by a third. However, since 2000, the improvement in energy intensity has been less substantial, reaching only 1% over two years. This Community average does not reflect the considerable differences between Member States caused by the differing economic structures (e.g. more or less energy intensive industry), the national currency exchange rate compared to the Euro and the level of energy efficiency that, by and large, is obviously much better in the EU-15.

If the current trend continues, gross energy demand could increase by 10% by 2020. Growth in electricity demand could also reach 1.5% per year. Today’s consumption in the EU could reach 1900 Mtoe within 15 years (2020), compared with 1725 Mtoe in 2005 (These predictions are made under the assumption of an average growth of GDP as foreseen to be 2.4% per year). . . . . .

. . . . . This Green Paper on energy efficiency envisages to launch the debate on how the EU could achieve a reduction of the energy consumption of the EU by 20 % compared to the projections for 2020 on a cost effective basis. With today’s most advanced technology, it is certainly possible to save around 20% of the energy consumption of the Member States of the EU Total consumption is currently around 1 725 Mtoe. Estimations indicate that, if current trends continue, consumption will reach 1 900 Mtoe in 2020. The objective is thus to arrive, thanks to energy savings of 20% at the consumption level of 1990, i.e.1520 Mtoe.

The 2020 goal is to limit energy consumption in Europe to 1520 Mtoe, but this is based entirely on projecting the early 2000s energy/GDP relationship out to 2020, assuming a continuous economic growth of 2.4% p.a. and then subtracting 20% from the final energy number. Measuring progress to date and comparing it with the original projection and the desired outcome reveals a very mixed picture.

Actual energy use in 2009 (latest IEA data) is well below the Green Paper projection and even just below the proposed pathway to 2020, but energy intensity (kgoe/$ GDP) is falling well short of the 2020 goal pathway. The issue of course is that the original growth projection of 2.4% p.a. bears little resemblance to reality. The EU has gone through a major recession, some parts of the EU remain in recession or worse and even the better performing economies are showing only minimal growth. There is also the possibility that this situation continues for some time.

This means that the EU really had four 2020 targets set in 2008, not three; 20% reduction in GHGs, 20% renewable energy use, 33% economic growth (2008-2020) and energy intensity of 0.09 kgoe/$ GDP. All this has been thrown off track by the lack of growth. The structural improvement in efficiency normally achieved as an economy grows and invests in new or replacement infrastructure has gone, the carbon price has collapsed due to a growing surplus of allowances (linked to both the lack of growth and the mandated investment in renewable energy) and while the EU is apparently on target for its renewable goal, there is pressure in these tight fiscal times to cut subsidies (with a drop in investment presumably following). Arguably, the target structure was only feasible under this one growth scenario.

But the Commission is trying to reboot the system through the proposed Energy Efficiency Directive. This calls for an even lower energy use by 2020 of some 1474 Mtoe p.a., which is presumably in line with a revised growth projection (assuming 0.09 ktoe/$ remains the goal then this appears to be <1% p.a. over the period 2009-2020). The draft Directive now also includes a proposed amendment to set aside allowances in the ETS, restoring confidence in that system as well.

The 2008 Energy & Climate Package would appear to be an over-constrained target framework, lacking in the flexibility needed as the economy twists and turns in unexpected ways over the duration of the time window (15 years). It argues for a more back to basics approach for deployment which simply imposes a carbon price on the economy through the cap-and-trade system. This then guides the way forward, providing the driver for renewable energy investment, greenhouse gas reductions and energy efficiency improvement (due to the cost penalty imposed on fossil fuel derived energy).

The Commission will almost certainly persist with the current framework through to 2020 and may yet have to administer other fixes, but post 2020 should be a new story. With the design of the next phase of the European energy journey looming, a back-to-basics carbon market approach is all that is really needed for the main deployment effort rquired in the economy.