Archive for the ‘Europe’ Category

The EU ETS isn’t out of trouble just yet

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On January 22nd the EU Commission launched its White Paper which lays out the major components of its energy and climate policy through to 2030. This is the first major step in what could well be a lengthy debate and parliamentary process before a new package of measures is finally agreed. The Commission has proposed a 40% EU wide greenhouse gas reduction target for the year 2030, an EU wide target of 27% renewable energy by the same year and a supply side mechanism to adjust the overall number of allowances in circulation within the EU ETS.

The latter component is clear recognition by the Commission that the ETS has been awash in allowances for some time now and with a price of just a few Euros is doing nothing to drive emissions management across the EU. There are multiple reasons for the situation the ETS currently finds itself in, but one major contributor has been overall energy policy design in the EU. This has imposed renewable energy targets to the extent that further emission reductions under the ETS are not required once the former have been met. Hence the near zero CO2 price. There are two parts to this particular story – the first is the overall level of the renewable energy target and the second is the reality that transport (oil) and commercial / residential (natural gas) sectors hardly contribute to this, so it forces a much higher renewable energy penetration in the power sector, which is under the ETS.

But with a 2030 reduction target of 40% and a new renewable energy goal of 27%, is the problem now remedied?

This of course depends on how the renewable energy target is met. Importantly, it will not be imposed on Member States as it was in the period to 2020, but is only binding at EU level. This could mean that the Commission expects to be at 27% renewables based on the impact of policies such as the ETS, rather than requiring that Member States guarantee a certain level of renewable energy use and therefore effectively forcing them to enact policies to deliver such goals. But many Member States are likely to continue their support of renewable energy and may force it into the overall energy mix right through to 2030.

The worst case outcome for the ETS would be one that sees the whole 27% renewable energy goal met with explicit policies at Member State level. The chart below shows this – note that this is a simple model of the EU for illustrative purposes. Assume that at the end of 2012 EU power generation and industry sector emissions are at 2000 million tonnes CO2. By 2020, with a 1.74% annual reduction under the ETS, they need to be at ~1730 million tonnes. But with renewable energy being forced into the power generation system (although not quite reaching the 20% across the EU) and the EU easily meeting its overall 20% CO2 goal, sector emissions are below the ETS cap, which implies nothing else need be done, hence the low CO2 price. Projecting this out to 2030 with the proposed 2.2% annual reduction and meeting the 27% renewable energy goal across the EU energy system, shows that sector emissions are only slightly above the cap (about 50 million tonnes), which again implies a low to modest CO2 price. Assume further that a CCS programme is actually running and delivering 50 mtpa storage (through direct incentives) and no further action is required – so a zero CO2 price once again! The model also assumes about 30% growth in electricity generation from 2012 to 2030.

 EU ETS RET impact to 2030

This very simple model doesn’t account for the large allowance surplus that exists in 2012 (> 1 billion allowances), which would therefore be unlikely to vanish through normal growth in electricity demand, industrial production and so on. This makes it imperative that the EU also implements the supply side mechanism within the ETS, which would then remove much of the surplus through the early 2020s. Ideally, implementation of this should be immediate and also with immediate effect, rather than waiting until post 2020.

Should Member States not implement specific renewable energy policies and the supply side mechanism is active and functioning, we might just have an ETS that actually drives change in the large emitters sector, but there are two big “ifs” here. Otherwise, expect continued price weakness and probably a higher overall cost of energy as a result.

As the EU Commission gears up to release its 2030 Energy and Climate White Paper in Davos week, there is considerable discussion regarding the emissions reduction target that will be recommended. Historically the EU has been keen on multiple targets, but in recent years this has backfired, with conflicting goals and multiple policy instruments leading to a weak carbon market and a lack of investment in one critical climate technology in particular, carbon capture and storage (CCS).

For the period 2020-2030, it is hoped that the EU will retreat on the number of targets and focus instead on a single greenhouse gas target that then becomes the main driver of change in the energy system. Such an approach could help restore the EU ETS and ultimately deliver the key carbon emissions goal at a lower overall cost, therefore also helping restore some EU positioning in terms of international competitiveness.

Most commentators are expecting the GHG target to be in the range of 35 to 40% from a 1990 baseline (vs. 20% for 2020), but there is very little discussion on how that target might be structured. There are two basic approaches;

  1.  Emissions must meet a particular goal in a given year.
  2. Cumulative emissions over a period of time must be below the baseline year on an average basis.

While a single statement such as “Emissions in 2020 must be 20% below 1990” is often used to cover both these cases, the goals are very different. This is a critical consideration as the EU sets out its position for 2030, but perhaps more importantly as future goals are tabled for the UNFCCC in Q1 2015.

The UNFCCC has, to date, monitored and reported on national objectives through the Kyoto Protocol, which is based on the second approach given above, i.e., cumulative emissions. In the Doha Amendment to the Kyoto Protocol, the EU commitment for the period 2013-2020 is a reduction of 20% below 1990. This is because the Kyoto Protocol is based on allowances (Assigned Amount Units or AAUs) and that these must be surrendered for each tonne emitted over the period. This is also how the atmosphere sees CO2 emissions – cumulatively. Every tonne matters as CO2 accumulates in the atmosphere over time. It doesn’t matter at all what the emissions are in a given year, only that the cumulative amount over time is kept below a certain amount. The EU ETS works in the same way – every tonne counts.

However, as if to confuse, the Doha Amendment also gives the EU Copenhagen pledge of a 20% (or 30% under certain conditions) reduction in greenhouse gas emissions by 2020 as a percentage of the reference year, 1990. In the particular case of the EU, due to the expectation of relatively flat emissions over the period 2013 to 2020, these two goals are very similar, such that the difference issue hasn’t really seen the light of day. Further to this, the Kyoto Protocol allows for carryover of AAUs from 2008-2012 into the 2013-2020 period, so the difference is further dampened. But when it comes to 2030, big differences could show up (see chart below).

 Eu Emissions Goal 2030

 In the case of a 35% target (for example), the brown line shows a pathway to this as a fixed goal in 2030, but equally any pathway would be okay as long as the emissions are 35% below 1990 levels in 2030. But on a cumulative emissions basis, assuming a linear reduction, this is only a 28% reduction for the period 2021 to 2030.

The green line equates to a 35% cumulative emissions reduction for the same period, but in the year 2030 a reduction of about 47% is actually needed to achieve this, a much more ambitious requirement then a simple 2030 goal.

Exactly what the EU says on January 22nd remains to be seen, with considerations such as the high level number itself and domestic vs. international action being the main discussion points. But the big difference might just lie in the eventual wording (“by 2030” or “through to 2030”) and the need to table commitments with the UNFCCC at some point, particularly if the latter still works on a cumulative basis after a global agreement is reached.

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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A rewind back to 2007 reveals an EU Parliament that was very keen on carbon capture and storage (CCS) and gave it tremendous support through the CCS Directive and the NER300 financing mechanism. Five years on and for all the reasons discussed in recent posts, only the UK looks likely to see any near term CCS development and this is entirely due to its own additional policy development.

In March 2007, the Presidency Conclusions of the Brussels European Council stated;

 Aware of the huge possible global benefits of a sustainable use of fossil fuels, the European Council:

    • underlines the importance of substantial improvements in generation efficiency and clean fossil fuel technologies;
    • urges Member States and the Commission to work towards strengthening R & D and developing the necessary technical, economic and regulatory framework to bring environmentally safe carbon capture and sequestration (CCS) to deployment with new fossil-fuel power plants, if possible by 2020;
    • welcomes the Commission’s intention to establish a mechanism to stimulate the construction and operation by 2015 of up to 12 demonstration plants of sustainable fossil fuel technologies in commercial power generation.

CCS couldn’t have had a much harder push out of the starting blocks, yet none of this project activity has happened and CCS is virtually at a standstill in the EU. This has led the EU Parliament to look more closely at the issue and in the very near future we should see the Environment Committee release a report on CCS. In the meantime the Committee on Industry, Research and Energy (ITRE) has posted a short draft opinion on CCS on the EU Parliament website. This may give some early insight into the likely direction of the more critical Environment Committee report. Key findings from ITRE are as follows;

    • Failing to include CCS within a long-term energy strategy will severely hamper national, Union and global efforts to address climate change;
    • Believes that the EU’s mandatory renewable target has undermined investment in CCS, and calls, therefore, for a technology-neutral approach to the Union’s 2030 energy goals, in line with Article 194(2) of the TFEU, in order to create a level playing field and ensure effective competition amongst varying low-carbon energy technologies;
    • Calls on the Commission and the Member States to address the main barriers to the deployment of CCS, such as the granting of permits and funding, the establishment of a CCS skills base and the development and testing of technologies for effective capture, transport and storage;
    • Believes that incentives and policy measures should target both CCS demonstration as well as subsequent longer-term operational projects and must provide greater certainty for private sector investment; believes, furthermore, that incentives and measures should be split efficiently both within the power-generation sector and CCS within industrial production processes;
    • Considers that the low carbon price delivered through the EU’s Emissions Trading Scheme (ETS), and subsequent revenues generated from the sale of allowances under the New Entrants’ Reserve of the ETS (NER300), has failed to deliver an attractive business case for early long-term private sector investment in CCS;

This is all solid stuff and it would appear that ITRE have got to grips with both the important role that CCS must play and the challenges that CCS faces to deploy. Perhaps one surprise is the reference to Article 194(2) of the Treaty of the Functioning of the European Union (TFEU). It is difficult to see how this particular part of the treaty actually supports the need for CCS. Rather, it tends to support the set of actions that have contributed to the problems that CCS is having, namely the focus on renewable energy.

ENERGY

Article 194

  • In the context of the establishment and functioning of the internal market and with regard for the need to preserve and improve the environment, Union policy on energy shall aim, in a spirit of solidarity between Member States, to:
    •  ensure the functioning of the energy market;
    •  ensure security of energy supply in the Union;
    •  promote energy efficiency and energy saving and the development of new and renewable forms of energy; and
    • promote the interconnection of energy networks. 
  • Without prejudice to the application of other provisions of the Treaties, the European Parliament and the Council, acting in accordance with the ordinary legislative procedure, shall establish the measures necessary to achieve the objectives in paragraph 1. Such measures shall be adopted after consultation of the Economic and Social Committee and the Committee of the Regions. Such measures shall not affect a Member State’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply, without prejudice to Article 192(2)(c).  

Many will argue that support for renewable energy is the right approach to address climate change, but as I have discussed in numerous posts, it’s not quite that simple. There is little doubt that renewable energy is part of our future and in the next century it may well be the major component, if not all, of our energy system. But in the meantime we are using fossil fuels to power pretty much everything and that is going to take a century to change. If we don’t capture the majority of the CO2 associated with that ongoing use (even with it declining throughout the century) then 2°C isn’t achievable, but nor for that matter is 3°C.

The TFEU doesn’t really give much guidance to help solve this, although Article 191 states;

. . . promoting measures at international level to deal with regional or worldwide environmental problems, and in particular combating climate change.

This then comes down to interpretation of the phrase “combating climate change”. A hardnosed analysis of the global emissions  issue leads to the necessity for a CCS strategy, irrespective of any personal views on whether we should or shouldn’t power the world with fossil fuels. The fact is that we currently do and this existing reality won’t change anytime soon.

 

In conjunction with its request for submissions on the 2030 policy framework, the EU Commission posed a series of questions on carbon capture and storage (CCS) to be answered separately. This follows on from the failure of the NER300 policy framework to deliver an EU CCS demonstration programme.

One question within this new consultation is of particular interest in that it opens up the possibility of a dedicated instrument designed specifically for the deployment of CCS. The Commission asked;

Should the Commission propose other means of support or consider other policy measures to pave the road towards early deployment, by:

a.      a support through auctioning recycle or other funding approaches

b.      an Emission Performance Standard

c.       a CCS certificate system

d.      another type of policy measure

One of the leading CCS focused industry / society groups (European Technology Platform for Zero Emission Fossil Fuel Power Plants, or ZEP) responded to this and argued for consideration of a CCS Certificate system should its preferred Feed-in-Tarrif approach not be acceptable. Such a system would require a certain (and annually increasing) amount of CO2 storage for each tonne of CO2 emitted, but the storage could take place in another location with proof of such storage coming in the form of a tradable certificate. But ZEP noted that;

Any system of certificates should be designed in such a way as to avoid any negative interaction with the existing ETS. Measures to ensure this could include making CCSCs fungible with a certain number of EUAs, or retiring EUAs, as CCSCs are supplied into the market.

While a robust carbon market is the preferred approach for driving investment in technologies such as CCS, frustration with price development is leading policy makers and some CCS proponents to consider targeted policies. The ZEP caveat is important in that overlapping policies have been a real problem for the EU ETS. With other polices taking away the need for the carbon price to trigger investment,  higher overall  costs of mitigation result, but at the same time weakening the visible CO2 price.  The same would be true of a CCS policy instrument. However, an EU wide CCS Certificate mechanism which operates for all the same facilities as the ETS could be designed as follows, delivering a first round of CCS projects but working within the ETS to at least mitigate the overlap issue to some extent:

  • For the period 2021-2025, each 100 tonnes of CO2 emitted would require the surrender of 99 EUAs (EU ETS Allowances or equivalent instruments) and 1 CCSC (carbon capture and storage certificate).
  • The CCSCs are tradable instruments and would be granted for each tonne of CO2 stored in the EU from 2015 onwards. This would give the EU some lead time to build up a modest bank of CCSCs.
  • From 2026 onwards, the CCSC requirement would increase by 1 in 100 each year, i.e. by 2030 the minimum compliance requirement for each 100 tonnes of CO2 emitted would be 6 CCSCs and 94 EUAs (or equivalent).
  • A facility that generates CCSCs would be deemed as emitting one tonne of CO2 for each CCSC sold into the market.
  • CCSCs could be banked for future use.
  • The initial 2021-2025 period would require about 20 million CCSCs in each year across the EU, therefore underpinning a number of projects.
  • As a “relief valve” mechanism for the period 2021-2025 only, an EUA could be converted to a CCSA for a fee, for example at the current ETS non-compliance penalty level (€100), with the money being placed in a CCS technology fund for disbursement to CCS projects.
  • Total EU allowance auction / allocation for the period 2020-2030 would be adjusted downwards on the basis of the creation of a certain number of CCSCs.
  • The approach could also inspire the EU to lead the development of an international CCSC at the UNFCCC which could also be used for compliance in the EU.

A CCS Certificate approach has a very modest price impact on the consumer (of electricity). Under an ETS, the marginal cost of compliance is reflected in the cost of everyone’s electricity and this must rise to levels above €50 per tonne before any CCS project activity is firmly triggered. This equates to quite an increase in electricity prices. But the CCSA not only ensures delivery but quickly socializes the cost of CCS, in that each electricity purchaser pays a fraction of the cost of the first CCS facilities. If a CCSC was trading at €80 per tonne of CO2 stored, then in the period 2021-2025 the consumer would see a cost per tonne of CO2 of only 80 € cents, or for coal fired power generation at 900 gms CO2/kWh, a price increase of less than a tenth of a €-cent per kilowatt hour.

So should we opt for CCS Certificates? Although they will deliver CCS, the approach isn’t as economically efficient as the carbon market left to its own devices. But as already noted, carbon markets aren’t being left to their own devices as other policies continually encroach on their turf (e.g. renewable energy targets), which means that CCS may be significantly delayed.

One further thought. Arguably, the increasing requirement to provide CCSAs could continue past 2030 until the ETS is fully replaced later in the century. This would at least align any use of fossil fuels with the long term requirement to store all the resulting CO2.

Targeting 2°C

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

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

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

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

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

2 degree probabilities

 

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

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

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

Redrawing the Energy-Climate Map

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The world is not on track to meet the target agreed by governments to limit the long term rise in the average global temperature to 2 degrees Celsius (°C).

International Energy Agency, June 2013

The International Energy Agency (IEA) is well known for its annual World Energy Outlook, released towards the end of each year. In concert with the WEO come one or more special publications and this year is no exception. Just released is a new report which brings the IEA attention back squarely on the climate issue, Redrawing the Energy-Climate Map. The IEA have traditionally focused on the climate issue through their 450 ppm scenario. While they continue to do that this time, they are also going further with a more pragmatic model for thinking about emissions, that being the “trillion tonne” approach. I have discussed this at some length in previous posts.

The report looks deeply into the current state of climate affairs and as a result fires a warning shot across the bows of current national and UNFCCC efforts to chart a pathway in keeping with the global goal of limiting warming to 2 °C above pre-industrial levels. The IEA argue that we are on the edge of the 2 °C precipice and recommends a series of immediate steps to take to at least stop us falling in. With the catchy soundbite of “ 4 for 2° “, the IEA recommend four immediate steps in the period from now to 2020;

  1. Rapid improvements in energy efficiency, particularly for appliances, lighting, manufacturing machinery, road transport and within the built environment.
  2. Phasing out of older inefficient coal fired power stations and restricting less efficient new builds.
  3. Reductions in fugitive methane emissions in the oil and gas industry.
  4. Reductions in fossil fuel subsidies.

These will supposedly keep some hope of a 2°C outcome alive, although IEA makes it clear that much more has to be done in the 2020s and beyond. However, it didn’t go so far as to say that the 2° patient is dead, rather it is on life support.

I had some role in all this and you will find my name in the list of reviewers on page 4 of the report. I also attended a major workshop on the issue in March where I presented the findings of the Shell New Lens Scenarios and as a result advocated for the critical role that carbon capture and storage (CCS) must play in the solution set.

As a contributor, I have to say that I am a bit disappointed with the outcome of the report, although it is understandable how the IEA has arrived where it has. There just isn’t the political leadership available today to progress the things that really need to be done, so we fall back on things that sound about right and at least are broadly aligned with what is happening anyway. As a result, we end up with something of a lost opportunity and more worryingly support an existing political paradigm which doesn’t fully recognize the difficulty of the issue. By arguing that we can keep the door open to 2°C with no impact on GDP and by only doing things that are of immediate economic benefit, the report may even be setting up more problems for the future.

My concern starts with the focus on energy efficiency as the principal interim strategy for managing global emissions. Yes, improving energy efficiency is a good thing to do and cars and appliances should be built to minimize energy use, although always with a particular energy price trajectory in mind. But will this really reduce global emissions and more importantly will it make any difference by 2020?

My personal view on these questions is no. I don’t think actions to improve local energy efficiency can reduce global emissions, at least until global energy demand is saturated. Currently, there isn’t the faintest sign that we are even close to saturation point. There are still 1-2 billion people without any modern energy services and some 4 billion people looking to increase their energy use through the purchase of goods and services (e.g. mobility) to raise their standard of living. Maybe 1-1.5 billion people have reached demand saturation, but even they keep surprising us with new needs (e.g. Flickr now offers 1 TB of free storage for photographs). Improvements in efficiency in one location either results in a particular service becoming cheaper and typically more abundant or it just makes that same energy available to any of the 5 billion people mentioned above at a slightly lower price. Look at it the other way around, which oil wells, coal mines or gas production facilities are going to reduce output over the next seven years because the energy efficiency of air conditioners is further improved. The fossil fuel industry is very supply focused and with the exception of substantial short term blips (2008 financial crisis), just keeps producing. Over a longer timespan lower energy prices will change the investment portfolio and therefore eventual levels of production, but in the short term there is little chance of this happening. This is a central premise of the book I recently reviewedThe Burning Question.

Even exciting new technologies such as LED lighting may not actually reduce energy use, let alone emissions. Today, thanks to LEDs, it’s not just the inside of buildings where we see lights at night, but outside as well. Whole buildings now glow blue and red, lit with millions of LEDs that each use a fraction of the energy of their incandescent counterparts – or it would be a fraction if incandescent lights had even been used to illuminate cityscapes on the vast scale we see today. The sobering reality is that lighting efficiency has only ever resulted in more global use of lighting and more energy and more emissions, never less.

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An analysis from Sandia National Laboratories in the USA looks at this phenomena and concludes;

The result of increases in luminous efficacy has been an increase in demand for energy used for lighting that nearly exactly offsets the efficiency gains—essentially a 100% rebound in energy use.

 I don’t think this is limited to just lighting. Similar effects have been observed in the transport sector. Even in the built environment, there is evidence that as efficiency measures improve home heating, average indoor temperatures rise rather than energy use simply falling.

The second recommendation focuses on older and less efficient coal fired power stations. In principle this is a good thing to do and at least starts to contribute to the emissions issue. This is actually happening in the USA and China today, but is it leading to lower emissions globally? In the USA national emissions are certainly falling as natural gas has helped push older coal fired power stations to close, but much of the coal that was being burnt is now being exported, to the extent that global emissions may not be falling. Similarly in China, older inefficient power stations are closing, but the same coal is going to newer plants where higher efficiency just means more electricity – not less emissions. I discussed the efficiency effect in power stations in an old posting, showing how under some scenarios increasing efficiency may lead to even higher emissions over the long term. For this recommendation to be truly effective, it needs to operate in tandem with a carbon price.

The third and fourth recommendations make good sense, although in both instances a number of efforts are already underway. In any case their contribution to the whole is much less than the first two. In the case of methane emissions, reductions now are really only of benefit if over the longer term CO2 emissions are also managed. If aggressive CO2 mitigation begins early, and is maintained until emissions are close to zero, comprehensive methane (and other Short Lived Climate Pollutants – SLCP) mitigation substantially reduces the long-term risk of exceeding 2˚C (even more for 1.5˚C). By contrast, if CO2 emissions continue to rise past 2050, the climate warming avoided by SLCP mitigation is quickly overshadowed by CO2-induced warming. Hence SLCP mitigation can complement aggressive CO2 mitigation, but it is neither equivalent to, nor a substitute for, near-term CO2 emission reductions (see Oxford Martin Policy Brief – The Science and Policy of Short Lived Climate Pollutants)

After many lengthy passages on the current bleak state of affairs with regards global emissions, the weak political response and the “4 for 2°C “ scenario, the report gets to a key finding for the post 2020 effort, that being the need for carbon capture and storage. Seventy seven pages into the document and it finally says;

In relative terms, the largest scale-up, post-2020, is needed for CCS, at seven times the level achieved in the 4-for-2 °C Scenario, or around 3 100 TWh in 2035, with installation in industrial facilities capturing close to 1.0 Gt CO2 in 2035.

Not surprisingly, I think this should have been much closer to page one (and I have heard from the London launch, which I wasn’t able to attend, that the IEA do a better job of promoting CCS in the presentation). As noted in the recently released Shell New lens Scenarios, CCS deployment is the key to resolving the climate issue over this century. We may use it on a very large scale as in Mountains or a more modest scale as in Oceans, but either way it has to come early and fast. For me this means that it needs to figure in the pre-2020 thinking, not with a view to massive deployment as it is just too late for that, but at least with a very focused drive on delivery of several large scale demonstration projects in the power sector. The IEA correctly note that there are none today (Page 77 – “there is no single commercial CCS application to date in the power sector or in energy-intensive industries”).

Of course large scale deployment of CCS from 2020 onwards will need a very robust policy framework (as noted in Box 2.4) and that will also take time to develop. Another key finding that didn’t make it to page one is instead at the bottom of page 79, where the IEA state that;

Framework development must begin as soon as possible to ensure that a lack of appropriate regulation does not slow deployment.

For those that just read the Executive Summary, the CCS story is rather lost. It does get a mention, but is vaguely linked to increased costs and protection of the corporate bottom line, particularly for coal companies. The real insight of its pivotal role in securing an outcome as close as possible to 2°C doesn’t appear.

So my own “ 2 for 2°C before 2020“ would be as follows;

  1. Demonstration of large-scale CCS in the power sector in key locations such as the EU, USA, China, Australia, South Africa and the Gulf States. Not all of these will be operational by 2020, but all should be well underway. At least one “very large scale” demonstration of CCS should also be underway (possibly at the large coal to liquids plants in South Africa).
  2. Development and adoption of a CCS deployment policy framework, with clear links coming from the international deal to be agreed in 2015 for implementation from 2020.

But that might take some political courage!

As is well known by now, the EU MEPs voted against the specific backloading proposal that was put before the Parliament. However, the Parliament also voted against the outright rejection  of the proposal, which means that the Parliament formally has no position on backloading, possibly leaving the door open for a reformulated attempt at passage. I won’t dwell on that as it probably requires too much speculation and intrigue even for a blog.

The situation the EU finds itself in is spelled out in more generic form in the new Shell New Lens Scenarios. The scenarios tell stories about the future, but these are built around a series of paradoxes and pathways, with the latter illustrated below.

 Lenses

When the financial, social, political or technological capital encourage early action, it can result in effective change and reform. Room to manoeuvre exists and a new pathway forward is forged. But when such capital proves inadequate to withstand the stresses applied, behavioural responses delay change, causing conditions to worsen until ultimately a reset is forced or a collapse occurs. This is a trapped transition. 

The EU seems to be getting quite good at the latter, with the New Lens booklet giving the example of the EU handling of the financial crisis as a Trapped Transition Pathway;

The “can” keeps being “kicked down the road” while leaders struggle to create some political and social breathing space. So there is continuing drift, punctuated by a series of mini-crises, which will eventually culminate in either a reset involving the writing off of significant financial and political capital (through pooling sovereignty, for example) or the Euro unraveling.

Similarly for the EU ETS. While backloading was never the complete solution to the problems faced by the ETS, it could have given it enough momentum to see through a series of much needed reform measures, paving the way to a more robust and economically efficient climate policy framework. Instead, the Parliament has “kicked the can down the road”, setting up the conditions for further crisis later on. This in turn could do real damage to the ETS, leading to a very negative outcome, i.e. Write-off & Reset or Decay/Collapse. Many of those who opposed the backloading amendment argued that it was better to wait for the full structural reform discussion, but that discussion has no formal schedule and is unlikely to commence before the full debate on the 2030 roadmap. Even then, opposition will rear its head again and the structural reforms required could well be watered down.

The vote attracted quite a bit of media attention, with many articles and significant commentary.  Perhaps strongest of all was The Economist, which spoke of “profound consequences” that will “reverberate round the world”. The Financial Times took a different view in its editorial, effectively arguing that the backloading itself was akin to “kicking the can down the road” and instead called for the structural reform to start in earnest and “end the system’s absurdities”. This included border carbon adjustments, long term targets (of the 2050 variety) and dealing with the surplus of allowances.

I have and continue to be an advocate of emissions trading and carbon pricing, but it is looking increasingly unlikely that these systems will ever effectively trigger the one essential response to rising CO2 emissions, which is carbon capture and storage (CCS). There are too many other vested interests which continue to suck the life out of an ETS, including competitiveness concerns from participants, renewable energy targets, energy efficiency mandates, developing country needs and environmental justice to name but a few. These are all important policy desires, but they need to find their home elsewhere and not in the space occupied by an emissions trading system.

In the end if the ETS approach doesn’t deliver CCS in particular, then some form of mandated requirement could be imposed instead.

After a day in Brussels listening to European MEPs, it is clear that the Parliament vote next week on the Commission proposal to backload the auctioning timeline in Phase III of the European Emissions Trading System (EU ETS), is going to be very close. This is a policy proposal that was born out of the call by many participants in the EU ETS, as well as the European Parliament, to address the chronic allowance surplus and therefore begin to steer the CO2 price into a more useful range in terms of real action and investment. A positive vote on the proposal would also be the start of a more structured reform of the policy package designed to reduce emissions across the EU over the coming decades.

But in the frantic days left before the vote, clarity and reason are struggling to be heard over the clamour of opposition, so here are the top ten reasons why an MEP should vote to support the “backloading” amendment next week:

1. Market Confidence

The current CO2 price in the ETS is just a few euros. Even the assumption that there will be a robust price by 2030 (enough for deploying CCS in 2030s for example), but discounted back to now, should result in a higher price than the one we have. That means the market is discounting the ETS itself, in other words questioning its very existence in 2030. Nobody will invest given such an outlook. A positive vote for backloading will signal that the Parliament is prepared to act on the ETS and begin to restore confidence for energy investment decisions.

2. Low carbon Investment

Apart from its annual compliance function, which the ETS is delivering, its purpose is to provide an investment price signal. This in turn steers long term investment in the covered sector, providing support and justification for lower emission investment opportunities. The near zero price signal being seen today means the EU has returned to “business as usual” energy investment, which is even resulting in a resurgence of coal based power generation projects. This will just put upward pressure on EU emissions in the 2020s. 

3. Jobs

Rewind to 2008 and the €25-30 CO2 price, which in combination with the NER300 saw some 20+ CCS projects being considered. The construction of the world’s first CCS network was a real possibility. Today, with the exception of the UK where the necessary investment signal has been created in a national level ”carbon policy bubble“, these projects have been shelved. So too have the jobs that would have been created had they gone ahead.

4. Credibility

Investment depends as much on long term credibility of the policy structure as the policy itself. Business investment will not proceed unless there is a belief that the supporting policy framework is robust and long lasting and therefore able to deliver the necessary return on that investment.

5. Leadership

While there is an issue with the EU over leading on actual emissions reduction, this isn’t the case with leadership on policy development to reduce emissions. Today, many states, provinces and countries have implemented or are in the process of implementing an ETS on the back of the initial success in the EU. They are now watching developments here closely as the EU debates the future of the system. A decision to reject the backloading proposal will potentially undermine the implementation of emissions trading globally (see 10 below).

6. Support

There is a noisy opposition to this proposal, as there was opposition in 2003 to even having an ETS and again in 2008 to building a full policy framework for managing emissions over the longer term. But many companies, institutions, business associations and individuals see the clear merit of a functioning market based approach for reducing emissions and strongly support the proposal. The voice of some European business associations on this issue is not necessarily the consolidated view of business in Europe. 

7. Europe

The ETS was designed to build on the strength of a single EU market and deliver through the synergy that it offers. A weak ETS is leading to fragmentation of this goal as national policies are developed to fill the gaps. Just look at what the UK government is having to do to shore up investment cases which would otherwise be supported by the ETS. This only means a less effective and ultimately more expensive route to the same goal. 

8. Growth

This is all about investment in the EU energy system. Without investment guided by credible policy and clear market price signals, growth stalls.

9. Environment

The carbon price delivered by the ETS is the only mechanism in place to drive the development and deployment of carbon capture and storage. Without this one critical technology, the climate issue simply doesn’t get resolved. The demand for, abundance of and low cost of extraction of fossil fuels may well be unassailable this century, so atmospheric CO2 will continue to rise. 

. . . and most importantly at #10 (well it’s actually #1)

10. Economy and competitiveness

An emissions trading system can deliver the lowest cost emission reduction pathway for the economy, but to do this it needs to be left to do the heavy lifting. The very low price of CO2 in the EU today is not a sign of low cost abatement, but quite the opposite. Abatement is being driven by other policies, with the cost to the economy probably much higher than necessary. The ETS needs to be restored as the principle driver of change in the EU energy system. This will lower energy costs in the EU, which in turns helps competitiveness.

Supporting backloading now won’t deliver all this in one go, but it will get the wheels of change in motion and importantly, signal an intent on the part of the Parliament to correct the energy and climate policy framework and make the EU ETS central to the overall delivery of current and future emission reduction goals.

The case for CCS demonstration

In recent months, particularly in the EU, the prospect of a major demonstration of CCS across various sectors and employing a variety of technologies has slipped badly. Perhaps the bottom was reached when in the EU not a single CCS project was awarded funding under the first round of the NER300, even though this mechanism was originally proposed for CCS (insertion into Article 10a of the ETS Directive, see below). Given that the second round has been announced and EU allowance prices are now even lower, the chance of a successful project under the NER300 must be close to negligible.

Up to 300 million allowances in the new entrants’reserve shall be available until 31 December 2015 to help stimulate the construction and operation of up to 12 commercial demonstration projects that aim at the environmentally safe capture and geological storage (CCS) of CO2 as wellas demonstration projects of innovative renewable energytechnologies, in the territory of the Union.

Yet this is a technology that can make a real difference to the problem of rising levels of CO2 in the atmosphere. I went further than this is my recent posts arguing that it is the only technology that can satisfactorily resolve the issue. The recently released Shell New Lens Scenarios show the impact of delay, even in a world with rapid deployment of renewable energy and its eventual domination of the energy system (Oceans scenario). The Mountains scenario sees CCS getting going in earnest in 2030, with an important start-up phase which sees some 20 million tonnes per annum of CO2 stored in 2020, rising to 400 million tpa by 2029. This means that by  2025 some 25 GW of power generation fitted with CCS is needed – there is effectively none today.

At the Gleneagles Summit in 2005, G8 leaders committed to “work to accelerate the deployment and commercialisation of Carbon Capture and Storage technology”, with a further recommendation at the 2008 G8 Summit in Japan that “20 large-scale CCS demonstration projects should be launched by 2010”. Similarly, the EU Heads of Government declared the need for 12 projects in the EU by 2015. So far, four big projects are operating and two further projects are under construction, although all are linked with process emissions of industrial facilities (various natural gas projects, a synfuels plant in the USA and the Quest oil sands project) rather than the power sector. A number of much smaller R&D projects are also in various stages of development. The G8 call was arguably linked with the political desire to limit global emissions to meet a 2°C goal (or a trillion tonnes of cumulative carbon emissions), which in itself requires CCS deployed on a major scale. As such, it is hardly surprising to see the IEA now telling us that 2°C is pretty much off the table. In the Mountains Scenario, which sees CCS finally getting going some 15 years later than the G8 call, 2°C isn’t met either, although the overshoot, while a concern, isn’t dramatic.

The lead time for any new energy technology, from pilot to the beginnings of commercial deployment and then to materiality in the energy system (>1%) typically takes some 25-30 years. I wrote about this some time ago on the back of a Nature article submitted by a colleague in our scenarios team. The various stages within this process are important, including the need for commercial demonstration. This step begins to de-risk the technology for future business investment, bringing some level of certainty to expected capital expenditure and ongoing operating costs in particular. For CCS there are other benefits as well;

  • A demonstration programme which comprises several projects begins to establish some infrastructure, which in turn lowers the cost for additional projects. Perhaps the best current example of this is in Rotterdam, where there are proposals for a CO2 pipeline loop in the industrial area of the city, connected to offshore storage in the North Sea. Given the large number of installations in the area, in combination with those further up the Rhine, real synergy is possible.
  • In some regions (and Europe is one, Germany in particular) there are growing issues with public acceptance of CO2 storage, even though there is little ongoing storage underway. A demonstration programme offers the opportunity to allay the fears related to storage.
  • Demonstration improves best practice in the operation of a CCS facility and related storage, particularly in a major grid dispatch situation.

Recently, policy makers in Brussels have started to voice the opinion that the EU could follow rather than lead on CCS. While they recognize the important role of the technology over the long term, they are questioning the need for the EU to invest and demonstrate in the short term. But waiting for others risks further delaying the deployment of this technology, which in turn is directly linked to the eventual accumulation of CO2 over this century and therefore temperature rise. Further, there are real EU projects on the drawing board today waiting for some stimulus, so doing nothing would be a real lost opportunity. The Commission is expected to publish a CCS paper later this month.

My good friend, Robert Swan, a polar explorer and environmentalist, often finishes his presentations with the quote;

“The Greatest Threat to Our Planet Is the Belief That Someone Else Will Save It.

It’s a good quote, even though it is a bit on the melodramatic side for me. But an appropriate CCS version might be:

“The real threat to the deployment of CCS is the assumption that someone else will demonstrate it.”