David Hone

In recent months there has been a renewed look at the idea of a financial carbon bubble, or unburnable carbon reserves. Most recently, a report from The Carbon Tracker with a forward by Lord Stern of the Grantham Research Institute on Climate Change (London School of Economics), argued that serious risks are accumulating for investors in high carbon assets, such as coal mining companies and the oil and gas industry.

The idea of the “carbon bubble” is based on a concept that I have discussed many times in this blog: that there is a finite limit to the “atmospheric space” for CO2 while still ensuring that warming does not rise above 2 °C. That limit is about one trillion tonnes of carbon.

The issue of the bubble arises because the combined proven oil, gas and coal reserves currently on the books of fossil fuel companies (and governments in the case of NOCs) will produce far more than this amount of CO2 when consumed. This implies that in a world where the 2 °C limit is imposed and achieved, most of the future value generation of the companies involved will never be realized and therefore investors in them today are looking at a financial bubble that may well burst in front them. According to my analysis and the global reserves data in the BP Statistical Review of World Energy, we get to about 1.6 trillion tonnes of carbon as shown below. This equates to the use of total current fossil energy reserves of about 900 billion tonnes of carbon equivalent (the balance comes from the use of cement and land use change).

 The report clearly sets out the global carbon budget, the reserves outlook, the current capital flow being consumed to expand those reserves and comes to the additional conclusion that this part of the global energy system will also waste trillions in capex over the coming decade as it develops more reserves that could also become unburnable. The report authors argue that even the massive application of carbon capture and storage will do little to help the situation.

There is really nothing to argue about in terms of the CO2 math itself. It is certainly the case that current proven reserves will take us well past 2 °C if completely consumed and the CO2 emitted. But now comes the reality check!

What is missing in the report is any discussion about the dynamics of the global energy system, the need to meet energy demand and of course the rapid growth we are seeing in that demand. To bring all this math into the equation it is probably best to turn to the new Shell Energy Scenarios, released about two months ago. I discussed these at some length a few weeks back.

In the context of this discussion, the initial focus should probably be on the Oceans scenario in that it sees the very rapid introduction of solar energy, with eventual large scale displacement of fossil fuels in the second half of the century. Global energy demand rises from 535 EJ in 2010 to 777 EJ in 2030 and 1056 EJ in 2060. Although solar (mainly PV) is the largest single energy source by that time, total carbon consumed through fossil fuel use amounts to 800 billion tonnes carbon by the end of the century, just a bit less than current proven reserves (900 billion tonnes as indicated above). The large consumption of fossil fuel is required simply to meet energy needs as renewable energy attempts to catch up with overall demand (which it won’t do until sometime in the 22^nd century). This change is purely through the market and social dynamics present in the Oceans scenario, which sees strong growth, improved energy efficiency driven by higher prices and solar eventually dominating. CCS comes in later in the century, removing about 100 billion tonnes of carbon.

By contrast, Mountains is a fossil fuel scenario, but with heavy reliance on CCS from about 2030. Total fossil fuel use is over a trillion tonnes of carbon equivalent, which exceeds current proven reserves. However, CCS removes some 300 billion tonnes of carbon, giving an overall accumulation of 1.25 trillion tonnes by 2100 (current accumulation plus fossil use to 2100 plus land use change and cement). This is still above the trillion tonne limit, but is the overall lower emissions outlook.

The key lesson from the scenarios in this regard is that both a rapid growth in renewable energy and the early use of CCS are required to manage emissions throughout this century. The paradox is that these exist in different scenarios with entirely different underlying economic and social drivers. It’s quite hard to have both – a world that likes fossil fuel readily gives permission to CCS going forward, but doesn’t really see huge segments of the nergy market taken by renewable energy. Nuclear is strong though. Conversely, the distributed energy solar world of Oceans doesn’t want to hear about CCS and therefore leaves it until physical climate pressures (e.g. extreme weather events) force action.

The reality check for the “carbon bubble” proponents is that global energy demands still need to be met and that there are limits to the growth rate of fossil energy substitutes, even as climate goals come under pressure.

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.

Nearly a decade ago the then CEO of BP, Lord John Browne, gave a landmark presentation on climate change mitigation in the City of London. He introduced to the broader interest group (the work had already circulated in the academic sector) the idea of stabilization wedges, which had been developed by Stephen Pacala and Robert Socolow at Princeton within a research program supported by BP. Each wedge represented one of a number of quantifiable actions that together were necessary to move from a business as usual (BAU) global emissions trajectory to a given atmospheric stabilization of CO2. In the initial study that stabilization was 500 ppm.

Wedges were on a very large scale (up to 1 GtC/annum) and consisted of actions such as:

• Increase fuel economy for 2 billion cars from 30 to 60 mpg
• Replace 1400 GW 50%-efficient coal plants with gas plants (four times the current production of gas-based power)
• Introduce CCS at 800 GW coal or 1600 GW natural gas (compared with 1060 GW coal in 1999) power plants.
• Add 700 GW (twice the current capacity) of nuclear fission capacity

This was the first real attempt to quantify the physical changes required in the energy system and turn that into an overriding story which people could actually understand. Many variations on the approach followed in subsequent years. More recently, researchers from universities in the USA and China looked again at the wedges and concluded that the scale of the issue had grown and that an even more ambitious set of wedges would be required to address the climate issue. The team behind this analysis introduced the concept of “phase-out” wedges, or wedges that represent the complete transition from energy infrastructure and land-use practices that emit CO2 (on a net basis) to the atmosphere to infrastructure and practices which do not. But this raises the major issue of stranded assets, or assets that have to be abandoned before their useful life has ended, typically because of economic impairment.

An alternative way of looking at this issue is to consider “lock-in” wedges. Each represents a chunk of infrastructure in use today that is very likely to continue operating until the end of its normal life, emitting CO2 while doing so and therefore adding to the growing accumulation of CO2 in the atmosphere. According to the Oxford University Department of Physics, cumulative carbon emissions today stand at some 567 billion tonnes (since 1750). Limiting the global temperature rise to 2°C requires limiting cumulative carbon emissions to one trillion tonnes. Each wedge adds towards a total committed block of emissions, which in turn would lock us into a 2°C or greater outcome should that commitment block be greater than 433 billion tonnes (1 trillion less 567 billion). Major wedges are described below:

1. The largest existing commitment is coal fired power stations. While the next generation of facilities may well be fitted with Carbon Capture and Storage (CCS) or at least be “CCS ready”, existing power stations may never be retrofitted. Today there is some 2000 GW of coal fired capacity, with each GW emitting about 6 million tonnes of CO2 per annum. More than half of this has been built in this century, so we might assume an average age of 16 years for the existing facilities. That leaves about 30 more years of operation. Even assuming that no more are built, that means cumulative CO2 emissions of 300 billion tonnes, or 80 billion tonnes of carbon. But we could well build another 1000 GW without CCS, so that alone adds another 225 billion tonnes of CO2, or 60 billion tonnes of carbon.
2. There are about 1 billion passenger cars in the world today and production is now over 60 million per annum. Assuming the average age of a current world car is 7-8 years and the average lifetime of a car is 15 years, this population could emit a further 10 billion tonnes of carbon. We will almost certainly build another billion internal combustion engine cars, which in turn will add a further 16 billion tonnes of carbon to the atmosphere.
3. Natural gas use in power generation is growing rapidly, with some 1600 GW in use today, growing to 2000 GW over this decade. By the early 2020s, only a tiny fraction  of this capacity will have CCS. Given that a gas fired power station emits less than half the amount  CO2 compared to a similar sized coal plant, this fleet could see a further 140-150 billion tones of CO2, or about 40 billion tonnes of carbon emitted prior to retirement.
4. According to the IEA, residential use of gas results in 1 billion tonnes of CO2 emissions per annum. This is somewhat hard wired into cities, so difficult to dislodge any time soon (although having replaced our gas boiler at home with an electric one because of new UK flue regulations, it’s clearly not that difficult). Nevertheless, this could well continue for 30-40 years, so perhaps another 10 billion tonnes of carbon.
5. Aviation and shipping have both an existing fleet and show almost no sign of finding viable large scale routes to zero emissions (but biofuels may be the solution for both). Expect another thirty years of emissions at a minimum, which is another 10 billion tonnes of carbon.
6. Finally, there is manufacturing industry which emits 6 billion tonnes of CO2 per annum globally. This includes refineries, ferrous and nonferrous metal producers, cement plants, chemical plants, the pulp and paper industry and various other sectors. Capacity is renewing rapidly both because of growth and development but also because of the gradual decline of developed country capacity in favour of much larger and more efficient production in regions such as the Middle East. New capacity will operate for thirty years at least, so this sector could be responsible for another 120 billion tonnes or more of CO2 or about 32 billion tonnes of carbon.

The sum of these “climate lock-in wedges” now looks something like this:

This picture includes the major sources of emissions (e.g. oil fired power stations not included) and probably represents the best case in terms of retirement of existing assets. Staying within the trillion tonne limit therefore leaves little room for complacency with regards the next generation of assets and particularly the use of CCS in power generation. An alternate view of this would be to just look at the current proven reserves of oil, gas and coal which amount to about 1.3 trillion tonnes (BP Statistical review of World Energy). If totally consumed without the application of CCS, they would result in over 1 trillion tonnes of carbon emissions, bringing the total accumulation since 1750 to 1.7 trillion tonnes.

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.

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.

Energy policy development over the last decade has shown one thing for certain, governments the world over are persistent in their desire to alter the energy mix and/or at least begin to manage emissions. Whether this is purely for environmental reasons or for concerns about energy security or perhaps for long term fiscal security almost doesn’t seem to matter, energy policy development and emissions management continues to be a high priority. This then opens up the question as to how business should best respond to this trend and what role it should play?

Recent developments in Australia present a useful case study. When the CPRS (Carbon Pollution Reduction Scheme – a national cap-and-trade system) was proposed in 2008, an unintended coalition of certain business interests, the Federal Opposition and Green Party opponents eventually managed to see the bill fail. Many businesses actually supported the bill at the time, but seemingly the planets were not suitably aligned for passage. Had things been different, Australia would now have been in the late implementation phase of a relatively benign approach to managing emissions with a carbon price very likely around AU$10 per tonne, trading on the back of the global price for a Certified Emission Reduction (the UNFCCC offset mechanism) and its link to the EU ETS. Instead, events have resulted in a very different outcome. A fixed carbon price of $23 per tonne will be implemented from July, albeit transitioning to a market related price in a few years time. Recent media reports tell of a heated national debate now underway, with many arguing that the price is out of line with the “prevailing global price” and therefore leaving Australia competitively exposed. Not surprisingly, those that first opposed the CPRS and those concerned about the current price are in many cases, one in the same. The first offer in the form of the CPRS was arguably the better deal, yet it was turned down.

At least two offers have been made in the USA. In 2001 the Bush Administration offered a science and technology based approach which has delivered some results, but given a general lack of enthusiasm for implementation by the NGO community in particular with some business groups as unintended allies, the initiative failed in key areas such as the development of carbon capture and storage. Had real progress been made, rollout of the technology might have been underway today. Eight years later the second offer came from the Obama Administration in the form of a national cap-and-trade approach in combination with technology incentives, but this was also declined. Both of these were also relatively benign, the first because it represented an early start and would had been largely government funded and the second because the overall structure of the deal offered significant competitive protection for key industries and included both a long lead time for implementation and a soft start. The Clean Air Act offer now on the table appears to be the least palatable of all these and could well prove to be less effective in terms of actually reducing emissions. Given that it will require specific actions of large emitters, the implied carbon price for some facilities may be very high. In addition, the approach will address individual sources but may not result in a real reduction of national emissions because no overall cap will be in place.

Canada has also followed a fairly tortuous path in recent years. No substantive national programme to manage emissions has emerged, yet various forms of market based policy have been tested and rejected. Although carbon pricing mechanisms now exist in some provinces, a national standards based regulatory approach may well emerge, keeping pace with the Clean Air Act developments now underway in the USA. This is bound to be more complex and almost certainly more costly for business than the cap-and-trade approach that was first proposed back in about 2003. In 2005 a North American cap-and-trade approach was even studied by a combined EPA / Environment Canada Task Force.

 The increasing number of standards based or fixed price approaches that are now “on offer”, bring into question the wisdom of defeating “cap-and-trade”. The latter offers compliance flexibility through offset mechanisms, banking and limited borrowing, competition protection through free allocation in the early phases of implementation and even technology incentives through constructions such as the NER300 in the EU-ETS. By contrast, a standard has limited flexibility, no price transparency and potentially onerous penalties. This would appear to represent something of an “own goal”.

The EU faces a related issue today. Despite some initial grumbling, businesses in Europe actually accepted the first offer of the EU ETS (cap and trade). But its effectiveness has slowly eroded over time. This is partly due to the recession but there is also a policy design cause arising from the superimposition of multiple layers of policy, such as specific renewable energy targets, nuclear build rates, efficiency mandates and more. These policies are well meaning but often misaligned. As the ETS has weakened, this process has accelerated therefore compounding the problem. The business community is split over what to do about this with various proposals involving the set aside of allowances favoured by some, but others arguing that the system is naturally responding to events and should be left to find its own way. The problem with the latter position is that it could result in an ETS that becomes politically and economically irrelevant, leaving a standards based approach as the way forward in Europe as well. Another “own goal” in the making!

Climate change is one of those subjects that is awash with data, leading to an almost endless capacity for analysis and ultimately conclusion drawing. The same data can be used to create different analytical output and a single analysis can lead to more than one conclusion. This comes about not just from the climate data itself, but from energy use data, energy use projections and the combination of all of these into both simple and highly complex models which seek to map out climate scenarios for the balance of this century and beyond.

A recent paper from Carnegie Institution, Stanford, CA looks at the differential climate impacts for the transition away from coal to various lower greenhouse gas energy systems, ranging from natural gas to hydro electricity. The authors modeled the temperature impact by 2100, based on a shift of 1 TW of coal generation capacity over the balance of this century. 1 TW was about the global coal capacity in 2000. Coal was picked as the base case because it is the most widespread method of generating electricity and is the most CO2 intense way of doing so. In the base case, warming from the continued use of 1 TW coal generation through to 2100 gives a temperature rise of 0.3°C.

The paper clearly illustrates the transition challenge inherent within the energy system, both from the perspective of the time it takes to replace the existing infrastructure stock and the latency of CO2 in the atmosphere. As a result of this, even the complete switch off of 1 TW of coal through conservation in the medium term does not deliver a 100% benefit. It would take some time to achieve such conservation during which the coal plants continue to emit and that CO₂ then remains in the atmosphere. By 2100, the benefit is about 0.25°C out of a possible 0.3. Various other alternatives are also considered.

This is an interesting analysis, but it only looks at the 1 TW case, whereas current coal capacity is 1.7 TW and forecast by IEA (Current Policies Scenario) to reach 3.0 TW by 2035. The conclusions from this analysis vary depending on the reporter. The actual conclusion of the paper was given in the final paragraph and is as follows;

Despite the lengthy time lags involved, delaying rollouts of low-carbon-emission energy technologies risks even greater harm in the second half of this century and beyond. This underscores the urgency in developing realistic plans for the rapid deployment of the lowest-GHG-emission electricity generation technologies.

But  one coal blogger came to a very different conclusion when reporting on this paper.

. . . . . studies such as this one, which recently appeared in Environmental Research Letters, which show the limited impact eliminating all coal-fired power generation would have, according to the study eliminating coal from the mix would only reduce global temperatures by 0.2 degrees over the next 100 years. Such a change would come at a massive economic and no doubt social cost, with no real change in climate outcomes.

That post implies there is questionable benefit in tackling coal because of the claimed limited climate impact that results from doing so (0.2°C) and the potential high (but not quantified) cost of the transition, but it does not appear to account for the expected growth of coal use to three times the level used in the analysis (presumably a 0.9°C impact if we do nothing). The Carnegie analysis also assumed that the starting point was a new coal fleet, whereas the reality today is that nearly half the global coal fleet is quite old (particularly USA, EU, Australia) and therefore ready for replacement in the near term.

Conclusions aside, the paper notes that “No previous study has predicted the climate effects of energy system transitions”. I don’t think that this is the case in that the 2008 Shell Scenarios which incorporate a major energy transition were modeled by MIT  to show the climate impacts. I have shown the charts below several times in the past (including last week), but they clearly show that a substantive transition (Blueprints) can make a difference by the end of the century. What it also shows is that the transition will be very long and that we won’t really see the climate benefit until the second half of the century. Even then, the 2°C goal is missed in 2100, although the climate system is beginning to stabilize.

One of the blogs I read from time to time is that of Paul Gilding, an independent writer on sustainability and former head of Greenpeace International. He spoke at TED last week with a talk called “The Earth is Full”. His blog post this week references the talk and argues why we shouldn’t rely on the “techno-optimist” point of view that all will be okay on the night.

 Driven by their optimism bias, people use the clearly huge opportunity of technology to reassure themselves we won’t face a crisis. They believe any serious limits in the system will be avoided because technology will intervene and we’ll adapt.

I discussed this a while back in an earlier post. Two colleagues in the Shell Scenario team published an article in Nature that showed clear historic trends for the deployment of new energy technologies.

 They derived two “laws” from this work, which are:

 Law 1

When technologies are new, they go through a few decades of exponential growth, which in the twentieth century was characterized by scale-up at a rate of one order of magnitude a decade (corresponding to 26% annual growth). Exponential growth proceeds until the energy source becomes ‘material’ — typically around 1% of world energy.

Law 2

After ‘materiality’, growth changes to linear as the technology settles at a market share. These deployment curves are remarkably similar across different technologies.

The “laws” show that it can take up to a generation (i.e. 25-30 years) for an energy technology to become material. Gilding also makes the point that we shouldn’t necessarily draw lessons from the spectacular deployment of technologies such as mobile phones and then assume that the energy industry can do likewise.

But can’t technology drive rapid change? Everyone at TED holds up their smart phones as a wonderful example of such fast, transformational change. This is a good and correct example, but it needs to be put in perspective. This is what I call a “toy technology” – something that makes our lives more convenient and more fun. These technologies are adding real value to our lives and driving change, but they are not transforming the foundations of our current economy.

Unfortunately the deployment of “toy technology” also follows the “laws”, although the time scales are shortened somewhat. Although the first hand-held mobile phone call was made around 1975 and Finland had a 20,000 person subscriber trial up and running by 1980 (i.e. first adopter), it wasn’t until 1995 that the technology became “material”, reaching 1-2% of the global population. Today the global market is approaching saturation (6 billion subscriptions) although now the transition from mobile phone to mobile smart device is underway. So even in the world of fast paced technological change, materiality still takes 15 or so years and full scale deployment another 15-20 years.

So should we be techno-optimists?

For the reasons I argued in my November post, “Can global emissions really be reduced”, it will only be a major technology shift that sees emissions fall dramatically. Ideally this should be introduced through a carbon price because that will pull it into the energy economy faster than would otherwise be the case. Carbon pricing was a principal feature of the Shell Blueprints scenario, which saw electric mobility, solar, wind and CCS all playing major roles in the period to 2050. Emissions do fall in that scenario and the level of CO2 in the atmosphere reaches a plateau, albeit above 450 ppm. 

We need to be optimistic about the role of technology, but also realistic about just how fast the transition can take place. Blueprints exceeded the “laws” in some instances yet still didn’t fully deliver on a 2°C ambition. However, natural gas was not as prevalent in that scenario as it now appears to be which should be a positive development, but on the other hand the Blueprints transition to a global carbon market was already well underway.