David Hone

A recent Reuters article reported from a UN session on climate risk and energy solutions:

 UNITED NATIONS, Jan 12 (Reuters) – Institutional investors with a collective $26 trillion under management opened a new front on Thursday in the fight against climate change, urging the private sector to mobilize, follow the money and find new technologies to cut greenhouse gas emissions. Putting a price on climate-warming carbon emissions, which has been instituted in parts of Europe and elsewhere with limited success, would be “nice to have” but not essential, said Kevin Parker, global head of Deutsche Asset Management.       

“It’s not going to be long before an investor looking to roll out a new energy plant has to take solar and wind and other forms of renewables very seriously,” Parker said in an interview outside a session at U.N. headquarters on climate risk and energy solutions.  ”It’s coming down to following the bouncing ball of money, because it’s money that talks.”       

Inside the session, which drew more than 400 participants from banking, insurance, government, labor and institutional investing, the United Nations’ Roland Rich warned the group against “putting all our eggs in the government basket.”

“The carbon-burning economy is tomorrow’s Rust Belt,” Rich said. “Your job, it seems to me, is to invest in the Microsofts and Googles of the green economy.”           

The article continued with reports of other speakers making similar calls. It may be the case that this reflects a significant level of frustration in the investment community, driven by weak carbon prices, inaction in several major economies and uncertainty with policy implementation where action is underway. Nevertheless, to argue that an issue such as climate change can be addressed without government action is a worrying development.

It has taken a good 15+ years to build the case for a carbon price in the energy system and while there is concern as to the current state of carbon markets, particularly in the EU, it is not the time to now argue that we can do without them.  The most effective emerging technology for dealing with CO2 emissions is carbon capture and storage (CCS) and arguably (at least by me) we will not see a reduction in global emissions until it starts deploying on a large scale. We won’t even see a reduction in the rate of growth of emissions until coal use reaches a plateau and begins to decline. Recent statistics hardly give confidence that such a point in time is even remotely close. 

Neither of these will happen without the presence of a carbon price, given the current demand for energy. Coal remains abundant, reliable and cheap for large scale power generation and while solar energy certainly falls on the planet in abundance, converting it to 24/7 electricity on a large scale (either directly or via wind) is neither reliable (from a 24/7 perspective) or cheap. Even as natural gas production increases globally, without a carbon price it will struggle to back out coal to the extent that it stays in the ground (rather it will tend to displace it to other markets). CCS of course is completely dependent on carbon pricing and early CCS demonstration in the EU is already suffering because of the low carbon price in the EU ETS.

There is no question that money talks and it is also true that a step change down in the cost of wind and solar has taken place in recent years, but the rate of investment in conventional energy infrastructure still far exceeds that of renewable energy and nuclear. In its recent World Energy Outlook, the International Energy Agency (IEA) warned that emissions lock-in at a level above that which is equivalent to a 2°C temperature rise this century is imminent.

Despite the repeated warnings, emissions continue to rise rapidly with no sign of a turndown. We really do need a carbon price in the energy system! It almost feels trite to have to say this is 2012, but apparently it is still necessary to do so.

After two busy weeks, the Durban COP was extended by a full day and then went well into a second, with long nights of negotiation along the way. Eventually a deal emerged which has polarized both the media and blogsphere between being the salvation of mankind or the quick route to runaway warming. In reality it is neither, but if that is the case then where are we?

First the good news. After years of discussion, stalling and negotiation the Clean Development Mechanism (CDM) is now able to accept Carbon Capture and Storage (CCS) projects. This important technology now has the opportunity for global use under a clear set of rules that all countries have sanctioned. Of course there remains the ongoing issue of the low price of CERs, largely driven by the weakness of the EU-ETS, but at least the CDM will continue to exist thanks to a Durban agreement on the continuation of the Kyoto Protocol, albeit with a limited set of players. If nothing else, the “CCS in CDM” agreement puts CCS properly on the radar and hopefully paves the way for implementation through other means, such as via the Green Climate Fund. 

In addition to the move on CCS, the Green Climate Fund and Technology Mechanism both made useful progress. In comparison to expectations going into Durban, the COP could be regarded as something of a success. But these are small steps to take for a two week conference which attracts some 10,000 people (including observers). Of course the real objective is to make a major step forward and agree a way for all parties to begin rapidly reducing emissions.

What then of the agreement in Durban to negotiate a new protocol (or another legal instrument or a legal outcome) by 2015 at the latest, for implementation by 2020? From the perspective of large scale mitigation action involving all the major emitters, this is good news, but given the reality of the rate of increase in the level of CO2 in the atmosphere, the story is really very different.

In a 2009 posting, I discussed the issue of a 2°C objective on the basis of CO2 behaving like a stock pollutant in the atmosphere (Allen et al, Nature, April 2009). For a 50% chance of limiting the global temperature rise to 2°C, the stock of CO2 should not rise above 1 trillion tonnes of carbon (or 3.667 trillion tonnes of CO2). This provides a useful way of assessing the impact of the “Durban Platform for Enhanced Action”. Consider four cases;

1. The “do nothing” base case which sees emissions continue to rise at the rate of 2% per annum (global emissions increased by 2.5% p.a. over the period 2000 to 2009 – IEA) and accumulate in the atmosphere. This sees the trillionth tonne emitted in 2044 with continued rapid accumulation in the decades following.
2. A dramatic (but of course hypothetical) deal in Durban which sees global emissions peak immediately and begin to fall at 1.7% p.a., the same rate of decline as currently built into the EU ETS. In this case the trillionth tonne is emitted just after 2100, but emissions are very low by this time and still falling, so the 2°C limit is effectively met.
3. Business as usual continues until 2020, but the “Durban Platform” acts aggressively on global emissions post-2020, with emissions peaking in that year and then falling. To achieve the same outcome as Case 2 the annual rate of decline must now be 3% p.a.
4. Business as usual continues until 2020, with the “Durban Platform” resulting in a global plateau in emissions from 2020 to 2030, then falling after that. Now the rate of decline must be over 4.5% p.a. to achieve the same outcome as Case 2. 

While the agreement to start negotiating again with a view towards implementation of a global plan from 2015/2020 must be seen as a positive development, the time lag now built into the process must equally be a cause for concern. There is nothing easy about emissions and the future, but starting the job today is an essential requirement for meeting the 2°C goal – this was also the clear message from the IEA (International Energy Agency) going into COP 17. A theoretical global decline of 1.7% p.a. is at least still within the bounds of technical (but clearly not political)plausibility, although only just, but arguably a reduction rate of 3% or 4.5% is beyond an achievable outcome. Even the financial crisis only managed to deliver a 1.4% reduction from 2008 to 2009 before emissions bounced back in 2010. A 3% p.a. decline from 2020 requires more than a billion tonnes per annum of reduction – or the startup of at least 130 very large CCS facilities that year and then each year after that. A 4.5% p.a. decline is considerably more difficult to achieve.

The above cases 3 and 4 which both represent a robust deal coming from the “Durban Platform” are also very optimistic given the track record of the UNFCCC negotiations and perhaps of greater concern, the track record of national implementation of agreements made.

Nevertheless, Durban may well be seen as a landmark COP and it may just mark the point at which attitudes change, but the shape of the outcome also makes the challenge ahead that much greater.

With delegates, energy / environment  Ministers, business representatives and NGO leaders arriving in Durban for COP 17, attention again turns to the pressing issue of actually reducing global emissions. The latest UNFCCC conference comes against the backdrop of two grim statistics of recent weeks – the record year on year (2009 to 2010) jump in global emissions just announced by the US Carbon Dioxide Information Analysis Center (CDIAC) and the prospect of an early “lock-in” of a minimum 2°C temperature rise this century, as indicated by the International Energy Agency in mid November.

As society grapples with these issues, the merit of various technologies and emission reduction approaches arises. Some advocate for a rapid switch to renewable energy, others favour nuclear and most argue that unless the efficiency of energy use is robustly tackled then there cannot be a solution. But a closer look at the current state of the global energy system reveals a very different reality.

As developing economy growth has accelerated in recent years energy prices have risen, albeit with rapid increases in both renewable energy deployment and fossil fuel production. Since 2000 the world has added 0.3 billion tonnes oil equivalent (btoe) per annum of non-fossil (zero carbon) energy, but nearly eight times this amount of fossil energy production (BP Statistical Review of World Energy). Even the global financial crisis has caused but a ripple in this trend. Demand is huge and growing. 

Arguably, we are in a time  where underlying global energy demand exceeds supply. This isn’t to say they are out of balance as that is not possible, but it says that if there were more energy then global economic growth would be even faster. This condition could well persist for a long time given population growth and the rapid expansion of several major economies – with more to follow.

A direct implication of this thinking is that the production of all fossil fuel energy is infra-marginal, i.e. there is nothing at the margin and that even the most expensive to produce barrel or tonne on the planet is profitable at current price levels. Rather, energy prices are increasingly being set by marginal and currently expensive local alternatives such as bio, wind and solar.  The further implication of this is that as developed countries install non-fossil energy supply or reduce their energy use through efficiency measures, the fossil energy that is backed out is simply moved elsewhere and there is no drop in global demand and no drop in global emissions – at all. This condition may also persist for a long time. In addition, in the case of rapidly developing economies such as China, renewable energy deployment is not backing out other fuels, rather it is supplementing a constrained fuel pool and allowing faster economic growth.

This then poses an enormous challenge for global efforts to reduce emissions. The current approach, which increasingly focuses on a “clean / renewable energy” solution, will not deliver a global reduction – at least not for a long time. Nationally there may be significant wins (e.g. the last 20 years has seen the UK reduce emissions through rapid uptake of natural gas), but on a global basis we are simply shuffling the fossil energy supply from one place to another (“Rearranging the deckchairs on the Titanic” comes to mind here). 

This then points to one solution in particular, the application of carbon capture and storage (CCS). With no reduction in fossil fuel use, carbon dioxide levels in the atmosphere will continue to rise  unless emissions are returned to their source. This argues for policy development to be tilted towards CCS technology with the goal of full  demonstration and commercialization in the short to medium term.

CCS is efficiently incentivized through a carbon price, although this is only emerging on a fragmented basis. But even national implementation which results in local rather than global CCS deployment can still be considered of global benefit as at least some emissions are captured and stored. As a carbon price becomes more global it does eventually force fossil fuels to the margin. This will then drive a  reduction in consumption as alternative energy sources come into the mix at lower and lower prices, but CCS remains a critical technology for this century at least.

For the UNFCCC process, this means an eventual complete about-face on CCS. Today it represents a glaring gap in the Clean Development Mechanism with CCS projects not even sanctioned for consideration. This at least is up for change in Durban. But longer term, following the thoughts outlined above, CCS should become the only viable offset mechanism for trade between nations given that it represents a tonne of CO2 sequestered. Permanent sequestration through forestry might also be considered. Anything else, no matter how laudable the project, may not actually represent a real reduction in global emissions.

On to Durban!!

Earlier this year I looked at the prospects for the USA meeting its 2020 declaration to reduce greenhouse gas emissions by 17% by 2020, relative to a 2005 baseline. Success at least looked feasible, driven by three significant factors:

1. The reduction in emissions as a result of the financial crisis;
2. The surge in natural gas production which at least has the potential to back out coal in the power sector, thereby delivering a reduction in power generation emissions;
3. The new and much more stringent CAFE standards which are now in place.

As illustrated in the chart below, a key element of the appraisal is the degree to which emissions bounce back after the recession, i.e. as production ramps up in response to new factory orders and so on. This is because of the scale of the fall in emissions as a result of the recession itself – some 500+ million tpa. 

Very recently the US Carbon Dioxide Information Analysis Center (CDIAC) released new estimates for global and national emissions for the years 2008, 2009 and 2010 – i.e. the key years in terms of the drop in emissions and first signs of recovery. The global trend is a concern given the significant jump of over 2 billion tonnes in CO2 emissions from 2009 to 2010 which more than offsets the 2008 to 2009 fall and puts global emissions at a record level.

The US figure is a real good news / bad news story. The rise from 2009 to 2010 was over 200 million tpa, which on the one hand indicates some recovery in the economy, but on the other puts significant pressure on a successful outcome  in 2020. The same projection but with the Industrial Recovery bar revised to 218 mtpa shows the target being missed by some margin.

A second critical element of this pathway is the rate at which natural gas backs out coal in the power generation sector – or coal generation is reduced as environmetal standards become tougher to meet, with natural gas filling the gap. The data for 2008-2010 isn’t conclusive, but it is showing some signs of a smaller recovery for coal than the national energy total and a loss of share in power generation to natural gas. 

Assuming about constant output from fossil generation through to 2020 (i.e. incremental power is picked up by new renewable capacity), then the necessary reduction scenario is only achieved if coal output drops by some 500,000 GWHrs and natural gas rises by a similar amount. More data is needed, but there is at least some indication that this trend may be underway, particularly now that petroleum based power generation has been driven to very low levels.

Depending on your take on events the toll has been as high as two Prime Ministers and one Leader of the Opposition, but Australia now has a carbon pricing mechanism operating in the economy (I say “now” in that even though it doesn’t formally start until July, the price exposure for companies was there the instant the law was officially passed). There does remain some uncertainty given the “blood oath” made by the current Opposition Leader to repeal the law, but at least for now the business playing field in Australia has changed.

The mechanism starts next July and is structured such that it transitions to an emissions trading system a few years later. This means that from the outset the approach is allowance based, with the government selling allowances at AU$23 per tonne of CO2 and then the same allowances being returned to government for emissions compliance. Somewhere around 2015 this will change in that the number of allowances available for distribution will be capped and banking of allowances, together with an opportunity to use offsets, will be allowed.

Australia has followed a near text-book approach to implementation as it has decided to recycle the funds collected directly back to consumers affected by the carbon price in the form of tax changes, with a bias towards those on lower incomes. Trade exposed industries will also see a direct recycle back, thus minimising the change in their international competitive positioning. The approach adopted by the government follows the cycle discussed in the WBCSD publication Carbon Pricing released earlier this year.

 The goal of a carbon price is to create a change in the economy such that the market begins to differentiate between goods and services on the basis of their carbon footprint.

In its generic realization, the carbon price, initially experienced by the emitter or fuel provider (e.g. by paying a tax, purchasing allowances from the government or implementing a required project), is passed through to the consumers of the product. The result is a change in the relative cost of most goods and services based on their carbon footprint, and the emergence of a new cost ranking within the economy. This will influence the purchasing decisions of consumers.

Products with a high carbon footprint will be less competitive, either forcing their removal from the market, or driving manufacturers to invest in projects to lower the footprint. Any revenue raised by the government from carbon pricing, will be typically directed to the treasury as part of the overall national budget process. It should be used efficiently; for example, to offset any net change in costs to the consumer by reducing taxes.

A transparent pass-through of operating costs to the consumer is an important feature of any market. It allows the manufacturer to adjust the sales price to maintain profitability, as new costs enter a process, or existing costs change. An increase in the sales price could only occur to the extent that the market allows the change to take place, due to competition from manufacturers with a different cost structure that may limit the potential for cost pass-through. This gives rise to one of the principal challenges of introducing carbon pricing into an economy.

Carbon pricing is being introduced piecemeal throughout the world. Some manufacturers incur the cost of carbon, while others do not, although they may be competing in the same market. A manufacturer incurring the cost of carbon is penalized, as the market price is set by a lower cost provider without the carbon price. This can result in “carbon leakage”, where a higher cost manufacturer struggles to compete, and market share is gained by a producer not subject to the carbon price. Consequently, the environmental integrity of the approach can be undermined and economic distortions introduced. A global carbon price is therefore important in order to gain a level playing field. Another challenge arises in heavily regulated markets where the producer may not be able to raise prices, and therefore cannot recover the carbon cost.

The design of a carbon pricing policy must recognize these issues.

Back in February when all this started, an observer might have thought that the economic roof had caved in.

But despite the difficult politics that have surrounded the proposal (now law), the government should be applauded for persisting. Regearing the economy and creating a different set of winners (and losers) somewhere down the road is not an easy task, but it has to be done.A command and control policy set which might appear as an alternative is both more expensive for consumers and far less flexible for business.

I happen to be in South Africa this week and a similar set of proposals is under discussion, although more likely implemented as a straight carbon tax. Australia and South Africa are similar in many respects – both are heavily dependent on coal and both are major resource based economies. South Africa will need to be even more thoughtful than Australia regarding recycle back into the economy, given the different income distribution in this country and the pressing need of access to electricity for all the population, but the principles which guide them should be the same. There is also the additional complication of having a state run monopoly providing electricity to the country, but even that is starting to change as the government looks at the introduction of independent renewable energy suppliers. As was the case in Australia, the battle lines are being drawn, at least according to the Cape Times today.

That part of the global economy exposed to a direct carbon price remains small, but it is rising and Australia is an important step, as will be South Africa. So far this isn’t enough to change the terms of the global energy mix, but it is having regional impacts. A similar move in China and / or the USA would change all that though.

I have just been at the inaugural Global Green Growth Forum (3GF) in Copenhagen. This was a high level event, opened by the Crown Prince of Denmark and the new Danish Prime Minister, then following the initial panel discussion there was an introductory keynote by United Nations Secretary General Ban Ki-Moon – in person. The venue was also around the corner from the Copenhagen Tesla dealership!! 

So the event got off to a flying start, but what then? One of the issues for me is that it wasn’t entirely clear what the conference was actually about. Green growth has become one of those new catch phrases that means many things, depending in large part on the listener. Perhaps the best articulation came in a coffee break discussion – “green growth” is the recognition of the type of growth in energy production and the provision of key goods and services that will be required over the coming decades as some three billion people move from a relatively low income status to middle class.

In fact this income shift is well underway and is placing stresses on a number of systems. Rising CO2 in the atmosphere is perhaps the early warning, but little has been done to mitigate that problem. Now there is concern about water, food, energy supply and general resource availability. Unlike the CO2 issue, there is little clarity as to what we might do about these issues. Faced with rising CO2 emissions, economists, the business community and much of civil society have been clear on the course of action to pursue – to put a price on carbon. We know how to do this, we know the timeframe within which it must be done and we have a reasonably clear notion of where it will lead (CCS, renewable energy etc.), but even this seems beyond our collective capacity to act. Instead, we are arguing about science, an otherwise solid bedrock of society.

At its root, the green growth agenda feels like a growing worry that the market structure we have created over the last two centuries isn’t sufficiently robust to take us forward and that somehow market fundamentals like supply, demand and ultimately price won’t work. It’s not exactly a surprise that we might be thinking this today, after all the financial markets have hardly done us any favours over the last two to three years. But does that mean markets in general will let us down? In the 1970s similar worries surfaced – then it was overpopulation, food supply and energy as the primary concerns. It was also a time of deep recession (1974), oil price shocks(1973) and a prevalence of floods (Australia 1974) and famine (Ethiopia 1973-74). But economies grew, the energy system adapted, amazing new technologies surfaced and food supply issues soon faded.

So back to the conference in Copenhagen and two days of leading figures talking about all things green. It was certainly interesting, but I don’t think it got very far. Leadership was identified as a key component, but there was no articulation as to where that leadership should take us. In fact, when one key panelist was answering a question on the agenda for Rio+20 he said that the agenda was currently lacking because there was no leadership. There was also a spattering of business bashing (e.g. “it is the fault of Japanese business that Japan won’t accept a second Kyoto commitment”) and even the assertion that government had sent a clear signal to business that it was serious about addressing climate change because of the agreement on the 2 °C target.

It looks like the green growth agenda is here to stay, even though we may just decide to take our chances with the market system that we have. But we shouldn’t do nothing. The CO2 issue represents a market failure, the Stern Report  made this clear in 2006. Arguably, deforestation is another. There are ways to address these failures within the existing market system, the application of a carbon price as discussed above is one. The development of REDD has the necessary ingredients to tackle deforestation.

A green growth agenda that can propose, clearly define and implement a limited number of such approaches is what we need. Hopefully the meeting in Copenhagen was a forerunner to this, rather than just a taste of more and more discussion forums.

Over recent weeks one of the major Australian newspapers (The Melbourne Age) has asked readers to submit questions on climate change and at the same time opened a poll so that all readers could vote on the questions they most wanted to see answered. The newspaper pledged to investigate and attempt to answer the top ten questions. The poll closed last weekend and the questions are now in. As promised, The Age has started to answer them. Without getting too lengthy and also drawing on many previous postings (so excuse the links), here are some thoughts from me on the ten questions (with abbreviated questions as headings – but click here to see the full questions: 

1. Can Australia make a difference by taking action?

While it is true that Australian emissions are small on a global scale and that therefore even reducing them to zero wouldn’t be sufficient to affect levels of CO2 in the atmosphere, this isn’t a reason not to take action. Climate change is a collective issue, a tragedy of the commons, which requires collective action to solve. No one country, region or industrial sector can solve this unilaterally. Even if the big three, China, the USA and the major EU economies acted alone (with China reaching a plateau in the short term and then reducing by 50% by 2050 and the US and EU reducing by 80% by 2050), global emissions would plateau at best assuming that the rest of the world emissions grew by no more than 1.5% per annum over the next 40 years (in fact they have been growing at well over 2% p.a. over recent decades). So this issue needs a response from all nations, including Australia.

Will Australia inspire other nations? This isn’t the primary motivation of acting and in any case many nations around the world are beginning to move on this issue and take action. The responses still vary widely, but they are underway. For example, Canada is developing legislation to stop the further construction of coal fired power stations, unless carbon capture and storage is utilised. China is now very close to introducing a carbon price into some parts of its economy and California is starting up a cap-and-trade system. The list is long and growing, even though the sum total of global efforts fall short of the necessary level of ambition.

2. What about agricultural emissions?

There is no doubt that agricultural emissions are important. As such, they featured in some detail in a recent study released by WWF and Ecofys which looks at the feasibility of a near zero emissions world by 2050. Although the primary focus of the report is energy, there is much said about agriculture because of the growing interaction with the energy system. For example, see page 62 of the report for a series of recommendations that relate to food and agriculture.

3. Isn’t it true that the magnitude of future warming is not “settled science”, but in fact highly uncertain?

Climate change is all about uncertainty, but a great deal of work has been done in this field. The MIT Joint Program on the Science and Policy of Global Change focuses considerable effort on communicating the risk and uncertainty (The Greenhouse Gamble) related to climate change. But importantly it also demonstrates that a policy led approach to managing emissions can shift the risk and offer benefits over the long term.

4. Shouldn’t we just go nuclear?

At least for the time being, there is no single solution to this issue. We will need a broad range of solutions. Even in France where nuclear has grown to dominate (~80%) the electricity sector over the last 40 years, emissions have only fallen by 14% (from 435 MT to 374 MT from 1971 to 2008 according to the IEA).

5. Are climate skeptics funded by industrial concerns so as to maintain the status quo?

The origins of climate skepticism and the driving force behind it is examined in great detail by Naomi Oreskes and Erik Conway in their book “Merchants of Doubt”. This is an excellent read and turns up some surprising answers, linking those who question and challenge the issue of climate change with the same people and groups who challenged tobacco as a cause of cancer, acid rain and the destruction of forests, chlorofluorocarbons and the thinning of the ozone layer and so on.  

6. Why is there so little investigative journalism into the science and its flaws.

This is because the science isn’t flawed. Yes, there remains uncertainty, but new research is refining and improving our knowledge of the Earth’s climate system and how it is expected to respond to increasing levels of CO2. I discussed the science in some detail in a recent post.

7. Renewables are viable now, so why do we need coal and uranium for baseload power?

A number of renewable technologies offer a great deal of potential and some are being widely deployed, such as onshore wind. But there are limits to the rate at which these new technologies can be fully developed and deployed. As such, we will need a broad range of energy technologies for a long time to come. My colleagues in the Shell scenarios team wrote about these limits in an article published in Nature late in 2009 and I discussed it in a posting at that time.

8. Is it possible to have a fruitful debate on the science given existing belief structures?

As mentioned above, I discussed the science at some length in a recent posting. But we do seem to live in a world today that is becoming detached from science, despite our increasing dependency and love of technology. I wrote a post on this last year. Perhaps belief structures are getting in the way, an issue which is also discussed by Naomi Oreskes in the book mentioned above.

9. How do the Liberal Party’s policies compare with other centre-right policies around the world?

I don’t think there is such a strong link between political leaning and climate policy, despite the rhetoric on this subject. Policy approaches vary widely around the world as do the governments that set them. For example, in the EU where there are 27 Member States with governments covering a broad range of the political spectrum, including many centre-right governments, there is a comprehensive climate change policy framework now in place which includes emissions trading, long term targets and tough energy efficiency goals. This policy framework goes beyond any of the party proposals under consideration in Australia today, but equally it has been in development for nearly ten years. It started out very modestly. In North America where there has been little progress on climate legislation at the federal level, many US States and Canadian Provinces, again covering a broad range of the political spectrum, have implemented far reaching emissions management policies. In the United States it was the Republican Party (centre-right) which introduced cap-and-trade (emissions trading) to the world when they decided to use that policy instrument to manage sulphur emissions from power stations in the 1980s.

10. Why should we believe the science when there is no observed relationship between climate and atmospheric CO2?

There is really no question of a relationship between climate and atmospheric CO2. This was shown over 100 years ago and explains very clearly and without challenge why the surface of the planet is temperate where a simple heat / radiation balance calculation shows that it should be frozen. The issue is therefore how much more change will occur as we double or triple the level of CO2 in the atmosphere.

As the US heads into the process of electing its next President, many subjects and issues will be debated. While climate change may not be the defining issue of the moment in the USA, given the long term importance of the subject it would be useful to understand how the various candidates for office might seek to shape the energy and climate policy landscape through this decade. The climate issue will almost certainly come back to confront a President in office through to 2017 and is probably inescapable for a  candidate with ambition to serve through to 2021.

Six areas of discussion and debate that could be on the agenda over the coming year would ensure both a better understanding of the subject and the range of potential policy directions that might be pursued by the next President;

Carbon pricing:

Many economists have said that the most effective way of beginning the long and complex task of managing carbon dioxide emissions is to put a price on the right to emit CO2 from power stations, industrial sources and transport. Although carbon pricing exists in some ares under regional and state based systems, a consistent national approach has yet to be developed.

Energy options:

Over the past decade the US has developed a major biofuels industry, become a leader in wind power deployment and significantly increased natural gas production. More recently new vehicle CAFE standards have been agreed. All of these offer real opportunity for significant emissions reduction, but need to be part of a broader energy policy framework that includes emissions management as an objective. The United States has already indicated its intention through the UNFCCC to reduce its greenhouse gas emissions by 17% by 2020 relative to 2005 and these options, if managed within the context of this goal, offer the possibility of success.

International positioning:

As a major current emitter and the largest cumulative historical emitter, it is important that the United States (with the EU, Canada, Australia, China, Japan and others) lead on the global task of managing CO2 emissions. But going it alone (or in a small club) isn’t a sustainable outcome. The USA will need to work with partners such as the EU and China to encourage and ultimately ensure global participation in the task of emissions reduction.

Technology policy:

Technology will play a long term role in the management of emissions. This will include scaled up use of technologies that the US already has experience with such as wind, biofuels and nuclear, together with new energy technologies such as solar and carbon dioxide capture and storage. New policies will be required to promote the development, demonstration and deployment of these and other technologies and to grow the technical skill base required to support this endeavor.

Looking beyond 2020:

With the 2020 energy picture now taking shape, longer term objectives need to be considered to ensure investment decisions made over the coming decade are compatible with the desired direction for 2030 and beyond. For example, should the USA have a recognized policy goal to reduce carbon dioxide emissions very substantially (this means something like an 80% reduction) over the first half of this century?

Adaptation:

Extreme  weather events of recent years and current heat and drought extremes have at least demonstrated that a considerable response effort would be required should  climate trends result in an increased frequency and / or intensity of such events. Sea level change may also pose a challenge for some areas as we head towards the middle of the century. Although the USA has a considerable response capacity, there is merit in beginning to fashion a more robust policy approach to physical climate change.

As I have noted in recent posts, the EU Emissions Trading System is suffering a decline in fortune. The price has been relatively low since the onset of the financial crisis, driven in part by a decline in industrial activity linked to the recession, but also to continuous overlaying of policy by both Member States and the Commission. Examples of the latter include the UK price floor proposal and the draft Energy Efficiency Directive from the Commission.

The next cab out of the ETS rank looks to be the California cap-and-trade system. Recently Point Carbon reported that:

 “California carbon allowances (CCAs) for 2013 delivery were bid at $16.75/t this week [NB: About 2-3 weeks ago] on news that companies would not have to surrender allowances to cover their 2012 emissions, market participants said.”

California emissions in 2008 (the last full GHG inventory) were as follows:

The total is 427 million tonnes against an allowance allocation in 2020 of 334 million tonnes. At least on first inspection there appears to be the necessary scarcity to ensure a robust carbon price

But California also has multiple policy approaches which operate in the same space as the cap-and-trade system. For example, by 2020 California is required to supply 33% of its electricity from renewable sources. In the transport sector, the Low Carbon Fuel Standard requires a 10% reduction in the carbon footprint of transport fuels by 2020, achieved through electrification, changes in the well-to-tank emissions of the fuel (e.g. through lowering refinery emissions) and substitution of gasoline with alternatives such as ethanol.

Many scenarios could play out here and the level of nuclear power will be critical, but these two policies alone could see emissions drop to 360-370 MT by 2020, removing much of the scarcity driving the carbon market.

Since the election of Governor Brown there is already talk of an even higher renewable energy requirement and there are other existing policies as well (Renewable Portfolio Standard, various energy efficiency standards, CHP requirements, vehicle efficiency measures).  In addition, what is not factored in here is California’s share of the overall drop in US emissions since 2008 as a result of the recession. But on the upside, at least from a carbon market perspective, is the compression of the whole trading period by one year as a result of the delay in implementation.

A back of the envelope analysis today indicates that the California system probably won’t see an allowance surplus through to 2020, nevertheless much of the apparent scarcity is removed by multiple policies operating within the cap-and-trade space. This means that the carbon market becomes a shorter term compliance mechanism rather than a longer term investment driver. It functions only as a check on the other policies.

Rather, investment is driven by mandates and standards on the back of a specific, predetermined design outcome for California’s future energy system – almost certainly a higher cost solution for the energy consumer, but with the same environmental outcome as the cap-and-trade would deliver if left to function on its own.

Apart from Australia announcing the details of its carbon pricing mechanism and eventual transition to an ETS, there was also news this week from a huge regional trading partner, South Korea. The South Korean cabinet has approved a plan to cut carbon emissions 30% below expected levels in 2020. In support of this, the government has submitted a bill to parliament that includes plans for an ETS from 1^st January 2015. The bill also has a chance of passing, given that the ruling party enjoys a comfortable majority – but don’t expect this to be a walk in the park. The Korea Herald reported:

Korea outlined action plans to tackle climate change on Tuesday (12^th July), breaking down reduction targets for high-emitting sectors in the medium term. The pan-governmental plan was devised to put the country’s low-carbon, green growth initiatives in motion, which President Lee Myung-bak launched in 2009 with a goal of cutting greenhouse gas emissions by 30 percent through 2020 from 2007 levels.

For the transportation sector, the target was set at 34.3 percent below business-as-usual levels. The government also aims to slash 26.9 percent from buildings, 25 percent from the public sector and 18.2 percent from industries, while saving 26.7 percent by switching to renewable electricity sources.

Under the plan, the government will multiply use of solar and wind energy, smart grid, as well as carbon capture and storage technology, which involves seizing carbon dioxide from power plants and other industrial facilities using coal and gas, compressing and sequestrating it underground or under the seabed.

It also plans to expand highly efficient facilities at residential and industrial complexes, and supplies of clean fuels such as liquefied natural gas, plastic scrap and biomass.

As for transport, the government will foster public transportation and electric and hybrid vehicles, while stepping up fuel efficiency standards for vehicles by 2015 to 140 grams per kilometer from the current 159 grams.

“We tried to draw up reasonable and fair measures to reduce emissions through collaboration between involved ministries, field research and public meetings,” the government said in a statement. “We’ll solidify Korea’s image as a leader in green growth.”

Green growth has been one of the key policies of the Lee administration as the country’s main economic force transitions from smokestack industries to high-tech.

Korea is the world’s No. 9 polluter, with annual emissions from Asia’s fourth-largest economy doubling between 1990 and 2007 to 610 million tons, slightly greater than Australia’s.

With the green growth vision, the government wants to stay at about 637 million tons through 2020, which is set to expand to 813 million tons.

By sector, the government expects the largest slice to come from industries with 56 percent of the total in 2020. Buildings came second with 22 percent, followed by transportation with 13.2 percent, agriculture, forestry and fisheries with 3.6 percent and public institutions with 2.3 percent.

To reach its goal, it has been promoting environmentally friendly investment and technologies, while establishing a comprehensive act on green growth.

But the government faced a setback as it postponed the adoption of a carbon trading scheme known as “cap-and-trade” after 2015 amid fierce opposition from industries that it would cost too much, thus hampering their growth.

Under the system, companies are required to release emissions above a government-imposed cap and to purchase extra credits from those that discharge below their quota.

“The government will strive to minimize negative impacts of emission-related regulations on the industry’s competitiveness and national economy,” it said.

Together with New Zealand, this raises the prospect of a significant carbon trading regime developing outside of Europe. What is perhaps more interesting though is how these schemes might link together in the 2020s and then how this linkage could be leveraged to generate emission reduction projects. Such an opportunity was highlighted in the recent WBCSD publication, Carbon Pricing, which I have mentioned in previous postings. In the WBCSD publication the example given was as follows:

 Today, Australia exports iron ore to Asia where it is smelted with coal to produce wrought iron and finally steel. In future years, a carbon price operating within Asian and Australian economies could encourage the development of the necessary process for the production of the steel in Australia using natural gas, where that fuel is prevalent, rather than coal, as is the case in Asia today. The transfer of allowances from Asia to Australia, assuming linked carbon trading systems, would underpin any additional emissions in that country, but overall emissions between the two would be lower, thus making the project an attractive proposition.

South Korea is one such economy that smelts iron ore from Australia and uses coal to do so. CO2 emissions from coal make up nearly half the emissions from the economy as a whole and fuel switching will be one of the early mechanisms implemented to reduce emissions.

The switch from coal to gas in steel making is technically possible by utilizing the DRI process (Direct Reduced Iron) and while South Korea may see such a move as a relocation of jobs, Australia would undoubtedly welcome the opportunity. Building a new plant in Australia with domestic natural gas and transferring allowances through a linked system offers an alternative to the fuel switching taking place in South Korea itself, which would require the gas to be delivered as LNG.

Don’t expect changes like this to happen just as these systems leave their respective starting blocks, but as linkages develop and international goals start to become recognized and delivered on, such optimization driven by the price of carbon becomes a real possibility.