David Hone

At an event in Brussels earlier this week the EU Commission shared some initial thinking with business and NGOs on the consultation they have launched with regards the EU international position on climate change as we head towards COP 21 in France in 2015 where a deal is targeted for agreement. Although the EU remains very open to input on the shape of their position, it was clear to me reading the consultation document and listening to the presenter in Brussels that they are putting enormous emphasis on ambition – largely in the form of the size of national pledges.

In one sense this is hardly surprising given the world is a long way from anything that looks like a 2°C pathway, but it feels like it is becoming a distraction in itself, taking the emphasis away from the much more difficult job of putting in place the various tools and practices that might actually give us some chance of getting on a pathway that leads to some real reductions. The EU focus, like the international one, is divided into two parts, increasing global ambition to 2020 and post 2020 goals and targets.

The discussion reminded me of one I had about a decade ago with a senior policy maker in a Kyoto Annex 1 government. At that time the country had just ratified a pretty ambitious target under the Kyoto Protocol, considerably more than economically comparable countries. The government was trying to come to terms with the task of meeting the target, but the perceived difficulty of meeting the target was becoming a major distraction in itself. The conversation went something like this:

GM (government policy maker): The target is very difficult to meet.

Me: Agreed, but perhaps that shouldn’t be your primary consideration.

GM: It has to be, we have a target.

Me: Yes, but perhaps you should focus on getting a carbon price embedded in the economy first, then use that to start to drive change.

GM: But will we meet the target?

Me: You may not, but you would leave a legacy of an economy with emissions management up and running, the required capacity building done and emissions at least moving in the right direction. At the end of the day if you don’t meet the target, at least you will have made a good attempt.

GM: Yes, I understand. But what about the target?

Although this country has seen considerable regional activity (bound only by their own targets, developed as part of their policy making), the national government has struggled to this day with a target it felt somewhat helpless about. Early paralysis was almost certainly a contributing factor.

The current international discussion over a 2°C pathway is now at a similar stage and the EU appears to have fallen victim to this sort of thinking. Building a position on the need for more national ambition to meet the target, may well be a self defeating strategy. Rather, what is needed is a clear focus on two primary objectives;

1. Getting a carbon price into the global energy economy.
2. Getting CCS up and running and ready for rapid commercial deployment.

These are very specific climate objectives so play in to what the UNFCCC should be able to deliver, although they will also need to be supported by strong growth in other energy technologies, such as solar, nuclear, geothermal and the like (which shouldn’t necessarily be the objective of the UNFCCC at all). This also carves out a different role for UNFCCC, one which is related to pragmatic implementation of the tools and practices related to mitigation, rather than trying to create a frenzy of activity around targets and enhanced ambition.

Ambition will always be important, but without some clear ideas as to the pathways available, it becomes a rather empty and pointless discussion.

Whether it is via the auction of allowances or the taxation of carbon emissions, climate policy is increasingly being seen as a source of revenue into the national treasury. For example, the Australian carbon pricing mechanism will raise several billion dollars per annum in its fixed price period (currently $23 per tonne CO2) and EU member state revenues from the ETS have risen as power generators in particular now face full auctioning of allowances, rather than the mainly free allocation that has existed since the system started in 2005.

The issue that the collection of revenue raises is what to do with it. Government already has a long established process for this. Money flows into the national treasury, with spending set through the Budget process that occurs on an annual basis. The principal link between revenue collection and spending is the political agreement on the size of the deficit or surplus, otherwise the two are largely independent. But carbon revenue challenges this model. For example, although the EU ETS Phase III Directive doesn’t (nor can it) dictate how auction revenue should be spent by Member States, it does suggest that it is used as follows:

Member States shall determine the use of revenues generated from the auctioning of allowances. At least 50 % of the revenues generated from the auctioning of allowances referred to in paragraph 2, including all revenues from the auctioning referred to in paragraph 2, points (b) and (c), or the equivalent in financial value of these revenues, should be used for one or more of the following:

1.  to reduce greenhouse gas emissions, including by contributing to the Global Energy Efficiency and Renewable Energy Fund and to the Adaptation Fund as made operational by the Poznan Conference on Climate Change (COP 14 and COP/MOP 4), to adapt to the impacts of climate change and to fund research and development as well as demonstration projects for reducing emissions and for adaptation to climate change, including participation in initiatives within the framework of the European Strategic Energy Technology Plan and the European Technology Platforms;
2. to develop renewable energies to meet the commitment of the Community to using 20 % renewable energies by 2020, as well as to develop other technologies contributing to the transition to a safe and sustainable low-carbon economy and to help meet the commitment of the Community to increase energy efficiency by 20 % by 2020;
3. measures to avoid deforestation and increase afforestation and reforestation in developing countries that have ratified the international agreement on climate change, to transfer technologies and to facilitate adaptation to the adverse effects of climate change in these countries;
4. forestry sequestration in the Community;
5. the environmentally safe capture and geological storage of CO2, in particular from solid fossil fuel power stations and a range of industrial sectors and subsectors, including in third countries;
6.  to encourage a shift to low-emission and public forms of transport;
7. to finance research and development in energy efficiency and clean technologies in the sectors covered by this Directive;
8. measures intended to increase energy efficiency and insulation or to provide financial support in order to address social aspects in lower and middle income households;
9. to cover administrative expenses of the management of the Community scheme.

A new report out recently from the International Council on Mining and Metals (ICMM) provides a detailed look at the current revenue recycling practices around the world. These include areas such as the following;

1. Compensating trade exposed industries
2. Support for lower income people to offset the carbon price.
3. Support for Research and Development on low carbon technologies.
4. Investing in low carbon / low emission projects and energy efficiency schemes.
5. Adaptation to climate change.

ICMM have built the report around a core principle which they extol, namely “apply climate change related revenues to manage a transition to a low carbon future”. The report is excellent and well worth reading, but it does raise a very fundamental issue around the direct hypothecation of carbon revenue. This is isn’t just a governance issue though.

Australia serves as an interesting recent example. The decision to link the Australian ETS with the EU ETS followed by the precipitous drop in EU carbon prices has caused Australian government carbon revenue projections to be adjusted (down) accordingly. Recent headlines in Australia suggest that those relying on government support for various energy initiatives are now concerned about the certainty of that support and the overall level of it going forward. This concern stems from the fact that carbon revenue has been earmarked against certain objectives, such as in the categories listed above.

The alternative approach is to largely delink the collection of revenue and its use, which is the standard practice for most government expenditure. After all, why should we imagine that the collection of carbon revenue and the needs of the economy to make the transition to a much lower emission state should follow the same path. In the very early years, expenditure on R&D and demonstration projects (e.g. CCS, solar thermal etc.) may require funding far in excess of the available carbon revenue, which is often low at this stage as governments introduce a new tax at a modest level or give the bulk of the ETS allowances away for free. Further, at this time the need for guaranteed support for those first tentative investments is critical for long term deployment pathways.

Some years down the road carbon revenue may be very large and probably in excess of the transitional needs, which then argues for the bulk of the money to flow to general revenue. This will lead indirectly to reductions in other taxes, but the linkage would be unspecified. In this case, forcing the use of a large revenue stream on specific objectives may become a market distortion in itself. It is the job of the underlying mechanism (e.g. carbon tax, cap-and-trade, energy pricing) to drive deployment of a new set of energy technologies, not government against the need to spend earmarked revenue.

This is an issue that will likely run and run, assuming carbon prices ever recover to some meaningful level. The ICMM report is a useful contribution to the discussion and certainly gives an excellent overview of current practices. However, it does enter the discussion with the somewhat myopic view of ongoing hypothecation.

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

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

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

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

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

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

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

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

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

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

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

1. Market Confidence

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

2. Low carbon Investment

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

3. Jobs

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

4. Credibility

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

5. Leadership

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

6. Support

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

7. Europe

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

8. Growth

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

9. Environment

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

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

10. Economy and competitiveness

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

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

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

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

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

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

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

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

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

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

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

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

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

Dear ENVI Committee,

Next week you have to make an important decision on the future of the EU ETS. The Commission has proposed that 900 million allowances due to be auctioned at the beginning of this phase of the ETS be held back and returned to the market before the end of 2020. The objective is to remove a good portion of the allowance surplus that currently exists in the trading system and is putting extreme downward pressure on the resulting price of CO2 emissions. This isn’t a full solution to the problems that confront the trading system, but it is the only politically possible route forward that has been identified. It will provide the necessary breathing room for a more structural approach which must come over the next two years and which will cover the period through to 2030 and beyond.

The ETS was designed and implemented as the principal pricing mechanism to guide investment in power generation and industrial facilities across the EU such that long term CO2 reduction goals could be met at the lowest cost to society. Quite simply, it isn’t performing that role today. While Europe should be gradually shifting away from unmitigated coal and beginning to implement carbon capture and storage (CCS), coal consumption is on the rise and the CCS Demonstration Programme is on the brink of complete collapse. This is because the CO2 price in Europe today is effectively zero. The few Euros that an emissions allowance can command in the market is a reflection of future value, but even that is a cause for concern. At €4 today, this points to a price expectation in 2030 of €7, hardly an indication of a robust market based approach to managing emissions and introducing new energy technologies.

Many have argued that the market is working and delivering on the 2020 target. For this reason they have further stated that market intervention is not necessary. Unfortunately this is misguided and poorly informed thinking. While there is no doubt that annual compliance is functioning under the ETS and therefore the system will also force compliance in 2020, there is very clear evidence that longer term investment is not being guided by the ETS. Rather, investment is either not happening at all or is being driven by other factors and policies, some at EU level but many at Member State level as well. This is not leading the EU down a path of lowest cost emissions reduction, but is instead driving up energy costs in the EU. The very low price of CO2 in the EU does not represent low cost emission reduction opportunities being implemented, rather it is a very real symptom of a high energy cost pathway. This is important as it is not, or has ever been, the cost of CO2 that is impacting the competitiveness of EU industry. Even at previous levels of up to €30, in combination with the free allocation provisions for trade exposed industries, the CO2 price is a relatively benign factor.

The vote on backloading needs to be a “yes” vote. This signals the intention of the European Parliament to begin the process of restoration of the most cost effective approach to meeting Europe’s energy needs and reducing emissions over time. A “yes” vote won’t immediately restore the ETS to good health, but it is a start. Much work remains to be done. But following the advice of those who counsel for a “no” vote would mark the start of a very different pathway for meeting Europe’s energy needs – one that is less certain, more expensive and probably with much higher emissions over time.

Yours sincerely,

David Hone

Chief Climate Adviser, Royal Dutch Shell

Chairman, International Emissions Trading Association

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.

In a speech given at Dartmouth College at the beginning of this month, US Lead Climate Negotiator Todd Stern caused some consternation in the media by opening up the subject of the global two degree Celsius target. Bylines such as “US Abandons 2° Target” appeared soon after, to the extent that a further statement was made two days later by Todd Stern to say;

 “The U.S. continues to support this goal. We have not changed our policy.”

Reading the speech more closely, Stern had not dismissed the target at all nor questioned the necessity of making substantial reductions in global emissions. Rather, he had outlined a negotiating strategy which might bring nations to the table and actually get them to agree on something, rather than the status quo situation which has so far resulted in little progress.

 For many countries, the core assumption about how to address climate change is that you negotiate a treaty with binding emission targets stringent enough to meet a stipulated global goal – namely, holding the increase in global average temperature to less than 2° centigrade above pre-industrial levels – and that treaty in turn drives national action. This is a kind of unified field theory of solving climate change – get the treaty right; the treaty dictates national action; and the problem gets solved. This is entirely logical. It makes perfect sense on paper. The trouble is it ignores the classic lesson that politics – including international politics – is the art of the possible. . . .

. . . . .

. . . . .

This kind of flexible, evolving legal agreement cannot guarantee that we meet a 2 degree goal, but insisting on a structure that would guarantee such a goal will only lead to deadlock. It is more important to start now with a regime that can get us going in the right direction and that is built in a way maximally conducive to raising ambition, spurring innovation, and building political will.

The 2°C target has been around for a while, but has no particular scientific basis. Rather, it represents an integrated assessment based on many inputs. From what I have been able to find, it appears to be the point at which various systems may see a step change in their response to rising temperatures. This includes the collapse of some major ice shelves, changes in major ocean current circulation, the demise of some marine ecosystems, extensive coral bleaching and so on. Much of this is summarized in an output document from a 2005 conference, Avoiding Dangerous Climate Change, convened by the British Government prior to their hosting of the G8. Although the EU had proposed a 2°C target well before 2005, it was at this conference and the following G8 meeting where it really took hold. Finally, at the UNFCCC COP in Cancun it was agreed as a formal goal, given that the objective of the Convention is to “avoid dangerous anthropogenic interference with the climate system”.

But the 2°C objective is just the beginning  of a long chain which must ultimately stretch down to the allowable emissions of a given power plant or the need to store a tonne of CO2 in a subsurface reservoir. This chain is riddled with uncertainty which almost never gets a mention. For example, many now link the 2°C objective with atmospheric stabilization of CO2 at a level of 450 ppm and in previous postings I have talked about 2°C equating to an atmospheric stock of one trillion tonnes of carbon. But these are levels that are associated with something around a 50% probability that global temperatures will plateau below a 2°C rise. In trillion tonne terms, based on a “business as usual” scenario, we will cross that point in about mid-2043. Shifting the bar such that we have a better than 75% chance of limiting the temperature rise to 2°C moves the crossover point back 15 years, to early 2028.

There is also no guarantee that we can collectively limit the temperature rise to below 2°C. Even if emissions stopped today, the range of possible outcomes from a 400 ppm CO2 level includes 2°C, albeit at quite a low probability. This is because the atmosphere is not in a state of heat equilibrium and will continue to warm at current levels of CO2.  As such, determining a target atmospheric CO2 concentration becomes difficult. 450 ppm is convenient in that it is above current levels, was feasible (at a stretch) when first raised and coincided with a 50% chance of limiting the temperature to 2°C. More recently James Hansen of GISS / NASA has argued for a target of 350 ppm, in that this would restore the current heat imbalance in the system and therefore stop the temperature rising. The problem with this goal is that we have already passed it and nobody really likes setting a target which can’t be met.

Further to the problem of determining a desired plateau for atmospheric CO2, comes the even more difficult task of translating this into a physical limit on global emissions. The task of halving emissions by 2050 is often discussed, but little mention is made of the fact that after 2050 the trajectory must head pretty rapidly to zero. Even the “half by 2050” goal has been obscured by a forgotten baseline year. For some it is 1990, others it is 2000 / 2005 or even just half compared to now. These are all very different. The original baseline when the “half” was first discussed was 1990, which for energy related emissions translates to a goal of 10 GT per annum – China today is at about 8 GT.

As already noted, CO2 acts like a “stock pollutant” in that it collects in the atmosphere. The best approach for this is to find a mechanism for limiting the cumulative CO2 emitted, in other words never emitting that trillionth tonne of carbon.

Framing the problem in this way then perhaps makes us think differently about the comments made by Todd Stern. Trying to carve up the space left in the atmosphere between 190+ nations may be a diplomatic stretch too far, so we should at least move with haste towards what we can do now. In the interim, as actions start to take root and countries realize that limiting emissions isn’t the end of life, the universe and everything, the door then opens to a more comprehensive approach. This would be an “evolving legal agreement” .

Such an approach isn’t the ideal, but given that “immediate global agreement” has very little chance of happening, it would appear to be the prudent way forward, but with the our sights still set on the 2°C goal.

A year ago as the EU ETS price showed clear signs of a second step change downwards (in 2008/9 from €25 to €15 then in 2011 from €15 to €7), the EU Commission was resolute in its view that the mechanism was working, that it was responding to changes in the market and that all was well in the house of emissions trading. Rightly or wrongly, that view was backed by most of the major industry and business groups as well, to the extent that even if the Commission had thought that action was necessary it had absolutely no mandate for action. 

But a year is a very long time in business and politics and this week, with the backing and support of many business groups, the EU Commission released its first concrete thinking on the state of the emissions market and began the political process necessary to attempt to address the problems.

The initial report (with the somewhat long title “Information provided on the functioning of the EU Emissions Trading System, the volumes of greenhouse gas emission allowances auctioned and freely allocated and the impact on the surplus of allowances in the period up to 2020″) spells out in pretty stark terms the scale of the allowance surplus that now weighs down the price. It also highlights the fact that it won’t be until well into the 2020s that this shows any real sign of going away through the natural development of the system and its declining cap. The report then lays out a course of action, with three proposed levels of severity examined. 

That course of action involves skewing the allowance distribution in Phase III, such that less allowances are auctioned in the early years (2013 to 2016) and more are auctioned in the later years (2017-2020) – but the total number of allowances to be released remains unchanged, which means that there is no overall change in the surplus position that is forecast for 2020. The proposal is called “backloading”. The Commission has limited power in this area and even this step has required them to propose a very minor change in the Emissions Trading Directive to clarify the role that they have in the carbon market.

The largest backloading proposed is (quoting the Commission working paper):

 ”a reduction by 1.2 billion in the first three years of phase 3. This would result in a large reduction in the surplus in 2013. Nevertheless the reduction in the surplus remains significantly below the increase experienced in 2011 and expected over 2012. By 2015 the surplus would be below 1 billion unused allowances compared to a case where no changes in the auction time profile were implemented. After 2015 the auctioned amounts would actually increase significantly, resulting in an issuance of allowances well above future emission levels. This would drive a re-emergence of the surplus. Total annual issuance in the period 2016 to 2019 would be higher than in any year in phase 2 bar 2012. The decrease in auctioned volumes early in phase 3 would require drawing on the existing surpluses to make available the necessary allowances to the market to comply with emissions. This type of change of the auction time profile is thus likely to give strong temporary support to prices in 2013 to 2015, but would put downward pressure on prices in the second half of phase 3.”

At best, the move buys time and gives the Commission some breathing room to gain agreement on the necessary Phase IV parameters (rate of cap decline, possible use of auction reserve pricing, sectoral coverage, free allocation levels etc.), but doesn’t inflame the whole ETS target debate by proposing a full set aside and cancellation of allowances. This latter step is what is really needed, but may be politically too big a bite to chew on given the recent animosity over the Low Carbon Roadmap to 2030 and beyond. As such the Commission has opted for something that it thinks can be done today, rather than fighting the bigger fight over targets which it will have to do anyway in the context of Phase IV. Better leave it for that discussion!!

It is important to reflect on the role of the business community in all this. None of this would have happened were it not for a shift in position from opposition to market intervention to support. This isn’t to say that all business groups support such a move, but today many do. The catalyst for support was the gradual realisation that if the ETS failed to trigger a change in the (power sector) investment profile going forward, governments would inevitably make the decisions for business by applying mandates.

Some business groups remain opposed to intervention, but these now appear to be the ones that have always opposed action to reduce CO2 emissions. While they claim to support the ETS, they strongly argue the case that the market should be left to its own devices. The real agenda is often very different. With the high levels of free allocation that have existed during Phases I and II, the businesses involved are more than happy with the status quo which requires little more than administrative compliance (it certainly doesn’t require emissions reduction through projects and investment).

The battle isn’t over yet and much remains to be done, but this week saw an important step forward and one that hopefully leads to the restoration of the ETS as the primary driver for emission reduction investments across Europe.

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.