Archive for the ‘Policy’ Category

The recent letter on carbon pricing from six oil and gas industry CEOs to Christiana Figueres, Executive Secretary of the UNFCCC and Laurent Fabius, Foreign Minister of France and President of COP 21 sent something of a tremor through the media world, to the extent that the New York Times picked up on it with an editorial on carbon taxation. The editorial transposed the CEO call for a carbon price into a call for a carbon tax (as is currently applied in British Columbia) and then set about building the case for a tax based approach and dismantling the case for mechanisms other than taxation; but their focus was on cap-and-trade (such as in California, Quebec and the EU ETS). The New York Times suggested that cap-and-trade doesn’t work, but apparently didn’t look at the evidence.

In January 2015 the EU ETS was ten years old. There were those who said it wouldn’t last and any number of people over the years who have claimed that it doesn’t work, is broken and hasn’t delivered; including the New York Times. Yet it continues to operate as the bedrock of the EU policy framework to manage carbon dioxide emissions. The simple concept of a finite and declining pool of allowances being allocated, traded and then surrendered as carbon dioxide is emitted has remained. Despite various other issues in its ten year history the ETS has done this consistently and almost faultlessly year in and year out; the mechanics of the system have never been a problem.

Effective carbon price
Comparing approaches and policies is difficult, but in general the various mechanisms can be rated as shown above. The most effective approach to mitigation is a widely applied carbon price across as much of the (global) economy as possible. Lost opportunities and inefficiencies creep in as the scope of approach is limited, such as in a project mechanism or with a baseline and credit approach; neither of which tackle fossil fuel use in its entirety.

The chart clearly shows carbon taxation and cap-and-trade competing for the top spot as the most effective mechanism for delivering a carbon price into the economy and driving lasting emission reductions. Both approaches work, so differentiating them almost comes down to personal preference, which can even be seen in the extensive academic literature on the subject where different camps lean one way or the other. My preference, perhaps influenced by my oil trading background, is to back the cap-and-trade approach. My reasons are as follows;

  • The cap-and-trade approach delivers a specific environmental outcome through the application of the cap across the economy.
  • Both instruments are subject to uncertainty, however the cap-and-trade is less subject to political change; conversely, taxation policy is regularly changed by governments. The New York Times made note of this with its reference to Australia, which has removed a fixed price carbon price that was effectively operating as a tax.
  • The carbon price delivered through a cap-and-trade system can adjust quickly to national circumstances. In the EU it fell in response to the recession and perversely has stayed down in response to other policies (renewable energy goals) currently doing the heavy lifting on mitigation. Why is this perverse; because the other policies shouldn’t be doing this job when a cap-and-trade is in place to do it more efficiently.
  • Acceptance is hard to win for any new cost to business, but particularly when not every competitor will be subject to that cost. The cap-and-trade system has a very simple mechanism, in the form of free allowance allocation, for addressing this problem for energy intensive (and therefore carbon intensive) trade exposed industries. Importantly, this mechanism doesn’t change the environmental outcome or reduce the incentive to manage emissions as the allowances held by a facility still have opportunity value associated with them.
  • Most carbon policies are being formulated at country or regional levels, rather than being driven by global approaches. Cap-and-trade systems are well-suited to international linking, leading to a more harmonized global price, while tax coordination is complex and politically difficult. Linking leads to a level playing field for industry around the world which fosters acceptance.

The economic effectiveness of both a carbon tax and a cap-and-trade system for carbon pricing means that countries and regions of all shapes and sizes have an implementation choice. For large, multi-faceted economies, the cap-and-trade system is ideally suited for teasing out the necessary changes across the economy and delivering a lowest cost outcome. At the same time it offers the many emitters considerable flexibility in implementation. Equally, for some economies or sectors where options for change are limited, the offset provisions that often feature in the design of an emissions trading system can offer a useful lifeline for compliance. Still, in some economies, a direct tax may be the most appropriate approach. Perhaps this is for governance reasons related to trading, or a lack of sufficient market participants to create a liquid market or simply to encourage the uptake of a fuel such as natural gas rather than coal.

The choice between these instruments isn’t as important as the choice of an instrument in the first place, which is why the letter from the CEOs is so important at this time.

Accounting isn’t enough

As the World Bank and others ramp up the discussion on carbon pricing, heads are turning towards Paris with thoughts on how the issue will be incorporated into the expected COP21 global climate deal. I have said many times in the past that unless a carbon price makes its way into the whole global energy system, then its success in bringing down emissions is far from assured. While local carbon pricing wins will appear, the global effort could be undermined by a lack of global coverage.   This is true of other policy approaches as well, but in the case of carbon pricing there is the significant benefit of economic efficiency.  For me, the signs so far aren’t great, with the text that came out of the Geneva ADP meeting showing few signs of tackling this important issue.

In recent weeks I have heard some commentators and national climate negotiators argue that the Framework Convention itself is sufficient to underpin cooperative carbon market development and that all the COP21 deal needs is a framework to ensure that accounting of carbon based trades is robust and avoids issues such as double counting (two parties each counting a particular reduction under their own emissions inventory). The underpinning language within the Convention can be found in several places (examples below), but the references are oblique and without direct recognition of carbon pricing or carbon markets;

  • Efforts to address climate change may be carried out cooperatively by interested Parties;
  • These Parties may implement such policies and measures jointly with other Parties and may assist other Parties in contributing to the achievement of the objective of the Convention;
  • Coordinate as appropriate with other such Parties, relevant economic and administrative instruments developed to achieve the objective of the Convention;

While this language could be interpreted as a mandate to develop a global carbon market and the ensuing exchange of carbon pricing instruments between Parties, or companies within the jurisdiction of those Parties, it hardly encourages this process to take place, let alone become a key activity in implementing a global deal. Similarly, if a Paris deal just addresses accounting issues, I don’t believe that this will act as the necessary catalyst for carbon market development either. It’s a bit like agreeing how to calculate the GDP and then not opening the national mint to print and issue the currency!!

Looking back at the Kyoto Protocol, the Clean Development Mechanism provides some valuable learning. While it isn’t a comprehensive carbon pricing instrument the Protocol nevertheless catalysed its development with a few paragraphs of text, to the extent that it eventually pushed some $100 billion (some have estimated much higher levels) in project investment into various developing country economies. This far eclipses the $10 billion that has so far been pledged to the Green Climate Fund, clearly demonstrating that market based approaches will almost always outstrip direct public financing or funding.    To meet the developed countries’ commitment to mobilize $100bn per annum by 2020, it is clear that carbon market approaches including linking will be required.  It is difficult to see how it will be met without incentivizing the private sector in this way.

This is the sort of step that I think the negotiators in Paris need to take. Rather than just elaborating on core accounting principles, I believe that they need to incorporate a means of actively encouraging carbon market expansion. Given the nationally determined contribution based architecture that is emerging, such a development will probably be a bottom up process, perhaps with heterogeneous linking between various market based systems. The Harvard Kennedy School are offering valuable insight into how this might transpire.

One organisation, IETA, has put forward a proposal for Paris along these lines. It is a light touch approach, given the opposition that a real carbon market proposal seems to foster, but hopefully it will be enough to get things started. The IETA proposal calls for the development of a “unified international transfer system”, in effect a “plug-and-play” linkage approach for national trading systems. With wording along these lines in the Paris agreement, later COP decisions could establish the modalities for such a system, thus opening up and accelerating the process that the likes of California and Quebec went through to link their respective trading systems. Such modalities would include the common accounting framework that is needed irrespective of the approach taken to encourage the development of a global market. In all cases, accounting still remains central to progress.

I won’t claim that this is the quickest and most effective way forward, but it is where we are and probably the best that can be achieved, assuming the push from above is there to encourage it. Without such a push, we are all left to hope that something may transpire on carbon markets, but wishful thinking isn’t a solution to 2°C.

Two views on mitigation economics

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The annual Forum held by the MIT Joint Program on the Science and Policy of Global Change is always an interesting event, with excellent presentations and lively debate ensuing. The recent Forum held in Boston in early October was no exception thanks to a discussion on two very different approaches to triggering the necessary mitigation of carbon dioxide emissions.

The debate started with a presentation on cumulative emissions and the clear link to atmospheric warming. This comes back to the “stock” vs. “flow” nature of carbon dioxide into the atmosphere which I have written about here and is the foundation of my recent book. The key to the issue is that as CO2 is a stock addition to the atmosphere, it doesn’t matter when or where the CO2 is emitted for the same net accumulation. As a result, the eventual accumulation will tend towards the full release of known fossil fuel reserves simply because the infrastructure exists to extract them and as such they will get used somewhere or at some time.  This also implies only one remaining path forward (given that non-use is unlikely) for stabilizing atmospheric concentrations of CO2; capturing and storing the CO2 when the fuels are used (i.e. Carbon Capture and Storage or CCS)

The above line of reasoning led one participant to propose that the simplest solution to the climate issue was to mandate sequestration, starting with a small amount for each tonne of CO2 emitted, say 1-2%, but progressively increasing this throughout the century until 100% is reached. Tradable CCS certificates (where one certificate represents one tonne of CO2 stored) could be used to distribute the benefits of individual large projects amongst many, particularly in the early years when the sequestration requirement from an individual emitter would still be small. Further, it was argued that this was economically more attractive than the widespread use of a carbon price, which would have to get to higher levels (probably more than $50/tonne) than current systems are offering to trigger even the first CCS project.

In the case of CCS certificate trading, which might trade in the range $50-$100 per tonne of stored CO2 early on, the cost for an individual emitter would nevertheless be initially small. If this was started in 2020 at 1% and reached 15% sequestration by 2030 (i.e. 100% by mid 2080s), the average cost over the period 2020-2030 to an emitter would be $8.50 per tonne of CO2, even with CCS certificates trading at $100 each. This is about the current level of the EU ETS which of course is unlikely to see any CCS projects at such prices.

For a carbon pricing approach, the CO2 price would have to be somewhat higher than the current level in the EU ETS to trigger CCS activity, which would likely delay its implementation and in any case probably cause grief within the system simply because of the higher price and its claimed impact on industry, competitiveness and consumers. It was argued in the MIT debate that this latter effect could well mean that it becomes politically unacceptable to ever let direct pricing mechanisms get to the level required for CCS.

The carbon pricing economists in the room responded to this, arguing that the direct pricing approach was more efficient in that it would allow a range of other mitigation options to play out in the interim before CCS was actually needed. This brought the response that only under the circumstances of uniform carbon pricing with full global reach might this be true; although with the caveat that in the context of an accumulation problem, there were no other mitigation options other than CCS and not using the fuels in the first instance. Partial reach (e.g. the EU ETS and China ETS) of carbon pricing, while significant, might simply introduce a trade distortion, rerouting fossil fuels to other parts of the world and eventually resulting in the same accumulation in the atmosphere. The claim was that carbon pricing tended to address the problem on a flow basis rather than stock basis and measured success as reduced emssions in the location where it operated, rather than reduced accumulation in the atmosphere over the long term. By contrast, it was argued that any application of CCS, even on a local basis, dealt directly with accumulation.

There wasn’t a resolution to the issues discussed above, but the discussion was a great example of the early development of policy thinking. Carbon pricing has dominated the debate for many years and rightly so, but as the science shifts in its emphasis and focuses more specifically on the root causes, policy will eventually have to adjust as well.

The Australian Prime Minister, Tony Abbott, turned up in Queensland very recently to open a coal mine (the $US3.4 billion Caval Ridge Mine in Central Queensland, a joint venture between BHP and Mitsubishi which will produce 5.5 million tonnes annually of metallurgical coal and employ about 500 people). In a TV interview he managed to inflame a number of commentators around the world with his quote that “Coal is good for humanity, coal is good for prosperity, coal is an essential part of our economic future, here in Australia, and right around the world . . . . . “.

In this world in which it is difficult for politicians to say anything without getting criticised, he was perhaps in a losing situation before he spoke, simply because of the critical role that coal happens to play in the global economy cast against the reality that its cumulative carbon footprint is the single largest contributor over time to the build-up of CO2 in the atmosphere. More recently, increased coal use has also contributed most to the rapid rise in global emissions.

In one sense Abbott is correct in that over and over again coal has been the starting point for industrial development. I explored this in more depth a few months ago. Coal is an inexpensive fuel, but perhaps most importantly it requires only minimal technology to utilize. There is no need for pipelines, leakage monitoring or sophisticated storage facilities. One could argue that the most important piece of technology is a shovel. This was true in Victorian England, it is still true in parts of China today and it may well be the case as Africa begins to industrialize on a large scale. Of course, the development of Africa on the back of the vast coal resource that sits in that continent (200 billion tonnes in Botswana alone) will send emissions to levels that are hard to contemplate and even more difficult to reduce. That is highly unlikely to be good for humanity.

Contrast this with the latest offering from activist and author Naomi Klein, who has recently published a book on the climate issue; This Changes Everything. I am about a quarter of the way into this and try as I may to be objective, I am already wondering if I will ever finish it. I feel that I have already been vilified a hundred times over, not just as part of the fossil fuel industry that she likens to an evil empire, but also as a shareholder daring to expect a return on my investments (“. . . . pour their profits into shareholder pockets . . .” ). Ms. Klein seems to believe that nothing short of a return to collective ownership, community living, local production and simple lifestyles will be sufficient to reduce carbon dioxide emissions. She blames anybody and everybody for the problem of rising emissions and lands the issue squarely at the feet of the economic system that has served us pretty well for centuries. Apart from her argument for the need to change everything, it looks as if I will have to plough through another 300 pages to find out how she imagines this might actually happen. My guess is that it could be more wishful thinking than practical policy advice. Should I ever get to page 533 (!!) I will let you know, but I don’t know if I have a thick enough skin for that.

One reviewer did manage to make it to the end and his views can be found here.

In the midst of this cacophony of criticism, the rational middle continues on without much of a voice. But some of us are at least trying. My new book, Putting the Genie Back: 2°C will be harder than we think, hasn’t attracted the talk shows or celebrity endorsements yet, but I have at least had some good feedback from readers and that is very gratifying. I wrote it to try and present a more balanced view of the climate issue and it does seem to be succeeding in that regard.

As governments struggle to find practical routes forward with positive outcomes for CO2 mitigation, attention is turning to dealing with other greenhouse gases, particularly methane. A number of methane emission initiatives are now underway or being planned, for example those within the Climate and Clean Air Coalition.

Methane seems like an obvious place to start. Anthropogenic emissions are about 250 million tonnes per annum. A tonne of methane emitted now has a short term (20 years) impact on atmospheric warming which is some 80 times greater than a tonne of CO2. This means that over the period of twenty years, the methane will add 80 times the amount of heat to the atmosphere as the carbon dioxide. But methane breaks down in the atmosphere quite quickly with a ‘half life’ of about seven years, so on a 100 year basis (with the methane effectively gone) the impact of a tonne of methane emitted now compared to a tonne of CO2 is much less. The factor falls to about 28, but even with a lower multiplier reducing methane still seems to be a worthwhile endeavour. While agricultural methane may require real lifestyle changes to bring down, e.g. less meat consumption, industrial methane emission management looks like something that can be done. Often mitigation may be a case of good housekeeping, such as monitoring and maintaining pipelines to minimize fugitive emissions.

While most articles about methane simply use the GWP (Global Warming Potential over 100 years) of 28 and present data and economics on that basis, a few dig deeper. Of note is the work of the Oxford-Martin School who present a number of policy papers on methane. In the more popular press, Burning Question author Duncan Clark has written about methane.

Both follow a similar line of reasoning. They note that methane and CO2, while both greenhouse gases, behave very differently with regards their impact on the actual goal of the UNFCCC, to limit eventual peak warming to 2°C or less. As noted, methane is a relatively short lived gas in the atmosphere, whereas CO2 is a long lived gas that accumulates in the atmosphere. This means there is another dimension to the issue, time. The point in time at which they are emitted relative to each other and the shape of any reduction pathway relative to the other is important. Duncan Clark describes this in the following way:

The difference between carbon dioxide and methane is a bit like the difference between burning coal and paper on a fire. Both generate plenty of heat but whereas the coal burns steadily for a long time and accumulates if you keep adding more, the paper gives an intense burst of warmth but one that quickly disappears once you stop adding it.

Their conclusions are similar. Peak warming is largely dictated by the cumulative amount of CO2 emitted over time. If a certain amount of methane is also emitted, the timing of that emission is what matters. Methane that is emitted today will immediately impact the rate of warming, but long before we reach peak warming (assuming CO2 emissions are eventually brought under control and warming actually peaks) the methane will have left the atmosphere and been converted to carbon dioxide, in which case it’s impact on peak warming is based only on the CO2 that remains from the methane. We may have accelerated warming in the short term but peak warming will remain largely unchanged. In this case, the warming potential of methane expressed in terms of its impact on peak temperature falls sharply and comes close to the stoichiometric conversion of methane to carbon dioxide, which is about 3, i.e. a tonne of methane when combusted or oxidised in the atmosphere gives rise to about three tonnes of carbon dioxide. Conversely, methane that is emitted much later, say when we are close to peak warming, will directly add to whatever level of temperature we happen to reach.

Does this mean that we shouldn’t bother about methane today? Unfortunately the answer is an ambiguous one. If we are confident that the world will quickly and decisively reduce CO2 emissions then of course we must also be reducing methane and other greenhouse gases as well. If we don’t, then we will still have a methane problem at the time peak CO2 induced warming occurs, in which case we will almost certainly overshoot our peak warming goal, i.e. 2°C, with the additional warming from the other greenhouse gases. But if we don’t address the CO2 issue, then addressing the methane issue now doesn’t offer a lot of benefit for later on. Instead, the benefit that we do get is less short term warming as we will have removed the intense burst of warming that the methane is providing.

Of course, since we don’t know how well or otherwise the task of CO2 mitigation will proceed (despite the fact that the track record is pretty poor), we feel obliged to act on methane now in case the CO2 mitigation picks up.  At least we know that we will slow down the near term rate of warming by doing so.

Not surprisingly, it turns out that dealing with methane and atmospheric warming is just as complex as dealing with CO2. In the case of CO2, many are convinced that steps such as efficiency measures can curtail warming, when all they are probably doing is geographically or temporally shifting the same CO2 emissions such that the eventual accumulation in the atmosphere is unchanged. In the case of methane, treating it as if it were interchangeable with CO2 but with a convenient and high multiplier may make us feel that modest effort is delivering great benefit, when it may be the case that little benefit is being delivered at all.

In both cases it is the science that we have to look at to decide on the appropriate strategy, not expediency and certainly not sentiment.

As we head towards COP21 in Paris at the end of 2015, various initiatives are coming to fore to support the process. So far these are non-governmental in nature, for example the “We Mean Business”  initiative backed by organisations such as WBCSD, CLG and The Climate Group. In my last post I also made mention of the World Bank statement on Carbon Pricing.

2 C Puzzle - 3 pieces

This week has seen the launch of the Pathways to Deep Decarbonization report, the interim output of an analysis led by Jeffrey Sachs, director of the Earth Institute at Columbia University and of the UN Sustainable Development Network. The analysis, living up to its name, takes a deeper look at the technologies needed to deliver a 2°C pathway and rather than come up with the increasingly overused “renewables and energy efficiency” slogan, actually identifies key areas of technology that need a huge push. They are:

  • Carbon capture and storage
  • Energy storage and grid management
  • Advanced nuclear power, including alternative nuclear fuels such as thorium
  • Vehicles and advanced biofuels
  • Industrial processes
  • Negative emissions technologies

These make a lot of sense and much has been written about them in other publications, except perhaps the second last one. Some time back I made the point that the solar PV enthusiasts tend to forget about the industrial heartland; that big, somewhat ugly part of the landscape that makes the base products that go into everything we use. Processes such as sulphuric acid, chlorine, caustic soda and ammonia manufacture, let alone ferrous and non-ferrous metal processes often require vast inputs of heat, typically with very large CO2 emissions. In principle, many of these heat processes could be electrified, or the heat could be produced with hydrogen. Electrical energy can, in theory, provide this through the appropriate use of directed-heating technologies (e.g. electric arc, magnetic induction, microwave, ultraviolet, radio frequency). But given the diversity of these processes and the varying contexts in which they are used (scale and organization of the industrial processes), it is highly uncertain whether industrial processes can be decarbonized using available technologies. As such, the report recommends much greater efforts of RD&D in this area to ensure a viable deep emission reduction pathway.

Two key elements of the report have also been adopted by the USA and China under their U.S.-China Strategic and Economic Dialogue. In an announcement on July 9th, they noted the progress made through the U.S.-China Climate Change Working Group, in particular the launching of eight demonstration projects – four on carbon capture, utilization, and storage, and four on smart grids.

Reading through the full Pathways report I was a bit disappointed that a leading economist should return to the Kaya Identity as a means to describe the driver of CO2 emissions (Section 3.1 of the full report). As I noted in a recent post it certainly describes the way in which our economy emits CO2 on an annualised basis, but it doesn’t given much insight to the underlying reality of cumulative CO2 emissions, which is linked directly to the value we obtain from fossil fuels and the size of the resource bases that exist.

Finally, Sachs isn’t one to shy away from controversy and in the first chapter the authors argue that governments need to get serious about reducing emissions;

The truth is that governments have not yet tried hard enough—or, to be frank, simply tried in an organized and thoughtful way—to understand and do what is necessary to keep global warming below the 2°C limit.

I think he’s right. There is still a long way to go until COP21 in Paris and even further afterwards to actually see a real reduction in emissions, rather than reduction by smoke and mirrors which is arguably where the world is today (CO2 per GDP, reductions against non-existent baselines, efficiency improvements, renewable energy goals and the like). These may all help governments get the discussion going at a national or regional, which is good, but then there needs to be a rapid transition to absolute CO2 numbers and away from various other metrics.

Steps towards Paris 2015

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National climate negotiators and a number of Energy/Environment Ministers are currently meeting in Bonn as the global climate deal process slowly edges forward. Whether the steps being taken are big or small remains to be seen, but there are at least steps, so that is a start. The most well publicized have been those of the United States and China who are both active domestically with action on emissions. In the case of the USA this is the EPA rules that gained heavy media coverage and for China it is the notion that they will peak their coal use at some point in the reasonable future, perhaps as early as 2020. The idea of peak coal in China is also starting to appear in government conversations and is not just something emanating from the Chinese academic community.

But another step was also taken in Bonn last week when Ministers were in town as part of an ADP Dialogue; a new business coalition reared its head. Called “We Mean Business”, this is a coalition of a number of existing business linked organizations and has been established to demonstrate to government that a broad business base sees the need for action on climate change and is prepared to support their actions in creating the necessary policy frameworks under which emissions can then be reduced. “We Mean “Business” has started life with seven supporting organizations;

We Mean Business
The question that needs to be answered is how important is this and can such a group exert any influence over the process at all. Looking back, one parallel that comes to mind is USCAP (Unites States Climate Action Partnership), a group of some 25 companies and NGOs that coalesced around the 2007-2009 US process to implement climate legislation, but most notably a cap-and-trade bill. This was a detailed federal legislative process and USCAP certainly got into the weeds of it, with a comprehensive manifesto of requirements. When the Waxman-Markey Bill did eventually pass through the House there were many elements within it that aligned with the USCAP manifesto, so arguably that organization did have some influence on content. More importantly perhaps, the very existence of USCAP helped create the political space in which comprehensive legislation could be considered, even though the process eventually stalled and ultimately failed in the US Senate.

But Waxman-Markey was a specific piece of national legislation; at the international level the process is more complex. While a cap-and-trade system is a very tangible policy outcome with a set of well understood rules and metrics, the likely outcome from Paris may be far less defined. One aspect that is common to both is the need for political space in which to act. While the majority of this will come from the Parties themselves, business can play a role here. However, such a business coalition will have to act at both national and international levels to be truly effective, in that delegations are most likely given a certain negotiating mandate within which they can operate before they leave for the COP. As such, simply showing that business supports the process at the international level will probably not be enough.

The second area for business advocacy comes in terms of content. This is more difficult in that the business coalition will be made up of a broad range of constituents acting in many different sectors of the economy. While a cap-and-trade system may be ideal for one company in a given sector in a particular country, another company might prefer financial incentives to help it develop a particular technology. Further, the nature of the international agreement won’t include specifics such as cap-and-trade, but will be much more about the process of establishing suitable national contributions and commitments. However, a business coalition could at least ask for some basic building blocks to be included, such as the use of market instruments and the ability to transfer some or all of a national contribution between Parties , both necessary precursors to the longer term development of a global carbon market.

It is early days for “We Mean Business”, but it at least exists and is starting to mobilize resources and interest. But the hard work hasn’t started; what it will actually do and how it might positively influence the process and eventual outcome is for the days and months ahead.

Scaling up for global impact

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A visit to Australia offers a quick reminder of the scale to which Liquid Natural Gas (LNG) production has grown over recent years. This was a technology that first appeared in the 1960s and saw a scale up over the 1970s and 1980s to some 60 million tonnes per annum globally. As energy demand soared in the 1990s and 2000s, LNG production quickly rose again to around 300 million tonnes per annum today and could reach 500 million tonnes per annum by 2030 (see Ernst & Young projection below).

2012OGJcolors

Flying into Australia we crossed the coast near Dampier in Western Australia, which is currently “Resource Central” for Australia. The waters were dotted with tankers (I counted 14 on the side of the plane I was sitting on) waiting for loading, many of which had the distinctive LNG cryogenic tanks on their decks. Two days later the first shipment of LNG from the new Papua New Guinea project took place and this received considerable coverage in the Australian media. Clearly LNG is booming in this region, with even more to come. Most major oil and gas companies have projects in development and there are several LNG “startups” considering projects.

This is a great example of technology scale up, which is going to be key to resolving the climate issue by progressively shifting energy production and use to near zero emissions over the course of this century. Carbon capture and storage (CCS) is one of the technologies that needs to be part of that scale up if we are serious about net zero emissions in the latter part of the century.

There are many parallels between LNG production and CCS which may offer some insight into the potential for CCS. Both require drilling, site preparation, pipelines, gas processing facilities, compression and gas transport, although LNG also includes a major cryogenic step which isn’t part of the CCS process.

LNG production and CCS are both gas processing technologies so the comparison between them needs to be on a volume basis, not on a tonnes basis. CO2 has a higher molecular weight than CH4 (methane), so the processing of a million tonnes of natural gas is the same as nearly 3 million tonnes of CO2. As such, the production scale up to 500 million tonnes of LNG by 2030 could be equated to nearly 1.5 billion tonnes of CO2 per annum in CCS terms, which is a number that starts to be significant in terms of real mitigation. The actual scale up from today to 2030 is projected to be 200-250 million tonnes of LNG, which in CCS terms is about 700 million tonnes of CO2.

This is both a good news and bad news story. The scale up of LNG shows that industrial expansion of a complex process involving multiple disciplines from across the oil and gas industry is entirely possible. LNG took two to three decades to reach 100 million tonnes, but less than ten years to repeat this. In the following ten years (2010-2020) production should nearly double again with an additional 200 million tonnes of capacity added. These latter rates of scale up are what we need now for technologies such as CCS, but we are clearly languishing in the early stages of deployment, with just a few million tonnes of production (if that) being added each year.

What is missing for CCS is the strong commercial impetus that LNG has seen over the last fifteen years as global energy demand shot up. With most, if not all, of the technologies needed for CCS already widely available in the oil and gas industry, it may be possible to shorten the initial early deployment stage which can last 20 years (as it did for LNG). If this could be achieved, CCS deployment at rates of a billion tonnes per decade, for starters, may be possible. This is the minimum scale needed for mitigation that will make a tangible difference to the task ahead.

The commercial case for CCS rests with government through mechanisms such as carbon pricing underpinned by a robust global deal on mitigation. That of course is another story.

Is the UNFCCC ADP on track?

This week (March 10th-14th) in Bonn, parties to the UNFCCC are meeting under the direction of the Fourth Part of the Second Session of the Ad Hoc Working Group on the Durban Platform for Enhanced Action (ADP 2.4). In short, this is the process that is trying to deliver a global deal on climate change over the next 20 months when the world comes together at COP 21 in Paris. The last attempt at such a monumental feat ended in tears in Copenhagen in December 2009.

One might imagine that a process with only a few months to reach a solution on a major global commons issue would be deeply imbedded in the economics of Pigouvian pricing, or at least attempting to see how the global economy could be adjusted to account for this particular externality. However, as we know from the Warsaw COP and previous such meetings that this isn’t the case, rather it is an effort just to get nation states to recognize that a common approach is actually needed.

The pathway being plied in Warsaw resulted in the text on “contributions”, which at least attempts to create a common definition and set of validation rules for whatever it is that nation states offer as climate action from within their own economies. More recently the USA set out its views on the nature of “contributions”. This process is at least trying to get everyone in a common club of some description, rather than having several clubs as has been the case since 1992 when the UNFCCC was created. The diplomatic challenge for Paris will be to find the most constraining club which everyone is still willing to be a member of and then close the doors. Once inside, the club rules can be continually renegotiated until some sort of outcome is realized which actually deals with emissions. This ongoing renegotiation will be for the years after Paris, it won’t happen beforehand or even during COP 21.

But ADP 2.4 in Bonn seems to have gone off-piste. Looking through the Overview Schedule, what can be seen is a series of meetings on renewable energy and energy efficiency. While this may be an attempt to highlight particular national actions as a template for others to follow, it is nevertheless symptomatic of a process that isn’t really dealing with the problem it is mandated to solve; limiting the rise in the level of CO2 in the atmosphere.

At best, the ADP has become a derivative process, or perhaps even a second derivative process. Rather than confronting the issue, it is instead dealing with tangents. Holding sessions on renewable energy is a good example of this behaviour. The climate issue is about the release to atmosphere of fossil carbon and bio-fixed carbon on a cumulative basis over time, with the total amount released being the determining factor in terms of peak warming (i.e. the 2°C goal). The first derivative of this is the rate of release, which is determined by total global energy demand and the carbon intensity of the energy mix. The second derivative is probably best described as the rate of change of the carbon intensity of the global energy mix, although this can be something of a red herring in that the global energy mix can appear to decarbonize even as emissions continue to rise, simply because demand change outpaces intensity change.

Energy efficiency is perhaps yet another derivative away from the problem. It deals with the rate of change of energy use, but this has further underlying components, one being the rate of change of energy use in things such as appliances and the other the rate of change of the appliances themselves. Efficiency isn’t good at dealing with the immediate rate of energy use in that this tends to be dictated by the existing stock of devices and infrastructure, whereas efficiency tackles the change over time for new stock. That new stock then has to both permeate the market and also displace the older stock.

Focussing on renewable energy deployment and efficiency is a useful and cost effective energy strategy for many countries, but as a global strategy for tacking cumulative carbon emissions it falls far short of what is necessary. Yet this is where the UNFCCC ADP 2.4 has landed. It also seems to be difficult to challenge this, as illustrated by one Tweet that emanated from a Bonn meeting room!!

 Twitter: 10/03/2014 16:47

shameful: US sells concept of “clean energy” (including gas, CCS) at renewable workshop. what hypocrisy / hijacking of process. #ADP2014

 

The EU ETS isn’t out of trouble just yet

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

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

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

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

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

 EU ETS RET impact to 2030

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

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