Archive for the ‘Policy’ Category

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.

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

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

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

a.      a support through auctioning recycle or other funding approaches

b.      an Emission Performance Standard

c.       a CCS certificate system

d.      another type of policy measure

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

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

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

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

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

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

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

Last week I attended the official launch in London of a book I reviewed recently, The Burning Question. Both authors were at the launch and they gave a great overview of the energy and climate predicament we have collectively managed to get ourselves into. Key to their message is that carbon emissions are growing exponentially and that no amount of energy efficiency or alternative energy investment is going to change that pathway anytime soon, rather both approaches may be exacerbating the problem. Of course they did make the point that all exponential systems eventually collapse or at best plateau, but in the meantime emissions continue to rise with no immediate sign of change. As I noted in my initial review, the authors paint themselves into something of a difficult corner and don’t give a great deal of insight as to how to get out, but carbon capture and storage looms large in their thinking. The book follows a line of thought that I have been developing in this blog over the last couple of years, best described here and here.

The morning after the book launch I found myself at a business association meeting where the subject of climate action was top of the agenda for the day. As if in follow-up to the previous evening, we quickly got on to the role of carbon capture and storage (CCS) for mitigation, vs. the apparently more attractive premise (to many people) that the focus must be on energy efficiency and renewables, with carbon capture and storage in more of a mop-up role at the end. The efficiency / renewables approach has been played out in numerous scenario exercises, most notably in that presented by WWF (with the support of Ecofys) in their 2011 report “100% Renewable Energy by 2050”. In all such cases and particularly that one, a natural progression of change within the energy system doesn’t feature, rather a “war time footing” scenario is advocated. This specific report was also presented to the meeting.

I contrast this with the recent Shell New Lens Scenarios which I discussed in a March posting. These do follow a natural progression forward, driven by social concerns, legislative change and energy economics. The conditions behind the Oceans scenario result in higher uptake of efficiency and much faster renewables deployment.  However, these are not strong enough to offset all of the extra pressures for energy demand growth from developing markets in particular.  As a result, fossil energy growth is similar to that of Mountains for the next several decades, and so without the strong stimulus for CCS in Mountains, the Oceans scenario results in higher cumulative CO2 emissions over the century and therefore additional warming. The reasons are somewhat similar to those articulated in The Burning Question.

This leads to thinking about climate action in terms of two paradigms. One recognizes the sobering reality of the global energy system as outlined in The Burning Question and seeks to address the issue through a combination of measures, prioritizing a robust carbon price in the energy system and placing a strong emphasis on carbon capture and storage. This tackles the issue from the fossil fuel end, which has the consequence of managing emissions directly (the CCS bit) and drawing in alternatives and reducing demand as pricing dictates (the carbon price bit). The other approach is to tackle the issue from the alternatives end, which results in forced efficiency measures and subsidized renewable energy coming into the mix. Following the logic of The Burning Question, this is like putting the energy system on steroids which pumps up global demand and potentially even forces emissions to rise.

Back then to the business association meeting which, at least in part, was also attended by a prominent official in the global climate process. The inevitable question as to the role of CCS arose and a debate around mitigation priorities got going. Many, including the official present in the room, took the view that efficiency and renewables were critical to the change process required and that this is where the emphasis must be.

 Of course the real sweet spot is somewhere in the middle, where there is a strong attack on emissions through carbon pricing and CCS, but in combination with a more rapid displacement of fossil energy with alternatives such as solar and nuclear. This isn’t easy to achieve as the social conditions for one are somewhat counter to those needed for the other. This is one paradox that also comes out of the New Lens Scenarios. Nevertheless, if those in leadership positions are sitting at one end of this spectrum rather than squarely in the middle, will we ever get a solution that actually addresses the problem head on? Perhaps The Burning Question needs to be distributed more widely!

There are many books and thousands of reports on climate change, carbon economics, energy transformation and the like, but few encapsulate the issue as well as a recently released book by Mike Berners-Lee and Duncan Clark, The Burning Question. Judging by the recommendation on the cover, even Al Gore liked it.

bqcover

Rather than speculate on the potential severity of climate events or try to convince readers that simple changes in consumer behaviour and green, job creating investment will solve everything, the book takes a thought provoking but dispassionate look at the global energy system. The authors discuss the role of fossil fuels and the carbon emission limits that we know we should meet and set out to explain the rock and the hard place that we find ourselves between. The rock in this case is the trillion tonne of carbon limit for cumulative emissions over time and the hard place is the abundance of fossil fuels, the rate at which we use them and the relative ease with which more becomes available as demand rises.

Berners-Lee and Clark present a compelling set of stories which show how fossil fuels dominate the global energy market, why it is proving almost impossible to displace them (on a global basis) and why strategies such as improving energy efficiency and deploying renewables  are not effective approaches to try and limit global emissions. In fact they make the point that in some instances the reverse happens – emissions just rise faster.

The tag line on the cover includes the teaser  “So how do we quit?” (using fossil fuels). Do they really know? As the book unfolds and the problem they describe mounts in both complexity and difficulty, there is almost the feeling of a thrilling ending around the corner. SPOILER ALERT. Sadly this is not quite the case, but they do give some useful advice for policy makers trying to get to grips with the issue and the book itself gives the reader a very different perspective on the energy-climate conundrum (although hopefully one that the readers of this blog have picked up over time, but here it is all in one book).

I assume that for similar reasons to my own line of thinking (but after beating around the bush about it for 181 pages) they do finally land on a key thought:

In the course of writing this book we have come to think that the most undervalued technology in terms of unlocking international progress on climate change is carbon capture – both traditional CCS for point sources such as power plants and more futuristic ambient air capture technologies for taking carbon directly out of the atmosphere.

It would appear that The Inconvenient Truth and CCS are indeed inextricably linked. Clark and Berners-Lee don’t go so far as to argue that CCS is the convenient answer, but the message on CCS is a strong one. Nevertheless, geoengineering makes a surprise entrance at the end!!

Overall, this is an excellent discussion which is both easy to ready and hugely informative. It is well worth putting it on the summer reading list.

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 Report

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.

 Lenses

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

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

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

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

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

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

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

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

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

1. Market Confidence

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

2. Low carbon Investment

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

3. Jobs

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

4. Credibility

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

5. Leadership

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

6. Support

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

7. Europe

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

8. Growth

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

9. Environment

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

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

10. Economy and competitiveness

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

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

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. Towards the trillionth tonne 

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.

  Towards two trillion tonnes

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.