Archive for the ‘Policy’ Category

A new reality to come to terms with

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The first UNFCCC talks since the adoption of the Paris Agreement are now underway and the various delegations are getting down to the tough task of implementation. I was in Bonn on the opening day of the two week meeting, representing the International Emissions Trading Association (IETA) in a side event hosted by the Clean Development Mechanism (CDM) Executive Board (EB). The aim of the event was to draw on the learning from a decade of CDM operation and apply this experience to Article 6 of the Paris Agreement. This is the Article that provides a potential new foundation for carbon market development. I was there to present the IETA Article 6 Vision paper which I posted a story on recently.

The side event was packed out and many were standing in the corridor leading to the room; there is clearly considerable interest in this topic. Over the years the CDM has been a successful mechanism, resulting in nearly 8000 projects and some 1.7 billion Certified Emission Reduction (CER) units issued. Even at a €5-10 per CER (as it was in the earlier days of the EU ETS), this still represents a carbon price based financial injection of up to €10 billion into developing economies. The CDM spawned a small industry of project developers, assessors, MRV professionals and climate finance experts and clearly demonstrated that even a gentle application of the market can have a significant impact. Little wonder that there is such interest in the mitigation mechanism embedded in Article 6 and its potential to drive change.

However, the CDM (or a version of it) is unlikely to be repeated or replicated under Article 6, at least not under the terms that existed within the Kyoto Protocol. It was clear from the discussion during the side event that this new reality is going to take a while to hit home and settle in. The CDM became an important source of climate finance for developing countries, where the only real obligation on the part of the host country for a given project was to provide the necessary governance structure to ensure eventual issuance of the CERs. But that is no longer the case given the provisions of the Paris Agreement and Article 6 are now effectively the same for all countries.

Over time, Nationally Determined Contributions (NDC) will expand to cover all greenhouse gas in all economies. Every NDC, either specifically or notionally (for assessment and stocktake purposes) is linked to a quantitative carbon budget and there is an expectation from the Paris Agreement that these budgets will be delivered. While the Paris Agreement doesn’t say this in such stark terms, it is nevertheless implied. The whole approach that the UNFCCC used to assess the NDCs in their latest synthesis report, released on May 2nd, underpins this. Their aggregate analysis is summarized in carbon budget terms as follows;

The implementation of the communicated INDCs is estimated to result in aggregate global emission levels of 55.0 (51.4 to 57.3) Gt CO2 eq in 2025 and 56.2 (52.0 to 59.3) Gt CO2 eq in 2030. The global levels of emissions in 2025 and 2030 were calculated by adding the estimated aggregate emission levels resulting from the implementation of the communicated INDCs, that is 46.5 (44.3 to 48.9) Gt CO2 eq in 2025 and 48.0 (45.1 to 51.4) Gt CO2 eq in 2030, to the levels of emissions not covered by the INDCs. Global cumulative CO2 emissions after 2011 are expected to reach 533.1 (509.6 to 557.2) Gt CO2 in 2025 and 738.8 (703.6 to 770.9) Gt CO2 in 2030.

As I noted in my last post and drawing on Article 6.5 in the Paris Agreement, this means that the transfer of credits from a project across a national border (in the style of the CDM) will impact the national inventory reports of both parties. These transfers will then have to be executed in the style of Joint Implementation (JI) of the Kyoto Protocol, which effectively required an adjustment to the project host country’s national goal if the crediting unit was to be used by another Party to meet their goal.

I raised this issue as part of my presentation and the message was then amplified by a couple of people in the audience during the Q&A. But the response from some in the room was close to one of denial of this new reality, even though the Paris Agreement makes the need for such adjustment clear. The discussion almost drifted back into the old reality of developing countries not having goals and targets, but fortunately we didn’t land there. We didn’t resolve the issue either, which means that there are probably some tough discussions ahead as the negotiators get down to business.

A week later in Bonn and after many hours of discussions on Article 6 by the Parties, there has been some progress. At a side event on the second Monday also on Article 6 and also standing room only, I heard one central African delegate note that we had certainly left the world of the CDM and that perhaps we were somewhere between the constructions offered by CDM and JI of the Kyoto Protocol, albeit this would have to be interpreted to match the new bottom up global architecture of the Paris Agreement. I also heard another national delegate argue strongly that the new mechanism was not a sustainable development mechanism and should not be referenced as such, even if sustainable development was an important outcome of the implementation of the mechanism. Several panellists talked about quantification of NDCs as an important precursor to the avoidance of double counting.

The various concerns and issues that have been raised in these early discussion are very valid and the answers aren’t immediately obvious. Many developing countries have placed the need for finance as a condition on at least some portion of their mitigation contribution and in the past the CDM offered such finance. But if the reality of a new mechanism is a tighter national goal as a consequence of using it, there may be some push back. In the IETA paper one possible solution to this was proposed, namely the direct purchase of project units from the host country of the mitigation activity by multi-lateral funds. But this is unlikely to reach the necessary scale of mitigation envisaged by the NDCs, so other approaches will have to be developed. Interesting times ahead!

Update: The co-chairs in the UNFCCC discussions on Article 6 have released informal notes on ITMOs (here) and the proposed mechanism (here). These are a summary of points made in the initial discussions in Bonn.

The highlight of the Paris Agreement is without question the ambition embodied within it. This had its foundation with the Alliance of Small Island States (AOSIS) and their deep concern regarding future sea level rise. But the issue snowballed as the conference progressed, supported by a strong dose of techno-optimism that was prevalent throughout the halls of the Le Bourget Conference Centre. The text that was agreed upon is important, with the goal embodied in to distinct sections;

Holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change;

Parties aim to reach global peaking of greenhouse gas emissions as soon as possible, recognizing that peaking will take longer for developing country Parties, and to undertake rapid reductions thereafter in accordance with best available science, so as to achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century . . .

In a post written before the conclusion of COP21, I assessed that a 1.5°C goal would require a rapid forty year transition to net-zero anthropogenic emissions and a period until at least the end of the century with negative emissions via BECCS (bioenergy and CCS) and DACCS (direct air capture and CCS). But the pathway proposed by the Agreement itself isn’t quite as ambitious, even while it aspires to a 1.5+°C outcome. Rather, it proposes achieving a balance between anthropogenic emissions and removals by sinks in the second half of the century. This may not be sufficient to achieve the 1.5+°C goal, with a key deciding element being the role of natural sinks.

The 1.5+°C pathway issue is highlighted in a paper published by the MIT Joint Program in July 2013. MIT deliberately avoided the use of negative emissions technologies, partly due to concerns about their scalability but also preferring to test the impact of natural sinks on the outcome. Of these, the ocean is the major short term sink because of the imbalance between levels of CO2 in the ocean and the atmosphere.

MIT analyzed four pathways that result in net zero anthropogenic emissions. These are shown in the chart below (fossil energy CO2 emissions only) against a business as usual trajectory based on the 2010 post-Copenhagen national pledges.

  1. An immediate drop to net zero by 2015, starting in 2010 (Natural only after 2015).
  2. A very rapid drop to net zero by 2035, but with growth from 2010 to 2030 (Natural only after 2035).
  3. A more extended drop to net zero by 2060, with the decline commencing in 2010 (Alternative).
  4. The IEA 450 scenario, with emissions peaking around 2020 and reaching net zero by 2070 (IEA 450).

MIT Scenarios - CO2 emissions

Pathway 3 is of particular interest. In this case anthropogenic emissions are at net zero by 2060, although starting to decline from 2010 when energy emissions are at 30 Gt CO2 per annum (it is now 2016 and they are at ~33 Gt). This scenario sees temperatures rise above 2°C by mid-century, but then decline as the ocean takes up significant quantities of CO2 from the atmosphere but with nothing being added from anthropogenic sources.  After some 20-30 years, as the ocean’s upper layer comes into balance with the atmosphere, uptake of CO2 slows. Mixing into the deep ocean is much slower but will continue for hundreds to thousands of years.

Back in 2010 the cumulative emissions from 1750 (to 2010) stood at some 532 billion tonnes carbon, which means that Pathway 3 approximates a 1.5°C outlook as the area under the curve from 2010 to 2060 (energy, cement and land use) represents an additional 250 billion tonnes of carbon emissions, giving a total of some 780 billion tonnes. The relationship between carbon emissions and temperature is about 2°C per trillion tonnes. The chart below shows the modelled pathway which results in an end-of-century temperature rise of 1.5°C.

MIT Scenarios - Temperature

The natural sink is therefore very important, offering some 0.5°C (see the light blue line in the chart above) of temperature reduction following an overshoot. This is possibly the only way in which 1.5°C can be met,  although significant anthropogenic sinks may also be developed (including reforestation) later which could offer the same drawdown. As such, with the Paris Agreement potentially not making use of this and instead only providing for emissions to fall to a level which matches the ability of sinks to take up carbon emissions, the task of meeting 1.5°C becomes considerably more difficult.

The same is true of the IEA 450 Scenario. With 2010 now behind us, the future equivalent of the Alternative pathway which saw reductions from 2010 onwards is probably the red 450 line (reductions from 2020), which overshoots to 2.7°C before achieving something of a plateau at 2°C. But to bring this down further by the end of the century and therefore comply with the Paris Agreement would also require the major application of anthropogenic sinks, such as via CCS and rapid reforestation.

This discussion may be something of a moot point today because the job of rapidly reducing emissions hasn’t even started and arguably we have at least 40+ years to think about where the endpoint should be. Nevertheless, as nations begin to reflect on the Paris outcome in the coming months and relook at their respective reduction pathways, the long term end point does become relevant because energy infrastructure planning requires a multi-decadal outlook. In its initial formulation of a long term carbon budget, the UK did need to look forward to 2050 but that was from a 2008 starting point. With a new starting point of 2020 or thereabouts, a 2060 or even 2070 end-point may well be considered.

There is of course a disturbing flip side to this story – continued rapid uptake of CO2 by the ocean also gives rise to increasing levels of ocean acidification.

Why carbon pricing matters – the video

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David+2

FASTER carbon pricing mechanisms

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Last week New York hosted amongst other events, the Papal visit, the UN General Assembly where some 150 world leaders gathered and Climate Week. Arguably this had the makings of a bigger coming together than COP21 itself, although many other issues were also on the agenda, such as the UN Sustainable Development Goals. Nevertheless, the climate issue progressed and the subject of carbon pricing was widely discussed, both how it might be implemented by governments and how companies could use carbon valuation internally in relation to project implementation and risk management.

A highpoint of the Climate Week events was the release by the World Bank of its FASTER principles on implementation of carbon pricing mechanisms . This is work to support the overall push by that organisation for greater uptake of explicit carbon pricing mechanisms at national level as governments consider how they might implement their INDCs.

FASTER is an acronym, with each of the terms further elaborated in a fairly readable 50 page accompanying document. The short version is as follows;

  • F – Fairness
  • A – Alignment of Policies
  • S – Stability and Predictability
  • T – Transparency
  • E – Efficiency and Cost-Effectiveness
  • R – Reliability and Environmental Integrity

I have a slight feeling that the acronym was thought up before the words, but each of the subject areas covered is relevant to the design of a carbon pricing mechanism by governments, such as a cap-and-trade system.

Importantly, the principles recognise many of the key issues that early cap-and-trade and taxation systems have confronted, such as dealing with competitiveness concerns, managing competing policies and complementing the mechanism with sufficient technology push in key areas such as carbon capture and storage and renewables. The latter requires something of a Goldilocks approach in that too little can result in wasted resource allocation, but too much while also being wasteful can end up becoming a competing deployment policy.

In the various workshops held during Climate Week, one aspect of the FASTER principles that did draw comment was the call for a “predictable and rising carbon price”. Predictability should be more about the willingness of government to maintain the mechanism over the long term, rather than a clear sign as to what exactly that price might be. For the most part, commodity markets exist, trade and attract investment on the basis that they are there and that the commodity itself will continue to attract demand for decades to come. We are still some way from a reasonable level of certainty that carbon pricing policies will be in place over many decades, given that they do not enjoy cross-party support in all jurisdictions.

Particularly for the case of a cap-and-trade system, a rising carbon price cannot be guaranteed. Rather, the system requires long term certainty in the level of the cap, after which the market will determine the appropriate price at any given point in time. This might rise as the EU ETS saw in its early days, but equally the widespread deployment of alternative energy sources or carbon capture and storage could see such a system plateau at some price for a very long time. Even within this, capital cycles could lead to the same price volatility as is seen in most commodity markets.

The guarantee of a rising price may not be the case for a tax based system either. Should emissions fall faster than the government anticipates, there could be popular pressure for an easing of the tax. As carbon tax becomes mainstream, we shouldn’t imagine it would be treated any differently to regular income based or sales tax levels, both of which can fluctuate.

The release of the FASTER Principles coincides with my own book on carbon pricing mechanisms, which was launched just prior to Climate Week. I cover many of the same topics, but drawing more on the events that have transpired over the last decade. Both these publications will hopefully be of interest to individuals and businesses in China, the government of which formally announced the implementation of a cap-and-trade system from 2017. This will be an interesting implementation to watch, in that it may well be the first such system that operates on a rising cap, at least for the first few years. Irrespective, the announcement ensured that Climate Week ended on a high note.

Why carbon pricing matters

An underpinning theme of my blog postings over the years has been discussion around government policy frameworks that seek to attach a cost to CO2 emissions – or so called carbon pricing. I have argued for them, commented on their inner workings and highlighted successes and failures along the way. At the start of each year I have published an overview of global progress, which of course has always featured the EU ETS, but now incorporates systems and approaches from countries such Kazakhstan and South Africa.

The importance of placing a cost on anthropogenic emissions of carbon dioxide cannot be understated, yet it took a fairly heroic effort from the World Bank this time last year to even get the subject of carbon pricing onto the agenda of the UN Climate Summit in New York. Despite the efforts in many countries, this important policy instrument still doesn’t get the recognition or attention it deserves. Yet, as I have argued on many occasions, including my e-book published to coincide with the Summit last year, the climate issue probably doesn’t get resolved without it.

So on the anniversary of that Summit, with Climate Week in New York coming around again, I have a second book being launched, devoted entirely to the all-important subject of carbon pricing as a national and global policy instrument.

Why Carbon Pricing MattersWhy Carbon Pricing Matters” looks at how various national pricing mechanisms work, why some of them may not work at all, what is wrong with others and of course seeks to answer the very question it poses in its title; why this policy instrument matters so much. With COP21 in Paris approaching, I have also argued the case for recognition of this instrument at the global level as well; this isn’t just about national policy implementation.

Not surprisingly the EU ETS gets a chapter to itself; there is a great deal of history here and many lessons learned, but some still to be recognized. As an Australian I have also ventured into the murky waters of carbon pricing policy in that country, which changes constantly and always throws up surprises. With a new Prime Minister, another round of debate may well be on the cards; we shall see.

Finally, I have again challenged the business community to think long and hard about this policy instrument – there are so many reasons why it is the best course to follow. Policy to manage carbon dioxide emissions is inevitable, so the choices we make now may impact the economy and environment for generations to come.

The book is available exclusively on Amazon, either for Kindle or iPads, iPhones and other devices with the Kindle App. This year, the book is also available in hard copy, given the number of requests I had for such treatment over the last twelve months. For those that haven’t caught up with my first attempt, it is now also available in hardcopy.

Will the Clean Power Plan deliver effective emission reductions?

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August 3rd saw the Obama Administration release its long awaited Clean Power Plan. The plan partly underpins the current US COP21 INDC (Intended Nationally Determined Contribution) to reduce emissions by 26-28% by 2025 compared to 2005. It also indicates that by 2030 the power sector emissions in the USA will be 32% lower than 2005 levels, which presumably is the beginning of the next phase of their national contribution. However, this plan if for electricity only, consumption of which represents a bit less than a quarter of final energy use in the USA.

Much of the media attention was on the proposal for existing power plants, but the rule comes in two parts; one for existing sources and a second one for new sources. For existing facilities the emphasis is on the near term (i.e. through to 2030), with the rule focussed more on portfolio transition than radical adjustment. As has been seen in recent years, the US is already on a journey of portfolio change, with significant retirement of older coal fired power stations underway and much greater utilization of surplus natural gas power generation capacity. This has been largely driven by the development of shale gas, which came at an opportune time given the age of the coal fired fleet. Back in 2010 I posted the two charts below, which contrast the ageing coal fleet (median build year around 1970-1975) with the relatively new natural gas infrastructure (median build year around 2000). The whole process has quickly and efficiently reduced emissions across the United States – a phenomena also seen in the UK in the 1990s as North Sea natural gas overwhelmed the older coal based infrastructure.

US Coal Fleet

US coal generation capacity

US Natural Gas Fleet

US natural gas generation capacity

The US journey of substitution continues today, but augmented by considerable solar and wind capacity. The new rule for existing plants encourages that transition to continue, focussing on energy efficiency in coal fired power plants (Building Block 1), continued substitution of coal by natural gas (Building Block 2) and a further push on renewables (Building Block 3). But the rule puts significant near term emphasis on renewable energy development rather than further encouraging the further uptake of natural gas. In fact, through the use of a crediting mechanism (Emission Rate Credits) within the EPA rule, the efficient displacement of coal by natural gas is curtailed, possibly even leading to a similar outcome as experienced over recent years in the EU, a higher overall energy cost and some coal growth. This happened in the EU because of near term renewable energy policies bringing more distant and costly projects forward, which in turn supressed the carbon price and the otherwise successful switching away from coal to natural gas that the carbon price was driving at the time.

In any plan to manage power sector emissions, carbon capture and storage (CCS) is almost certainly a long term requirement, so it should be encouraged from the outset. In the case of the existing source rule, there is no particular steer towards CCS. Although CCS is mentioned about sixty times in the 1,500 page document, there is a significant caveat; cost. While the rule makes several references to the cost of CCS, this is much more in the context of retrofit of facilities that have limited remaining shelf life. Although CCS is critically important over the longer term, it doesn’t make much economic sense to retrofit old facilities with the technology and as can be seen above, the new build coal fleet is relatively small.

But CCS does come into the picture when looking at the construction of new coal fired power plants. These will operate for up to fifty years, well into the period when the USA may want to reduce national emissions to very low levels, yet still make use of the vast fossil fuel resources that is has at its disposal. The EPA rule finds that the best system for emission reduction (BSER) for new steam units is highly efficient supercritical pulverized coal (SCPC) technology with partial carbon capture and storage (CCS). In such cases, the final standard is an emission limit of 1,400 lb CO2/MWh‐gross, which is the performance achievable by an SCPC unit capturing about 20 percent of its carbon pollution. This offers some opportunity for CCS to develop in the near term, depending of course on the rate at which older coal fired power stations are displaced and new ones are proposed. That in turn may be hampered by the Emission Rate Credit mechanism. A flaw in the thinking on ERCs (and also for much of the push towards renewable energy as a means of dealing with atmospheric CO2) is the assumption that a tonne of CO2 not emitted now by generating electricity from renewable energy or improving efficiency equates to a lower eventual concentration of CO2 in the atmosphere.  This may not be the case, a point I discuss at some length in my e-book, Putting the Genie Back. Given that both geographical (used elsewhere) and temporal (used later) displacement of fossil fuel is a reality, the actual offset of CO2 by using renewable energy is dependent on the future energy scenario. By contrast, a tonne of CO2 stored is over and done with. Renewable energy should certainly be encouraged, but not at the cost of pushing CCS out of the picture.

The USA is now heading towards an electricity mix that consists of efficient natural gas generation, some legacy coal, renewables, some nuclear and possibly coal with CCS. It has taken a long time to get to this position and doubtless there will be challenges ahead, but the direction appears to be set. However, I will always argue that a well implemented emissions trading system could have achieved all this more efficiently, at lower cost and therefore with less pain, but at least for now that is not to be (or is it – there are a legion of trading provisions within the rule).

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.