Archive for the ‘South Africa’ Category

Carbon pricing and COP21

As we get closer to COP21 there will be plenty of articles and opinion pieces put forward describing the process, speculating on the outcome and generally trying to help readers understand what exactly is going on. One such piece appeared in the Financial Times recently, written by Pilita Clark. It’s a good summary and has some thoughtful insights but requires some clarification around what the six oil and gas industry CEOs actually argued for in their letter to the UNFCCC.

Pilita Clark rightly points out that a Paris accord, if reached, will be based on many widely differing national contributions, rather than a single agreed policy such as a global carbon price. But the article further qualifies this conclusion with reference back to the letter that the CEOs of Shell, BP, ENI, BG, Statoil and Total wrote to the Executive Secretary of the UNFCCC and the French Presidency, with the following remark;

“. . . the European oil and gas companies that have called for a global carbon pricing framework ahead of the Paris meeting have done so safe in the knowledge this would never emerge from the talks.”

In fact the letter didn’t call for a global carbon price or pricing framework for the very same reason that Pilita Clark gave; this isn’t on the agenda and would never be agreed by the negotiators assembled in Paris.

Rather, the main agenda item for Paris is the negotiation of a framework within which the Intended Nationally Determined Contributions (INDC) will sit. This will probably include provisions for measurement, reporting, verification, peer review and financial assistance for implementation.   An important tool for nations to meet their mitigation goals will be through  carbon pricing mechanisms, which are referenced in a few Parties’ INDCs but not often enough.   The framework agreed in Paris could also include another important provision; the notion of cooperative implementation through the transfer of the obligation under the INDC to another party. This would allow emission reductions to be made at lowest cost globally, which in turn could assist the process of review and agreement on greater ambition.

The International Emissions Trading Association (IETA) have been advocating for such a provision for over a year, with a proposal that would require such transfers to be reconciled in terms of carbon units of some description. The transfer of units would lead to price discovery and therefore the emergence of a carbon market at international level. IETA proposed the following short text insertion within the expected Paris agreement:

Cooperation between Parties in realizing their Contributions

Parties may voluntarily cooperate in achieving their mitigation contributions.

  • A unified international transfer system is hereby established.
  • A Party though private and/or public entities may transfer portions of its nationally determined contribution to one or more other Parties through carbon units of its choice.
  • Transfers and receipts of units shall be recorded in equivalent carbon reduction terms.

IETA have also proposed alternative formulations of the same idea as various Parties (national governments) have put forward their own versions of the concept. Like almost every piece of language proposed so far, this has been incorporated to some extent in the 55 pages of text about to be negotiated, along with its multitude of bracketed options and alternative language possibilities. What survives remains to be seen?

In their letter, the CEOs alluded to this idea, when they called for the following;

Therefore, we call on governments, including at the UNFCCC negotiations in Paris and beyond – to: 

  • introduce carbon pricing systems where they do not yet exist at the national or regional levels
  • create an international framework that could eventually connect national systems. 

National carbon pricing systems make complete sense, such as the ETS in Europe and the proposed carbon tax in South Africa. The framework that could connect them would allow for the speedy and transparent transfer of a national obligation across a border through emissions trading, which is exactly what happens today between Norway and the EU, between countries within the EU and arguably even between the USA and Canada through the California – Quebec ETS linkage. But this needs to be a much more widespread activity in order to quickly leverage the full potential for emission reduction that exists at any point in time.

This isn’t an empty call for a global carbon price, but a reinforcement of the call that IETA has been making for some time and a plea to the UNFCCC, the French Presidency of the COP and the respective Parties to see such a measure included in the Paris agreement. It’s a simple practical step that is needed to catalyse the development of a global carbon market.

As delegates start negotiations in Durban, the major issues of the Kyoto Protocol and a “Roadmap to 2020” are dominating the news wires. The big picture story is very important, but in the meantime nations need to use this meeting to make real progress in a number of smaller but important areas. Despite the rhetoric, an alternative global framework is slowly emerging from the process, albeit one that won’t immediately deliver the sharp reductions that we know are needed, but nevertheless one that has the prospect of engaging the business community and catalyzing significant project activity in many countries. In particular, the developing country emission reduction pledges which emerged from Copenhagen and Cancun in response to the agreed 2°C global ambition are being progressively distilled into a series of Nationally Appropriate Mitigation Actions (NAMAs), or bottom-up national/sector policies and commitments.

There still remain very substantial gaps to fill. Recently, through its Vision 2050 project, the World Business Council for Sustainable Development (WBCSD) called again for the development of “a carbon price and a network of linked emissions trading frameworks . . . “ in combination with technology development policies as the principal systematic and lowest cost approaches to reducing emissions. Although such a comprehensive approach remains distant, the issues of technology and financing are being dealt with to some extent through the development of the UNFCCC Technology Mechanism and the Green Climate Fund. These mechanisms, in combination with the development of NAMA programmes in key countries can make a real difference, but a number of essential steps should be taken in Durban to fully activate this process;

  1.  Full business involvement is critical to getting the large scale investment needed. As business we need to better understand and even contribute to the development of proposals through an open consultation process and stakeholder meetings. Then, as countries begin defining and implementing NAMAs, partnerships with business should be established through which proposals can be developed and therefore attract the necessary investment.
  2. The Green Climate Fund needs to begin operating, with a particular focus on large scale emission reduction opportunities in power generation and transport in emerging economies. It’s also important that the fund is available to a broad range of emission reduction technologies.
  3. Delegates must recognize the long term importance of a carbon market and therefore ensure that the Clean Development Mechanism (CDM), the one existing mechanism able to project a carbon price into the entire developing world, has a clear way forward independent of a global agreement on targets. The opportunity to confirm the acceptability of Carbon Capture and Storage projects under this mechanism should not be lost.
  4. Finally, the COP should seek to establish a means by which the Technology Mechanism can support and fund the creation of local and regional technology platforms tied to NAMA delivery.

These are modest steps, somewhat esoteric in nature for the layman, but essential for real progress. We recognize that the meeting in Durban can only deliver so much, but the above is not outside the grasp of a single meeting.  A recent Shell document that I have worked on gives more detail on what is needed from Durban.

To download the document, click here -> Structural Approaches (Durban).

A carbon price for Australia – finally!

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

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

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

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

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

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

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

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

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

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

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

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

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

A focus on South Africa

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With COP 17 being held in Durban this year, there will be quite some attention paid to how South Africa responds to its own 2020 national pledge. This was articulated in a letter to the UNFCCC from the Department of Environmental Affairs on 29th January 2010 as follows;

 South Africa will take nationally appropriate mitigation action to enable a 34% deviation below “Business As Usual” emissions growth trajectory by 2020 and a 42% deviation below “Business As Usual” emissions growth trajectory by 2025. In accordance with Article 4.7 of the Convention, the extent to which this action will be implemented depends on the provision of financial resources, the transfer of technology and capacity building support by developed countries.

More recently, this goal was further described in the National Climate Change Response Green Paper, as follows;

 The prioritization of mitigation interventions that significantly contribute to a peak, plateau and decline emission trajectory where greenhouse gas emissions peak in 2020 to 2025 at 34% and 42% respectively below a business as usual baseline, plateau to 2035 and begin declining in absolute terms from 2036 onwards, in particular, interventions within the energy, transport and industrial sectors.

The second piece of text gives some insight into the South African view of “business as usual” which is otherwise missing from the Green Paper. According to the IEA, energy emissions in South Africa were 431 million tonnes in 2008, which represents a growth of about 2.5% p.a. from 1990 or 3% p.a. from 1971. Continuing at 2.5% p.a. until 2020 gives energy emissions of 580 million tonnes. A 34% reduction below this gives a 2020 target of 383 million tonnes, well below a peak. 3% growth from 2008 with a 34% reduction still represents an absolute fall in emissions, with emissions growth needing to be over 3.5% p.a. before a 34% reduction represents a plateau at current levels. Such a growth rate does not appear to be consistent with historical trends, although with strong commodity prices in operation globally driving a mining boom and SASOL expanding its coal-to-liquids operation there may be some step changes in the pipeline.

If we assume that the absolute emissions goal for South Africa for 2020 is equivalent to current levels, the scale of the challenge facing that economy becomes clear. The South African energy mix is nearly 85% coal, with the balance being crude oil derived products (vs. coal / gas derived oil products) for transport. There is currently no natural gas of consequence in the energy mix, with minimal local production, no LNG terminals and one import pipeline from Mozambique which directs gas to SASOL a gas-to-liquids plant. With growth almost certain in transport but no effective biofuel industry and residential emissions (from coal) growing at twice the rate of other sectors, reductions will have to come from the power generation sector or the SASOL coal to liquid plants.

Although there is an active renewable energy industry and 5% of electricity is delivered by two nuclear power plants, expansion in these areas will not create reductions until less coal is consumed for electricty production. Gas may also figure in the mix one day, but as noted that is not there today. That means efficiency gains in the power stations are the only immediate option as plant shutdowns seem unlikely given the tight electricity supply-demand situation in the economy.

If efficiency cannot be substantially improved that leaves the SASOL plants. Two major coal-to-liquids plants and a smaller gas-to-liquids plant emit some 60 million tonnes CO2 per annum, much of it as a nearly pure stream as a result of the chemistry of the conversion of coal to syngas followed by a Fischer-Tropsch reaction. Only one solution exists here, carbon capture and storage. A major project would not only demonstrate the immense potential of CCS and the scale to which single projects must aspire, but could balance the books in terms of the national target as renewable energy projects and energy efficiency measures limit the emissions growth in other sectors.

But such a project will require considerable financing and a carbon price. Although COP 16 in Cancun saw a major step  forward in terms of CCS eligibility within the Clean Development Mechanism, the state of the global offset market does not lead to the view that it could offer much support to a 10-20 million tonne per annum sequestration project starting up around 2020. Both the mechanism itself is struggling and the demand for credits is weak with only modest buying through the EU-ETS.

South Africa’s ambitions deserve praise, but the question now will be the ability of developed countries to help them deliver or do we all just wait for the government to call on its reduction caveat, i.e. “the extent to which this action will be implemented depends on the provision of financial resources, the transfer of technology and capacity building support by developed countries”.