Can Emissions Trading Deliver?

From Whitehall to the Whitehouse (http://www.whitehouse.gov/agenda/energy_and_environment) energy is on the agenda. With the recent high cost of energy still on policy makers minds, difficulties with Russian gas, the constant flow of environmental signals reminding us of a changing climate and economies desperately looking for ways to stimulate activity and create jobs, the idea of an “energy revolution” seems appealing.

The Whitehouse web site calls for the implementation of an economy wide “cap-and-trade” programme to reduce greenhouse gases by 80% by 2050. But is this really sufficient to do the job? An 80% reduction in emissions requires nothing less than an energy revolution, but can such a revolution really be delivered by an emissions trading system?

There is no question that emissions trading will be an important part of the necessary policy approach, but on its own it is far from the comprehensive framework that is needed. Such a framework comes from a look at not just what is wanted, but also a consideration of how it might be done.

The World Business Council for Sustainable Development publication Pathways to 2050 (www.wbcsd.org/web/publications/pathways.pdf) showed that “mega-trend” scale changes will be required in four key sectors of the energy economy – power generation, industry & manufacturing, transport and buildings & commerce. Each of these will need specific and different policy approaches to enable the necessary changes.

Technology will also be key to the changes required. Certain existing technologies must be rapidly deployed and a range of new technologies will need to be brought to market. A typical technology pathway model consists of three phases, Discover & Develop, Demonstrate and Deploy and each are needed to allow the technology to progress down the cost curve. Policy development often fails to consider the “demonstrate” phase, which sees the first commercial scale implementation of a particular technology and may require the construction of supporting infrastructure. Early infrastructure construction facilitates the shift to full deployment.

To fully enable the necessary changes to take place, policy must focus across all the sectors and along the full technology path. Within this framework, “cap-and-trade” is the instrument of choice for the deployment of technology (leading to emissions reduction) in the power generation and industry & manufacturing sectors. But that is just a small portion of the full framework. Deployment mechanisms must still be implemented in the transport and buildings sectors, demonstration support for a variety of technologies will be needed in all sectors and a comprehensive research and development programme is required across the whole economy.

In the European Union, progress has been made in completing the framework. The recent passage through the EU Parliament of the Energy and Climate policy package included a significant support measure for the EU carbon capture and storage demonstration programme. At a CO2 price of EUR 30, nearly EUR 10 billion will be available for commercial scale demonstration of this important technology.

In the US, the journey towards a new energy policy package is only just beginning. Whilst “cap-and-trade” will rightly feature as a cornerstone of the overall approach and will likely be the most visible and talked about aspect of what is to come, policy makers will also need to look beyond this single instrument to deliver the desired revolution.