China has set the goal of being carbon neutral by 2060. What might the transition look like and what has to happen in the 2020s to get started?
Category: China
Carbon pricing policy in 2018. Was it a year of progress??
Carbon pricing remains at the centre of most government policy discussions on climate change, but in a year which saw the Intergovernmental Panel on Climate Change (IPCC) give an unambiguous warning on the need for mitigation action, carbon pricing policy development rather stumbled along.
Undoubtedly the highlight of the year was the restoration of the EU Emissions Trading System (ETS) to again become a meaningful mechanism, with prices rising to over €20 as EU growth gained momentum and allowance supply tightening. The recognition that the Market Stability Reserve would be a feature of Phase IV in the 2020s certainly contributed to this. Also in the EU, discussions opened around the need for an EU ETS floor price, following the successful example set by the UK which has seen coal almost vanish from the generation mix since their implementation of such a system.
Singapore also moved forward with the implementation of its carbon tax.
But outside the EU and Singapore it was hard to find any stellar examples of progress, although intent remains high in many jurisdictions. Rather, 2018 was a year troubled by a number of developments in the carbon pricing space;
- In Canada, a new government was elected in the province of Ontario and true to their election manifesto the new Premier took rapid action to remove Ontario from the cap-and-trade system it had only recently joined with California and Quebec.
- Also in Canada, the Federal government moved ahead with its backstop pricing mechanism which will kick in for individual provinces if they do not implement a price through some mechanism of their choice. While this was a positive development, the prospect of litigation from some provinces (either by the current provincial government or by an opposition in waiting) means that this program may have a bumpy ride in the years to come.
- In Brazil there has been discussion for some time now on implementation of a carbon pricing policy, but this is unlikely to continue under the new administration.
- In Australia, even the possibility of a carbon based policy being implemented seemed to create political turmoil. Nevertheless, Australia is not devoid of a mechanism in that the Safeguard Mechanism put in place with the Emissions Reduction Fund has created a secondary market for Australian reduction units on the back of some industrial facilities exceeding their safeguard cap.
- In France, protests erupted late in the year on the back of a carbon tax implemented in the fuels market, although many other factors also lay behind the demonstrations. The government was forced to delay implementation.
- Finally, the year ended with failure at COP24 to agree on the rule-book for Article 6 of the Paris Agreement. While the Article 6 mechanisms are not there to directly implement carbon pricing, their use would certainly help catalyze such developments in many economies.
In between the highs and lows of 2018, there was still progress. China announced further details of its upcoming cap-and-trade system and continues to make progress in implementing their plans and Kazakhstan is now looking to reboot their early system. The very long running discussion on a carbon tax continued in South Africa with the prospect of a system emerging in 2019, although the parliamentary process has yet to conclude.
But this is not the required profile of action for a world that is intent on reaching the goals of the Paris Agreement. That profile was illustrated by the May release of the Shell Sky Scenario which highlighted the extraordinary rate of progress required in this policy area in the 2020s. Whereas in 2020 Sky shows only modest uptake of carbon pricing, reflective of the situation today, by 2030 some form of carbon pricing is covering the bulk of the global economy at a level between $25 and $60 per tonne of carbon dioxide.
Sky Scenario carbon pricing profile (Source: Shell analysis)
Developments in this space need to pick up pace dramatically in 2019, but perhaps the transparency and reporting framework agreed at COP24 will help in that regard. While the Paris rulebook makes no specific demands on governments to implement policy, it will put a spotlight on the actions they choose to take and the mitigation they seek to achieve. Carbon pricing policy ought to see some uptick under such circumstances.
Overview of carbon pricing developments (Source: own analysis)
Note: Scenarios are not intended to be predictions of likely future events or outcomes and investors should not rely on them when making an investment decision with regard to Royal Dutch Shell plc securities. Please read the full cautionary note in http://www.shell.com/skyscenario.
Carbon market developments in 2017
Looking back at my 2017 post on developments in 2016, it becomes clear that the past twelve months have been more consolidation than progress in terms of carbon market development. It also means that the coloured map (below) hasn’t really changed, apart from a slight set-back and the very positive addition of Singapore.
A big story that emerged in 2016 was the prospect of a nationwide emissions trading system in China. Observers waited throughout 2017 for the formal commencement or at least an announcement, but news didn’t come until mid-December of an imminent launch. Rather than an economy wide cap-and-trade system, the government announced that an emissions rate based system would commence in the electricity sector. Harvard’s Rob Stavins has written extensively about it in a recent blog post.
The Chinese carbon market will double the share of global CO2 emissions covered by worldwide carbon-pricing systems to almost 25 percent.
China wasn’t the only country in the news. Also within the Asian economy, Singapore announced the start of a carbon tax based system from 2019, with a draft Bill appearing for consultation during 2017. The tax will be applied on power stations and other large direct emitters which produce more than 25,000 tonnes of carbon dioxide equivalent of greenhouse gases a year. There are currently 30 to 40 of such large emitters, mainly from the petroleum refining, chemicals and semiconductor sectors. The proposed tax will be around S$10-$20 per tonne CO2.
In North America, progress was mixed. The focus continued to be on Canada with the September announcement that Ontario had entered into an agreement to formally link its carbon market with markets in Quebec and California effective January 1, 2018. The Agreement will allow the governments of Ontario, Quebec and California (the Parties) to hold joint auction of greenhouse gas emission allowances and to harmonize regulations and reporting requirements. An important addition to this was the passage of a Bill in California to extend that State’s cap-and-trade system through to 2030. But with the announcement that the US would be leaving the Paris Agreement and that the Administration would be rolling back the Obama Clean Power Plan, progress in the rest of the country was muted.
In Central Asia, the Kazakhstan emissions trading system remained suspended (hence the change from green to orange), but following an announcement by the government, this should revert to operational status in 2018.
South Africa also moved forward slightly, with a further consultation announced on its draft carbon tax legislation.
Here in the EU, the ETS continued, but 2018 saw much needed reforms agreed. The main elements of the agreement are:
- The linear reduction factor will be 2.2 % from 2021;
- Each year from 2019 to 2023, 24 % of the cumulative surplus of allowances will go to the Market Stability Reserve; from 2023 the allowances held in the reserve above the total number of allowances auctioned during the previous year should be cancelled;
- Conditional lowering of the auction share by 3 % of the total quantity if needed, to avoid application of the cross-sectoral correction factor;
- Member States may voluntarily cancel allowances to offset national climate and energy policies that reduce the demand.
The EU ETS expanded slightly with the agreement of a link with the Swiss ETS, although it may be some time before this comes into practice. The ratification of the agreement will require the approval of the Council and Parliament, which is expected in early 2018. When parties are technically ready to connect the two systems, they will formally deposit their instruments of ratification. The agreement will enter into force at the start of the following year.
As the year concluded and nations met in Bonn for COP23, it was also clear that carbon pricing, both through taxation or a trading system was being widely considered. This offers considerable hope for the years to come.
Drivers behind flattening CO2 emissions
The International Energy Agency (IEA) recently reported that carbon dioxide emissions from energy use remained flat in 2016, the third year in a row. This is a noticeable departure from the 21st century trend which has seen global carbon dioxide emissions rise by some 40% in just 14 years. The Guardian reported this story and added the by-line “International Energy Agency report puts halt in emissions from energy down to growth in renewable power”. But the story within the energy system has more facets than this (Data sourced from the BP Statistical Review of World Energy).
Although global growth hasn’t been outstanding in recent years, it has nevertheless chugged along at around 2.5-3%. Energy use has also increased, albeit at a lower rate of some 1% per annum. This is at the lower end of the expected range of energy vs. GDP, but it is probably too early to say that this represents a longer term shift in this relationship. However, this could be the case if efficiency improvements can outpace economic development or at least come close.
Renewable energy is growing rapidly, although this is mainly in the area of electricity generation. From 2014 to 2015 solar and wind generation increased globally by about 200 TWh, which was nearly equal to the overall growth in electricity generation for that year. As an aside, BP reported that the overall electricity growth rate in 2015 was down on 2014 (2.4%) and remained well below the 10-year trend (2.8%). This is slightly concerning as electrification of the energy system is a key requirement for long term emissions reduction. Electricity generation needs to be accelerating compared to overall energy demand growth.
Although the 2016 data isn’t available yet, BP reported that coal use declined globally in 2015 vs. 2014 by 1.8% and natural gas use increased. While most of this could be attributed to the USA and Canada, China also saw a notable coal decline along with growth in natural gas use. The global coal use reduction is equivalent to nearly 300 million tonnes CO2, or about 0.8% of global emissions. Any replacement with natural gas would result in about half the emissions. This is very noticeable in the USA where coal use fell in 2015 by 13%, natural gas use grew by 3% (but against a larger absolute use), oil demand increased by 3%, but emissions declined by 2.6%.
Coal use is declining for a number of reasons;
- The surge in natural gas production in the USA in particular, triggering the closure of older coal fired power stations that cannot meet new environmental regulations.
- Air quality concerns in China, leading to a shutdown of coal fired industry and power generation around the major cities.
- Some mothballing or closure of overcapacity in metallurgical industries in China.
- The impact of a modest carbon price in a number of jurisdictions and some government imposed moratoriums on new coal generation construction (e.g. Canada).
However, coal use continues to increase sharply in a number of developing countries such as Vietnam, the Philippines, Malaysia, India, Colombia and Indonesia. Current expectations are that this will continue.
Oil use continues to increase, with BP reporting a global rise from 2014 to 2015 of 2%.
The final story is therefore one of several parts and it would appear that this trend has continued into 2016 although further data will be required for verification;
- Global growth is modest, but energy use increases are trending at the lower part of the expected rise for this level of economic growth.
- Coal use is declining, with natural gas filling much of the gap but at lower emissions.
- Renewables are growing quickly, covering most of the increase in electricity generation, but not quite all.
- Oil demand continues to increase, with its growing emissions being offset by the reduction in coal use.
The end result is that flattening in global emissions that has been seen for three years now.
Paris ratification maths
The joint announcement by the US and China that they would ratify the Paris Agreement and the more recent announcement by Brazil has raised the prospect that the agreement could enter into force sooner rather than later. Could it even happen prior to COP22 in Morocco or at least by the end of 2016? Certainly the G20 gave entry into force a boost when they included this in their Communique earlier this month.
We reiterate our commitment to sustainable development and strong and effective support and actions to address climate change. We commit to complete our respective domestic procedures in order to join the Paris Agreement as soon as our national procedures allow. We welcome those G20 members who joined the Agreement and efforts to enable the Paris Agreement to enter into force by the end of 2016 and look forward to its timely implementation with all its aspects.
Paragraph 1 of Article 21 of the Agreement specifies the requirements for entry into force as follows;
This Agreement shall enter into force on the thirtieth day after the date on which at least 55 Parties to the Convention accounting in total for at least an estimated 55 percent of the total global greenhouse gas emissions have deposited their instruments of ratification, acceptance, approval or accession.
The UNFCCC is running a tracker page and the exact status by country can be found on the UN Treaties site.
The combined emissions of China and the United States account for most of the 39% shown in the tracker picture above (mid-September). But of course they are only two parties, whereas 27 have ratified so far. Many of these are small island states, such as Barbados and the Cook Islands, some of which may be challenged in the near term by rising sea levels. So what might be a potential pathway to 55 / 55?
In terms of the number of parties, the Alliance of Small Island States (AOSIS) which consists of 44 members can get us most of the way there. With AOSIS and the 12 other non-AOSIS parties that had ratified by mid-September, the 55 Party threshold is surpassed. So it would appear that entry into force on this basis is achievable as other countries will doubtless come forward as well.
But 55% of global emissions may be a bit more difficult. The 40 AOSIS countries are all low emissions, so even their combined impact will be below 1% of global emissions. Starting with the USA, China and Brazil, the bar moves above 40% and with AOSIS, Norway, Peru and others who had ratified by mid-September it will approach 42%.
The 55 country and 55% line could easily be crossed with ratification by the other major emitter, the EU, but the parliamentary process in Brussels would normally push this into 2017. However, the political push behind the Paris Agreement can hardly be described as normal. At an EU leader summit last week, there was a strong indication given that EU ratification could happen in as little as three weeks.
If the EU fast track doesn’t happen, 13% of global emissions have to come from somewhere else. Some combinations of major emitters that could deliver this are as follows;
- Australia, Japan, South Korea, South Africa, Thailand, Vietnam and Venezuela gets to about 10%.
- Russia and India are at least 5% each.
- Canada, Australia, Japan, Ukraine, Mexico, Saudi Arabia, Kazakhstan also combine to about 10%
- Taiwan, Turkey, Algeria, Argentina, Egypt, Pakistan, Nigeria, Malaysia, Kuwait, Iran and Indonesia combines to about 10%.
Russia and India are clearly important, as was Russia with the Kyoto Protocol. But their early ratification isn’t essential. The other lists above clearly show that there are sufficient 0.6-3% countries to get this over the line. The first list, combined with Iran and Indonesia is but one example.
Given progress to date, a concerted push by AOSIS and perhaps the likes of the Umbrella Group (a UNFCCC collection of countries including USA, Australia, Japan and Canada amongst others), entry into force of the Paris Agreement is quite feasible in the nearer term. With the EU on board it is almost certain.
It’s all about the transition
The ambition embodied within the Paris Agreement argues for the need to reach a state of net zero anthropogenic emissions around the middle of the century, although the text of the Agreement is less stringent and points to the second half of the century for a balance between sinks and sources. Either way, this presents a formidable challenge.
Looking at a modern developed economy today, it is possible to imagine a state of much lower emissions, or even net-zero. The technologies to have a zero emission power sector are readily available and have been for some time; look at the level that nuclear power reached in France as early as the 1980s. Today we also have carbon capture and storage and scalable renewable energy. Vehicle electrification is now coming of age and it is not difficult to imagine a future where this dominates, with heavy transport potentially using hydrogen. Homes can also be electrified and the service sector / secondary industry economy that drives the developed world today is primarily electricity based.
But the manufacture of goods still represents a large part of the global economy. Material goods represent one facet of our economy and certainly one that is critically important in the early stages of development of most economies. For example, between 2004 and 2014 some 350 million refrigerators were produced and went into use in China with a further 250 million exported. Production in 2000 was just 12 million units. China is now the world’s 6th largest exporter (2014 by value) of refrigerators, but this is just one sixth of US refrigerator exports.
The same is true when it comes to the refining and fabrication of the raw materials that developed and developing country secondary industry requires. These products all demand considerable use of fossil fuels for combustion based processes such as smelting, refining, base chemical manufacture and similar. Nevertheless, we could perhaps imagine a world based on 3D printing using various exotic materials (graphene, certain polymers etc.) as the raw material for manufacture. But even in this world considerable chemical plant capacity and therefore process heat would be required to manufacture the printer feedstock, but carbon capture and storage could handle emissions from these sources.
China grew rapidly on the back of large scale manufacturing and at the same time it built vast swathes of infrastructure; from cities such as Shanghai and Chongqing to the high speed rail networks that now connect them. Between 1995 and 2015 cumulative emissions from China amounted to some 130 billion tonnes of carbon dioxide, or 100 tonnes per person. For the most part, this wasn’t for personal domestic use (i.e. home electricity and heating), but to make products for consumers in China and for export which in turn finances domestic infrastructure for the future. The process is far from complete, but China is already starting to look to other economies to make its raw materials and supply finished products as it attempts to develop its service sector.
The situation for the least developed economies is not dissimilar to China 30 years ago. Some 3 billion or more people live in circumstances where little or only modest levels of infrastructure exists. While they may now have basic renewable energy for lighting and some other services, their standard of living remains far below other parts of the world. The development pathway in front of them may well be similar to the one that China embarked on in the 1980s. That pathway might even be funded by products made for the Chinese economy as its service sector grows and energy use reaches a plateau or even falls slightly.
The 100 tonnes per person of development emissions is perhaps the hardest to decarbonise. It is from steel mills, cement plants, chemical plants, manufacturing industry and heavy goods transport. These are the backbone industries and services for development, many of which have long gone from developed economies. They may also be quite expensive to decarbonise, which is problematic for economies in the earlier stages of rapid development. This development also leads to a degree of lock-in as once industries are created and jobs are in place there is a strong desire to keep them; the recent concern as the last major UK steel plant shed more jobs is an example. The same industries are also needed to continue making a wide range of products, from cars to iPhones, for consumers in the rest of the world.
One particular challenge for post-Paris implementation of the Agreement is this 100 tonnes per person of development emissions and the lock-in that follows. While the net-zero goal looks feasible and can be imagined as a longer term outcome, the interim emissions bulge as development continues and the supporting industries required for infrastructure are put in place may take us well beyond 2°C rather than the goal of well below. Further to this, the energy demand that will be created just to fuel the energy transition itself could be significant as hundreds of lithium mines open, solar PV factories expand and new vehicle technologies are offered to the public.
Article 6 within the Paris Agreement makes mention of a Sustainable Development Mechanism that results in emissions reductions. Such a mechanism could be an important part of the solution set for this problem. More on that to follow.
Carbon pricing in 2015
Perhaps more than any other aspect of the climate agenda, carbon pricing took a major step forward in 2015. This was supported by many initiatives, but most notably by the creation of the Carbon Pricing Leadership Coalition under the auspices of the World Bank. This in turn encouraged a variety of private sector interventions, such as the mid-year letter on carbon pricing from six oil and gas industry CEOs to the UNFCCC. All these actions urged governments to implement carbon pricing policies within their economies as the principle mechanism for advancing climate change action.
In terms of real policy developments, the January 2016 map (below) doesn’t look radically different to the January 2015 map, but a number of important changes took place;
- China confirmed the implementation of a nationwide ETS, with a proposal that would see such a system up and running over the coming 2-3 years.
- The fledging California-Quebec linked market is likely to see both Ontario and Manitoba join on the Canadian side.
- Alberta announced its intention to implement a comprehensive carbon tax from 2017.
- The US Clean Power Plan has elements within it that could (but not a given) lead to widespread adoption of a trading model, which in turn implies a carbon price developing in the US power sector.
- India again doubled its coal tax in the middle of the year, now at 200 Rupees per tonne of coal. While not a strict carbon price, it will have a similar impact. However, the level is very modest (<$2 per tonne CO2), even compared to the current low price of coal (~$40 per tonne).
- The aviation industry is moving closer to a voluntary carbon pricing system.
- South Africa moved forward with its carbon pricing legislation.
- The EU introduced the Market Stability Reserve as a mechanism to begin to manage the allowance surplus in the EU ETS.
The year ended with what may become the most important element of all, Article 6 of the Paris Agreement. While this doesn’t mention carbon pricing at all, it nevertheless provides fertile ground for its development through international trade of allowances and various other carbon related instruments. It also seeks to create a new global mechanism to underpin emissions reductions and promote sustainable development.
2016 will need to build rapidly on these developments if a government implemented carbon price based approach is to become the global model for reducing emissions. The ambitious goal of the Paris Agreement will need much wider and faster uptake of carbon pricing policy than is apparent from the charts below.
After the INDCs, is 2°C possible?
The last few weeks have seen a flood of Intended Nationally Determined Contributions (INDC) arrive at the UNFCCC offices in Bonn, presumably to be included in the assessment of progress promised by the UNFCCC Secretariat for release well before the Paris COP21.
There are now some 150 submissions and assessing them in aggregate requires some thinking about methodology. For starters, the temperature rise we will eventually see is driven by cumulative emissions over time (with a climate sensitivity of about 2°C per trillion tonnes of carbon – or 3.7 trillion tonnes CO2), not emissions in the period from 2020 to 2025 or 2030 which is the point at which most of the INDCs end. In fact, 2025 or 2030 represent more of a starting point than an end point for many countries. Nevertheless, in reading the INDCs, the proposals put forward by many countries give some clues as to where they might be going.
For Europe, the USA and many developed economies, the decline in emissions is already underway or at least getting started, with most having already said that by mid-century reductions of 70-80% vs. the early part of the century should be possible. But many emerging economies are also giving signs as to their long term intentions. For example, the South Africa INDC proposes a Peak-Plateau-Decline strategy, which sees a peak around 2020-2025, plateau for a decade and then a decline. Similarly, China has clearly signalled a peak in emissions around 2030, although with development at a very different stage in India, such a peak date has yet to be transmitted by that government.
Nevertheless, with some bold and perhaps optimistic assumptions, it is possible to assess the cumulative efforts and see where we might be by the end of the century or into the early part of next century. In doing this I used the following methodology;
- Use an 80/20 approach, i.e. assess the INDCs of the top 15-20 emitters and make an assumption about the rest of the world. My list includes USA, China, India, Europe, Brazil, Indonesia, South Africa, Canada, Mexico, Russia, Japan, Australia, Korea, Thailand, Taiwan, Iran and Saudi Arabia. In current terms, this represents 85% of global energy system CO2 emissions.
- For the rest of the world (ROW), assume that emissions double by 2040 and plateau, before declining slowly throughout the second half of the century.
- For most countries, assume that emissions are near zero by 2100, with global energy emissions nearing 5 billion tonnes. The majority of this is in ROW, but with India and China still at about 1 billion tonnes per annum each, effectively residual coal use.
- Cement use rises to about 5 billion tonnes per annum by mid-century, with abatement via CCS not happening until the second half of the century. One tonne of cement produces about half a tonne of process CO2 from the calcination of fossil limestone.
- Land use CO2 emissions have been assessed by many organisations, but I have used numbers from Oxford University’s trillionthtonne.org spreadsheet, which currently puts it at some 1.4 billion tonnes per annum of carbon (i.e. ~5 billion tonnes CO2). Given the INDC of Brazil and its optimism in managing deforestation, I have assumed that this declines throughout the century, but still remains marginally net positive in 2100.
- I have not included short lived climate forcers such as methane. These contribute more to the rate of temperature rise than the eventual outcome, provided of course that by the time we get to the end of the century they have been successfully managed.
- Cumulative emissions currently stand at 600 billion tonnes carbon according to trillionthtonne.org.
The end result of all of this are the charts below, the first being global CO2 emissions on an annual basis and the one below that being cumulative emissions over time. The all important cumulative emissions top out just below 1.4 trillion tonnes carbon.
The trillionth tonne point, or the equivalent of 2°C, is passed around 2050, some 11 years later than the current end-2038 date indicated on the Oxford University website. My end point is the equivalent of about 2.8°C, well below 4+°C, but not where it needs to be. The curve has to flatten much faster than current INDCs will deliver, yet as emissions accumulate, the time to do so is ticking away.
Even with a five year review period built into the Paris agreement, can the outcome in 2030 or 2035 really be significantly different to this outlook? Will countries that have set out their stall through to 2030 actually change this part way through or even before they have started along said pathway? One indication that they might comes from China, where a number of institutions believe that national emissions could peak well before 2030. However, the problem with accumulation is that history is your enemy as much as the future might be. Even as emissions are sharply reduced, the legacy remains.
Nevertheless, we shouldn’t feel hopeless about such an outcome. Last week I was at the 38th Forum of the MIT Joint Program on the Policy and Science of Global Change and I was reminded again during one of the presentations of their Level 1 to Level 4 mitigation outcomes which I wrote about in my first book, 2°C Will Be Harder than we Think. These are shown below.
Taking no mitigation action at all results in a potential temperature distribution with a tail that stretches out past 7°C, albeit with a low probability. However, we can’t entertain even a low probability of such an outcome, so some level of mitigation must take place. While Level 1 remains the goal (note however that the MIT 2°C is not above pre-industrial, but relative to 1981-2000), MIT have shown that lesser outcomes remove the long tail and contain the climate issue to some extent. The INDC analysis I have presented is similar to Level 2 mitigation, which means the Paris process could deliver a very substantial reduction in global risk even if it doesn’t equate to 2°C. More appreciation of and discussion around this risk management approach is required, rather than the obsession with 2°C or global catastrophe that many currently present.
Of course, extraordinary follow through will be required. Each and every country needs to deliver on their INDC, many of which are dependent on very significant financial assistance. I looked at this recently for Kenya and India. Further, the UNFCCC process needs its own follow through to ensure that global emissions do trend towards zero throughout the century, which remains a very tall order.
Final steps towards Paris?
The last ten days have seen a rush by nations to publish their Intended Nationally Determined Contributions (INDCs), with the much anticipated INDC from India amongst those submitted. On Monday October 5th, the Co-Chairs of the ADP also released a proposal for a first draft of a new climate change agreement for Paris. So it has been a very busy few days, but are we any closer to a deal and could that deal have sufficient ambition to bend the emissions curve?
The India INDC is telling as an indicator of where the developing world really is, versus where the rapidly emerging economies such as China now find themselves. In the case of the latter group, there is thinking towards an emissions peak with China indicating that this will be around 2030 and continuing signals from the academic and research community in that country indicating that it may well be earlier. One such article appeared recently in the Guardian. But for the much poorer developing countries the story remains very different.
The submissions from India is 38 pages long, but of this some 28 pages is supporting evidence and context, explaining the reality of Indian emissions, the need to grow the economy to take hundreds of millions out of poverty and the expected use of fossil fuels to power industry, including areas such as metal smelting, petrochemicals and refining. With a focus on efficiency in particular, India expects to achieve a 33 to 35 percent reduction in CO2 intensity of the economy, but in reality that means a rise in energy related emissions to around 4 billion tonnes or more by 2030, up from some 2+ billion tonnes per annum at present (1.954 Gt in 2012, IEA). This could be tempered by a further element of their contribution which aims to increase forest sinks by some 3 billion tonnes of CO2 in total through to 2030.
There has been considerable speculation as to the renewable energy component of India’s INDC, with a hope that this would show enormous progress in solar deployment in particular. The INDC took the somewhat unusual route of talking in capacity additions, rather than generation (and therefore emissions). India aims to achieve 40% cumulative electric power capacity from non-fossil fuel based resources by 2030. This is significant, but less than it might appear. In a very simple example where 100 GW of generating capacity is comprised of 40 GW solar PV and 60 GW coal, the generation mix might be around 14% renewables and 86% coal. This is assuming a 20% capacity factor for the solar PV (maximum is 50% with day-night) and 80% capacity factor for the coal.
India has also put a considerable price tag on their INDC, with a mitigation effort of some US$ 834 billion through to 2030. In a previous post I looked at the costs assumed in the Kenyan INDC, which came to some $25 billion, but for a population of ~60 million (average through to 2030). With a projected population of some 1.5 billion by 2030, the finance side is in the same ballpark as the Kenyan INDC, albeit on the higher side.
Finally, the last few days have seen new draft text appear – shortened dramatically from some 80 pages to a manageable 20. But references to government led carbon markets, carbon pricing systems or even the use of transfer mechanisms between parties are largely missing. Article 34 of the Draft Decision does hint at the need to rescue the CDM from the Kyoto Protocol by referring to the need to build on Article 12 of the Protocol, but it will be of little use if there isn’t substantial demand for credits in developing and rapidly emerging economies. Simply creating a new crediting mechanism or even bringing the CDM into the Paris agreement won’t on its own direct the finance to the likes of Kenya and India. That demand and related finance flow will only come if the developed and emerging economies are building emissions trading systems (such as in China) and have the ability and confidence to transfer units related to it across their borders. So a great deal of work remains to be done.
FASTER carbon pricing mechanisms
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.