Category: Europe

How quickly can a synthetic aviation fuel industry emerge?

dchone May 15, 2023

In late April, the European Parliament and EU Member States reached agreement on new mandates for sustainable aviation fuels through to 2050. Under the final agreement, the percentage of sustainable aviation fuel (SAF) that must be blended with kerosene will start at 2% by 2025, moving to 6% by 2030, 20% by 2035, 34% by 2040, and reaching 70% by 2050. A dedicated sub-target for synthetic fuels derived from green hydrogen will also come into force from 2030. Although the final wording and requirements for these mandates have yet to be released, the headline numbers are clear even if the detail isn’t – starting at 1.2%, the synthetic fuel requirement will be scaled up to 5% by 2035, reaching 35% by 2050.

SAF is going to require a huge effort and should rightly be the immediate focus of attention, largely because of the state of technology and the amount of effort that has gone into preparing the groundwork for a SAF industry. But while the overall SAF target is challenging, given the small quantities produced today, the synthetic fuel mandate looks daunting. In EU parlance, synthetic fuels are renewable liquid and gaseous transport fuels of non-biological origin, meaning liquid or gaseous fuels which are used in the transport sector other than biofuels or biogas, the energy content of which is derived from renewable sources other than biomass. In the aviation industry this presumably means two types of fuel;

Hydrogen as a direct fuel derived from renewable energy sources.
Synthetic kerosene (also known as an e-fuel), produced by combining hydrogen derived from renewable energy sources (via electrolysis of water) and carbon from the atmosphere (via direct air capture or DAC), with the energy required for the capture and final synthesis also coming from renewable sources such as wind and solar PV.

For 2030, hydrogen as a direct fuel is a non-starter given that the planes don’t yet exist and probably won’t do so until 2040 at the earliest, although we might see some small commuter versions before that. So for 2030 and probably 2035, this mandate is really only about e-fuels. The synthesis of such a fuel is discussed in detail in a paper by Kraan et al., An Energy Transition That Relies Only on Technology Leads to a Bet on Solar Fuels, Joule (2019), with the energy schematic they developed shown below. This is to produce one barrel of fuel (5.5 GJ solar fuel on the right of the schematic).

The illustration above presumes feasibility and the availability of a wide range of thechnologies at large scale. In reality, that isn’t the case today. Clearly solar PV and synthesis technologies exist at scale, but Direct Air Capture (DAC) is still to be demonstrated at scale (i.e. 1 million tonnes per annum or more) and hydrogen electrolysis is only just reaching the sort of scale required for synthetic fuel production. As such, the discussion below should be viewed in that context and not just be a question of quickly building the necessary facilities.

In 2023 we can expect EU aviation fuel consumption to be somewhere around 1 million barrels per day, which includes both internal EU demand and international aviation bunkers for flights departing from the EU, for passenger and freight movements. So a 1.2% synthetic fuel mandate means the production of at least 12,000 barrels per day of e-fuel within seven years, or over 4 million barrels (600 kt) produced in 2030.

Jet fuel is mainly carbon in terms of weight, so 600 kt is about 500 kt carbon and 100 kt of hydrogen. This amount of hydrogen (but in practice more is needed) will require multiple 200 MW electrolyser projects, each similar to the project recently announced by Shell in Rotterdam that will produce 60,000 kg per day of green hydrogen, currently Europe’s largest such project. The Shell project will begin operation in 2025 after two years of construction, along with offshore wind capacity built in the Hollandse Kust Noord area.

The 500 kt carbon equates to nearly 2 million tonnes of atmospheric carbon dioxide capture in 2030, which is a scale of capture that doesn’t currently exist in the world. However, Occidental and its subsidiary 1PointFive announced in late 2022 they plan to begin detailed engineering and early site construction for their first large-scale DAC facility with start-up expected in late 2024. Upon completion, the DAC plant will be the world’s largest of its kind and is expected to capture up to 500,000 metric tons of carbon dioxide per year.

However, the provisions of the EU Directive on these types of fuels allows for other sources of CO₂ to be used, but in some cases for a limited time period. Up until 2041 it will be possible to use CO₂ from sources such as industry where allowances have already been surrendered against such emissions. It is also permissible to use the captured CO₂ from the production or the combustion of biofuels, bioliquids or biomass fuels. These provisions mean that an immediate relaince on DAC as a source of carbon for synthetic fuels isn’t required.

Producing sufficient hydrogen and capturing enough carbon dioxide is energy intensive and is just the start. These then must be combined to make the synthetic fuel, which takes even more energy and more hydrogen than the molecular weight of jet fuel points to. For example, a hydrogen based reaction is required to convert the carbon dioxide to carbon monoxide, which is required for the subsequent synthesis reaction. If the facilities designed to do this make use of Fischer-Tropsch technology, jet fuel won’t be the only product. Its yield might be as much as 67% (with the other 33% being lighter and heavier hydrocarbons, but this will require an optimised catalyst), which means that for the above jet fuel requirement the picture becomes more complex and bigger. The required production of synthetic fuels rises to 18,000 barrels per day, of which 12,000 is jet fuel.

The synthesis plants are not simple projects either, although the underlying technology is tried and tested in facilities such as the Shell gas-to-liquids synthesis plant in Qatar. That unit takes natural gas and breaks it down into hydrogen and carbon monoxide (synthesis gas) before recombining these into longer chain hydrocarbon molecules such as for jet fuel. That facility operates on a very large scale, producing some 150,000 barrels per day of product (of which some is suitable for jet fuel use). Building smaller versions is possible, although even the first Shell synthesis pilot plant, built 30 years ago in Malaysia and still operating today, produces 14,700 barrels of oil product per day. Even smaller scale gas-to-liquids is also possible, with Petrobras operating such a unit in a remote location as a pilot for the conversion of associated gas from oil production into useful liquids.

Given the rapid scale up of the synthetic fuel mandate (4x from 2030 to 2035), the sensible approach will be for the EU to build reasonably large from the start. A first facility might be the size of the Shell Malaysia unit (the illustration shows an 18,000 b/d unit but this is still small by global refining standards), but would also require about 3 GW of green hydrogen capacity and three million tonnes per annum of DAC. Apart from the synthesis unit which is arguably smaller than the desirable scale for modern refining, the hydrogen and DAC units are unprecedented in size. However, both hydrogen and DAC are scalable technologies, with the latter currently deployed on a modular basis, and as noted above DAC isn’t an immediate requirement.

Building an 18,000 b/d synthesis facility, 3 GW of hydrogen electrolyser capacity and 3 MT per annum of DAC combined with large scale renewable energy production (say 6 GW of offshore wind) is a formidable project, costing many billion euros and taking years in terms of planning, approvals, financing and construction. Such a project will also stretch the available technologies, given that DAC in particular doesn’t yet operate at scale anywhere. But the EU needs to start at least five such projects over the coming 2-5 years, not just to meet the synthetic fuel mandate of 2030, but also with an eye on the 2035 mandate and beyond.

Finally, an EU foot in the removals door

dchone March 6, 2023

As the EU continues to develop and progress legislation around its 2030 and net-zero emissions goals, one key proposal has surfaced that will be with us for decades to come. It is the EU proposal to create a certification framework for removals – i.e. measuring and certifying the amount of CO₂ that is removed from the atmosphere and permanently stored through some anthropogenic activity. Examples might include direct air capture with geological storage (DACCS) or reforesting an otherwise barren land area (nature base solution or NBS). The proposal includes the very clear reason why it is needed;

The European Climate Law provides for the EU to become climate neutral by 2050. This requires that GHG emissions are significantly reduced, and that the unavoidable emissions and removals should be balanced within the European Union at the latest by 2050, with the aim to achieve negative emissions thereafter. To achieve this objective, both natural ecosystems and industrial activities should contribute to removing several hundred million tonnes of CO₂ per year from the atmosphere. Today and with current policies, the EU is not on track to deliver these quantities: carbon removals in natural ecosystems have been decreasing in recent years, and no significant industrial carbon removals are currently taking place in the Union.

Readers of my previous posts will know that this is something of a pet subject for me and so it is pleasing to see that the EU if finally recognising the importance of removals. The need for a tradable carbon dioxide removal unit is essential for net-zero emissions, in fact it is the essence of the phrase because of the use of the word ‘net’. However, while a first step is important, time is not on the side of the EU, so they will have to move much faster.

In a 2022 post I noted that the revised EU ETS allowance decline rate built into the Fit for 55 framework would take the system to zero new allowances in 2040, but that would almost certainly be ahead of the point in time at which there would be zero emissions in the covered sectors. As such, some form of new allowance would be needed, with the obvious candidate being a carbon removal unit brought in as an external credit. That would make the EU ETS a vibrant carbon removal trading platform, creating a market for carbon removals and establishing a clear price.

But it would seem that the EU is not yet prepared to take such a step. While the certification proposal is important, it lacks one key element, a business model to encourage businesses to use it. The EU appears to be pinning its hopes on voluntary activities, or companies looking to create or acquire certified removals to use for their net-zero commitments. This will happen to an extent, but mainly at the lower cost end of the spectrum such as soil carbon projects, land use change projects and similar. These do form an important part of the EU Fit for 55 framework, but so does the need for DACCS and bioenergy with CCS (BECCS).

The voluntary market and a certification process are no match for the $180 per tonne CO₂ on offer in the USA for DACCS under the Inflation Reduction Act (IRA). In the EU there is the Innovation Fund to help drive technologies such as DACCS, but it isn’t operating on the same scale as the IRA. The Innovation Fund could provide EUR 40 billion of support over 2020-2030 for the commercial demonstration of innovative low-carbon technologies, whereas IRA is around USD 330 billion. And IRA has a specific and clearly defined incentive for carbon dioxide removal, which isn’t the case for the EU Innovation fund, although a DACCS would be considered within the framework. It’s therefore not difficult to guess where the DACCS projects will end up and which country will benefit from the investment. That being said, ETS revenues and other mechanisms could bridge this gap if directed more towards energy technology development and demonstration.

The EU could create demand for DACCS and BECCS on a large scale if it opened the EU ETS up to such units, recognising that they will be needed by 2040, but almost certainly prior to that as the ETS reaches reductions in excess of 80%, a point it will hit around 2035. That is in 12 years. The EU Commission may well have such a move in their future plans, but history would argue that if they don’t start now, time will defeat them. Major changes in direction for the EU ETS take at least 5-10 years to be developed and bed in. For example, the Market Stability Reserve (MSR) started life in about 2011 with proposals for a set-aside of allowances to remove the post financial crisis surplus, then came backloading and finally the first implementation of the MSR and some tweaks a bit later. In 2023 it operates very well.

Given the need for a clear market price signal, i.e. the €100 per tonne CO₂ price now available from the EU ETS, a clear set of implementation rules to support projects, and recognition that a functioning DACCS industry will take at least a decade to establish, if not more, the inclusion of removals within the EU ETS becomes rather urgent. Encouraging the use of Article 6 of the Paris Agreement to facilitate carbon dioxide removal technologies is another area that I have written about and is also relevant to the EU in this context. At the moment, the only signal on offer is an indication of a review of negative emissions and trading in a few years’ time.

And just like that, zero emissions looms

dchone October 14, 2022

Some time ago I posted a discussion on the allowance decline within EU Emissions Trading System (EU ETS), with no new allowances available after 2058 based on the proposed linear rate of decline of 2.2% each year, but assuming that this would be brought forwards to 2050. Back in early 2020 the EU was in the first stage of laying out its ambition for the 2020s and I noted then;

Based on a continuation of the EU ETS under the current trajectory it won’t reach zero until the late 2050s. . . . Under a revised EU ETS, from January 1st 2050 (or perhaps 2051) there will be no further allocation of allowances, either by auction or freely given. Yet this may not be a time in which there are no emissions – thirty years is possibly insufficient time for the complete turnover of everything in the large emitters system.

A great deal of water has passed under the bridge since then and today as we look at the EU ETS, a radically different picture emerges. The EU has announced its Fit for 55 package and as part of that has also announced a significant change for the EU ETS. Notably, they have said;

In phase 4 of the EU ETS (2021-2030), the cap on emissions continues to decrease annually at an increased annual linear reduction factor of 2.2%. The Union-wide cap for 2021 from stationary installations is fixed at 1,571,583,007 allowances. The annual reduction corresponding to the linear reduction factor is 43,003,515 allowances. . . . . The Commission is proposing a new target to reduce emissions from the EU ETS sectors by 61% by 2030, compared to 2005 levels. This represents an increase of 18 percentage points compared to the -43% target under the existing legislation. To reach this target, the Commission proposes a one-off reduction of the overall emissions cap by 117 million allowances (‘re-basing’), and a steeper annual emissions reduction of 4.2% (instead of 2.2% per year under the current system).

The above is more easily viewed graphically and is shown below. As previously discussed, the original 2.2% line meant that the EU ETS finally reached zero new allowances in the late 2050s, but the changes proposed under Fit for 55 bring that forwards. Note that the rebasing proposal is a one-off reduction of 117 million allowances to bring the cap in line with a pathway that would have materialised if the 4.2% reduction factor would have been applied from 2021 onwards, but the chart below shows the new line as continuous from 2021.

The market doesn’t currently know what the plans are for post 2030 when annual allowance allocation will be around 800 million tonnes, but if the 4.2% linear reduction factor continues, then new allowance allocation will cease in 2041. That would bring the date for zero allocation forwards 17 years from the current 2.2% reduction factor line.

Zero emissions for the ETS sectors (power generation, industry, aviation and soon to include marine) in 2040 is incredibly ambitious and I could argue with some certainty that those same sectors won’t be emissions free in that time. There is no doubt that significant progress will have been made, but the idea that every plane will run on 100% sustainable aviation fuel or a new fuel, e.g. hydrogen, or that every cement plant will incorporate carbon capture and storage in just 18 years is unlikely. As such, the Commission will either have to alter the post 2030 trajectory or plan on a somewhat different outcome.

Altering the post 2030 trajectory such that the system reaches zero allowances in, say, 2050 may seem like the simple solution, but by the late 2020s when this could be under discussion, society may well be facing a situation where Europe both wants and needs to reach net-zero emissions prior to 2050. This would be linked with the global emissions pathway relative to the meagre carbon budget remaining for 1.5°C (now <400 Gt). In short, we will be heading for over-expenditure, which in turn means at least some regions reaching net-zero emissions even earlier than 2050. However, incorporating other sectors into the EU ETS, such as road transport, could also offer some flexibility with regards the decline rate of the cap.

The second approach is one that I have written a great deal about (e.g. here and here), but one that is still not part of the current EU ETS. It is to embrace net-zero and recognise that the ETS will need to become a platform for trading and surrendering carbon removal units against ongoing emissions. Removal units might come from within the EU in the form of units representing Direct Air Capture with geological storage (DACCS) or from outside under Article 6 of the Paris Agreement. The latter could include a much broader range of removals, such as the capture and storage of CO₂ from ethanol manufacture in a country such as Brazil. Whatever is included will need to be the subject of extensive consultation, but without it the EU ETS will likely become an infeasible system (meaning that the only option for emitters is to default or shut down) as the zero allowances point is approached. The earlier that zero allowances is set, the more likely is the infeasibility.

Removals are near to becoming essential in Europe and it is important that the Commission accelerates its thinking on incorporating them within the EU ETS. Removals need to form part of the system within the 2020s, such that during the 2030s the mechanisms to create them can flourish and deliver.

Can the energy transition help EU energy needs?

dchone August 11, 2022

As the EU grapples with the challenge of displacing Russian oil and gas and meeting immediate needs as Russian supplies are cut, the question of the scale and speed of the energy transition emerges. How fast can Russian supplies be displaced by the transition itself?

The two charts below show the current situation. Prior to the Russian invasion of Ukraine, oil and gas supplies from Russia and into Europe contributed to about 40% of overall European demand, with local production making up much of the balance in the case of gas, but just about half the balance in the case of oil. In the case of gas, the flow to Europe is about a quarter of Russian supply, but for crude oil and oil products it’s nearly half.

Both charts show that European production has declined over twenty years and in the case of oil reached an apparent plateau around 2012. It’s unlikely that local production increases could make up for the cut in Russian supplies, so that leaves three immediate options;

Immediately cut overall energy demand, which in turn could translate to a reduced need for Russian supply.
Find supplies elsewhere.
Accelerate the energy transition to reduce the overall need for oil and gas in the energy mix.

While it’s clear from recent announcements that the EU strategy will embrace all three options in the short term, the longer term strategy will almost certainly rest with the transition itself. But such a transition could well take all of this decade, and probably longer, to complete.

Gas supply is perhaps the more problematic issue, as supply is less flexible globally than oil due to pipeline constraints, LNG capacity (the availability of shipping, liquefaction and regassification facilities) and long term storage. While gas has become a flexible commodity in the 21^st century, it still remains easier to reorganise, redirect and store oil. However, gas may be faster to displace than oil from an energy transition perspective.

The gas chart above also shows how the rapid deployment of wind energy across Europe could be used to offset Russian gas requirements, but it’s a journey that takes the best part of a decade. This assumes a compounding growth rate in wind deployment of 10% per year, slightly above current levels of 8%, but equivalent to the growth rate from 2010 to 2017. However, with a much larger installed base, 10% growth in 2029-2030 means installing some 50 GW of wind in that year versus the 15 GW installed in 2017 and again in 2021. So the annual installation rate has to at least triple. Of course wind isn’t the only technology, there is solar PV as well, at least for the southern latitudes of Europe.

Further to the above, if rapid growth in renewables is focussed entirely on displacing Russian gas or filling the void left by the absence of Russian gas, less progress will be made in displacing the current use of coal in the EU. This could make meeting the EU 55% by 2030 emissions reduction goal more challenging, as eliminating coal for a given electricity production can deliver twice the emissions reduction versus the same shift for gas.

By contrast, displacement of Russian oil through the energy transition looks to be a slower process, although it may turn out to be less necessary. Oil is a more flexible commodity in terms of source and destination, although there could still be pinch points in the system, for example inland east European refineries tied to Russian crude via pipelines. The largest portion of EU oil demand is for transport and within that the capacity for replacement in the 2020s sits with electrification of passenger vehicles, vans and city buses. Alternatives for larger trucks, ships, barges and planes are not yet mature enough for fast large scale deployment.

If we assume a very rapid deployment of electric vehicles (EV), to the extent that all new sales are electric by late in the 2020s (a rate faster than the current goal of 2035 for all EV sales), only about 50 million tonnes per year of oil is displaced by 2030, or about a fifth of the oil that comes from Russia. This is because of the time it takes to turnover the exiting stock of vehicles. Within Europe there are some 250 million passenger cars (Source: Eurostat), but new car sales are in the range 12-16 million vehicles per year, so in eight years only about half the total stock will be replaced anyway. With EVs currently comprising about 10% of new sales, albeit that share growing rapidly, replacing even half the total vehicle stock with EVs will take longer.

In the end, a rapid energy transition can contribute significantly to the EU weaning itself off Russian oil and gas, but this won’t happen in the next few years. By the end of the decade significant progress can be made, especially for gas, but it will likely be well into the 2030s before the same is achieved for oil.

Is it time to open up the EU ETS again?

dchone January 20, 2022

As the new year gets going, the EU is facing much higher energy prices than it has had to contend with in the recent past, topped off with an escalating carbon price driven both by the energy price and the ambitious decarbonisation plans of the EU Commission. Starting in late 2020 at a price of around €20, the purchase of an EU allowance (EUA) in the EU Emissions Trading System (ETS) now costs between €80 and €90 per tonne of CO₂.

The current allowance price in the EU ETS provides a significant incentive to reduce emissions, including investment in substantial mitigation technologies such as carbon capture and storage (CCS). As such, this is a welcome and critically important change from over a decade of prices below €20 and a low of €3 where the system did little to encourage the energy transition. For much of the 2010s the ETS was awash in allowances, with the surplus brought about by the financial crisis and subsequent EU recession, the influx of units from the Clean Development Mechanism (CDM) of the Kyoto Protocol and the overlaying of other policies in the ETS sector, a practice that erodes the need for a specific carbon price and will undermine its impact.

We are now in a world where the EU ETS is driving substantial mitigation action, which is exactly what it is supposed to do. The question that arises is what comes next? One way of answering that question is to look at a scenario analysis of the EU net-zero emissions goal, such as in the Shell EU Sketch released by the Shell Scenario team a bit over a year ago.

A deeper look at the Shell EU Sketch highlights the ambition of the Fit for 55 (FF55) goal. Even in the scenario, the reduction planned under FF55 for the EU ETS sector isn’t fully met in 2030, but instead requires another five years of effort. In addition the energy transformation in the EU is not yet fully matching that of the Sketch. Take for example the build rate of CCS facilities in the Sketch versus the real world. At the rate of change in the Sketch, some 40 major (~ 1 mtpa each) CCS facilities need to be operating by 2030 and over 100 by 2035. The EU has finally started developing CCS clusters, but not yet fast enough to meet these goals. This implies that during the 2020s the EU ETS could see further price escalation if project activity does not fully match the reduction goals of the system.

The Fit for 55 package of measures and targets is extraordinary ambitious, contributing to the global reductions required to avoid passing 1.5°C of warming and setting up the EU for a landing at net-zero emissions in 2050. It does need a meaningful carbon price to usher in the transition, but in the Shell EU Sketch it rises to around €60 by 2030 and €200 by 2050 (but on a much smaller level of emissions than today). The current price of an EU allowance should usher in real change for industry and industrial processes, which is needed, but a continuing steep up-trend may also be a sign of a system that is becoming overly constrained by the rate of reduction required compared to the rate at which projects can be implemented.

When the EU ETS first started the Kyoto Protocol was coming into force and we all imagined a world of interconnected cap-and-trade systems, ambitious clean energy projects in developing countries and a resultant liquid global carbon market. With substantial demand coming from the Kyoto signatory countries with targets and good supply from clean energy projects, the resultant carbon market would be of sufficient size to deliver cost savings to all participants. Importantly, major price spikes could be managed. Almost none of this happened.

In the process, the EU ETS was designed with external hooks to make use of the mechanisms of the Kyoto Protocol (CDM and Joint Implementation or JI) and to connect with other systems. With the prospect of an Australian ETS about a decade ago the EU began early negotiations with the Australian Government to link the systems, but a change of government in Australia put an end to the Australian efforts. With the US leaving Kyoto and other countries making little use of the mechanisms, the EU ETS was left as the only real buyer of emission reduction units (CER) from the CDM. So it was flooded with them, contributing to the 2008 price collapse. The EU rightly closed the doors and it wasn’t until 2020 when they were partly reopened with a link to the Switzerland ETS.

Industry will be feeling the competitive pressure and rising fuel bills for citizens opens the door to voter anger when it comes to elections if the EU ETS price continues to rise without adequate relief valve mechanisms. The Market Stability Reserve (MSR) would offer some reprieve as it starts releasing banked allowances, but a longer term solution could also be found through Article 6 of the Paris Agreement. The EU ETS could open itself to projects executed under the 6.4 mechanism and transferred into the EU ETS via 6.2, along with the necessary corresponding adjustments to the counterparty country nationally determined contribution (NDC). I discussed the corresponding adjustment mechanism in my last post of 2021. The transfer provision under 6.2 also provides an opportunity to link with other trading systems, such as the recently created UK ETS.

Making use of Article 6 will be a very different experience to that with the CDM. This is a mechanism that operates between two nationally determined contributions (NDC), each with its own plan to reduce emissions, but each plan must be converted to a carbon budget for the period of the NDC in order to use Article 6. The rules for doing this were thrashed out in Glasgow and can be found in III.B of the decision. When the transfer between NDCs is executed, a corresponding adjustment must be made to the respective carbon budgets. This means that the selling country must make up the amount of the sale through additional actions within their NDC, which ensures that the overall reduction goals of the respective NDCs are maintained. Under the CDM, no such provision existed.

With robust Article 6 accounting standards, the EU can have confidence that environmental integrity is preserved and that real reductions are delivered through the ETS. This was always a concern with the CDM. However, there is a fine balance to be achieved when creating a relief valve in that a sharp fall in the carbon price is not helpful for investment. As such, the EU might initially look to trade with a very limited number of countries, such as those with similar ETS structures. The UK, New Zealand and South Korea could all fall into this category.

By opening up the ETS the EU will promote confidence in international carbon trading, which will become an increasingly important part of the mitigation toolkit as the world gets closer to net-zero emissions. This is because remaining emissions and the availability of sinks to balance won’t always be in the same jurisdiction. But most importantly, a larger trading system will lower overall costs for the same reduction goals or alternatively may promote greater ambition, which is certainly needed and was called for in the Glasgow Climate Pact. This will benefit everyone.

Article 6 at COP26

dchone October 11, 2021

My home country, Australia, seems to reside permanently in the international climate doghouse, but a closer look reveals that they have made steady progress on some of the less advertised fronts related to mitigation. This was highlighted again recently when the government’s Energy and Emissions Reduction Minister Angus Taylor announced that carbon capture and storage (CCS) projects would be eligible for emission reduction credits.

This might seem like a distraction to some, but Australia has been forging a clear path towards growing its carbon removal capacity for some years now. The Federal Emissions Reduction Fund (ERF) has long targeted opportunities in soil carbon, forest management and reforestation and now CCS is added to the list. Short of a miracle in energy technology development and deployment, the current mechanisms for energy supply do not hold within them a net-zero emissions solution available within 30 years, so it is only through the addition of direct carbon dioxide management in the form of removals that the goal of the Paris Agreement can be met. Unfortunately, this doesn’t seem to be widely appreciated, with the exception of the United States and their 45Q tax incentives for CCS, Canada with their early demonstration projects and Australia with its behemoth Gorgon CCS project, creation of the Global Carbon Capture and Storage Institute and domestic focus on removals. Other countries are now scrambling to establish similar initiatives, but are somewhat lagging.

The case for CCS and carbon removals is an easy one to make – it emerges from any credible analysis of the energy system that accounts for likely future energy demand, real world deployment rates and the expected fossil fuel legacy that will persist into the 22^nd century even as significant reductions in use are made. Depending on assumptions, removals can stretch to a trillion tonnes of carbon dioxide over the course of the century. It is only in a scenario with a very constrained future energy demand that removals become less important, but still don’t disappear. The chart below, which I have posted before, shows the four IPCC 1.5°C archetype scenarios (P1, a high sustainability consciousness develops across society, to P4, a technology driven society with high energy demand and technical solutions to environmental issues) and the Shell Sky 1.5 scenario – all require carbon removals. In the P1 scenario sink use is quite low, highlighted by an end to land based anthropogenic emissions and the subsequent development of the land as an enhanced sink from mid-century on, at about 5 Gt per year drawdown of carbon dioxide. P1 makes no use of geological storage. By contrast, the P4 scenario makes very extensive use of geological sinks with BECCS playing a substantial role even as land based emissions are eventually reigned in.

So how does all the above relate to COP26? Of course ambition is very much on the agenda and removals are required to deliver on that ambition, but so are many other steps. However, one of the features of carbon removals is that they will likely have to emerge through cooperative action between governments. Remaining emissions and the availability of removal sinks probably won’t exist in the same geographies, so a global trade in emission sinks will need to emerge. This would happen under Article 6 of the Paris Agreement, which still remains as unfinished business after the rulebook negotiations at COP24 in Katowice. Article 6 establishes a framework for cooperative action between countries in realizing their NDCs, which includes trading carbon units across borders.

The charts below illustrate how a standstill in global emissions (at 300 units in the illustration) is brought to net-zero through cooperative action between governments and the aviation sector. Large scale cross border investment results from the development and trading of carbon units, including removals, that would otherwise not take place. This is why Article 6 is so important – it helps all sectors and Parties to the Paris Agreement reach net-zero emissions.

While the UK Government has many ambitious plans for COP26, and Article 6 is certainly among them, I believe that agreement on the Article 6 rulebook is the most important outcome needed from Glasgow. Apart from its future value to society, an agreement on this difficult piece of rule-making would demonstrate that countries can work together to achieve an outcome that may not be in their immediate self-interest. Article 6 brings a rigour to emissions reporting and accounting that we must have for net-zero emissions. It introduces concepts such as carbon budgets and emissions inventory adjustments for trade to take place, which progressively caps the emissions of nationally determined contributions and forces them towards exact quantification, rather than narrative description. Of course nations aren’t required to use Article 6, it’s voluntary, but once they choose to they must also choose accounting rigour.

After the failure to agree on the Article 6 rule-book at Katowice, great progress was made at COP25 in Madrid, but final agreement still wasn’t possible. Nevertheless, a text emerged that would do the job, although it was entirely bracketed. But the text did capture the key elements that are required for Article 6 to function;

Removals specifically referenced.
A simple but robust approach for adjusting nationally determined contributions (NDC – the national plan for emissions reduction and adaptation put forward by a country) when an Article 6 transfer takes place.
A centralized accounting and reporting platform, with a clear focus on the avoidance of double counting of mitigation actions.
The creation of a supervisory body for the 6.4 mechanism.
Specifications for the design of a 6.4 activity and subsequent issuance of associated emission reduction units.
An approach to meet the requirements for adaptation funding required under 6.6 of the Paris Agreement.
A transition arrangement for ending the Clean Development Mechanism (CDM) of the Kyoto Protocol. The CDM has left several countries holding project carbon units that they are keen to monetize so as to support the underlying internal project investment.
A simple framework giving some structure to Article 6.8, the non-market approach cooperation.

Nevertheless, some disagreement between countries remains and these issue will need to be resolved in Glasgow.

There is a set of issues related to the scope of an NDC and whether some activities that are in addition to the NDC and involved in a transfer should be subjected to the same adjustments as the Madrid text outlines. This feels like a distraction for two reasons; the NDCs should rapidly expand to cover all activities within an economy and if there are activities still not covered by the NDC, they have no place under Article 6 anyway as this provision of the Paris Agreement is about cooperation to achieve NDCs.

Another tough issue has been the need to give meaning and substance to 6.4 (d) To deliver an overall mitigation in global emissions. The proposal in the Madrid text is to cancel a portion of the emission reduction units issued to the 6.4 activity, but this is unnecessarily punitive. It also risks pushing all activities into simple 6.2 transfers, which would undermine the whole purpose of having a project based mechanism which is more suited to many countries. The discussions in Glasgow simply need to recognize that, by definition, a 6.4 activity and related transfer with NDC adjustments always results in an overall reduction in global emissions. This is illustrated in the diagrams above and is the inherent purpose of an emissions trading structure.

Finally, there is the lingering problem of how best to wind up the CDM and what then becomes of the projects still delivering reductions and the legacy unused CERs sitting in registry accounts. For projects that continue to deliver reductions, the answer seems straightforward – they continue to operate, produce CERs and these are transferred under the provisions of 6.2, which ensures corresponding adjustments to NDCs. In the case of legacy units, I think the IPCC have answered the question, both in the 2018 SR15 and the 2021 AR6 reports. Both reports show that the temperature rise is now around 1.2°C and both offer a carbon budget requirement from 1.1.2018 and 1.1.2020 respectively to ensure that 1.5°C isn’t passed. By rebasing the climate issue in 2020 (in the case of AR6), anything that happened before that is now irrelevant in that it is part of the 1.2°C baseline. The carbon budget they developed has subsequently informed Parties on their NDC requirements and is already being used by the UNFCCC to assess the NDC gap . Adding pre-2020 units to current mitigation activities is simply undermining the carbon budget calculation.

With an agreement hopefully reached on Article 6 in Glasgow, the spotlight will then turn to national governments to open up the possibility of cooperative arrangements. This could come through linking of trading systems, opening up trading systems to external units and encouraging the private sector to develop mitigation projects through Article 6.4. Importantly, governments should also follow the lead of Australia and develop protocols for removals, as these are the units that will be in particular demand as net-zero emission goals and targets need to be met. Europe, in particular, will need to accelerate its removals thinking, an area where it is lagging in its mitigation efforts.

On to Glasgow!

Carbon sinks and reform of the EU ETS

dchone November 19, 2020

On Wednesday morning of this week, POLITICO held a virtual event: “Energy Visions: Carbon removal and natural sinks in reaching climate neutrality by 2050”.

I was fortunate to have the opportunity to open the event with a few minutes of remarks to set the scene. This was followed by a discussion between the POLITICO moderator and Tina Bru, Norway’s Minister of Petroleum and Energy and then a panel session with;

MEP Bas Eickhout, Vice Chair of the Parliament’s Environment Committee and spokesperson for the Greens political group
Mauro Petriccione, European Commission Director General for Climate Action
Jannicke Gerner Bjerkås, CCS Director at Fortum
Gert-Jan Nabuurs, professor European Forest Resources, Wageningen University and Research IPCC Co-ordinating Lead Author

Although the panel couldn’t agree on how to handle the introduction of sinks into the EU as an emissions balancing mechanism, for me at least it is clear that the EU Emissions Trading System offers the simplest route forward. I have also written about this previously. See below for my opening remarks at the POLITICO event.

Good morning.
I want you to imagine for a moment that it is 2050, perhaps your autonomous electric car is already waiting in the driveway to shuttle you to the railway station, and as you step outside the house system shuts off most indoor electricity consumption. On your way to work you start thinking about an event your company had participated in a few days earlier; the last allowance auction under the EU Emissions Trading System. Now that the EU has reached net-zero emissions there would be no further allocation or auctions, in fact no more allowances.
But there is the familiar sound of planes at the nearby airport as the 787 and A350 departures continue, seemingly without pause. Although the first hydrogen fueled Boeing 808 and Airbus A500 planes can now be seen in the skies, a good proportion of air traffic still runs on jet fuel produced from crude oil. Biojet makes up the difference.
The railway station you use is in an industrial part of the city and the cement plant that was constructed there in 2030 using the most efficient process design of the day continues to operate, running on natural gas. It was built to supply concrete foundations for the gigantic 20 MW turbines in the burgeoning wind energy market.
These planes and industrial facilities are part of the 2050 EU landscape and continue to operate but do so in the absence of allowances under the EU Emissions Trading System. How will that be possible?
It is important to recognize that net-zero emissions in 2050 does not represent a point in time when there is no fossil fuel use and therefore no emissions. Today we are 70% dependent on fossil fuels for energy in the EU and although that number is clearly falling, it won’t be zero in 2050. In some cases the technologies required to remove dependence on fossil fuels don’t yet exist or are only at the earliest stages of their development. While some facilities using fossil energy should have carbon capture and storage operating by 2050, that won’t be true in all cases. Planes cannot do this and there will be regions within the EU where local at source carbon capture and storage either isn’t practical or cannot be implemented.
Rather, net-zero represents a balance between remaining emissions and the remote removal of carbon dioxide from the atmosphere. This can be achieved by 2050 in the EU, but we need the policy tools to guide us towards such an outcome. The EU Emissions Trading System is an excellent candidate for change.
Today the Emissions Trading System operates by surrendering allowances against emissions, but when the system ceases to have allowances in 2050, what happens? The Emissions Trading System needs to progress from an allowance-based system to one that manages net-zero emissions by requiring the surrender of sink based units against annual emissions. A sink unit wouldn’t be issued in the way an allowance is but would be created through projects that captured carbon dioxide from the atmosphere and permanently stored it. There are broadly three ways to do this;
One – through industrial projects that strip carbon dioxide from the atmosphere and store it geologically or use it in a way that offers near permanence, such as in making building materials.
Two – through the use of biomass to create energy but capturing and storing the carbon dioxide released in the process, which originated from the atmosphere as the biomass was grown. There is a bio-ethanol plant doing this today in the United States.
And three – by engaging in natural based projects such as rewilding and reforestation, or encouraging farmers to employ different grazing and cultivation techniques which help build soil carbon stocks.
Verified removal units from these types of projects will need to be part of the Emissions Trading System so that some parts of industry and various energy system services can continue operating past 2050. But the change to the trading system needs to be well before 2050, ensuring that enough capacity can be created by incentivising sink activity. A very early milestone would be establishing the certification process for removals within the EU.
Earlier this year Shell released a scenario Sketch illustrating a pathway forward for the EU to reach net-zero emissions by 2050. In that analysis, industrial bioenergy facilities with carbon capture and storage start to operate in the EU by 2035, which points to market signals emerging in the 2020s for project activity to start. We also showed that a gap between what can be achieved and what needs to be achieved for net-zero by 2050 also starts to emerge in 2035. This gap could be filled with nature-based sinks, at least until industrial capacity can catch up, but once again this will require a commercial carbon sink mechanism to incentivise action.
We shouldn’t forget about the period after 2050, at which point the world may require progressive regions such as the EU to extend their reductions into negative territory, in other words having more sinks than emissions. Trading of sinks could be a valuable export opportunity for the EU.
The EU Emissions Trading System is the right commercial lever to drive sink activity forwards, partly because of its carbon pricing structure but also because it must evolve to become a sinks and sources balancing system by 2050. As part of the current rethink of the trading system in preparation for 2030 and beyond, a sink mechanism should be included. Initially this could simply be the recognition of sink units from projects within the EU but should eventually be extended to global recognition of units. These would be transferred under Article 6 of the Paris Agreement along with the necessary safeguards to guarantee environmental integrity and the adjustment of trading partner carbon registries.
Without action in the 2020s to incentivise carbon sinks and subsequent follow-up in the 2030s, the EU may find itself unable to meet its net-zero emissions goal in 2050.
Thank you

Shining a light on carbon dioxide removal

dchone July 13, 2020

An important research paper emerged recently from the German Institute for International and Security Affairs (Stiftung Wissenschaft und Politik, SWP), raising the profile of carbon dioxide removal (CDR) from the atmosphere. CDR covers a set of technologies and practices that result in carbon dioxide already in the atmosphere being captured and stored, effectively removing it from the system where it is leading to surface temperature warming. This might be done for one of two reasons;

To balance emissions from an ongoing source of carbon dioxide, so there is no net effect on atmospheric carbon dioxide levels and therefore no warming associated with that source. This is basis for the term net-zero emissions.
To reduce the level of carbon dioxide in the atmosphere in an attempt to lower surface temperature warming. This might be necessary if warming has exceeded a particular goal, such as 1.5°C, and there is a need to bring the temperature back down again.

There are two categories of CDR and within each of them a subset of approaches. These are;

Natural solutions, which come from increasing the total carbon held within the natural biosphere. Examples include;
- Reforestation and afforestation.
- Various farming practices to increase soil carbon.
- Wetland restoration and expansion.
- Sustainable harvesting of timber plantations to build structures such as houses, where the carbon is locked away for decades or longer.
Technical solutions linked with geological storage of carbon dioxide. Examples include;
- Direct air capture of carbon dioxide paired with geological storage (DACCS). This happens today on a very small scale in Iceland [Link], but is likely some years away from a first large scale demonstration.
- Pairing traditional carbon capture and geological sequestration (CCS) with an energy facility using biomass as the feedstock (BECCS). This is indirect air capture in that the carbon dioxide is removed from the atmosphere when the biomass is grown. This is a scalable technology today and a major facility exists in the USA. Bioethanol production is widespread in the USA, with the fermentation step producing significant amounts of pure carbon dioxide. At such a facility in Illinois around one million tonnes per year of this carbon dioxide is captured and geologically stored, effectively removing carbon dioxide from the atmosphere. An example discussed in the EU Commission’s Hydrogen Strategy released recently notes the possibility of negative emissions from clean hydrogen production (bio-gas +CCS).

Carbon capture and storage is a version of (2) above, but the capture is directly associated with the generation of carbon dioxide, such that it is never emitted. As such, there is no removal from the atmosphere, but the geological storage step remains the same.

The paper gives a good summary of the approaches for CDR (both natural and technology based) and picks apart the various reasons for an almost complete lack of action so far. It also makes the case for why CDR is important and notes the lack of progress so far. Two key findings are given below;

If the EU truly wants to meet its own climate policy goals, it will not be able to avoid pursuing the unconventional mitigation approach of CO2 removal from the atmosphere – in addition to far-reaching conventional emission reduction measures.

Although the European Parliament is one of the more progressive players in EU climate policy, it has so far made little progress on the issue of CDR. During the negotiations on the Regulation on the Governance System for the Energy Union, which was concluded in 2018, it was the EP which succeeded in getting the Council to explicitly mention the long-term option of a European net negative emissions pathway. However, this did not result in any noticeable action on the part of the EP with regard to CDR. In its own-initiative reports, CO2 removal has not been given priority to date. Nor has a firm CDR approach played any role in recent legislative procedures – for example, in the amendments to the Emissions Trading Directive, the Effort Sharing Regulation, and the revision of the LULUCF Regulation during the last legislative period. Currently, there is no solid evidence of how the EP in its current composition will position itself on CDR. The first indication will be the EP’s negotiation position on the EU Climate Law.

Nevertheless, the EU Commission has recognised the role of CDR in its strategic long-term vision for a prosperous, modern, competitive and climate neutral economy in 2050. They include within the report the image shown below.

Some weeks ago, Shell released a Scenario Sketch which illustrates how the EU might achieve its goal of net-zero emissions in 2050. The Sketch made maximum use of available and expected technologies, including CCS on various industrial facilities, but a gap still remained with emissions of some 700 million tonnes per annum. This gap was filled with CDR, both nature based and artificial. In 2020 (pre-COVID 19), the EU energy system emission flows can be represented as shown below (all numbers in million of tonnes CO2 per year);

For the most part, energy needs are met with fossil fuels, with some portion of that (~160 Mt per year) ending up in finished products such as plastics. Net emissions of carbon dioxide exceed 3 billion tonnes per annum. The use of bioenergy in the EU is also shown, but is effectively emission neutral. A much smaller portion of the energy system is non-emitting, from sources such as wind, solar and nuclear.

By 2050, the picture looks very different. The non-emitting sector has grown substantially and net emissions are zero. However, actual emissions from the continued use of fossil fuels is 670 million tonnes per year and the total potential emissions from fossil fuel use is 1.13 billion tonnes per year.

Several factors are contributing to the overall net-zero outcome;

Some fossil fuel is use for making products such as plastics, as is the case today.
A bioplastics industry has emerged, with 50 million tonnes per year of atmospheric carbon dioxide ending up in finished products.
There is large scale use (240 million tonnes per year) of CCS in industry, such as in smelters and petrochemical plants.
There is 620 million tonnes per year of CDR, in two categories;
- 350 million tonnes of BECCS.
- 270 million tonnes of nature based solutions.

While the use of CDR may well decline in the ensuing decades after 2050 and might have vanished completely by the 22^nd century as further substitution for fossil fuels permits, the 2050 situation is one of very large scale deployment of technologies and practices that are either non-existent in the EU today or hardly visible. The level of deployment is such that a major commercial solution needs to emerge, driving the business sector to invest in CDR.

That solution could come from within the EU ETS as I discussed in a recent post, or a new mechanism could emerge that forces deployment of CDR through mandate or encourages it through a feed-in tariff. Both have been used successfully to get the renewable energy industry going. Whatever the approach for activating a commercial response, it needs to start soon. Building an industry on the scale shown will take many years and time is in very short supply.

The SWP paper comes to the same conclusion, i.e. start now, but it is already proposing upper deployment limits for individual sectors and overall use of CDR so as to maximise direct mitigation and the shift away from fossil fuels. This is hardly the way to unleash a commercial engine. Those who invest in CDR need to be assured that there isn’t some artificial limit put in place that may in turn limit the return on their investment, particularly if they are early adopters who take on additional commercial risk. In any case, CDR isn’t an inexpensive option that is easy to do – even large scale reforestation in the EU will be a challenge in terms of land use, maintenance, protection and longevity. The case for investing in CDR may well be a hard won battle in the boardroom, with many companies preferring to find direct mitigation options anyway.

The time for turning our minds towards CDR is now, as the EU rolls out its Green Deal and sets the rules for engagement that may well prevail to 2050 and beyond. Although the subject of CDR has been broached and by 2023 the EU Commission wants to put forward a carbon removal certification framework, CDR needs to be a priority within the immediate policy framework that emerges from the European Parliament.

A Climate-Neutral EU by 2050

dchone May 5, 2020

As the EU works to reset its emission reduction goals to align more closely with the 1.5°C goal of the Paris Agreement, a question arises around the scale and scope of the energy transition required. What will it look like? How fast should it proceed? Which technologies need to be accelerated to achieve the desired outcome? To help answer these and provide a perspective on the transition, my colleagues in the Shell Scenario team have produced a scenario sketch of the journey forward, arriving in 2050 with a net-zero emissions energy system (NB: The pathway was formulated in late 2019 prior to the COVID-19 pandemic and therefore does not include the energy system disruption being seen in 2020).

From a policy perspective, the EU has been addressing the climate issue for at least 15 years, with the EU Emissions Trading System in place since 2005. The 2020 energy situation arises from the 2007 climate and energy package, which included three key targets:

20% cut in greenhouse gas emissions (from 1990 levels)
20% of EU energy from renewables
20% improvement in energy efficiency

The targets were set by EU leaders in 2007 and enacted in legislation in 2009. They are also headline targets of the Europe 2020 strategy for smart, sustainable and inclusive growth. Within this, the EU Emissions Trading System is the EU’s key tool for cutting greenhouse gas emissions from large-scale facilities in the power and industry sectors, as well as the aviation sector. The ETS covers around 45% of the EU’s greenhouse gas emissions. In 2020, the target is for the emissions from these sectors to be 21% lower than in 2005.

The year 2020 represents a halfway point from 1990 to 2050, during which 20% of the hard deployment work has been done, but with a number of key technologies available at scale that hardly existed or didn’t exist around the turn of the century. Solar PV and Electric Vehicles are two examples (although solar PV did exist in 2000, it was expensive and small scale). That leaves just 30 years for the remaining 80% reduction, which must also include bringing to scale several other technologies which are yet to be deployed in the EU. This is a tall order and the scenario sketch illustrates how extraordinarily stretching it will be.

The additional key technologies that must move quickly to scaled deployment are as follows;

Clean hydrogen production via electrolysis of water or removing and storing the carbon from natural gas;
Hydrogen fuel cell road transport for heavy goods (see chart below).
Carbon capture and storage in various industrial settings – e.g. steel, cement, petrochemicals.
Biomass power plants fitted with carbon capture and storage (as a negative emissions technology).
Air transport that utilizes hydrogen as a fuel – in the sketch first flights are imagined in the mid-2030s.
Advanced biofuels for planes, ships and heavy road transport (see chart below).
Grid scale electricity storage.
Electrification of light and heavy industry processes.
Use of hydrogen in homes for heating and cooking.
Some technologies that appear late in the sketch will need intensive development over the medium term. Hydrogen as a fuel for industrial facilities, but particularly iron ore smelting, is a good example.

On the assumption that development and demonstration of all the above proceeds rapidly, deployment kicks in for most during the 2030s. But in the 2020s the energy technologies that have been nurtured over the last twenty years must be accelerated. For example, by 2030 solar must be quadruple current deployment, wind nearly triple current deployment and nuclear must be growing again, not declining.

In the 2030s the really hard work starts, with carbon capture and storage moving from first demonstration in the EU by 2025 to 40 medium sized facilities (one million tonnes CO2 stored per annum) by 2030 and over 100 by 2035. New technologies such as hydrogen fuel cell trucks must become ubiquitous during the 2030s, with at least 600,000 vehicles on the road by the end of that decade.

All of the above will require both technology development incentives and deployment policies. The analysis assumes a rising carbon pricing mechanism – whether explicit or implicit – to more than €200 per tonne of CO2 equivalent by 2050 to deliver and sustain the emission cuts and CO2 management necessary for the EU to reach climate neutrality. But even the EU ETS will need to change, as I discussed in a recent post.

While carbon pricing is an efficient lever for reallocating resources and driving behavioural change, it will not be enough on its own. A sectoral approach to policy which brings clean technologies, fuels and products to market, as well as their deployment and diffusion at scale, must urgently be developed. It is essential that policy should help provide consumers and businesses with low-carbon alternatives to adopt.

In the sketch, 2050 marks a point of climate neutrality for Europe, helped by the development of large scale carbon sinks through reforestation. But this isn’t the end of the transition, merely a point of significance. The hydrogen economy will continue to grow, electrification of industry will expand and efficiency gains will continue to be made. As was illustrated in the Sky Scenario, Europe will likely shift to become a net-negative emission economy during the second half of the century, a necessary requirement to ensure global net zero emissions and a 1.5°C limit on warming.

Download the EU Sketch here.

Getting to net-zero emissions with the EU ETS

dchone February 3, 2020

Perhaps the biggest policy development of 2020 (possibly lasting through to 2023 or so as all the legislative requirements are agreed and put in place) will be the EU laying the foundations for its declared goal of net-zero emissions by 2050. Although the goal of net-zero was always there as an intention, the date of 2050 brings it close enough to require policy makers to give thought and then substance to the mechanisms that will deliver it. One such mechanism is the EU Emissions Trading system, which has now been operating for 15 years (but effectively 20 years from a design perspective) and covers the large emitters across the EU as well as encompassing intra-EU aviation.

The EU ETS functions by progressively reducing the number of allowances available to emitters on a linear trajectory, which means that under current plans the number of allowances issued each year will fall by about 48 million units, with 2020 allocation limited to around 1.8 billion allowances. Subsequent phases of the EU ETS, potentially including the current Phase IV, will need to see an increase in the annual reduction of allowances such that the system reaches zero in 2050. Based on a continuation of the EU ETS under the current trajectory it won’t reach zero until the late 2050s. A revision in the system could operate from the start of Phase IV, i.e. in January 2021, which means that the current 2030 goal would change. If the revision comes in from the start of Phase V, then that implies an even steeper decline for the period 2031 to 2050.

While the mechanics of the cap-and-trade architecture is very simple, the reality of 2050 is not. Under a revised EU ETS, from January 1st 2050 (or perhaps 2051) there will be no further allocation of allowances, either by auction or freely given. Yet this may not be a time in which there are no emissions – thirty years is possibly insufficient time for the complete turnover of everything in the large emitters system. Some industrial facilities, much of the aviation sector and even some power stations in parts of Europe may still be using fossil fuels as their energy source or will be emitting carbon dioxide from a conversion process (e.g. cement manufacture). Any remaining banked allowances and allowances in the Market Stability Reserve (MSR) will be quickly consumed against these ongoing remaining emissions.

The potential for remaining EU emissions can be seen in the Shell Sky Scenario, released in 2018. Even though the scenario represents a period of very rapid energy system and industrial transition, the time from now to 2050 isn’t sufficient to bring heavy industry, aviation and power generation to zero. Even in 2070 significant aviation emissions remain and require balancing with the net negative situation reached in the power sector through the deployment of bioenergy with CCS.

N.B. Sky aviation emissions include international aviation whereas the EU ETS does not.

So how will the EU ETS work once it runs out of allowances?

The key to the future operation of the EU ETS lies within the objective it is trying to deliver, net-zero emissions. Net-zero means that there is a balance between remaining emissions and the removal of the equivalent amount of carbon dioxide form the atmosphere, i.e. a sink. This stems from Article 4 of the Paris Agreement;

Article 4

. . . . . . 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 . . . . . .

However, the EU ETS is currently an allowance issuance and surrender system, which points to a change in its structure at some point in the period leading up to 2050. This would require the introduction of a unit into the EU ETS that represented a ton of carbon dioxide removed from the atmosphere and permanently sequestered. From 2050, the EU ETS would then become a system without allowances that managed the balance between remaining emissions and sinks, at least until emissions actually reached zero. Policy makers would need to define the parameters of the unit such that it could be relied upon to provide sufficient volume for the required balance. Two considerations would be key;

Whether the units came from within the EU or also from outside the EU under the accounting framework of Article 6 of the Paris Agreement (i.e. the use of corresponding adjustments between NDCs to avoid double counting);
The type of sequestration opportunities permitted, which could include geological (e.g. direct air capture with geological storage), natural (e.g. reforestation projects) or product based (e.g. manufacture of products used in society such as plastics).

These units wouldn’t be issued directly by the EU governments in the way allowances are today, but would be made available for sale to emitters from projects that sequestered carbon dioxide. Governments would of course be involved in issuance of units to the sequestration projects against verified permanent storage of carbon dioxide.

A further consideration would be when such a unit is introduced into the EU ETS and how sufficient removal capacity is developed prior to 2050 to ensure there is enough available when net-zero emissions is required. This will be a judgment call arrived at through transition scenario analysis. However, the point in time when the unit will first be needed is not 2050, but when the allowance decline pathway first crosses the actual decline in emissions pathway. The illustration below shows how this might happen as reductions become more challenging over time.

To date, the actual reduction in emissions has typically been faster than the decline in allowance availability, hence the allowance surplus that developed in the 2010s and the creation of the MSR which has acted as an allowance removal mechanism (but it can also return allowances). These lines could potentially cross at some point in the 2030s, so the point of introduction could be at the start of Phase V of the ETS, i.e. 2031.

The EU Commission has developed a similar chart for their own communications, although this is for the transport sector as a whole, much of which is not currently covered by the EU ETS. However, expanding coverage is another option on the table. If such an expansion introduces more activities that may have remaining emissions in 2050, then the need for a sink unit becomes more important.

A provision such as described above might be seen by some as a backstop in EU ETS, but nevertheless an essential one for continuing smooth operation of the system. Without it, the EU ETS could become unstable in the years approaching 2050 as immediate mitigation opportunities for remaining emissions become unavailable and there are insufficient allowances available to cover these emissions.