Category: Policy

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.

The future of carbon pricing

dchone January 13, 2020

At this time of the year I usually review the progress in implementing carbon pricing around the world, but it seems timely to look more closely at where carbon pricing policy might be headed. That timeliness is driven by the bushfires in my home country of Australia, where the media have resurfaced the 2008 Garnaut Report. The Garnaut Climate Change Review looked in depth at the climate issue and also recommended ways in which the Australian Government might take on the task of emissions mitigation. The recent resurfacing of the report has come about due its very specific comments on bushfires, which have always been an important issue in Australia. Notably, the report says;

So here we are in 2020 and the effect is indeed very observable. But of equal importance are the recommendations on mitigation that Garnaut put forward. He proposed that Australia implement an emissions trading system, similar to that operating in the EU, with a view to inserting a carbon price into the Australian economy and allowing it to efficiently drive down emissions. After more than a decade of political wrangling, there is no carbon price in Australia and energy system emissions remain today at about the level they were when Garnaut penned his report.

Unfortunately the Australian story is not unique. As the reality of a changing climate has become increasingly apparent and despite widespread agreement among economists that a carbon pricing system of some form is the most economically efficient way of driving down emissions, the global uptake of this policy instrument remains limited.

The World Bank compiles a detailed list of carbon pricing systems and it shows that over 50 systems exist around the world, notionally covering over 20% of global emissions. But a deeper look reveals that most of these are very light taxes, typically under US$10 per ton of carbon dioxide. Many of the other systems are still in various stages of implementation, but there are a handful of systems that stand out;

The EU Emissions Trading System has been operating for 15 years and trades close to €25, but spent more than six years below €10 following the 2008 financial crisis. It covers half of EU energy system emissions.
The British Columbia carbon tax has been in operation since 2008 and operates at CAN$40 per ton.
The California cap-and-trade system (also linked with Quebec) has operated since 2012 and trades at nearly US$20 per ton.
Korean ETS has been operating since 2015 and trades at nearly US$30 per ton.
New Zealand have been a stalwart of emissions trading and have an economy wide system that has operated for many years and currently trades around NZ$30.

Source: World Bank

Nearly a quarter of a century into carbon trading and pricing, taking the 1997 Kyoto Protocol as a starting point, progress is muted at best and certainly not commensurate with the task at hand. In the Shell Sky Scenario, carbon pricing is a critical component for success, with implementation becoming global over the 2020s and a price range of $25-$60 developing by 2030.

But the harsh reality is that there is little sign of this happening, despite the need and despite the economic efficiency of the approach. Implementation can be challenging for policy makers; in some countries even small forced price changes in goods and services, sometimes linked to carbon price implementation, have led to street protests and worse. While some governments have tried to impose carbon pricing, the outcome often ranges from tepid implementation at a very modest price level to eventual retraction (e.g. Ontario). Others just seem to be philosophically allergic to the idea. So where does that leave us?

Explicit carbon pricing through taxation and trading systems may well have seen its best days, which perhaps means a turn towards more implicit mechanisms through standards and mandates. These may well be more expensive for society to implement but are often price opaque or even price invisible. Renewable energy mandates have had considerable success, so we may well see this type of policy imposed more broadly in areas such as transport (favoring Electric Vehicles) and home heating (requiring certain technologies in new builds and renovations). Within the industrial sector, a standard that prevents emissions would force the use of carbon capture and storage, with an implied carbon price of perhaps $50-$100 per ton.

The financial markets are beginning to impose a carbon price of sorts, with finance and investment for coal technologies becoming harder to find and some equity market commentators attempting to dissuade investment in certain companies with links to fossil fuels. In the week of the UN Climate Summit last September, an alliance of several large pension funds and insurers responsible for directing more than US$ 2.4 trillion in investments and under the name Net-Zero Asset Owner Alliance, committed to carbon-neutral investment portfolios by 2050.

Some governments are looking at border tariffs based on the carbon content of imported goods, which offers another more opaque means of imposing a carbon price.

Despite the above, carbon pricing won’t go away and as emissions eventually fall (which they will) a price could well emerge as a direct cost for carbon dioxide removal. The aspiration or even requirement to be a net-zero emitter will mean the funding of atmospheric carbon dioxide removal to balance remaining emissions. This could occur through natural solutions such as reforestation, or through technical means such as direct air capture and geological storage, but probably both. Sequestered carbon could become a commodity of sorts, trading widely and imposing a form of carbon price throughout society.

At the start of this new decade, carbon pricing may well be at a crossroads. Direct implementation through taxation and emissions trading systems is looking harder, even though it remains the preferred solution from an economic efficiency perspective. While the pressure to develop carbon pricing systems should not be eased, we may nevertheless see direct carbon pricing approaches take a back seat to more opaque mechanisms. But the eventual goal of net-zero emissions implies a price to deliver on the ‘net’. That is emerging today through trade in nature-based offsets, but largely in the voluntary markets. Eventually, a regulatory approach should emerge and then carbon sink pricing will be here to stay.

Article 6: A job to do at COP25

dchone November 29, 2019

As the Parties and representatives of the many UNFCCC observer organisations gather in Madrid, there is talk of increased mitigation ambition and the need to step up the global response to the many changes now being seen in the climate system. With the release of the Gap Report, the UN Environment Programme (UNEP) noted that greenhouse gas emissions in 2018, also accounting for deforestation, rose to more than 55 gigatonnes, and have risen on average by 1.5% a year for the past decade.

Source: UNEP Gap Report 2019

UNEP stated that global emissions must fall by 7.6% every year from now until 2030 to stay within the 1.5°C ceiling on temperature rises that scientists say is necessary to avoid disastrous consequences.

While this is an important statement, should another clarion call be the overriding theme of COP25?

Perhaps even more important than the call to act is the creation of the economic conditions, mechanisms and processes that will facilitate the shift. The Paris Agreement itself was a critical step in that journey and we have seen in just a few years that the global focus has shifted from talk of percentage reductions to an emphasis on net-zero emissions. This has changed the landscape and given a clear long-run signal to businesses and governments, with the result that numerous countries are now either pondering a 2050 goal of net-zero emissions or have actually established such a goal. Similarly, many businesses and sectors are now thinking along such lines and some have a focus on establishing zero emission business models to grow alongside the (diminishing) legacy systems they have in place.

But the landscape required for global action is far from complete and this is what COP25 can help deliver. Article 6 of the Paris Agreement was left out of the otherwise complete ‘rule-book’ at COP24 in Poland, with the Parties unable to agree on the architecture of cooperative approaches. Superficially this may seem to be a minor issue and certainly not something that would stand in the way of progress, but cooperative approaches should be viewed in the context of global trade which is a key enabler of the global economy.

Trade underpins economic activity and offers society the flexibility to provide the wide range of goods and services that we all benefit from – not everyone can economically produce everything themselves. For example, trade in commodities provides materials for manufacturing and construction that may be unavailable domestically. Trade is often the underpinning reason for foreign direct investment. It encourages the business sector to engage in projects and activities outside their traditional base with a view to bringing goods and services into that base.

This is also true for managing emissions – not all countries can reduce emissions at the same rate and it is certainly not the case that every country can be at zero emissions when needed, so we could use trade to collectively get there through Article 6.

Article 6 is essential for the journey to and destination of net-zero emissions. Recently published research from IETA and the University of Maryland found that cooperation through Article 6 has the potential to reduce the total cost of implementing NDCs significantly, in the order of $320 billion/year in 2030, or alternatively facilitate removal of more emissions, in the order of 9 GtCO2/year in 2030, at no additional cost if those cost savings are reinvested into additional mitigation.

By channeling investment towards zero emission energy systems and expanding the use of natural and artificial sinks, Article 6 can help deliver of the goals of the Paris Agreement. For the most part, this would be pursued through projects enabled by the private sector, including their use of the provisions within Article 6 and the issuance of tradable units by host governments.

Article 6 offers the opportunity to scale the millions of tons of emission reductions that the Clean Development Mechanism (CDM) of the Kyoto Protocol delivered from a multitude of small projects to gigaton reductions from large-impact programmes featured in economy-wide NDCs. To do this, Article 6 must be fit for that purpose and not anchored to the thinking of two decades ago. We learned much from past mechanisms, but they were never designed for the long haul. Carbon would potentially trade at the scale of the commodities that underpin it, such as oil, coal and iron ore. Today, the global crude oil market is around $2 trillion per year (based on producer to end-user sale at $50-$60 per barrel); a global carbon sink market of around $1 trillion per year could be envisaged as underpinning the journey to net-zero emissions in the 2050s (Sky 1.5 Scenario with sinks trading at a notional value of $50 per ton of CO₂).

Article 6 establishes a reliable framework within which carbon based trade can be efficiently and expeditiously executed between various national emission markets and projects while ensuring environmental integrity at a global level. This is analogous to the way globally established rules and institutions allow currency markets to function. Article 6 will give confidence to investors in clean energy and emissions mitigation projects and ensures that all countries access the market through a common framework. This in turn delivers cost efficiency and ultimately enhanced mitigation.

COP25 in Madrid must deliver a simple but rigorous rule book for Article 6, which is based on transparent numerical accounting, recognizes both natural and industrial sinks and supports and encourages large scale transactions.

Looking again at carbon pricing

dchone September 23, 2019

It is Climate Week in New York and among the police barricades at the UN, the protests and traffic there is still the opportunity for new thinking and revisiting important subjects. Perhaps none is more important than the role that carbon pricing must play, yet its impact on the energy transition has been limited to date. One of the reasons for the modest uptake in carbon pricing (largely limited to the EU and a some parts of North America, but others now emerging, e.g. Singapore, South Africa and hopefully China) has been ongoing concerns relating to competition, be it for a single industry or more widely at national level compared to trading partners. By contrast, in the Shell Sky Scenario, government implemented carbon pricing emerges rapidly and robustly in the 2020s as part of a suite of critical policy measures to bend the global emissions curve and begin the long journey to net-zero emissions.

Following on from the Paris Agreement in 2015 the World Bank initiated a coalition to help usher in carbon pricing as a policy instrument. The Carbon Pricing Leadership Coalition (CPLC) brings together governments, civil society and industry and offers a forum to learn and share ideas. To that end, the CPLC created the High Level Commission on Carbon Pricing and Competitiveness and at the opening of Climate Week the Commission launched its report on the issue.

As the report discusses, those involved in the use of carbon pricing recognize the concerns that exist due to differential carbon prices between jurisdictions, currently ranging from zero (many places) to around $100 per ton of carbon dioxide (a few cases in some sectors in a handful of countries). There is the potential risk that high-carbon economic activity may move to regions without a carbon price or with a lower price. This could result in decreased profits and job losses. It could also exacerbate political push-back and undermine the intended environmental outcome of reduced GHG emissions. If this “carbon leakage” occurs, it would be a lose-lose: a loss of competitiveness or economic activity without an environmental gain.

But the report finds there is little evidence to date that carbon pricing has resulted in the relocation of the production of goods and services or investment in these products to other countries. This outcome is consistent with the economic literature assessing the competitive impact of environmental regulation more broadly. There may be several reasons for this, including the observation that carbon price levels have generally been moderate and existing programs include protection for at-risk sectors. In addition, tax rates, labour availability, and infrastructure may be more significant to investment decisions regarding location of production than environmental regulations.

While competitiveness remains a key concern for policymakers considering a price on carbon, the report argues that these concerns should not be overstated. Competitive risks exist primarily for highly emissions intensive and trade-exposed (EITE) sectors and jurisdictions that depend on such sectors. These risks can and should be addressed through a suite of locally tailored policy design choices intended to protect industry from unfair international competition even as they ensure that the incentive and support for low-carbon innovation remains.

The report points out that there are a variety of options to address competitiveness risks, including free allocation of emission rights and border measures. However, these should be based on a location-specific, data-driven evaluation of impacts. Once implemented, these measures should be periodically re-evaluated to ensure their effectiveness and usefulness. To that end, data transparency from industry, at least with government officials, is particularly important for assessing how and when intervention is necessary.

The report also revisited the broader carbon pricing subject for the sake of context and not surprisingly found that carbon pricing is an effective, flexible, and low-cost approach to reducing greenhouse gases (GHGs). Combined with other policies, carbon pricing can help accelerate and ensure a smooth transition to a low-carbon economy. Perhaps the more important context is that carbon pricing is intended to drive a shift away from high-emissions products to low-emissions products and processes. That intent may mean that some firms that compete against these low-emissions substitutes may experience a loss of market share and reduced profits even as others adapt, increase their profitability and develop new business models. That is the point of the instrument and more broadly, it is the point of the transition required to address the climate issue.

The CPLC isn’t the only organisation revisiting the basics of carbon pricing for Climate Week. The World Business Council for Sustainable Development (WBCSD) released its own report on the views of the business community on carbon pricing. The new WBCSD paper presents reasons why business supports carbon pricing as a critical enabler to raise climate ambition and calls for governments to put on a price on carbon and develop clear and consistent long-term carbon pricing policies as part of their national commitments and long-term strategies.

My own reflection on all this takes me to the movie Groundhog Day, but perhaps better phrased as Groundhog Decade when it comes to the climate issue. Ten years ago and in some cases more, I contributed to and was involved in the release of similar reports that came to the same conclusions and in some cases from the same organisations. Yet a decade later, the advance of carbon pricing as a preferred policy instrument has been modest at best and in the interim the largest implementation of carbon pricing (the EU ETS) spent much of the time languishing at very low levels and therefore having very little impact on the energy transition; fortunately in the case of the EU that has now changed. Not surprisingly, global greenhouse gas emissions have risen over the last decade.

But this time around something else has to change as there isn’t another decade to just discuss and think about the implementation of carbon pricing – in fact the decade just passed wasn’t thinking time either, it was the time during which all that had been discussed should have been implemented. Now there is no time for prevarication if the goals of the Paris Agreement are to be realised. The Sky Scenario and many other similar pieces of work make that abundantly clear.

In the shadow of Apollo

dchone August 2, 2019

The recent 50^th anniversary of the first moon landing brought with it many calls for an “Apollo Project” approach to address climate change. Such an approach is never defined in detail by those calling for it, but it presumably means marshaling government funds, establishing more energy research organisations and focusing all efforts on getting a handful of key energy technologies up and running in a short space of time.

There is no doubt that the Apollo programme was an amazing technical and engineering achievement, but is it the right recipe for success for dealing with the climate issue?

Behind the Apollo programme and the broader NASA effort in the 1960s was an immense research effort, which included a great deal of energy system research. After all, space flight is a voracious consumer of energy but storing energy and carrying energy for the journey is challenging. The 1960s saw significant NASA backed research into a technology that we now pin great hopes on for the 21^st century, solar PV. In both the USA and USSR solar was fitted to various space vehicles, starting with the Telstar communication satellite in 1962 and Soyuz 1 in 1967. The first orbiting space station, Skylab, was powered by solar PV in 1973.

Skylab (Source: NASA)

As the 1970s unfolded and oil price shocks hit the global energy system, interest in solar PV picked up. In 1977 the U.S. Department of Energy launched the Solar Energy Research Institute, which later becomes known as the National Renewable Energy Laboratory (NREL). By 1980 ARCO Solar became the first panel manufacturer to hit 1 MW of yearly production. Two years later, the solar company installed the first megawatt-scale solar project in California. Today solar PV is deploying rapidly with current global solar generation (including thermal) now at 600 TWh, which represents about 2% of global electricity generation, which in turn is about 20% of all final energy use (Source: BP Statisitical Review of World Energy). Solar generation increased by 29% from 2017 to 2018 but remains a minor part of the energy system despite an average growth rate over the last decade of around 50% per year.

But this development from first invention at Bell Labs in 1954 and first use in 1962 has taken over 65 years to scale to 2% of the electricity system, yet it was born out of the Apollo project. While solar may be entirely fit for purpose in space based systems, that still isn’t the case on earth, where the day-night cycle, seasons, latitude and weather all factor into its usefulness. A large scale (e.g. big city, >1 million people) generation system that can rely on solar PV for 100% of its energy doesn’t exist yet, although a smaller solar thermal system with molten salt storage now operates in Morocco.

Of course the most visible outcome of Apollo was the big step forward in manned space travel, with huge hopes as the 1960s came to a close of a golden age emerging. In his 1968 film 2001: a Space Odyssey, Stanley Kubrick imagined vast space stations, a Pan Am shuttle service and manned bases on the moon.

By 2012, with solar PV growing rapidly, not only had Pan Am long vanished, but the USA had no manned launch capacity given that the Space Shuttle programme was at an end. It would have been a brave futurist that made such a statement back in 1969. Rather, the USA currently relies on the launch capacity of Russia, using technology that has changed little since the 1960s. However, a new generation of advanced heavy lift rocketry is emerging from the private sector in the USA.

Nevertheless, the space programme and related government and private efforts within the USA in the 1960s contributed enormously to human technical progress, with the computing developments at the time giving rise to the internet revolution which shows every sign of being as trans-formative as the industrial revolution in the 1800s. That revolution could yet have a significant impact on the energy system, but such a change is not yet clear.

What is apparent from the Apollo programme is that big focused efforts do not necessarily give rise to expected outcomes, even if they achieve their short term goals. Such efforts can certainly be game changing, and Apollo was, but in areas not necessarily targeted in the first instance. The other key factor is that large scale change doesn’t come quickly, as has been the case with solar PV. From a climate change perspective, there simply isn’t the time to allow new technologies to germinate and grow on a 60+ year timeline.

All the above raises the question as to what type of approach is needed to deliver broad energy system change over the coming decades. The Sky Scenario, released by Shell in 2018, attempts to illustrate this. It highlights the need for change across multiple fronts, using technologies that largely exist today or at least have a clear line of sight and driven by a strong policy framework. Sky relies on six key factors, with an important underpinning licence for change from society. It requires;

The adoption of carbon-pricing mechanisms by governments globally over the 2020s,
A step-change in the efficiency of energy use leads to gains above historical trends.
The rate of electrification of final energy tripling, with global electricity generation reaching a level nearly five times today’s level.
New energy sources growing up to fifty-fold, with primary energy from renewables eclipsing fossil fuels in the 2050s.
Some 10,000 large carbon capture and storage facilities are built, compared to fewer than 50 in operation in 2020.
Net-zero deforestation by 2070. In addition, an area the size of Brazil being reforested offers the possibility of limiting warming to 1.5°C, the ultimate ambition of the Paris Agreement.

Embedded within this are perhaps multiple Apollo programmes, across many countries and sectors, also requiring some level of collaboration across national borders and utilising well-funded public-private-partnerships . Those programmes must cover all the key sectors and engage at every aspect of the technology cycle, but particularly the need to take technologies across the so-called ‘valley of death’ by ensuring sufficient early deployment to achieve significant cost reductions. This was done very effectively for solar PV within the German Energiewende over the last decade, although that programme relied on the rapid scale-up of PV-Cell manufacture in China.

The ‘Apollo programme’ for climate is global in nature and is illustrated below.

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.

What is a ‘mitigation outcome’?

dchone November 20, 2018

The potential for carbon market development was included in the Paris Agreement, as Article 6, at the very last moment of the negotiations in December 2015 and up until that moment the text flipped from being in, to out, to in again. Yet Article 6 is potentially one of the most important aspects of the Paris Agreement in that it is there to catalyze and support cooperative approaches towards meeting the goals of independently established so-called “Nationally Determined Contributions” (NDC). In a recent post I noted the importance of this Article in the years to come as the world looks towards the goal of net-zero emissions, or the ‘balance’ required under Article 4 of the Agreement.

As negotiators have tackled the development of the so-called ‘Paris rule book’ over the past two years, they have had to agree on the meaning of and then implementation strategy for the many short paragraphs of the Agreement. Article 6.2 is no exception. It simply says;

6.2 Parties shall, where engaging on a voluntary basis in cooperative approaches that involve the use of internationally transferred mitigation outcomes [ITMO] towards nationally determined contributions, promote sustainable development and ensure environmental integrity and transparency, including in governance, and shall apply robust accounting to ensure, inter alia, the avoidance of double counting, consistent with guidance adopted by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement.

This paragraph could be interpreted in a variety of ways, but the broad understanding of its meaning and the basis for its implementation has been trade of carbon units across borders. In recent weeks negotiators released draft text covering the options they have been discussing, which runs to 29 pages.

The options that are outlined will need to be pared down at COP24 in Poland to the final text, but one aspect that is currently missing is a clear definition of the term ‘mitigation outcome’. This is important in that it is apparent from the text as it stands that there may be a range of views as to what is a ‘mitigation outcome’.

For example, under the heading “Vintage” there is the proposal that says, “The year in which the mitigation outcome took place”, which implies that a ‘mitigation outcome’ is an event, such as an observable decline in emissions from some activity. Elsewhere, the form of a ‘mitigation outcome’ is referred to as a unit with a unique serial number, but also a net flow between participating Parties or alternatively emission reductions and removals or emissions avoided. In the section on characteristics it is variously defined as real, permanent, additional and verifiable. Later in the text there is reference to “an ITMO that is achieved in its jurisdiction”. Achievement again implies that something has taken place, such as a reduction arising from a specific project.

Interpreting a ‘mitigation outcome’ as an event or a specific measured reduction from a project will likely limit the effectiveness of Article 6.2 and therefore reduce the scope for cooperative approaches. A project/event-based definition of a mitigation outcome will be too narrow to allow for the system benefits that are achieved in a carbon market. Governance arrangements in Article 6.4 should ensure integrity of the project and Article 6.2 should focus on the integrity of the accounting of the units in the system.

One potential use of Article 6.2 is to account for the flow of allowances between the NDCs of two Parties which have in place linked emissions trading systems. An example of this is the linkage between Norway and the EU. Under the linked arrangement, allowances flow back and forth throughout the year as ETS participants trade to achieve compliance. There will be a net country level exchange for the year which can then be used to make the necessary adjustments to the national NDC. But there is no specific project taking place or clearly defined mitigation event, rather the net transfer is simply the result of the linked cap-and-trade systems functioning efficiently and may comprise millions of individually traded emission allowances. But an emission allowance can still be considered a mitigation outcome, in that the ability to sell the allowance stems from the seller not requiring it for compliance, presumably because emissions are lower than initially expected when the allowance was acquired. But even then, the allowance may date from a previous year, having been initially banked by the seller.

This discussion points to the need for a much simpler structure to the Article 6.2 rule book, which includes a broad definition of ‘mitigation outcome’ and excludes several clauses currently proposed by the Parties that narrowly define the accounting around the transfer as if it stemmed from a defined emission reduction project. While the use of 6.2 may, in some instances, relate to units arising from specific projects, in other cases this will not be so.

A definition of ‘mitigation outcome’ included within the rule book could be structured as follows and appear upfront in the current Section III – Definitions.

“Mitigation outcome” means units denominated as carbon dioxide that are held within the NDC and represent greenhouse gas emission, reduction or removal activities;

Such a definition, sitting alongside a clear but simple accounting framework that ensures adjustments are made to both the NDC emission accounts, would allow Article 6.2 to be used as a broad base for cooperative approaches.

Additionality and Article 6 of the Paris Agreement

dchone April 27, 2018

As negotiators gather in Bonn for another round of discussions on implementation of the Paris Agreement, various detailed issues are surfacing. One, which pertains to Article 6 of the Agreement, is the concept of additionality of actions implemented under the Article. In the Decision Text that accompanied the Paris Agreement, which is effectively the instruction manual for implementation, the need for additionality is referred to in relation to Article 6, Paragraph 4, the emissions mitigation mechanism. The Decision Text says;

Recommends that the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement adopt rules, modalities and procedures for the mechanism established by Article 6, paragraph 4, of the Agreement on the basis of:

. . . .

(d) Reductions in emissions that are additional to any that would otherwise occur;

. . . .

The Article 6 negotiators have already grappled with this to some extent as the concept appears in the ‘Informal document containing the draft elements’, Annex XII.D, released in mid-March. In that document three possible definitions for additionality are considered, i.e.;

An Article 6, paragraph 4, activity to be additional by demonstrating that:

Option A {reference to what would otherwise have occurred}

(a) Emissions are reduced below those that would have occurred in the absence of the activity.

Option B {definition related to activity being beyond the NDC}

(b) The reduction of emissions goes beyond what would be achieved through the delivery of the NDCs of the host Party {further development may be required for implementation}.

Option C {definition linked to scope of NDC}

The concept of additionality stems from the Clean Development Mechanism (CDM) of the Kyoto Protocol, where Article 12.5 specifies that emission reductions are only to be certified under the CDM if they are additional to any that would occur in the absence of the certified project activity. In his 2009 paper ‘Additionality in the Clean Development Mechanism: Why and What?’, Benito Müller outlined a number of different ways in which additionality constraints under the CDM can be argued for. For example, there are arguments (i) from ‘environmental integrity’, (ii) from implementing Article 4.7 (of the Convention), and (iii) from the need to safeguard Annex I domestic mitigation efforts. Müller notes that the most important and widely used argument, is that additionality is needed to protect the environmental integrity of the regime. Being an offset mechanism, the CDM requires additionality to ensure that any ton emitted in developed countries against a CER must not increase the level of emissions permitted under the regime.

Under the CDM, additionality became something of a quasi-science, with baselines established for projects against which assessments could be made. The UNFCCC developed a toolkit, which recommended a scenario based approach for determination of additionality. But despite the effort put in, the analysis is largely subjective in nature. It all depended on what the assessor thought the future might bring, versus an objective numerical approach based on specific goals. The reason behind this is that developing countries didn’t have targets under the Kyoto Protocol, so environmental integrity could only be assessed, rather than measured.

Translating this concept to the Paris Agreement argues for new thinking on additionality in that the structure behind Paris requires all participating countries to have some form of target or goal embedded within their respective Nationally Determined Contributions (NDC). Paragraph 5 of Article 6 also specifies that emission reductions resulting from the 6.4 mechanism shall not be used to demonstrate achievement of the host Party’s nationally determined contribution if used by another Party to demonstrate achievement of its nationally determined contribution. This would happen if reduction units created under the mechanism were transferred to another Party without an accounting protocol. Doing so, would be classified as double counting. Within the Decision Text, there is a further requirement that double counting is avoided on the basis of a corresponding adjustment by both Parties for anthropogenic emissions by sources and/or removals by sinks covered by their nationally determined contributions under the Agreement.

The above discussion points to a more numerical and therefore objective approach to accounting for transfers under the Paris Agreement, in that corresponding adjustments are most easily executed when NDCs are quantified. I discussed this at length here. It also means that the more traditional complex assessment of additionality can be avoided, in that the corresponding adjustments ensure that environmental integrity is maintained.

If such a corresponding adjustment is made, then in the case of the host Party, the transferred quantity must be additional. This is because the host Party, having made the transfer, must find further, presumably lower cost, mitigation opportunities in their own economy to meet the stated goal of their NDC. This in turn means that the transferred actions were in addition to the requirements of the NDC, hence additionality can always be claimed. The quantification of systems is ideally done in units of CO2, but could even be in units of clean electricity or capacity in the case of renewable energy based NDCs.

Attempting any other assessment process to establish whether an activity goes beyond the NDC of the host Party is fraught with difficulty. In most instances this will be almost impossible to assess due to the difficulty of establishing the contribution of a single activity to the overall national emission pathway. Even if assessment is possible, it may be an extended period before the assessment can be made due to the need to collect and collate all the greenhouse gas data for the whole NDC. This will lead to any emission reduction units from the activity being untradeable in that they will carry considerable performance risk related to the outcome of an assessment that will be both uncertain and take a year or more to be delivered.

An extension of this approach to additionality is that units created under the 6.4 mechanism don’t require the same level of scrutiny as units created under the CDM. Should an activity produce an abundance of units which are then sold outside the host county, always a concern under the CDM through the application of a generous baseline, then the corresponding adjustment will act as a deterrent by demanding even greater mitigation efforts by the host. Although this isn’t a desirable way to operate the mechanism, it is nevertheless self-correcting.

The current informal text under consideration in Bonn doesn’t clearly identify the above route towards assessing additionality, but presumably Option B could fill this need. The text might then read;

The reduction of emissions goes beyond what would be achieved through the delivery of the NDC of the host Party. The host Party’s nationally determined contribution is adjusted numerically by an amount corresponding to any use of the emission reduction of said activity by another Party to achieve its nationally determined contribution, ensuring that additionality is established.

As the negotiators get down to their tasks in Bonn, they need to rethink additionality, jettison the model founded for good reasons under the Kyoto Protocol, and embrace a more quantified and objective approach to this subject.

Meeting the goals of the Paris Agreement

dchone March 27, 2018

Over the past few months I have been deeply involved with my colleagues in the Shell Scenario team preparing a new scenario that illustrates a technically possible but challenging pathway for society to meet the goals of the Paris Agreement on climate change. From an emissions mitigation perspective, those goals are as follows;

Holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 °C above pre-industrial levels
. . . aim to reach global peaking of greenhouse gas emissions as soon as possible;
. . . achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century.

Today, that scenario is being launched as an extension of the two existing global Shell scenarios already in use, Mountains and Oceans. Both those 2013 scenarios achieve the goal of net-zero emissions, but not early enough to also ensure the rise in average surface temperature stays well below 2°C, rather they plateau at around 2.5°C. The new scenario, named Sky, sees a rapid energy transition taking place over 50 years as the Paris Agreement moves into full operation and countries ratchet their nationally determined contributions (NDC) in two five-year cycles through the 2020s towards a pathway that reaches net-zero emissions in the energy system by 2070. The ‘ratchet’ mechanism is the underlying driver of the Paris Agreement, although the formal way in which it will function is still being negotiated. But it is critical that it works, given that the first round of NDCs result in a ~3°C pathway, or possibly higher.

The Sky outlook is not a given though; it sits in the top right corner of a classic scenario matrix, one which embraces both global leadership and the need for mechanisms and approaches to share common interests. Both will be required to address the climate issue, but on a consistent and long-term basis. In 2014 and 2015 the world saw a flash of the potential that is there as the Paris Agreement was brought to fruition.

Sky means big transformations for society on many fronts; we identified seven major changes for the coming decades for success. Sky requires a complex combination of mutually reinforcing drivers being rapidly accelerated by society, markets, and governments.

From now to 2070 –

A change in consumer mindset means that people preferentially choose low-carbon, high-efficiency options to meet their energy service needs.
A step-change in the efficiency of energy use leads to gains above historical trends.
Carbon-pricing mechanisms are adopted by governments globally over the 2020s, leading to a meaningful cost of CO2 embedded within consumer goods and services.
The rate of electrification of final energy more than triples, with global electricity generation reaching a level nearly five times today’s level.
New energy sources grow up to fifty-fold, with primary energy from renewables eclipsing fossil fuels in the 2050s.
Some 10,000 large carbon capture and storage facilities are built, compared to fewer than 50 in operation in 2020.
Net-zero deforestation is achieved. In addition, an area the size of Brazil being reforested offers the possibility of limiting warming to 1.5°C, the ultimate ambition of the Paris Agreement.

But Sky is not without its challenges.

For example, the existing energy system has been under pressure for much of this century with rapidly rising demand, driven by population growth, development and even a much-heralded saviour, energy efficiency. The connections people make through international travel have already doubled in the first two decades of this century (measured in terms of international air travel arrivals), partly through the efficiency drives by airlines and aeroplane manufacturers which in turn lower costs.

Coal also remains a fuel of choice, despite its higher CO2 emissions and local air quality impact in some cities. A stark reality of the early 21st century is the lack of a clear development pathway for an emerging economy that doesn’t include coal. Coal is a relatively easy resource to tap into and make use of. It requires little technology to get going but offers a great deal, including electricity, heating, industry, and, very importantly, smelting to make iron. Although solar PV and wind offer clean, distributed electricity, benefiting households, electricity alone is currently insufficient for rapid urbanisation and industrialisation, including the construction of cities and the manufacture of products such as automobiles and appliances.

Nevertheless, Sky shows that achieving net-zero emissions in just 50 years is technically possible, but there is no margin for interruption, stalled technologies, delayed deployment, policy indecision, or national back-tracking. Rather, it requires a rapid acceleration in all aspects of an energy transition and particularly robust policy frameworks that target emissions. Success can be accomplished only through a broad process that is embraced by societies, led by governments, and lightly coordinated by organisations including the UNFCCC, the EU, ASEAN, and others.

Perhaps the most interesting aspect of the work over the past months has been the collaboration with the MIT Joint Program on the Science and Policy of Global Change. They used their Integrated Global System Modelling (IGSM) framework to assess the rise in global average surface temperature that we might see under the Sky transition, which then led to the recognition that the extended ambition of the Paris Agreement, limiting the temperature rise to 1.5°C, was still a possibility. It wouldn’t be the energy transition alone that could deliver that, but the addition of a significant and rapid program of reforestation happening around the world. Nature based solutions (NBS) will be very important over the coming decades.

Sky on its own lands squarely between 1.5 and 2°C, meeting the primary goal of the Paris Agreement, but with large scale reforestation gives the world a shot at 1.5°C. The MIT report can be found here.

You can read the full story on the Shell website at www.shell.com/skyscenario.

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 www.shell.com/skyscenario.

It’s all in the numbers

dchone February 13, 2018

One of the noteworthy features of the 160+ nationally determined contributions (NDC) submitted to the UNFCCC following the adoption (and now ratification) of the Paris Agreement, is that no two are alike. True to the Paris Agreement, countries have submitted a description of their contribution, with most offering some indication of the emissions outcome, but the way this information is transmitted varies considerably by country.

In May 2016, the UNFCCC released a synthesis report of the NDCs, aggregating them in the only way that makes sense given the nature of climate issue, by cumulative emissions. Every NDC was turned into a cumulative carbon release to the atmosphere (i.e. quantification), which were then summed and compared to the ideal global carbon budget for a ‘well below 2°C’ pathway. Needless to say, the UNFCCC analysts almost certainly had to make numerous assumptions to do the calculations.

The problem that confronted the analysts was that not one of the NDCs was presented in the format they needed. Many offered an end goal in 2025 or 2030, such as the EU which is targeting a 40% reduction by 2030 against a 1990 baseline. Baseline years also vary across the NDCs. In most NDCs, little to nothing is said about what happens in the intervening years, so an assumption must be made about the likely trajectory. Others were presented as an expected reduction against a notional future emissions trajectory and some were presented without any emissions trajectory at all.

The variation in NDCs is now a well-known story, but the lack of quantification of NDCs has other implications which extend past the obvious analysis of the environmental outcome. It also limits the ability for carbon trade between the NDCs and potentially runs up against the accounting provisions of the Paris Agreement.

Those accounting provisions are dotted throughout the Agreement, but Article 4.13 is perhaps the most comprehensive. It states;

Parties shall account for their nationally determined contributions. In accounting for anthropogenic emissions and removals corresponding to their nationally determined contributions, Parties shall promote environmental integrity, transparency, accuracy, completeness, comparability and consistency, and ensure the avoidance of double counting, in accordance with guidance adopted by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement.

The above could be interpreted as a post-NDC (i.e. after the period for which the NDC applies) true-up of emissions, but even that requires summing all the emissions across all the years of the NDC, not just ticking off actions against a list or noting that emissions in the final year were as expected. Unless cumulative emissions are established for the whole period of the NDC, the environmental integrity of the NDC is questionable as it is cumulative emissions that determine the environmental outcome. Only a full assessment of the NDC in terms of cumulative emissions meets the other requirements of completeness, accuracy and comparability.

Further, post-NDC quantification of emissions is unlikely to be sufficient for trading purposes, or in the language of the Paris Agreement, internationally transferred mitigation outcomes. This is because transfers out of a country require a local corresponding adjustment. While this could also be done post-NDC, it should be done at the time of the transfer such that the country can determine the new trajectory it needs to be on and ensure policy measures are suitably modified to ensure compliance, particularly if transfers are large compared to national emissions (say, more than 5%). Of course, if both countries were operating economy wide cap-and trade systems the correction would be automatic, but that is hardly the case today.

The above makes quantification of NDCs an important and perhaps necessary step for the Paris Agreement, but agreement on this by the Parties appears to be distant. However, such a step is inevitable. As countries get closer to declaring full emissions compliance with the Paris Agreement, i.e. achieving net-zero emissions (NZE) or ‘a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases’ in the words of the Agreement itself, quantification becomes essential.

NZE will occur when the country in question has balanced the remaining emissions with sinks and there will likely be some remaining emissions well into the 22nd century. Those sinks will either be developed locally or purchased internationally via the transfer provision of Article 6. But both the buyer and seller of such sinks will have to implement careful accounting to ensure the integrity of the net-zero claim. This takes us back to the quantification discussion.

The Paris Agreement is rigorous in concept and the negotiators of 2015 should be commended for the thoughtfulness of their text. But as the delivery of the Paris ‘rulebook’ approaches, that same rigor does not yet appear to have the full backing of all the Parties.

Applying Pigouvian charges

dchone August 17, 2017

A recent article in the Guardian argues that fossil fuels receive about $5 trillion per year globally of unseen benefits, representing some 6.5% of global GDP. The journalist concludes that this must point to a dim future for this energy source. The discussion stems from a paper that has been recently published in the journal, World Development, but is originally a piece of work by two analysts who work for the IMF that surfaced prior to COP21 in 2015. The same authors are involved with the current article.

The new version of the paper classifies these benefits into two types,

‘‘pre-tax subsidies”— these arise when consumer prices paid by fuel users are below the opportunity costs of fuel supply (e.g., many oil producers in the Middle East and North Africa traditionally set domestic prices below international prices). This is the definition that leaders had in mind at the 2009 G20 Pittsburg meeting when they called for a phase out of energy subsidies (IEA, OPEC, OECD, & World Bank, 2010).
‘‘post-tax subsidies”— these arise when consumer prices are below the cost of supply when a ‘‘Pigouvian” charge ⁽¹⁾ is included to reflect environmental damages. Economic efficiency requires that the prices of goods and services reflect not only supply costs but also (i) (most importantly) environmental costs like global warming and deaths from air pollution and (ii) taxes applied to consumer goods in general.

A visit to the IEA website on energy subsidies shows that the value of pre-tax consumer price subsidy worldwide totaled $493 billion in 2013, falling to $322 billion by 2015 as oil prices fell globally. This is equivalent to ~$25 per tonne of oil equivalent, or $3.50 per barrel. By comparison, these amounted to $390 billion in 2009 (in 2014 dollars), the year the G20 and APEC commitments were made. The value of these estimates has fluctuated from year-to-year in line with reform efforts, the consumption level of the fuels in question, international prices for fossil fuels, exchange rates and general price inflation. IEA decomposition analysis reveals that, while movements in world prices typically have the greatest impact from year-to-year, policy interventions have played an important role as well. These subsidized prices are primarily focused on oil and electricity and in many cases, are a mechanism for distribution of benefits to very low income segments of the national population. For example, India subsidized oil, electricity and natural gas in 2015 for its consumers for an amount of nearly $20 billion, but is not a recognized oil producer.

However, the focus of the Guardian article is the lack of charges for externalities in relation to fossil fuel use. By applying a series of Pigouvian charges to fossil fuels, covering issues such as carbon dioxide emissions and air pollution, they argue that fuels are under-priced by some $5 trillion per annum. The additions made also cover issues related to fossil fuel use, but not directly caused by them. An example is road traffic congestion and safety which the article specifically mentions. These would also be externalities in a transport system powered by electricity. In total, these missing post-tax charges for coal amount to $2.5 trillion, oil is $1.5 trillion and natural gas about $400 billion. Pre-tax price subsidies for coal hardly exist, amounting to just over $1 billion per annum globally per the IEA.

Applying this methodology to fossil fuels also opens the debate for other goods and services. For example, many governments offer direct help to farmers and subsidise food prices. The production of rice and beef contributes some 6 billion tonnes of carbon dioxide equivalent to the atmosphere in the form of methane, which alone amounts to an externailty of $250 billion per annum or roughly $1.30 per kilo in the case of beef (vs. a US average ground beef price of $7 per kilo).

A robust and comprehensive application of Pigouvian pricing across the economy incorporating all externalities would likely touch every single product or service in use today, excluding any energy penalty related to fossil fuels. Environmental damage and health issues remain widespread in the world, despite great efforts to address them at every level of society. Many are simply a function of the vast scale on which manufacturing operates, which in turn results in some environmental degradation. In March 2014, the Guardian reported on the social and environmental costs associated with the production of rare earth metals, which have become critical in the manufacture of a multitude of electronic products today, including renewable energy systems. The article raised questions on cancer rates, which in turn links human mortality costs with these products.

In the case of fossil fuels, the simplest and most effective way of confronting this issue is to introduce a carbon price, ideally at a level that reflects the social costs of use. The World Development article uses a figure of around $40 per tonne of carbon dioxide. While this wouldn’t address every aspect of fossil fuel use, it would nevertheless go a long way towards addressing the concerns of the authors.

(1) This refers to the work of Arthur Cecil Pigou, a University of Cambridge economist who published The Economics of Welfare in 1920. In this book, Pigou introduced the concept of externality and the idea that external problems could be corrected by the imposition of a charge. By ‘externality,’ Pigou meant an indirect economic impact of an activity that happened outside the immediate system where the activity was underway. The externality concept remains central to modern welfare economics and is at the heart of environmental economics. In the case of climate change, the externality is the release of carbon dioxide into the atmosphere and the future social and economic impact caused by the consequent increase in the surface temperature of the planet. Externalities can be both positive and negative, but in the case of carbon dioxide emissions, it is considered negative. Pigou argued that the activities associated with a negative externality should be penalized to the extent of the impact, such that their real economic value can be assessed. This penalty is widely known as a Pigouvian Tax. Alcohol taxes are Pigouvian; so are taxes on cigarettes.