The last few Conferences of the Parties COP have resulted in impasse among the developed and developing countries. Notably the less developing countries highlighted common but differentiated responsibilities amongst the developed countries on carbon dioxide emissions. Whilst developing countries acknowledged the need to curb their carbon dioxide emissions, they also emphasised that it was the economic and industrial development of the developed countries that have brought emissions to its present high level. Developing countries (including the likes of China and India) would not sacrifice the economic development and well being of its populace to reduce carbon emissions. On the other hand, developed countries highlighted the growing emissions of the developing nations (China is now the biggest emitter in the world). Whilst Europe is willing to go it alone, the same commitment cannot be said of other developed countries. Notably the USA would not go agree to any legally binding target without the participation of the developing countries.
Legally binding targets: the be all and end all?
That makes legally binding targets and enforcement – a key objective of international treaties hard to achieve. Negotiations lumbered on with the last COP 17 in Durban hailed as a breakthrough just for a ‘roadmap’ to an agreement in 2015. The difficulties are obvious – the recent EU unilateral move on an airlines tax on carbon emissions invoked threats of trade war and retaliation by China, India, Russia and the USA, with the latter even commenting that it was an infringement on their ‘sovereignty’. Given the nations do not even agree to economic payments of ~$10 million, how likely they will agree on more holistic international agreements?
In an ideal scenario, the international treaties sought to achieve legally binding caps on carbon emissions amongst the nations. These caps would preferably be linked via a global cap and trade agreement as a carrot and stick incentive for nations to reduce their emissions. The objective of a global market for a cap and trade is to assign a price on carbon and thence incentivise carbon abatement programs like renewable energies and carbon sequestration and storage (CCS). Much contention arises on the level of cap for each nation. Too low a level and at which base year would impede its economic growth.
This makes it difficult for carbon intensive countries like Canada to agree to binding agreements. Canada with its vast resources of heavily pollutive tar sands has already backed out of the Kyoto Protocol it originally was a signatory to. Other countries like Venezuela (Orinco heavy oils) and OPEC would have found it equally hard on any agreement. Even Japan with the recent closure of its nuclear plants in exchange for fossil fuels generation will find it hard to replace them in time with renewable energies to meet targets.
Market economics and technological drivers:
What international treaties fail to achieve – that of an equitable carbon price and incentives for carbon abatement projects and development are already been driven at national levels and on bilateral agreement levels. This is more the result of corporate entrepreneurship in response to rising oil prices than environmental conscientious governments. The EU ETS – a result of the multi-lateral Kyoto Protocol has seen its carbon price fell to a record low of €6.05 in early April 2012. This was the combination of record corporate investment into renewable energy generation and warm weather that caused an over-allocation of EUAs – a flaw of the cap and trade system that artificially assigns emissions permit quota. Present political discourse is ongoing to reduce the emissions quota so has to increase the EUA price. A higher carbon price is needed to send a strong signal to companies to invest in costlier carbon abatement technologies.
A cost-benefits study of climate change policies recommends a carbon price that slowly increases through the next decade. An initial low price would enable it to pick low-lying fruits (of low marginal abatement benefits). This is increased through the 2020s when more advanced abatement technologies become more economically feasible. A too high an initial price set would create large opportunity costs to other measures of social and economic welfare.
Recent technological advances and economies of scale have however made in some cases –carbon abatement technologies competitive. For example, onshore wind generation in some cases have reached grid parity. Solar PV generation costs have also been drastically reduced and projected by experts to be competitive with conventional electricity by 2015. Generally, on levelised costs of generating electricity basis, onshore generation of electricity costs between $70-225/ MWh. Solar PV electricity costs $200-$300/MWh. Coal generation and gas-fired levelised costs of electricity have cost between $40-$120/ MWh depending on the costs of fuel. See the 2010 IEA electricity generation costs by fuel. Over the past decade, renewable generation of electricity have benefited from subsidies and feed-in tariffs, which provided it initial consumer acceptance and lower costs. It is a victim of its own success now with a cut of the solar installation subsidy in Germany by as much as 29% from 1 Apr ’12 while the tax breaks for wind manufacturers in USA may not be extended beyond end of this year.
Other economic factors are at work in growing renewable generation. With spiralling growth in fuel consumption due to a youthful population, many Middle East countries have seen its crude export volumes drop. Notably Saudi Arabia saw its crude consumption increase from 1.2 in 2001 to 2.6 mb/d in 2011. Several Middle East countries still use expensive fuel oil/ crude oil for electricity generation. If this trend continues, Saudi Arabia may even turn to be a net importer of crude oil however unlikely it is in 2035. The Middle East governments recognise this and are building wind farms and exploiting its sunny conditions for solar power. A recent growth spurt has seen Abu Dhabi establishing Masdar city – an envisioned zero emissions city. See the article Middle East countries have reasons to back renewable energies. Other countries like Egypt and UAE are taking marginal steps towards non- fossil fuels generation (including nuclear generation). Another key reason that OPEC countries are backing renewable energies is that oil is still expected to retain its place as a main primary energy supplier till 2030s as assured by all outlook reports by IEA, BP and Shell.
What incremental benefits of international treaties?
Given the inexorable costs reduction of renewable technologies and its deployment, what will be the incremental benefits of legally binding emissions targets and the artificial market conditions created by international treaties ? It will hasten the development of certain backstop technologies -in particular carbon sequestration and storage (CCS). The CCS has been recognised by IEA as a lever technology to lower world carbon dioxide emissions from 2020s. An estimated carbon cost of €40-50 per tonne will make it economically feasible now, when present price is only €6. However, existing CCS technology is still at a research stage for fixed electricity installations. The only economic use of CCS is in enhanced oil recovery (EOR). The World Coal Association updates a current map of CCS projects.
Another backstop technology that may be promoted is electric vehicles – notwithstanding technologies/ measures like – solar, wind, hydro, geothermal, biomass and energy efficiency programs that are already growing without multi-lateral treaties. Electric vehicles however source their power from power generation facilities. Only if the latter power is from renewable generation will carbon emissions be reduced. Further, due to existing vehicle life span – only 20 million electric vehicles (source IEA) out of 1 billion vehicles is expected to be on the roads. This may reduce an estimated 0.2 Gt of total 30 Gt annual emissions (with transportation contributing ~30% emissions) – not much incremental benefit.
A rosy scenario has been painted about the emergence of natural gas as a major fuel source. This was contributed in part by an increase in unconventional gas supply – in particular coal bed methane, tight gas and shale gas. Coal bed methane production is growing but is expected to be important in countries with large coal reserves – Australia and Canada.
Shale gas boom:
Of this natural gas boom, shale gas share of supply has increased to 40% in 2011 from 10% in 2005 in the United States alone. Dick Cheney in 2005 then Vice-President exempted gas drilling from federal regulations. This led to advances in horizontal drilling and hydraulic fracturing and the subsequent boom in shale gas revolution in the United States. Shale gas is expected to contribute to ~13% of total gas volumes in 2035 worldwide under the Golden Age of Gas Scenario (GAS).
Much of the shale gas drilling techniques were attempted by small independents initially. This has contributed to recent boom in shale gas investments in particular with large foreign entities for ‘technological transfer’:
- in Dec 2011, a $2.3b joint venture between Total S.A. (25% stake), and Cheaspeake Energy and EnerVest to develop the Utah Shale in Ohio
- in Dec 2011, a $0.9b joint venture between Sinopec and Devon Energy for shale gas development in the United States.
- in Jan 2012, Marubeni $1.3b joint venture with Hunt Oil to develop Eagle Ford shale resources
This shale gas revolution has spread worldwide. Below is a figure showing the shale gas reserves estimated by the Energy Information Administration. Presently countries that are investing heavily include China, Argentina and Poland whilst licensing rounds have started in India and Israel.
Environmental considerations for shale gas:
However, not all is rosy in this shale gas scenario – in particular environmental and costs considerations have surfaced. Scientists have speculated the following environmental concerns:
- Hydraulic fracking possibly causing two separate earthquakes in Ohio and Blackpool, UK, although the link has not been confirmed.
- Fracking chemicals leakage to the water aquifer in Wyoming as detected by the Environmental Protection Agency, (EPA). Again the evidence is not conclusive, but this has led to legislation requiring drilling companies to publicise the content of their proprietary fracking liquids. Many in the industry advocated tighter regulations and casings on the drilling as enough to prevent such leakages.
- Huge amount of water resources needed for the fracking process. Total volume pumped into a well is from 7500-20000 cubic metres. (source: IEA GAS report)
- From well head to burner, shale gas production is also more emissions intensive relative to conventional drilling – although only marginally at 3.5%1 higher than conventional gas production if modern techniques are used. (source: IEA GAS report)
Already, these environmental concerns have led to bans and moratorium in Europe – in particular France, Germany and Britain. Only Poland has been going ahead in the environmental conscious continent.
There is also a lack of price projection and its effect on project economics. With estimated break even costs for shale gas production at about $4 mmBtu2 and present Henry Hub prices at $3 mmBtu3, present production is at a loss. The shale gas revolution is a victim of its own success in the United States. Supply glut is only expected to clear in 2015. A key reason investments still keep flowing is technology transfer and realising that shale gas could be a future revolution.
Notwithstanding these, production over the past 3-4 years is still shedding light on the reserves profile. Presently, a hyberbolic decay profile is assumed whilst in a study an exponential decay is found more appropriate. Total recovery is reduced by half consequentially. Given the short life of existing wells, costly re-fracking may also be needed later. These have important impacts on project economics. Already, reserves estimation in the large Marcellus shale resources has been reduced in a new USGS survey to 84 tcf from a previous 264 tcf by the Department of Energy.
Implications: Higher costs and lesser abundance
The overall implications of these environmental considerations and project economics are potentially higher costs and lesser abundance. However the cause and effect may not be linear. Potential factors include the fast development of LNG infrastructure to link world markets3, and the de-linkage of gas to oil prices outside of the Americas. Maintaining gas prices linkage to oil indices will de-link its own supply and demand fundamentals to gas prices. The construction of LNG terminals will facilitate the export of the gas to markets in Asia, priced at >$10/mmBtu. See the author’s earlier article on a trading hub in Asia. The consequential development of any protocol post 2015 will have a bearing on the relative emissions advantage of natural gas to its substitutes, fuel oil and coal.
1 – Other study reports highlight shale gas emissions (including the higher GWP of methane) to be much higher. This remains a subject of debate.
2 – This estimate figure varies greatly among different well and reports – $2-$6 per mmBtu.
3 – This is progressing at a fast pace worldwide, but still faces obstacles – for example the recent aborted Hess Fall River project.
In the recently concluded COP 17 in Durban, a less well known outcome was the addition of Carbon Capture and Sequestration (CCS) as a Clean Development Mechanism (CDM) project.
The addition of CCS was a major coup for coal lobbyists. Although it was not a desired outcome for environmentalists, the use of coal as a major energy source is here to stay. First for the facts – coal in 2010 supplies almost 30% of the world primary energy needs – 12 billion toe (from bp energy outlook 2011). China itself generates more than half its electricity from coal burning.
By 2030, the world energy demand is expected to increase 45%. Whilst there will be an increasing use of renewables and gas, this is not expected to displace coal as a major energy source. Coal as a percentage supply of primary energy is expected to decrease only marginally to 26%. (Source: bp)
The recent Fukushima nuclear accident has further shifted nuclear energy dependence to other sources of energies including renewables and gas. Wind and solar energy – the two main forms of renewables are intermittent sources of energies and cannot fully compensate nuclear energy as a base load. The tapping onto the reserves of unconventional gas – that of coal bed methane and shale gas has been offered as a solution, although the environmental impact of hydraulic fracking for shale gas is presently under investigation.
A portfolio approach of reducing emissions is thence the only solution forward – that of broadening the energy source base to low emissions fuels, energy policies (taxation and cap and trade) and increasing energy efficiency. A policy scenario target motioned by the IEA is to limit atmospheric concentration to 450 ppm of carbon dioxide and thence temperature rise to not more than a critical threshold of 2 degree Celsius1. This has been remarked as ‘hard to achieve’ due to the lock-in of existing infrastructure (eg power and industrial plants and use of fossil fuels in existing car fleet). In a New Scenario policy report (in the World Energy Outlook 2011 by IEA), CO2 emissions is expected to reach 35 Gt in 2035 resulting in a 650 ppm CO2 concentration and a temperature rise of 3.5 deg Celsius. CCS is a swing measure that has been identified as a critical technology to reduce emissions from coal power plants by the IPCC 4th assessment report.
CCS is not a new technology having been used to enhance recoveries in oil fields. However its use in coal fired power plants has not been commercially tested, albeit pilot plants are in USA and Norway. See the world coal association link on available CCS technologies. In China, coal fired plants alone contributed 6.5 Gt of total 7.7 Gt carbon dioxide emission in 2009. In its latest 5-year Plan in Apr’ 11, an objective of the government is the reduction of environmental pollution. This can be substantially achieved through the replacement of inefficient and pollutive coal power plants. By including CCS to the list of CDM additionality projects, the private sector can also be economically motivated to modernise existing coal plants in developing countries. These measures will hasten the commercialisation of CCS through technological learning by doing. CCS can presently be classified as a ‘back-stop technology’.
The use of coal for power generation is here to stay for the foreseeable decades, and a pointed policy measure is to use it in a sustainable manner.
1 – this was purported in the IPCC 4th AR, although the climate science linkage has been disputed recently.
Being the major producer of fossil fuels which are the single important contributor of carbon emissions, OPEC role in climate change is pivotal. The key to reducing greenhouse emissions is the use of renewable and alternative energies and less use of polluting fossil fuels. Whilst OPEC has to ensure the future profitability of its oil revenue, it at the same time wants to be perceived to be an advocate of climate change issues.
Change in OPEC stance
In the early 2000s when climate change starts to gain global attention, there were initial rumblings among members of OPEC. There were fleeting suggestions of compensation for schemes like carbon trading and carbon tax that would have reduced the attractiveness of crude as a fuel source. OPEC wanted an assurance that even as it invested in its capacity, future demand would be assured.
Over the past decade, even as climate change talks stagnated and gained more prominence, OPEC has changed its stance. In 2007, it adopted a $3b climate change fund to fund research in carbon capture and sequestration (CCS) technology, especially in the area of enhanced oil recovery. This research is envisaged to reduce the carbon emissions from the use of fossil fuels and increase its attractiveness. Such technology is more suited for immovable facilities like power plants and industrial facilities (eg refineries). At the moment this technology is prohibitive and will be cost effective only if carbon price reaches more than $60/tonne. (Comparatively, the present EUA on the european trading scheme is about $22 at time of writing.)
The electric vehicle and transportation fuels
The advance of CCS technology is not likely to make an immediate significant reduction in carbon emissions due to the exorbitant costs to modify existing industrial facilities, and potential fuel switching to the less pollutive and cheaper natural gas.
A recent Apr 2011 report by the IEA highlighted the progress of the use of renewable fuels. However, since the strong production growth of 2010, its growth (including bioethanol and biodiesel) has slowed to less than 2mb/d. The use of such biofuels is also strongly dependent on mandates and subsidies, making it an unattractive proposition.
An analysis of the usage of fossil fuels indicates transportation fuels to be the main demand driver. Gasoline, jet fuel and diesel constitute 21.3 mb/d, 6.9 mb/d and 21.2 mb/d or 55% respectively of 90 mb/d global demand (notwithstanding bunker fuel which will change to use marine diesel in the next decade).
It is the advent of the electric vehicle that may potentially displace the major use of transportation fuels and thence fossil fuels. It is this area that OPEC will probably be watching. The use of such vehicles will take time to filter through as old vehicles are replaced. Further it requires infrastructure to be built for the re-charging and maintenance of expensive batteries. A research by Goldman Sachs estimates this revolution to slowly take place over the next 5-10 years. For its use by the mainstream consumer, this will take an even longer time.
In the interim period, the insatiable global demand for crude oil from the emerging economies is expected to increase, creating a temporal period of imbalance in demand/ supply. The world is not going to wean itself of dependence on fossil fuels in the medium term. This will continue to incentivise OPEC to invest in existing capacity.
Almost a year has passed since the COP15 in Copenhagen. An earlier note by the author highlights the aftermath of the Copenhagen Accord.
The Copenhagen Accord closed with a list of salient points to be observed but are not legally binding on the signatories. The next COP 16 is taking place in Cancun, Mexico from Nov 29 to Dec 10 2010. Over the past year, much has changed in the climate policies taking shape in the various countries.
Firstly, instead of a multilateral binding emissions cap on the countries, there have been more national level programs to reduce emissions. The cap-and-trade program which would have seen emissions targets in place for the various countries appears to be dead. Instead, with rising social awareness a carbon tax regime appears to be gaining popularity among many nations. Among countries which have implemented the carbon tax are India in Jul 2010 and South Africa in Sep 2010. Carbon taxes are not new and have been in place in several European countries like Switzerland, Denmark and Finland in one form or another. They have also been in debate recently in countries like Singapore, Taiwan and more importantly China for implementation starting from 2012. Being unpopular as they are, they are likely to face political pressure for passing into legislation. Any form of tax will likely see an equitable distribution to other forms of rebates as what have happened in several European countries in the past.
See the author’s note on hybrid of taxes and a state cap-and-trade program. https://erictham.wordpress.com/2010/01/23/a-carbon-state-taxes-and-a-nations-cap-and-trade-hybrid/
On a national level, countries have also invested heavily in R&D and pilot plants on renewable technologies. Notably China has poured billions into solar power, wind and nuclear (if it qualifies as renewable energy), and will emerge as the leading nation on such technologies.
The mid term elections victory by the Republicans in the USA has also put a damper on multilateral agreement on emissions targets. The Republicans have been moving backwards on pledges on emissions targets and have even cast doubts on the scientific bases of global warming. With a lack of impetus from the largest emitter, it is unlikely that the COP16 will see any binding agreement among the nations on emission targets. Whilst carbon taxes have been studied by economists to be more efficient and distributional in its effects to reduce emissions, it lacks a volume target which the cap-and-trade program offers. Further it lacks a carrot-and-stick discipline amongst nations which only a volume target can provide.
Looking ahead, the COP16 is more likely to see piecemeal agreements in place. These may include technology transfer to poorer countries, financial aid to countries for reforestation and forestalling deforestation, and a central body for carbon monitoring and measuring. The highly successful clean development mechanism (CDM) over the past few years is likely to decline in importance over the next two years. This is partly as the Kyoto Protocol expires in 2012 for the European countries without a new deal in place. The main recipient of the deals, China has also seen a saturation of deals over the past few years.
Recently, controversies on climate change have surfaced. This includes the much respected IPCC group that won a Nobel Prize for its work on perils of climate change. In particular, the IPCC was criticised for using unsubstantiated technical articles (in the National Geographic) in establishing global warming over the ages. Its much hyped claim that the Himalayan glaciers will disappear by 2035 was also retracted due to previously inconclusive evidence. A scandal arises over East Anglia University a leading climate research facility in UK, for having emails deleted to cover up actual earth cooling data. The wave of media attention on global warming and backlashing over climate critics have cast the latter in bad light. It appears that the global warming have been over-sensationalised.
First for the facts. It is true that carbon dioxide concentration has risen considerably over the past century from 250 ppm to 390ppm presently. This has been caused by man-made activities with the industrial and transport revolution over the past century, and an extensive use of fossil fuels.
Now for the science. However, climate science has not evolved to an extent to relate an increased carbon dioxide concentration in the atmosphere to global warming. The earth is a complex system, and factors like thermohaline circulation, methane beds or plate tectonics are not fully understood for its impact on the global warming. Further, the earth being millions of years old have undergone cycles of warming and cooling in its long history. The data that have been collected over the past few decades just constitutes a statistical blip in the bigger history of things.
A recent interesting article by Paul Krugman claims not countering global warming leaves future generations the dire risk of not having an environment fit for living. The author is of the opinion combating global warming is an economic one. Whether carbon dioxide emissions ultimately leads to global warming or not is best left to the scientists.
However, the world needs an economic push. In the 1980s, it was the electronics revolution. In the 1990s, it was the Internet revolution, and the 2000s saw a telecommunication revolution with the advent of iPod and wireless technology. Moving ahead for the next 2 decades, it is the green economy. The green economy will provide hybrid vehicles, hydrogen fuel cells, energy efficient buildings, renewable energies and unconventional sources of energy like shale gas, oil-sands from which jobs will be made available. Further, this development of alternative sources of energy and energy efficiency will help to improve energy security. This is in spite the IEA has projected that in the 2030s, the main source of primary energy will still be fossil fuels.
The automobile industry for example needs a push. Gone are the days of the gas-guzzling SUVs. Instead, Congress has mandated to improve the miles per gallon to 35 mpg by 2020, a level that is still behind the Japanese vehicles. Such a push towards the green economy provides a conduit for human ingenuity and technological innovation.