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.
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.
Many climate change bills and policies have arisen worldwide for climate mitigation and adaptation. These bills are still at the stage of being passed as legislation, with the most established being the European Emissions Trading Scheme. The development of these bills is important as the progress of multi-lateral global arrangements very often hinge on the outcome of national legislations. The COP15 in Copenhagen in Dec ’09 did not legally bind nations to reduction targets, and the Mexico COP16 will be important to resolve this.
A review of these bills shows the popularity of the cap-and-trade scheme. Carbon tax which in the opinion of most economists as being the most effective in climate change mitigation has not been proposed (although Japan has made a cursory mention of it). France, the only country that had previously proposed a carbon tax, has dropped it due to political opposition and being disadvantaged as the only country in EU to possibly implement it.
Most of the emissions trading scheme adopted by countries differ in slight aspects. Some adopt a fixed cap in emissions or cap on emissions intensity. Others adopt trading inter-firm only and limited international offsets. Countries adopt varying degrees of auctioning (and timeframe) for the emission allowances and exemptions for certain industries to prevent carbon leakages and maintain national competitiveness. All countries (including developing countries) mandate to have a greater use of renewable fuels. Below is an update of the climate bills worldwide, and their main propositions.
In the USA, the two main legislations are the Kerry-Boxer Bill Clean (Energy Jobs and American Power Act EJAP) and the Waxman-McKay Bill (Clean Energy and Security Bill CESB). The Waxman-McKay Bill was narrowly passed in Congress in Jun ’09. It proposes a 17% cut in emissions relative to the 2005 level, while the Kerry Boxer Bill proposes a 20% cut in emissions. The steeper cuts by the EJAP however has exempted emission from new sources like LNG industries, coal mines and landfills from the cap. At the Copenhagen COP15 last year, President Obama actually proposed a 17% cut in emissions. Both bills are similar and endorse an emissions trading scheme and will be reconciled in the House, before being signed into law. Other features of the bills are:
- Mandates electric utilities to meet 20% of electricity demand by 2020 through renewable sources and energy efficiency
- Auctions 15% of the emissions allowance, with the rest being given free to the industries. The auction revenue will help in deficit reduction and be spent on R&D for renewables technology and carbon capture and storage.
- Allows for the Environmental Protection Agency (EPA) to regulate carbon dioxide as a pollutant, effectively giving it more powers to regulate it.
- New rules to encourage development of nuclear fuel, LNG and advanced biofuels.
- Floor of $10/t of CO2 rising each year and ceiling of $28/t.
The European emissions trading scheme (ETS link) is a cap-and-trade scheme that started originally in two phases (2001-2005) and (2006-2012) in response to the Kyoto Protocol. The latter phase saw an expansion of members from EU12 to EU27, with the inclusion of the East European states. The period 1990-2007 saw a reduction of 9.3% in emissions level.
There is presently no international accord to replace the Kyoto Protocol, when it expires in 2012. The EU has however committed to reducing 20-30% of its emissions by 2020 relative to 2005, pursuant to similar reducing measures undertaken by other OECD countries.
In the new EU ETS, emission allowances will be auctioned instead of being freely given to most sectors (aviation, power generation, certain industries) in the earlier scheme. The amount of emissions allowances auctioned will increase progressively from 2013, with the auction revenue going to research & development, and offset schemes in the developing countries. However, to combat leakages and maintain competitiveness, certain industries like steel and cement will still be allocated free emissions allowances.
The ETS scheme covers only 40% of emissions, with transport, waste and agricultural industries not included. These sectors are instead mandated to reduce emissions under National Allocation Plans (NAPs) according to their level of development from the highest reduction (Luxembourg) to an increase (in Belarus). The plan is by 2020 to have 20% of transport fuels met by renewables. Existing schemes for the CDM will also be changed to be based by sectors instead of by project basis.
Australian carbon pollution reduction scheme (CPRS)
The CPRS (link) scheme proposes a 5-25% reduction in carbon dioxide emissions by 2020 of 2005 levels, with the actual level of reduction depending on corresponding actions by developed countries. The bill was debated in Parliament in May 2009, but was rejected in Nov ’09. A revised version of it is to be re-voted in May ’10. The bill plans for a cap-and-trade scheme by 2012, with an initial fixed price of A$10/t of CO2 in 2011, and full trading after this.
The revised bill also raises the level of industry assistance for emissions trade exposed industries. These industries predominantly include the coal, mining and other energy-intensive industries. A buffer of emissions level has increased to 10% for 60% assistance and 5% for 90% assistance, essentially allowing more leeway for unplanned emissions. Agricultural emissions have also been exempted from the cap-and-trade. A Renewable Energy Target (RET) has also mandated that 20% of electricity to be generated from renewables by 2020.
Other OECD countries that have proposed climate mitigation measures include Japan, Canada and New Zealand. Japan has endorsed a cap-and-trade scheme with a target reduction of 25% from 1990 levels by 2020. The cap-and-trade scheme does not impose a flat cap on emissions but instead an emissions ceiling on some polluters and a per unit production ceiling on others. Details remain to be worked out. (link)
Canada is also pursuing domestic emissions trading (link), which will subsequently be linked to the US. It has proposed a 17% emissions reduction by 2020 of 2005 levels, pursuant to the US doing the same. Its emissions trading scheme is only done between firms, with each firm having to meet its intensity targets. Deviations (+/-) from these targets will allow credit/ debit on its trading account. Canada is also targeting international emissions offset schemes but has limited these offsets to 10% of their emissions target. Companies are also allowed to contribute to a carbon fund at C$15/t to offset their emissions. This amount is fixed at 2010, and rising each year thereafter. This fund is used in the R&D of renewable technologies and CCS technologies.
New Zealand has proposed a 10-20% reduction in emissions by 2020 of 1990 levels. (link) It has adopted a trading scheme starting from 1 July 2010 for transport, energy and industrial sectors. There is a transitional phase until Jan 2013 with a 50% obligation only and a C$25/t of CO2 fixed price option.
Developing countries fall under the non Annex I category in the Copenhagen and emissions targets reductions are voluntary. However, emissions growth in developing countries (especially China, Brazil and India) is high and instrumental to most increases in global emissions.
Brazil (link) for example has committed to reduce deforestation in the Amazon, and increase further use of renewable fuels, including bioethanol and hydropower. This reduces an expected 36% of its emissions in 2020 relative.
China (link) has committed to 40-45% reduction of its emissions intensity of GDP, increases its share of non fossil fuel usage by 15% by 2020, and increases forest coverage by 40 million hectares. India just stated to reduce its emissions intensity by 20-25% by 2020 of its 2005 levels.
The Copenhagen COP 15 ended in Dec 2009 with an announcement at the last plenary meeting to ‘take note’ of the following salient points:
( see http://unfccc.int/resource/docs/2009/cop15/eng/l07.pdf for original accord)
- that global temperature rise will be capped at 2 degree Celsius in view of sustainable development
- that an assessment be completed by 2015 of the impact of any rise above 1.5 degree Celsius
- USD 30 billion be made available for the period 2010-2012 for mitigation measures in the developing countries. Thus far, Japan has pledged $11b, EU $10.6b and the USA $3.6b.
- USD 100 billion be made available per year by 2020 for mitigation measures in the developing countries
- that by 31 Jan 2010, Annex I countries will pledge the percentage of carbon dioxide reductions from a base year http://unfccc.int/home/items/5264.php
- that by 31 Jan 2010, non-Annex I countries list down mitigating measures for carbon dioxide reduction http://unfccc.int/home/items/5265.php
The accord is not legally binding as five countries – Venezuela, Bolivia, Cuba, Nicaragua and Sudan opposed the vote. After the accord, much finger-pointing was made amongst the members. How the accord will impact climate change and mitigation measures however are not much reported. The author takes the view that the accord is not a set-back as it appears. In fact, whilst it delays global agreements of its kind, regional blocs and national efforts at mitigation and adaptation will continue to persist.
Noticeably the lack of a visible accord after the expiry of the Kyoto Protocol in Dec 2012 has caused the drying up of the Clean Development Mechanism (CDM) over the past two months. The CDM allows developed EU countries to acquire emission credits through investing in projects that reduce emissions in developing countries. Most CDM projects have long project life span, and the uncertainty over its replacement has dampened its interest.
The closure of the accord caused an initial 10% knee jerk drop of EUX prices (€15.7 to 14.0 for the Dec 12 contract). Prices have since languished in the €14.0s, with the lack of an alternative after the Kyoto Protocol. The EUX is the only liquidly traded carbon instrument globally. Whilst its price does not reflect the global price of carbon, the fall in its value does indicates the lesser significance placed on carbon dioxide reduction.
In addition, talks of retaliatory measures among the developed countries have surfaced. This includes imposing carbon import taxes on exporting countries that ‘don’t do enough’. This helps to reduce carbon leakage, when carbon intensive industries shift to those countries having less strict regulations. A carbon import tax is not socially optimal and does not help in reducing overall emissions. They may act as the carrot-stick that forces conformance to global emissions standards ultimately.
In fact, countries are more likely to resort to allowances and rebates to protect their own carbon intensive industries. This is already happening globally for example with the CPRS in Australia and the Waxman-Markay Bill in USA. These policies grant rebates and carbon emission allowances on the materials and the energy industries at least for the first few years of bill enactment, effectively acting not much of a disincentive.