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.