The recent vote in the European parliament shows it to be strongly in favour of introducing carbon border adjustment mechanisms (CBAMs) for sectors covered by the EUETS.
On 10th March the European Parliament passed a resolution on the design of a WTO-compatible EU carbon border adjustment mechanism (CBAM)[i]. The vote was non-binding. However it shows where the debate has reached.
Perhaps the most striking thing about the vote was the size of the support for the introduction of CBAMs. The Parliament voted 444 to 70 in favour. This stands in contrast to the position as recently as 2017, when a majority in the Parliament voted against such measures. (An initial amendment on possibility of including imports in the EU ETS was passed in 2008, the start of Phase II of EU ETS, but nothing has ever been implemented.)
The vote recommends implementing CBAMs by setting up a separate pool of allowances, mirroring the ETS price[ii]. This places no restriction on the volume of emissions embodied in imports, but ensures that it pays the same carbon price as EU producers. A further provision states that importers should not to be charged twice for the carbon content of their products, implying an adjustment or rebate for any carbon price already paid.
The proposed sectoral coverage includes all imports of products and commodities covered by the EUETS. As a starting point it recommends covering at least power generation, steel, cement, aluminium, oil refining, paper, glass, chemicals and fertilizers, which would already lead to 94% of industrial emissions under the EUETS being covered.
Wording on the need for a rapid phase out of free allowances was removed by a narrow vote on an amendment. However the resolution as passed notes the incompatibility of CBAMs with free allocation for the same tonne of emissions, and some sort of phase-out of free allocation seems clearly envisaged.
There is mention of special treatment for Least Developed Countries, but there is no explanation of what this means. Possibilities range from the benign, for example using revenue raised from CBAMs to assist in achieving low carbon development pathways, to the highly undesirable, for example giving exemptions that incentivise polluting industry to move there to avoid CBAMs.
The resolution indicates that the ultimate goal is for CBAMs to disappear as the world adopts similarly robust pricing schemes. However this seems a distant prospect. The likelihood of CBAMs needing to be retained seems to be implied by a recommendation that an independent observatory body be established to monitor implementation.
The next major step will be when the Commission publishes its proposals in the summer. It remains unclear what those proposals will be and what will eventually be passed. Indeed it remains possible that eventually no CBAM proposals will be passed into law, or that they may be introduced to a quite limited extent. But as things stand their introduction looks likely, and it will be one of the most significant changes to the EUETS since its introduction.
For many years carbon prices have been too low to effectively incentivise enough of the actions needed to meet climate targets. There are now signs that this is changing.
Carbon pricing is widely seen as crucial for securing cost-effective emissions reductions. However for many years carbon prices have mainly been too low to bring on the changes required to limit climate change[i]. Prices of $50-100/tCO2 or more are likely to be needed[ii]. However, even in 2020, the World Bank’s annual report on the State and Trends of Carbon Pricing showed that almost half of emissions covered by carbon pricing were seeing a price of less than $10/tCO2, and around 85% were seeing a price of less than $30/tCO2. At the time this included emissions under the EUETS[iii].
However there are now signs that this is changing. The price under the EU ETS, the world’s largest carbon market, was below €10/ tCO2 for much of the period from 2012 to 2017 (see chart). However, prices have risen strongly over the last few years, as a result of reforms to the system, and of the prospect of tighter caps in future as the EU moves towards greater emissions reduction. Prices are now around €40/tCO2. This is much closer to what’s needed.
Chart: Prices for allowances in the EUETS (€tCO2)
Note: Dates on axis correspond to start of the year. Source: Ember.
Looking ahead, there is an emerging trend towards much higher prices in some places. Several jurisdictions have set intended levels for prices in 2030 that are around two to five times current prices under the EUETS. Prices under the carbon tax for industry in the Netherlands are due to rise to €125/tCO2 by 2030 (see previous post). Norway has now proposed an even more ambitious carbon tax, reaching a price of €200/tCO2 by 2030[iv]. (Like the Dutch tax it will be a top-up tax, adding to the EUA price to reach the target level in the covered sectors.) Canada intends that prices will reach C$170/tCO2[v],while Ireland has set a target level for its carbon tax of €80/tCO2[vi], again both in 2030 (see table).
Target carbon prices for 2030
Target carbon price per tonne for 2030
€125 for industry €32 for power generation
At the moment such examples are too few and volumes covered are too small for this to be regarded as a global trend. However, such price levels have the potential to reframe expectations of carbon price levels, and so help enable similar prices elsewhere.
As carbon prices rise it will be essential to make sure that increases are politically acceptable (see an earlier post for some ways this can be achieved). And although higher carbon prices have the potential to accelerate decarbonisation, to be fully effective they need to be accompanied by appropriate supply side measures, such reinforcement of grids and support for new technologies
Nevertheless, the higher prices we are now beginning to see offer hope of much more effective carbon pricing over the next few years.
Paying CCS projects per tonne of CO2 captured tends to create incentives to make more CO2. Basing payments on emissions savings, with actual emissions compared with what they would be without CCS, provides much better incentives.
There is a story that a city was over-run by snakes (or rats in some versions of the story). The authorities put a bounty on snakes, with a reward for every dead snake presented. This worked for a while. But when many of the snakes had been killed, the people began to miss the income. So they started breeding snakes to earn the bounty. When the bounty was removed people released the snakes they had been breeding, and the town was over-run again. I don’t know if this story is true, but apparently there is real example of something very similar from Georgia in the USA in 2007 with a bounty on wild pigs[i].
This story illustrates how perverse outcomes can arise if you target something that looks like what you want to achieve (fewer live snakes) but is actually something different (more dead snakes).
Payments for tonnes of CO2 captured by a CCS project can lead to exactly this sort of problem. The atmosphere is over-run with CO2 and you want to reduce emissions. But if you put a “bounty” on CO2, in the form of a contract payment for each tonne of CO2 captured, you provide incentives to make more CO2, just as there was an incentive to breed more snakes.
The current proposals by the UK Government run into exactly this problem, because CCS support contracts include payments based on the number of tonnes of CO2 captured[ii]. This makes captured CO2 a valuable product, and thus creates incentives for more production of CO2 (a CO2 factory), while disincentivising energy efficiency. It could also potentially make less efficient projects appear cheaper than others on a cost per tCO2 basis, because they will be producing more CO2 for the same manufacturing output, and so may benefit from economies of scale in capture, and thus reduced costs per tonne.
The incentive to produce more CO2 is seen in its clearest form when energy is cheap. This may be, for example, due to a fall in market energy prices, or access to low costs energy, for example at a refinery. If a factory reduces output of its main product, it may continue to burn fuel and run it through the capture process anyway, because the capture payments make this profitable. It will essentially get into the CO2 production and capture business.
A less extreme form of this type of distortion is the reduction in incentives for energy efficiency, either in the factory or the capture unit. An energy efficiency project may be profitable without the capture incentives, but the loss of contract payments for tonnes captured may make this uneconomic.
Illustrative worked examples of both these issues are included at the end of this post.
Improved incentives by estimating tonnes avoided
A better choice is to base payments on the amount by which emissions are reduced by the operation of the CCS plant. This represents the actual environmental benefit of the project. It gives better incentives and a better basis for comparing projects.
The emissions reduction is the difference between:
what would have been efficiently emitted without the capture plant operating; and
what is actually emitted with the plant operating.
Emissions without capture (tonnes) – emission with capture (tonnes)
This calculation approximates the environmental benefit of the capture project (though is not on a full lifecycle analysis in this form).
It is not dependent directly on tonnes captured, so gives no incentive for additional CO2 to be produced. However, it still does give incentives for increased capture rates of other changes that reduce residual emissions (the 5% or so not captured).
This incentive extends to choosing the appropriate size of capture unit and efficiently operating the plant, including optimising the capture rate.
This approach requires the emissions that would have happened without the capture plant to be estimated (the counterfactual). This can, for example, be based on the following.
Benchmark emissions per tonne of product. This may be based on those under the ETS, which already exist for most producers at risk of carbon leakage.
Historical emissions per tonne of product from that particular plant.
Some other metric fixed in advance.
Something like this is already envisaged for power projects, with payments based on MWh produced.
Under this approach there is no incentive to burn energy to generate capture revenue, because the payment does not vary with tonnes captured. It is only affected by the benchmark and residual emissions. However, the costs are still incurred in making extra CO2, so it becomes highly unprofitable.
Similarly, no net revenue is lost by an energy efficiency project. Indeed some may be gained due to reductions in residual emissions. Incentives are thus maintained or strengthened. The incentive to reduce residual emissions is created by the carbon price, and possibly by additional contractual payments (see note at the end of this post).
There are some challenges to implementing this approach, but it is broadly in line with the benchmarking approach for free allocation of allowances under an ETS. As such, it should prove entirely practical, although, like free allocation, not entirely uncontentious.
Payments based on reductions in emissions are a much better approach than payments based on tonnes captured, and need to be implemented for forthcoming capture projects.
Adam Whitmore – 17th February 2021
Example: Incentives to make extra CO2.
The table shows and illustration of how this might arise. The numbers are illustrative, but broadly realistic. Natural gas costs around £10/MWh, so it costs just under £60 to make a tonne of CO2 for capture. (Historic natural gas wholesale prices have mainly in the range 9-26/MWh[iii]over the past decade, although they fell below this range in 2020.) If incentive payment for capture are £80/tCO2 (excluding transport and storage), then making CO2 for capture is profitable, even allowing for some non-fuel operating costs for the capture process. This does not happen if payments are based on emissions savings.
Tonnes of CO2/MWh fuel (GCV)
Fuel to produce 1 tonne CO2 (MWh)
1/0.184 = 5.43
Fuel used per tonne CO2 captured assuming 95% capture efficiency (MWh)
5.43/0.95 = 5.72
Fuel cost (£/MWh GCV)
Cost of fuel per tonne CO2 captured (£/tCO2)
5.72*10 = 57.2
Non fuel opex per tonne captured (£/tCO2)
Cost of uncaptured emissions at 95% capture and £40/tCO2 (£/tCO2)
Total costs per tonne captured (£/tCO2)
57.2 + 10 + 2 = 69.2
Revenue per tonne captured (£/tCO2)
80 THIS REVENUEDOES NOT EXIST WITH ALTERNATIVE APPROACHES, SO COSTS ARE NOT RECOVERED
Profit per tonne captured (£/tCO2)
Assumptions: Natural gas cost £10.00 per MWh. No additional costs from producing energy to run the capture process, as equipment is already in place and the energy from the additional fuel burn here is sufficient. However there may be some additional electricity purchases costs is electricity to run compressors is bought from the grid. There are some incremental non-energy operating costs in running the capture unit. These are £10/tonne. The 5% not captured pays a carbon price of £40/tonne. Carbon captured receives a payment of £80 per tonne captured.
Example: an energy efficiency project.
In the illustrative example shown below, improved energy efficiency is economic based on fuel cost savings alone, by £4/MWh. However there is a loss of revenue from incentive payments due to smaller volumes of CO2 being captured, which is only partly offset by savings in capture plant operating costs. This loss of revenue leads to a financial loss on the efficiency project of £5/MWh. This makes the project uneconomic. Again, this does not happen if payments are based on emissions saved.
Cost of energy efficiency per MWh saved (£/MWh)
Fuel cost saving (£/MWh)
Profit per MWh saved
Reduction in tonnes captured per MWh saved
Loss of incentive payment at £80/tCO2 (£/t)
14.0 NO PAYMENTS ARE LOST UNDER ALTERNATIVE APPROACHES SO ENERGY EFFICIENTY REMAINS PROFITABLE
Savings in capture plant operating costs
Profit per MWh saved
4 – 14 + 5 = -5 (now makes a loss)
What is the effective carbon price when payments are based on emissions reductions?
There is the risk off double penalty for additional emissions if payments under a contract are reduced and a carbon price is also payable on residual emissions. This can be addressed simply by paying only the difference between the carbon price and the strike price on the residual emissions. Payment would be:
– residual emissions * carbon price this is the payment under carbon pricing system
This would effectively charge a higher carbon price for residual emissions. This would give stronger incentives, which may be appropriate for early demonstration projects. An alternative would be to price any residual emissions at the carbon price only. Payment would be:
Benchmark emissions * strike price
– residual emissions * carbon price this is the payment under carbon pricing system
The Dutch Carbon Tax illustrates how taxes and emissions trading can be combined. It acts as a top-up to the EUA price, in effect putting a floor on the carbon price. It also has exemptions from the tax which work very like the allocation of free allowances in an ETS.
On the 1st of January 2021 the Netherlands introduced a new carbon tax for industry. The tax mainly applies to emitters covered by the EUETS, but also extends to waste incinerators, which are currently outside the EUETS. The design is similar to the tax in power generation, introduced a year previously.
The tax in effect tops-up the EUA price. If the EUA price is less than the tax, the amount of tax paid is the difference between the tax and the annual average EUA price for the year. For example, if the carbon price is set at €125/tCO2 in 2030, and the annual average EUA price in 2030 is €50/tCO2 a tax of €75/tCO2 is payable. The tax is payable after the year end. If the EUA price is above the level of the tax then no tax is paid. Waste incinerators pay the tax in full.
In this way the tax sets a minimum level for the carbon price (a floor price), but does not prevent the carbon price from going higher if EUA prices are high.
The level of the taxes has been set out from now to 2030 (see chart). For industry the price rises linearly from €30/tCO2 in 2021 to €125/tCO2 in 2030. The taxes are intended to be consistent with the Netherlands’ decarbonisation targets, and their level is subject to review and revision over time to ensure consistency with the targets.
Chart: Carbon taxes in the Netherlands
To give time for industry to achieve emissions reductions there are exemptions from the tax, called dispensation rights. These dispensation rights mean no tax is payable on some proportion of a benchmarked quantity of efficient emissions. Benchmarks for dispensation rights will fall over time, as will the proportion of benchmark emissions qualifying for dispensation rights.
This resembles free allocation of EUAs according to a benchmark in the EUETS. Indeed, the benchmarks for free allocation under the EUETS and dispensation rights under the tax are linked. Unused dispensation rights can be sold to other emitters covered by the tax, but not to intermediaries.
The dispensation rights under the tax and the free allocation of allowances under the EUETS have very similar effects. Both remove carbon costs for a benchmark level of emissions.
This approach in effect creates a hybrid between an ETS and a carbon tax. In particular it puts a floor on the carbon price, and provides exemptions similar to those achieved with free allocation of allowances, but as part of a a tax mechanism. It illustrates the way in which design of carbon pricing can incorporate similar features in both a tax and an ETS. Debate should focus on features and effectiveness, not on abstract debates about emissions trading vs. taxes.
Adam Whitmore – 22nd January 2021
Thanks to my colleague Christiaan Gevers Deynoot for helpful insights into this tax.
The rate of installation of solar and wind electricity generation needs to increase by a factor of more than five to reach net-zero emissions globally by 2060.
Electricity generation from solar and wind will be the central feature of a zero-carbon global energy system. Solar and wind generation have already reached large scale, with increasing rates of installation and falling costs. In 2019 solar and wind accounted for over 8% of global electricity generation[i]. However, much more is needed. The market for electricity will grow enormously as low carbon electricity replaces fossil fuels in many applications, and solar and wind will take a greatly increased share of this larger market.
So how much will solar and wind need to grow if the world is to reach net zero emissions by 2060?[ii]
I’ve estimated this by looking at three factors:
Total final energy consumption (end use). This is assumed to be similar to 2019 levels of around 100,000 TWh p.a. (350 EJ p.a.) in the central case, with a sensitivity of 25% total growth.
The proportion of energy consumptions that is met by electricity (including by hydrogen produced by electrolysis). This is assumed to be 80% in the central case, with a range 70-85%
The proportion of electricity from solar and wind. This is also assumed to be 80% with a range 70-90%.
The basis for these assumptions is outlined at the end of this post.
The analysis implies that solar and wind will meet around two thirds of world energy demand by 2060. This is approximately 30 times the current total generation from these sources (see chart).
Chart: Composition of Global Energy Consumption
To reach this total, about 1,600 TWh p.a. of electricity generation from wind and solar needs to be added every year on average between now and 2060, more than five times the 2019 rate of growth of 300TWh[iii]. To reach this total by 2050 would require around seven times the current rate.
The multiple of current rates of installation needed for net-zero is shown in the table below, with the range corresponding to the range of assumptions noted above.
Table: Multiple of current installation rate for solar and wind necessary to reach net zero global emissions
Net zero by 2060
4 – 8
Net zero by 2050
5 – 11
Most individual assumptions make little difference to these estimates, with estimates continuing to lie within the ranges shown. The most significant differences arise from variations in assumptions about the amount of biofuels, the amount of hydrogen made from natural gas with CCS, rather than by electrolysis, and to some extent amounts of nuclear and CCS in power generation, including the retrofit of CCS to existing power plants. Explicitly accounting for efficiency losses in making hydrogen from electrolysis would increase the need for wind and solar still further.
The main conclusion appears robust: a very large scale up of solar and wind, 4-11 times the current rate of installation, is required to enable of the huge switch away from fossil fuels necessary to eliminate emissions by around mid-century. This is broadly consistent with estimates by the International Renewable Energy Agency (IRENA) [iv].
Although the scale-up is very large, there do not appear to be any fundamental constraints preventing it. For example, the amount of land used for solar by 2060 would be enormous – about 0.4% of the earth’s land surface[v]. However this does not seem an insuperable barrier – for example it is much less than now used for agriculture. Other challenges include storage. Batteries and increasing interconnection are likely to reduce difficulties caused by variation in renewable output. It also seems likely that, as I’ve assumed, hydrogen will play a significant role as a storage medium to complement variable renewable electricity, especially for storage over weeks or months.
Meanwhile, continued increases in the scale of solar and wind generation, and consequent learning, will continue to reduce costs significantly. This will in turn greatly reduce the cost of the transition to net zero.
The need for such large growth implies continuing focus on policies to support the deployment of wind and solar electricity generation, including greatly expanded and enhanced electricity transmission grids. Other technologies will also be essential, but they all need to be developed in the context of the predominant role of wind and solar electricity generation.
Adam Whitmore – 14th December 2020
Total energy consumption in 2060
This refers to energy end use (final consumption), not primary energy, which includes among other things, large losses from using fossil fuels in power generation. I have here included electrolysis to make hydrogen as part of final consumption. If the efficiency losses from this process were added to final consumption as shown here the demand for wind and solar would be even greater.
The International Renewable Energy Agency (IRENA) has developed a scenario in which improvements in energy efficiency lead to demand being approximately constant or slightly falling over the period from now to 2050. There is potential for major efficiency gains, for example in replacing oil with electricity in the transport sector, increased use of heat pumps, and continuing energy efficiency gains in buildings. In contrast, as noted, there are losses in the production of hydrogen by electrolysis.
With such large opportunities for improved efficiency available, and with widespread international action to reduce emissions, I have assumed that something close to the scenario from IRENA is achievable, and that energy consumption in in 2060 will be around 102,000 terawatt hours per annum (370 EJ), a similar level to 2019.
Other data projections show consumption increasing by about 25%, and a sensitivity of 25% of additional consumption is also included for the upper end of the ranges shown.[vi]
Electricity as a proportion of energy.
Electricity consumption is assumed to increase by a factor of about three to four. Some of this electricity is used to make hydrogen, which acts as a form of energy transport and storage. The remaining energy use is concentrated in aviation and shipping, and some industrial processes. This is expected to be met from other sources, for example hydrogen made from fossil fuels with CCS (sometimes called blue hydrogen). Bio fuels will likely play an important role, but are likely to be limited among other things by the scale of available supply[vii]. They may well make their most valuable contribution in bio energy with CCS (BECCS), providing negative emissions.
I have excluded losses from transmission and distribution, which would increase further the amount of solar and wind required.
Wind and solar as a proportion of electricity.
I have then assumed that around 80% of electricity comes from wind and solar, with a range of 70%-90%. Other low carbon electricity sources account for the remaining 10-30%. This includes nuclear, which currently accounts for 10% of total electricity production, with output having fallen over the last decade[viii]. Hydro, which currently accounts for 16% of electricity generation, has grown over the last decade. I have assumed it cannot grow faster than this due to resource limitations. There may also significant amounts power generation from fossil fuels with post-combustion CCS. Other renewables such as geothermal are likely to account for only a small proportion of the total.
Nuclear may play a larger role than I’ve have assumed. However, it has very long lead times, is much more expensive than renewables and faces political obstacles in many jurisdictions. It seems unlikely to grow to dominate electricity production as it did in France in the 1980s and 1990s. CCS remains in the early stages of its deployment, but may play a significant role, for example in system balancing. There may also be substantial retrofit of existing plants, especially in Asia.
[v]https://onclimatechangepolicydotorg.wordpress.com/2013/09/25/solar-deployment-are-there-limits-as-costs-come-down/ I’ve assumed 70kWh/m2 (a conservative assumption because it is based on data from older less efficient cells and much capacity will be based on newer more efficient technologies). This includes total site area (i.e. not only the panels). Generating 40,000TWh on this basis would require an area of around 570,000km2, about 0.4% of the world’s land surface of 149 million square km. This is a huge area – more than double the size of the United Kingdom of 242,000 km2 – although as noted probably an overestimate – and the true figure taking account of efficiency gains might be indicatively 30% less that this. It is in any case far less than the land devoted to agriculture, which uses solar energy to grow food. And solar power can often make use of spaces – such as rooftops and deserts – that have few alternative uses.
Over the last year and a half there has been a wave of pledges to reduce greenhouse gas emissions to net zero[i]. In June 2019 the UK became the first major economy to commit to achieving net zero. However, the UK now accounts for just under 1% of world emissions, so this commitment on its own makes little difference to prospects for global emissions, even if it is met in full. The UK’s commitment was followed by similar pledges by the EU and New Zealand[ii]. These pledges increased coverage to around 9% of emissions.
The proportion of emissions covered by such pledges changed radically in September 2020 when China, by far the world’s largest emitter with around 30% of the global total, committed to achieving carbon neutrality[iii]. With Japan and South Korea recently making similar pledges, nearly half of emissions from energy and industry are now covered by pledges to eliminate them (see chart).
Chart: proportion of emissions from energy and industry covered by net-zero pledges[iv]
Shares of emissions are in 2019. Source: EDGAR database
This has happened so fast that it seems likely to create strong momentum for action by other countries. For example, it is hard to see Australia (1.14 % of emissions) not responding while its major trading partners in Asia are taking such action. The Government of Canada (1.54% of emissions) has already made a net-zero pledge, though it has not yet been passed into law.
India (6.8 % of emissions) alone could increase the proportion of emissions covered to over 50%. However the Indian Government does not yet appear ready for such a pledge.
The USA (13.4 % of emissions) could make a huge difference. President-elect Biden has committed to rejoining the Paris Agreement and has proposed a net zero target. However the balance of power in the Senate is still unclear, and this may prove an obstacle to some types of action.
The data described here covers emissions from energy and industry only, so does not include emissions from land use change. Tropical countries with rapid deforestation, notably Brazil and Indonesia, add substantially to global emissions – partly, of course, driven by demand for agricultural products from China, Europe and North America and elsewhere. Reforestation, alongside other measures, could enable routes to net-zero for these jurisdictions, especially with support from elsewhere.
The challenge of meeting net zero commitments remains daunting. However, the more countries that adopt such commitments, the easier it will be to meet them, as new technologies will be deployed at larger scale and lower cost, and there will be fewer distortions to trade arising from different levels of ambition to reduce emissions.
For too many years far too little has been done to reduce emissions and avoid damaging climate change. However it appears that, while there is still a vast amount of work to be done, at last things are beginning to head in the right direction.
Adam Whitmore – 10th November 2020
[i] In this post I use the terms carbon neutrality and net zero emissions interchangeably. I have interpreted each to be consistent with the definition used in the Paris Agreement (Article 4) of achieving a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases. It is not always clear what is implied by the use of each term in public announcements. It may be that in some cases carbon neutrality is intended to refer to carbon dioxide only, allowing net emissions of other greenhouse gases to continue.
[ii] Other countries within the EU, including France, Sweden and Denmark, made their own pledges. This was followed by an EU wide commitment. The full legal processes for ratifying this commitment by the EU have not yet been completed but the commitment has support from all major parties and institutions, and its ratification appears to be a formality.
[iii] China’s pledge is to achieve carbon neutrality by 2060, rather than the date of 2050 pledged by others, but it is possible this date will be brought forward in future. It is in any case a hugely ambitious commitment.
[iv] The chart shows commitments excluding small economies, and including only those where the commitment seems firm. Some smaller economies, including Costa Rica, also have net zero targets, while others have aspirational targets with varying degrees of commitment.
China’s newly stated aim to reach to carbon neutrality by 2060 is one of the most important announcements on climate change policy ever made.
A few months ago I stood back from updating this blog. I am now returning to posting regularly. I will be doing so at an exciting time for climate policy.
At the United Nations General Assembly last month China’s President Xi announced that China will achieve carbon neutrality before 2060[i] with emissions peaking before 2030. This is among most significant announcements on climate change policy ever made.
It commits the world’s largest emitter (by far) to eliminating greenhouse gas emissions over the next 40 years. This alone is likely to reduce global temperature increases by about 0.25 degrees C, compared with China reaching carbon neutrality in 2100[ii].
And its impact will go beyond that. Emissions reductions elsewhere are now likely to be cheaper and more readily available, because China’s efforts to reduce its own emissions will lead to low carbon technologies being deployed at huge scale. And with Europe also setting goals of reaching net zero by 2050 there appears to be enough political momentum to encourage other countries to follow a similar path.
This could lead to global emissions being reduced to close to zero well before 2100, with the world thus standing a good chance of meeting the goal of the Paris Agreement of limiting temperature rises to well below 2 degrees. This is the first time this has looked at all likely – though limiting temperature rises to 1.5 degrees still looks very difficult.
Why has China chosen to make this announcement? There seem to be four main reasons for the announcement.
First, China has long been concerned about the effects of climate change, especially because of the risks it creates for food and water supply. The increasing effects of climate change now visible around the world are likely to have heightened China’s concerns.
Second, it seems clearly designed to promote Chinese leadership in a global context. President Xi’s speech was notably internationalist in its rhetoric, a perspective conspicuously absent from the United States over the last four years. It is not necessary to take the text at face value to interpret it as seeking leverage internationally. Such leverage is likely to be especially valuable to China at a time when the Chinese Government is rightly being criticised for gross violations of human rights.
Third, the costs of reducing emissions, especially the costs of renewable energy sources, have fallen rapidly, and are expected to continue doing so.
Fourth, China appears to see major opportunities for its industries in producing and exporting low carbon technologies. It is already a world leader in the production of many technologies, notably solar panels and batteries, and it will doubtless look to extend this to other technologies. There will inevitably be losers from this, especially in coal mining and in coal fuelled industry and power generation, of which China has vast amounts. However there seems likely to be time to manage this. Approaches may include very large scale retrofitting carbon capture and storage to existing power and industrial plants using coal.
A fifth motivation may be increasing energy security by reducing demand for imported oil and gas.
One caveat is that, in line with other countries, China’s commitments refer to emissions within China. However, emissions from other countries supplying China will also matter a great deal. For example, if greatly increased meat consumption in China is supplied by imports it will likely put tremendous pressure on emissions, ecosystems and biodiversity elsewhere. It is thus essential that China’s efforts to reduce its emissions are accompanied by other measures to reduce the environmental impact of its development in other parts of the world, including through activities in its belt and road initiative.
China’s new course of action poses a challenge for other countries that have previously led in this area.
The UK can justly claim it has long provided leadership on climate change. Margaret Thatcher was among the first world leaders to highlight the importance of climate change, which she did in a number of speeches she gave in the late 1980s. The Hadley Centre, one of the world’s leading centres for climate research, was established in 1990. In 2005 the UK further raised the international political profile of climate change when it chaired the Gleneagles G8 summit. The Climate Change Act, passed nearly unanimously by Parliament in 2008, established legally binding targets for emissions reduction – the first legislation of its kind anywhere in the world. In 2019 the UK became the first major economy to adopt a legally binding net zero emissions target, to be achieved by 2050. And the UK has reduced per capita emissions since 1990 by more than any other major economy, although this partly reflects changes in industrial structure not connected with climate policy.
To play a continued leadership role, the UK will need to continue to show by its actions what can be done to reduce emissions to net zero. It needs to identify and implement practical, cost effective pathways to this goal. This process has begun, but more is needed.
In parallel, diplomatic activity is necessary so that Europe, China and others seeking to eliminate their emissions can be effective in bringing other countries along, especially the USA.
Those of us working on climate change policy for a long time have become accustomed to the idea that the chances of limiting global temperature rise to below 2 degrees were low. China’s announcement has changed that. It may not be enough. Even more rapid action, followed by decades of negative emissions, may prove essential to stabilising the climate. Nevertheless it marks a huge step forward, and should inspire everyone to make even greater efforts.
Adam Whitmore – 14th of October 2020
[i] I assume here that carbon neutrality means net zero emissions of greenhouse gases, as set in the Paris Agreement and many other documents. It is possible it refers to eliminating carbon dioxide emissions only, but this would in any case be a huge step forward as CO2 is by far the most significant greenhouse gas.
The last seven year have seen too little progress on solving the climate change problem, despite some welcome developments. Much more rapid progress is now needed.
It is now seven years since I started this blog – my first post was on 3rd March 2013. It seems a good time to take a look at what has gone well and what has gone badly over that period in efforts to reduce climate change. So here are seven ways in which things have gone badly, and seven ways in which they have gone well.
Things that have gone badly over the last seven years
Annual CO2 emissions from energy and industry have increased over the last seven years, continuing the long-term trend, when they need to be decreasing rapidly.
Chart 1: Emissions of CO2 from energy and industry (excluding land use)
Over 15% of the remaining carbon budget has been used since 2013, even on the most optimistic view[i].
In 2013 the remaining carbon budget (that is, total cumulative CO2 emissions that remain possible while limiting global mean surface temperature rises to 2 degrees) was around 1900Gt CO2. It is now around 1600Gt CO2.The remainder is getting used up ever more quickly as emissions continue to rise.
Large amounts of high carbon infrastructure are still being built.
This includes large amounts of new coal-fuelled power generation. This risks lock-in of emissions for decades.
There is a lack of progress with developing and implementing low carbon technologies in many sectors
Most emissions intensive industries, notably steel, have made little progress in changing their processes to reduce emissions. One of the main technologies likely to be needed for decarbonising industrial emissions, CCS, has seen very little deployment, with only about an additional 10 mtpa[ii] stored from projects coming on line since 2013. The largest contributor to the increase has been the Gorgan project, which is natural gas production, so not likely to be part of a net zero emissions world. 10 mtpa is only about 0.02% of global emissions. CCS is also likely to be essential for achieving negative emissions from Bioenergy with CCS (BECCS), among other things. There has also been only very limited progress to date on deploying low carbon hydrogen.
China appears to be making emissions reduction less of a priority.
Among other factors, recently slowing economic growth seems to have focussed attention in China towards economic stability and energy security rather than the threats from climate change.
Most countries have targets that are far too weak
Existing pledges under the Paris Agreement imply a continuing increase in global emissions rather than the rapid decrease that is needed[iii].
This is a daunting list of problems. However, there is also some good news, although in all cases it would be even better if positive trends were happening faster.
Good news from the last seven years
Costs of low carbon technologies have fallen rapidly, and continue to fall.
Wind and solar electricity are in many cases now competitive with, and often cheaper than, electricity from new fossil fuel generation. Falling battery costs will enable to the electrification of surface transport and help balance the grid.
This seems to me to be by far the greatest cause for optimism. Low carbon options will simply become the default choice for new investment in many cases, and policies to reduce emissions will increasingly be working to support a trend that is driven by economic as well as environment imperatives.
Some countries have put binding targets in place for net zero emissions.
The UK already has such a target for 2050, seeking to end the UK’s contribution to climate change. The EU seems likely to formalise a similar target very soon.
Some countries have cut emissions significantly, showing what can be done.
The UK has cut its annual emissions by nearly 20% since 2013[iv], with the largest component of this being a reduction in coal use in the power sector, a change readily replicable elsewhere.
Public concern about climate change has risen while scepticism about the science has largely disappeared, at least outside the USA and a few other countries.
85% of UK voters are now concerned about climate change[v] with over a quarter ranking it among their top three issues[vi]. This was reflected during the recent general election campaign[vii] in all parties offering policies to reduce emissions to net zero . Over time this should create the political space for some of the more challenging policies that will be needed to reduce emissions to close to zero.
Additional policies are being put in place, and carbon pricing is increasingly widespread.
For example, almost all major economies now have renewables targets, and there are over 50 carbon pricing systems in place around the world.
Governments increasingly see economic opportunities in decarbonisation rather than costs.
The opportunities created by new industries are increasingly recognised as part of wider industrial policy.
The Paris Agreement has been signed.
Almost all countries have now committed to limit temperature rises to below 2 degrees and to make a contribution to reaching that target, recognising different national circumstances. Some may consider this is the main piece of good news over the past seven years. However its effectiveness remains to be proven, and its success looks likely to depend on some of the other trends I’ve highlighted, notably falling costs for low carbon technologies.
Looking at these trends together, I am both less optimistic and more optimistic than I was in 2013. I am less optimistic because seven years of rising emissions and continuing investment in high carbon infrastructure have made the challenge of limiting climate change even greater than it was. But I am more optimistic because there is greater recognition and acceptance of the problem, more is now being done (though still nowhere near enough) and, above all, because low carbon energy is rapidly becoming cheaper than high carbon energy. As a result it looks likely that emissions from the energy sector will eventually be greatly reduced and even halted entirely. This may make it easier to focus on reducing other emissions as well, especially those from deforestation.
But eventually will be too late. Much damage is already being done to our world. More will inevitably follow. This will include the loss of irreplaceable parts of the natural world. Given rising emissions, and how much of the carbon budget has been used up, it now looks practically impossible to keep temperature rises to 1.5 degrees, and difficult, though still possible, even to limit them to 2 degrees.
However it could still get much worse. The task now is to avoid the worst of the risks by keeping emissions and accompanying temperature rises as low as possible, including keeping global temperature rises to below 2 degrees. With a lot of effort and a little luck there is still time (just) to achieve this. But the task has never been greater or more urgent.
Consumption based accounting for emissions can provide valuable insights, but focussing on production based accounting is the right approach for most policy work.
There has been much discussion of whether it is more useful for policy purposes to measure emissions on a production basis or consumption basis. Production based accounting looks at emissions from a jurisdiction, including in making goods for exports. Consumption based accounting looks at emissions from the entire production chain for all the goods and services consumed in a jurisdiction. This means including emissions occurring elsewhere in the manufacturing process – looking at the total carbon footprint. For example, if a car includes steel made in another jurisdiction, then the emissions from that steel production will be counted under a consumption based approach. However, to exclude double counting, consumption based accounting should exclude emissions from making exports.
Many advocate for the use of consumption-based accounting for judging policy, as representing the full impact of consuming goods. However, while both approaches have merit, there are good reasons for preferring production-based accounting for most policy making.
The international policy architecture that covers emissions reduction is based on commitments by governments under the Paris Agreement to reduce emissions from within their borders, a production-based approach. This architecture does not appear likely to change. This means that production-based accounting must at least play a significant role in efforts to reduce emissions.
Furthermore, this international policy architecture is based on sound principles. It reflects that fact that while the effect of emissions is global, control over emissions is largely national. This means production-based accounting makes more sense, as it puts measurement where the control is.
It is possible to influence emissions elsewhere, for example by introducing border adjustments and product standards in some cases, most likely mainly for bulk commodities. This could in principle extend to limiting consumption emissions in some cases. For example, imports of steel could be included in the EUETS (see here), restricting total emissions from steel consumption in Europe. However in most cases the ability to control of emissions still fundamentally lies with production.
Finally, the economic benefit of production usually accompanies the emissions. For example, if steel production relocated from Europe to China the economic benefits of that production also relocate.
Without either the direct control over the emissions from production, or the economic benefits of production, it does not seem appropriate to hold jurisdictions responsible for emissions beyond their borders (although imposing border taxes or similar measures on some types of emissions may make sense to prevent carbon leakage). Put bluntly, reducing emissions resulting from (for example) Chinese production for export is and should be China’s responsibility, not that of importing countries. And when, for example, it is said that the UK has reduced its emissions by around 40% since 1990 (a production-based figure) this is both accurate, and a good measure of the progress that has been made, even though a significant proportion of this has been due to changes in economic structure.
This is not intended to suggest that no attention should paid to consumption-based accounting. Consumption-based emissions have fallen less rapidly than production emissions from the UK, as industry has relocated. This does indicate the need to put continuing pressure on exporters to the UK to reduce their emissions. It also helps individuals to make different choices, and to put pressure companies to produce lower carbon products.
Indeed, from the point of view of an individual seeking to take action to reduce their carbon footprint consumption-based emissions can provide valuable insights into the appropriate choices. And there are of course good reasons for reducing consumption of many goods, with benefits that go beyond limiting climate change. And policies to reduce consumption can clearly have many merits as well.
However, the main focus needs to be on each country putting its own house in order, and that means focusing on reducing emissions within its borders.
Border Carbon Adjustments have been discussed for many years. However they are now receiving renewed political impetus. This is especially so in Europe, as the new head of the European Commission has asked for proposals on BCAs to be developed.
A new report, of which I am the principal author, looks at the design issues raised by BCAs, their advantages, and the potential difficulties with their implementation.
It covers a range of issues, some of which have received limited discussion to date, including:
The different ways of implementing BCAs – tariffs, different types of allowances, and relationship to consumption taxes
Dealing with imports from jurisdictions with their own carbon pricing
Phasing in of BCAs
Use of different benchmarks for different purposes (BCAs vs. free allocation)
The report, including a summary table of the issues that need to be addressed, can be found here: