As usual I will be taking a break from writing this blog for the remainder of the summer. I will be back in the autumn.
Fixed price allowances can be a useful way of establishing emissions trading gradually.
I have previously looked at the relative advantages of carbon taxes and emissions trading systems (ETSs), including in the videos on this site.
Among the drawbacks of emissions trading systems is that they tend to be more complex to administer than carbon taxes. An emissions trading system requires surrender of allowances, which need to be issued, often by both auction and free allocation, and tracked as they are traded. There is a range of administration needing for this, including maintaining a registry of allowances and ownership. In contrast, a tax simply requires a payment to be made per tonne emitted.
The administrative cost of emissions trading is unlikely to be a significant proportion of the costs of a system for a large jurisdiction with high administrative capacity, for example the EU. However it can be daunting for smaller jurisdictions with more limited administrative capacity. Even a large jurisdiction may be concerned about the time needed to establish an emissions trading system.
There may also be concern about the economic the risks. For example, there will always be uncertainty about price when the cap is first set.
These difficulties can be reduced by including an initial phase of fixed price allowances. Under this approach emitters pay a fixed price per tonne. However rather than simply paying a tax they are required to surrender allowances. An unlimited number of allowances is available from the regulatory authorities at a fixed price.
This approach has the advantage that it puts in place much of the administrative infrastructure necessary for emissions trading. Allowances are issued and a registry is established. From there it is a more straightforward path to limiting the number of allowances to impose a cap, and allowing them to be traded.
It has the further advantage that it can introduce a carbon price, perhaps gradually through and escalating price, and the effect of this can be assessed when setting a subsequent the cap. The additional information can further reduce risks.
The Australian example
This approach of issuing fixed price allowances was implemented in Australia, starting in 2012. An initial 3 year phase was originally planned with emitters required to surrender allowances. An unlimited number of allowances was available each year at a fixed price. This was AU$23/tonne in the first year, escalating at 2.5% plus the rate of inflation each year. This was intended to be followed by a transition to an emissions trading system with a cap and a price floor.
The chronology in practice was as follows. Legislation to introduce carbon pricing was passed in 2011. The fixed price came into effect ion 1st July 2012, with unlimited allowances available at AU$23/tonne. Full trading was originally scheduled to being in 2015. In 2013 it was announced this would be brought forward a year to 2014. However this did not happen, as the incoming Abbott government, which took office in September 2013, repealed the carbon pricing scheme with effect from July 2014.
In the Australian political context that prevailed at the time the similarity to a tax was seen as a drawback politically. It allowed the opposition to label it a tax, which the previous government had committed not to introduce. A very sensible approach was therefore abandoned. However this was a feature peculiar to Australian politics at the time, and not a more general problem.
The EU and the Western Climate Initiative have both shown that it is possible to establish emissions trading systems directly, without the need to go through an initial fixed price phase (the WCI systems were delayed by a year from their originally intended start date, but have generally worked well since). And some jurisdictions will choose a tax in any case.
Nevertheless, if there is a desire to put an ETS in place in a way which lowers the initial administrative burden and some of the risks of establishing an ETS, then transitioning to an ETS through issuing fixed price allowances can be a valuable approach.
Adam Whitmore – 13th June 2018
Today I have posted the fourth video in my series about carbon pricing. This one looks at ways of safeguarding industrial competitiveness, including free allocation of allowances and border adjustments.
Copies of the slides and a transcript of the talk are also available.
This and the other videos in the series can be found on the video tab of this site and this link.
Adam Whitmore – 8th June 2018
Assessing the potential contribution of carbon capture and storage (CCS) to limiting climate change must take into account the huge physical scale of the materials being captured and transported.
In my previous post I looked at the slow growth of carbon capture and storage (CCS) and carbon capture and use (CCU). In this post I look at the scale of CO2 that needs to be captured to make a material difference to the climate, and some of the implications of this.
As reference points, the chart below shows annual production of major commodities. The mass of fossil fuels produced and consumed each year is huge – about 12 billion tonnes every year, over one and a half tonnes for each person in the world. That is much more than other major commodities. Wheat is less than a billion tonnes per annum, the iron ore for the world’s iron and steel industry is a little over two billion tonnes, and cement is something over four billion tonnes.
However the CO2 produced from energy and industry (so excluding land use), is much greater still – about 36 billion tonnes. The vast majority of this comes ultimately from the world’s fossil fuels. Very simply, the mass of the fossil fuels is mainly carbon, and burning this carbon adds two atoms of oxygen to each atom of carbon, more than tripling the mass, hence the scale of the mass of CO2 produced relative to fossil fuels.
Chart: annual production of major commodities[i]
Even capturing and transporting around a third of current emissions would involve dealing with masses as large as the current fossil fuel system, which has required, cumulatively, tens of trillions of dollars of investment over many decades. Many low carbon technologies have faced similar challenge of scale. For example, it has taken decades to get wind power to the scale where it is making a material difference to emissions.
The problem gets even worse for any process of CO2 capture from the air that involves use of a solid to bind the CO2. This is because binding CO2 as a solid inevitably involves adding mass. For example, if theCO2 were eventually to end up as limestone (CaCO3) the limestone would have more than double the mass of the captured carbon dioxide.
This is especially important for some of the proposals for removing carbon dioxide from the atmosphere by direct air capture into solid form. To make any worthwhile reduction in atmospheric concentration hundreds of billions of tonnes of solid material will be eventually be generated. For this reason it is often considered that air capture is best located the source of the scrubbing mineral and where it can be easily disposed of, but the masses involved are nevertheless huge and handling remains a huge problem.
The challenges raised by the mass of CO2 produced by energy use extends to the development of more localised technologies. Suppose, for example a new technology were invented for carbon capture, capable of cheaply absorbing and binding in solid form CO2 produced by a standard domestic heating boiler. A typical UK household burns about 16,500 kWh of gas per annum[ii], which generates about 3.3 tonnes of CO2. Any attempt to capture this would produce many tonnes of material a year to be disposed of. This compares with current total waste per household at present of around 1 tonne per household. Alternatively, if household CO2 capture were based around solvents to regenerated while the CO2 is piped away, this would require huge amounts of new pipeline infrastructure. This is unlikely to be practical. Instead any CCS is likely to be deployed centrally, for example as part of low carbon hydrogen production, with the hydrogen burnt to produce heat, or for production of low carbon electricity.
The vast scale of CO2 emissions has several implications. First, it will usually be much better to avoid creating the CO2 in the first place than to try to deal with it as a waste problem. The waste problem is already too big to handle, so adding more in the hope of being able to deal with it is not likely to be the best option.
Second, any system that does make a material contribution to reducing climate change will take vast investment and many years to build – which is a good reason for starting now.
Third, making CCS and CCU more economically viable would help, and this is one of many reasons that higher carbon prices are desirable.
There are however two important caveats to this. One is that land use does have an important contribution to make. The scale of release of CO2 from land use and, correspondingly, the potential benefits from reducing deforestation and improving management of biological sinks are large. However, as I’ve previously noted, there are limits on the availability of biofuels.
The other caveat is that all contributions to reducing emissions are welcome, and there may be cases, especially in industry, where there are few if any alternatives to capture. Reducing emissions will require a very large range of technologies to be deployed. Nothing I’ve said in this post should be taken as a reason for not proceeding with CCS or CCU.
As I noted in my previous post CCS continues to look necessary in a range of applications. And building an industry at the scale required will take decades, and there is an urgent need for progress. It is imperative to recognise just how large the physical scale of the challenge is, even relative to other economic activities such as iron and steel production often (rightly) thought to be very large scale.
Adam Whitmore – 21st May 2018
[i] Based on data in the BP statistical review of world energy, UN Food and Agriculture organisation, EDGAR database, USGS, http://www.worldcement.com. The ratio of fuels to carbon dioxide is not exactly the same as the ratio of the masses of carbon to CO2, which is 3.7, because of the other components in fossil fuels. The CO2 total includes emissions from industrial processes in addition to combustion. However many non-combustion emissions, such as the use of carbon in anodes from aluminium smelting, and (depending on your definition of combustion) the use of coke in blast furnaces also use fossil fuels as their source of carbon.
[ii] Source Ofgem
CCS has not yet been implemented on a scale needed to make a substantial difference to climate change. However it continues to look necessary for the longer term, with more projects necessary to get costs down.
A decade or so ago many people expected rapid development of Carbon Capture and Storage (CCS) as a major contributor to reducing global emissions. I was one of them – at the time I was working on developing CCS projects. However, the hoped-for growth has not yet happened on the scale needed to make a material difference to global emissions.
The chart below shows total quantities captured from large CCS projects, including 17 that are already operational and a further 5 under construction. The quantity of emissions avoided are somewhat lower than the captured volumes shown here due to the CO2 created by the process itself.[i]
Between 2005 and 2020 capture will have grown by only around 25 million tonnes p.a.. This is only 0.07% of annual global CO2 emissions from energy and industry. In contrast the increase in wind generation in 2017 alone reduced emissions by around 60 million tonnes[ii], so wind power reduce annual emission more from about 5 months’ growth than CCS will from 15 years’ growth – though it took wind power several decades to get to this scale.
Chart 1: Growth of large CCS projects over time
Source: Analysis based on Global Carbon Capture and Storage Institute database[iii]
The picture gets even less promising looking at the types of projects that have been built. The chart below shows the proportion of projects, measured by capture volume, in various categories. The largest component by some distance is natural gas processing – removing the CO2 from natural gas before combustion – which accounts for over 60% of volumes. This makes sense, as it is often a relatively low cost form of capture, and is often necessary to make natural gas suitable for use. However, it will clearly not be a major component of a low carbon energy system. Much of the rest is chemicals production, including ethanol and fertiliser production. These are helpful but inevitably small. There are just two moderate size power generation projects and two projects for hydrogen production, which is often considered important for decarbonising heat.
Furthermore, most of the projects separate out CO2 at relatively high concentrations or pressures. This tends to be easier and cheaper than separating more dilute, lower pressure streams of CO2. However it will not be typical of most applications if CCS is to become more widespread.
Chart 2: Large CCS projects by type (including those under construction)
Source: Analysis based on Global Carbon Capture and Storage Institute database
This slow growth of CCS has been accompanied by at least one spectacular failure, the Kemper County power generation project, which was abandoned after expenditure of several billion dollars. Neither the circumstances of the development or the technology used on that particular plant were typical. For example, the Saskpower’s project at Boundary Dam and Petra Nova’s Texas project have both successfully installed post combustion capture at power plants, rather than the gasification technologies used at Kemper County. Nevertheless, the Kemper project’s failure is likely to act as a further deterrent to wider deployment of CCS in power generation.
There have been several reasons for the slow deployment of CCS. Costs per tonne abated have remained high for most projects compared with prevailing carbon prices. These high unit costs have combined with the large scale of projects to make the total costs of projects correspondingly large, with a single project typically having a cost in the billions of dollars. This has in turn made it difficult to secure from governments the amount of financial support necessary to get more early projects to happen. Meanwhile the costs of other low carbon technologies, notably renewables, have fallen, making CCS appear relatively less attractive, especially in the power sector.
The difficulties of establishing CCS have led many to propose carbon capture and utilisation (CCU) as a way forward. The idea is that if captured CO2 can be a useful product, this will give it a value and so improve project economics. Already 80% by volume of CCS is CCU as it includes use of the CO2 for Enhanced Oil Recovery (EOR), with project economics supported by increased oil production.
Various other uses for CO2 have been suggested. Construction materials are a leading candidate with a number of research projects and start-up ventures in this area. These are potentially substantial markets. However the markets for CO2 in construction materials, while large in absolute terms, are small relative to global CO2 emissions, and there will be tough competition from other low carbon materials. For example, one study identified a market potential for CCU of less than two billion tonnes p.a. (excluding synthetic fuels) even on a highly optimistic scenario[iv], or around 5% of total CO2 emissions. It is therefore difficult to be confident that CCU can make a substantial contribution to reducing global emissions, although it may play some role in getting more early carbon capture projects going, as it has done to date through EOR.
Despite their slow growth, CCS and CCU continue to look likely to have a necessary role in reducing some industrial emissions which are otherwise difficult to eliminate. The development of CCS and CCU should be encouraged, including through higher carbon prices and dedicated support for early stage technological development. As part of this it remains important that more projects CCS and CCU projects are built to achieve learning and cost reduction, and so support the beginnings of more rapid growth. However in view of the lead times involved the scale of CCS looks likely to continue to be modest over the next couple of decades at least.
Adam Whitmore – 25th April 2018
[i] CO2 will generally be produced in making the energy necessary to run the capture process, compression of the CO2 for transport, and the rest of the transport and storage process. This CO2 will be either emitted, which reduces the net gain from capture, or captured, in which case it is part of the total. In either case the net savings compared with what would have been emitted to the atmosphere with no CCS are lower than the total captured.
[ii] Wind generation increased by a little over 100 TWh between 2016 and 2017 (Source: Enerdata). Assuming this displaced fossil capacity with an average emissions intensity of 0.6 t/MWh (roughly half each coal and gas) total avoided emissions would be 60 million tonnes.
The past five years have given many reasons for optimism about climate change
I have now been writing this blog for just over five years, and it seems timely to step back and look at how the climate change problem appears now compared with five years ago.
In some ways it is easy to feel discouraged. In the last five years the world has managed to get through about a tenth of its remaining carbon budget, a budget that needs to last effectively forever.
However, in many ways there seem to be reasons for much greater optimism now than five years ago. Several trends are converging that together make it appear that the worst of the risks of climate change can be avoided.
There is increasing action at the national level to reduce emissions, reinforced by the Paris Agreement …
Legislation is now in place in 164 countries, including the world’s 50 largest emitters. There are over 1200 climate change and related laws now in place compared with 60 twenty years ago[i]. And this is not restricted to developed countries – many lower income countries are taking action. Action at national level is being supported around the world by action in numerous cities, regions and companies.
This trend has now been reinforced by the Paris Agreement, which entered into force in November 2016, and commits the world to limiting temperature rises and reducing emissions.
There is increasing evidence of success in reducing emissions …
Many developed countries, especially in Europe, have shown since 1990 that it is possible to reduce emissions while continuing to grow their economies. Globally, emissions of carbon dioxide from energy and industry have at least been growing more slowly over the past four years and may even have reached a plateau[ii].
Carbon pricing is spreading around the world …
Among the many policies put in place, the growth of carbon pricing has been especially remarkable. It has grown from a few small northern European economies 15 years ago to over 40 jurisdictions[iii]. Prices are often too low to be fully effective. However, carbon pricing has also been shown to work spectacularly well in the right circumstances, as it has in the UK power sector. And the presence of emissions caps in many jurisdictions gives a strong strategic signal to investors.
Investors are moving out of high carbon sources and in to lower carbon opportunities …
Companies are under increasing pressure to say how their businesses will be affected by climate change and to do something about reducing emissions. And initiatives such as the Climate Action 100+, which includes over two hundred global investors controlling over $20 trillion of assets, are putting pressure on companies to step up their action. This will further the trend towards increasing investment in a low carbon economy. Meanwhile, many funds are divesting from fossil fuels, and vast amounts of capital are already going into low carbon investments.
Falling costs and increasing deployment of renewables and other low carbon technologies …
Solar and wind power and now at scale and continuing to grow very rapidly. They are increasingly cost-competitive with fossil fuels. The decarbonisation of the power sector thus looks likely to proceed rapidly, which will in turn enable electrification to decarbonise other sectors. Electric vehicle sales are now growing rapidly, and expected to account for the majority of light vehicle sales within a couple of decades. Other technologies, such as LED lighting are also progressing quickly.
This is not only making emissions reductions look achievable, it is making it clear that low carbon technologies can become cheaper than the high carbon technologies they replace, and can build whole new industries as they do. As a reminder of just how fast things have moved, in the last five years alone, the charts here show global generation from wind and solar since 2000.
Falling costs of low carbon technologies, more than anything else, gives cause for optimism about reducing emissions. As lower carbon alternatives become cheaper the case for high carbon technologies will simply disappear.
Charts: Global Generation from Wind and Solar 2000 – 2017
Sources: BP Statistical Review of World Energy, Enerdata, GWEC, IEA
Climate sensitivity looks less likely to be at the high end of the range of estimates …
The climate has already warmed by about a degree Celsius, and some impacts from climate change have been greater than expected. However, the increase in temperature in response to increasing concentrations of greenhouse gases has so far shown few signs of being towards the top end of the possible range, although we can never rule out the risk of bad surprises.
Taking these trends together there is reason to be cautiously optimistic …
There will still be serious damage from climate change – indeed some is already happening. And it is by no means clear that the world will act as quickly as it could or should. And there could still be some nasty surprises in the earth’s reaction to continuing emissions. Consequently, much effort and not a little luck is still needed to avoid the worst effects of climate change.
But compared with how things were looking five years ago there seem many reasons to believe that things are beginning to move in the right direction. The job now is to keep things moving that way, and to speed up progress.
Adam Whitmore – 10th April March 2018
Videos on carbon pricing (around 10 minutes each) written and narrated by me are now on youtube, with more planned.
The set can be found here:
Regular readers of this blog will probably be familiar with most of the material but I hope they will be nevertheless be useful both as a refresher and a guide for people who are new to the area.
Here are links to the individual videos, with transcripts and slides for the talks also includedThe three talks I’ve produced so far are:
1. An introduction to carbon pricing, which explains the idea of carbon pricing and looks at current using examples from practice around the world, both in summary and looking at the particular example of highly successful carbon pricing in the UK. This can be found here.
2. Types of carbon pricing, which looks at the merits of taxes and emissions trading systems, and looks in particular at hybrid systems, including California. This can be found here.
3. A more technical talk on the social cost of carbon, which includes some material that may be new even to those already quite familiar with climate change policy. It illustrates some of the difficulties of applying conventional economic concepts to a problem with as many dimensions as climate change, but concludes that they still have some value. This can be found here.
The links together with supporting material (transcripts and slides) can be found on the tab at the top of this page labelled videos, or at this link.
Please pass the links on to anyone you think might find them of interest.
Adam Whitmore – 20th March 2018