Making a low carbon future better as well as cheaper

Framing of decarbonisation pathways needs to take the value in use of low carbon technologies into account.  This can provide a fuller and more positive guide to policy than analysis of marginal abatement costs alone. 

Much analysis of pathways for decarbonising economies takes as its starting point Marginal Abatement Costs (MACs), looking at the cost per tonne of reducing emissions.  This is a useful perspective, for example highlighting the cost effectiveness of improved insulation in buildings.  However, framing decarbonisation as a problem of costs incurred in reducing emissions risks ignoring other characteristics of a low carbon economy.  A broader and more positive framing needs to consider how a more attractive low carbon future can be realised.  This broader framing emphasises some of the potential benefits of low carbon technologies, as well as focussing on non-price barriers to adoption.  Such a framing can offer a more useful guide to the range of policies needed to develop low carbon pathways.  (I should also note that carrying out reliable MAC analysis can itself pose significant challenges.  Some of these are reviewed at the end of this post, but here the main focus here is on those issues difficult to accommodate within the MAC framework).

MAC analysis tends to assume that the reduction in emissions is the main difference between two products which are otherwise very similar (very close substitutes for each other).  This is largely valid for commodities such as electricity, although even here issues such as timing and reliability of generation need to be considered.  However for most consumer goods improving characteristics in use can greatly increase their value.  Making low carbon products cheaper is crucial.  But if they are also better than the higher carbon alternatives this will lead to much more willing and rapid adoption.

Electric vehicles illustrate how non-price attributes can provide additional value to consumers and others, but can also create barriers to adoption.  Electric vehicles have a number of characteristics, which, at least in my experience, make them preferable to their internal combustion engine equivalents.  They are quiet and pleasant to drive, as the Nissan Leaf, the world’s best-selling electric car to date, and the more recent BMW i3 both demonstrate.  Refuelling by simply plugging in overnight is convenient, and there is no need to visit petrol stations, which are not generally pleasant places to be despite the best efforts of oil companies to make them more appealing.  Low centres of gravity lead to good road holding, and electric motors are instantly responsive, making for smooth and often rapid acceleration.  Performance has been one of the main selling points of the Tesla S, and responsiveness is one reason electric motors are finding their way into hybrid drive trains even on high performance cars such as my local car factory’s premiere product, the astonishingly quick and vastly expensive McLaren P1.

While car markets are highly competitive the variation in price for similar cars shows that consumers are often prepared to pay a premium for a car with improved characteristics.  For example, variants of the Volkswagen Golf hatchback range in price from £17,000 to £26,000.  Electric vehicles may similarly be able to realise premiums that reflect their benefits, with the Tesla S already the bestselling car in a third of the richest US postal codes.

Wider benefits may also play a role in adoption of low carbon technologies.  Local air quality is improved by the absence of emissions of particulates and other local pollutants.  This has led some cities to encourage electric vehicles, with, for example, plans for all new London taxis to be zero emission by 2018.  Such non-GHG benefits are produced jointly with greenhouse gas emissions reduction and will in some cases dominate the case for change.

There are also non-price barriers to the use of EVs that can also affect uptake, most notably availability of recharging points to enable longer journeys.  To ease these difficulties governments and the industry are expanding charging networks.  However range limitations remain, along with price, the biggest obstacle to uptake for most electric vehicles.   The Tesla S largely overcomes the range problem with its 300 mile range, but at over £60,000 excluding the government incentive it is not a cheap vehicle.  Plug-in hybrids largely avoid the range problem by retaining an internal combustion engine or on-board generator, but with some compromises of their own.

Similarly, there is much that manufacturers can do to make other low carbon products more appealing.  The chart below shows the spectrum from different types of lighting.  The quality of the light is very different in each case, with the light from compact fluorescents (CFLs) clearly much less continuous than from other sources.  Whatever else, these are clearly not exact substitutes.  It was perhaps premature for the EU to regulate incandescent electric light bulbs out of the market when many people found the light from the substitutes less appealing, and, while many may  prefer them to CFLs, there may be much manufacturers can still do to improve the quality of light from LEDs, alongside continuing reductions in costs.

Source:  http://blogs.scientificamerican.com/solar-at-home/2011/03/21/a-better-kind-of-lightbulb/

To take one more example of non-price characteristics from among many, there is surely room for improvement in the aesthetics of rooftop solar panels, at least in some contexts, and a number of innovators are working on this.

Fortunately, gauging and meeting consumer preferences is something markets do rather well, at least when consumers know what they want and can tell what has been delivered.  So markets have an important role to play in decarbonisation.  But it will be the behaviour of markets for low carbon products as well as markets carbon such as the EUETS that will be crucial to successful decarbonisation.

Decarbonising an economy is difficult and complex.  It can be made easier if new technologies not only have lower carbon dioxide emission than the alternatives, but are also better in other respects.  Policy can help promote this by stimulating innovation, enabling early adoption and removing barriers.  If the future not only has a safer, more stable climate, but is also brighter, cleaner, better looking, and more fun to drive around it will be a lot easier to persuade people that it’s a future in which they wish to invest.

Adam Whitmore – 28^th February 2014

 

Challenges in applying a marginal abatement cost framework – Electric vehicles as an example

MAC analysis is further limited by difficulties of application in practice.  Several factors complicate estimates of the cost of abatement, and some of these are illustrated here by reference to electric vehicles.  These factors can be, and sometimes are, taken into account in careful analysis of abatement costs.  However they are difficult to treat properly, because of the scope of the modelling frameworks and the amount of information they require make them very demanding to assess.

First, the quantity of emissions avoided, and thus cost of abatement, is very dependent on the emissions intensity of the source of electricity.  For example, Norway, currently the world leader in the deployment of EVs, has a mainly hydro based grid, leading to relatively large emissions reductions.  However emissions from electricity generation will be greater in countries with fossil based systems, which will lead to a lower reduction in emissions and higher abatement costs, other things being equal.  However just how much lower may depend on factors such as when EVs are charged, and what the marginal generating plant on the system is at that time. 

Furthermore, lifecycle emissions of the vehicle itself can vary greatly between EV models and even between the same model made with materials from different sources.  For example, the emissions from smelting aluminium for a lightweight body can be very different depending the source of the electricity used in smelting, and emissions will be different again in making a carbon fibre body such as that used for the BMW i3 and i8.  An additional complication is that many lifecycle emissions can fall outside the jurisdiction being assessed, and may be covered by a quite different set of policies.   

Costs can also change greatly over time, sometimes to an unanticipated extent.  Batteries account for a large proportion of the cost of an EV, but costs are falling rapidly.  In the last five years costs have more than halved and energy densities, which set the size of battery pack, have more than doubled.  This trend seems likely to continue as a result of continuing R&D and increasing deployment.  

Technology spill-over benefits from early deployment are difficult to account for in a MAC analysis.  They are among the reasons EVs currently attract financial incentives in many jurisdictions, for example a £5000 grant in the UK, $7500 Federal Tax Credit in the USA, and exemption from VAT and purchase tax in Norway.  Other incentives can also play a role in stimulating early adoption, including exempting EVs from tolls or congestion charges, allowing EVs on High Occupancy or bus lanes, providing free parking, and mandating tight emission standards.

Sources:  

On battery costs:  US DoE report published as part of their EV programme shows costs for batteries declining to around $300-350/kWh.  For a comparison changing the specification of a Tesla S from a 60kWh battery to an 85kWh battery (the two models are otherwise quite similar) increases the price by £6170 excluding VAT, which is $400/kWh (see here).    

Data in the main body of the post on the sales of the Tesla S in prosperous postcodes is from Forbes.com

The EU’s recent proposal for a 2030 EUETS target does not look very ambitious

The EU’s recently announced greenhouse gas emissions target for 2030 looks like just enough to keep the 2050 target credible, but seems unlikely to be perceived as highly ambitious by other jurisdictions.  

The European Commission has recently proposed a target of reducing EU greenhouse gas emissions to 40% below 1990 levels by 2030.  Sectors covered by the EUETS (power generation and large industry) will be required to reduce emissions to 42% below 1990 levels.  This post takes a look, using some rough-and-ready analysis, at how onerous the EUETS target would be if implemented.   The Commission also announced a proposal to establish a “market stability reserve” for the EUETS.  I will return to this proposal in a future post, but for now the analysis excludes its effect.  The analysis also excludes the temporary delay of allowances sales over the next few years (backloading), which does not affect cumulative totals to 2030 in the absence of the stability reserve.

A target of a 40% reduction by 2030 is on a straight line track from the 20% mandated by 2020 towards the least stringent end of the 2050 target, which is an 80-95% reduction from 1990 levels.  This appears to be the minimum reduction likely to retain the credibility of the 2050 target, especially given the current surplus of allowances in the EUETS.  A smaller reduction by 2030, requiring deeper cuts to be achieved more rapidly towards 2050, would likely have increased the perceived probability that the 2050 targets would not be adhered to.

There is currently a surplus of EU allowances of around 2.2 billion tonnes, equivalent to about one full year of emissions covered by the scheme.   This scale of surplus has arisen mainly due to the severity of the recession in Europe.  Emissions currently remain below the cap, and even as the cap tightens it will take more than a decade for the surplus to disappear.

This is illustrated in the chart below.  The cumulative cap on emissions between now and 2030 (green line) starts at level of the current surplus.  It then increases, but less rapidly each year as the annual cap comes down.  This is compared with the illustrative case of annual emissions are constant at 2012 levels (solid blue line), so cumulative emissions grow linearly.  In this case, with no reduction in annual emissions, the surplus disappears in around 2026.  However in practice power sector emissions are expected to fall over the period (see below), reducing cumulative emissions (dashed blue line).  This leads to the surplus disappearing only in 2029, and reduces the cumulative shortfall by 2030 to quite low levels, assuming emissions from industry are constant.  Aviation is excluded from these totals.  Although internal flights remain covered by the EUETS, the associated cap remains unclear.

Cumulative emissions (excluding aviation) and the cumulative cap (including current surplus) show a deficit emerging only in the late 2020s …

 

The power sector is the largest source of emissions covered by the EUETS, so is crucial to demand for allowances.  There may be some increase in electricity demand over the period, and hence in demand for allowances.  The increase may be smaller with strong efficiency measures, or larger if there is very rapid uptake of electric vehicles, and will also vary more generally with GDP growth over the period.  There is also likely to be a decrease in nuclear generation to 2030 as older plant comes to the end of its working life and is not replaced by an equal amount of new plant.

However the growth in demand and fall in nuclear output seem likely to be more than offset by continuing growth in generation from renewables.  This implies a net decrease in the need for fossil generation, leading to lower emissions in the absence of changes to the fossil fuel mix.  However there may be some increase in emissions from internal EU  aviation, although any increase is likely to be much smaller in absolute terms than the decrease from the power sector.  Trends in emissions from industry, assumed to stay constant here, will also affect the total.

Together these trends might lead to a cumulative excess of expected emissions over the cap of around a billion tonnes by 2030 (about 3% of the total), including some growth in emissions from domestic aviation.   Projections of emissions over more than a decade and a half are obviously uncertain, and the cumulative total could easily vary by a billion tonnes or more from this total.  Nevertheless, it seems likely that the shortfall in allowances cumulatively over the period will be somewhere in the low- to mid- single figures percent of the total over the period, with the market remaining in surplus until the late 2020s.   The additional abatement required to eliminate the shortfall in this case could be achieved by a moderate amount of fuel switching.  And scenarios where a surplus of allowances persists through to 2030 are not hard to construct.  (The shortfall is somewhat increased if you take the view that there is a permanent stock of allowances needed to enable hedging in the market,  Some estimates indicate that this is around a billion tonnes, which would increase the shortfall to around 6% in the scenario above.  However it is by no means clear that this is needed through the 2020s, and anyway it remains easily accommodated by fuel switching,  Conversely around an extra 800 million allowances unused from the New Entrant Reserve  may come into the market at the end of Phase 3 in 2020, further reducing any shortfall )

Any substantial scarcity that does emerge seems likely to be as a result of banking of allowances into the period after 2030, either as a result of private sector banking or the operation of the market stability reserve, which effectively mandates a certain amount of banking of any large surplus.

The EU’s apparent intention to (just about) keep on a track towards its 2050 targets is surely welcome.  However the proposed 2030 target for the EUETS thus does not seem very demanding.  It seems unlikely that such a cap will be to be taken by other countries as a sign of strong EU leadership on emissions reduction.  It also seems unlikely that the EUETS alone will become effective at stimulating large scale investment in low carbon technologies over the next decade and a half.  This risks endangering progress to reduce emissions after 2030.  Additional policy instruments will likely be needed if the EU is to succeed in building the low carbon infrastructure needed to put itself on a path to largely decarbonising its economy by the middle of the century.

Adam Whitmore  –  14^th February 2014

Notes on data and assumptions  

The 40% target requires a 20% point reduction by 2030 from the already mandated 20% cut due by 2020.  If this were followed by 40% points (40% down to 80%) over the subsequent two decades an 80% cut would be achieved by 2050.   20% of 1990 levels per decade thus takes the cap towards the top end of the 2050 target range of an 80-95% cut by 2050.

2012 emissions include the industrial emissions additionally covered in Phase 3.  Emissions from large industry are assumed to remain constant over the period.  The linear reduction factor is assumed to increase from 1.74% p.a. to 2.2% p.a. in 2021.

The estimates of power sector trends are based on the IEA 2013 World Energy Outlook New Policies Scenario.  This scenario shows demand growth in EU power generation of 0.4% p.a. over the period, leading to an additional 260TWh of generation by 2030 compared with 2011.  It also shows a decline of 10% in nuclear, but his may include optimistic assumptions about new build.  A decrease in nuclear generation of 20% (180 TWh p.a.) seems plausible, and I’ve used this estimate.  This leads to potential additional demand from fossil generation of 440TWh (260TWh + 180TWh).  The IEA estimates that generation from renewables, including hydro, will approximately double between 2011 and 2030, increasing by 730TWh p.a..  This leads to a net reduction in demand for fossil generation of around 290TWh (730TWh – 440TWh) by 2030.  The estimate of the saving takes account of the profile of these trends, for example the more rapid fall-off in nuclear in the 2020s.  Additional TWh of low carbon power are assumed to reduce emissions by 0.4t/MWh, equivalent to displacing mainly gas. 

The electricity sector projections take their base year as 2011 while the emissions data base year is 2012, but this is taken account of in the calculations. 

Internal aviation emissions are currently around 84 mtpa, but the position of aviation within the EU post-2020 is currently unclear.  The calculations assume that international aviation is dealt with under a separate agreement through ICAO, or not at all. 

The calculations exclude any additional reductions if other jurisdictions take action.  Any reductions in the cap due to international action may in any case be accompanied by increased use of offsets within the EU.