Monthly Archives: June 2015

The IEA’s Bridge Scenario to a low carbon world again underestimates the role of renewables

In this, my last post until September, I take a quick look at the IEA’s latest renewables projections.  The IEA has just produced its World Energy Outlook Special Report on Energy and Climate Change, which is intended to describe how the energy sector can transition to being part of a lower carbon world.  It includes a new Bridge Scenario which emphasises what can be done over the next decade or two.  There is much that is good in the report, including its mention of the potential to reduce methane emissions from the energy sector, a subject which I’ll return to in a future post.  However its renewables projections are less satisfactory.

I previously noted how the IEA has vastly underestimated renewables growth in the past (see here), and that their current projections show future rates of deployment of renewables slowing substantially from present levels (see here).  I had hoped that, especially given its topic, this latest report would include a more realistic outlook for renewables.  However even the Bridge Scenario projections continue to look much too pessimistic.

The table below shows a comparison of the IEA’s wind and solar PV projections for the 2020s with actual installations for last year and expected rates for this year.  It shows that the IEA projects installation rates for the 2020s at about last year’s level and below levels expected for this year, implying a stagnation or contraction of the industry rather than continued growth, even as measures to reduce emissions are increased.

Annual average installation rates for wind and solar PV (GW)

  2020s IEA Bridge scenarios (annual average) 2014(Actual) 2015 (estimated by Bloomberg)
Wind 55 51 63
Solar PV 42 43 58

 

Notes: Historic data is taken from Bloomberg, BP, and the Global Wind Energy Council (GWEC).  Data for wind installation in 2014 is similar at 49 GW, 52GW, and 51 GW respectively according to each source.  Different data sources give somewhat different values for the amount of solar PV installation in 2015.  BP shows solar PV at around 40GW, Bloomberg around 45GW.  I have taken the mid-point of these two values. There are various possible explanations for the difference, for example different estimates of which projects were completed by the end of the year.   Previous years’ estimates for the amount of solar PV installed are very similar between the two sources (within a GW or so).

The chart below (an update from my previous post) shows this data graphically, and compares it with history and the IEA’s 2014 World Energy Outlook New Policies Scenario.  It shows welcome but limited increases in the rate of installation of both wind and solar PV projected by the IEA.  There is still a clear trend break between history and the projections.

Chart

Note:  IEA projections are for 2012 or 2013-2020 and for each 5 years thereafter, and are shown at the mid-point of each interval.  

The IEA seems to continue to be concerned about the costs of renewables, leading them to be very cautious in their projections.  But with costs falling, pressure for action to reduce emissions increasing, and penetration of both wind and solar PV globally remaining well below saturation levels, continued growth in the rate of deployment seems much more likely than stagnation or decline.

The IEA’s work is widely respected and quoted.  This makes it all the more important that their renewables scenarios become more realistic.  Currently they serve mainly to distort the public debate on pathways to decarbonisation, and detract from the other good work in this area that the IEA does.   The time for the IEA to improve its projections for renewables seems long overdue.

Adam Whitmore – 27th June 2015

When Margaret Thatcher and the Dalai Lama agree

Environmental protection forms part of the mainstream of the Anglo-American conservative political tradition.  Policy debate on climate change should recognise this.

Climate change is often seen as a politically divisive issue, with those on the left more active and concerned than conservatives.  And indeed there is much evidence that those with different values perceive the issue differently[i].  However, concern about climate change can be placed firmly in the mainstream of the conservative tradition[ii].

Traditional conservatism has long emphasised the need for people to safeguard for future generations that which they have inherited.  Edmund Burke, widely regarded as the founder of modern conservatism, put this case in the context of the French revolution, arguing that people:

“should not think it among their rights to cut off the entail or commit waste on the inheritance by destroying at their pleasure the whole original fabric of their society, hazarding to leave to those who come after them a ruin instead of an habitation.”[iii] 

Environmental damage was far from being a hot political issue in Burke’s time, but it is a small step to apply this idea of safeguarding an inheritance to environmental conservation.  Republican US President Ronald Reagan again did exactly this when he said:

“What is a conservative after all but one who conserves, one who is committed to protecting and holding close the things by which we live … And we want to protect and conserve the land on which we live — our countryside, our rivers and mountains, our plains and meadows and forests. This is our patrimony. This is what we leave to our children. And our great moral responsibility is to leave it to them either as we found it or better than we found it.”[iv]

Another Republican US president, Richard Nixon stressed the need to safeguard the natural environment, and that freedom does not include the right to impose costs on others:

“Restoring nature to its natural state is a cause beyond party and beyond factions … Clean air, clean water, open spaces—these should once again be the birthright of every American. We can no longer afford to consider air and water common property, free to be abused by anyone without regard to the consequences.  Instead, we should begin now to treat them as scarce resources, which we are no more free to contaminate than we are free to throw garbage into our neighbor’s yard.”[v] 

Such sentiments have in the past been translated into action by conservative politicians.  The 1956 Clean Air Act was passed by a Conservative government in the UK, and the US Environmental Protection Agency was founded in 1970 during the Nixon presidency.

The UK Climate Change Act was passed in 2008 with cross party support, with only five Members of Parliament (less than 1%) voting against.  Going further back, the UNFCCC was signed by British Conservative Prime Minister John Major and by Republican US President George Bush, along with the representatives of over 160 other governments.  The Hadley Centre, one of the world’s leading climate research centres, was established in 1990 under a Conservative government led by Margaret Thatcher, who opened the centre herself.

Indeed Margaret Thatcher was among the first senior politicians to talk about the need to reduce greenhouse gas emissions and spoke eloquently about the consistency between environmental protection and conservative values.  In 1988, the same year the Intergovernmental Panel on  Climate Change was established and four years before the UNFCCC was signed, she said to the Conservative Party conference, talking about a range of environmental problems including climate change:

It’s we Conservatives who are not merely friends of the Earth—we are its guardians and trustees for generations to come.  The core of Tory philosophy and the case for protecting the environment are the same. No generation has a freehold on this earth. All we have is a life tenancy—with a full repairing lease. This Government intends to meet the terms of that lease in full.[vi]

This metaphor of the earth as our home of which we are guardians, and which it is our duty to protect, is common among those who otherwise hold widely differing points of view.  The Dalai Lama has said that:

“The earth is our only home … If we do not look after this home, what else are we charged to do on this earth?” [vii]

There is, and should be, much debate about the specific details of climate change policy.  But there should be no debate about the necessity and value of the objective of safeguarding the earth.  When Margaret Thatcher and the Dalai Lama can express almost the same idea in almost the same terms, people can surely develop a sense of common purpose about preventing severe climate change.  This has never been more necessary.

Adam Whitmore – 11th June 2015

[i] See here for a discussion of this.

[ii] I talk in this post about traditional conservatism.  A discussion of the more difficult case of libertarianism and climate change will need to await another post, but even there I think common ground can be found.  I also recognise that the actions of the Republican Party in the USA at the moment often diverge from traditional conservatism.  There is also a strand of thinking on the left which has in the past neglected environmental issues, but this is less prominent than it was.

[iii] Edmund Burke, Reflections on the Revolution in France, 1790

[iv] Remarks at dedication of National Geographic Society new headquarters building, June 19, 1984 http://www.reagan.utexas.edu/archives/speeches/1984/61984a.htm   (A good selection of Reagan’s other remarks on environmental protection can be found athttp://blog.republicen.org/our-top-9-ronald-wilson-reagan-quotes-on-the-environment.)

The next passage of the same speech, less often quoted, emphasises the validity of exploiting natural resources for human ends, in a responsible way, making explicit reference to a religious rationale:

“But we also know that we must do this with a fine balance.  We want, as men on Earth, to use our resources for the reason God gave them to us — for the betterment of man.   And our challenge is how to use the environment without abusing it, how to take from it riches and yet leave it rich.”

This view is taken further by some in their advocacy of man’s right to exploit nature, often justified in terms of a passage in the Bible that refers to man’s dominion over nature, Genesis 1:26-28:

26 And God said, Let us make man in our image, after our likeness: and let them have dominion over the fish of the sea, and over the fowl of the air, and over the cattle, and over all the earth, and over every creeping thing that creepeth upon the earth. 27 So God created man in his own image, in the image of God created he him; male and female created he them. 28 And God blessed them, and God said unto them, Be fruitful, and multiply, and replenish the earth, and subdue it: and have dominion over the fish of the sea, and over the fowl of the air, and over every living thing that moveth upon the earth.

However many interpreters of the Christian tradition argue for the stewardship that is implied by dominion, for example citing Genesis 2:15:

15 And the Lord God took the man, and put him into the garden of Eden to dress it and to keep it. 

Pope Francis, among others, appears much more inclined to adopt the perspective of a Christian duty to safeguard God’s creation.

[v] State of the Union Address, January 22, 1970

[vi] Speech to Conservative Party Conference, 1988 Oct 14 Fr.  For other examples of her views on climate change and environmental issue see: Speech to the Royal Society (1988 Sep 27), Speech to Conservative Party Conference (1989 Oct 13), Speech to United Nations General Assembly, Global Environment (1989 Nov 8) and Speech at 2nd World Climate Conference (1990 Nov 6).  See http://www.margaretthatcher.org/ for the full text of each speech.  In her later writings she expressed scepticism about the motives of some advocating action on climate change, but that should not detract from her well-informed concern and advocacy of action while in office.

[vii] The universe in Single Atom, Dalai Lama (2005), Chapter Nine.  This statement was in the context of the need to respect the Earth’s biological heritage.

Carbon prices around the world are consistently too low

Carbon pricing is spreading rapidly around the world [i].  However prices almost everywhere are far too low at the moment to price emissions efficiently.  The chart below summarises carbon prices in those jurisdictions with pricing.  The horizontal axis shows volumes, the vertical axis shows prices, as in a conventional commodity supply curve.  The vast majority of priced emissions – about 90% of the total – are priced below $14/tCO2.  Higher carbon prices are invariably for small volumes, and are found only in Europe and British Columbia.  They include prices under the French carbon tax, which covers sectors outside the EUETS, the UK carbon price floor, where the EUA price is topped up, and longstanding carbon taxes in Scandinavia.

The chart also shows the social cost of carbon – which represents the cost of the environmental damage caused by emissions – as estimated the US EPA.  This is almost certainly an underestimate[ii] of the true cost, and the concept has other limitations that imply it is no more than a lower bound to what it is worth paying to avoid emissions.  Carbon prices are thus too low even compared with a likely underestimate of the cost of emissions.  Taxes are too low and caps are too loose to price carbon adequately.  Consequently efficient abatement is not happening[iii].

Prices and volumes of carbon pricing around the world

Carbon supply curve

Price data is from May 2015.  I have excluded the Mexican carbon tax on the grounds that it does not apply to natural gas and so does not fully tax carbon.  The Chilean carbon tax is included although it does not come into force until 2018.  The South African carbon tax is scheduled to be introduced next year, but may be postponed, or may not be introduced at all.  The EUETS price would be somewhat higher but for the weakness of the Euro against the dollar at the moment.   The Social Cost of Carbon is the US EPA estimate at a 3% discount rate and converted to $2015 – see reference 2.

Prices may increase in future.  However this process looks likely to be too slow in most cases.  For example, under the California and Quebec scheme prices are currently at the floor set by the auction reserve.  This escalates at 5% p.a. real terms.  However at the present rate this will take until around 2050 to catch up even with the EPA’s estimate of the social cost of carbon[iv], which also shows increases in real terms over time.  Prices elsewhere in North America are mostly lower still.  In the EU there is little evidence from forward markets that allowances will reach significantly closer to the social cost of carbon over the next few years, and it seems unlikely that China will seek to price emissions at much above levels that prevail in the EU and North America.  It therefore seems likely on present trends to be a long time before prices in major jurisdictions reach levels that reflect the cost of damage from climate change, or are sufficient to limit temperature rises to two degrees.

This implies that further action is needed to make higher prices more politically acceptable.  Doing this will be a huge challenge, but two strands of any solution appear clear.  Ensuring that industry that is genuinely vulnerable to carbon leakage is appropriately safeguarded from competitive distortions will help mitigate political obstacles to higher pricing.  And efficient carbon pricing may further be helped by more explicit recycling of revenue to citizens, including ideas such as cap-and-dividend, in which the proceeds of sale of allowances under a cap-and-trade scheme are returned directly to citizens.  This in effect defines citizens as owners of the right to emit and so gives everyone a stake in higher prices (more on this in a future post).  Elements of such an approach are evident in British Columbia and were part of the former Australian scheme.

Measures other than carbon pricing are in any case necessary to bring about the required transformation of the energy sector[v].  And while carbon prices remain too low there will be an even greater need for such approaches, even if these may sometimes themselves help keep the carbon price low.  Funds to subsidise deployment of low carbon technologies may come from the proceeds of carbon pricing, especially in jurisdictions such as North America where earmarking of revenues is common.

The spread of carbon pricing is a success story, but a limited one in view of the prices prevailing to date.  Efforts both to strengthen the carbon price and enhance complementary policy approaches are needed if climate change is to be limited to acceptable levels.

Adam Whitmore – 2nd June 2015

 

Notes

[i] See  here

[ii] See  here

[iii] The marginal price signal is at too low a level, so some economically efficient abatement is not being signalled.  It is possible that an inefficient mix of abatement is being purchased, even though the level of abatement is efficient.  This could be the case if, for example, there was too much expensive abatement through renewables programmes.  However for a number of reasons this does not seem plausible.  For example, abatement is currently insufficient to meet the agreed 2 degree target, and support for renewables globally is clearly not excessive in view of their present share of generation and the required speed of reduction (although it may well be desirable for more of the support to be in the form of a higher carbon price on fossil fuel use).

 

[iv] Escalating the current carbon price at 5% real terms to 2050 gives a price of about $74/tCO2, roughly in line with the EPA’s central estimate of the Social Cost of Carbon at that date of 2011$76/tCO2.

[v] See here