Category Archives: Climate change policy

Climate change: how did we get here, and why is it so hard to fix? (Part 1)

Activities that cause emissions are ubiquitous, diverse and deeply embedded in modern life.  The world’s energy system is huge and long-lived.  This makes emissions tough to deal with. 

This post is the first of two stepping back a little from the specific topics I usually cover to take a very high level look at why the climate change problem is so hard to fix.  This first post looks at how we got here and (at a very high level) the physical and engineering challenges of addressing the climate change problem.  The next post will consider some of the political and psychological barriers to greater action.

The consequence of industrialisation

The world’s climate was remarkably stable from before the birth of agriculture, some 8-10,000 years ago, until very recent times[1].  Human civilisation grew up in a stable climate, and knew nothing else, despite the calamities caused on occasions by storms, floods, drought, and so forth.

Industrialisation changed this.  There is no single year that definitively marks the beginning of industrialisation, but 1776 probably as good a reference point as any.  It was an eventful year, with the US Declaration of Independence giving history one of its most famous dates, while elsewhere the first edition of Adam Smith’s Wealth of Nations was published and the Bolshoi Theatre opened its first season.  But in the long view of history perhaps more important than any of these was that James Watt’s steam engines began to power industrial production[2].  This, more than any other event, marks the beginning of the industrial era.

In the nearly two and a half centuries since 1776, world population has grown by almost a factor of about 10.  Economic output per person has also grown by a factor of about 10.  Taking these two changes together, the world’s economic activity has increased by a factor of about 100.  This has put huge stresses on a range of natural systems, including the atmosphere[3],[4].

The increase in the use of fossil fuels has been even greater than the increase in industrial activity.  Around 12 million tonnes of fossil fuels, almost entirely coal, were burnt each year before 1776[5].  Today the world burns about 12 billion tonnes of fossil fuels each year, an increase of a factor of 1000[6].

This huge increase in the burning of fossil fuels is now – together with deforestation, agriculture and a few other activities – changing the make-up of the atmosphere on a large scale.  This in turn, is changing the world’s climate.   Within a single human lifetime – just one percent or so of the time since the birth of agriculture – changes to the climate are likely to be much greater than human civilisation has ever before experienced.  The consequences of these changes are likely to be largely harmful, because manmade and natural systems are largely adapted to the world we have, not the one we are making.

The characteristics of the systems that have led to these changes also make the problems hard to address.

The scale of emissions is huge …

The scale of CO2 emitted from the energy system is vast, around 36 billion tonnes p.a.  If this were frozen into solid form as “dry ice” it would cover the whole of Manhattan Island to the depth of about two thirds of the Empire State building.

The system that generates these emissions is correspondingly huge.  The world’s energy system cost tens of trillions of dollars to build, and is correspondingly immensely expensive to replace.

The diversity and dispersion of emissions makes the problem more challenging …

The problem is worse even than its scale alone suggests.  It would be simpler to deal with emissions if they were all in one place, whether Manhattan or elsewhere, and in solid form.  Instead emissions are dispersed across billions of individual sources around the world.  And they come from many different types of activity, from transporting food and powering electronics to heating and cooling homes and offices.  There is no single technology doing one thing to be replaced, but a wide diversity of technologies and applications.

And once emissions get into the atmosphere the greenhouse gases are very dilute.  Carbon dioxide makes up only 400 parts per million (0.04%) of the atmosphere.  Among other things this makes capture of CO2 once it has got into the atmosphere difficult and expensive.

And assets producing emissions are very long lived …

Energy infrastructure often lasts many decades, so changing infrastructure tends to be a long term process, with premature replacement expensive.  And on the whole the existing system does its job remarkably well.  There would be little need for very rapid changes to the system if it were not for climate change and other forms of pollution.

Energy is central to modern life …

Finally it’s not possible to simply switch off the world’s energy system because it is essential to modern life.  Hurricane Sandy disrupted much of New York’s energy system, and the consequences of that gave an indication of how quickly modern life collapses without critical energy infrastructure.

These physical characteristics of the problem are compounded by the political and psychological obstacles to change at the necessary scale.  I will return to these in my next post.

Adam Whitmore – 22nd May 2017

 

[1] This climatically stable period since the end of the last ice age between 11,000 to 12,000 years ago is referred to as the Holocene.  Agriculture started not long after the ice sheets retreated and the world warmed.  Human activity has now led to a new period, referred to as the Anthropocene.

[2]   https://en.wikipedia.org/wiki/Watt_steam_engine.  The first use of the Watt engine to provide the rotary power, which was crucial for factories, was a little later in 1782 at the Soho manufactory near Birmingham.  https://en.wikipedia.org/wiki/Soho_Manufactory.

[3] http://www.scottmanning.com/content/year-by-year-world-population-estimates/

[4] http://www.ggdc.net/maddison/maddison-project/data.htm

[5]Reliable data is obviously hard to come by that far back, but See Energy for a Sustainable World: From the Oil Age to a Sun-Powered Future By Vincenzo Balzani, Nicola Armaroli .  They estimate 10 million tonnes in 1700 and 16 million tonnes by 1815.  The majority of the increase would have been in the later part of this period.  See also Socioecological Transitions and Global Change, edited by Marina Fischer-Kowalski, Helmut Haberl, who quote estimates of 3 million tonnes p.a. in 1700 in the UK, a large proportion of the world total at the time, with little increase to 1776.  This consumption included a few primitive, inefficient steam engines, used mainly for pumping water from coal mines themselves.  The Newcomen steam engine required such large quantities of coal that it was rarely economic to site it away from coal mines.  The Watt engine was more than twice as efficient.

[6] My estimate of the total mass of coal, oil and gas, based on data in BP statistical review of World Energy.

UK emissions reductions offer lessons for others

The UK has outperformed all other major economies in emissions reductions since 1990.  This offers lessons for both the UK and others.

In my previous post I described how the UK has made good progress towards its legally binding commitment to reduce emissions by 80% from 1990 levels by 2050.  This post compares emissions cuts in the UK with those elsewhere.

Since 1990 the UK has reduced both total and per capita emissions more than any other major economy (see chart).  The UK’s lead would be greater if emissions reductions in 2016 were included, because UK emissions fell by a remarkable 6% in 2016 alone, mainly due to falls in emissions from the power sector[1].  This is despite the percentage fall for CO2 from the UK (shown here) being smaller than when all greenhouse gases are taken into account[2].

Reductions in CO2 emissions from the energy sector and industry 1990 to 2015 – Total (blue) and per capita (green)

Data for this chart and other data quoted in the text is largely sourced from: http://edgar.jrc.ec.europa.eu/news_docs/jrc-2016-trends-in-global-co2-emissions-2016-report-103425.pdf

Emissions from the Russian Federation have also fallen significantly, but this reflects the very high level of emissions in the Soviet Union, with its huge and pervasive inefficiencies.  All of the decrease in emissions from the Russian Federation was in the 1990s.  Germany has also benefitted from reduction in emissions in the former East Germany and has made good progress in other respects, notably with installing renewables.  However it has been hampered by continuing extensive use of coal and lignite for power generation.

Emissions reductions in France have been somewhat less, but this remains a very creditable performance because France started with a very low carbon power sector, consisting almost entirely of nuclear and hydro.  There were thus fewer opportunities for emissions reductions.  Despite the lower percentage fall than in the UK, France’s per capita emissions in 2015 were still almost 20% below those of the UK (5.1 tonnes per capita in France compared with 6.2 tonnes per capita for the UK).

The USA has accommodated significant population growth with only a small rise in emissions, but this is clearly nowhere near enough if it is to make an appropriate contribution to global reductions.  Emissions remain at 16.1 tonnes per capita, more than two a and a half times UK levels and more than three time French levels.  Japan’s emissions have been largely constant through the period.  Australia has done notably badly. China’s emissions (not shown) have roughly quadrupled over the period, reflecting its rapid, carbon intensive development.

While there have been many factors at work here, the UK approach to policy has played its part.  Policy has successfully targeted relatively low cost emissions reduction, notably reducing coal use in the power sector.  Above all the Climate Change Act (2008) has provided a consistent and rigorous policy framework.

There will doubtless be some who argue that outperforming others to date means the UK needs to do less.  But this is very far from the case.  Others need to catch up to what the UK has achieved, for example by eliminating coal use.  Power generation from coal currently accounts for just under a third of the total emissions from energy and industry globally.

And the UK itself still needs to stick resolutely to its goals, and meet the challenge of continuing decarbonisation now many of the cheaper and easier things have already been done.

But others can at least look at lessons from the UK experience and see what there is to learn that could apply to their own circumstances.

Adam Whitmore – 9th May 2017

 

[1] https://www.gov.uk/government/statistics/provisional-uk-greenhouse-gas-emissions-national-statistics-2016

[2] The percentage reduction for the UK is less than quoted in my previous post, mainly because the data in this post is for CO2, so excludes large reductions in UK emissions of methane, mainly from waste, and N2O, mainly from industry. There are differences between sources of data for CO2 only, but these are small.  The Edgar data quoted here shows 580 million tonnes in 1990 falling to 400 million tonnes in 2015 (31% fall).  The UK Government’s data shows CO2 emissions falling from 596 million tonnes to 404 million tonnes over the same period (32% fall).  The UK’s 2015 final greenhouse gas emissions inventory is available here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/604351/2015_Final_Emissions_data_tables.xlsx.

 

 

Half way there

The UK has made excellent progress on reducing emissions.  But the hard part is yet to come.

The UK’s Climate Change Act (2008) established a legally binding obligation to reduce UK emissions by at least 80% from 1990 levels by 2050.  This is an ambitious undertaking, a sixty year programme to cut four in every five tonnes of greenhouse gas emissions while simultaneously growing the economy.

The story so far is, broadly, an encouraging one.  2016 emission were 42% below 1990 levels, about half way to the 2050 target[1].  This has been achieved in 26 years, a little under half the time available.  And it has been achieved while population has grown by about 15%[2] and the economy has grown by over 60%.  The reduction in emissions from 1990 to 2015 is shown on the chart below, which also shows the UK’s legislated carbon budgets.   There is of course some uncertainty in the data, especially for non-CO2 gases, but uncertainties in trends are less than the uncertainty in the absolute levels, and emissions of CO2 from energy, which is the largest component of the total, are closely tracked.

The UK is half way towards its 2050 target, in a little under half the available time …

Source: Committee on Climate Change

The chart below shows the sectoral breakdown of how this has been achieved, and this raises some important caveats.

Progress in some sectors has been much more rapid than others …

Source: Committee on Climate Change

The largest source of gains has been the power sector, especially if a further fall of a remarkable in emissions from power generation in 2016 is included (the chart only shows data to 2015).  While renewables have made an important contribution, much of this fall has been due to replacing coal with gas.  This been an economically efficient, low cost way of reducing emissions to date, to which UK carbon price support has been a major contributor.  However coal generation has now fallen to very low levels, so further progress requires replacing gas with low carbon generation – renewables, nuclear and CCS.  This is more challenging, and in some cases is likely to prove more expensive.

The next largest source of gains, roughly a third of the total reduction, is from industry.  However, while detailed data is not available, a large part of this reduction may have been due to broader economic trends, notably globalisation of the world economy leading to heavy industry becoming more concentrated in emerging economies.  This trend may also have had some effect on electricity demand and thus emissions.  The aggregate reduction in global emissions may thus be smaller than indicated by looking at the UK alone.  Reducing global emissions still requires a great deal more progress on industrial emissions, especially in emissions intensive sectors notably iron and steel and cement.

Progress in reduction of emissions from waste, especially methane from landfill, has been a third important contributor.  Again, this has been highly cost-effective reduction.  However about two thirds of emissions have now been eliminated so further measures will necessarily make a smaller contribution, though there is much that can still be done with the remainder such as eliminating organic waste from landfill.

Other sectors have done much less, and will need to do more in the years to come.  Progress on f-gases may be helped by the recent international agreement on HFCs, although more will still need to be done.  Transport emissions have made only slow progress in recent years.  It is essential that electrification is encouraged so that a large change similar to that achieved in the power sector can be achieved in transport.  The buildings stock remains an intractable problem, and the first priority must be to at least make sure that new buildings are built to the highest standards of insulation.

So continuing the trend of falling emissions in future will be difficult and will require new and enhanced policy measures.  But in 1990 the prospects of achieving what has already been achieved doubtless looked daunting, and progress to date should encourage further efforts in future.

Adam Whitmore -25th April 2017

Material in this post draws on a presentation by Owen Bellamy of the Committee on Climate Change at a British Institute of Energy Economics seminar on 5th April 2017.

[1] The UK’s domestic emissions need to go down slightly more rapidly than the headline target would suggest due to the role of international aviation and shipping.  This is shown on the chart.  However the broad message is the same.

[2]https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/populationestimates/articles/overviewoftheukpopulation/mar2017

A wealth of ideas about wealth funds

There are many ways of designing a wealth fund based on revenues from carbon pricing.  Debate about these is necessary, but should not distract from the merits of the broader proposal. 

Last month I outlined the value of the carbon emissions, and the possibility of establishing a wealth fund based on revenue from carbon pricing.  This post provides some brief responses to questions that have been raised in response to this proposal.   There are many good design options to choose from.

Would the fund necessarily be national?

No.  There are many national wealth funds in operation, and national carbon wealth fund may well be a pragmatic way forward in many cases.  However, the Alaskan wealth fund is an example of a state based scheme, and others would be possible.  In the EU a fund could also be established either at EU or Member State level.  An international fund would be difficult and perhaps impossible to establish, but would appropriately reflect global nature of the climate change problem.

How would such a fund be governed?

There are many options here.  The most important criterion is that governance should benefit the ultimate owners of the asset, namely citizens, rather than the state or special interest groups.  This implies some independence from government.  Other criteria such as transparency and ethically sound investment will also be important[1].  Some have advocated a fully independent trust fund.  However in practice some degree of government oversight is likely to be required[2].

How would this global public good be allocated internationally?

The distribution between nations of access to the atmosphere has proved a major point of contention in global negotiations on limiting climate change, and this situation appears unlikely to change[3].  However existing carbon pricing regimes – or simply emitting free of charge – already use up a global public good.  Giving citizens and governments a greater stake in increased carbon prices is likely to decrease the quantity of emissions, and so the proportion of the global commons used[4].  This makes the approach I have proposed more compatible with good stewardship of the global commons than existing arrangements, at least for the next 50 years until revenues start to decline.

What would the macro-economic effects be?

These effects would probably not be large, at least for a national UK fund.  The payment into a UK fund would be at most around £16 billion p.a. assuming much greater coverage and higher carbon prices than at present, a little under 1% of GDP per annum[5].  Even this would be unlikely to cause major economic dislocation, especially if phased in over a few years.  The fund would grow large over time, reaching around £860 billion by the end of the century, depending on many factors including which other environmental taxes were included  [6].  However this is not vastly larger than the Norwegian fund today, which is for a very much smaller economy.  Furthermore any fund would have the effect of redirecting revenue from consumption to investment, which would probably have a positive macroeconomic effect in the context of historic UK underinvestment.

Would such a measure be socially regressive?

The concern here is that poorer households spend a larger proportion of their income on energy than richer households, and so energy taxes, and thus carbon taxes, tend to hit them disproportionately harder.  However poor households still spend less on energy, and therefore carbon, in absolute terms than richer households, so an equal dividend, as I’ve proposed, would have a net progressive effect.   Furthermore, households account for only a minority of energy use, but would get the full benefit of dividends (or at least a large proportion), increasing the extent to which it is progressive.

However there are some important intergenerational issues to consider.   The proposal for a fund takes the view that present generations should safeguard capital assets so they retain value to future generations.  This is in line with the standard definition of sustainable development[7].  However there are distributional issues here which need to be addressed.  Some present citizens will be worse off.

How would it fit with other green taxes?

The proposal is clearly consistent with using green taxes more widely as a policy instrument.  What’s different from the standard approach to green taxes is the suggestion of placing revenue in capital fund rather than using revenue to fund current expenditure.  The landfill tax to which I referred in my original post currently raises around a billion pounds per annum[8].  It would be natural to add this revenue to a UK wealth fund.

Would distribution to citizens be the only use for funds?

There is no reason some of dividends from the fund should not be used to fund things like R&D.  As I have previously discussed there are many legitimate calls on revenue from carbon pricing.  However there are many compelling arguments for allocation direct to citizens, and this should in my view be a priority for the fund.

Each of these questions requires further elaboration of course, and there are many other questions to be resolved.  The design of any major new institution such as a carbon wealth fund will require a great deal of consideration of a range of issues.  However further examination appears to strengthen rather than weaken the case for such a fund.

Adam Whitmore – 22nd  March 2017

Thanks to John Rhys for raising some of these issues.  A variant of this post, responding to John’s points, was published on his website. 

 

[1] See Cummine (2016) cited in my original post for further details For a specific proposal for a UK wealth fund:  http://www.smf.co.uk/press-release-conservative-mp-calls-for-uk-sovereign-wealth-fund-to-address-long-term-and-structurally-ingrained-weaknesses-of-the-economy/

[2] See Barnes, Who Owns the Sky (2001)

[3] This problem does not arise for the conventional resources (such as oil and gas) that typically provide the income for sovereign wealth funds of the nations where the resources are located. There is an interesting question as to whether countries should have full property rights to natural resources within their territories, as is often assumed at present, but this is too large a subject to go into here.

[4] The assumption here is that increasing prices from current low levels will increase revenue.  Carbon prices would increase by a factor of say five or more in many cases, and it is unlikely that emissions would decrease by an equal factor – though if they did it would be very good news.

[5] This assumes 400 million tonnes of emissions are priced, compared with 2015 totals of 404 million for CO2 emissions and 496 total greenhouse gases (source: BEIS), implying a high proportion of emissions are assumed to be priced.  The carbon price is assumed to be £40/tonne, roughly the Social Cost of Carbon at current exchange rates and well above current price levels.  This would give total revenue of £16 billion in the first year based on both volumes and prices substantially greater than current levels, but still less than 1% of UK GDP of approximately £1870 billion in 2015. (source: https://www.statista.com/statistics/281744/gdp-of-the-united-kingdom-uk-since-2000/ )

[6] Assuming that the UK reduces its emissions in line with the Climate Change Act target of an 80% reduction from 1990 levels by 2050, and then to zero by the end of the century, and that 80% of emissions are priced at the Social Cost of Carbon as estimated by the US EPA, converted at current exchange rates of $1.25/£.

[7] Sustainable development is usually characterised as meeting the needs of present generations without compromising the ability of future generations to meet their own needs.

[8] https://www.uktradeinfo.com/Statistics/Pages/TaxAndDutybulletins.aspx

Reform of the EUETS has at last made significant progress

The effective limit on the size of the MSR proposed by Council is an extremely welcome strengthening of the EUETS.  However it will still take a long time for the EUETS to become fully effective.

This post updates last week’s post to reflect the important agreement on the EUETS reached in Council earlier this week.  On Tuesday the Environment Council endorsed more ambitious EU ETS policy changes than those agreed by the European Parliament.  This surprised many observers (including me) and is a very welcome change.

The most important change is an effective limit on the size of the Market Stability Reserve (MSR).  Allowances held in the MSR will be cancelled if the MSR contains more than the previous year’s auction volumes, although the precise interpretation of this remains to be defined.   In effect this change means that the number of allowances in the MSR is unlikely to be more than about 500 -700 million after the limit takes effect in 2024.  Indeed the volume limit is tighter than I had previously expected to be possible when I was advocating a size limit on the MSR last June (see here).

The huge size of the MSR during Phase 4 means that this reform will likely result in a cancellation of about 3 billion tonnes from the MSR over Phase 4 (see chart).  Much of this 3 billion tonnes will go into the MSR in 2019, and will be cancelled in 2024 if the reform is finally adopted.

Chart:  The proposed reform will likely lead to cancellation of around 3 billion tonnes from the MSR

chart

Notes:  Uses base case emissions (see previous post), assumes 57% auctioning, and assumes all unallocated Phase 3 allowances go into MSR in 2020.  EP MSR is the MSR under the European Parliament proposals.  New MSR is with the new proposals from Council.  Source: Sandbag

Despite this proposal the market is likely to remain weak for a long time.  Emissions will remain below the cap until the middle or the end of the next decade, and perhaps for longer.  Volumes are not in any case likely to begin returning from the MSR until close to 2030, so the size limit will probably begin to bite in the 2030s.  Tightening the cap to reflect actual emissions remains essential for a well-functioning EUETS over the next few years, and additional measures to complement the EUETS will continue to be necessary (see my previous post for more on these points).   Indeed this reform increases the value of additional action as it implies that additional surplus allowances will indeed be cancelled, leading to greater reductions in cumulative emissions.

Nevertheless, despite its limitations, this reform is a substantial and very welcome strengthening of the EUETS.  Even though the market will still take many years to tighten, this reform is likely to have some influence on earlier prices as traders anticipate a tighter market.  Indeed, in contrast to the measures coming out of Parliament, the market responded immediately to the vote (prices temporarily increased €1/tonne, about 20%).   It is highly desirable that this reform is retained through the remainder of the legislative process.

Adam Whitmore  – 3rd March 2017

Thanks to Boris Lagadinov at Sandbag for useful discussions and providing the chart for this post.

With a weaker EUETS other policies must be stronger

The recent vote in the European Parliament and continuing discussions in Council make it clear that the EUETS is likely to remain weak for many years.  In this context, other climate change policies in Europe will need to be strengthened if Europe is to make a smooth and successful transition to a prosperous low carbon economy. 

The EUETS looks likely to continue with low prices and a large surplus for at least the next 10 years, and probably beyond …

The EUETS has been running a surplus since its early years.  This trend continued last year.  On preliminary estimates for 2016 emissions were around 11% below the cap.  By 2020 (the end of Phase 3 of the EUETS) the cumulative surplus of allowances will have reached nearly 4 billion tonnes, the equivalent of more than two complete years of emissions.  A little over half of this will be in the Market Stability Reserve (MSR), with the rest available to the market (see Chart 1).

Chart 1:  The surplus will have grown to nearly four billion allowances by 2020

capture

Source: Sandbag

Furthermore, there does not look likely to be any scarcity of emissions in Phase 4, which runs to 2030.  Total emissions over Phase 4 (2021-2030) look likely to be below the total cap (and perhaps greatly below) even with little abatement due to the carbon price (see Chart 2a).  The reason for this is that emissions start well below the cap – indeed emissions are already below the cap for 2020[1].  Consequently it takes a while for the cap to fall below emissions (see Chart 2b).  Indeed, the cap may not fall below emissions until after 2030, especially if there are significant reductions in generation of electricity from coal, which currently accounts for 40% of all emissions under the EUETS.  This type of case is illustrated by the low emissions scenario in the charts.

Chart 2a: There is no scarcity on average during Phase 4, and perhaps a large surplus

chart-2a

Source: Sandbag

Chart 2b: Emissions compared with the cap for Phase 4

chart-2b

Source: Sandbag

The reforms recently voted on by the European parliament do not significantly affect this situation …

The measures passed in the European Parliament last week include a doubling of the rate of transfer from the MSR for four years, so removing surplus allowances from the market more quickly.  This is welcome, but does not have much effect.  The surplus available to the market is so large that by the time it has been largely moved to the MSR the slower rate has had a chance to largely catch up (see Chart 3).  In both cases a substantial surplus persists for most of the decade even under the Base emissions case.

Chart 3: Effect of the MSR withdrawal rate

chart-4

Note:  This analysis assumes all allowances are allocated.  In practice some allowances may remain unallocated.   Source: Sandbag

The decision to cancel 800 million allowances from the MSR is also welcome.  Indeed much more cancellation will be required in future, and ideally the size of the MSR should be limited, for example to a billion tonnes.  However without further reform this will only have an effect in the very long term.  The MSR will be so large by the end of Phase 4 that allowances will take several decades to return at the maximum allowed rate of 100 million per annum (see Chart 4).  The 800 million allowances due to be cancelled would anyway have returned only in the about the 2050s.  They thus have almost no effect on the market over the next decade and a half.

Chart 4: Cancelled allowances from the MSR would anyway only return after decades

chart-5

 Source: Sandbag

As a result the EUETS seems likely to remain weak for the foreseeable future…

With such an oversupply of allowances the price seems likely to remain weak.  How weak is impossible to say, but the price has not perceptibly moved as a result of the recent vote in the ENVI committee and the Parliament.  Prices have remained at around €5/tonne, and the forward curve currently shows prices essentially flat at this level to 2020.  It is also hard to see scarcity of allowances being sufficient to drive substantial abatement for several years beyond 2020, and perhaps much longer.

This implies that the EUETS will fail to deliver adequate or efficient signals for either short term abatement or longer term investment in low carbon technologies. The EUETS looks likely to become mainly a backstop mechanism and an accounting and MRV framework, rather than the primary driver of action many wish it to be.

This in turns requires other policies to provide most of the incentives to decarbonise if low cost abatement opportunities are to be realised now, and if the European economy is to be put on track for a prosperous low carbon future.

The weakness of the EUETS is likely to represent a marked shift in climate policy in the EU …

The continuing weakness of the EUETS is likely to trigger a range of actions.  Some of these may be at the EU level but many are likely to be at the national level.  They are likely to include some mix of the following:

  • National carbon pricing initiatives, perhaps along the lines of UK carbon price floor and similar measures proposed in France, with perhaps groups of countries adopting similar or even co-ordinated policies.
  • Additional restrictions on coal plant, including closure in some cases.
  • Assistance with selected low carbon technologies, including CCS, for industry, especially as low EUA prices are likely to mean that the EUETS’ Innovation Fund will not be worth very much.
  • Emissions performance standards for certain sectors.
  • Continuing emphasis on energy efficiency and renewables.

This in turn risks further weaken the EUETS unless opportunities are taken to fix it in future.  Indeed it risks a reinforcing feedback of weaker price signals from the EUETS leading to more additional actions, leading to yet weaker price signals, and so forth unless action is taken.  Action to correct the EUETS and avoid this is certainly desirable, but now looks unlikely on any substantial scale for at least the next several years.

There is another possibility that might emerge.  One of the changes in the current package allows Member States to cancel allowances rather than auction them.  It is possible that a group of larger Member States could collaborate and cancel substantial number of allowances.  Such an approach would be to be most effective once the MSR has absorbed more of the current surplus.  This could lead to a group of Member States doing what Parliament has been unable to do, and Council appears unlikely to do.  This may not be a model of Europe wide decision making, but may be the as good a chance as any for the EUETS to succeed.

Yet such action by multiple Member States at a large scale still seems distant, and may never occur.  The priority must be to put in place other policies which help put the EU on track to meeting its long term decarbonisation goals, and which work towards delivering the Paris Agreement commitments.

Adam Whitmore – 24th February 2016

Notes:

This post is in part adapted from a talk I gave at the Dutch PermRep in Brussels on 7th February, modified to take account of the subsequent vote in the Parliament.

Thanks to Boris Lagadinov and others at Sandbag for providing the charts for this post.  Further material can be found on the Sandbag website.

[1] Emissions in 2016 were 1754Mt (preliminary estimate) compared with the 2020 cap of 1816Mt.

How not to squander $130 trillion

Carbon pricing should be used to establish wealth funds from which current and future citizens can benefit. 

The world has a limited carbon budget …

Climate change depends on the cumulative total of emissions of greenhouse gases, so total cumulative emissions globally must be limited by the need to limit climate change.  This limited total of cumulative emissions is sometimes referred to as a global carbon budget.  Specifically, if global mean surface temperature rises are to be limited to two degrees centigrade, as now mandated in the Paris Agreement, total cumulative CO2 emissions from now on must be limited to around 1600 billion tonnes of CO2[1]. From this perspective the atmosphere is a finite resource that can only be used once, rather like any exhaustible natural resource, with the important caveat that (unlike many natural resources) no more atmosphere remains to be discovered.

But currently the value of this resource is being squandered …

At the moment only a very small proportion of greenhouse gas emissions is priced adequately.  Most emissions remain unpriced, and the growing proportion that is priced is mostly sold at well below both the cost of damages, and well below the value of an increasingly scarce resource.  A valuable scarce resource is thus being given away or sold below cost, subsidising emitters.  Huge natural wealth is being squandered.  And once gone it can never be replaced[2].

It would be better to use revenue from carbon pricing to create a wealth fund to benefit both current and future generations …

So is there a better approach to managing this precious resource?  It seems to me that there is. It would be much better to realise value of emissions in the form of a fund for citizens, with proceeds from carbon pricing (the sale of allowances or taxes) paid into the fund.  Carbon pricing should be comprehensive, with prices at adequate levels.  The finite volume of the resource implies it is best used to establish a wealth fund, where financial capital is built as natural capital is used up.  The fund would belong to all citizens.  Granting its value to citizens would surely encourage better management of the atmosphere, and thus the climate, and higher carbon prices than generally prevail at present.

Such a fund would be analogous to a sovereign wealth fund based on oil and gas reserves, of which the Norwegian fund is the leading example[3].  Wealth is invested in productive activity, with the income from this available to fund pensions and other expenditure. So, how much might this resource be worth in purely financial terms?

Such a fund could be enormously valuable …

Each tonne of CO2 emitted to the atmosphere should be priced at a minimum of the cost of damages from climate change – the social cost of carbon. This is currently around US$50/tonne, and rising over time.  Emissions may be more valuable than this, either because of the limitations in estimates of the social cost of carbon (see here), or because the value of the emissions in terms of the economic activity they enable is greater than their cost in environmental damage.  But evaluating the resource at its cost at least puts a lower bound on its value, unless the economic value of those emissions is below the cost assumed here, which seems unlikely with such a constraining budget[4].

The profile of emissions also matters.  For simplicity I’ll assume current emission levels to 2020, then a linear decrease to the end of this century[5].  This is broadly similar to many emissions tracks that have been modelled as consistent with 2 degree warming, and (consistent with this) the cumulative total is close to the 1600 billion tonnes budget I mentioned above.  It is also consistent with the Paris Agreement goals of reaching net zero emissions at some point in the second half of the century[6].

The annual value of emissions is then estimated from multiplying the (rising) cost of emissions with the (falling) quantity of emissions.  This is shown in the chart below.  The effects of rising prices and falling emissions roughly balance over the next 50-60 years or so, with revenues remaining roughly similar at close to $2 trillion p.a..  Revenues then fall rapidly in the last quarter of the century as emissions fall to zero.  The eventual value of the fund, excluding investment returns and dividends paid out, is the sum of these annual revenues (the area under the curve).

Chart: Potential annual revenue into carbon funds globally … chart

On this basis, the total value of the remaining carbon budget is a staggering $130 trillion.  This is equivalent to $13,000 for each person in the world, assuming world population of 10 billion people later this century.  A 3% annual dividend from this would generate about $400 p.a. for everyone.

Towards a citizens’ dividend …

Dividends from the fund could be used in many ways.  One approach with a range of advantages is distributing benefits to all in the form of a “citizen’s dividend”.  There is already a feature of the Alaskan wealth fund derived from oil revenues, where distribution is in the form of a Permanent Fund Dividend to all citizens.  This is widely considered to have helped build and maintain public support for the scheme[7].

This approach is closely related to the idea of “tax and dividend” carbon pricing.  I have previously argued that such approaches have merit, and indeed tax and dividend has recently been advocated by senior Republicans in the USA[8].  However, there is an important difference between a fund and tax and dividend as often presented, in that revenues are used to establish a fund that is intended to be permanent, whereas tax and dividend proposals often assume revenues to be distributed in full.

There is also a relationship between the idea of a citizen’s dividend and a universal basic income, which is much discussed at the moment and subject to a few trials.  However, there is a crucial difference in that the citizen’s dividend does not seek to provide an adequate income.  Rather it is simply a return on funds invested.  Instead, it is likely to be one component of any universal basic income.

Who would benefit?

There is a natural case for distributing dividends equally, as all have equal rights to the atmosphere.  The atmosphere is a global resource, and climate change knows no borders, so it is natural to make any fund global.  However establishing such an arrangement is likely to be too great a political challenge.

A bottom up approach with individual nations pricing carbon and establishing their own funds is likely to be much more tractable.  Such a national approach would have other advantages.  For example, it would allow other environmental taxes, such as those on landfill, and indeed other sources of revenue to contribute to the fund.  A series of national funds would not stop any fund being used to finance activities of international benefit – indeed such uses would be highly desirable.

Establishing national funds will have many challenges.  However the prize seems large enough to be worth pursuing.  The current system of simply allowing emissions to be dumped into the atmosphere, often free of charge and almost always too cheaply, is a waste of a unique and irreplaceable asset.  Irreplaceable natural wealth such as the atmosphere should be managed carefully, not squandered recklessly.

Adam Whitmore – 13th February 2017 

[1] Based on “Warming caused by cumulative carbon emissions towards the trillionth tonne”.  Allen et. al. Nature vol. 458 (2009), adjusted for emissions since the publication of that paper.

[2] Many people, including me, would also wish to note the ethical dimension here.  It is not appropriate to treat the atmosphere only as mere resource for people to use as they wish, and all decisions about its management must reflect ethical considerations, including responsibilities to future generations, and the duty of care to the world’s natural heritage.  I am simply arguing here that treating it as valuable resource would be a major step forward from treating it as a resource to be used as though it were unlimited and emissions were inconsequential, as is often the case at present.

[3] For an excellent review of Sovereign Wealth Funds and how they could be better managed and used for the benefit of citizens see Angela Cummine, Citizens’ Wealth, Yale University Press, 2016.

[4] If the price would be lower than the SCC with this emissions track it implies that the 2 degree target is too loose and 1.5 degree or lower would be preferred.

[5] This is a rough and ready calculation, taking CO2 emissions from energy and industry only.  It ignores the effect of other gases and effectively assumes other sources of CO2, mainly deforestation, are approximately net zero cumulatively over the century after taking into account the role of sinks and deforestation.  This may be optimistic.  Adjusting for these would lead to a higher starting point and steeper decrease in emissions, reducing somewhat the value of the fund.

[6] In this scenario emissions are low enough to be balanced by a small quantity of negative emissions by the last decade of the century.

[7] See Angela Cummine, Citizens’ Wealth, Yale University Press, 2016., p.140-2.

[8] See “US Republican elders push for carbon tax”, Carbon Pulse, 8th February 2017