Tag Archives: climate change policy

There should be few reservations about auction reserve prices

The auction reserve price in California has proved successful in maintaining a minimum carbon price.  However it shows the importance for an emissions trading system of political commitment and stability. 

This is the second of two posts looking at experience of carbon price floors.  My previous post looked at UK carbon price support, which guarantees a minimum price by means of a tax.   This post looks at an alternative approach, which is used in California  and the other Western Climate Imitative systems, Quebec and Ontario.  Here, instead of imposing a tax, the floor is set by specifying a reserve price in auctions of allowances.  If bids in auctions stay below the reserve price the allowances are not sold.  Reserve prices such as this are common in practice in many commercial auctions, including those held by major auction houses and online.

Reserve prices give what is often called a “soft” floor.  The market price can go below the auction reserve, but eventually the need to buy allowances at auction is likely to ensure that the price recovers.

The chart below shows the auction reserve price in the California system (green line), which started at $10/tonne in 2012 and is increased each year by 5% plus the rate of inflation.  The California market price (blue line) has generally stayed above this level.  However it did dip below the reserve price for a while in 2016, illustrating that the floor is soft.  This price dip reflected a combination of legal challenges to the system, and political uncertainty about the continuation of the system after 2020, which together reduced the demand for allowances.  Once those uncertainties were resolved the market price recovered.

Chart: Auction reserve prices and market allowance prices in the California cap-and-trade system to end of 2017

Source:  http://calcarbondash.org/ and CARB

The Regional Greenhouse Gas Initiative (RGGI) has similar arrangements but with a much lower reserve price, and there too the price has been above the floor.

The environmental effectiveness of price containment mechanisms depends in large part on what eventually happens to any unsold allowances.  In the case of California this issue particularly affects the upper Price Containment Reserve, from which allowances are released if prices go above defined thresholds.  Allowances from this reserve appear most unlikely to be required in the current phase, as prices seem highly unlikely to reach the threshold levels.  If these unsold allowances in the reserve are cancelled, or otherwise put beyond use, cumulative emissions will be lower.  However if they eventually find their way back into the system, and enable the corresponding quantity of emissions to take place, the environmental benefit may not be realised, or at least not it full.  Some sort of cancellation mechanism is therefore needed, for example cancelling allowances that have been in the reserve for more than a specified number of years.

So price floors can work, however in the case of the California system at least two things need to be agreed as the rules for the system after 2020 are debated this year.

First, continuation of the escalation of the floor price needs be confirmed at least at the current rate, and ideally the rate should be increased.

Secondly, rules for cancelling unsold allowances from the Price Containment Reserve need to be defined.  The cancellation of allowances from the Market Stability Reserve included in the recent reforms to the EUETS sets a valuable precedent in this respect.

The theoretical advantages of a floor price in an ETS are well known.  The experience of auction reserve prices now proving effective in practice over a number of years should encourage other jurisdictions, especially the EU, to introduce similar arrangements.  And those jurisdictions such as California where they are already in place need to continue to develop and enhance them.

Adam Whitmore – 15th February 2018

Emissions reductions from carbon pricing can be big, quick and cheap

The UK carbon tax on fuel for power generation provides the most clear-cut example anywhere in the world of large scale emissions reductions from carbon pricing.   These reductions have been achieved by a price that, while higher than in the EU ETS, remains moderate or low against a range of other markers, including other carbon taxes.

The carbon price for fuels used in power generation in the UK consists of two components.  The first is the price of allowances (EUAs) under the EUETS.  The second is the UK’s own carbon tax for the power sector, known as Carbon Price Support (CPS).  The Chart below shows how the level CPS (green bars on the chart) increased over the period 2013 to 2017[i].  These increases led to a total price – CPS plus the price of EUAs under the EUETS (grey bars on the chart) – increasing, despite the price of EUAs remaining weak.

This increase in the carbon price has been accompanied by about a 90% reduction in emissions from coal generation, which fell by over 100 million tonnes over the period (black line on chart).   Various factors contributed to this reduction in the use of coal in power generation, including the planned closure of some plant and the effect of regulation of other pollutants.  Nevertheless the increase in the carbon price since 2014 has played a crucial role in stimulating this reduction in emissions by making coal generation more expensive than gas[ii].  According to a report by analysts Aurora, the increase in carbon price support accounted for three quarters of the total reduction in generation from coal achieved by 2016[iii].

The net fall in emissions over the period (shown as the dashed blue line on chart) was smaller, at around 70 million tonnes p.a. [iv] This is because generation from coal was largely displaced by generation from gas. The attribution of three quarters of this 70 million tonnes to carbon price support implies a little over 50 million tonnes p.a. of net emission reductions due to carbon price support.   This is equivalent to a reduction of more than 10% of total UK greenhouse gas emissions.  The financial value of the reduced environmental damage from avoiding these emissions was approximately £1.6 billion in 2016 and £1.8 billion in 2017[v].

Chart:  Carbon Prices and Emissions in the UK power sector

The UK tax has thus proved highly effective in reducing emissions, producing a substantial environmental benefit[vi].  As such it has provided a useful illustration both of the value of a floor price and more broadly of the effectiveness of carbon pricing.

This has been achieved by a price that, while set at a more adequate level than in the EU ETS, remains moderate or low against a range of other markers, including other carbon taxes.  CPS plus the EUA price was around €26/tCO2 in 2017 (US$30/tCO2).  The French the carbon tax rose from €22/tCO2 to €31/tCO2 over 2016-2017. In Canada for provinces electing to adopt a fixed price the carbon price needs to reach CAN$50/tCO2 (€34/tCO2) by 2022[vii].  These levels remain below US EPA 2015 estimates of the Social Cost of Carbon of around €40/tCO2 [viii].

This type of low cost emissions reduction is exactly the sort of behaviour that a carbon price should be stimulating, but which is failing to happen as a result of the EU ETS because the EUA price is too low.  More such successes are needed if temperature rises are to be limited to those set out in the Paris Agreement.  This means more carbon pricing should follow the UK’s example of establishing an adequate floor price.  This should include an EU wide auction reserve for the EUETS.  The reserve price should be set at somewhere between €30 and €40/t, increasing over time.  This would likely lead to substantial further emissions reductions across the EU.

Adam Whitmore – 17th January 2018

Notes:

[i] Emissions date for 2017 remains preliminary.  UK carbon price support reached at £18/tCO2 (€20/tCO2) in the fiscal year 2015/6 and was retained at this level in 2016/7.  In 2013/4 and 2014/5 levels were £4.94 and £9.55 respectively.  This reflected defined escalation rates and lags in incorporating changes in EUA prices. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/293849/TIIN_6002_7047_carbon_price_floor_and_other_technical_amendments.pdf and www.parliament.uk/briefing-papers/sn05927.pdf

[ii] http://www.theenergycollective.com/onclimatechangepolicy/2392892/when-carbon-pricing-works-2

[iii] https://www.edie.net/news/6/Higher-carbon-price-needed-to-phase-out-UK-coal-generation-by-2025/

[iv] Based on UK coal generation estimated weighted average emissions intensity of 880gCO2/kWh, and 350gCO2/kWh for gas generation.

[v] 50 million tonnes p.a. at a social cost of carbon based on US EPA estimates of $47/tonne (€40/tonne).

[vi] There is a standard objection to a floor in one country under the EUETS is that it does not change of the overall cap at an EU level so, it is said, does not decrease emissions.  However this does not hold under the present conditions of the EUETS, and is unlikely to do so in any case.  A review of how emissions reductions from national measures, such as the UK carbon price floor, do in fact reduce total cumulative emissions over time is provided was provided in my recent post here.

[vii] The tax has now set at a fixed level of £18/tonne.  It was previously set around two years in advance, targeting a total price comprising the tax plus the EUA price.  There was no guarantee that it would set a true floor price, as EUA prices could and did change a good deal in the interim.  Indeed, in 2013 support was set at £4.94/tCO2, reflecting previous expectations of higher EUA prices, leading to prices well below the original target for the year of £16/tCO2 in 2009 prices (around £17.70 in 2013 prices). See https://openknowledge.worldbank.org/handle/10986/28510?locale-attribute=en.  The price is also below the levels expected to be needed to meet international goals (see section 1.2), and below the social cost of carbon as estimated by the US EPA (see https://onclimatechangepolicydotorg.wordpress.com/carbon-pricing/8-the-social-cost-of-carbon/ and references therein).

[viii] Based on 2015 estimates.

The case for additional actions in sectors covered by the EUETS is now even stronger

Recently agreed reforms to the EUETS mean that excess allowances in the MSR will be cancelled.  This further strengthens the case for actions such as phase-out of coal plant, increasing energy efficiency and deploying more renewables.

About a year ago I looked at whether additional actions to reduce emissions in sectors covered by the EUETS do in practice lead to net emissions reductions over time [i].

It is sometimes claimed that total emissions are always equal to the fixed cap.  By implication additional actions do not reduce total emissions, because if emissions are reduced in one place there will be a corresponding increase elsewhere.  This is sometimes called the “waterbed hypothesis” by analogy – if you squeeze in one place there is an equal size bulge elsewhere.

Although often repeated, this claim is untrue.  Under the EU ETS at present the vast majority of emissions reductions from additional actions will be permanently retained, reflecting the continuing surplus of allowances and the operation of the MSR.  Furthermore, over the long term the cap is not fixed, but can respond to circumstances.  For example, tighter caps can be set by policy makers once emissions reductions have been demonstrated as feasible.

When I last looked at this issue, the fate of additional allowances in the MSR remained necessarily speculative.  It was clear that additional excess allowances would at least not return to the market for decades.  It also seemed likely that they would be cancelled.  However, no cancellation mechanism was then defined.

This has now changed with the trilogue conclusions reached last week, which include a limit on the size of the MSR from 2023.  The limit is equal to the previous year’s auction volume, and is likely, given the size of the current surplus, to lead to large numbers of allowances being cancelled in the 2020s.

With this limit in place there is a very clear pathway by which allowances freed up by additional actions, such as reduced coal burn or increased renewables, will add to the surplus, be transferred to the MSR then cancelled (see diagram).  Total emissions under the EUETS will be correspondingly lower.

There is now a clear mechanism by which additional actions reduce total emissions

Modelling confirms that with the limit on the size of the MSR in place a large majority of reductions from non-ETS actions are retained, because additional allowances freed up almost all go into the MSR, and are then cancelled.  This is shown in the chart below for an illustrative case of additional actions which reduce emissions by 100 million tonnes in 2020.  Not all of the allowances freed up by additional actions are cancelled.  First there is a small rebound in emissions due to price changes (see references for more on this effect).  Then, even over a decade, the MSR does not remove them all from circulation.  This is because it takes a percentage of the remainder each year, so the remainder successively decreases, but does not reach zero.  If the period were extended beyond 2030 a larger proportion would be cancelled, assuming a continuing surplus.  Nevertheless over 80% of allowances freed up by additional actions are cancelled by 2030.

The benefit of additional actions is thus strongly confirmed.

The large majority of allowances freed up by additional actions are eventually cancelled

Source: Sandbag

When the market eventually returns to scarcity the effect of additional actions becomes more complex.  However additional actions are still likely to reduce future emissions, for example by enabling lower caps in future.

Policy makers should pursue ambitious programmes of additional action in sectors covered by the EUETS, confident of their effectiveness in the light of these conclusions.  Some of the largest and lowest cost gains are likely to be from the phase out of coal and lignite for electricity generation, which still accounts for almost 40% of emissions under the EUETS.  Continuing efforts to deploy renewables and increase energy efficiency are also likely to be highly beneficial.

Adam Whitmore – 15th November 2017

[i] See https://onclimatechangepolicydotorg.wordpress.com/2016/10/21/additional-actions-in-euets-sectors-can-reduce-cumulative-emissions/  For further detail see https://sandbag.org.uk/project/puncturing-the-waterbed-myth/ .  A study by the Danish Council on Climate Change reached similar conclusions, extending the analysis to the particular case of renewables policy.  See Subsidies to renewable energy and the european emissions trading system: is there really a waterbed effect? By Frederik Silbye, Danish Council on Climate Change Peter Birch Sørensen, Department of Economics, University of Copenhagen and Danish Council on Climate Change, March 2017.

New long term targets for emissions reduction are needed.

The UK and other jurisdictions need to set target dates for reaching net zero greenhouse gas emissions.  These need to be reinforced by new targets for 2060 that are at least close to zero, and by reaffirmed or strengthened targets for 2050.

Ten years ago setting emissions reduction targets for 2050 was a major step forward

2018 sees the tenth anniversary of the UK’s Climate Change Act[i].  This remarkable piece of legislation established a legally binding obligation for the UK to reduce its greenhouse gas emissions by 80% from 1990 levels by 2050, with obligations along the way in the form of five year carbon budgets.  So far progress has been remarkably good, though significant challenges remain.

Other jurisdictions also adopted 2050 targets at around the same time.  In 2005 California also set a target of an 80% reduction from 1990 levels[ii].  In October 2009 the EU established a long term EU goal for reducing emissions by 80-95% from 1990 levels by 2050[iii].

At the time these targets were path breaking.  However, ten years on there are good reasons for reviewing and extending them.

But now the world has moved on …

  • When the targets were established, the period to 2050 seemed long enough to give appropriate strategic guidance to policy makers and investors. However, future dates are now ten years closer.  A 2060 target now gives about the same time horizon for planning as the 2050 targets did when they were established.
  • The Paris Agreement sets targets to limit temperature rises which imply stringent limits on cumulative emissions. It also sets a goal of net zero global emissions in the second half of the century.
  • A fifth or more of the world’s carbon budget that remained in 2008 has since been used up[iv], increasing the urgency of emissions reductions.

Extending targets to reflect these changes would have some clear benefits … 

Together these changes imply a strong case for setting new targets now.

The most compelling target would be a date by which emissions must fall to net zero.  Such a target would make it clear to all sectors that they need to completely decarbonise by a specified date.  At the moment emissions of up to 20% of 1990 levels are allowed even in 2050.  This allows each of those sectors where decarbonisation is more difficult – for example parts of industry, agriculture or residential heating – to largely continue in a belief that there will still be plenty of room for them within the 2050 emissions limit, even though this cannot be true for most sectors.  This in turn allows them to continue to believe they can carry on indefinitely without taking the steps needed to decarbonise.  A date for reaching zero makes it clear this can’t happen.

Setting stringent target for 2060 – at or close to zero – would also give investors in low carbon infrastructure greater confidence, and deter investment in higher carbon alternatives. In the case of the UK and California, a simple extrapolation of their current targets would suggest a 2060 target of a 93% reduction from 1990 by 2050, reaching zero by 2065.

As part of the process of setting these longer term goals the existing 2050 targets need to be at least reaffirmed and preferably tightened.  If this is not done there is the risk that policy makers will simply see the problem as having become more distant, and delay action.  This is the last thing that the climate needs.

2050 targets may also need to be revised …

As a first step, the EU’s target of 80-95% cuts clearly needs to be made more precise.  The current uncertainty of a factor of four in the level of emissions allowed in 2050 is too wide for sensible policy planning.

However the events of the last ten years also raise the question of whether the stringency of the 2050 targets need to be increased, with implications for later periods.  The UK Government’s former Chief Scientific Adviser Sir David King and others have suggested that there is a strong case for the UK seeking to reach net zero emissions by 2050[v].  The difference in cumulative emissions in declining linearly to net zero by 2050 instead of by 2065 is substantial, at a little over 3 billion tonnes – equivalent to about 8 years of current UK emissions.

The goal of reaching zero emissions by 2050 is clearly desirable in many ways.  However there is a risk that it may have unwanted side effects.  The government’s advisory body, the Committee on Climate Change has pointed out that policies are not in yet place even to meet current goals for the fifth carbon budget in around 2030[1].  The route to net zero emissions in 2050 – just over 30 years from now – looks even less clear.  Indeed reaching that goal even by 2065 remains challenging.  If even tighter targets are introduced they may come to be regarded as unrealistic, which may in turn risk weakening commitment to them.  A somewhat slower emissions reduction track may prove a relatively acceptable price to pay for retaining the credibility and integrity of the targets.

Whatever the judgement on this, the need for longer term targets is clear.  Governments need to set dates for reaching net zero emissions.  These need to be supported by targets for 2060 that specify continued rapid reductions in emissions after 2050, and by reaffirmation of 2050 targets, tightening them as necessary.  These new targets will in turn help stimulate the additional actions to rapidly reduce emissions that are ever more urgently needed.

Adam Whitmore – 6th November 2017

 Notes:

[1] https://www.theccc.org.uk/publication/2017-report-to-parliament-meeting-carbon-budgets-closing-the-policy-gap/

[i] https://www.theccc.org.uk/tackling-climate-change/the-legal-landscape/the-climate-change-act/

[ii] https://www.arb.ca.gov/cc/cc.htm

[iii] https://www.consilium.europa.eu/uedocs/complementary measures_data/docs/pressdata/en/ec/110889.pdf

[iv] The calculation is based on data in the IPCC Fifth Assessment Report, Synthesis Report.  This quotes a  cumulative budget of 3700 billion tonnes of CO2 for a two thirds probability of staying below 2 degrees.  Of this 1800 billion tonnes had been used by 2011.  Assuming CO2 emissions of roughly 40 billion tonnes p.a. including land use gives a remaining budget in 2008 of 1920 billion tonnes.  Over the subsequent ten years about 400 million tonnes CO2, which is just over a fifth of 1920 billion tonnes, have been emitted.

[v] http://www.independent.co.uk/environment/ministers-greenhouse-gas-emissions-fail-cut-environment-greg-clark-chief-scientist-david-king-a7969496.html

Prospects for Electric Vehicles look increasingly good

Electric vehicles update

Indicators emerging over the last 18 months increase the likelihood of plug-in vehicles becoming predominant over the next 20 years.  However, continuing strong policy support is necessary to achieve this.

Several indicators have recently emerged for longer term sales of plug-in vehicles (electric vehicles and plug-in hybrids).  These include targets set by governments and projections by analysts and manufacturers.

The chart shows these indicators compared with three scenarios for the growth of plug-in vehicles globally if policy drivers are strong.  (The scenarios are based on those I published around 18 months ago, and have been slightly updated for this post – see the end of this post and previous post for details.) The green lines show the share of sales, and the blue lines show the share of the total vehicle stock.  Other indicators are marked on the chart as diamonds, shown in green as they correspond to the green lines.  I’ve excluded some projections from oil companies as they appear unrealistic.

The scenarios show plug in vehicles sales in 2040 at between just over half and nearly all of new light vehicles.  However the time taken for the vehicle fleet to turn over means that they are a smaller proportion of the fleet, accounting for between a third and about three quarters of the light vehicle fleet by 2040.  The large range of the scenarios reflects the large uncertainties involved, but they all show plug-in vehicles becoming predominant over the next 20 years or so.

The indicators shown are all roughly in line with the scenario range (see detailed notes at the end of this post), giving additional confidence that the scenario range is broadly realistic, although the challenges of achieving growth towards the upper end of the range remain formidable.  Some of the projections by manufacturers and individual jurisdictions are towards the top end of the range, but the global average may be lower.

Chart.  Growth of sales of Plug-in light vehicles

 

The transition will of course need to be accompanied by continuing decarbonisation of the power sector to meet greenhouse gas emissions reduction goals.

Maintaining the growth of electric vehicle sales nevertheless looks likely to require continuing regulatory drivers, at least for the next 15 years or so.  This will include continuing tightening emissions standards on CO2 and NOx and enabling charging infrastructure.  If these things are done then the decarbonisation of a major source of emissions thus now seems well within sight.

Adam Whitmore – 13th October 2017

 

 

Background and notes

This background section gives further information on the data shown on the chart.  In some cases it is unclear from the reports whether projections are for pure electric vehicles only or also include plug-in hybrids.

Developments in regulation

Policy in many countries seems increasingly to favour plug-in vehicles.  Some recent developments are summarised in the table below.   These policy positions for the most part still need to be backed by solid implementation programmes.  Nevertheless they appear to increase the probability that growth will lie within the envelope of the projections shown above, which are intended to correspond to a world of strong policy drivers towards electrification.

Policy developments 

Jurisdiction Policy commitment
UK Prohibit sale of new cars with internal combustion engines by 2040[1]
France Prohibit sale of new cars with internal combustion engines by 2040[2]
Norway All new sales electric by 2025[3]
India All cars electric by 2030 (which appears unrealistic so goal may be modified, for example to new cars)[4]
China Reportedly considering a prohibition on new petrol and diesel.  Date remains to be confirmed, but target is for 20% of the market to be electric by 2025.[5]

 

Sales

The market is currently growing rapidly from a low base.  Total vehicle sales were 0.73 million in 2016, compared with 0.58 million in 2015.  Six countries have reached over 1% electric car market share in 2016: Norway, the Netherlands, Sweden, France, the United Kingdom and China. Norway saw 42% of sales being EVs in June 2017

Manufacturers’ projections

Several manufacturers have issued projections for the share of their sales they expect to be for plug-in vehicles.  Some of these are shown in the table.

Manufacturers’ projections for sales of plug-in vehicles

 

Manufacturer Target/expectation for plug-in vehicles
Volkswagen 20-25% of sales by 2025[6]
Volvo All new models launched from 2019[7]
PSA ( Peugeot and Citroen brands) 80% percent of models electrified by 2023[8]

 

Clearly individual manufacturers’ projections may not be achieved, and to some extent the statements may be designed to reassure shareholders that they are not missing an opportunity.  So far European manufacturers have been slow to develop EVs.  Also these manufacturers may not representative of the market as a whole.  Other companies may progress more slowly.

However others may proceed more quickly.  As has been widely reported, Tesla has taken over 500,000 advanced orders for its Model 3 EV, itself equivalent to almost the entire market for electric vehicles in 2015.  And in line with the Chinese Government’s targets manufacturers in China are expected to increase production rapidly.

Projections by other observers

Projections by other observers are in most cases now in line with the scenairos shown here.

  • Morgan Stanley project 7% of global sales by 2025[9]
  • BNP Paribas project 11% of global sales by 2025, 26% by 2030[10]
  • JP Morgan profject 35% of sales by 2025 and 48% of sales by 2030[11]
  • Last year Bloomberg’s projections showed growth to be slower than with these projections. However they have since updated their analysis, showing 54% of new cars being electric by 2040[12].
  • DNV.GL recently published analysis showing EV’s accounting for half of sales globally by 2033, in line with the mid case in this analysis.

In contrast BP predicts much slower growth in their projections[13].  However BP’s view seems implausibly low in any scenario in which regulatory drivers towards EVs are as strong as they appear to be.  Exxon Mobil gives lower projections still, while OPEC’s are a little above BP’s but still well below the low case shown here.[14].

Notes on changes to projections since May 2016

These projections are updated from my post last year but the differences over the next 15 years are comparatively minor.  The projections are for light vehicles, so exclude trucks and buses.  Note that percentage growth in early years has been faster than shown by the s-curve model – however this is likely to prove a result of the choice of a simple function.  What matters most for emissions reductions is the growth from now and in particular through the 2020s.

Assumption change Rationale
Higher saturation point Continuing advances in batteries reduce the size of the remaining niche for internal combustion engine vehicles
Longer time to saturation The higher saturation point will need additional time to reach.
Somewhat slower growth in total numbers of vehicles Concerns about congestion and changed modes of ownership and use are assumed to lead to lower growth in the total vehicle stock over time.  This tends to make a certain percentage penetrations easier to achieve because the percentage applies to fewer vehicles.

 

 

[1] http://www.bbc.co.uk/news/uk-40723581

[2] http://www.bbc.co.uk/news/world-europe-40518293

[3] http://fortune.com/2016/06/04/norway-banning-gas-cars-2025/

[4] https://electrek.co/2016/03/28/india-electric-cars-2030/

[5] http://www.bbc.co.uk/news/business-41218243

[6] http://www.bbc.co.uk/news/business-36548893

[7] https://www.media.volvocars.com/global/en-gb/media/pressreleases/210058/volvo-cars-to-go-all-electric

[8] http://www.nasdaq.com/video/psa-prepared-for-electric-vehicle-disruption–says-ceo-59b80a969e451049f87653d9

[9] https://www.economist.com/news/business/21717070-carmakers-face-short-term-pain-and-long-term-gain-electric-cars-are-set-arrive-far-more

[10] https://www.economist.com/news/business/21717070-carmakers-face-short-term-pain-and-long-term-gain-electric-cars-are-set-arrive-far-more

[11] https://www.cnbc.com/2017/08/22/jpmorgan-thinks-the-electric-vehicle-revolution-will-create-a-lot-of-losers.html

[12] https://about.bnef.com/electric-vehicle-outlook/

[13] https://www.bp.com/en/global/corporate/energy-economics/energy-outlook.html

[14] https://www.economist.com/news/briefing/21726069-no-need-subsidies-higher-volumes-and-better-chemistry-are-causing-costs-plummet-after

Underestimating the contribution of solar PV risks damaging policy making

Underestimating the contribution of solar PV risks damaging policy making

The continuing lack of realism in projections for solar PV risks damaging policy making by misdirecting effort in developing low carbon technologies.

Solar PV continues its remarkable growth …

Electricity generation from solar PV continues to grow very rapidly.  It now supplies over 1% of global electricity consumption and this proportion looks set to continue growing very rapidly over the next decade as costs continue to fall.

Chart 1 Rapid growth of solar PV generation continues

Sources: BP statistical review of world energy [i].  1% of consumption based on data for generation with an adjustment for losses.

Many studies have underestimated this growth and continue to do so …

This growth has been much faster than many predicted.  In 2013 and again in 2015  I noted[ii] that the IEA’s annual World Energy Outlook (WEO) projections for both wind and solar PV were consistently vastly too low.  Specifically, the IEA’s projections showed the annual rate of installation of wind and solar PV capacity remaining roughly constant, whereas in fact it both were increasing rapidly.  Updated analysis for solar PV recently published by Auke Hoekstra[iii] shows that this position seems remarkably unchanged (see Chart 2).  The repeated gross divergence between forecasts and outturns over so many years makes it hard to conclude anything other than the IEA is showing a wilful disconnection with reality in this respect, though their historical data on the energy sector remains very valuable.

Chart 2:  IEA projections for solar PV capacity continue to vastly underestimate growth

Although the IEA’s projections are particularly notable for their inability to learn from repeated mistakes, others have also greatly underestimated the growth of solar PV[iv].    Crucially, as a recent study in Nature Energy[v] shows, this tendency extends to many energy models used in policy making, including those relied on by the IPCC in its Assessment Reports.

This is largely because models have underestimated both the effect of policy support on deployment and the rate of technological progress, and so have underestimated the resulting falls in cost both in absolute terms and relative to other technologies.  Where new information has been available there has often been a lag in incorporating it in models.  Feedbacks between cost falls, deployment and policy may also have been under-represented in many models.  Consequently models have understated both growth rates and ultimate practical potential for solar PV.

This damages policy making  …

Does this matter?  I think it does, for at least two reasons.

First, if policy is based on misleading projections about the role of different technologies then policy support and effort will likely be misdirected.  For example, means of integrating solar PV at very large scale into energy systems look to have been under-researched and under-supported.  Other low carbon technologies such as power generation with CCS may have received more attention in comparison to their potential[vi].

Second, there is a risk of damaging the policy debate.  In particular there is a risk of exacerbating polarisation of the debate, rather than creating a healthy mix of competing judgements.  There is already a tendency for some commentaries on energy to favour fossil energy sources, and perhaps nuclear, and for others to favour renewables – what one might call “traditionalist” and “transitionalist” positions.  Traditionalists, including many energy companies, tend to point to the size and inertia of the energy system and the problems of replacing the current system with new sources of energy.  Transitionalists, including many entrepreneurs and environmentalists, tend to emphasise the urgent need to reduce emissions, the speed of change in technologies and costs now underway, and the exciting business opportunities created by change.

Both perspectives have merit, and the debate is too important to ignore either.  The IEA provides an example of distorting the debate. It will naturally, due to its history, tend to be seen as to some extent favouring the traditionalist viewpoint.  If this perception is reinforced by grossly unrealistic projections for renewables it risks devaluing the IEA’s other work even when it is more realistic, leaving it on one side of the debate. An opportunity for a balanced contribution from a major institution is lost.  The debate will be more polarised as a result, risking misleading policy makers, and distorting policy choices.

Securing balanced, well informed debate on the transition to a low carbon energy system is quite challenging enough.  Persistently underestimating the role of a major technology does not help.

Adam Whitmore -26th September 2017

 

 

[i] http://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/statistical-review-2017/bp-statistical-review-of-world-energy-2017-renewable-energy.pdf

[ii] For details see here, here and  here

[iii]  https://steinbuch.wordpress.com/2017/06/12/photovoltaic-growth-reality-versus-projections-of-the-international-energy-agency/

[iv] An exception, as I have previously noted is work by Greenpeace.  Some previous scenario work by Shell was also close on wind and solar, but greatly overestimated the role of CCS and biofuels.

[v] The Underestimated Potential for Solar PV Energy to Mitigate Climate Change, Creutzig et. a. Nature Energy, Published 28/08/17

[vi] CCS still looks essential for decarbonisation in some cases, and given lead times for its development continued research and early deployment is still very much needed.  This is especially so for industrial applications.  Deployment in power generation looks likely to be more limited over the next decade or more, though some may still be needed when to move to very low emissions, and eventually to zero net emissions.  However the contribution of CCS to power generation now looks likely to be much less than that from solar PV.

A chance to change some dubious climate accounting

The UK should change the way it accounts for emissions under its legally binding carbon budgets, whether or not it remains part of the EUETS.

An apparently technical question about the UK’s accounting for its carbon budgets raises broader questions about alignment of targets and policy instruments.

The UK’s carbon budgets are legally binding obligations under the Climate Change Act (2008) to limit total emissions from the UK.  Checking whether emissions are within the budget ought to be simple.  Measure the UK’s emissions to see if they are at or under budget.  If not there’s a problem.

But it does not work that way.  For sectors not covered by the EUETS actual emissions are indeed used.  However for those sectors covered by the EUETS – power generation and large industry – emissions are deemed always to be equal to the UK’s allocation under the EUETS (which is made up of both auctioned allowances allocated free of charge[1]), whatever emissions are in reality.  Actual emissions from the covered sectors could be much higher and carbon budgets would still be met

While this may sound bizarre, there was a logic to it when the rules were established.  If UK emissions from the traded sector are above the UK’s allocation UK emitters need to buy in EUAs.  If the scheme were short of allowances, as was expected when present accounting rules were set, the additional EUAs bought by UK emitters to cover emissions above the UK’s allocation would lead to reduced supply of EUAs for others.  There would in consequently be reduced emissions elsewhere matching the increased emissions in the UK.  The approach was therefore to some extent a reliable measure of net emissions.  It also aligned with the EUETS having clear National Allocation Plans (NAPs) for EUAs for each Member State, something that no longer exists.

Now this type of accounting no longer makes sense.  With a large surplus of allowances in the EUETS, if the covered sectors in the UK emit more than their budget they will simply buy surplus allowances.  These allowances would otherwise almost all eventually be placed in the Market Stability Reserve (MSR).  Under current proposals (and indeed most likely eventualities), these EUAs would eventually be cancelled.  Additional emissions in the UK are therefore not balanced by reductions elsewhere – they simply result in buying surplus EUAs which would never be used.  This type of situation is sometimes called “buying hot air”.

To avoid this occurring in future, accounting for carbon budgets needs to change to actual emissions.  This will necessarily happen anyway if the UK leaves the EU ETS.  UK allocations under the EUETS will no longer exist. Accounting cannot be based on a non-existent allocation.

But even if the UK stays part of the EU ETS the basis of accounting should change to prevent the UK is meeting its carbon budgets by simply buying in surplus EUAs.

The possibility of buying in surplus to cover UK emissions appears quite real.  UK emissions were above allocation until quite recently.  This was not too serious a problem then, because carbon budgets were being met fairly comfortably anyway.  However the situation may recur under the 2020s and early 2030s under fourth and fifth carbon budgets, which will be much more challenging to meet.  Total UK emissions could be allowed to rise above those carbon budgets simply as a result of an accounting treatment[2].

When a target applies to a jurisdiction that does not wholly align with the policy instrument there will always be a need to consider circumstances in assessing whether targets are being met.  The UK should not be able to meet its carbon budgets simply due to an accounting convention.  Current rules were put in place before the current oversupply under the EUETS arose.  It is no longer fit for purpose.  It should be changed to accounting based on actual emissions whether or not the UK is part of the EUETS.

Adam Whitmore -20th June 2017

[1] This consists of auctioning plus free allowances plus UK allocation under the NER. In Phase 4 it would also include any allocation from the Innovation Fund. Future volumes placed in the MSR and thus excluded from auctioning would also be deducted from the total. If the UK were to leave the EU ETS and backloaded UK allowances currently destined for the MSR were to return to the market this would have a significant effect on measured performance against carbon budgets under current accounting.

[2] Whether this led to total actual emissions being above carbon budgets would depend on the performance of the non-traded sector.