Tag Archives: climate change policy

The EUETS has not been fully fixed

The reforms introduced to the EUETS for Phase 4 improve its functioning, but without further reform a chronic surplus looks likely and the risk of low prices remains.

The changes to the EUETS that were agreed in late 2017 make significant improvements to its design.  The temporary doubling of the intake rate for the MSR will reduce the surplus in the market more quickly.  And the provision to cancel allowances from the MSR when it exceeds a defined size will avoid the number of allowances in the MSR growing indefinitely.  The price of EUA’s has risen, although they remain below the levels needed to stimulate many efficient emissions reductions.  These changes have led some to conclude that the problems with the EUETS have been resolved.

However, major risks remain.  The cap for Phase 4 (which runs through the 2020s) was set on the basis of an overall reduction in emissions from 1990 levels of 40% by 2030[i].  In practice, emissions now look likely to reach around 50% below 1990 levels by 2030, and possibly to go lower than this if additional policies are put in place.  This looks likely to result in emissions remaining well below the cap throughout Phase 4.

This is illustrated in Chart 1 below, which shows three scenarios included in a recent report by climate NGO Sandbag[ii] (to which I contributed).  The correspond to overall reductions from 1990 levels of 50%-58% by 2030, rather than the 40% reduction on which the cap was set.

Many of the additional emissions reductions are from the sectors covered by the EUETS.  In particular increased renewables and decreased coal and lignite burn in power generation are the largest contributors to reduced emissions.  Consequently, in each scenario emissions remain well below the cap throughout the 2020s.

Even the European Commission’s own modelling suggests a 46% reduction in emissions from 1990 levels now looks likely.  This, while a somewhat smaller decrease than shown in these scenarios, would nevertheless likely result in emissions below the cap throughout the 2020s.

Chart 1: Projected EUETS emissions under three scenarios compared with the cap

Source: Sandbag

With emissions so persistently below the cap the surplus, after decreasing to 2020, begins to grow again, and continues growing to 2030 (see Chart 2).  It does so despite the operation of the MSR.

Chart 2: Projected cumulative surplus under three scenarios

Source: Sandbag

With such a large and persistent surplus there is a clear risk of prices weakening. This is especially the case later in the decade, where reductions in coal use in power generation seem likely to reduce the need for generators to buy emissions as a hedge to cover forward contracts, which may in turn further reduce demand for allowances.

The problem of the chronic surplus arises because the cap is both undemanding and rigid. There are at present no mechanisms for automatically resetting it, and no measures such as price containment which might limit how low prices could go.

The best way to deal with this problem is simply to reduce the cap in around the middle of Phase 4. This would be in line with the principles of the Paris Agreement, which envisages signatories to the Agreement adjusting their commitments over time to bring them more into line with the agreed temperature targets.

Chart 3 shows the effect of resetting the cap in 2026 to match actual emissions.  Under the Base Case the surplus begins to reduce rapidly as a result of the cap being reset.  Such an approach could readily be made consistent with other reforms, such as introducing a price floor in the EUETS.

Chart 3: Effect on the surplus of reducing the cap in 2026 (Base Case)

Source: Sandbag

While the 2017 reforms to the EUETS were a major step forward they are unlikely to prove sufficient.  Further measures will be needed to make sure the EUETS is robust as emissions continue to fall.

Adam Whitmore – 9th April 2019

 

 

 

[i] With a 43% reduction from 2005 levels in the sectors covered by the EUETS.

[ii] https://sandbag.org.uk/wp-content/uploads/2019/03/Halfway-There-March-2019-Sandbag-3.pdf

 

Increasing the political acceptability of carbon taxes

Straightforward, practical measures can make carbon taxes more acceptable to voters.

Carbon pricing often faces political obstacles due to public opposition …

Carbon pricing has spread widely in recent years, with around 40 systems now in place[i].  However, most emissions are not yet priced, and, even where they are, most prices remain too low.

Both expanding coverage and increasing price levels face political obstacles.  Overcoming these is essential for carbon pricing to play the role that it should in reducing emissions.  Fortunately, evidence is now emerging on what can be done to reduce opposition from voters – overcoming opposition from powerful lobbies such as industry warrants separate approaches.

A study by researchers at the LSE’s Grantham Research Institute, based on reviewing 39 existing empirical analyses, describes people’s objections to carbon pricing and other kinds of environmental taxes, and suggests specific actions to overcome them.  (The study focusses on carbon taxes, and most evidence is from North West Europe and North America, so the conclusions may not extend fully to emissions trading systems or to other cultural contexts.)

The study identifies several reasons people oppose carbon taxes:

  • The personal and wider economic costs of a tax are seen as too high.
  • Carbon taxes are seen as regressive, having a disproportionately negative effect on low-income households.
  • Carbon taxes are not believed to be an effective way to reduce emissions.
  • Governments are seen as having a ‘hidden’ motive to increase fiscal revenue rather than curb emissions.

However the study noted that people’s aversion to carbon taxes decreases over time after they have been introduced, particularly if the effects of the tax are measured and communicated.

There are various design options for reducing public opposition …

The study then identifies a range of measures for addressing the objections

  • Phasing in carbon taxes over time, introducing the tax at a low rate but having commitment devices to subsequently increase the rate to more efficient levels.
  • Redistributing revenues to ameliorate the regressive effects of taxes.
  • Earmarking revenues for emission reduction projects, which is popular with voters and improves the perceived effectiveness of carbon taxes.
  • Ensuring revenue neutrality of carbon taxes.
  • In all cases, policymakers need to gather and communicate the objectives and design of the carbon price to improve trust and credibility, before and after the introduction of a carbon tax. This includes communicating emissions reductions achieved and co-benefits of reductions in other pollutants[ii].

Drawbacks to these options seem limited …

The study notes that these recommendations may diverge from “first best” tax designs recommended in the economics literature.  However, while the study does not assess the implications of this, it is not clear to me that, even where they exist, these divergences are very significant.  They seem to me likely to be easily outweighed by the increased acceptability (a “sub-optimal” carbon tax that can be implemented is usually better than an “optimal” one that can’t).  And there are likely to be benefits often omitted in modelling of “first best” designs. This is especially the case as once a tax is in place it can be modified to over time as experience is gained and acceptance increases.

For example, phasing in a carbon tax is likely to produce economic benefits by reducing economic dislocation due to a price shock from sudden introduction at its full level, which may at least partly counterbalance the inefficiencies from prices being below optimal levels for an initial period.  Similarly, redistribution of revenue to poorer households may provide an economic stimulus benefits as poorer households are more likely to spend the revenue than richer households.  It may also increase social solidarity in ways which are conducive to economic welfare and growth.

Other emissions reductions, for example improving building insulation and deploying new technologies, may be funded at more nearly optimal levels where there are currently restrictions.  However, caution is needed here, and there may often be a stronger case for dispersing funds to citizens.

Revenue neutrality can take different forms.  One approach is to use revenues to reduce other taxes.  This is the approach adopted for the introduction of the carbon tax in British Columbia.  Economists tend to favour this type of approach because existing taxes are seen as distortionary.  However this approach often lacks transparency and credibility even if accompanying tax cuts are publicised – for example if other taxes are reduced they may be increased again in future.  This appears to be one reason why voters tend not to prefer this option.

And the current Canadian experiment with “tax and dividend” approaches appears promising …

A stronger guarantee is provided when revenue is explicitly returned to citizens.  This approach is usually referred to as “tax and dividend” (or “fee and dividend”, or “cap and dividend” in the case of any emissions trading system).  I’ve previously noted the advantages of this approach (see here).  It has been implemented for the Swiss carbon tax in the form of rebates on health insurance costs.  Four provinces in Canada are now working on implementing dividends in the form of direct financial payments to citizens.  This will make most citizens better off as the result of the tax, because they will also benefit from revenue raised from businesses.

There is an argument made in the environmental economics literature that a lump-sum dispersal to citizens is economically suboptimal, because it is better to use funds to reduce other taxes and so reduce distortions.   There is little if any empirical support for this argument as far as I am aware.  But in any case taking a view that citizens have more of a natural claim on property rights to the atmosphere than governments makes the limitation of the argument clear.  From this perspective, not providing citizens with any of the proceeds from pricing emissions is in effect a 100% tax on those proceeds imposed on everyone.  This is indeed non-distortionary – it applies the same tax to everyone irrespective of circumstances – but a fixed per-capita tax is not regarded by governments or their citizens as a good idea anywhere, for sound reasons.

A larger objection to returning all revenue directly to citizens, or using it to reduce current taxes, is that emissions run down natural capital for the benefit of current generations at the expense of future generations.  Intergenerational justice would, as I’ve previously argued (see here and here), be better served by some combination of preserving natural capital and investing revenue from carbon pricing in a “carbon wealth fund” analogous to a sovereign wealth fund.  However this would be unlikely to increase the political acceptability of carbon pricing compared with immediate dispersal of revenues to citizens.

Overall, the study makes a range of recommendation that are well justified on a range of grounds, and seem likely to help establish carbon pricing more widely and effectively.  It is to be hoped that governments everywhere take note of the findings.

Adam Whitmore – 5th March 2019 

Thanks to Maria Carvalho for useful discussions about the background to the study covered by this post.

[i] See the World Bank’s State and Trends of Carbon Pricing report here.  The definition of carbon pricing adopted in that report is quite broad, but even excluding some of the systems included in the report there remain over 40.

[ii] Please see World Bank’s  Guide to Communicating Carbon Pricing here for more information on developing an effective communications strategy.

 

The IEA’s solar PV projections are more misleading than ever

The IEA is still grossly underestimating solar PV in its modelling

This post is a quick update of previous analysis.

Back in 2013 I pointed out how far from reality the IEA’s projections of renewables deployment were.  They persistently showed the rates of installation of renewables staying roughly constant over the following 20 years at whatever level they had reached at the time of the projection being made.  In reality, rates of installation were growing strongly, and have continued to do so (see chart).  Rates of installation are now a factor of nearly four times greater than the IEA was projecting back in 2013 – they were projecting installation rates of about 28GW for 2018, where in fact around 100 GW were installed in 2017[1] and an estimated 110GW in 2018.

I have returned to the topic since 2013 (see links at the bottom of this post), as have many others, each time pointing out how divorced from reality the IEA’s projections are.

Unfortunately, the IEA is continuing with its approach, and continuing to grossly understate the prospects for renewables.  Auke Hoestra has recently updated his analysis of the IEA’s solar PV projections to take account of the latest (2018) World Energy Outlook New Policies Scenario (see link below chart – in addition to chart data his post also contains a valuable commentary on the issue).  The analysis continues to show the same pattern of obviously misleading projections, with the IEA showing the rate of solar PV installation declining from today’s rate until 2040.  Of course eventually the market will mature, and rates of installation will stabilise, but this seems a long way off yet.

IEA projections for solar PV in successive World Energy Outlooks compared with outturn

http://zenmo.com/photovoltaic-growth-reality-versus-projections-of-the-international-energy-agency-with-2018-update/

In 2013 I was inclined to give the IEA the benefit of the doubt, suggesting organisational conservatism led to the IEA missing a trend.  This no longer seems tenable – the disconnect between projections and reality has been too stark for too long.  Instead, continuing to present such projections is clearly a deliberate choice.

As Hoekstra notes, explanations for the disconnect have been advanced by the IEA, but they are unsatisfactory.  And as renewables become an ever-larger part of the energy mix the distortions introduced by this persistence in misleading analysis become ever greater.

There is no excuse for the IEA persisting with such projections, and none for policy makers taking them seriously.  This is disappointing when meaningful analysis of the energy transition is ever more necessary.

Adam Whitmore -21st January 2019

https://onclimatechangepolicydotorg.wordpress.com/2013/10/08/why-have-the-ieas-projections-of-renewables-growth-been-so-much-lower-than-the-out-turn/

https://onclimatechangepolicydotorg.wordpress.com/2015/02/27/the-ieas-central-projections-for-renewables-continue-to-look-way-too-low/

https://onclimatechangepolicydotorg.wordpress.com/2015/06/27/the-ieas-bridge-scenario-to-a-low-carbon-world-again-underestimates-the-role-of-renewables/

https://onclimatechangepolicydotorg.wordpress.com/2017/09/26/underestimating-the-contribution-of-solar-pv-risks-damaging-policy-making/

[1] The BP Statistical Review of World Energy shows a total of 87GW installed in 2017 https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2018-renewable-energy.pdf

Simple approximations can link emissions and temperature rise

Some simple indicators based on stylised emissions tracks help show clearly the consequences of different rates of emissions reductions.

A simple relationship allows the overall objectives – limiting temperature rises and reducing emissions – to be linked in a straightforward way[i]. Over relevant ranges and timescales temperature rise varies approximately linearly with cumulative emissions of CO2, after adjusting for the effect of other greenhouse gases.  Specifically, for every 3700 GtCO2 emitted (1000GtC) the temperature will rise by about 2.0 degrees[ii] (with estimates in the range 0.8 to 2.5 degrees)[iii].  This is the transient climate response to cumulative emissions (TCRE).

There has been around a 1.0 degree rise in temperatures to date[iv].  This means the remaining total of cumulative emissions (“carbon budget”) needs to be small enough to keep further temperature rises to around 0.5 to 1.0 degrees if it is to meet targets of limiting temperature rises to 1.5 to 2.0 degrees.

The remaining carbon budget for meeting a 1.5 degree target (with 50% probability) is around 770 GtCO2.  The remaining carbon budget for meeting a 2 degree target (again with 50% probability) is 1690 GtCO2[v].  This is illustrated in Chart 1, which shows temperature rise (median estimates) against additional emissions from 2018.

There are many uncertainties in the estimates of the remaining carbon budget.  These include different estimates of the climate sensitivity, variations in warming due non-CO2 pollutants, and the effect of additional earth system feedbacks, including melting of permafrost.  These can each change the remaining carbon budget by around 200GtCO2 or more.

Chart 1: Temperature rise from additional emissions

 

Source: adapted from Table 2.2 in http://report.ipcc.ch/sr15/pdf/sr15_chapter2.pdf

To look at the implications of this simple relationship we can make the following assumptions about future levels of emissions.  These are simplistic, but like all useful simplifications, allow the essence of the issue to be seen more clearly.

  1. Net emissions continue approximately flat at present levels (of around 42 GtCO2a.[vi]) until they start to decrease.
  2. Once net emissions start decreasing they continue decreasing linearly to reach zero – when any continuing emissions are balanced by removals of COfrom the atmosphere. They then continue at zero. There are of course many other emissions tracks leading to the same cumulative emissions.  For example, many scenarios include negative total emissions, that is net removal of carbon dioxide from the atmosphere, in the second half of the century.
  3. Relatively short-lived climate forcings, such as methane, are also greatly reduced, so that they eventually add about 0.15 degrees to warming[vii].

Chart 2 shows various temperature outcomes matched to stylised emissions tracks.  Cumulative emissions are the areas under the curvesTo limit temperatures rises to 1.5 degrees, emissions need to fall to zero by around 2050 starting in 2020, consistent with the estimates in the recent IPCC report[viii].

For limiting temperature rises to 2 degrees with 50% probability, zero emissions must be reached around 2095To reach the 2 degree target with 66% probability emissions need to be reduced to net zero about 20 years earlier – by around 2075 from a 2020 start.  |To reach a target of “well below” 2 degrees is specified in the Paris Agreement emissions must be reduced to zero sooner.

Chart 2: Stylised emissions reduction pathways for defined temperature outcomes (temperatures with 50% and 75% probability)

This simplified approach yields some useful rules of thumb.

Each decade the starting point for emissions reductions is delayed (for example from 2020 to 2030) adds 0.23 degrees to the temperature rise if the subsequent time taken to reach zero emissions is the same (same rate of decrease – i.e. same slope of the line) – see Chart 3 below. This increase is even greater if emissions increase over the decade of delay.  This is a huge effect for a relatively small difference in timing.

Delaying the time taken to get to zero emissions by a decade from the same starting date (for example reaching zero in 2070 instead of 2060) increases eventual warming by 0.11 degrees.

Correspondingly, delaying the start of emissions reductions increases the required rate of emissions reduction to meet a given temperature target.  For each decade of delay in starting emissions reductions the time available to reduce emissions to zero decreases by two decades.  For example, tarting in 2020 gives about 75 years to reduce emissions to zero for a 2 degrees target.  Starting in 2030 gives only 55 years to reduce emissions from current levels to zero once reductions have begun, a much harder task.

Chart 3: Effect of delaying emissions reductions (temperatures with 50% probability)

These results are, within the limits of the simplifications I’ve adopted, consistent with other analysis (see notes at the end for further details)[ix].

How realistic are these goals? Energy infrastructure often has a lifetime of decades, so the system is slow to change.  Consistent with this, among major European economies the best that is being achieved on a sustained basis is emissions reductions of 10-20% per decade.  While some emissions reductions may now be easier than they were, for example because the costs of renewables have fallen, deeper emissions cuts are likely to be more challenging.  This implies many decades will be required to get down to zero emissions.

All of this emphasises the need to start soon, and keep going. The recent IPCC report emphasised the challenges of meeting a 1.5 degree target.  But even the target of keeping temperature rises below 2 degrees remains immensely difficult.  There is no time to lose.

Adam Whitmore – 23rd October 2018

Notes

[i] This analysis draws on previous work by Stocker and Allen, which I covered a while back here: https://onclimatechangepolicydotorg.wordpress.com/2013/12/06/early-reductions-in-carbon-dioxide-emissions-remain-imperative/

[ii] This is the figure implied in Table 2.2 in http://report.ipcc.ch/sr15/pdf/sr15_chapter2.pdf.  All references to temperature in this post are to global mean surface temperatures (GMST).

[iii] IPCC Fifth Assessment Report, Synthesis Report, Section 2.2.4 for the range.  The central value is that which appears to have been used to construct Table 2.2 of http://report.ipcc.ch/sr15/pdf/sr15_chapter2.pdf

[iv] The IPCC quotes 0.9 degrees by 2006-2015, which is consistent with 1.0 degrees now.

[v] Table 2.2 of http://report.ipcc.ch/sr15/pdf/sr15_chapter2.pdf

[vi]  http://report.ipcc.ch/sr15/pdf/sr15_spm_final.pdfC1.3

[vii] See IPCC 1.5 degree report Chapter 2 for details.

[viii] http://report.ipcc.ch/sr15/pdf/sr15_spm_final.pdf summary for policy makers, see charts on p.6

[ix] See for example work by Climate Action Tracker https://climateactiontracker.org/global/temperatures/, and and the Stocker and Allan analysis cited as reference (i) above.  The recent IPCC report Chapter 2 Section C1, concludes:  In model pathways with no or limited overshoot of 1.5°C, global net anthropogenic CO2 emissions decline by about 45% from 2010 levels by 2030 (40–60% interquartile range), reaching net zero around 2050 (2045–2055 interquartile range). For limiting global warming to below 2°C CO2 emissions are projected to decline by about 20% by 2030 in most pathways (10–30% interquartile range) and reach net zero around 2075 (2065–2080 interquartile range). Non-CO2 emissions in pathways that limit global warming to 1.5°C show deep reductions that are similar to those in pathways limiting warming to 2°C.”  References in this paragraph to pathways limiting global warming to 2C are based on a 66% probability of staying below 2C.

 

 

Satellite data can help strengthen policy

Advancing satellite technology can improve monitoring of emissions.  This will in turn help make policies more robust.

There are now around 2000 satellites in earth orbit carrying out a wide range of tasks.  This is about twice as many as only a decade ago[i].   Costs continue to come down, technologies are advancing and more organisations are making use of data, applying new techniques as they do so.   As progress continues, satellite technologies are positioned to make a much larger contribution to monitoring greenhouse gas emissions.

Tracking what’s happening on the ground

Satellites are critical to tracking land use changes that contribute to climate change, notably deforestation.   While satellites have played an important role here for years, the increasing availability of data is enabling organisations to increase the effectiveness of their work.  For example, in recent years Global Forest Watch[ii] has greatly increased the range, timeliness and accessibility of its data on deforestation.  This in turn has enabled more rapid responses.

This is now extending to other monitoring.  For example, progress on construction projects can be tracked over time.  This enabled, for example, monitoring the construction of coal plant in China, which showed that construction of new plants was continuing[iii].

Monitoring operation and emissions

As the frequency with which satellite pictures are taken increases, it becomes possible to monitor not only construction and land use changes, but also operation of individual facilities.  For example, it is now becoming possible to track operation of coal plant, because the steam from cooling towers is visible[iv].  This can in turn allow emissions to be estimated.

More direct monitoring of emissions continues to develop.  Publicly available data at high geographic resolution on NOx, SOx, particulates and in the near future methane[v] are becoming increasingly available[vi].   For example, measuring shipping emissions has traditionally been extremely difficult, but is now becoming tractable, at least for NOx.

Measuring methane is especially important.  Methane is a powerful greenhouse gas with significant emissions from leakage in natural gas systems.  Many of these emissions can easily be avoided at relatively low cost, leading to highly cost-effective emissions reduction.

Monitoring CO2

CO2 is more difficult to measure than other pollutants, in part because it disperses and mixes in the atmosphere so rapidly.  However, some of the latest satellites have sophisticated technology able to measure CO2 concentrations very accurately[vii].  These cover only quite small areas at the moment but are expected to scale up and allow more widespread direct monitoring.  The picture below shows a narrow strip of the emissions from a coal plant in Kansas, based on data from the Orbiting Carbon Observatory 2 (OCO‐2) satellite.  These estimates conform well with reported emissions from the plant.

Figure 1:  Satellite data showing CO2 emissions for a power plant in Kansas

Note: the red arrow shows prevailing wind direction.

Space agencies around the world are now exploring how such monitoring can be taken further.  For example, the EU has now asked the European Space Agency to design a satellite dedicated to monitoring CO2.  It is expected to be operational in the 2020s.[viii]

Work is also underway to improve data analysis, so that quantities of emissions can be attributed to individual plants.  Machine learning holds a good deal of promise here as a way of finding and labelling patterns in the very large amounts of data available.  It is likely soon to be possible to monitor emissions from an individual source as small as a medium size coal plant, taking account of wind speed and direction and so forth.

Implications

These developments will make actions much more transparent and subject to inspection internationally.  Governments, scientists, energy companies, investors, academics and NGOs can monitor what is going on.  Increasingly polluters will not be able to hide their actions – they will be open for all to see.  This is turn will make it easier to bring pressure on polluters to clean up their act, potentially including, for example, holding countries to account for their Nationally Determined Contributions (NDCs) under the Paris Climate Agreement.

Improved transparency and robust data are not in themselves solutions for reducing climate change.  Instead, they play an important role in an effective policy architecture.  And the do so with ever increasing availability and quality.  This gives cause for optimism that policies and their implementation can be made increasingly robust.

Adam Whitmore – 12th September 2018

Thanks to Dave Jones for sharing his knowledge on the topic .

[i] https://www.ucsusa.org/nuclear-weapons/space-weapons/satellite-database#.W5Y-7ZNKhcA, https://allthingsnuclear.org/lgrego/new-update-of-ucs-satellite-database,

[ii] https://www.globalforestwatch.org/about

[iii] See here http://www.climatechangenews.com/2018/08/07/china-restarts-coal-plant-construction-two-year-freeze/ for examples

[iv] https://twitter.com/matthewcgray/status/1032251925515968512

[v] http://www.tropomi.eu/data-products/methane

[vi] https://www.scientificamerican.com/article/meet-the-satellites-that-can-pinpoint-methane-and-carbon-dioxide-leaks/

[vii] https://agupubs.onlinelibrary.wiley.com/doi/10.1002/2017GL074702

[viii] https://www.bbc.co.uk/news/science-environment-43926232

 

Fixing the starting price of allowances in an ETS

Fixed price allowances can be a useful way of establishing emissions trading gradually.

I have previously looked at the relative advantages of carbon taxes and emissions trading systems (ETSs), including in the videos on this site.

Among the drawbacks of emissions trading systems is that they tend to be more complex to administer than carbon taxes.  An emissions trading system requires surrender of allowances, which need to be issued, often by both auction and free allocation, and tracked as they are traded.  There is a range of administration needing for this, including maintaining a registry of allowances and ownership.  In contrast, a tax simply requires a payment to be made per tonne emitted.

The administrative cost of emissions trading is unlikely to be a significant proportion of the costs of a system for a large jurisdiction with high administrative capacity, for example the EU.  However it can be daunting for smaller jurisdictions with more limited administrative capacity.  Even a large jurisdiction may be concerned about the time needed to establish an emissions trading system.

There may also be concern about the economic the risks.  For example, there will always be uncertainty about price when the cap is first set.

These difficulties can be reduced by including an initial phase of fixed price allowances.  Under this approach emitters pay a fixed price per tonne.  However rather than simply paying a tax they are required to surrender allowances.  An unlimited number of allowances is available from the regulatory authorities at a fixed price.

This approach has the advantage that it puts in place much of the administrative infrastructure necessary for emissions trading.  Allowances are issued and a registry is established.  From there it is a more straightforward path to limiting the number of allowances to impose a cap, and allowing them to be traded.

It has the further advantage that it can introduce a carbon price, perhaps gradually through and escalating price, and the effect of this can be assessed when setting  a subsequent the cap.  The additional information can further reduce risks.

The Australian example

This approach of issuing fixed price allowances was implemented in Australia, starting in 2012.  An initial 3 year phase was originally planned with emitters required to surrender allowances.  An unlimited number of allowances was available each year at a fixed price.  This was AU$23/tonne in the first year, escalating at 2.5% plus the rate of inflation each year. This was intended to be followed by a transition to an emissions trading system with a cap and a price floor.

The chronology in practice was as follows.  Legislation to introduce carbon pricing was passed in 2011.  The fixed price came into effect ion 1st July 2012, with unlimited allowances available at AU$23/tonne.  Full trading was originally scheduled to being in 2015.  In 2013 it was announced this would be brought forward a year to 2014.  However this did not happen, as the incoming Abbott government, which took office in September 2013, repealed the carbon pricing scheme with effect from July 2014.

In the Australian political context that prevailed at the time the similarity to a tax was seen as a drawback politically.  It allowed the opposition to label it a tax, which the previous government had committed not to introduce.  A very sensible approach was therefore abandoned.  However this was a feature peculiar to Australian politics at the time, and not a more general problem.

The EU and the Western Climate Initiative have both shown that it is possible to establish emissions trading systems directly, without the need to go through an initial fixed price phase (the WCI systems were delayed by a year from their originally intended start date, but have generally worked well since).  And some jurisdictions will choose a tax in any case.

Nevertheless, if there is a desire to put an ETS in place in a way which lowers the initial administrative burden and some of the risks of establishing an ETS, then transitioning to an ETS through issuing fixed price allowances can be a valuable approach.

Adam Whitmore – 13th June 2018

A limited but important medium term future for CCS

CCS has not yet been implemented on a scale needed to make a substantial difference to climate change.  However it continues to look necessary for the longer term, with more projects necessary to get costs down.

A decade or so ago many people expected rapid development of Carbon Capture and Storage (CCS) as a major contributor to reducing global emissions.  I was one of them – at the time I was working on developing CCS projects.  However, the hoped-for growth has not yet happened on the scale needed to make a material difference to global emissions.

The chart below shows total quantities captured from large CCS projects, including 17 that are already operational and a further 5 under construction.  The quantity of emissions avoided are somewhat lower than the captured volumes shown here due to the CO2 created by the process itself.[i]

Between 2005 and 2020 capture will have grown by only around 25 million tonnes p.a..  This is only 0.07% of annual global CO2 emissions from energy and industry.  In contrast the increase in wind generation in 2017 alone reduced emissions by around 60 million tonnes[ii], so wind power reduce annual emission more from about 5 months’ growth than CCS will from 15 years’ growth – though it took wind power several decades to get to this scale.    

Chart 1: Growth of large CCS projects over time

Source: Analysis based on Global Carbon Capture and Storage Institute database[iii]

The picture gets even less promising looking at the types of projects that have been built.  The chart below shows the proportion of projects, measured by capture volume, in various categories.  The largest component by some distance is natural gas processing – removing the CO2 from natural gas before combustion – which accounts for over 60% of volumes.  This makes sense, as it is often a relatively low cost form of capture, and is often necessary to make  natural gas suitable for use.  However, it will clearly not be a major component of a low carbon energy system.  Much of the rest is chemicals production, including ethanol and fertiliser production.  These are helpful but inevitably small. There are just two moderate size power generation projects and two projects for hydrogen production, which is often considered important for decarbonising heat.

Furthermore, most of the projects separate out CO2 at relatively high concentrations or pressures.  This tends to be easier and cheaper than separating more dilute, lower pressure streams of CO2.  However it will not be typical of most applications if CCS is to become more widespread.

Chart 2:  Large CCS projects by type (including those under construction) 

Source: Analysis based on Global Carbon Capture and Storage Institute database

This slow growth of CCS has been accompanied by at least one spectacular failure, the Kemper County power generation project, which was abandoned after expenditure of several billion dollars.  Neither the circumstances of the development or the technology used on that particular plant were typical.  For example, the Saskpower’s project at Boundary Dam and Petra Nova’s Texas project have both successfully installed post combustion capture at power plants, rather than the gasification technologies used at Kemper County.  Nevertheless, the Kemper project’s failure is likely to act as a further deterrent to wider deployment of CCS in power generation.

There have been several reasons for the slow deployment of CCS.  Costs per tonne abated have remained high for most projects compared with prevailing carbon prices.  These high unit costs have combined with the large scale of projects to make the total costs of projects correspondingly large, with a single project typically having a cost in the billions of dollars.  This has in turn made it difficult to secure from governments the amount of financial support necessary to get more early projects to happen. Meanwhile the costs of other low carbon technologies, notably renewables, have fallen, making CCS appear relatively less attractive, especially in the power sector.

The difficulties of establishing CCS have led many to propose carbon capture and utilisation (CCU) as a way forward.  The idea is that if captured CO2 can be a useful product, this will give it a value and so improve project economics.  Already 80% by volume of CCS is CCU as it includes use of the CO2 for Enhanced Oil Recovery (EOR), with project economics supported by increased oil production.

Various other uses for CO2 have been suggested.  Construction materials are a leading candidate with a number of research projects and start-up ventures in this area.  These are potentially substantial markets.  However the markets for CO2 in construction materials, while large in absolute terms, are small relative to global CO2 emissions, and there will be tough competition from other low carbon materials. For example, one study identified a market potential for CCU of less than two billion tonnes p.a. (excluding synthetic fuels) even on a highly optimistic scenario[iv], or around 5% of total CO2 emissions.  It is therefore difficult to be confident that CCU can make a substantial contribution to reducing global emissions, although it may play some role in getting more early carbon capture projects going, as it has done to date through EOR.

Despite their slow growth, CCS and CCU continue to look likely to have a necessary role in reducing some industrial emissions which are otherwise difficult to eliminate.  The development of CCS and CCU should be encouraged, including through higher carbon prices and dedicated support for early stage technological development.  As part of this it remains important that more projects CCS and CCU projects are built to achieve learning and cost reduction, and so support the beginnings of more rapid growth.  However in view of the lead times involved the scale of CCS looks likely to continue to be modest over the next couple of decades at least.

Adam Whitmore – 25th April 2018

[i] CO2 will generally be produced in making the energy necessary to run the capture process, compression of the CO2 for transport, and the rest of the transport and storage process.  This CO2 will be either emitted, which reduces the net gain from capture, or captured, in which case it is part of the total.  In either case the net savings compared with what would have been emitted to the atmosphere with no CCS are lower than the total captured.

[ii] Wind generation increased by a little over 100 TWh between 2016 and 2017 (Source: Enerdata).  Assuming this displaced fossil capacity with an average emissions intensity of 0.6 t/MWh (roughly half each coal and gas) total avoided emissions would be 60 million tonnes.

[iii] https://www.globalccsinstitute.com/projects/large-scale-ccs-projects

[iv] https://www.frontiersin.org/articles/10.3389/fenrg.2015.00008/full