Tag Archives: decarbonisation

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.

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.

Overcoming the difficulty of acting to reduce emissions

Limiting climate change poses major challenges to traditional decision making, but progress is now being made.

This is the second of two posts stepping back a bit and considering why the climate change problem is so difficult to solve.  My previous post looked at some of the physical feature of the problem such as the scale, dispersion and diversity of emissions.  This post looks more at the economic, social and psychological barriers to action[1].

Perceptions

The first area of difficulty is in perceptions of the facts.  The science of climate change now one of the best established areas of human knowledge.  However a gradual change, for example with temperatures on average increasing by around a fifth of a degree per decade, may be difficult to notice.  Shifting probabilities of extreme events may be similarly difficult to perceive. Consequently, even facts well-established academically may not readily become part of acknowledged personal experience, and so will not be as readily internalised into decidion making.

This may be compounded by an availability bias.  Those regions changing most rapidly and visibly, especially the arctic, are remote and sparsely populated, so changes are less available to people despite the best efforts of reporters.

These difficulties are compounded by a framing effect due to daily or seasonal temperature variation.  A three degree rise in annual global mean surface temperatures may not sound like much if you experience day to day fluctuations of much more than that, even though in reality a change of this magnitude would lead to very severe consequences. As a result of this framing, many of the consequences of climate change may not sound so bad to those not closely involved with the issue.

On the other hand, the risks of some solution may be seen as high – “the lights might go out” – because in many ways the current system works well.  People’s subjective perception of the balance between risk and reward may therefore be quite distorted.

Finally, the perceived solutions to climate change may conflict with some value systems (see here and here), making people less willing to accept what needs to be done.

Lags

The difficulty of action is compounded by long (and uncertain) time lags between cause and effect.  Many consequences, such as the worst effects of sea level rise, are thus seen as belonging to the distant future.  They are beyond the normal planning horizons of governments, companies and most other institutions – though it is worth noting in many cases not outside the lifetime of today’s children.  It also challenges our own individual decision making.  We often have a tendency to concentrate on those problems which seem most urgent.  This makes climate change difficult for people, companies and governments to deal with.

Damage is also often seen as remote in place as well as time.  Most people will tend naturally to be less concerned with changes perceived as unlikely to affect their immediate neighbourhood.

Imperatives from existing social structures

Furthermore, career and other motivating social imperatives are not often aligned with dealing with the climate problem.  A bonus may depend on this year’s profits, or a promotion on generating local value, an election on a more immediate problem.  And social norms may encourage bigger houses, bigger cars and more air travel despite their effect on the climate.  Many people (including me) would be reluctant to live in a smaller house for the sake of the climate.

Governance of a global public good

The most pervasive barrier to action is that emissions and the benefits of the associated activity tend to be largely local, whereas the resulting damage is global.  The global nature of the climate means that a stable climate is a global public good in the economic sense[2].  However this public good must be maintained by avoiding harmful emissions.

As in all such cases, there are incentives for some to free-ride on the efforts of others to support the provision of this public good.  No one country can by itself sustain a stable climate – although China can make a huge difference – but there is no global enforcement mechanism to oblige co-operation.

The ability of any one company or any one individual in influence the outcome is smaller still.  People are right to feel that they alone cannot solve the problem.  There is a need for co-operation at a global level.

Tropical deforestation, a major source of emissions, provides a further difficulty.  It is hard to solve in part because governance is often weak even at the national level in forest countries.  This leads to weak constraints on the actions of companies and individuals, often pursuing their own incentives, which fail to reflect the wider environmental damage.

What happens when these don’t apply

The Montreal Protocol on CFCs offers an interesting contrast, in that it was achieved in part because it lacked some of the characteristics of climate change.  Although the science is complex it could be boiled down to a simple message: “chemicals we are putting into the atmosphere destroy the ozone layer.”  The lags involved were perceived as comfortably within normal human timescales.  And the consequences of failure were easy to present as scary. “If we don’t fix this problem lots more people will get skin cancer” is about as simple and relatable as messages get.

Added to this, the uses of the chemicals were limited to a few sectors of the economy, with readily available substitutes.  This made the costs appear much lower, and opposition from businesses and their allies, some of whom would benefit from regulatory change, much less strong.

The result was relatively prompt and effective action.

A way forward for reducing emissions

This also points a way forward for climate change.  The extension international agreement to limit HFCs because of their effects on the climate is an example of similar forces at work, and is a cause for optimism.  A major threat to the climate has been addressed.  Although not perfect, the agreement appears to have every chance of being successful.  This is despite having many of the barriers to action that hamper all attempts to address climate change.

What was absent was the scale and cost of decarbonising the energy system.  But even here there is progress.  Low carbon technologies are rapidly improving and falling in cost, in some cases to a spectacular degree.  This is lowering the barriers to action, and will do so to an ever increasing extent.  It is creating a powerful constituency for action.  There are now many companies invested in the transition to a lower carbon economy and jobs in low carbon industries increasingly outnumber those in high carbon sectors.  Again this will increase over time.

These trends have combined with the greater political awareness of the problem, and the increasing desire to do something about it, which is embodied in the Paris Agreement. The reactions to statements from the USA of intention to withdraw from in the agreement indicate how solid the international consensus has now become.

While the Paris Agreement provides an overarching framework, the hard work of emissions reductions is now being achieved by a vast and growing range of regulatory interventions across the world.  There is a huge diversity of regulation now in place, from carbon pricing to emissions standards to technology incentives.  Compared with the situation as recently as the beginning of this century progress has been huge.

This is a counsel of optimism, not of complacency or of naiveté about the rate of progress compared with what is needed.  Limiting dangerous climate change will still require a great deal of hard work, and quite a lot of luck.  But progress has been enormous despite formidable barriers, and there is no reason why progress should not continue.

Adam Whitmore – 6th June 2017  

[1] For further discussion of some of the issues raised in this post see file:///C:/Users/Adam/Documents/Book/Research%20material/The_Dragons_of_Inaction_Psychological_Barriers_Tha.pdf .  This is a useful review of psychological barriers, although in my view the author overemphasises the role of individual action.   See also: https://www.apa.org/science/about/publications/climate-change.pdf

[2] A stable climate is non-rival (someone can benefit from it without limiting the ability of others to do so) and non-excludable (there is no way of preventing someone benefiting).  According to the 2009 movie Star Trek this concept of a public good is sufficiently important to be included in the education curriculum on the planet Vulcan.  The reference to the definition using the terms non-rival and non-excludable occurs during the first scene on Vulcan, about 15 minutes into the movie.

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.  Some political considerations aside, 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.

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.