policies and technologies

Policies and Technologies

• A national policy framework• Understanding “cap-and-trade”• Key technologies• A new international agreement

2

Oil Biomass Gas Coal Nuclear Renewables

Primary Energy

Liquids

Direct combustionIndustry and Manufacturing

Mobility

Final Energy

Agriculture and Land Use

Energy

En

erg

y

En

erg

y

Buildings

Power Generation

The “energy and CO2 economy”

3

Pathways to 2050

0

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450

$0 $20,000 $40,000 $60,000

GDP per capita, US$ 2000 (ppp)

En

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ca

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GJ

Improving energy efficiency

2025

2050

Falling CO2 emissions per unit of energy

2008

Wealthy developedDevelopedLeading developingDeveloping

The scale of change

The scale of transformation required to even approach the 450 ppm target is massive. The International Energy Agency estimates that to achieve this;

•Energy intensity of the global economy must improve by 2.7 percent per year, against a current rate of less than 1 percent in the last decade;

•The share of energy from renewable sources must increase from 10 percent to 38 percent by 2030;

•Carbon capture and storage must be online and account for a 14 percent reduction in emissions by 2020;

•Nuclear must increase by 9 percent by 2030, which implies building 20 new nuclear plants per year around the world whereas less than two are built annually today.

5

How can all this be achieved ?

Government policy will be important

6

Oil Biomass Gas Coal Nuclear Renewables

Primary Energy

Liquids

Direct combustionIndustry and Manufacturing

Mobility

Final Energy

Agriculture and Land Use

Energy

En

erg

y

En

erg

y

Buildings

Power Generation

Key Sectors in the “energy & CO2 economy”

An abatement curve can provide insight

An abatement curve can provide insight

New Technologies

Alternative product

Number of installations

Tec

hnol

ogy

cost

Benefit to deployEarlier deployment through demonstration

Discover & DevelopMust be well funded to drive innovation.

0

20

40

60

80

100

1 10 100 1000

DeploymentDriven by new features and price.

Demonstration (at scale)A critical step in the early commercialization of a technology

New Energy Technologies – e.g. CCS

Power generation without CCS

Number of installations

Tec

hnol

ogy

cost

CO2 priceEarlier deployment through demonstration

Discover & DevelopNeed to refocus and rapidly expand R&D.

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20

40

60

80

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1 10 100 1000

DeploymentTypically driven by the CO2 market

DemonstrationNo early adopters and high start-up costs so this phase will need help.

11

A structured policy approach is needed

Power Generation / Industry &

Manufacturing

Transport Commercial & Domestic (Buildings)

Discover & Develop

Demonstrate

Deploy

A structured policy approach is needed

Power Generation / Industry &

Manufacturing

Transport Commercial & Domestic (Buildings)

Discover & Develop • Support for infrastructure

(e.g. grids & pipelines)• Support for advanced

fuel development• Urban planning decisions.

• Education and awareness.

Demonstrate • Fiscal support for large-scale CCS demonstrations

• Fiscal support for early 2nd generation biofuel manufacture.

• Public transport infrastructure

• Encouraging radical design

Deploy • “Cap-and-Trade”

• CCS rules and recognition

• Renewable Energy Certificates

• “Fast-track” planning

• Vehicle efficiency standards

• Incentivise fuels based on W-t-W CO2 reduction.

• Consumer behaviour

• Use of public transport

• Efficiency standards (appliances, air-con)

• Use of project mechanisms linked to GHG market.

• Encouraging “electrification”.

Broad energy production and use R&D support

A structured policy approach is needed

A simple, high profile and credible target for the renewables’ share of power generation, supported by a range of incentives to encourage investment.

Measures to incentivise new fuels based on their “well-to-wheels” CO2 reduction potential,

implementation of vehicle efficiency standards and vehicle/road-use programs targeted at drivers

A series of robust energy standards for buildings, appliances etc. with incentives for retrofit of existing infrastructure.

"Cap and trade" emissions trading systems for power generators, most industrial facilities and large fleet transport such as aviation.

Emissions Trading or “Cap-and-trade”

Initial emissions100 Mt p.a.

Year 5 at 95

Year 15 at 80Year 10 at 88

Offsets

Allowance trading between facilities$ CO2

Government issues 88 million allowances into the economy

CCS Project

Efficiency Project

Key principles of “cap-and-trade”

• The aim of “cap-and-trade” is to direct investment capital towards lower CO2 emission projects, via a market price for CO2 emissions.

• Therefore, the trading system should not remove that capital from the industries or firms covered by the system.

Design Features to be Discussed

• Allocation of allowances

• Banking and borrowing

• Recognition of technologies

• Constraints and limitations

• External projects mechanisms (or offsets)

• Linkage

An Introduction to Cap-and-Trade

Courtesy Holmes Hummel, PhD

Using Musical Chairs: An Illustration of Managed Scarcity

Musical Chairs: A Helpful Analogy

Each chair (an allowance) represents the “right to emit”

one metric ton of carbon dioxide (1 mtCO2) or an equivalent amount of any other greenhouse gas

Musical chairs

At the start of the game, everyone has a seat –

because there are no limits on carbon emissions.

2008

Musical chairs

After the first year, a cap is imposed by issuing a limited number

of allowances and making players compete for the allowances

available.

In our analogy, one player doesn’t have a chair…

2009

Would anyone be willing to trade their chair for $30?

2009Musical chairs

Sure! For that price, I can finance an efficiency upgrade, eliminating my need for a pollution permit.

2009Musical chairs

So, the market price for the “right to emit” in the first year

is $30 for one ton of carbon dioxide…

2009Musical chairs

At that price, some players may realize it would be more profitable to reduce their emissions and sell their allowances.

Profit opportunities are a main driver for innovation and investment in the global economy today, and the climate challenge needs both.

2009Musical chairs

The new flow of capital in the economy

CO2

Goods and services pass into the economy, with the price of CO2

embedded

Emitters buy allowances from the government through auction

Governmentrecycles auction

revenue to consumers through the tax system

The CO2 price and allocationPoints of regulation

Resource

Power Generation

FactoriesHeavy industry Light industry

Consumer

Electricity

Tim

e CO2 price impact

• Over time, the CO2 price will impact the entire value chain.

• The rate at which this happens varies considerably.

• It can be very fast for electricity.

• It will be very slow for some products where the price is established outside the capped market.

The CO2 price and allocationPoints of regulation

Resource

Power Generation

FactoriesHeavy industry Light industry

Consumer

Electricity

Tim

e CO2 price impactFree allocation early on as little / no price pass through

Progressive shift to auctioning as the CO2 price impacts the economy

Full auctioning as the CO2 price impacts the entire value chainAuction funds recycled to consumers through the tax system

CO2 is a commodity

Artificial limits within “cap-and-trade”

Although created entirely by policy makers and legislation, an emissions trading market is still a market. As such, it should not be subject to;

• Price caps;

• Price floors and / or reserve prices;

• Arbitrary price management by oversight bodies or parliament;

• Imposition of trading limits (e.g. offsets);

• Unexpected rule changes;

External Projects (or offsets)

Emission reduction projects executed outside the capped sector can offer important benefits;

• An inflow of compliance units (credits) can offer further flexibility in meeting the cap.

• Access to external projects can act as an efficient cost control mechanism within the capped sector.

• Projects can help developing countries begin managing emissions.

• The flow of project credits can help build a global CO2 market.

All national emission trading systems should recognise the same global project mechanisms.

Advantages of Emissions Trading

• It is designed to deliver an environmental outcome, in that the cap must be met.

• It will deliver its environmental objective at lowest cost to the economy.

• A national trading system can be linked with other such systems, delivering over time a global carbon market.

• A trading system offers both compliance and policy flexibility.

• The structure is simple.

• It works. The trading system will deliver what it is asked to do.

US sulphur trading has delivered the required cuts in sulphur emissions.

The EU system has suffered early data issues, not design issues.

Going global !

Linkages develop between all systems and more systems appear

2000 2005 2010 2015 2020 2025

Danish-ETS

UK-ETSAustralian ETS

US National or North American “cap-and-trade”

Norwegian ETS

EU-ETS

CDM

CDM evolves to include clean electricity mechanism

Pre-Kyoto Kyoto Post 2012

Expanding EU-ETS

Japan technology standards

Linkage framework

New technology mechanisms evolve (e.g. for CCS)

China adopts CCS standard

New Zealand ETS

Evolution of the EU-ETS

2005 2008 2013 2020

Phase I

Learning by doing

Discrete• No banking

Allocation

• Conservative• Grandfathering• Trial auctions

Member State driven

Commission guidance

Establishes capacity

Some CER inflow

Phase II

The real thing

Kyoto compliance• Banking to 2012+

Allocation

• Still grandfathering

• Some benchmarking• Regular small auctions

Commission guidance

Member States follow

Active liquid market

CER inflow rises

Phase III

Expansion – gases & sectors

-20% (or –30%) by 2020• EU wide cap

Allocation

• 100% auctioning for powergen• Benchmarking for industry• Top decile benchmarks• Recognition of carbon leakage

Commission led

Member State compliance

Limited CER inflow

CCS recognition

Evolution of the EU Cap

2005

2006

2007 20

0820

0920

10 2012

2013

2014 20

15 2016

2018 20

1920

2020

2120

11 2017

2180MtCO2pa

2083 actual in

2005 1964

Gradient – 1.74%

Phase II Phase IIIPhase I Start up Phase

1620-20%

-30%

Trend line continues aiding predictability

Not to scale!

EU ETS price and market activity

Key:

Dec 07 delivery

Dec 08 delivery

Dec 09 delivery

Source: Point Carbon

Key technologies

Only four pathways forward:

• Energy efficiency

Transport

Buildings (e.g. insulation)

Appliances (e.g. Air conditioning)

• Renewable energy

Wind, solar, wave, tidal, bio-energy

• Nuclear power

• Fossil fuels with Carbon Capture and Storage (CCS)

All four are essential and will be needed at scale:

• To meet energy demands this century

• To limit CO2 emissions into the atmosphere

36TrafficRoad transport:

> 750 million light duty vehicles~ 70 million trucks and buses> 250 million motorbikes~ 5 billion tonnes CO2 p.a.

Change takes time

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Total vehicles, millions

Total alternative vehicles

Total traditional vehicles

Annual total vehicle growth of 2% p.a.Annual vehicle production growth of 2% p.a. Large scale "alternative" vehicle manufacture starts in 2010 with 200,000 units per annum and grows at 20% p.a. thereafter.

Transport - an ongoing evolution

Energy sources Energy carrier Drive-train options

Electrolysis

Solar

Wind

Hydro

Nuclear

CCGT

Conventional and advanced bio-fuels

Biomass

Liquid fuelsOil Conventional ICE

Hydrogen

FCV

CO2

Gas

CoalPartialoxidation

Syngas CO, H2

Fischer–Tropsch Synthetic

fuels

Shift reaction

Hybrid

Electricity

Electric vehicle

Plug-in hybrid

Mobility – What is needed

Key directions . . .

Involve fuel producers, vehicle makers and the consumer.

• New more efficient vehicles

• Broadening the range and type of fuels

• Changing the way we use mobility

Key technologies . . . • Hybrids and plug-in hybrids (drive trains and batteries)

• Advanced biofuels, synthetic diesels, electricity.

• Integrated public / private transport mechanisms

• Hydrogen / CCS

Carbon Capture and Storage (CCS)

CCS technology is available:

• A family of technologies all in use today

• Large scale end-to-end demonstration needs to happen

• Deployment need not be a distant dream

41The scale of the challenge

We are at 386 ppm CO2 in the atmosphere today.

The science tells us not to go beyond 450 ppm.

The difference is 64 ppm.

Emissions are rising at over 2 ppm per annum

• The current generation of coal fired power stations in China (recently built, under construction and planned) will alone add 15 ppm CO2 to the atmosphere if run for 50 years without carbon capture & storage.

• Every year we delay the global deployment of CCS we commit the planet to a 1 ppm increase in long-term stabilization of atmospheric CO2, thereby further limiting our chances of containing climate change.

Carbon capture and storage in practice

New Technologies

Alternative product

Number of installations

Tec

hnol

ogy

cost

Benefit to deployEarlier deployment through demonstration

Discover & DevelopMust be well funded to drive innovation.

0

20

40

60

80

100

1 10 100 1000

DeploymentDriven by new features and price.

Demonstration (at scale)A critical step in the early commercialization of a technology

New Non-Energy Technologies

Alternative product

Number of installations

Tec

hnol

ogy

cost

Benefit to deployEarlier deployment through demonstration

Discover & DevelopR&D is well funded in the high tech sector;

• Extreme competition• Spinoffs from other government initiatives.

0

20

40

60

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DeploymentCool new features help deployment

Demonstration (at scale)Early adopters pay for this step in the IT sector

New Energy Technologies – e.g. CCS

Power generation without CCS

Number of installations

Tec

hnol

ogy

cost

CO2 priceEarlier deployment through demonstration

Discover & DevelopNeed to refocus and rapidly expand R&D.

0

20

40

60

80

100

1 10 100 1000

DeploymentTypically driven by the CO2 market

DemonstrationNo early adopters and high start-up costs so this phase will need help.

CCS and the EU trading system

Power generation without CCS

Number of installations

Tec

hnol

ogy

cost

CO2 priceEarlier deployment through demonstration

0

20

40

60

80

100

1 10 100 1000

Demonstration• EU Council of Ministers announces a 10-12 large-

scale project demonstration programme.• EU Parliament supports the programme with a pool of

300 million bonus allowances offered for CO2 stored.

• At €25 per tonne of CO2 this is worth €7.5 billion.

• No single project to be awarded more that 45 million allowances bonus allowances.

Deployment• CCS recognised within the EU-ETS.• New CCS legislation sets standards for

storage and establishes rules for long term liability.

CCS and the EU trading system

Power generation without CCS

Number of installations

Tec

hnol

ogy

cost

CO2 priceEarlier deployment through demonstration

0

20

40

60

80

100

1 10 100 1000

Demonstration• EU Council of Ministers announces a 10-12 large-

scale project demonstration programme.• EU Parliament supports the programme with a pool of

300 million bonus allowances offered for CO2 stored.

• At €25 per tonne of CO2 this is worth €7.5 billion.

• No single project to be awarded more that 45 million allowances bonus allowances.

Deployment• CCS recognised within the EU-ETS.• New CCS legislation sets standards for

storage and establishes rules for long term liability.

We need to replicatethis model globally

The end game – nuclear fusion??

51A new global directionis also needed

Very demanding reductions are called for

Effective action requires:

• Global emissions to fall by at least 50% relative to 1990 by 2050;

• Global average per capita emissions that will – as a matter of basic arithmetic – need to be around 2 tonnes (T) by 2050 (20 GT divided by 9 billion people): this figure is so low that there is little scope for any large group to depart significantly above or below it;

• Agreement by developed countries to take on immediate and binding national targets of 20% to 40% by 2020, and to commit to reductions of at least 80% by 2050;

Key Elements of a Global Deal

Nicholas Stern

The implications are clear

-5

0

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2005 LatestIEA

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2050 withnominalOECD

emissions

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2050 withOECD 2 GT

sink

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China

Non-OECD (excl. China)

OECD

The Kyoto Protocol

• Agreed in 1997• Ratified in 2005• Started in 2008• First commitment period is 2008-2012• Base year is 1990

• Sets absolute emission targets for developed countries• Overall reduction for developed countries of 5%• Introduces global trading• No mandatory action for developing countries• Establishes a project mechanism which allows

developing countries to benefit from the CO2 price in developed countries

A new global deal

• Must be more inclusive• Maintains absolute targets for developed countries• Provides a clear pathway forward for developing

countries, with absolute targets the goal for many• Builds technical capacity in developing countries• Operates on a much larger scale than the Kyoto Protocol

• Builds towards a global carbon market• Embodies financing mechanisms• Draws on clean technology funds• Addresses land use and deforestation• Deals with adaptation

The prospect of emission targets looms

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Finland

Romania

“Developed” countries with Kyoto Targets

KoreaTaiwan

Singapore

China Thailand

Malaysia

Rapidly emerging economies in Asia

Two pathways to consider

No target under the Kyoto ProtocolOpportunity to respond to the market through the Clean Development Mechanism

National action agreementsNational policies and measuresSectoral agreementsFunding via market mechanismsUse of clean-technology funds

Direct recruitment to cadre of nations with targets

National emission target

2013 - 2020

2013 - 2020

2018 - 20302008 - 2012

Abatement

GtCO2e per year in 2030

B CA

Large scale abatement within the electricity sector.Some land restoration.

Energy efficiency measures, land use practices, avoided deforestation.

Higher cost technologies still moving down the cost curve

The global abatement curveCost of abatement

€/tCO2e

The anatomy of a dealCost of abatement

€/tCO2e

Abatement

GtCO2e per year in 2030

B C

Targeted systems for agriculture and deforestation D

A

Developed

Developing

Less Developed

Absolute targets

National policies and measures:SD-PAMs, NAMAs, without access to international project mechanisms.

Large scale action in the electricity (and transport) sector driven by international project mechanisms and clean tech funds.

Large scale action through cap-and-trade, transport measures (vehicle efficiency, low carbon fuels etc.) and building regulations

Support for Demonstration programmes globally

Smaller scale clean development projects utilising the CDM

Going global !

Linkages develop between all systems and more systems appear

2000 2005 2010 2015 2020 2025

Danish-ETS

UK-ETSAustralian ETS

US National or North American “cap-and-trade”

Norwegian ETS

EU-ETS

CDM

CDM evolves to include clean electricity mechanism

Pre-Kyoto Kyoto Post 2012

Expanding EU-ETS

Japan technology standards

Linkage framework

New technology mechanisms evolve (e.g. for CCS)

China adopts CCS standard

New Zealand ETS