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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
50
100
150
200
250
300
350
400
450
$0 $20,000 $40,000 $60,000
GDP per capita, US$ 2000 (ppp)
En
erg
y p
er
ca
pit
a,
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.
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.
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
0
500
1000
1500
2000
2500
2000 2010 2020 2030 2040 2050
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
80
100
1 10 100 1000
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
5
10
15
20
25
30
1990 BaseYear
2005 LatestIEA
2050 with60% OECDreduction
2050 withnominalOECD
emissions
2050 with noOECD
emissions
2050 withOECD 2 GT
sink
En
erg
y C
O2 E
mis
sio
ns,
GT
/an
nu
m India
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
0
50
100
150
200
250
300
350
$0 $10,000 $20,000 $30,000 $40,000
GDP per Capita, US$ ppp (2000)
En
erg
y p
er
Ca
pit
a, G
J
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