Download Corrupting the Climate? - European Capacity Building Initiative

Climate change and incentives for energy
technology innovation
Presentation to Ernst & Young
Energy Training Event
Cambridge, 14 September 2003
Michael Grubb, Associated Director of Policy, The Carbon Trust
Visiting Professor of Climate Change and Energy Policy, Imperial College, London, &
Senior Research Associate, Department of Applied Economics, Cambridge University
Imperial College
OF SCIENCE, TECHNOLOGY AND MEDICINE
Overview
• The international instruments - UNFCCC and
Kyoto Protocol
• The ‘Kyoto crisis’ of 2001-2 & implications
• Elements of Bonn/Marrakesh Accords on
Implementing Kyoto
• European implementation - overview
• Economic instruments and European
emissions trading directive
• Technology and innovation incentives –
overview
• The UK Programme
The international instruments:
•
•
The UN Framework Convention on
Climate Change (UNFCCC)
The Kyoto Protocol to the UNFCCC
UN Framework Convention on
Climate Change
• Adopted 1992, Entered into force 1994, 181 Parties
• Ultimate Objective: Stabilise atmospheric
concentrations at a level that would prevent
‘dangerous’ anthropogenic interference
• All Parties obliged to address climate change:
– Formulate, implement, publish & regularly update national
plans ..
– Communicate information related to implementation
• Industrialised countries (Annex I Parties)
– Must demonstrate taking the lead
– Adopt policies & take corresponding measures on the
mitigation of climate change
– Aim to return greenhouse gas emissions to 1990 levels
• Annual Conference (COP) to review adequacy of
action and propose additional measures if required
The Kyoto Protocol: core elements
• Binding commitments to limit greenhouse gas
emissions for each industrialised country (‘Annex I’):
specific binding commitments are a qualititative leap,
bringing much complexity
• Defined for first ‘commitment period’ 2008-2012;
subsequent periods to follow
• ‘Basket’ of six greenhouse gases (CO2 main), plus
some allowance for sinks / land-use change and
forestry
• Collective commitment, to reduce Annex I emissions
to 5% below 1990 levels by first commitment period
• Range of other provisions concerning activities in
developing countries, technology transfer, policies
and measures, etc.
Kyoto’s first-period
quantified commitments
Region
Percentage reduction
from 1990 levels
EU
USA
Japan
Canada
Australia
Russia and Ukraine
-8
-7
-6
-6
+8
0
Mechanisms for international transfer
• ‘Bubbling’ - used by the EU - to redistribute targets
amongst a group of countries
•
•
•
•
UK, -12.5%
Germany, -21%
France, 0
Greece, +25%
• Project-investment crediting amongst Annex I parties
(‘Joint implementation’)
• The Clean Development Mechanism
• Credits for investments in developing countries that
contribute towards sustainable development and reduce
GHGs
• Emissions trading
• Allows countries to ‘trade’ parts of their allowed
emissions
Structure of International Emissions Trade
Government A
Government B
Assigned amount
Corporate allocation & authorisation
Register
Register
Permit
Industry A
Industry B
The ‘Kyoto crisis’ of 2001-2
and its outcome
The Kyoto Crisis of 2000-1•
Nov 2000
Mar 2001
Apr - June
July
Oct - Nov
Nov 2001
Dec 2002
Collapse of COP6 Hague negotiations
Whitman says ‘reviewing .. not walking
away’, but then Bush rejects Kyoto as ‘fatally
flawed .. and unfair to America’
Widespread assumption that Kyoto will
collapse; but EU extracts promise of US noninterference if rest of world goes ahead
No US counter-proposal; COP6 resumed
Bonn negotiations reach political agreement
Still no US counter-proposal;
Marrakesh COP7 finalises legal details
All key parties indicate they expect to ratify
Canadian ratification brings tally to 100: only
Russia still needed
Why did most of world back Kyoto?
• Sound structure that any regime of binding commitments
would need:
– Multi-year target periods give scope for national variations in
circumstances, and for future development of responses
– Multiple gases, some carbon sinks, international mechanisms make
it uniquely efficient agreement and create worldwide engagement
• Demonstration and momentum:
–
–
–
–
–
demonstrate that EU and others are serious
maintain institutional ‘learning by doing’
promote technological development
give private sector greater certainty and basis for investments
lay groundwork for next phase
• Political imperative: legitimacy of international system and
a decade’s investment at stake
The Bonn-Marrkesh Agreement
on implementing the Kyoto Protocol:
structural elements
• Finance
– Climate change fund and LDC fund under the Convention
– Adaptation fund under the Kyoto Protocol
• Carbon Sinks
– Concessions on managed forests to Japan, Canada, Russian weaken
aggregate target c. 4% points equivalent
– Other sinks included on comprehensive but carefully monitored basis
• Compliance
– Reaffirmation of legally binding nature of KP
– Enforcement branch, penalties for non-compliance
• Kyoto Mechanisms
Entry into force:
Russia now holds the key ..
• Requires 55 countries to ratify (111 have now
done so)
• .. Including 55% of industrialised countries’
CO2 emissions in 1990
–
–
–
–
–
European Union-15
Japan
Canada
Poland
Other EU-Accession & Baltics
Total as of Sept 2003
– Awaited: Russia
• US
• Autralia
24.2%
8.5%
3.3%
3.0%
3.4%
43.4%
17.4%
36.1%
2.1%
Are the Russians coming ...?
• Russia benefits from Kyoto, but internal disputes:
‘hot air’ or real investment, longer term implications?
• Monday 8th Sept: Russian Min. Natural Resources
passes Kyoto to Govt to initiate formal process
• Likely that Putin will pass it to Duma end of this
month: Duma lined up for quick ratification (but its
Russia, and the US is discouraging it ….)
• Focus will emerge on project mechanisms and use of
revenues from emissions trading
• A new Europe-Russia climate-energy dialogue?
– Prodi initiative
– Reaction to US & fear of loss of Protocol
• Gas and energy investment will be the beneficiaries
EU & UK Implementation
of climate / Kyoto goals:
overview, and focus on
emissions trading
Total EU greenhouse gas emissions in
relation to the EU’s Kyoto target
120
Index
110
100
98,4
Kyoto target
96,0
90
92,0
80
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Greenhouse gas emissions
Kyoto target path 2008-2012
Kyoto target 2008-2012
CO2 Emissions
2012
Progress of Individual Member States
Spain
Ireland
Denmark
Portugal
16,5
Distance to target indicators (DTI):
difference between (linear) targets and
trends in 1999:
16,3
13,5
10,2
Netherlands
8,8
Austria
8,5
7,3
Italy
Belgium
6,1
Greece
5,7
France
-0,2
Sw eden
-0,3

Finland
United Kingdom
Germany
Luxembourg
-1,1
-8,4
-9,3
-30,7
-0,4
EU-15
-40,0

-30,0
-20,0
-10,0
0,0
10,0
20,0
European Climate Change Programme
(ECCP): Results
• Some 40 cost-effective policies and measures
with an emission reduction potential of some
664 - 765 Mt CO2 eq (± twice EU target)
• Overall costs for EU target in 2010:
3.7 € bn / 0.06 % of GDP
‘Cost effective’ GHG reduction potential
for sectors in EU to 2010
(including full implementation of the ACEA Agreement)
Marginal cost
€20/tCO2 eq
Emissions
1990 or 95
Mt CO2
equivalent
1422
Baseline
emissions for
2010 with
existing
measures
-6%
Cost-effective
potential beyond
baseline
projection for
2010
-13%
Energy sector
Industry
Transport
Households
Services
Agriculture
Waste
Total
757
753
447
176
417
166
4138
-9%
31%
0%
14%
-5%
-18%
1%
-12%
-4%
-6%
-15%
-4%
-13%
-9%
ECCP - Most promising measures
•
•
•
•
•
•
•
•
EU wide emissions trading
renewable energy sources
energy performance of buildings
energy-efficiency standards for equipment
energy demand-side management
combined heat and power generation
containment / monitoring of fluorinated gases
modal shift in transport (infrastructure use &
charging)
Carbon / energy taxes in Europe
Ten European countries have energy or carbon taxes ...
(CO2 tax : Denmark, Finland, France, Italy, Norway, Netherlands,
Switzerland; Energy tax : Czech Republic, Germany, Netherlands,
UK)
although tax levels differ ...
(e.g., Finland: $19 / ton CO2, France : $25 - $35 / ton CO2,
Switzerland : $125 / ton CO2)
applications vary . . .
(e.g., Germany : diesel, heating oil, electricity; Norway: shipping
fuels, landfill waste; UK : excise taxes on cars)
and exemptions / derogations are numerous :
(e.g., Germany & UK : energy intensive industry; France: gas and
cogeneration, Norway: major industry, oil and gas).
Trading instruments in Europe
• Many countries are exploring forms of trading :
– GHG trades : Australia, Belgium, Canada, Denmark, European
Union, Finland, France, Germany, Ireland, Netherlands, Norway,
Sweden, UK, USA.
– RES/Electricity: Australia, Belgium, Denmark, France, Germany,
Italy, Netherlands, Sweden, UK, US
– JI/AIJ : Canada, Czech Republic, Japan, Netherlands, Norway,
Sweden, USA
• Few have rules to link to international regimes
• Start dates range from 2001 to 2008, with primary focus in
electricity and energy sectors, and point of application of
permit relatively high-level
• Most are now aligning with / awaiting European Emissions
Trading Directive
European Emissions Trading Directive
(European Env Council, 9 Dec 2002,
as modified and passed by European Parliament, June 2003)
•
•
Mandatory caps on CO2 from power plants and
most industrial facilities of > 20MW thermal capacity
Applies to all EU including Accession countries,
covering about 45% of European CO2 emissions
Two phases:
• 2005-7 precursor with national, force majeure and installation opt-out
provisions, non-compliance penalty 40 Euros / tCO2
• 2008-12 compulsory, opt-in provisions for additional facilities &
non-CO2 gases, non-compliance penalty 100 Euros / tCO2
•
Voluntary pooling arrangements for both periods, with
safeguards to ensure transparency.
•
Partial auctioning, max 5% precursor period and 10% 2008-12
•
Governments decide on allocation plan subject to Commission
oversight (based on agreed National Allocation Plan criteria)
Comparing the UK ETS & the EU ETS
• UK ETS
–
–
–
–
–
–
–
–
–
2002-2006
Voluntary
No power generators
Indirect and direct
emissions
All six GHGs
Absolute & relative
targets
Financial incentive
Open to most sectors
Open to projects
• EU ETS
–
–
–
–
2005-2007, 2008-2012
Mandatory
Power generators
Only direct emissions
from large sources
– Only CO2 for now
– Only absolute targets
– Open to a limited
number of sectors
– Project to be
determined
Timing of EU trading relative to UK
policies
UK CCLAs
Overlap
UK ETS
1st period
2002
2003
2004
2nd period????
2005
2006
1st period
2007
2008
2009
2010
2011
2nd period
EU ETS
Kyoto
2012
2013
Incentives for technology and
innovation: an overview
Wide range of low carbon technology groups
exist at various stages of the innovation chain
Commercial
-isation
Diffusion
• Fuel Cells
• Wave
• Advanced CHP • Ultra-high
• Fusion
efficiency
CCGT
• Offshore Wind
• Biomass
(Electricity)
• Solar PV
• Nuclear Fission
• Onshore Wind
• Biomass
(Heat)
• Process
Energy
Demand Replacement
• Product
Replacement
• Process
Improvement
• Product
Improvement
• Buildings
Services and
Fabric
Enabling
• Electricity
Storage
• Hydrogen
Distribution
• Smart Metering • Intermediate
energy vectors
Basic R&D
Energy
Supply
• Photoconversion
• Hydrogen
Production
Transport • Ethanol
Applied R&D
(Ligo-cellulose)
Note:
Demonstration
• Fuel Cells
• Syngas Fuels
• HVDC
Transmission
• High efficiency
powertrains
• Biodiesel
• Ethanol
Most technology groups have components at more than one stage of the innovation chain; for
simplicity technologies shown at principle stage only
Source: Carbon Trust: Low Carbon Technology Assessment 2002
Driving forces and locus for
intervention changes along the chain
Government
Policy Interventions
Market Pull
Business
Basic
R&D
Applied
R&D
Demonstration
Commercial
Diffusion
-isation
Product/ Technology Push
Investments
Investors
Consumers
In building a low carbon economy, energy efficiency
and renewables have several advantages
Characteristic
Energy Efficiency
Renewables
Large Potential
• PIU identified
>100MtC by 2050
• PIU identified
>50MtC by 2050
Cost Effective
• Current economic
potential in reduced
costs >£12Bn/year
• Once implemented,
benefits are captured for
investment life-cycle
• Improvements driven by
many end users
• Costs reducing rapidly
as technologies mature
Long-term
Solution
Incremental
• Not dependant on a
finite fuel source
• Low risk as capacity can
be added incrementally
Climate policy in Europe is less technology-focused
than in US, but wider effort across innovation chain
• Less aversion to government regulation
• Environmental policy in 1980s heavily focused on
technology standards / ‘BAT / BATNEEC’
• Shift towards overall emission targets on grounds of
efficiency and innovation (UNECE agreements on NOx,
SO2; Large Combustion Plant Directive)
• Fifth Environmental Action Plan marked decisive move
towards market instruments
• Many member states deploy energy efficiency and marketbased renewables incentives
• Innovation policy itself relatively low attention, BUT
– European institutions play large role in R&D. Sixth EU R&D
Framework Programme features energy and environment strongly,
big investment in the ‘hydrogen economy’
– EU governments well placed for action along the ‘innovation
chain’
EU governments spurred by success wind energy in Europe, 1990-2000
12000
Column 8
Other
10000
Sweden
Spain
UK
MWe
8000
Netherlands
Denmark
Germany
6000
4000
2000
0
1990
1992
1994
1996
1998
2000
Technology and business
engagement in the UK climate
change programme
UK White Paper commitments are
backed by a wide range of policy
instruments for the energy sector
• Upstream energy (including generators)
– IPPC Directive (& LCPD)
• Non-domestic energy users:
– CCL and CCLAs
– IPPC Directive
– UK ETS
• Electricity suppliers:
– Renewables obligation (ROC)
– Energy efficiency commitments (EEC)
Many instruments and support measures
are targeted at business
Climate
Change Levy
Emissions
Trading
Scheme
Renewable
Obligation
Market
Support
• Energy tax on electricity, coal and gas
• Negotiated Agreements covering 6000 companies
– 80% rebate in return for meeting sector based
emission reduction targets
• Direct participation through voluntary cap and trade
– 34 companies
• Participants from negotiated agreements
• “Project based” participation
• Tradable certificates for renewable power
– current 3% of power generation, rising to
10.6% by 2010
• Ofgem (Regulatory office)
• Grants from Dept of Trade & Industry
• The Carbon Trust
The interfaces are complex!
IET
(PAAs)
National
trading
schemes
Energy efficiency
commitment
(EEC)
JI projects
(ERUs)
UKETS
Renewables
Obligation
(ROC)
CDM
projects
(CERs)
EU
trading
scheme
Flare
consents
.. But the total is considerable - Climate change
programme now involves about £1.3bn/yr
through wide range of instruments
Over 80% by value of current government interventions
have been in existence for <3 years
Total =
Share of Sector Funding
100
90
80
460
470
220
Other
LCIP
New Opportunities
NREP - DTI Energy R&D
ENERGIE
DTI Capital Grants
Other
EEBPp
ETS
Other
PV Roof
Warm Front
ECAs
70
60
CCL exemption (CHP/Renew ables)
Other
S
NREP - DTI A
LCIP
EST
E
Community Energy
E
B
P
EST
p
E
T
Road Tax S
50
40
30
20
120 15 £1.3Bn/year
CCAs
ROCs
EEC - Energy
Efficiency
Commitment
L
C
I
P
10
0
Power
Industry
Domestic
Transport Other
Note: Other includes Public/Commercial and Agriculture
Source: CSA Energy Research Review Group, Feb 2002, DEFRA, DTI, DTLR Press Releases, CT Analysis
>3 years
1-3 years
<1 year
A key challenge has been managing
interface between policy and business
Carbon Trust is a business-led, government backed investment
company set up to try and tackle this in context of wider UK programme
•
Reflects consensus between business and Government on support for the
UK climate change programme
•
Independent company with secular Board - business, Government, NGOs,
research community, trade unions
•
Govt funding current c.£50m/yr deployed through a flexible range of financial
and non-financial investment support
•
Its objectives are,
– To ensure that UK business and public sector meet CO2 targets
– To improve competitiveness of UK industry through resource efficiency
– To help UK industry capture commercial value of low-C technologies
“The Carbon Trust will take the lead on low carbon technology and innovation
in this country and put Britain in the lead internationally”
The Prime Minister, October 2000
Carbon Trust programmes support investment
in both diffusion and tech development
Develop new
technologies
Deploy existing
technologies
Low Carbon Innovation Prog.
Financial
support
Direct investment in UK based
low-carbon technologies
~ £25m pa
Nonfinancial
support
Enhanced
Capital
Allowances
~£150m pa
Interest
Free
Loans
~ £10m fund
Low Carbon Innovation Prog.
Co-ordinate & broker
technologists and funding partners
Advice, training & accreditation
~ £20m pa
Inform policy makers
Towards a
low-carbon
economy
Conclusions
• Climate change - real and serious challenge
• Kyoto, the ‘only game in town’, has become a European-led
test of multilateralism in the face of US unilateralism, raising
it to highest political levels
• Kyoto based upon principles of international economic
instruments, leading to similar instruments at national levels
• The main debate has moved from international policy
formation to implementation
• Design and compatibility of EU ETS key to this
• UK implementation - a leading programme including
investment incentives totaling c.$2bn Euro/yr
• Supplementary overheads appended
Supplementary Overheads
Future CO2 emissions with Kyoto+:
the impacts of global spillover
First
Commitment
Period
14000
Carbon
emissions
MtC
12000
No spillover
10000
Developing
country
emissions
8000
Medium spillover
6000
4000
High spillover
2000
Industrialised country
emissions (Kyoto -1% / yr)
0
1990
2000
2010
2020
2030
2040
2050
Year
2060
2070
2080
2090
2100
UK policy development
• Early 1990s:
consensus-building,
easy wins, and spinoffs
• 1997/8 Labour
government
restructuring
• Scientific concern accepted
• Advisory Committee on Business &
Environment
• Strengthening of Energy Efficiency Best
Practice Programme
• Elec. Privatisation and the dash-for-gas
• Non-fossil fuel obligation
• DETR under Deputy Prime Minister
• Marshall Report on Economic Instruments
• Climate Change Levy announced in budget
• 2000 Climate Change • Launch of negotiations on Climate Change
Agreements
Programme
• ACBE Working Group on Emissions Trading
• Business engagement & support spearheaded
CO2 constraints are likely to boost
aggregate gas demand
% different in gross inland consumption for EU-15 (Mtoe)
for emissions level (relative to 1990)
Stabilise
Solid Fuels
Liquid fuels
Natural Gas
Nuclear
Electricity
Renewable energy sources
-23.3
-4
2.9
-1.1
-2.2
8.6
-6%
-40.4
-8.1
5.1
-0.5
-3.7
21.1
Gas and security in the EU Green Paper
• New circumstances: internal market in energy,
creation of DG-Tren, environment, rising security
concerns
• ‘The EU must take better charge of its energy destiny
… at present it has too few resources and
instruments’ [EU Green Paper]
• Nuclear and coal ‘undesirables’
• Energy efficiency and renewables are priorities, need
bigger incentives
• gas prices should be delinked from oil
• gas stocks needed?
Synergies and tensions …
Climate, Security and Liberalisation
Liberalisation
Environment
Security
Stronger EU role:
‘take charge of destiny’
Renewables
Decline of coal
Nuclear stagnation
Gas into transport
Gas into electricity
*
*
**
**
?
**
**
**
**
?
*
**
**
**
xx
xx
**
x
Linking the climate levy, trading &
negotiated agreements
Climate levy:
all business but blunt
Incentive to join reduced rate (2)
Funded
programmes
Incentive to
negotiate reduced rate (1)
Emissions trading:
Information / allocation
large producers
Efficiency & credibility
Negotiated
Agreements
GHG coverage
Emission source
CO2 from direct fossil
fuel combustion
CO2 from process
sources
Other GHGs from
process sources
CO2 from electricity
generation
D = Directly affected;
IPPC
D
CCL CCLA EUETS
D
D
D
D
D
D
D&
I
I
I
I = Indirectly affected
D
UK ETS internal interfaces
CCLAs with
relative targets
allowances
Gateway
CCLAs with
absolute targets
Direct entrants
with absolute
targets
(financial
incentive)
Emission
reduction projects
credits