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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