Canute’s Fallacy

Last week the Royal Academy of Engineering published a not-much-reported paper on the changes needed in the UK energy infrastructure in order to meet the Government’s commitment on carbon emissions. Unlike many of the plethora of Government-sanctioned studies, this is a neat and concise paper, which aims to highlight the extent of the changes required to energy supply as well as demand in order to hit the 2050 target of reducing UK emissions by 80% below 1990 levels. When considering that there has already been a reduction of 21% in emissions since 1990, this means reducing the greenhouse gases emissions from the current 600 MtCO₂e to approximately 150MtCO₂e.

This paper considers a number of future scenarios, ranging from maintaining energy demand at current levels to reducing them significantly. Demand is categorised into four main areas: Low grade heat, used for space and water heating, high-grade-heat as required for many industrial processes, energy for all electrical appliances, both domestic as well as industrial, and all forms of transport. As can be seen in the table below, by far the greatest savings envisaged are in the production of low-grade heat, principally through the unexciting means of insulating the notoriously draughty UK housing stock. The forecast reductions in overall energy demand range from around 25% to 50%.

Projected changes in UK energy demand 2050

On the supply side, the paper is at pains to emphasise that the decarbonisation of energy production should be obtained using technology that is readily available. Given that the economic lifetime of much of the energy production and distribution infrastructure is in excess of fifty years, this is not an unreasonable assumption. However, for all those inferring a conservative approach by the report’s authors, should review the projections on renewable energy. Currently, the UK’s installed capacity of renewable energy production is approximately 5GW. This report forecasts a thirty-fold shift in capacity to 157GW. Some of the implications are staggering. For offshore wind, this is equivalent to installing an 80m-tall wind turbine every day to 2050, while for solar energy, approximately 36m² of solar panels will have to be rolled out.  Similarly, extracting energy from the sea will require 1000 miles of wave machines, which is greater than the distance from London to Inverness up the North Sea coast. However, what is even more striking is the requirement for biomass (read bio-fuels, wood, organic waste matter etc.) to represent practically as much production capacity as all other forms of renewable energy put together.

The remaining forms of low-carbon energy are nuclear power and fossil-fuel plants with carbon capture and storage (CCS).  In order to compensate for the reduction in fossil fuel usage, these forms of energy generation should increase from 5.4GW (current average nuclear power capacity) to anything between 70 and 30 GW. The stark nature of the change required is shown in the figure below.

Projected changes in UK energy supply 2050

These graphs however don’t do justice to the scale of the challenge, both in reducing the generation infrastructure, as well as completely overhauling the distribution systems, on a scale that eclipses the development of the North Sea offshore infrastructure. Moreover, as these targets can only be achieved if either heating or road transport is weaned off fossil fuels and onto electricity, this will have enormous impacts upon the electricity demand profile, as well as require the creation from scratch of a distribution system designed to support electric vehicles. These challenges are compounded by the rapid erosion of the UK’s engineering base. For example, between 2001 and 2006, there was a reduction of around 45% in electrical engineering students at UK universities, a problem compounded by the fact that subsequently 60% of them did not then take up careers in engineering.

The report does not assess the economic merits of each carbon reduction strategy, nor does it try to estimate the overall cost of such an undertaking. It simply, and quite eloquently, states that the scale of the engineering challenge is massive, and will be highly unlikely to be achieved in the current regulatory regime, as market forces alone do not provide adequate incentives to companies to carry out the required investments.  In a nutshell, turning government rhetoric into reality will require “nothing short of the biggest peacetime programme of change ever seen in the UK”.

By far the most reported-on and discussed environment-related news item last week was the announcement by the Crown Estate of the successful bidders for nine offshore wind farm sites around the British coast. This will allow for the creation of 25GW renewable capacity, dwarfing the current 700MW capacity already installed, and the further 4.7GW capacity either being built or going through planning stages.

To put this into perspective, the current electricity generating capacity in the UK is around 83GW, meaning that this project alone will allow the UK to meet the EU target of producing 20 percent of energy from renewable sources by 2020. It has already been compared in scale and importance to the development of the North Sea oil and gas offshore production of the 1980s. Indeed, it ties in neatly with the rapid exhaustion of these fields.

There are however, a number of serious obstacles that need to be overcome in order to meet the set targets. First, as highlighted by the Carbon Trust, the economics are still not terribly favourable to investors, something that is not being helped by the expiration of the favourable Renewables Obligation subsidy scheme in 2014, and the current weakness of Sterling compared to the Euro. In addition, there are the technical challenges associated with building wind farms at a rate five times that currently being achieved, in water that is deeper and further away from land than current offshore wind farms. An analysis by consultants to the Crown Estate highlights the difficulties in developing the a supply chain on this massivescale. Key concerns include the lack of competition in the development and manufacture of the turbines themselves, with only Siemens and Vestas having a proven capability in offshore wind generation, a limited supply of sub-components such as gearboxes, a lack of suitable vessels and port facilities, and a shortage of players capable manufacturing high voltage subsea cables.

Apart from these not-insignificant issues, and the massive challenge in acquiring the necessary capital to finance such a massive undertaking, there remains an additional critical factor that needs to be overcome if offshore plants on this scale are to meet their potential. Generating the energy is only half of the equation, the second being distributing it to end-users when they require it. This will require an investment in a distribution network on a scale and cost similar to that to developing the wind farms themselves.

One key initiative was kicked off in December, when nine EU countries, Germany, France, Belgium, the Netherlands, Luxembourg, Denmark, Sweden and Ireland and the UK, signed a declaration of intent to build a North Sea grid that will link offshore wind farms, tidal power stations and Norwegian hydroelectric plants to customers. The scale of this grid will overcome the main problem associated with many forms of renewable energy, namely that its supply irregular, and is often sourced away from the main areas of demand. When pooled together, a widely spread collection of wind farms can produce a more steady flow of energy than a single plant, while hydroelectric plants can be used to add additional power when required, or act as giant storage facilities when power levels are in excess of demand.

Although perhaps less headline-grabbing than the Crown Estate’s announcement, this investment in a pan-European distribution grid is more significant, as it indicates that perhaps the EU is beginning to truly beginning to live up to its mantra of leading the world in the quest of decarbonising its economy. Such a grid will not only inevitably improve the economics, reliability and feasibility of a wide range of renewable energy initiatives, but also start to tangibly address the energy security issues faced by much of Europe.

The text of the Copenhagen Accord, starts off so promisingly, with a practically Hollywood-esque statement, underlining that “climate change is one of the greatest challenges of our time”, evoking the booms of rising orchestral music as hoards of alien spaceships gather menacingly over the White House. The document, unlike most international treaties and conventions, can hardly be described as being a weighty time, given that it barely covers two and a half sheets of paper. It goes on to acknowledge that an average increase global temperature of 2 degrees Celsius should not be exceeded, and this must be achieved by deep cuts in global emissions.

The remainder of the document covers what’s been agreed to do about it, and really on the face of it, there is little to write about. There is the intention of mobilising $100 billion a year by developed countries for mitigation, adaptation, tackling deforestation and technology transfer to developing countries, with small island states and poorer countries being at the top of the beneficiaries list. In addition, all countries need to submit their targets for emissions reductions by the end of this month.

While all this sounds good, all these are subject to a blanket caveat to the effect that the time-frame for emissions peaking for developing nations (which now form the majority of global carbon emitters) will take place in an as-yet-unspecified longer timeframe, while social and economic development and poverty eradication are the overriding priorities of developing countries. This sounds very much like a “Get out of Jail” card, and has fuelled the criticisms of the Accord, the most colourful of which was provided by Greenpeace, who claimed that Copenhagen was “a crime scene with the guilty leaving for the airport.”

But taking a step back, first consider what the aspirations for the Conference were, at least to the more environmentally-concerned participants. Japan and the European Union committed themselves to reducing carbon emissions by 20% over 1990 levels by 2020, with the EU prepared to extend this to 30% if other countries played ball. The USA only promised more modest cuts in the order of 17% over 2005 levels. Looking at what was leaked during the meeting, a proposed longer-term aspiration of an 80% cut by 2050 mysteriously disappeared in the last couple of days, while any linkage between emissions and the resulting increase in global temperatures is missing. This is the key failing of Copenhagen. Although the accord does set a limit for temperature increases, there is no agreement, nor indication, be it binding or indicative on how this will be achieved. It seems to me very much a case of let’s cross our fingers, and hope that the promised emission reductions will serendipitously lead to the hoped-for control of global temperatures. The absence of jointly-agreed targets will, in my opinion, severely reduce the incentive for individual countries to unilaterally agree to pursue reductions, as this may raise the fear of loss of economic and industrial competitiveness.

The lack of any binding outcome on emissions was much in line with the objectives of China and India. Prior to the conference, China and India were using the more nebulous notion of reducing carbon intensity by 40-45% and 20-25% respectively. A quick dabble with a spreadsheet indicates in the case for China, an average GDP growth rate of 4% over this period, would mean that there would be no overall reductions in emissions. Given the growth in the Chinese economy that has already taken place between 2005 and 2009, no further economic growth for the next 10 years would still see emissions cut by only 15%. China has since been very keen to scotch any insinuations that it deliberately tried to scupper the conference, as was most eloquently suggested by Lars-Erik Liljelund, the director general of the Swedish environmental protection agency when he said “China does not like numbers”.

The two positives to be taken from Copenhagen is that all countries now acknowledge the need to reduce carbon emissions, and obligations for doing so are the responsibility of all countries, and not simply the handful of Annex 1 signatories of the Kyoto protocol. The announcement of $100 billion a year in aid to help poorer countries combat climate change, while certainly headline-grabbing, is less significant. To put this into context, this is less than 0.25% of the OECD GDP, and well below the UN’s target of 0.7% of gross national income of developed countries to be channelled towards development aid. As put by Sudan’s representative this is significantly less than the global bailout of banks.

The clear casualty of Copenhagen has been the consensus-driven process and the ambition of some of its players. Trying to get consensus among nearly 200 participants was always destined to failure. The baton now passes to organisations such as the G20 and other economic and political blocs, to take on leadership in combating climate change. This should not be seen as a step backwards, as these organisations are more suited to driving through agreement leading to tough action. Moreover, the absence of overall emission reduction targets, should not prevent countries from seeking in reducing emissions across the board, across all industries and economic sectors. Each individual initiative, be it related to carbon markets, tackling deforestation, aviation and so on, are best tackled through specialist organisations, rather than through cumbersome United Nations summitry. Copenhagen should therefore be viewed as the beginning of many parallel journeys, rather than the missed destination of a triumphal march.

Last week’s edition of The Economist featured a comprehensive briefing on Smart Grids, which will be able to “avoid outages, save energy and help other green undertakings, such as electric cars and distributed generation”. In order to confirm its status as an over-hyped industry, NASDAQ last month launched an index of companies that are primarily involved in components of smart grids. These include electric meters, networks, sensors, energy storage and software.

So, are smart grids really going to change the face of electricity distribution, and have a meaningful impact upon carbon emissions? In a nutshell, I believe that the answer is yes. For too long, power distribution has been an un-sexy industry that has lagged behind communications and information technology industries. To the uninitiated, innovation appears to have been lacking. In fact very few new household names have appeared on the scene in the past decade or so, and the few companies that have made the headlines, have done so for the wrong reasons. Enron, anyone?

Simply put, the current energy distribution infrastructure was designed to link a small number of large energy producers to an immeasurably larger number of energy consumers. For example, in the UK, the approximately 25m households are served by around 180 large power plants dotted around the country. Energy flows in only one way and is managed centrally by the National Grid’s control centre near Wokingham in Berkshire. If this energy transmission model is akin to broadcast TV, where a relatively small number of broadcasters serve a large number of viewers, then is the Smart Grid the energy world’s equivalent of peer-to-peer file sharing, where control is decentralised and energy flows both ways?

Certainly, the players appear to be the right ones, with companies such as Google, Cisco, Microsoft and IBM have all moving into this space. Both Microsoft and Google offer web-based energy use management systems - called PowerMeter and Hohm respectively - that collate and organise the information transmitted from a smart meter. Cisco, too sticks to its core competencies and focuses on providing Internet-based technologies for the management of communications between different components of the smart grid. Cisco openly states that the genesis of smart grid systems is analogous to the Internet. So is this simply wishful thinking, and if not, how can the smart grid help combat climate change?

The first is by introducing demand management. In its most crude form, energy companies already carry this out by offering tariffs that distinguish between peak and off-peak usage times. An analysis of the profile of electricity consumption of a typical UK household shows great variability between peak demand in the evening and the trough in the early hours of the morning. If the demand profile could be levelled out by adjusting the activity of appliances such as dishwashers, washing machines and fridges, then the amount of spare generating capacity can be reduced. The impact this can have is limited by the fact that much peak energy use is accounted for by lighting, cooking and consumer electronics, none of which are of much use at three o’clock in the morning!

The second, and perhaps more effective, use of smart meters is simply in making people more aware of how much energy they are using, and what appliances are responsible for most consumption. This on its own should result in an overall reduction of energy consumption. Clearly, it is difficult to predict how much energy can be saved, but studies  indicate average savings of between 0 and 15% of energy consumption. Given that according the UK Energy Digest, domestic use accounts for approximately half of the electricity consumption, this alone can result in approximately a 1% reduction in UK emissions.

However, the clincher for the development and roll-out of the Smart Grid is that the current infrastructure will struggle to cope with the forecast growth in renewable energy generation. Although in my previous post, I shared my scepticism whether micro-generation will ever serve more of a purpose than simply providing a feel-gut feeling to soothe one’s conscious, macro-renewable generation will place an important role in emissions reductions. These inherently involve much greater variations and fluctuations than most other types of power generation, thereby requiring more sophisticated ways of managing and distributing the energy.

As a result of the above, the electricity distribution industry is undertaking a much-belated investment in technologies befitting the 21^st century, rather than the 1960’s infrastructure used to date, with the added benefit of post-crunch stimulus package investments. While in itself, the smart grid does not solve the emissions conundrum, I very much suspect that like the Internet, this new infrastructure will spawn off a wide range of innovations that may well change the way we live.

On the face of it, micro-generation appears to provide many of the answers to the many of the more intractable problems pertaining to emissions reductions? How can we rapidly increase the energy produced from renewable energy without very capital-intensive investments in large power plants such as nuclear or offshore wind farms, while at the same time putting in place the distribution infrastructure to get the power from where it is produced to where it is needed? The answer is simple, generate the electricity where it is needed. In this way, not only do you dispense with the need to shift the power from one part of the country to another, but it also reduces the cost of this energy to end consumers, as they can sell whatever energy they do not consume. The gird becomes a sort of electronic exchange for buying and selling power, an energy ebay of sorts.

Or is it that simple? Recently, the DIY chain B&Q announced that they will no longer be selling wind turbines for domestic use. A report by the Carbon Trust found that when installed in urban locations, micro wind turbines have a yield that is significantly below 10%, while in rural areas a yield of up to between 15% and 20% can be achieved. This is however only possible if care is taken when siting the turbines, focusing on the crests of hills, isolated buildings and landscape that is clear of obstructions.

Wind Turbine Power Curve - Source: The Carbon Trust

The main reason for the low yield or capacity of urban sites is the poor quality and low speed of wind in urban settings. Most wind turbines have a cut-in speed below which no power is generated. This is typically around 3-4 metres/second. As the wind speed increases, so does the power output until the rated power is reached, beyond which no further power increases are possible. For most turbines, this is in the order of around 11-13 metres/second. Above their cut-out speeds, no energy is generated. When compared with an average urban wind speed of around 2 – 3 metres/second, the limitations of micro generation are apparent. A study carried out by the consultancy firm Encraft showed that the average generation of a set of micro turbines in a variety of urban settings was 214Whr/day. Given that the average household electricity consumption is 4700kWhr per year, this means that such sites can generate 1.7% of a household’s average energy needs. This clearly will have an underwhelming impact upon the UK’s efforts to reduce its carbon emissions. In its report, the Carbon Trust comes to similar conclusions, estimating that the potential for wind micro-generation is to produce 0.4% of the country’s electricity needs, if 10% of households installed generators. In 2006, large-scale wind farm generation was 3 times this value.

This post has only considered the role of wind power, the most prominent type of micro-generation. There are several other candidates, including solar photovoltaic, heat pumps, and micro combined heat and power. In due course, I intend to have a look at all of these. However a study of the payback times of a number of these technologies indicated that installing photovoltaic panels would payback in around 80 years if no subsidy or grants were applied. This very cursory look leaves me therefore sceptical about the potential of micro-generation, although will hold my judgement until I consider the impact of feed-in tariffs in the UK.

Much has been written and discussed about the rollercoaster ride of the price of crude oil and many other commodities over 2008. But what about the cost of carbon credits? An examination of the price of European Union Allowances (EUAs) carbon futures contracts shows that the price of carbon allowances peaked on 1^st July , and as of the end of this month were trading at around 15 euros, which is approximately half the value at their peak.

Sounds familiar? Well, it certainly should. The price of crude peaked on 7 July, although the fall has been rather more marked, with futures contracts on the NYMEX being traded at around a quarter of their value in early summer. Comparing the trajectories of the prices of carbon and oil over the year shows a remarkably similar pattern. Of course, this should not come as a surprise. Carbon credits are effectively allowances for large EU emitters to produce a given amount of carbon dioxide. Given the current carbon-intensive nature of industry, it stands to reason that an expectation of a fall in industrial output should not only result in a decline in projected energy demand (represented by oil prices), but also in an expected decline in carbon emissions, and consequently in the value of a carbon allowance.

There are of course other factors at play. Analyst firm IDEAcarbon indicated that industrial producers were dumping carbon allowances in order to generate cash given that reduced output meant that they were now surplus to requirements. Moreover a report released by Deutsche Bank in early December forecast that lower production levels and a drive to meet Europe’s renewable energy targets would mean that in 2009 emissions from those companies participating in the EU’s Emissions Trading Scheme (ETS) would decrease by 10% compared to 2007. Although this has caused concern with traders, it should not cause a similar collapse as seen in the first phase of ETS, as any existing allowances will be carried on through to Phase 3.

Although some have questioned the EU’s allocation policy and the depressive effect the economic downturn is having on the price of carbon allowances, the truth is that this scheme was not designed to provide profit opportunities for speculators. The price of carbon is not an end in itself, but purely a market mechanism to cap EU emissions. Whether this reduction is achieved as a result of carbon pricing or through other mechanisms is quite incidental. As for the forecast for 2009? Analysts believe that the average value of EUAs over the next four years should be around 29 euros. However, it takes a brave man to make any sort of prediction in these turbulent days, and I firmly believe that discretion is the better part of valour.

It is difficult these days to ignore the media coverage of the global financial crisis, known to its friends as the Credit Crunch. Not content with slaying and humiliating venerable financial institutions, it is now turning its attention to the real economy, thereby transforming itself into a global economic crisis. No area of the economy seems to be immune. The price of oil and most commodities have plummeted, the cost of shipping goods across the world, regarded as a good proxy for trade, has fallen off a cliff edge, and the papers are full of stories of job losses and companies on the brink of bankruptcy.

Given that it is accepted that most developed economies are in for a recession, and possibly the most severe economic slump since the Great Depression of the ‘30s, what is the impact likely to be on carbon emissions and efforts to curb climate change? In this post, I have a look at some of the key relationships between economic output and carbon emissions, and the likely impact of the current economic slowdown.

The first step in understanding the relationship between economic output and emissions is to divide carbon emissions into its principal contributing factors. The Kaya Identity one way of doing this. Effectively it splits total carbon emissions into different components  - Apologies for the use of an equation in my blog - I cannot escape the engineer in me.

Carbon emissions from energy = Population x GDP per head x Energy Use/GDP x Emissions/Energy Use

In order to make any meaningful extrapolations based on economic output, it is necessary to understand how the energy required to produce a unit of economic output and the carbon intensity of that energy vary with changes in economic activity. Thanks to the excellent Climate Analysis Indicators Tool (CAIT), it is easy to make such an analysis. Broadly speaking, in advanced economies, the both the carbon intensity of energy use and the energy intensity of economic output have been steadily declining over the past three decades. This is a result of technological improvements as well as a shift towards service and IT industries, which are less carbon-intensive.

It is therefore useful to have a look at what happened in previous economic downturns. The most recent significant recessionary period to hit Western economies was in 1991. An examination of the emissions in the UK at that period actually shows an increase in emissions in that period. This indicates that for advanced economies, the link between emissions and economic output during a recession, is tenuous at best. Other studies examining emissions patterns in Japan, the US, the European Union and Australia also agree that in the case of mature economies, changes in patterns of income do not necessarily drive similar patterns in emissions.

UK economic output and emissions. Source: CAIT

A useful case study for understanding how emissions vary in developing economies can be seen by what happened during the 1997 Asian financial crisis, when the  economies of the Asean countries contracted by approximately 10% over that period. This was matched by a similar decrease in carbon emissions over that period. Analysis of other financial crises, including that in Mexico in 1995 and in Argentina in 2002 show identical patterns.

Effect upon emissions of Asian Financial Crisis of 1998. Source: CAIT

It is however difficult to make use of previous financial crises as a guide to what is likely to happen this time round. One key difference is that this financial crisis is not regional in nature, but is truly global, and is occurring in a world that is much more interconnected than during any other downturn. Reduction in consumption in developed countries is likely to have a knock-on effect upon production in developing countries, most prominently China, which is responsible for approximately 14% of global emissions. In fact, the most significant downturn in OECD emissions occurred not as a result of reduced economic activity, but as a result of a hike in energy prices during the 1973 oil crisis and the oil shock of the early 1980s.

Relationship between price of oil and OECD emissions

It therefore remains to be seen what will have the biggest effect, whether it is a reduction in emissions due to reduced consumption and manufacturing, or an increase due to the less favourable economics of renewable energy. There is concern that the current slump and falling oil prices will delay capital investment in renewable energy. The Guardian reports that analysts calculate that wind energy in the US is attractive at oil prices of $147 per barrel, more than double current prices. Time will tell whether politicians will continue to uphold pledges to increase the share of renewable energy as the economic slump deepens, or whether it was simply yet another case of hot air.

One of the most-discussed approaches to tackling climate change is by attaching a price to carbon emissions. Carbon-trading refers to all the market-based schemes whereby companies can buy or sell a right to emit greenhouse gases. This post covers some of what I believe are the more salient points regarding the buying and selling of emissions allowances.

In January 2005, the European Union established the Emissions Trading Scheme (ETS), which is now by far the world’s largest carbon market. This is an allowances market, whereby the emitters in the five industries that were initially covered by the scheme (electricity, oil, metals, building materials and paper) are allocated a certain level of carbon emissions. In total, approximately 12,000 energy and industrial plants across the EU fall within the remit of the ETS. Where the actual emissions are below those allocated, the holder of the emissions can sell on these allowances, in the form of EU Allowance Units of one tonne of carbon dioxide (EUAs), to other companies who need these certificates to allow them to emit more carbon than they hold allowances for. Conversely, where a company’s projected emissions are in excess of its allocation, it can purchase additional EUAs. Where it fails to do so, it will have to pay a fine of 100 euros per excess tonne. This therefore acts as an upper limit on the price of one tonne of carbon dioxide that can be traded. In order to police the scheme, all EU countries are required to maintain a national registry to track the allowances and actual emissions of each emitter. There is now a thriving trade in these carbon commodities.  According to the World Bank, in 2007, 50 billion US dollars worth of ETS allowances were traded, an increase of approximately 100% over the previous year, and six times that transacted in 2005, clearly indicating that this is a sizeable commodity on the upward path.

The second source of carbon credits lies outside the EU. The ETS allows operators to purchase carbon credits in the form of Certified Emission Reductions (CERs). These are reductions in developing countries that are funded by EU operators, under the premise that more cost-effective reductions in emissions than can be achieved by reducing the emissions in developing countries than within the EU. These projects are organised through the Clean Development Mechanism (CDM) of the Kyoto protocol.  This scheme has come under serious criticism recently, mainly because large companies find they can raise more money from damaging by-products than from their main output. The Economist magazine reports that projects to cut emissions of HFC-23, a chemical used in the manufacture of fridges whose warming effect is 11,700 times that of carbon dioxide, cost about €1 to produce a carbon credit worth up to €11. Although the scheme was designed to provide funds to finance initiatives which would not have otherwise taken place, The Guardian and the BBC found numerous examples where companies could have justified the changes on straightforward commercial grounds without the additional funding. The key principal is that of “additionality”, that is the cuts in emissions would not have taken place without the extra funding, and there are serious questions about whether the criteria are being applied correctly.

The Emissions Trading Scheme - Phase 1

The first phase of the ETS was from 2005 to 2007, and covered approximately 40% of EU carbon dioxide emissions. Like all other commodities markets, a significant proportion of trades are carried out by speculators, keen to profit from what can be potentially rapidly appreciating commodity. However, these speculators got their fingers badly burnt in 2006, when the price of an EUA fell from $30 to $10 on news that the original emissions allocations were so generous, that there would be no need for much emissions reductions.

The Emissions Trading Scheme - Phase 2

The second phase of the ETS covers the period 2008-2012. In designing it, the European Commission worked hard to ensure that there will be a shortfall between the demand for carbon emissions and the total allocation. This has proved to be an extremely difficult exercise to carry out, as the emissions growth over the period will depend upon weather patterns, energy prices, policy initiatives, oil and gas prices as well as the emissions cap and price of carbon. The EU estimates that the cap for Phase 2 will result in emissions being six percent lower than those measured in 2005, and seven percent below those measured in 2007. The World Bank agrees, and calculates that the annual shortfall of at least 100 Mtonnes of carbon dioxide per year, and on average around 200 Mtonnes. Moreover, it believes that the cost impact upon the customer will be negligible. In Phase 2, the EU focuses much of its attention on power generation, as not only are mitigation opportunities deemed to be cheaper than for other sectors, but it faces limited exposure to competition from outside the EU.

One of the most controversial aspects of Phase II is the inclusion of aviation as one of the regulated sectors. In July, the European parliament voted to bring airlines into the ETS. Under the approved legislation, all flights landing or taking off from Europe are to be included in the scheme, and that 15% of the emission allowances must be bought by auction. The allowances granted will mean that airlines will have to reduce emissions by three percent from 2005 levels in 2012, and by five percent from 2013. Predictably enough, the airlines were not impressed. The European Regions Airline Association stated: “The European Parliament has no idea what the economic or social cost of the proposals will be and, even less so, their environmental impact“.  Friends of the Earth, on the other hand, claimed that the plan was “so weak, it will have little impact on the rocketing growth in carbon dioxide.” So given that the European parliament has managed to antagonise both sides of the arguments may provide an indication that it perhaps has reached a sensible balance. What is less clear however, is how this deal will impact efficiency of aircraft. Bill Glover, who heads Boeing’s environmental strategy believes that the easiest savings will be found by improved aircraft maintenance, changing flight styles, for example by adjusting rates of climb and descent, and by routing aircraft more efficiently. These are not too dissimilar from the advice given to motorists to reduce car fuel consumption. As per my previous blog entry on aviation, this remains one of the more difficult nuts to crack, and I remain to be convinced on the economic wisdom of these taxes upon air travel.

Moving on to Phase III

Moving beyond Phase II, the European Commission has proposed to reduce emissions to 20% below 1990 levels by 2020, and is prepared to bring this down even further to 30% if other developed countries (shorthand for the US) make similar commitments. The ETS is therefore being reviewed to bring it in line with these ambitious objectives. The main changes proposed are:

• Emissions to be reduced by 21% by 2020 compared to 2005 levels
• Emissions will be tracked in a single register
• Free allocation of allowances to be eliminated by 2020
• The power industry, and all other sectors able to pass along costs will face full auctioning by 2013

One of the key changes in Phase 3 is the reduction on use of credits from outside the EU, effectively stopping the issuing of any new CERs after 2012. This stemmed from the EU’s aim to obtain meaningful commitments from other countries, and push through a successor for Kyoto. Nevertheless, several critics have stated that this will effectively stymie investment in carbon-reduction technologies in developing countries.

Carbon Prices - Source: European Climate Exchange

Reviewing the prices of Phase 1 and Phase 2 EUA allowances clearly shows the crash in prices that occurred in April 2006, when the first verified emissions reports were published which indicated that the allowances had been overly-generous. In the following year, greater consensus was developed that there were excess allowances being traded, and so these progressively became worthless. However, the Phase 2 allowances have been hovering for the past year between 20 and 25 euros. In particular in the period from March to June 07, the European Commission imposed considerably smaller allocations than those requested by member states, resulting in an increase in the price of Phase 2 allowances, while the recent easing in oil prices in July and August coupled with a worsening economic outlook have been reflected by a decline in the price of Phase 2 allowances.

The data above clearly indicate that the carbon market responds logically and consistently to inputs, and can therefore be considered as functioning well. The efficacy of such market-based mechanisms to put a price on the cost of carbon solution is not in doubt, save for some eco-socialist rants. In fact, the UK Government’s report on the Economic Impact of Climate change strongly recommends the establishment of a wider framework for setting a price for carbon. In order for this to be a success, there must be genuine scarcity in carbon allowances, these should be auctioned rather than given away freely, and there must be clear information relating to supply of allowances. Perhaps, most importantly, any scheme should be rigorously monitored and policed so as to maintain public and investor confidence in the programme, and prevent any reoccurrence of the April 2006 crash.
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The wind generation industry is currently on a roll. Global capacity is increasing at around 30% per year, and this year will exceed 100 gigawatts. A report published this week by the analyst firm Emergency Energy Research claims that investment in the United States alone could see it deliver 150GW of wind power by 2020, becoming the world leader in terms of installed capacity. This year alone has seen US wind capacity increase by approximately 45%, largely fuelled by a federal production tax credit (PTC), which provides tax income relief equivalent to 2 cents per kW-hour produced by a qualified wind facility. The effect of this tax upon wind investment in the United States can easily be seen from the sharp drops in capacity additions that were observed in 2000, 2002 and 2004, all years where the tax credit expired as was not renewed for a number of months.

American wind power investment - American Wind Energy Association

There is currently a lot of heated debate about extending the tax credit, which is due to expire at the end of this year. In what appears, at least to an outsider, as a typical example of ‘pork barrel’ politics, the current extension was passed as part of the Tax Relief and Health Care Act of 2006. Amongst those lobbying for its extension, is Google’s charity foundation, one of whose programmes is to provide investment in technologies and programmes that can result in the development of renewable energy at a price cheaper than coal. This is supported by the American Wind Energy Association who claims that thousands of jobs are at risk if this credit is not renewed. It somehow appears to me that this is another case of a lobby group crying wolf. For example, GE’s wind turbine business is worth approximately $6billion annually, and is unlikely to shut down such a large-scale operation overnight. A further criticism is observed in the Stern Review which highlights that providing a technology-neutral incentive can entrench an advantage of longer-established technologies, which is the primary reason why on-shore wind power has been the principal beneficiary of the PTC, now accounting for 92% of new capacity in renewable power generation.

An alternative approach to lowering the cost of renewable energy is what’s known as feed-in tariffs. Basically this involves the electricity companies buying renewable energy from those generating it at prices above the market price for electricity, and sharing the cost amongst all its consumers. In Britain, such policies are supported by both the Conservative and Liberal Democrat parties, as well as several environmental groups such as Friends of the Earth. The Stern Review reports that feed-in tariff price support mechanisms result in larger deployments at lower cost. Both Spain and Germany have feed-in tariffs and both installed more than twice as much wind power in 2006 than in the UK managed.

Wind Power Investment UK compared to Germany and Spain - REN21

Such an approach would replace the current UK mechanism, known as the Renewables Obligation. This requires all power companies to produce a certain proportion of power from renewable sources, and gives them the opportunity to buy and sell credits. However, due to problems in getting planning permits approved for wind turbines, there is simply not enough renewable energy being produced, and the energy providers have to buy credits from a handful of providers, thus pushing up prices. Although there is about 2.4 gigawatts of capacity in the UK, according to Greenpeace there are approximately a further nine gigawatts currently passing through planning applications across the land. The British Wind Energy Association claims that many of them have been in stuck for up to five years. A quick scan across news sites indeed highlights several schemes across the country from the Lake District to the Essex coast where proposals for wind farms have fallen foul of local nimbys.

This lack of consistency and transparency is clearly having an impact upon wind investment in the UK. The current planning regime allows for local planning authorities to force a public enquiry on all wind farm applications. To date, with one exception, all large onshore wind farm applications in England and Wales have had to go through this hurdle, yet of all the schemes that went to enquiry, all but one were accepted, raising the question of the usefulness of the process. The Government is responding to criticisms by the environmental organisations and energy providers by introducing new planning legislation which will create an Independent Planning Commission to decide on nationally-significant projects. For wind farms, this means that projects with a capacity in excess of 50MW will be decided by this body, based on policy defined by the Government and within a fixed timeframe of nine months. While this change should hopefully provide greater clarity to the application process, it is nevertheless worthwhile pointing out that smaller projects will still have to go through the same process, and that the legislative changes being proposed will not apply to Scotland, where the biggest opportunities lie.

When deciding to have a look at the principal issues relating to wind energy, I was expecting to be focusing on technical issues such as power distribution and connection to the grid. However it became clearly obvious that the principal technical issues have been resolved, and wind turbines are as efficient as they are ever likely to be. Instead, the successful rollout depends on the twin factors of financial incentives and planning frameworks. Only where these two are addressed properly, has wind power ever really taken off.

It is one of the more clichéd scenes in a war film, often just before the credits start to roll. The exhausted vanquished or victors look up to the skies on hearing the drone of aircraft overhead, to be greeted by a shower of leaflets encouraging surrender or claiming that resistance will be futile. This is what came to mind when I was at Stansted Airport yesterday evening waiting to pick up some relatives. An advertisement poster by an industry organisation whose name I fail to recall, said that it was promoting the “a sustainable growth of air travel of 5% each year”.

That got me wondering on how significant an impact air travel has upon climate change. On one hand, at the moment, air travel represents one of the more intractable problems. While there have undoubtedly been significant improvements in the efficiency in aircraft over the past few decades, no-one disputes that they remain intractably tied to the use of fossil fuels. Unlike most forms of land-based transport which can be (relatively) easily rectified, there does not appear to be any technological improvement on the horizon which would decouple air transport from the use of kerosene as a fuel. The International Panel on Climate Change concluded that “there would not appear to be any practical alternatives to kerosene-based fuels for commercial jet aircraft for the next several decades.”

With this in mind, the current 1.6% of global greenhouse gases starts to take on a more ominous perspective. The IPCC estimated that taking into consideration the increased impact of carbon emissions at high altitudes, air transport will account for approximately 5% of the total warming effect by 2050.

An article in last week’s New Scientist looked at the opportunities that can be provided by using biofuels for air travel. This highlighted a number of technological improvements that lower the freezing temperature and increase the energy content of biofuels so as to make them a feasible alternative to kerosene. A much publicised Virgin Atlantic test flight from London to Amsterdam consumed twenty-two tonnes of fuel of which only 5% was neat biofuel. Even so, this required the equivalent of 150,000 tonnes of coconuts. This clearly points to the crux of the problem. Although it may be technological feasible to replace kerosene with plant-derived fuels, doing so will require enormous amounts of biomass. For example, the current favourite biomass, the Jatropha nut yields about 1.7m tonnes of biofuel per hectare, which would mean that a land area twice the size of France would have been required to fuel all of 2007’s air transport. The article points to the use of algae as the most promising source of next generation biofuels. Although there remain several technological challenges that still need to be overcome, the potential yield is 36 tonnes of biofuel per hectare, meaning that 2007’s fuel consumption would require one-twentieth of the land to produce it as compared to the Jatropha nut, although this is still equivalent to the area of Ireland. This seems to point to a negligible impact for biofuels upon the carbon emissions attributable to air travel.

So lets return to the aviation industry’s objective of increasing air travel by 5% per annum. What will its impact be upon global carbon emissions? The UK Government commissioned QnetiQ to assess carbon emissions from civil aircraft so as to support the IPCC’s work. This report points to two important factors:

(1)    An annual offered increase in seats-km offered of 5%, will require an increase in distance travelled of 3.78%.

(2)    The fuel efficiency improvements that can be expected are:

1.3% per year to 2010

1.0% per year to 2020

0.5% per year beyond 2020

Applying these figures show that carbon emissions due to air travel will double in the period to 2030, to around 1.4 GtCO₂e, by which time it will represent 3% of global emissions. Post 2030 should see a significant decrease in emissions if carbon stabilisation is ever to be achieved, such that by 2050, aviation will represent 10% of emissions, which is way in excess of the IPCC’s 5% estimate.

Growth in Air Travel and Associated Emissions

Clearly the aviation industry’s figure of sustainable growth of 5% per year is clearly a case of pie in the sky, certainly in the long term. Even George Monbiot, in his wildly optimistic handbook on how to achieve a 90% cut in emissions by 2030, gave up at finding relatively painless solutions to the problem of ‘love miles’ and proposed rationing permits for long-distance travel as the only practical solution. A number of measures including the application of a carbon tax on air travel, and the development of alternative modes of long-distance travel will certainly curb the upward demand for air travel, but without some unexpected radical technological breakthrough, air transport will remain one of the stickiest problems in the climate change puzzle. As most of my family lives in excess of 2000km away from my Reading home, this is also a very personal problem.