May 2 2017 watch

May 2, 2017

From 8 to 18 May the UNFCCC, the climate body of the United Nations, will hold a climate change conference in Bonn that will “start in earnest the process of putting flesh on the bones of the Paris Agreement”, as David Hone, Chief Climate Change Advisor at Shell, puts it in his long-running blog on the Shell website.

In a recent blog post (20 April), Hone specifically looks at the implications of Article 6 of the Paris Agreement, which allows for the possibility of countries to trade carbon credits with each other, i.e. to fulfill part of their national commitments (NDCs) not by reducing their own emissions, but buying emission reductions achieved by other countries.

Article 6, however, does not much more than allow for the possibility of carbon trading. It does not say how this should be organised. That has still to be negotiated.

Hone, who is also board member of the IETA (International Emissions Trading Association), created in June 1999 “to establish a functional international framework for trading in greenhouse gas emission reductions”, and supported by big energy companies like Shell, BP, Chevron, BHP Billiton, Enel, Rio Tinto, and RWE, describes in his blog post how he believes Article 6 could be developed, based on the views of the IETA.

In summary, the IETA views Article 6 as follows:

• Article 6.2 – Underpins carbon trade between countries as cap-and-trade systems are linked and emitters seek to optimize their mitigation economics; e.g. California-Quebec (i.e. USA and Canada).
• Article 6.4 – Offers a means of assigning units to mitigation actions, both at the project level and the system / sector level. This is a pre-requisite for trade.
  • Create allowances for a cap-and-trade system at national level.
  • Create credits within a sector baseline-and-credit system.
  • Create CERs [certified emission reductions] for a specific project.
  • Certify carbon sequestration.
• Article 6.5 – Changes the accounting for cross-border carbon trade, but particularly for project based units.
• Article 6.8 – Non-market approaches, such as the Kigali Amendment to the Montreal Protocol, can offer solutions in areas that are not as well suited to emissions trading, therefore supporting the development of more robust carbon markets.

However, this is just a start, Hone notes. The “challenge” is to come up with a framework “that can be built on as more granular rules, modalities and procedures are required to fully define the operation of Article 6. That more granular work will likely emerge after COP24 in 2018 …”

For the upcoming conference in Bonn, the IETA has written “a straw-proposal for negotiators to consider, in a format that would be suitable for inclusion in a COP24 Decision” (the proposal has not been published, but can be obtained by the IETA at secretariat@ieta.org).

One major problem of carbon trading is that it can lead to “double-counting”. This is “easily managed in conventional cap-and-trade systems, such as the linked Quebec-California system (Canada-USA), but is more complex between nationally determined contributions (NDCs) which may not be similar in structure”, writes Hone.

The IETA has chosen to “follow a route that requires quantification of the NDCs, even if their initial basis is not in terms of absolute emissions. For example, the IETA definition of an internationally transferred mitigation outcome (ITMO, as given in Article 6.2 of the Paris Agreement) has a specific reference to quantification, that is later used to ensure double-counting cannot take place.”

Hopefully, Hone concludes, the IETA proposal will “help accelerate the negotiating process and leads to an outcome that is both suitable for the Parties themselves and workable for the business world that the Parties will likely turn to for full implementation of the Paris Agreement.”

***

Not everybody is enthusiastic about the idea of international carbon credit markets, however. Indeed, a study prepared for the European Commission, published in March, takes a highly critical stance towards international credit schemes.

Inside Climate News summed up the study with the headline “Carbon credits likely worthless in reducing emissions” and wrote that “schemes allowed by the Paris climate agreement won’t help countries reach their reduction targets and should be phased out”.

That is perhaps a little bit exaggerated – but not much.

The study looked in particular at the existing Clean Development Mechanism, based on the Kyoto Protocol, which will end when a new framework, based on the Paris Agreement, will be agreed on. It draws devastating (but not entirely new) conclusions about the functioning of the CDM, in particular about the “additionality” of projects. Buying credits for a project is only useful if a project would not have been carried out otherwise (if it is “additional”), but the overwhelming majority of CDM projects (73-85%) have a “low likelihood” that they are additional, according to the study.

The authors then also look at how their findings “could be applied more generally both to assess the environmental integrity of other compliance offset mechanisms, as well as to avoid flaws in the design of new mechanisms being used or established for compliance.” They note that “many of the shortcomings identified in this study are inherent to crediting mechanisms in general, not least the considerable uncertainty involved in the assessment of additionality and the information asymmetry between project developers and regulators.”

After analysing the CDM projects, the authors come to a number of “key findings” that they write should be applied to a future framework:

• Most energy-related project types (wind, hydro, waste heat recovery, fossil fuel switch and efficient lighting) are unlikely to be additional, irrespective of whether they involve the increase of renewable energy, energy efficiency improvements or fossil fuel switch.
• Industrial gas projects (HFC-23, adipic acid, nitric acid) are likely to be additional as long as the mitigation is not otherwise promoted or mandated through policies.
• Methane projects (landfill gas, coal mine methane) have a high likelihood of being additional.
• Biomass power projects have a medium likelihood of being additional overall because the assessment of additionality very much depends on the local conditions of individual projects.
• The additionality of the current pipeline of efficient lighting projects using small-scale methodologies is highly unlikely because in many host countries the move away from incandescent bulbs is well underway. How additional is the CDM? 11
• In the case of cook stove projects, CDM revenues are often insufficient to cover the project costs and to make the project economically viable. Cook stove projects are also likely to considerably over-estimate the emission reductions due to a number of unrealistic assumptions and default values.

Based on these findings, they issue a number of recommendations, of which the most important is probably that, “given the inherent shortcomings of crediting mechanisms, we recommend focusing climate mitigation efforts on forms of carbon pricing that do not rely extensively on credits and on measures such as results-based climate finance that does not result in the transfer of credits or offsetting the purchasing country’s emissions. International crediting mechanisms should play a limited role after 2020, to address specific emission sources in countries that do not have the capacity to implement alternative climate policies.”

In short, the researchers – from the Öko Institut, Infras, SEI and Carbon Limits – believe Article 6 of the Paris Agreement should be implemented very selectively.

It will be interesting to see how this will work out.

May 2, 2017

You have of course heard about the record low prices in the German offshore wind auction held earlier in April, with three of four winning bids coming in at “zero euros”. That is to say, the projects will be built (by Dong and ENBW) at wholesale market prices, without subsidies (apart from the grid connections, which will be supplied for free). (We reported on this here.)

How are such low prices possible – beating even the already very low prices achieved earlier in Denmark and the Netherlands (as low as €50/MWh)? The secret, as it turns out, is that the projects will only need to be ready around 2025 – and that by that time manufacturers like Siemens and Vestas will be able to offer gigantic turbines.

As Bloomberg news agency reported, “offshore wind turbines are about to become higher than the Eiffel Tower, allowing the industry to supply subsidy-free clean power to the grid on a massive scale for the first time.”

“Manufacturers led by Siemens are working to almost double the capacity of the current range of turbines, which already have wing spans that surpass those of the largest jumbo jets”, writes Bloomberg. “The expectation that those machines will be on the market by 2025 was at the heart of contracts won by German and Danish developers … week to supply electricity from offshore wind farms at market prices by 2025.”

Bloomberg notes that “just three years ago, offshore wind was a fringe technology more expensive than nuclear reactors and sometimes twice the cost of turbines planted on land. The fact that developers such as EnBW and Dong Energy are offering to plant giant turbines in stormy seas without government support show the economics of the energy business are shifting quicker than anyone thought possible — and adding competitive pressure on the dominant power generation fuels coal and natural gas.”

“Dong and EnBW are banking on turbines that are three to four times bigger than those today,” said Keegan Kruger, analyst at Bloomberg New Energy Finance. “They will be crucial to bringing down the cost of energy.”

Dong has said it expects to be able to deploy turbines of 13 to 15 MW – almost twice as large as the largest, 8 MW machines on the market today.

If you think that’s amazing, Bloomberg adds that “the scale of the turbines may not even stop at 15 megawatts. In Albuquerque, New Mexico, a unit of Lockheed Martin is working on components for a possible 50-megawatt turbine that would have blades 100 meters long — each stretching further than two soccer fields. These gigantic blades would be able to fold away to reduce the risk of damage at dangerous wind speeds. Siemens, along with Vestas and General Electric, are advising on the research program that’s funded by the U.S. Department of Energy.”

The Danish government, by the way, has just confirmed that it expects the Danish renewable energy industry to operate without subsidies soon. The Danish energy minister, Lars Christian Lilleholt, said that “in just a few years,” renewable energy providers won’t need state support anymore. He added that it’s a development he couldn’t have imagined as recently as last year.

Lilleholt says the experience in Denmark “demonstrates that coal is no longer cheaper to produce than renewable energy. What’s more, the development is set to become more pronounced. ‘Everything suggests that technology will help make renewable energy more and more competitive’. And as green energy becomes more efficient, the minister warns that ‘already today, it’s impossible to build a new coal power plant without support.’”

Denmark is on target to have all its energy needs covered by renewables by 2050, with half that goal set to be achieved in 2030.

May 2, 2017

So Engie, OMV, Shell, Uniper and Wintershall have taken the plunge again and signed up to plunk down €950 million each for Nord Stream 2. Together they will finance 50% of the pipeline which is estimated to cost €9.5 billion. Gazprom will remain the sole shareholder of the company. Thus, Shell & Co will avoid the long arm of the Polish anti-trust authorities, who blocked the shareholdership of the companies last year. There is, presumably, no law against financing of any Gazprom project – as long as it’s not on a sanctions list…

The move comes as no surprise. The companies have said all along that they were looking for new ways to back Nord Stream 2. They are apparently prepared to face the wrath of the European Parliament and a number of Eastern European member states which are adamantly opposed to the new pipeline. The European Commission has also not been very enthusiastic. The Commission is still considering whether it could make the pipeline (which runs in international waters through the Baltic Sea) subject to the unbundling and third-party access rules of the Third Energy Package, which would destroy its value for Gazprom. Chances that they will succeed do not seem to be very high, though.

***

The question is whether opposition to Nord Stream 2 makes much sense in the first place. Its opponents are motivated above all by a desire to strike at Russia, which they regard essentially as an enemy of the EU. (See the recent Energy Post panel debate on Nord Stream 2 here. See also this account of a recent debate in Brussels between supporters and opponents of the pipeline.) That in itself is a legitimate viewpoint. But there may be other, more effective ways to fight the Russian bear.

The European Commission has, in fact, shown the way, with its anti-trust action against Gazprom, which it started in September 2012. Gazprom in December last year submitted a proposal to settle the case. On 13 March, DG Competition announced it was satisfied with the proposals and invited third parties to comment by May 4 – i.e. this week.

So did the Commission “win” the case and manage to put the bear back in its cage? Some people have portrayed the settlement as a Russian victory (since Gazprom will not have to pay any fines), but according to a detailed assessment written by Jonathan Stern and Katja Yafimava of the Oxford Institute for Energy Studies (OIES), published on 21 April, the case is actually mostly a success story for Brussels.

They conclude that “Gazprom’s proposal for commitments has addressed all substantiated DG COMP concerns in respect of territorial restrictions, prices, and infrastructure. Their acceptance would provide insurance against any future abuse by Gazprom of its dominant position in central and eastern European member states. Most importantly, Gazprom has henceforth agreed to charge average weighted import border prices in Germany, France and Italy and/or prices at relevant generally accepted liquid hubs in Continental Europe, instead of alternative fuel (oil-linked) prices, despite the fact that at present west European border/hub prices do not (yet) accurately represent gas market conditions in either Bulgaria or the Baltics (and only in the past one to two years, and only approximately in Poland). This means that if the proposals are accepted, buyers in these countries will be able to buy Russian gas at prices which otherwise would not have been offered to them until interconnections had been established with northwest European hubs (potentially up to three years hence).”

For more (fascinating) details, I recommend reading the whole paper. Perhaps the most important upshot of the case, according to Stern and Yafimava, is that “Gazprom has committed to introduce competitive benchmarks, including western European hub prices, into its price review clauses in contracts with customers in [Bulgaria, Estonia, Latvia, Lithuania and Poland]. These commitments will give the customers an explicit contractual right to request changes to their gas prices when they diverge from competitive price benchmarks, thus ensuring competitive prices in these countries in the future.”

This, note the authors, implies that any customer in Europe can henceforth demand gas Gazprom at prices equivalent to the “weighted import border prices in Germany, France and Italy” and “the prices at the relevant generally accepted liquid hubs in Continental Europe”. This commitment is not just important for Gazprom, they write, “but also for the pricing of gas in Europe generally, because they probably signal a definitive end to oil-linked/alternative fuel pricing. Any party in a price negotiation or arbitration can now argue that DG COMP has ruled that even if a country is not connected to a hub, ‘competitive pricing’ means west European border or hub prices, and this is universally applicable.”

In other words, this is a huge – virtually the final – step in the completion of a competitive EU gas market, in which all players, including Gazprom, will have to play by the same rules.

What this means in turn is that there is much less reason to worry about “dependence” on Russian gas. Although Gazprom has been growing its market share in Europe in recent years (last year it increased its sales to Europe by 12.5% to 179 bcm, to account for 34 per cent of the EU’s gas supply), worldwide there is no shortage of gas suppliers eager to sell gas (LNG) to Europe.

***

What this suggests, then, is that European countries that want to limit their economies ties to Russia, for political reasons, now hold all the cards in their own hands. They can choose to buy gas from Russia at competitive prices – or buy gas from other suppliers, e.g. U.S., Australian or Qatari LNG,  if they wish.

They can even go one better and reduce gas competition altogether, e.g. by investing in some combination of renewable energy with other low-carbon energy sources (nuclear power, coal with CCS). Even if not all EU countries choose to follow this route, it will still have an effect on Russia, by putting pressure on gas demand and thereby prices.

An example of a country that has done just that is Turkey. After Germany, Turkey is Europe’s biggest buyer of Russian gas. The country is 98% dependent on imports for its gas supply (which constitutes 26% of its primary energy supply). Its gas demand grew from just 15 bcm in 2000 to a high of 48.7 bcm in 2014, and – according to major Turkish player Botas – was expected to almost double by 2030 to reach 81 bcm.

This would have put Turkey in a very dependent position, mostly on Russia, so – as Gulmira Rzayeva writes in another important new paper from Oxford Institute for Energy Studies (OIES) – the government “initiated a policy of reducing the share of imported gas and increasing the share of domestically produced energy resources (mainly hydropower, coal, lignite, wind and solar energy) in the energy mix, particularly in the power generation sector.”

This was very successful: “The measures undertaken were effective in just a few years and resulted in an almost 27% reduction in the share of gas in this sector (from 60% in 2007 to 33% in 2016). As a result, overall gas demand declined from 48.8 bcm in 2015 to 46 bcm in 2016, the first decline since 2009.”

It seems a good model to follow, except for the coal and lignite part of course. But then countries in South Eastern Europe have another option, which they are hardly pursuing: to expand their renewable energy. As our EU correspondent Sonja van Renssen reported last week: “The EU is doing all it can, including spending billions, to expand renewable energy and improve energy efficiency in Southeast Europe. But the response of local policymakers and investors is lukewarm – despite the enormous potential of the region.”

May 2, 2017

The world’s first research programme dedicated to “negative emissions technologies” (aka geoengineering) has been launched by the UK government, reports the website Carbon Brief.

Last week, we noted on Energy Post Weekly that in the US a number of prominent scientists are urging more research on geoengineering, in view of the increasing unlikelihood that greenhouse gas emissions can be limited.

The UK government has apparently come to the same conclusion, as it has launched a £8.6 million national research programme which is funding “negative emissions” projects, including forms of geoengineering.

Specifically, the following technologies will be investigated:

• Soil carbon management
• Afforestation
• Bioenergy with carbon capture and storage (BECCS)
• Enhanced weathering
• Direct capture of methane from the air

The new research programme will investigate the potential of these methods, “as well as the political, social and environmental issues surrounding their deployment”. It is coordinated by the UK’s government-funded National Environment Research Council (NERC) and will fund around 100 researchers at 40 UK universities.

As Dr Steve Smith, head of science at the UK’s Committee on Climate Change, told Carbon Brief:

“This UK programme appears to be something of a world first in focussing on the ‘real world’ potential of greenhouse gas removal. Understanding this will be important for working out how to achieve the goal agreed in Paris of balancing sources and sinks of greenhouse gases.”

Carbon Brief notes that a “€10m German research programme, launched in 2013, included some negative emissions projects as part of a wider range of topics related to climate engineering, sometimes described as geoengineering. A US National Academy of Sciences committee will meet for the first time in May to discuss a research programme on carbon dioxide removal.”

One of the concerns of the researchers is whether environmentalists will “come to view greenhouse gas removal technologies as an unacceptable option”, similar to how they perceive nuclear power. An objection to greenhouse gas removal could be that it would discourage actions taken to limit emissions. One of the research groups will look at this problem of “moral hazard” , i.e. whether greenhouse gas removal will make decision-makers feel less pressure to fund and implement mitigation measures.

Another consortium will prepare “the most comprehensive global assessment of the potential of … soils to remove greenhouse gases from the atmosphere”.

Professor Euan Nisbet of Royal Holloway University of London will lead a small project investigating how to remove methane directly from the atmosphere. “It hopes to find a way to deal with hard-to-eliminate methane emissions from widely distributed agricultural or industrial sources, such as livestock or gas pipelines”, notes Carbon Brief. Nisbet says: “We’re planning to use a mix of techniques…to investigate the problem of taking methane out of ambient air masses and to try to design very low cost ways of removing at least some of the methane coming from these intractable sources.”

Nisbet notes that “Methane is a hot topic at the moment. It’s rising fast and the causes of the rise seem to be meteorological, not directly anthropogenic. There’s a lot of discussion about why the rise is taking place – more emissions, or changing sinks? – but, either way, this may be a climate change feedback. This is important for the Paris Agreement, especially as methane’s global warming impact has recently been significantly reevaluated upwards.”

According to Nisbet, “The progress we may make in cutting CO2 emissions may be negated by the unexpected methane rise. The best way to cut methane is to stop emissions. Obviously, the starting point is to reduce gas leaks from the natural gas industry and to cover landfills, etc. But there are also wide disseminated emissions from cattle (including winter cattle barns and also feedlots), active cells in landfills, gas compressors turning on and off, etc, that are much more intractable.”