carbon trading

How to get the GET right (please give us a carbon tax and skip EU and UN boondoggles)

October 23, 2018 by Karel Beckman

ENERGY WATCH #1 - October 23, 2018

How to get the GET right (please give us a carbon tax and skip EU and UN boondoggles)

by Karel Beckman

What is the timeframe for the Global Energy Transition (GET)?

According to a report from global consultancy Wood Mackenzie, “Thinking global energy transitions: The what, if, how and when”, the “sustainability tipping point – when the world shifts from the age of oil and gas to the age of renewables – will arrive by 2035, less than 18 years away.”

The report notes “the emergence of two drivers underpinning the pace of the global energy transition: renewables and the use of electric-based technologies in transportation. By 2035, the convergence of the two will usher in the age of renewables. ‘Sustainability friendly’ technologies – such as autonomous driving and the wider application of advanced grid-edge and machine learning applications – will effectively become the norm.”

You may think – so what, here is another report predicting a speedy energy transition. However, what is significant about this report is the source: Wood Mackenzie has for decades been known as perhaps the most prestigious oil industry consultancy in the world. You can say that when Wood Mackenzie speaks, the oil and gas industry listens.

And they have only fairly recently decided to start studying alternative energies – in effect, when they took over Greentech Media and Make two years ago. A month ago, in late September, they combined their “clean power research” into one unit called Wood Mackenzie Power & Renewables, which now employs 115 solar, energy storage, wind, power market and grid experts spread across 15 countries. The company says it has invested strongly in “integrating datasets, technology platforms and teams.”

The conclusions Wood Mackenzie now draws from its research must be quite alarming to its clients in the oil sector (and they undoubtedly include all major oil companies). Although it notes that lots of things could either speed up the energy transition (e.g. a breakthrough in battery technologies or more policy-led curbs on the internal combustion engine) or slow it down (e.g. as a result of affordability or reliability issues), nevertheless “the global energy transition (GET) is happening, and the implications for commodity markets are profound. We expect oil demand to peak by 2036, and for EVs to displace around 6 million b/d of oil demand by 2040. The decline will likely accelerate thereafter with the pace of change heightened post-singularity.”

According to the report, the “point of singularity” – when the GET is over and a new era in energy begins – will be reached when the renewables revolution and the EV revolution meet:

Although solar and wind currently account for only 7% of the global power market, “the breakthrough success of these technologies is better revealed by looking locally”, notes the report. “Solar and wind (shown as green circles in the chart) already provide 20% to 50% of generation in many complex regional power systems, some quite large. The state of South Australia, ERCOT (Texas, US), CAISO (California, US), the Iberian Peninsula power grid (Spain and Portugal), and the German grids are leaders. Other power

systems such as Elia (Belgium), SPP (across 13 central US states), TenneT (Netherlands), and WECC (Western US) are in the 15% to 20% range.”

“Electric vehicles, by contrast, have captured just 1% of the total car market by stock”, Wood Mackenzie observes. “Yet EVs are beginning to exhibit similar trends to those seen in renewables markets a few years back (blue circles in the chart). Norway, supported by monumental investment initiatives, is approaching double-digit market share for electric vehicles (stock), with upwards of 35% of annual new

car sales electric. Other markets will surely follow Norway’s lead. With rapid technology growth, supportive policy frameworks and large numbers of new models expected to enter the market within the next few years, electric vehicles are preparing for the mainstream.”

According to Wood Mackenzie, “These different early trajectories of renewables and EV adoption reflect the natural pace and order of how the GET will unfold. Renewables growth is a necessary precursor to any future transport electrification. Success in the former will inevitably boost the rationale for the latter. The convergence of the two trends is likely to accelerate the progress of the GET. It is at this point, in 2035, that we expect the singularity to occur…. By then, close to 20% of global power needs will be met by solar or wind, enough to displace the equivalent of roughly 100 bcfd of gas demand [this is about 27% of current global gas demand, KB]. Similarly, upwards of 20% of all miles travelled globally by cars, trucks, buses and bikes will use electric motors rather than gasoline or diesel.”

What will happen beyond this point? “After the singularity, adoption rates for renewable generation and electrified transport increase rapidly as they become the default choice across many energy systems around the world. So much so that half of all new power plants constructed globally are either solar or wind, or a hybrid combination with storage. Plus, half of all additional miles travelled by road will use an electric vehicle. The convergence of other nascent technologies embedded within grid-edge applications – autonomous and shared driving, for instance – facilitates this rapid uptick.”

The chart below shows “a visual schematic of renewables and electric vehicles as a percentage of the annual ‘new’ market for power and transport sectors by 2040. Compared with the previous chart, this shows the rate of growth of these technologies rather than total market share. This is how we anticipate the world will look like five years from singularity (based on Wood Mackenzie’s interim integrated H1 2018 long-term outlook). Each bubble represents a country, and the bubble size, the size of the market.”

Needless to say, “The GET is influencing all aspects of the energy industry and related sectors: state and national policy, the corporate value chain and capital markets. The implications for commodity markets are profound. Peak oil demand is acknowledged as a potential reality, even if it is a decade or two away. Oil demand could be 5 to 6 million b/d lower under our base case forecasts by 2040, compared with a scenario where EVs and autonomous driving make no impact at all. Once we reach the point of singularity, demand could fall away at an accelerating rate. Gas, too, will be affected.”

The report warns that “Energy market disruption is a probability, likely inevitable. There will be winners – and no doubt high-profile losers. There will be geopolitical upsets, too.”

Wood Mackenzie does add that, although the GET is unstoppable, “it can only go so fast. Too fast and it may be counter-productive. Power outages, political turmoil, freak accidents, regulatory lags and other unintended consequences are likely.”

***

This last warning from Wood Mackenzie is one that policymakers and climate NGO’s should take to hear. Power outages, political turmoil, freak accidents, regulatory lags and other unintended consequences are likely.

That means: backlash is likely, which could derail the entire GET. This is after all not a simple policy measure. It is a fundamental transformation of the economy.

What is important to realize the GET, is the story that is told about it. The framing. Emma Pinchbeck, executive director of Renewable UK, wrote an interesting opinion article about this in the British newspaper the Telegraph, entitled: Sceptical about climate change? You might still like a green economy.

She writes: “There is a well-known cartoon of a climate summit with a speaker showing a list of benefits including ‘liveable cities, clean air, green jobs, preserved rainforests’ while someone in the audience asks: “What if it’s a big hoax and we create a better world for nothing?”

She adds: “I think about this cartoon a lot, as in the last 10 years we’ve managed to mangle an issue about what we value as a society and turned it into a false dichotomy: ‘Higher energy bills today, for more polar bears tomorrow.’ This framing of how we avoid widespread destruction to habitats and our economy by limiting warming to 1.5C is one that politicians have been maddeningly slow to move on from. And it is a framing that misses out on the economic opportunities and those things that cannot be valued in a spreadsheet.”

In my own country, the Netherlands, I see this happening too, with opposition politicians arguing that climate policy will mean spending hundreds of millions on heat pumps and other expensive alternatives to natural gas and oil with only very small effects on total greenhouse gas emissions.

The fact that Dutch emissions will only have a very small effect on total emissions is true of course, but misleading, since we can hardly expect the rest of the world to move if we as rich countries don’t do so in the first place.

But the part about costs is misleading too. To be sure, politicians and NGO’s should be honest that there will be costs and risks, winners and losers. Climate policy is not a simple win-win story, as it’s sometimes made out to be.

But neither is it a simple story about costs. There will be huge benefits too, as the cartoon shows. Benefits which, I am convinced, can never be caught in statistics or economic analysis. They are as much about value judgements as anything.

***

Who will make the big decisions in the end and how will they be made? Here I feel that some climate advocates are completely missing the mark. Often they will issue calls for some form of centralized decision-making, on the Chinese model, with the idea that a few political leaders should get together and decide how the economy must be structured.

Of course leadership is needed, including bold visions and decisions. But it’s a dangerous illusion to think that a transformation of the economy can be realized top-down.

First, if power is concentrated, it can be used in the wrong way too. Those Chinese leaders can just as well decide to call off their renewables revolution and plunge for coal again if they feel that is more in their interest.

Secondly, the world is just too complex for a few people to know what are the best options. Should we build 500 nuclear power stations or a thousand concentrated solar power plants or a hundred battery gigafactories? Such decisions are best left to “the market” (i.e. individual people and companies).

Personally, I believe the best thing to do is what the new Nobel prize winning economist William Nordhaus has been advocating: put a price on carbon.

How exactly? In an interview in the New York Times, Nordhaus discusses how this could best be done. It should be framed, he says, not as a cost, but as a “financial windfall for taxpayers”.

In other words, carbon should be taxed and the taxes spent so that all citizens benefit. He mentions the EU ETS as an example of how NOT to do it, and British Columbia (Canada) and South Korea as good models.

“We learned with the European Union that once you go beyond the simple, idealized version of carbon prices and into implementation, it’s a very different thing”, says Nordhaus. “One of the things we found out: One of the problems with cap and trade [a system in which governments place a cap on countries’ carbon-dioxide pollution and companies then pay for, and trade, credits that permit them to pollute] is that it is dependent on predicting what future emissions will be. But if those projections are wrong, the system fails.”

“With the E.U., their projected carbon emissions were high, but the actual carbon emissions were low, and the carbon price fell drastically, from $30 to $40 per ton down to single digits. So the price was so low it did not have an effect in lowering emissions. It was flawed design. If the models had predicted too few emissions, and the price had gone to $1,000 per ton. we would have had a different problem.

The carbon tax has different problems, but not this one. The price of carbon is independent of the amount of emissions.”

The best model Nordhaus has encountered so far is British Columbia. “You raise electricity prices by $100 a year, but then the government gives back a dividend that lowers internet prices by $100 year. In real terms, you’re raising the price of carbon goods but lowering the prices of non-carbon-intensive goods. That’s the model of how something like this might work. It would have the right economic effects but politically not be so toxic. The one in British Columbia is not only well designed but has been politically successful.”

***

Note that even ExxonMobil is lobbying for a carbon tax nowadays, although that might not necessarily be a recommendation.

The US oil giant, known for its lobbying efforts against climate change policies, announced recently that it will spend $1 million over two years to lobby for a carbon tax. The company has long favored carbon taxes, but it’s the first time it will put real money behind the idea.

But website Vox reports that there is a catch: in exchange for a tax, Exxon apparently wants immunity from all climate lawsuits in the future.

With its announcement to lobby for a carbon tax, Exxon is backing a broader effort for carbon pricing from an extremely high-powered initiative called the Climate Leadership Council. This Council is backed by major companies such as ExxonMobil, Shell, BP, Total, GM, Unilever, and Pepsico, and has among its founding members such luminaries as Stephen Hawking, Steven Chu, Ben Bernanke, Janet Yellen and Klaus Schwab.

It has a plan consisting of four pillars:

I. A GRADUALLY INCREASING CARBON FEE

The first pillar of a carbon dividends plan is a gradually rising fee on carbon dioxide emissions, to be implemented at the refinery or the first point where fossil fuels enter the economy, meaning the mine, well or port. Economists are nearly unanimous in their belief that a carbon fee is the most efficient and effective way to reduce carbon emissions. A sensible carbon fee should begin at $40 a ton and increase steadily over time, sending a powerful signal to businesses and consumers, while generating revenue to reward Americans for decreasing their carbon footprint.

II. CARBON DIVIDENDS FOR ALL AMERICANS

All the proceeds from this carbon fee would be returned to the American people on an equal and monthly basis via dividend checks, direct deposits or contributions to their individual retirement accounts. In the example above of a $40/ton carbon fee, a family of four would receive nearly $2,000 in carbon dividend payments in the first year. This amount would grow over time as the carbon fee rate increases, creating a positive feedback loop: the more the climate is protected, the greater the individual dividend payments to all Americans. The Social Security Administration should administer this program, with eligibility for dividends based on a valid social security number.

III. BORDER CARBON ADJUSTMENTS

Border adjustments for the carbon content of both imports and exports would protect American competitiveness and punish free-riding by other nations, encouraging them to adopt carbon pricing of their own. Exports to countries without comparable carbon pricing systems would receive rebates for carbon fees paid, while imports from such countries would face fees on the carbon content of their products. Proceeds from such fees would benefit the American people in the form of larger carbon dividends or could be used for transitional assistance for industries or regions hurt by the carbon fee. Other trade remedies could also be used to encourage our trading partners to adopt comparable carbon pricing.

IV. REGULATORY SIMPLIFICATION

The final pillar is the elimination of regulations that are no longer necessary upon the enactment of a rising carbon fee whose longevity is secured by the popularity of dividends. Many, though not all, of the Obama-era carbon dioxide regulations could be safely phased out, including an outright repeal of the Clean Power Plan. Robust carbon fees would also make possible liability rationalization for emitters. To build and sustain a bipartisan consensus for a regulatory rollback of this magnitude, however, the initial carbon fee rate should be set to significantly exceed the emissions reductions of all Obama-era climate regulations, and the carbon fee should increase from year to year.

The idea is for the plan to be first implemented in the U.S. and then to apply it to other countries.

***

Dare I say that I find this plan much more appealing than such initiatives as the Green Climate Fund or The Global Commission on Adaptation, both UN-backed schemes that seem to be mainly the stuff of high-profile climate conferences with a lot of talk and in the end very little action.

The website Climate Change News, not exactly a hotbed of climate skepticism, has been reporting how the Green Climate Fund, set up under the Paris Agreement, has been bogged down by bureaucratic bickering. The idea is that developed nations will put billions into this fund to help developing countries implement climate policies, but it doesn’t take a Ph.D to figure out that this money will mostly end up in the pockets of government bureaucracies, as Climate Change News shows.

As to the Global Commission on Adaptation, this is led by Ban Ki-Moon, Bill Gates and Kristalina Georgieva, CEO of the World Bank, and consists of 28 commissioners, including two national presidents as well as the mayor of Miami. Somehow I am convinced that a carbon tax will be much more useful than whatever is going to come out of this commission.

What about EU-led and subsidized efforts?

On 17 October, the European Commission announced that it had signed a Memorandum of Understanding with the Bill Gates-led initiative Breakthrough Energy to “establish a Breakthrough Energy Europe (BEE) – a joint investment fund to help innovative European companies develop and bring radically new clean energy technologies to the market.”

“With this initiative, the Commission takes action to continue leading in the fight against climate change and to deliver on the Paris Agreement – giving a strong signal to capital markets and investors that the global transition to a modern and clean economy is here to stay”, the Commission said in a press release.

According to the press release, Breakthrough Energy Europe “links public funding with long-term risk capital so that clean energy research and innovation can be brought to market faster and more efficiently. With a capitalisation of €100 million, the fund will focus on reducing greenhouse gas emissions and promoting energy efficiency in the areas of electricity, transport, agriculture, manufacturing, and buildings. It is a pilot project that can serve as a model for similar initiatives in other thematic areas.”

Breakthrough Energy Europe is expected to be operational in 2019. Half of the equity will come from Breakthrough Energy and the other half from InnovFin – risk-sharing financial instruments funded through Horizon 2020, the EU’s current research and innovation programme.

Forgive me my skepticism: I have been around too long. I am prepared to take a bet with anyone that very little useful will come out of this initiative. A real, biting carbon tax, by contrast, will work miracles.

***

On a final note about what markets can do, guided by prices, compared to what policymakers can NOT do, consider this bit of news from the Hill: Greenhouse gas emissions dropped nearly 3 percent in Trump’s first year!

“Harmful greenhouses gases that largely contribute to climate change decreased during President Trump’s first year in office, according to new Environmental Protection Agency (EPA) report released Wednesday”, notes The Hill. “U.S. emissions dropped by 2.7 percent from 2016 to 2017, continuing a downward trend that’s been apparent since 2007, according to data collected through the agency’s Greenhouse Gas Reporting Program.”

Doesn’t this supremely ironic piece of news say it all?

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Ramez Naam invests in blockchain marketplace for carbon removal projects – should you do so too?

September 18, 2018 by Express Editor

EXPRESS #2 - September 18, 2018

Ramez Naam invests in blockchain marketplace for carbon removal projects – should you do so too?

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In his usual straightforward style, the well-known American author, investor and futurist Ramez Naam (we published a series of articles by him on Energy Post in 2016), has announced that he has made an invested in blockchain company Nori – and he thinks you should do so too.

“Over the last two years, as both an angel investor and a public speaker on energy and climate, I’ve looked at at least a few dozen startups and proposals on how to use blockchain in energy or climate.

I’ve passed on all of them”, writes Naam. “Until now.”

“Over the past few months I’ve been talking with the founders of Nori”, explains Naam. “This summer, I agreed to come onboard as an advisor. In addition to that, I’m investing my own money in the Nori presale.”

According to Naam, “Nori is a transparent marketplace for people and companies to fund the removal of carbon from the air — something we simply have to do if we’re going to limit climate change to safe levels. Nori starts with incredibly simple, low cost ways of removing carbon from the air. The very first carbon removal method in the market will be soil carbon capture — ways that farmers, at extremely low cost (~$3/ton) can change their practices so that their land absorbs more carbon dioxide from the atmosphere and holds it in the soil. From there, Nori will move into other methods, starting with the cheapest methods that can absorb the most carbon.”

“Most importantly to me”, says Naam, “Nori solves critical problems with current carbon offset systems. Every ton of carbon removed by Nori is a real ton sucked out of the atmosphere — not a theoretical offset that might or might not matter. And Nori’s blockchain makes every ton of carbon removal accountable and transparent — every ton removed can be tracked back to a specific project at a specific location that’s been verified by a specific investor.”

Naam notes that “the good news” is that “momentum is slowly building for offsetting carbon emissions, and on the technology and policies that support removing carbon from the atmosphere.”

He gives three examples:

Tax credits for carbon capture. In 2018, the US Congress passed a tax credit for carbon removal from the atmosphere, that should help bootstrap the industry.
Industrial scale carbon capture machines. In June, scientists published an analysis that industrial-scale machines could remove carbon from the air at $100/ton. (Other methods, like soil capture and planting trees, are much much cheaper. But industrial scale capture could scale to as much carbon as we want — it’s a good backstop.)
Lyft and other companies voluntarily offsetting carbon emissions. In April, Lyft announced that it would offset the carbon emissions from every passenger ride in the US. Lyft joins a host of tech companies — like Google, Apple, Facebook, and Microsoft — that are committing to being carbon neutral through a combination of clean energy and carbon offsets.

Nevertheless, Naam adds that “current carbon offset markets have some serious problems”:

They’re not transparent. If you buy an offset, you typically can’t see exactly what your purchase funded.
Most offsets are hypothetical. You can pay for an offset by funding more energy efficiency at a polluting factory, for example. But many of those efficiency improvements would have been made anyway, for purely economic reasons.

Nori, says Naam, solves these problems in two ways.

Nori’s marketplace only lists actual removal from the air, and not hypothetical offsets. 1 Nori token pays for the removal of one ton of CO2 (or equivalent in other greenhouse gases) from the atmosphere. No hypothetical future reductions. Only actual removal.
Nori uses blockchain to make carbon removal transparent and accountable. Because of the structure of blockchain, where every transaction is kept immutable and viewable by everyone with access to the blockchain, every ton of carbon removed from the air can be traced back to the specific project and location, and what human inspector verified it.

If you’re interested in learning more, you can visit Nori.com, read the Nori whitepaper, or invest in the Nori crowdsale via Republic.

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“The biggest carbon supply squeeze Europe has ever seen” could lead to a gas boom – and crisis in coal mining regions

September 4, 2018 by Karel Beckman

ENERGY WATCH #4 - September 4, 2018

“The biggest carbon supply squeeze Europe has ever seen” could lead to a gas boom – and crisis in coal mining regions

by Karel Beckman

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Miners in Poland protest against planned closure of mines

The Carbon Tracker Initiative – the UK-based think tank which popularized the terms “carbon bubble” and “stranded assets” – reports that “The EU carbon market has been the hottest commodity market in the world over the last 16 months, with the price of European carbon allowances (EUAs) up 310% since May 2017, 120% since the start of the year.”

The price rice has been “driven by the market’s anticipation of the start-up from January 2019 of the Market Stability Reserve (MSR), the centrepiece of the EU-ETS reform agreed last year. With only five months to go before the MSR starts reducing the over-supply of EUAs [carbon allowances] by 24% of the outstanding cumulative surplus each year over 2019-2023, the market is now counting down to the biggest supply squeeze the EU-ETS has ever seen”, writes CTI.

In a new report, called Carbon Countdown, CTI tries “to model the amount of emissions reductions that can occur from fuel switching and energy-efficiency savings over 2019-23 if EUA prices rise to levels that flip the merit order and enable gas to run ahead of coal across the EU.”

“The logic of our argument”, writes CTI, “is that the supply squeeze caused by the MSR over 2019-23 will create a cumulative deficit for the power and aviation sectors over these five years of ~ 1.4bn tonnes, and that in order to clear the market over this period power generators will have to reduce emissions via switching from coal to gas.”

The report concludes “that in order to achieve the level of fuel-switching required to clear the market over 2019-23 it will be necessary for combined-cycle gas-turbine plants (CCGTs) with a thermal efficiency rate of 45% and above to displace coal plants with thermal efficiencies of 38% and below. With the fuel-switching price very sensitive to efficiency rates, then other things being equal this implies higher EUA prices than we imputed from our modelling in our previous report, Carbon Clampdown.”

CTI stresses that its projection for 2019-2023 is subject to many uncertainties, relating to:

exactly how much abatement might be required over 2019-23
the amount and availability of CCGTs with the required efficiency levels
the evolution of commodity prices between now and 2021, the EUA price required to plug generators’ and airlines’ forward-hedging gap could be higher or lower than the levels imputed from our modelling

CTI also notes that “it is important to remember that the EU-ETS is ultimately a political construct, and there is therefore always a political dimension to EUA prices. This is not only because of the impact of CO2 prices themselves on EU industry – after all, industry is largely protected from high prices at the moment owing to its accumulated surplus of EUAs and to the fact that it is still receiving the vast amount of its EUAs for free – but also because higher CO2 prices will raise power prices for both industry and households. Accordingly, we also provide a reminder in this report of the measures that could be taken under existing legislation – i.e. before the scheduled review of the MSR in 2021 – to smooth the impact of lower auction volumes when the MSR is at its peak over 2019-21.”

In case you are wondering what exactly the Market Stability Reserve (MSR) is about, the CTI report has a very useful infographic that sums it all up:

***

Whatever the exact amount of coal-to-gas switching that we will see, it is clear that the rising CO2 price spells trouble for the coal sector.

That is not a big surprise. The European Commission’s Joint Research Centre published a report at the end of June, on the EU coal regions, noting that around 160,000 jobs of the half million jobs may be lost in the European coal sector by 2030.

The report contains interesting facts and figures and draws some important conclusions. Here some highlights:

Coal today accounts for 16% of gross inland energy consumption in the EU, and 24% of the power generation mix.

Six countries still rely on coal to meet at least 20% of their energy demand.

The role of coal is, however, decreasing, as part of the ongoing transformation of the energy system. The need to reduce greenhouse gas emissions has led to an increasing share for renewables; and coal power generation is actively discouraged with stringent post-2020 emission requirements, high CO2 emission allowance prices, and likely restrictions on coal eligibility for future capacity remuneration mechanisms.

There are currently 207 coal-fired power plants in 21 Member States … with a total capacity of almost 150 GW (15% of total European power generation capacity); and 128 coal mines in 12 Member States and 41 regions with a combined annual production of approximately 500 million tonnes (55% of gross EU consumption).

It is estimated that the coal sector currently employs about 237,000 people. The vast majority work in coal mining (185 000). Poland employs about half of the coal workforce, followed by Germany, the Czech Republic, Romania, Bulgaria, Greece and Spain. Twenty regions account for nearly 200,000 direct coal-related jobs. Six of these regions are in Poland (including the region of Silesia with an estimated 82 500 jobs in 2015) and another five in Germany.

Throughout the coal value chain the number of indirect jobs dependent on coal activities is up to 215,000, with four regions in Poland, Bulgaria and Czech Republic presenting above 10,000 jobs each. Many of these jobs will become redundant in the next decade, both in direct and indirect coal activities.

The vast majority of coal-fired plants in Europe were commissioned more than 30 years ago. These plants are on average 35 years old, with an estimated efficiency of 35%, well below the current state of the art. The first wave of power plant retirements will take place in the period 2020-2025, driven by competition in a carbon-constrained world. This could lead to the loss of 15,000 direct jobs in power plants.

The countries hit hardest are likely to be the UK, Germany, Poland, the Czech Republic and Spain. A second decommissioning wave between 2025 and 2030 could cause the loss of another 18,000 jobs, mainly in Germany, Poland, UK, Bulgaria and Romania. By then, approximately two thirds of the current coal-fired power generation capacity will have been retired.
Carbon capture and storage (CCS) as a mitigation option to reduce CO2 emissions could facilitate the continuity of operation of retrofitted coal plants in the longer term provided it is economically viable and that legal and regulatory challenges are overcome. Preliminary estimations indicate that roughly 13% of European capacity can be retrofitted with CCS.

Coal mines are already closing down due to a lack of competitiveness. In 2014-2017, 27 mines were closed across Germany, Poland, the Czech Republic, Hungary, Romania, Slovakia, Slovenia and the United Kingdom. In 2018, 5 more will close in Germany, Poland Romania and Italy. Further 26 mines are expected to close in Spain. Taking into account criteria, including mine productivity, depth of operation and product quality, it is estimated that coal mines in Romania, Slovakia, Spain, the Czech Republic, Germany, Italy, Poland, Slovenia and the United Kingdom could close in the short to medium term. Overall, it is estimated that about 109 000 mining jobs are exposed to high risk due to a lack of competitiveness.

In regions with mining infrastructure the dependency on the coal industry resulted in limited development of other economic sectors – most coal regions have a lower GDP/capita than the national average.

The decline in coal-related activities will also affect other sectors of the economy. The European iron and steel sector relies on domestic coking coal – a critical raw material for the European economy – to meet 37% of its needs. Hard coal mines capable of producing this type of coal could continue to operate purely by serving this sector, as long as coking coal prices are sufficient enough to sustain mining operations.

According to the JRC, “the retirement of coal assets should be coupled with a strategically planned and gradual industrial restructuring process, aiming to support redundant coal workers. New employment and business opportunities can be created by building on the industrial heritage of the affected regions and establishing new, competitive industries and services.”

***

What also will not come as a surprise is that not everyone is ready to accept the end of the coal era in Europe.

The Polish electricity industry association PKEE has reacted fairly critically to the JRC report. In a press statement released on 30 August, the PKEE notes that “The assumption of decommissioning ca. 70% of coal-fired power plants’ installed capacity in Poland by 2030 is at the same time completely unrealistic. Its fulfilment would result in a serious threat to energy supply security. This would result in the entire Polish economy having to pay the cost of implementing the decarbonisation policy.”

Overall, the European Commission’s Report “minimises the impact assessment of the negative consequences of the coal sector restructuring that will affect mainly local communities”, says the PKEE. “The Report fails to indicate well-justified proposals for remedial measures and at the same time ignores the consequences such as depopulation of coal regions as a result of migration, loss of human capital or increase in poverty. The Report leads to the conclusion that it will be local communities which will pay the most for meeting obligations, benefits of which will be distributed on a global scale. Therefore a just distribution of the costs of decarbonisation coupled with sources of financing adequate to the scale of the identified challenges should be a necessary precondition of the transformation to a “green” EU economy.”

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With subsidies for renewables declining, the market for Guarantees of Origin may see strong growth

September 4, 2018 by Express Editor

EXPRESS #2 - September 4, 2018

With subsidies for renewables declining, the market for Guarantees of Origin may see strong growth

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The market for renewable energy based on “Guarantees of Origin” (GOs) has shown steady growth again in 2018 so far.

At least, that’s the message coming from ECOHZ, a Norwegian consultancy which is active in the GO market. “Once again we have evidence that renewable energy is becoming increasingly important for households and industries across Europe,” Tom Lindberg, Managing Director of ECOHZ, has said in a press release, commenting on newly issued statistics from the the Association of Issuing Bodies (AIB), which oversees the EU market for GOs.

“Both available supply and market demand continue to grow, as we experience an increasingly healthy and robust market,” said Lindberg. “Comparing year-to-date (YTD) supply and demand of Guarantees of Origin (GOs) for 2018 and 2017 show that supply is up by 45 TWh, while demand is up by 34 TWh.”

It is not exactly clear from the press release what “year to date” means in this context. The data from the AIB referred to have not been made public by the AIB.

The total demand for renewable energy vouched for Guarantees of Origin is getting close to 500 TWh, according to the chart above. That’s about one-sixth of total EU electricity consumption.

GOs are to some extent controversial. They are, for example, issued on the basis of existing hydropower production in countries like Norway. In practice, this means that electricity suppliers in, say, the Netherlands, can make their “grey” electricity “green” by buying GOs from a Norwegian hydropower producer. That in itself is legitimate, but it does mean that now the Norwegian customers are in effect buying “grey” electricity when they buy it from the same Norwegian hydropower producer – without realizing it.

Nevertheless, ECOHZ reports that while “hydropower is still a big share, changes are occurring rapidly. Hydropower’s supply share fell from 79% in 2015, to 64% in 2017.”

“This change can primarily be explained by increased availability of solar and wind,” says Lindberg. Wind is increasing fast, from 11% in 2015, to 21% in 2017. Solar’s share is still small, but has grown from 1% in 2015, to 5% in 2017.

One thing that is holding back the market for GOs is that many countries, including Germany, forbid issuing GOs for renewable energy that has been produced with government subsidies. Governments regard this as double counting. The Netherlands and the Nordic countries are exceptions. However, since support schemes are being dismantled in many countries, the market for GOs may see additional growth of GOs based on solar and wind, notes Lindbergh.

In addition, more countries may be joining the AIB and the pan-European marketplace connected to AIB’s electronic GO hub. Currently there are 20 members. “Lithuania, Latvia and Greece are all vying to be approved as new AIB members, most likely sometime late 2018 or early 2019”, notes Lindbergh. “Poland, Serbia, and Bosnia, could be next in line, but full AIB membership will likely not happen until later in 2019.”

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EU carbon price rises good news for nuclear and renewables

August 21, 2018 by Sonja van Renssen

BRUSSELS INSIDER #1 - August 21, 2018

EU carbon price rises good news for nuclear and renewables

by Sonja van Renssen

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EU carbon prices hit a 10-year high last week, Reuters reported, reaching €18 per ton, three times as much as a year ago.

Analysts expect prices to continue climbing over the next few years, as the EU’s reform measures will be implemented The first of the reforms, the Market Stability Reserve (MSR), comes into effect in 2019. This will take “excess reserves” out of the market.

Traders are already anticipating on the effects of the MSR. “This year is all about buying in anticipation of the start of the MSR,” Energy Aspects analyst Trevor Sikorski said.

Carbon analysts at Thomson Reuters forecast the MSR will remove 390 million tonnes of permits in 2019, cutting the supply available from government auctions by 40 percent, notes Reuters. “Over the years 2019-2023, the analysts forecast a total of almost 1.5 billion permits will be withdrawn.”

“In a recent Reuters survey of eight analysts, the analysts on average expect prices to hit 20.76 euros a tonne by 2020 with the most bullish forecast at 30 euros/tonne.”

In addition to the MSR, the total quantity of carbon permits – known as the Linear Reduction Factor – will be reduced by 2.2 percent each year from 2021 to 2030, up from 1.74 percent a year now. This means there will be fewer permits available to buy, driving up the cost.

The big question is how this will affect the European power mix. According to the Guardian, “the carbon price rises and further anticipated increases would begin to hurt coal operators’ profit margins and influence investment decisions.”

Phil MacDonald, the head of communications at Sandbag, a group that monitors the carbon market, said: “It will already be cutting into coal profits … Renewables get a big win from this and so does nuclear.”

Mark Lewis, the head of research at the Carbon Tracker thinktank, said “although coal plant owners were bearing the brunt of the higher carbon price, they would pass it straight through to consumers. The price of carbon would need to go much higher, to as much as €30 (£27) per tonne, to trigger large-scale switches from coal to gas and renewables, he argued. ‘I don’t think we are at the stage yet where the carbon price will have a major effect’.”

Sandrine Ferrand, a market analyst at Engie Global Markets, said the extra cost would be significant for coal, at about €11-12 extra per megawatt hour. “But the incentive to switch fuels would be limited because gas prices had also increased, alongside oil prices.”

“So far, the carbon price is not high enough to trigger a large switch from coal-fired power generation to less polluting gas-fired power generation,” she said.

“Coal companies are also insulated temporarily as they hedge when buying carbon permits and have benefited from recent increases in wholesale power prices.”

One wild card, notes The Guardian, “is Brexit and whether the UK quits the carbon market if and when it leaves the EU. Chris Piabiatek, a carbon trader at Vertis Environmental Finance, which expects a tonne of carbon to cost just under €19 next year, said a no-deal Brexit that involves the UK crashing out of the carbon market would be ‘super bearish’ for carbon prices.”

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Why carbon pricing is not the Holy Grail of climate policy

July 3, 2018 by Karel Beckman

ENERGY WATCH #4 - July 3, 2018

Why carbon pricing is not the Holy Grail of climate policy

by Karel Beckman

James Hansen had himself arrested at a tar sands protest in front of the White House - when it was still occupied by Obama

Putting a carbon price on emissions is by many regarded as an almost magical solution for climate change. Big energy companies in particular frequently lobby for carbon pricing and against support schemes for renewables, and they get ample support from economists.

As Richard Cowart, Principal and Director at the Regulatory Assistance Project, an international consultancy, writes on the RAP blog: “To many economists and carbon market enthusiasts, putting a price on carbon is by far the preferred tool to drive down carbon pollution. So, whenever carbon prices fail to reduce emissions fast enough, those advocates simply conclude that the price isn’t high enough.”

He notes that “in response to the persistent problem of low carbon prices within the European emissions trading system (ETS), we now hear calls for high carbon floor prices—which would require covered emitters to pay, usually to national treasuries, the difference between the current ETS price and a higher set floor price. In 2013, the U.K. created a national carbon price floor with the aim of raising carbon prices to 70 pounds per tonne by 2030. Due to public concern over its high cost and modest benefits, the carbon price floor is now frozen at 18 pounds/tonne. Despite the U.K.’s experience, in March 2018 officials in the Netherlands announced plans to impose a minimum carbon price of [18 euros/tonne starting in 2020 and rising to] 43 euros/tonne by 2030, almost triple the current allowance price. French President Emmanuel Macron recently stated that France would push for a minimum carbon price regionally; discussions are underway in Germany as well.”

However, Cowart cautions that, although “Carbon prices can be an important tool, and creating a predictable carbon price corridor in Europe would be a useful ETS reform. But higher carbon prices by themselves are both too expensive and too limited in what they can deliver. We will not achieve our Paris objectives if we continue to overlook and underfund the other useful tools in the low-carbon toolbox.”

According to Cowart, “The policy mix should be guided not by a goal of high carbon prices, but by the principle of carbon efficiency: How much does a given policy cost the public per tonne of carbon actually reduced?”

Cowart notes that “most carbon price proposals focus on the sectors the EU ETS covers. Within that scheme, the largest sector subject to a floor price would be electric generation.”

“Unfortunately”, he adds, “due to the way wholesale power markets are designed, when carbon prices are added to generators’ costs, electricity consumers end up paying far more than the market price of carbon for each tonne of carbon the new policy actually reduces. Here’s why:

In today’s “single-price” power markets, when carbon prices drive up the cost of coal-fired power plants, they also drive up the market price of gas, nuclear, and even some renewable power plants—resulting in a price increase for most power consumed.
Meanwhile, even though coal and gas power are made more expensive, this doesn’t necessarily lead to large changes in total hours during which those fossil power plants will run over the course of a week, a month, or a year—so total emissions don’t change much.
Therefore, because market clearing prices go up across the board, but there are relatively small changes in system operations and fossil emissions, end-use consumers can pay dearly in electricity costs for each tonne of reduction achieved across a power system.

According to Cowart, “This problem has been studied repeatedly but is still rarely discussed. In a study for the European Commission in 2008, the Energy Research Centre of the Netherlands (ECN) found that a carbon price of 20 euros would, on average across 20 EU power markets, end up costing power consumers 248 euros per tonne actually reduced. In a later study for RAP, using the same models, ECN and Cambridge Econometrics found that if carbon prices were to reach 80 euros, the cost to consumers for every tonne reduced in power markets would be 478 euros. This is not a uniquely European problem. Similar results have been modelled for power markets in the United States.”

Cowart argues that policymakers should not look just at carbon prices, but also at how to use carbon revenues: “Across Europe there are many low-cost energy efficiency options where well-run programs can cut energy bills for families and businesses while reducing emissions. Carbon revenues are an ideal source of funding for these efficiency programs. One RAP study, which analyses years of energy efficiency expenditures in the U.K., reveals that investing carbon revenues in well-run efficiency programs can save seven to nine times more carbon for a given price rise than just hammering consumers to use less through higher energy prices.”

As to carbon price floors, they will not solve the problems that plague the EU ETS, says Cowart: “They don’t reduce the surplus and may not even reduce emissions, while they increase costs to consumers. What we need instead is to link carbon prices and carbon revenues to create a ”virtuous circle“ that can sustain the political will to achieve economywide decarbonisation.”

Any carbon price or tax regime “should focus on the principle of carbon efficiency”, notes Cowart, “which critically asks, ‘How much will this action cost the public per tonne of carbon actually reduced? If we are to sustain the long-term political support needed to meet the Paris goals, carbon schemes need to deliver large-scale savings efficiently and affordably.’”

“Fortunately, the key partner to the carbon pricing hammer is already in the toolbox: carbon revenue recycling. The final cost of carbon reductions will be much lower if we recycle carbon revenues back into the economy strategically, especially in low-cost energy efficiency measures that lower bills for families and businesses.”

Many Member States already dedicate significant carbon revenues, or their equivalents, to clean energy initiatives, Cowart points out. “Leading examples include Germany’s Energy and Climate Fund and the Czech Republic’s Green Savings Program. In the U.S., the leading example is the Regional Greenhouse Gas Initiative, where nine states have invested more than 60 percent of their carbon revenues in energy efficiency programs, lowering emissions and saving money.”

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Incidentally, one point that Cowart does not discuss, is that a unilateral carbon price floor established by a country that is taking part in the EU ETS, such as the UK or the Netherlands, has an effect on the overall demand and supply situation in the ETS.

As one analyst pointed out to me: “If the policy in question overlaps with the EU ETS (as is the case …for a price floor targeting the power sector), it would logically have a bearish carbon market impact as it would lead to lower emissions and a laxer market balance in the EU ETS. The practical effect of that policy (to what degree it reduces emissions, to what degree it affects the EU ETS) depends on many factors; such as the nature of the price floor, the power mix in the country in question, and the level of interconnection between the power market in the country implementing the price floor and the neighbour countries.”

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Cowart’s critical view of carbon pricing as exclusive solution seems to be borne out by the experience in China, which is in the process of creating a huge carbon market. As MIT Technology Review points out, however, it does not look like it is going to be “a particularly aggressive one”.

“Early signs indicate that China is taking an extremely cautious approach, driven by fears of undermining economic growth. That is likely to put off real emissions reductions until well into the next decade”, writes author James Temple.

It’s a problem that’s been plaguing the EU ETS as well. China even at the last moment exempted heavy industry from the scheme, which is now limited to the power sector.

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So what is the alternative? James Hansen wrote an interesting article in the Boston Globe about what he believes “needs to change in our approach” climate change. In case you don’t know who James Hansen is: he is the NASA scientist who, 30 years ago, in 1988, testimony to the U.S. Senate, was the first highly placed expert in the U.S. who openly said that “the greenhouse effect” was “here”.

His statement had a huge impact. “The next day”, he writes, “it led the front pages of newspapers across the country. Climate theory led to political action with remarkable speed. Within four years, almost all nations, including the United States, signed a Framework Convention in Rio de Janeiro, agreeing that the world must avoid dangerous human-made interference with climate.”

However, Hansen is critical about what happened next. “Sadly”, he writes, “the principal follow-ups to Rio were the precatory Kyoto Protocol and Paris Agreement — wishful thinking, hoping that countries will make plans to reduce emissions and carry them out. In reality, most countries follow their self-interest, and global carbon emissions continue to climb.”

So what should be done? Hansen, who is critical of the potential of renewable energy (“the notion that renewable energies and batteries alone will provide all needed energy is fantastical”) argues that a carbon fee should be imposed “on fossil fuel companies at domestic mines and ports of entry”. In other words, this is not a “carbon price”, but an import fee.

“Economists agree”, writes Hansen: “If 100 percent of this fee is distributed uniformly to the public, the economy will be spurred, GNP will rise, and millions of jobs will be created. Our energy infrastructure will be steadily modernized with clean energies and energy efficiency.”

“The clinching argument for a carbon fee”, he notes, “as opposed to ineffectual cap-and-trade schemes dreamed up by politicians, is that the fee can be imposed almost globally via border duties on products from countries that do not have a fee, based on standard fossil fuel content of the products. This will be a strong incentive for most countries to have their own fee.”

It is an interesting idea, no doubt. It differs from the Kyoto Protocol and Paris Agreement presumably because it will lead to higher income for countries rather than higher costs. But its success will still depend on decisions made by national politicians who would still have to ignore the lobbying of the sectors that would be hit by the higher carbon costs. In this sense it does not differ from other carbon pricing schemes.

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