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Climate change and incentives for energy technology innovation

Climate change and incentives for energy technology innovation. Presentation to Ernst & Young Energy Training Event Cambridge, 14 September 2003 Michael Grubb, Associated Director of Policy, The Carbon Trust Visiting Professor of Climate Change and Energy Policy, Imperial College, London, &

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Climate change and incentives for energy technology innovation

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  1. Climate change and incentives for energy technology innovation Presentation to Ernst & Young Energy Training Event Cambridge, 14 September 2003 Michael Grubb, Associated Director of Policy, The Carbon Trust Visiting Professor of Climate Change and Energy Policy, Imperial College, London, & Senior Research Associate, Department of Applied Economics, Cambridge University

  2. Overview • The international instruments - UNFCCC and Kyoto Protocol • The ‘Kyoto crisis’ of 2001-2 & implications • Elements of Bonn/Marrakesh Accords on Implementing Kyoto • European implementation - overview • Economic instruments and European emissions trading directive • Technology and innovation incentives – overview • The UK Programme

  3. The international instruments: • The UN Framework Convention on Climate Change (UNFCCC) • The Kyoto Protocol to the UNFCCC

  4. UN Framework Convention on Climate Change • Adopted 1992, Entered into force 1994, 181 Parties • Ultimate Objective: Stabilise atmospheric concentrations at a level that would prevent ‘dangerous’ anthropogenic interference • All Parties obliged to address climate change: • Formulate, implement, publish & regularly update national plans .. • Communicate information related to implementation • Industrialised countries (Annex I Parties) • Must demonstrate taking the lead • Adopt policies & take corresponding measures on the mitigation of climate change • Aim to return greenhouse gas emissions to 1990 levels • Annual Conference (COP) to review adequacy of action and propose additional measures if required

  5. The Kyoto Protocol: core elements • Binding commitments to limit greenhouse gas emissions for each industrialised country (‘Annex I’): specific binding commitments are a qualititative leap, bringing much complexity • Defined for first ‘commitment period’ 2008-2012; subsequent periods to follow • ‘Basket’ of six greenhouse gases (CO2 main), plus some allowance for sinks / land-use change and forestry • Collective commitment, to reduce Annex I emissions to 5% below 1990 levels by first commitment period • Range of other provisions concerning activities in developing countries, technology transfer, policies and measures, etc.

  6. Kyoto’s first-period quantified commitments RegionPercentage reduction from 1990 levels EU -8 USA -7 Japan -6 Canada -6 Australia +8 Russia and Ukraine 0

  7. Mechanisms for international transfer • ‘Bubbling’ - used by the EU - to redistribute targets amongst a group of countries • UK, -12.5% • Germany, -21% • France, 0 • Greece, +25% • Project-investment crediting amongst Annex I parties (‘Joint implementation’) • The Clean Development Mechanism • Credits for investments in developing countries that contribute towards sustainable development and reduce GHGs • Emissions trading • Allows countries to ‘trade’ parts of their allowed emissions

  8. Structure of International EmissionsTrade Government A Government B Assigned amount Corporate allocation & authorisation Register Register Industry A Industry B Permit

  9. The ‘Kyoto crisis’ of 2001-2 and its outcome

  10. The Kyoto Crisis of 2000-1 Nov 2000 Collapse of COP6 Hague negotiations Mar 2001 Whitman says ‘reviewing .. not walking away’, but then Bush rejects Kyoto as ‘fatally flawed .. and unfair to America’ Apr - June Widespread assumption that Kyoto will collapse; but EU extracts promise of US non- interference if rest of world goes ahead July No US counter-proposal; COP6 resumed Bonn negotiations reach political agreement Oct - Nov Still no US counter-proposal; Marrakesh COP7 finalises legal details Nov 2001 All key parties indicate they expect to ratify Dec 2002 Canadian ratification brings tally to 100: only Russia still needed

  11. Why did most of world back Kyoto? • Sound structure that any regime of binding commitments would need: • Multi-year target periods give scope for national variations in circumstances, and for future development of responses • Multiple gases, some carbon sinks, international mechanisms make it uniquely efficient agreement and create worldwide engagement • Demonstration and momentum: • demonstrate that EU and others are serious • maintain institutional ‘learning by doing’ • promote technological development • give private sector greater certainty and basis for investments • lay groundwork for next phase • Political imperative: legitimacy of international system and a decade’s investment at stake

  12. The Bonn-Marrkesh Agreement on implementing the Kyoto Protocol: structural elements • Finance • Climate change fund and LDC fund under the Convention • Adaptation fund under the Kyoto Protocol • Carbon Sinks • Concessions on managed forests to Japan, Canada, Russian weaken aggregate target c. 4% points equivalent • Other sinks included on comprehensive but carefully monitored basis • Compliance • Reaffirmation of legally binding nature of KP • Enforcement branch, penalties for non-compliance • Kyoto Mechanisms

  13. Entry into force: Russia now holds the key .. • Requires 55 countries to ratify (111 have now done so) • .. Including 55% of industrialised countries’ CO2 emissions in 1990 • European Union-15 24.2% • Japan 8.5% • Canada 3.3% • Poland 3.0% • Other EU-Accession & Baltics 3.4% Total as of Sept 2003 43.4% • Awaited: Russia 17.4% • US 36.1% • Autralia 2.1%

  14. Are the Russians coming ...? • Russia benefits from Kyoto, but internal disputes: ‘hot air’ or real investment, longer term implications? • Monday 8th Sept: Russian Min. Natural Resources passes Kyoto to Govt to initiate formal process • Likely that Putin will pass it to Duma end of this month: Duma lined up for quick ratification (but its Russia, and the US is discouraging it ….) • Focus will emerge on project mechanisms and use of revenues from emissions trading • A new Europe-Russia climate-energy dialogue? • Prodi initiative • Reaction to US & fear of loss of Protocol • Gas and energy investment will be the beneficiaries

  15. EU & UK Implementation of climate / Kyoto goals: overview, and focus on emissions trading

  16. Total EU greenhouse gas emissions in relation to the EU’s Kyoto target

  17. Progress of Individual Member States Distance to target indicators (DTI): difference between (linear) targets and trends in 1999:

  18. European Climate Change Programme (ECCP): Results • Some 40 cost-effective policies and measures with an emission reduction potential of some 664 - 765 Mt CO2 eq (± twice EU target) • Overall costs for EU target in 2010: 3.7 € bn / 0.06 % of GDP

  19. ‘Cost effective’ GHG reduction potential for sectors in EU to 2010(including full implementation of the ACEA Agreement)

  20. ECCP - Most promising measures • EU wide emissions trading • renewable energy sources • energy performance of buildings • energy-efficiency standards for equipment • energy demand-side management • combined heat and power generation • containment / monitoring of fluorinated gases • modal shift in transport (infrastructure use & charging)

  21. Carbon / energy taxes in Europe Ten European countries have energy or carbon taxes ... (CO2 tax : Denmark, Finland, France, Italy, Norway, Netherlands, Switzerland; Energy tax : Czech Republic, Germany, Netherlands, UK) although tax levels differ ... (e.g., Finland: $19 / ton CO2, France : $25 - $35 / ton CO2, Switzerland : $125 / ton CO2) applications vary . . . (e.g., Germany : diesel, heating oil, electricity; Norway: shipping fuels, landfill waste; UK : excise taxes on cars) and exemptions / derogations are numerous : (e.g., Germany & UK : energy intensive industry; France: gas and cogeneration, Norway: major industry, oil and gas).

  22. Trading instruments in Europe • Many countries are exploring forms of trading : • GHG trades : Australia, Belgium, Canada, Denmark, European Union, Finland, France, Germany, Ireland, Netherlands, Norway, Sweden, UK, USA. • RES/Electricity: Australia, Belgium, Denmark, France, Germany, Italy, Netherlands, Sweden, UK, US • JI/AIJ : Canada, Czech Republic, Japan, Netherlands, Norway, Sweden, USA • Few have rules to link to international regimes • Start dates range from 2001 to 2008, with primary focus in electricity and energy sectors, and point of application of permit relatively high-level • Most are now aligning with / awaiting European Emissions Trading Directive

  23. European Emissions Trading Directive(European Env Council, 9 Dec 2002, as modified and passed by European Parliament, June 2003) • Mandatory caps on CO2 from power plants and most industrial facilities of > 20MW thermal capacity • Applies to all EU including Accession countries, covering about 45% of European CO2 emissions • Two phases: • 2005-7 precursor with national, force majeure and installation opt-out provisions, non-compliance penalty 40 Euros / tCO2 • 2008-12 compulsory, opt-in provisions for additional facilities & • non-CO2 gases, non-compliance penalty 100 Euros / tCO2 • Voluntary pooling arrangements for both periods, with safeguards to ensure transparency. • Partial auctioning, max 5% precursor period and 10% 2008-12 • Governments decide on allocation plan subject to Commission oversight (based on agreed National Allocation Plan criteria)

  24. UK ETS 2002-2006 Voluntary No power generators Indirect and direct emissions All six GHGs Absolute & relative targets Financial incentive Open to most sectors Open to projects EU ETS 2005-2007, 2008-2012 Mandatory Power generators Only direct emissions from large sources Only CO2 for now Only absolute targets Open to a limited number of sectors Project to be determined Comparing the UK ETS & the EU ETS

  25. Timing of EU trading relative to UK policies

  26. Incentives for technology and innovation: an overview

  27. Wide range of low carbon technology groups exist at various stages of the innovation chain Basic R&D Applied R&D Demon-stration Commercial-isation Diffusion Energy Supply • Photo-conversion • Fuel Cells • Advanced CHP • Fusion • Wave • Ultra-high efficiency CCGT • Offshore Wind • Biomass (Electricity) • Solar PV • Nuclear Fission • Onshore Wind • Biomass (Heat) Energy Demand • Process Replacement • Product Replacement • Process Improvement • Product Improvement • Buildings Services and Fabric Enabling • Hydrogen Production • Electricity Storage • Hydrogen Distribution • HVDC Transmission • Smart Metering • Intermediate energy vectors • Syngas Fuels Transport • Ethanol(Ligo-cellulose) • Fuel Cells • High efficiency powertrains • Biodiesel • Ethanol Note: Most technology groups have components at more than one stage of the innovation chain; for simplicity technologies shown at principle stage only Source: Carbon Trust: Low Carbon Technology Assessment 2002

  28. Policy Interventions Business Consumers Investments Driving forces and locus for intervention changes along the chain Government Basic R&D Applied R&D Demon-stration Commercial-isation Diffusion Market Pull Product/ Technology Push Investors

  29. In building a low carbon economy, energy efficiency and renewables have several advantages Characteristic Energy Efficiency Renewables Large Potential • PIU identified >100MtC by 2050 • PIU identified >50MtC by 2050 Cost Effective • Current economic potential in reduced costs >£12Bn/year • Costs reducing rapidly as technologies mature Long-term Solution • Once implemented, benefits are captured for investment life-cycle • Not dependant on a finite fuel source Incremental • Improvements driven by many end users • Low risk as capacity can be added incrementally

  30. Climate policy in Europe is less technology-focused than in US, but wider effort across innovation chain • Less aversion to government regulation • Environmental policy in 1980s heavily focused on technology standards / ‘BAT / BATNEEC’ • Shift towards overall emission targets on grounds of efficiency and innovation (UNECE agreements on NOx, SO2; Large Combustion Plant Directive) • Fifth Environmental Action Plan marked decisive move towards market instruments • Many member states deploy energy efficiency and market-based renewables incentives • Innovation policy itself relatively low attention, BUT • European institutions play large role in R&D. Sixth EU R&D Framework Programme features energy and environment strongly, big investment in the ‘hydrogen economy’ • EU governments well placed for action along the ‘innovation chain’

  31. EU governments spurred by success - wind energy in Europe, 1990-2000

  32. Technology and business engagement in the UK climate change programme

  33. UK White Paper commitments are backed by a wide range of policy instruments for the energy sector • Upstream energy (including generators) • IPPC Directive (& LCPD) • Non-domestic energy users: • CCL and CCLAs • IPPC Directive • UK ETS • Electricity suppliers: • Renewables obligation (ROC) • Energy efficiency commitments (EEC)

  34. Many instruments and support measures are targeted at business • Energy tax on electricity, coal and gas • Negotiated Agreements covering 6000 companies • 80% rebate in return for meeting sector based emission reduction targets Climate Change Levy • Direct participation through voluntary cap and trade – 34 companies • Participants from negotiated agreements • “Project based” participation Emissions Trading Scheme Renewable Obligation • Tradable certificates for renewable power • current 3% of power generation, rising to 10.6% by 2010 • Ofgem (Regulatory office) • Grants from Dept of Trade & Industry • The Carbon Trust Market Support

  35. The interfaces are complex! CDM projects (CERs) IET (PAAs) JI projects (ERUs) National trading schemes EU trading scheme UKETS Energy efficiency commitment (EEC) Renewables Obligation (ROC) Flare consents

  36. Over 80% by value of current government interventions have been in existence for <3 years .. But the total is considerable - Climate change programme now involves about £1.3bn/yr through wide range of instruments Total = £1.3Bn/year 15 >3 years 1-3 years <1 year Other Note: Other includes Public/Commercial and Agriculture Source: CSA Energy Research Review Group, Feb 2002, DEFRA, DTI, DTLR Press Releases, CT Analysis

  37. A key challenge has been managing interface between policy and business Carbon Trust is a business-led, government backed investment company set up to try and tackle this in context of wider UK programme • Reflects consensus between business and Government on support for the UK climate change programme • Independent company with secular Board - business, Government, NGOs, research community, trade unions • Govt funding current c.£50m/yr deployed through a flexible range of financial and non-financial investment support • Its objectives are, • To ensure that UK business and public sector meet CO2 targets • To improve competitiveness of UK industry through resource efficiency • To help UK industry capture commercial value of low-C technologies “The Carbon Trust will take the lead on low carbon technology and innovation in this country and put Britain in the lead internationally” The Prime Minister, October 2000

  38. Carbon Trust programmes support investment in both diffusion and tech development Develop new technologies Deploy existing technologies Towards a low-carbon economy Low Carbon Innovation Prog. Direct investment in UK based low-carbon technologies ~ £25m pa Enhanced Capital Allowances ~£150m pa Interest Free Loans ~ £10m fund Financial support Low Carbon Innovation Prog. Co-ordinate & broker technologists and funding partners Advice, training & accreditation ~ £20m pa Non- financial support Inform policy makers

  39. Conclusions • Climate change - real and serious challenge • Kyoto, the ‘only game in town’, has become a European-led test of multilateralism in the face of US unilateralism, raising it to highest political levels • Kyoto based upon principles of international economic instruments, leading to similar instruments at national levels • The main debate has moved from international policy formation to implementation • Design and compatibility of EU ETS key to this • UK implementation - a leading programme including investment incentives totaling c.$2bn Euro/yr • Supplementary overheads appended

  40. Supplementary Overheads

  41. Future CO2 emissions with Kyoto+: the impacts of global spillover

  42. Early 1990s: consensus-building, easy wins, and spin-offs 1997/8 Labour government restructuring 2000 Climate Change Programme Scientific concern accepted Advisory Committee on Business & Environment Strengthening of Energy Efficiency Best Practice Programme Elec. Privatisation and the dash-for-gas Non-fossil fuel obligation DETR under Deputy Prime Minister Marshall Report on Economic Instruments Climate Change Levy announced in budget Launch of negotiations on Climate Change Agreements ACBE Working Group on Emissions Trading Business engagement & support spearheaded by creation of Carbon Trust UK policy development

  43. CO2 constraints are likely to boost aggregate gas demand % different in gross inland consumption for EU-15 (Mtoe) for emissions level (relative to 1990) Stabilise -6% Solid Fuels -23.3 -40.4 Liquid fuels -4 -8.1 Natural Gas 2.9 5.1 Nuclear -1.1 -0.5 Electricity -2.2 -3.7 Renewable energy sources 8.6 21.1

  44. Gas and security in the EU Green Paper • New circumstances: internal market in energy, creation of DG-Tren, environment, rising security concerns • ‘The EU must take better charge of its energy destiny … at present it has too few resources and instruments’ [EU Green Paper] • Nuclear and coal ‘undesirables’ • Energy efficiency and renewables are priorities, need bigger incentives • gas prices should be delinked from oil • gas stocks needed?

  45. Synergies and tensions … Climate, Security and Liberalisation Liberalisation Environment Security Stronger EU role: ‘take charge of destiny’ * ** ** Renewables * ** ** Decline of coal ** ** xx Nuclear stagnation ** ? xx Gas into transport ? * ** Gas into electricity ** ** x

  46. Linking the climate levy, trading & negotiated agreements Climate levy: all business but blunt Incentive to negotiate - reduced rate (1) Incentive to join - reduced rate (2) Funded programmes Emissions trading: large producers Negotiated Agreements Information / allocation Efficiency & credibility

  47. GHG coverage

  48. UK ETS internal interfaces CCLAs with relative targets allowances Direct entrants with absolute targets (financial incentive) Gateway CCLAs with absolute targets Emission reduction projects credits

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