Month: December 2014

Climate change: positive messages on the international scene

By Dr Flora WhitmarshGrantham Institute

This blog forms part of a series addressing some of the criticisms often levelled against efforts to mitigate climate change.

smoke stacksThe Twentieth Session of the Conference of the Parties (COP 20) – the latest in a series of meetings of the decision making body of the UN Framework Convention on Climate Change –began in Lima this week. Many in the media are quick to point to the difficulty of obtaining international agreement on greenhouse gas emissions reductions, and to denounce COP 15, which took place in Copenhagen in 2009, as a failure. Far from being a failure, the Copenhagen meeting paved the way for future climate change action. World leaders agreed ‘that climate change is one of the greatest challenges of our time’ and emphasised their ‘strong political will to urgently combat climate change in accordance with the principle of common but differentiated responsibilities and respective capabilities’, and it was agreed that ‘deep cuts in global emissions are required’. The Copenhagen accord also said that a new Copenhagen Green Climate Fund would be established to support developing countries to limit or reduce carbon dioxide emissions and to adapt to the effects of climate change.

The last objective is in progress: the green climate fund was set up at COP 16, held in Cancun, Mexico in 2010, and several major countries have pledged money. Japan has pledged $1.5 billion, the US has pledged $3 billion, Germany and France have pledged $1 billion each, the UK pledged $1.13 billion and Sweden pledged over $500m. This brings us close to the informal target of raising $10 billion by the end of the year. The goal is to increase funding to $100 billion a year by 2020. There have also been several smaller donations. This is a key step in tackling climate change, because the gap between developed and developing countries in their ability to respond to climate change and their level of responsibility for causing the problem must be addressed.

Obtaining international agreement to reduce emissions is a real challenge. It is not surprising that it is difficult to reach consensus on a course of action between a large range of different countries at different stages of development who bear differing levels of responsibility for greenhouse gas emissions to date: the UN Framework Convention on Climate Change has 196 Parties. However, there has been significant progress towards global emissions reductions, led by the EU, China and the US.

UK commitments

Prior to the Copenhagen COP, the UK Climate Change Act was passed in 2008, and contains a legally binding commitment to reduce UK emissions by at least 80% on 1990 levels by 2050. In addition, the UK Committee on Climate Change has recommended an emissions reduction of 50% on 1990 levels by 2025 in order to meet the longer term target. Some have argued that by taking unilateral action, the UK put itself at risk of losing out economically to countries that had not made such pledges. Competitiveness concerns have been evaluated by the Committee on Climate Change, the body set up as part of the Climate Change Act to advise the UK government on emissions targets. The committee found that ‘costs and competitiveness risks associated with measures to reduce direct emissions (i.e. related to burning of fossil fuels) in currently legislated carbon budgets are manageable.’ Continued support from the EU emissions trading scheme may be needed in the 2020s, but this depends on progress towards a global deal.

By making this commitment the UK has been able to enter into negotiations with other countries from a position of strength. The UK is one of the leading historic emitters of carbon dioxide – it is, of course, the sum total of our emissions beginning in the industrial revolution that will, to a good approximation, determine humanity’s impact on the climate, not the emissions in any given year – and therefore it is right that the UK took the lead by making this commitment. Had we not made such a pledge, it would have put us in a more difficult position when negotiating with other countries, particularly those still on the path to development.

EU pledges

The UK is not now acting alone – other major countries have recently made significant emissions reduction pledges. The recent European Council agreement that the EU should cut emissions by 40% on 1990 levels by 2030 represents a step forward. It was decided that all member states should participate, ‘balancing considerations of fairness and solidarity.’ It was also decided that 27% of energy consumed in the EU should be from renewable sources by 2030, and a more interconnected European energy market should be developed to help deal with the intermittency of renewable sources of energy.

The EU target is still not quite as ambitious as the UK target. However, this latest EU agreement is a significant step in the right direction and demonstrates that international cooperation on a large scale is possible, albeit within a body like the EU with pre-existing economic ties. In addition, it generally costs more to cut emissions the faster the cuts are implemented. If the world is genuine in its commitment to tackling climate change, very significant emissions reductions are ultimately required, and delaying action means having to cut emissions more quickly at a later date – at a higher cost. In addition, the Committee on Climate Change found that despite short term increases in electricity prices, early action means that UK electricity prices are projected to be lower in the medium term compared to a fossil fuel intensive pathway, assuming there is an increase in the carbon price in the future.

China and the US

A recent development is the bilateral agreement between China and the US. China stated that its emissions would peak by 2030, by which time the country aims to get 20% of its energy from non-fossil fuel sources, and the US pledged to reduce its emissions by 26%-28% on 2005 levels by 2025. Some have suggested that the agreement does not go far enough because China’s emissions will continue to rise until 2030 under the deal, and the US target is not as stringent as the EU or UK targets. However, these pledges coming in the lead up to Lima from the two largest emitters globally are hugely significant, and pave the way for further progress.  China has already made significant progress in reducing the energy intensity (energy per unit of GDP) of its economy: the 11th Five Year Plan, covering the period 2006-2010 aimed to reduce energy intensity by 20%, and achieved a reduction of 19.1%. Despite some disruption to the energy supply, this success in meeting the target demonstrates the Chinese government’s track record of achieving its objectives on green growth. The current five year plan aims to cut energy intensity and carbon intensity (carbon emissions per unit of GDP) by a further 16% and 17% respectively on 2010 levels by 2015. It is right that developing countries should be able to grow their economies – China’s per capita GDP is still relatively low – and this has to be balanced with climate change targets.

The EU, China and the US together accounted for just over half of total global carbon dioxide emissions in 2013. Their pledges demonstrate that smaller groups of countries made up of the major emitters can make a difference without waiting for far-reaching international agreement on emissions reductions. Their willingness to act also has the potential to spur other industrialised countries into reducing their own emissions. More action is still needed, but there has been significant progress since the Copenhagen conference, which should pave the way for more ambitious pledges.

Why subsidise renewable energy?

by Ajay Gambhir, Grantham Institute

This blog forms part of a series addressing some of the criticisms often levelled against efforts to mitigate climate change.

 

It is often claimed that intermittent renewable sources of electricity (mainly wind and solar photovoltaics), are too expensive, inefficient and unreliable and that we shouldn’t subsidise them.

Wind turbines at a burning sunsetWhat are the facts?

Last year, governments spent about $550 billion of public money on subsidies for fossil fuels, almost twice as much as in 2009 and about five times as much as they spent subsidising renewables (IEA, World Energy Outlook 2014). This despite a G20 pledge in 2009 to “phase out and rationalize over the medium term inefficient fossil fuel subsidies” that “encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change”.

Reducing the cost of renewables

There is a key reason why it makes sense to subsidise the deployment of renewable energy technologies instead of fossil fuels. They are currently more expensive than established fossil fuel sources of power generation such as coal- and gas-fired power stations, because the scale of the industries that produce them is smaller and because further innovations in their manufacture and deployment are in the pipeline. As such there needs to be a period of translating laboratory-stage innovations to the field, as well as learning and scaling-up in their manufacture, all of which should bring significant cost reductions. This is only likely to be possible with either:

  • a) a long-term, credible carbon price at a sufficient level to make the business case for developing and deploying renewable energy technologies instead of CO2-emitting technologies; or
  • b) some form of subsidy in the short to medium term, which creates a market for these technologies and provides businesses operating in a less-than-certain policy environment with the incentive to build industrial scale manufacturing plants to produce them (ever more economically as scale and learning effects take hold).

Unfortunately, there is unlikely to be a long-term, credible and significant (“long, loud and legal”) carbon price anytime soon, given the immense political lobbying against action to tackle climate change, and the lack of global coordinated emissions reduction actions, which means any region with a higher carbon price than others puts itself at risk of higher energy prices and lost competitiveness. Whilst subsidies are also likely to raise energy prices, their targeting at specific technologies (often under some fiscal control such as the UK’s levy control framework) means they should have less overall impact on prices. In addition, subsidies have helped to put some technologies on the energy map faster than a weak carbon price would have done and have given a voice to new energy industries to counter that of the CO2-intensive incumbents.

Nevertheless, subsidies should not remain in place for long periods of time, or at fiscally unsustainable levels. Unfortunately some countries, such as Spain, have fallen into that trap, with an unexpectedly high deployment of solar in particular leading to a backlash as fiscal costs escalated, rapid subsidy reductions and the stranding of many businesses engaged in developing these technologies. Germany’s subsidy framework for solar, with its longer term rules on “dynamic degression” levels (which reduce over time depending on deployed capacity in previous years) has proven a better example of balancing the incentive to produce and deploy new technologies with the need to manage fiscal resources carefully (Grantham Institute, 2014).

Reaching grid parity

Fortunately, the price of solar and onshore wind has fallen so much (through manufacturing and deployment scale-up and learning that the subsidies were aimed at in the first place) that they are now approaching or have achieved “grid parity” in several regions – i.e. the same cost of generated electricity as from existing fossil fuel electricity sources. Analysis by Germany’s Fraunhofer Institute shows that solar PV, even in its more expensive form on houses’ rooftops, will approach the same level of electricity generation cost as (hard) coal and gas power stations in Germany within the next decade or so, with onshore wind already in the same cost range as these fossil fuel sources.  Subsidies should be phased out as the economics of renewables becomes favourable with just a carbon price (which should be set at a level appropriate to reducing emissions in line with internationally agreed action to avoid dangerous levels of climate change).

It’s important to note that grid parity of electricity generation costs does not account for the very different nature of intermittent renewables compared to fossil fuel power stations, which can very quickly respond to electricity demand peaks and troughs and help ensure that electricity is available as required. For example one common contention is that for every unit of solar capacity in northern latitudes, significant back-up of fossil fuel generation (most often gas turbines, which are quick to ramp up) is required to meet dark winter peak demand in the evenings. Indeed, analysis by the US Brookings Institute based on this principle (as given much publicity in The Economist in July 2014) suggested this would make solar PV and wind much more expensive than nuclear, gas and hydro power.

Unfortunately, and as reflected in the published responses to the Economist article, this analysis has proven to be too simplistic: not accounting for the fact that wind and solar provide complementarities since the wind often blows when the sun’s not shining; that electricity grids can span vast distances (with high voltage direct current lines) which effectively utilise wind and sunlight in different regions at different times; that there is a great deal of R&D into making electricity storage much cheaper; that electricity networks are going to become “smarter” which means they can more effectively balance demand and supply variations automatically; and that the costs of these renewable technologies are coming down so fast that (particularly in the case of solar) its economics might soon be favourable even with significant back-up from gas generation.

In summary, the world is changing, electricity systems are not what they once were, and there is a very sound economic case for meeting the challenge of climate change by deploying low-carbon renewable electricity sources. It is encouraging to see that there has been a rapid rise in the deployment of these technologies over the past decade, but more needs to be done to ensure that the low-carbon world is as low-cost as possible. This means supporting and therefore continuing to subsidise these critical technologies to at least some extent.

 


References

International Energy Agency (2014) World Energy Outlook 2014

Statement from the G20 in Pittsburgh, 2009, available at: https://www.g20.org/sites/default/files/g20_resources/library/Pittsburgh_Declaration.pdf

Grantham Institute, Imperial College London (2014) Solar power for CO2 mitigation, Briefing Paper 11, available at: https://workspace.imperial.ac.uk/climatechange/Public/pdfs/Briefing%20Papers/Solar%20power%20for%20CO2%20mitigation%20-%20Grantham%20BP%2011.pdf

Fraunhofer Institute (2013) Levelized cost of Electricity: Renewable Energy Technologies, available at: http://www.ise.fraunhofer.de/en/publications/veroeffentlichungen-pdf-dateien-en/studien-und-konzeptpapiere/study-levelized-cost-of-electricity-renewable-energies.pdf

The Economist (2014a) Sun, Wind and Drain, Jul 26th 2014, available at: http://www.economist.com/news/finance-and-economics/21608646-wind-and-solar-power-are-even-more-expensive-commonly-thought-sun-wind-and

The Economist (2014b) Letters to the editor, Aug 16th 2014, available at: http://www.economist.com/news/letters/21612125-letters-editor