Whether we are able to address climate change will come down to our ability to develop, commercialise and deploy low carbon technologies. This will not happen miraculously – some type of policy intervention will be necessary, but what type? As a first step to exploring this subject, I looked at the lessons that we can draw from other initiatives where policies have been used to support the development and commercialisation of emerging technologies. Such case studies remain the best way of separating fact from fiction. And some of the lessons are surprising.
1 Cooperation between the public and private sectors is the key to success
Both the public and private sectors have different strengths that they bring to technology development innovation and both are essential to the successful development of technology. In the case of FGD technology, utilities provided a framework for demonstrating and field testing the technology at industrial scale and provided valuable feedback into the resolution of specific operational problems, while the government provided funding for R&D and demonstration projects and facilitated the exchange of information. In the case of the wind power industry in Denmark, the Government put in place a strategy to develop a sustainable domestic wind power industry, provided capital and operating subsidies and tax incentives and supported the standardization of wind turbine designs, while the private sector took the risks and invested strongly in order to develop domestic markets and take advantage of export opportunities.
2 Long term planning, support and targets are crucial
Technology development and deployment take decades. The development of LEVs in Japan began in the1970s and continues today. It took up to 17 years to develop the first industrial sale strip casting technology. Even the development of electronic ballasts spanned two decades. Given these long periods, technology development requires a long term planning framework to guide the development of technology over decades. These plans need to incorporate long term aspirational targets, but as the LEV case study shows, these plans also need to be flexible enough to adapt to changing circumstances and to incorporate technology and market learning and feedback. Crucially, support from both the private and public sector needs to be sustained over the length of the technology development chain. One of the keys to the success of the Danish wind power industry was the reliable nature of public support and private commitment to the goals of the technology strategy. In contrast, in the U.S. the start-stop nature of government funding is widely cited as one of the factors that undermined the development of the renewables industry there.
3 Technology Development needs Government Support
With the exception of strip casting technology, none of the other technologies would have developed to the extent they have without direct public support. The Japanese Government’s support for LEVs, the US Government’s support for FGD and AFBC technology, and the Danish Government’s support for a domestic wind power industry were all critical to the successful development and deployment of these technologies. In each case public support was directed at three discrete phases: support for basic and applied R&D; support for demonstration and field testing; and support for scale-up and commercialization. In this sense, public support can be particularly valuable in helping technologies to cross the ‘valley of death’ when a technology still faces reliability, performance and cost problems, and the risks of private investment remain high, as was the case with the FGD and electronic ballast technologies in the U.S. In each case the development of these technologies have contributed public welfare benefits that private actors would not have been able to benefit from.
4 Successful policy combines technology push and demand pull approaches
Again, each of the technologies discussed in the case studies benefited from a combination of technology push and demand pull policies; there was no magic policy bullet that supported any one of those technologies. LEVs in Japan benefited from direct public financing of R&D, public subsidies for demonstration projects, Government procurement programs and infrastructure investment. AFBC technologies in the U.S. received direct government support for R&D and also benefited from electricity market reforms that created niche markets for co-generation technologies. And FGD technologies benefited from the introduction of stringent technology based emission standards, as well as public support for R&D focused on specific technical issues. This combination of technology push and demand pull is critical to accelerating technology innovation. What is also interesting is that these technology push and demand pull policies do not follow the technology sequentially through its innovation chain. Technology push and demand pull policies are often needed simultaneously at all stages of the innovation chain, perhaps to differing degrees. In Japan, even while the emphasis of policy was on early stage R&D of LEVs, the government still put in place procurement programs to pull this early stage technology in to the market. Likewise, while the US government introduced the emission standards to pull FGD technology in to the market, they continued to subsidize applied R&D that delivered further technology improvements and addressed outstanding operational issues.
5 Trying to pick technology “winners” is a fool’s game
The history of BPEV technology in Japan and AFBC technology in the US demonstrates how difficult it is to pick technology “winners”. BPEV technology was the technology of choice in Japan and received the lion’s share of public support, but it was HEV technology that finally penetrated the market. Likewise, the bubbling AFBC design technology was heavily backed by the U.S. government and industry, but it was the circulating AFBC design, developed largely in Europe, that achieved the greatest acceptance in the market. Indeed, the literature is littered with examples of technologies that were adjudged to be the most promising technology, that received hundreds of millions of dollars in funding, and that ultimately failed. Technology support programmes have faired better where they have identified specific technology clusters, and then allowed ‘the experts’ – that is technology suppliers, customers, markets, researchers and technologists – to choose the technologies in which to invest. The Government can facilitate this process by the introduction of competitive tendering, which the DOE employed in the case of the electronic ballast technologies, and in demanding greater accountability and performance from the private sector actors who undertake research and development using public funds. Detailed technical knowledge, technology expertise and industry experience is also essential to being able to assess the merits of alternative technology options and to direct public support at those problems or barriers that are most critical to the success of a technology.
6 Focus on areas of strategic importance or comparative advantage
The most successful cases of technology development are often focused upon areas of strategic national or corporate interest or on areas where nations or industries enjoy a comparative advantage. In the case of LEVs in Japan for example, both the Japanese government and Japanese vehicle manufacturers considered the development of LEVs to be of strategic and economic importance to the country as a whole, and the support for this technology was deemed important to positioning Japanese vehicle manufactures ahead of their European and North American rivals. They built this new technology on the basis of the comparative advantage that they enjoyed in electric drive trains and battery technologies. In the case of strip casting technology, the steel industry was driven to invest in the development of this new technology because it promised to reduce the capital costs of the casting stage and to deliver them a comparative advantage over rivals. In the case of the Danish wind power industry, government and industry sought to collaborate to build a comparative advantage in a field that they believed promised significant growth in the future. It is easy to forget that prior to the development of this industry, 92% of Denmark’s electricity came from coal and much of that was imported from Germany. The development of the Danish wind power industry was also crucial to diversifying the country’s power supply, to increasing the country’s energy independence, as well as improving the balance of payments benefits that came with a vibrant and growing export industry. The support of FGD technologies in the U.S. also helped develop a small, specialist export capability. In the 1990s when demand for FGDs in the U.S. was lower than expected, many U.S. FGD technology suppliers sold their technologies into the growing markets in Germany and Japan. The economic benefits that derive from each of these examples shows how a technology development strategy focused on an area of national strategic importance and built upon an area of comparative advantage can create vibrant new business sectors.
7 Overcoming reliability, performance & costs Issues are critical
Reliability, performance and costs are the three challenges that all new technologies must overcome if they are to successfully penetrate the market. This was the case with all of the case studies I investigated. Strip casting, FGD, electronic ballasts, AFBC, wind turbines, and LEV technologies all faced reliability, performance and cost barriers and one of the most important factors behind their relative success was the way in which public support and private investment was focused very precisely on overcoming these barriers. This often required large scale investment from both the public and private sector to establish demonstration plants (as was the case with AFBC technology) which allowed the technology to buy down the learning curve. In other cases it required specific R&D focused on outstanding operational problems such as the fouling of early stage FGD technologies, or the battery capacity and performance in LEVs. In other cases it required government procurement programs and field testing to demonstrate the reliability of new technology and communicate its benefits to users, as was the case with the US Government’s specifications for electronic ballasts in some federal buildings. In all of these examples this type of support was crucial to winning market confidence in the new technology.
8 Price Signals have only a limited role to play in the development of new technology
There is no evidence in any of the case studies that price signals played a determinant role in the development and deployment of the new technology. More important were direct financial subsidies, either in the form of feed-in-tariffs as was the case with the Danish wind industry, or in the form of tax incentives, rebates or exemptions as was the case with HEVs and LEVs in Japan, or in the form of matched public-private investment as was the case with AFBC and FGD technologies. In the sole example where price signals were used, namely the US SO2 trading scheme, their effect was to undermine the development of FGD technology by providing an incentive to the lower cost solution of fuel switching low sulphur coal.
9 Good-old fashioned Command and Control Policies are needed
In most of the case studies, mandatory, government imposed limits, targets or standards were the key to the deployment of the new technology. FGD and AFBC technologies were developed in response to the imposition of mandatory air quality emissions limits. Japanese HEVs and Danish wind technologies were developed to meet mandatory government targets for the uptake of these technologies.
10 Information Sharing and Technology Networks are important
The case studies also illustrate the importance of information sharing within the development community during the course of developing a technology and between the development community and users prior to and during the early stage deployment of the new technology. The US SO2 Symposium established by the EPA to facilitate the exchange of information on SO2 control technologies, including FGD technologies, is widely cited by industry professionals as having played a crucial role in the development and uptake of FGD technology. In a similar vein, the DOE’s publication of the benefits of electronic ballasts amongst potential users was important to reassuring the commercial building sector of the benefits of the new technology. A particular feature of the strip casting case study was the important role that technology micro-networks played in developing the new technology. Strip casting technology development was undertaken within the context of several international technology networks that generally comprised a steel maker, equipment supplier and engineer. Of the three most successful micro-networks, BHP cooperated with the Japanese machine builder IHI in one, Usinor, Arcelor and Thyssen cooperated in the EUROSTRIP micro-network, and Nippon Steel and Mitsubishi cooperated in a third successful micro-network. It was only in this way that the participants could marshal the resources, expertise and experience needed to develop the new technology. The micro-networks competed with one another and benchmarked there performance against one another, but they also shared information and the investment and progress of one group often spurred investment and progress by another group. These micro-networks imparted a very powerful momentum to the development of the strip casting technology. Public, private and academic cooperation and information sharing was also an important feature of the MITI’s market expansion plans for LEVs in Japan.
11 In spite of common characteristics, each technology is different
In addition to those characteristics that are common to each of the case studies, the above examples also illustrate that there are a myriad of other factors that will be important to the development of a technology and that these factors are often particular to that technology. For example, the failure to develop infrastructure, particularly recharging facilities for BPEVs, undermined the uptake of the new LEV technologies in Japan. Whereas, in the case of FGD technology, no substantial infrastructure requirements impeded the development or uptake of that technology as it was applied to new power stations or retrofitted to existing plant. In the case of the strip casting technology, development was led by the large steel makers and no small steel making companies played any significant role in the development of the technology. In contrast, in the case of the electronic ballast technology, incumbent firms had significant sunk investment in the existing technology and it was small, independent players who took the lead in developing the new technology. In the case of the Danish wind power case study, the new technology was largely welcomed by consumers, many of whom joined cooperatives and invested directly in wind farms located within their region. Whereas, an intensive campaign of consumer awareness was needed to convince users of the advantages of electronic ballast technologies. It is important to recognize these differences and to develop the technology strategy and policy accordingly.
12 R&D and wait…doesn’t work
Finally, none of the case studies above are examples of an “R&D and wait” policy approach. That is, public investment in R&D, and then let the markets take care of the rest. Such an approach does not work. Either new technologies take a very long time to mature, or worse, new technologies are developed elsewhere as a result of the innovative activities and policies of other nations and it is businesses in those countries that capture the benefits of innovation. Our understanding of the innovation chain has evolved so that we understand that public support and private investment have an important role to play in all stages of the innovation chain, simultaneously.
Summary of key policy lessons from the selected case studies
You’ll find the detailed case studies here.
Atmospheric Fluidised Bed Combustion Technology in the United States
Flue Gas Desulphurisation Technologies in the United States
Government-Industry Partnerships for electronic ballasts lighting systems
The development of strip casting technology in the iron & steel industry
Government Policy for Hybrid & Electric Vehicles in Japan
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Tags: Case Studies, Innovation, Low carbon technology
This fifth case study looks at the development of hybrid, electic and low emissions vehicles in Japan between the 1970s and the 1990s.
Japan’s dominance of the hybrid electric vehicle (HEV) market is the result of a conscious decision by the Japanese Government and automakers to invest in an area of strategic national interest, exploit an area of comparative advantage and commit to a programme of technology development spanning over 3 decades.
In the 1970s the Japanese Government, in response to the oil shocks and air pollution concerns, launched a series of market expansion plans for the development and commercialization of low emission vehicles (LEVs) and set targets for their uptake within Japan. The plans spanned horizons of at least 10 years and were intended to coordinate the actions of government agencies, automakers and suppliers, municipalities and universities in their effort to accelerate the development of LEVs. They identified the various barriers hindering technology development and called upon the various stakeholders to address those barriers through R&D, amending laws and regulations, creating new standards and building fuel infrastructure.
Over the course of two decades the MITI led a number of specific R&D initiatives, including the 5-year government-industry R&D programs launched in the 1970s, the electric vehicle field tests run through the late 1990s, specific research into new fuel cell and battery technologies as well as funding for high energy efficiency hybrid vehicles. The MITI funded programmes are usually long (>10 years) and divided into three phases starting with R&D on basic technologies, then demonstration and prototype, and finally, production and early deployment; the private sector is expected to increase its share of responsibility as the technology comes closer to commercialisation (Daito, 2002).
The R&D programmes first introduced by the MITI focused upon battery powered electric vehicles (BPEVs), which MITI and industry stakeholders adjudged to be the best technology option. However, the uptake was disappointing and only 655 BPEVs were introduced between 1977 and 1996, mostly in supported, niche markets (JEVA, 1996). The introduction of the Californian ZEV mandate in 1990 affected major Japanese manufacturers encouraging Toyota, Nissan and Honda to invest heavily in BPEV technology (Mauro, 2000; Patchell, 1999). Government purchasing programmes were implemented to encourage the uptake of the BPEVs, but these programmes fell far short of government targets, and infrastructure to support the operation of BPEVs was also slow to materialize. By 2000, the weak market response and stalling of the ZEV mandate in California led to a bleak domestic outlook for BPEVs.
LEV growth was catalysed by Toyota’s launch of the Prius hybrid electric vehicle in 1997, which saw technology developed for BPEVs put to use in a petrol-based HEV configuration. By 2001, over 50,000 HEVs were in circulation in Japan, and several new models of HEVs were being introduced onto the market. The MITI continued to provide financial support to HEVs by subsidizing half of the extra cost of an HEV compared to a comparable conventional vehicle (Daito, 2002). Toyota’s production and sales volumes gradually increased as the Prius captured greater market share. Cumulative sales of the Prius surpassed 1 million vehicles in 2008 and now most major car companies have a HEV in production or are in the process of developing such a vehicle.
Summary
- Japanese investment in LEVs was part of a long term plan implemented over several decades. It was a conscious decision taken by the government and Japanese vehicle manufacturers to invest in an area of strategic national importance and where Japanese industry already enjoyed a comparative advantage.
- In the latter stages, public support for, and private investment in, the new technology was motivated by a desire to position Japanese vehicle manufacturers ahead of their European and American rivals in a sector of the market that was considered to be strategically and economically important.
- The government took the lead in developing long term market expansion plans that coordinated the efforts of all public and private sector stakeholders around a shared vision that included specific targets.
- These targets proved to be unrealistic and none of the targets were ever met. However, the planning process was sufficiently flexible to allow the plans and the targets to adapt to changing circumstance and to reflect the technology and market learning and feedback.
- Much of the early R&D was focused upon BPEV technologies, which government and industry adjudged to be the most promising technology option. This judgment proved incorrect, reflecting the difficulties of picking “winning” technologies. Nevertheless, the advances made in BPEV technology fed directly into the more successful HEV technologies that made use of the electric drive train and battery technologies that came out of the BPEV research.
- Long term public support was based upon a cooperative model with industry. The R&D programs covered three distinct phases covering early stage R&D, demonstration and commercialization. The percentage of funding provided by the private sector was expected to increase as the technologies progressed through these three phases.
- Government subsidies, procurement programmes and the development of niche markets, all had a role to play in encouraging the early uptake of the new technology. However, it was not until HEVs became available that uptake increased in line with expectations, reflecting the ability of HEV technology to fit within the constraints of the existing transport infrastructure.
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Tags: Case Studies, Electric, Innovation, Transport
In the graphs below, I compare new renewable energy capacity with new conventional energy capacity for selected countries. The data comes from the EIA and is shown in GW for each year between 1980 and 2006. New renewable capacity (excluding conventional hydro) is shown in blue and new conventional capacity (including conventional hydro) is shown in red.
United States
United Kingdom
Germany
Spain
Australia
China
Brasil
Europe
World
Filed under: Renewables | 9 Comments
Tags: Australia, China, Energy, Europe, Germany, Renewable, Spain, Statistics, UK, US
An excellent study, by Dr. Tao Wang and Dr. Jim Watson of the Tyndall Research Centre, looks at the development paths necessary to substantially reduce China’s greenhouse gas emissions over the long-term. The study is a culmination of three years of research and it is probably the most thoughtful and comprehensive study of its kind to date. However, as the authors themselves remark, it is one thing to model alternative low carbon development paths and quite another to demonstrate their viability. In this piece I look at the results of this study and consider whether Watson and Wang’s development paths are achievable in practice.
Watson & Wang Explore Four Low Carbon Development Scenarios
The study explores four scenarios, whereby China might reduce its greenhouse gas emissions over the long-term. For the purpose of this study, China’s target emissions are set at between about 1.7Gt-CO2 and 4.4Gt-CO2 by 2050; these targets representing emissions caps that are consistent with different international burden sharing arrangements and equivalent to per capita emissions of between 1.15 and 2.96t-CO2.
The Low Carbon Development Scenarios Presented by Watson & Wang
The Results are Insightful: Difficult, but Achievable
The results of the study are insightful. According to Watson and Wang, it is possible to achieve the ambitious targets that the study cites; however, to do so will require that China’s greenhouse gas emissions peak between 2020 and 2030, no later. The most critical factor is the nature and speed of change in China’s economic and industrial structure. In the study, Watson and Wang envisage that China will undergo a relatively rapid transition to a service and technology economy. This, they say, will be ‘key’ to China’s low carbon development. Of the four scenarios that are presented in the study, all require a massive expansion in renewable energy capacity. The scenarios posit that 40 percent of China’s total energy demand will be generated from renewable sources by 2050; representing more than 60 percent of the country’s power generation. Under these scenarios, renewables would surpass fossil fuels as the largest energy source in China. Three of the four scenarios also require massive investment in carbon capture and storage (CCS). According to the study, China would have to begin deploying CCS technology no later than 2030 and would have to deploy this technology on 80 to 90 percent of its fossil fuel-fired portfolio by 2050 – between 600 and 1200GW depending upon the scenario – if the country is to meet its targets. All four scenarios also envisage a role for nuclear power, but this role is not as important as that of renewables or of CCS. Under the most optimistic nuclear scenario, the study envisages no more than 12 percent of China’s total energy demand coming from nuclear, or about 30 percent of its power requirements (about 400GW). The study also highlights the importance of significant improvements in energy efficiency, the electrification of the transport sector and complimentary social and economic policies. The study does not address the potential for biological sequestration.
Primary Energy Structure in 2050, under Four Low Carbon Development Sceenarios
Let’s take three of the key points in turn – the transformation to a service and technology economy; the massive deployment of new renewable energy capacity; and the large-scale roll-out of CCS technology– and consider how practical these might be.
Transformation to a Service & Technology Economy
Watson and Wang argue that for China to successfully meet its emission targets the country will need to rapidly transform from a predominantly agricultural and industrial economy to a service and high technology economy. Indeed they say that this is ‘key’ to China achieving its targets. Thus, according to their scenarios, by 2050 more than 80 percent of China’s Gross Value Added (GVA, which is an equivalent measure of GDP) will be generated from the service and technology sector. Over the same period, the contribution from agriculture will fall from 15 percent to 5 percent, and the contribution from industry (excluding technology) will fall from 30 percent to less than 15 percent. The Chinese economy would still depend upon a greater contribution from agriculture and industry than is the case presently in most European countries.
This scale of transformation has occurred before. In Japan for example, the agricultural sector’s contribution to national economic output fell from 35 percent in 1911 to 8 percent in 1969. But it is one thing to talk of such a transformation in a country with a population of 100 million people, as Japan had in 1969, and quite another to talk of such a transformation in a country as populous as China. No country with a population of over one billion people has ever experienced such a transformation. Perhaps the closest example would be the former Soviet Union, and that does not inspire confidence. At the very least, the economic, social and political ramifications of such a transformation will be staggering; more likely it will be revolutionary and few revolutions are without victims and unintended consequences/orderly.
If we accept that such a transformation is possible, it simply begs the question: if China will no longer be producing ‘widgets’ for the world, then who will be? Who will be feeding, clothing and supplying China in 2050? The transformation that Watson and Wang envisage may reduce China’s emissions, but it will simply move the problem elsewhere; it will not solve it. It seems to me that the key to low carbon development is not a transformation to a service and technology economy reliant upon imports of emissions intensive goods, but rather a transformation to an economy that balances the agricultural, industrial, service and technology sectors – but that is a subject for another post.
Massive Deployment of Renewable Energy Sources & Technologies
Watson and Wang argue that in order to meet the ambitious emission targets, China will need to rapidly increase renewable energy capacity, from current levels of 76GW to between 1,200 and 2,000GW depending upon the scenario. This is an extremely ambitious programme of expansion; twice the size of the development required to meet the EC’s Renewable Energy Directive and four times the size of the US programme presented in the American Economic Recovery Act and the Waxman-Markey bill. It would require a total investment of US$85 billion per year over 40 years. New wind power capacity would need to be added at a rate of 16GW per year and new solar capacity would need to be added at a rate of about 20GW per year – these figures are five times higher than the current installation of new wind power and over one hundred times higher than the current rate of installation of new solar. Biomass would also play an important role, though as the authors note, first-generation biofuels would be unsustainable on such a scale. Thus, China would need to rely upon second- and most probably third-generation biofuels for as much as 15 percent of its total primary energy demand under some scenarios.
The scale of renewable energy deployment that Watson and Wang envisage is ambitious, but it is not outside the realms of possibility. The approximately US$85 billion per year of investment that would be required is in the order of 1 to 2 percent of China’s current GDP, which is large, but not excessive given the magnitude of the problem that renewable would address. Chinese government policy has also highlighted renewable and particularly wind and solar technologies as nationally important economic sectors, and recent developments in China’s nascent renewable industry also augur well. In 2008 China led the world in new installed wind capacity, installing 6GW of new wind power and doubling its existing capacity. China also leads the world in solar thermal water heaters and Chinese companies are amongst the world’s largest manufacturers of renewable energy technologies and components. There are obvious opportunities for China to develop a dominant position in the renewable sector on the back of a massive domestic market.
Nevertheless, we cannot look at China in isolation. The combined renewable energy programmes of Europe, the US and China would require the development of more than 3.5TW of new renewable capacity between now and 2050: this is equal to four-fiths of the world’s current installed electricity capacity. The renewable energy sector is already stretched meeting current demands. There is pressure on land and resources, skilled renewable engineers are in short supply, capital is not as easy to come by as it once was, infrastructure is lagging behind, and planning approvals and permits are taking longer to come through. To deliver such an ambitious programme will require a lot more than just technology; it will require engineers, infrastructure, capital and institutions.
Large-scale Roll-out of CCS Technology
Watson and Wang also envisage an important role for CCS. Indeed there is a lot riding on CCS; it is important in three out of the four scenarios. Indeed, without CCS it is difficult to see how China would achieve the targets cited in the study. According to Watson and Wang, China would need between 600 and 1,200GW of installed CCS by 2050 – covering 80 to 90 percent of all fossil-fuelled power stations. By my reckoning, this would equate to about 7Gt-CO2 each year that would need to be sequestered in a suitable geological structure. Given that China has an estimated capacity to store over 3,000Gt-CO2 in oil, gas, coal and deep saline structures, this figure would appear to be achievable. Nevertheless, the programme is again extremely ambitious. For example, it is several times greater than the 160GW of CCS that the EPA and EIA forecast will be needed in the US to meet the emission reduction targets under the Waxman-Markey bill.
Despite the fact that CO2 storage is used in the oil and gas industry on a small-scale, CCS technology for use in alongside a coal-fired power station is not yet technically or commercially viable. There is no commercially operating coal-fired power plant anywhere in the world that has installed CCS technology. The development of CCS will therefore require a multi-national research effort. In China, domestic research into CCS is limited at present, and plans to have a pilot CCS plant operational by 2012 are still at a very early stage. Nevertheless, a number of joint Sino-European and Sino-American research programmes have recently been launched and much hope has been placed in these initiatives. In Europe, the EC has set an objective of mounting 10 to 12 demonstration-scale CCS projects by 2015, with a view to having the technology commercialised by 2020. There is more than €7 billion of potential funding earmarked for such projects as part of the European Economic Recovery Plan and the New Entrant Reserve provisions under the third phase of the EU ETS. If these objectives are met, a roll-out of the technology in China starting in 2030 might be considered feasible. But it’s a big if. The EU does not have an impressive track record in developing and commercialising large-scale energy technologies. Consider the European Pressurised Reactor (EPR) Programme. The new reactor has been under development for more than twenty years. The first commercial-scale version is only now being built in Finland and it is already €1.5 billion over budget and 3 years behind schedule; the technology is not even licenced for deployment in the United States and the United Kingdom. The United State’s track record in developing large-scale energy technologies may be marginally better, but development of such type and scale take decades, not years.
Aside from the many technical and economic elements which must be resolved if CCS is to be considered a workable solution, there are also several legal and financial issues that will need to be addressed if CCS is to be adopted by commercial entities. CCS requires the storage of CO2 in a geological structure in perpetuity. Who will take on the legal and financial liabilities of such storage? These are not secondary issues; no commercial enterprise that I know of would be willing to commit to a commercial-scale project without clear limits on their financial and legal liabilities; it would be tantamount to signing a blank cheque. The expense of building a new coal-fired CCS power plant exceeds most companies’ balance sheets, so if utilities cannot find a way to transfer these project risks to other parties, then credit-rating agencies will cut their ratings, undermining the company’s market value and adding even further to their costs. Here too however, there are a number of positive initiatives underway. In Europe, the EC has begun developing a Directive for CCS projects that will articulate the legal and financial framework for such projects. Likewise, under the CCS provisions of the Waxman-Markey bill in the US, clear guidelines are provided for the assignment of financial and legal responsibility for the stored CO2.
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Tags: 2050, BRIC, China, Energy, Future, Low carbon growth
In this piece I look at the strengths and weaknesses of the cap-and-trade provisions under the Waxman-Markey bill and the lessons that European policymakers could learn from the US approach.
Strengths
Coverage
The Waxman-Markey provisions cover all six greenhouse gases and 86 percent of US GHG emissions. Once we take into account the inclusion of domestic offsets, there will be very few emission sources that do not participate in the scheme in one form or another. In contrast, the EU ETS from Phase 3 onwards will cover just three greenhouse gases and only 52 percent of EU emissions. EU policy makers need to expand the scheme to include all six greenhouse gases and increase its coverage by including transport fuels and waste amongst the liable sectors.
Allocation
The Waxman-Markey bill makes innovative use of the allocation of allowances. Not only does it allocate allowances with the objective of aiding the worst-affected liable parties, it also aims to use allocation to encourage the development of clean technologies, offset the impacts of rising energy prices and to support domestic and international adaptation and reforestation. As with many schemes, allowances are allocated to energy intensive, trade exposed industries in order to reduce the impact of the scheme on these sectors. However, this represents only a small portion of the total allowances – about 15 percent in 2014, falling to 11 percent by 2020 and close to zero by 2030. The majority of the remaining allowances are still allocated gratis, but in this case to unregulated sectors, with stipulations that the revenue from the allowances be used to offset price increases in electricity, gas and heating oil and to invest in renewable energy, energy efficiency and carbon-capture and storage technologies. A small portion of allowances are also to be allocated to public bodies with the proceeds to be invested in international technology transfer, international and domestic adaptation and the reduction of tropical forests deforestation. In total, between 2012 and 2025 about three-quarters of allowances are to be directed towards consumer assistance and other public benefit programmes. From its inception, the scheme will also include a relatively large portion of allowances for auction – about 16 percent in 2018 rising to 20 percent by 2020 and 70 percent by 2030 – with the revenue recycled back to low and middle income households as a tax credit or dividend. This imaginative use of the valuable resource that allowances represent is in stark contrast to the experience in the EU ETS to date, where allowances have been allocated gratis to liable parties, with no, or limited, safeguards in place to reduce the impact of the scheme on energy prices and on households, or with limited revenue raised to fund additional technology development or other important public schemes. With the centralization of the allocation process under phase 3 of the EU ETS, we will have to hope that the EC is ready and able to take a similarly imaginative view of allocation in the future. The EC’s intention to auction 60 percent of allowances in 2013 is an excellent development, though further information is needed on how that revenue will be used to respond to climate change.
Regulation
The Waxman-Markey bill sets out a very clear framework for the regulation of trading in emission allowances and their derivatives. Under the bill’s provisions, the Federal Energy Regulatory Commission will be charged with the regulation of the cash market in allowances and offsets; while the Commodity Futures Trading Commission will have responsibility for the regulation and oversight of the derivatives market. Notably, the bill would prohibit over-the-counter trading of derivatives, which is the source of potential market-abuse. These provisions, taken in tandem with other proposed US legislation that would require greater disclosure of derivative trading activities and may also impose quantitative limits on non-commercial derivative positions, would create a very strong regulatory framework that would increase confidence in the trading mechanisms and reduce the potential for abuse. In contrast in Europe, the regulation of derivative trading is left largely to individual national regulators, which translates into a lack of consistency, less than transparent reporting and the potential for abuse. In Europe, there is no prohibition on over-the-counter derivative trading and there are no proposals to limit derivative positions as there is in the US.
Domestic Offsets
The Waxman-Markey bill also lays the foundations for the inclusion of domestic emission offsets. Under the bill’s provisions, domestic offsets will be eligible for inclusion in the cap-and-trade scheme. The offset programme will be administered by a dedicated body, created specifically for that purpose – the Offsets Integrity Advisory Panel – reporting directly to the EPA. Further, the bill includes provisions to encourage domestic offsets over international offsets by discounting international offsets by 1.25 starting from 2018. These provisions create a framework for the inclusion of a number of domestic abatement opportunities, create clear rules to ensure the integrity of these offsets and provide greater incentives for domestic abatement over international actions. In contrast, it will not be until phase 3 of the EU ETS when domestic offsets could be accepted under the scheme and at present there have been no further information on the type of domestic offsets that might be eligible, the way in which such a scheme would be administered, and which body would be responsible for overseeing such as scheme. European policy makers need to act promptly to provide clear guidelines on the eligibility, administration and regulation of domestic offsets under phase 3 of the EU ETS.
Weaknesses
International Offsets
The Waxman-Markey bill would allows liable parties to use up to 1 billion international offsets per year towards their compliance obligation (up to 1.5 billion under certain circumstances). This would mean that the US could meet its entire emission reduction task using international offsets from the beginning of the scheme through until 2018. International offsets could represent up to 70 percent of the US emission reduction task in 2020 and 14 percent in 2050. In contrast, under the rules proposed for Phase 3 of the EU ETS, liable parties can use international offsets for up to 50 percent of the emission reduction task, which would equate to an average of about 200 million offsets per annum over the period 2008 to 2020.
Agricultural and Forestry Offsets
The Waxman-Markey bill also includes a number of concessions to the agriculture and forestry industries. A fifth title was added to the bill in its final stages of negotiations in the US House of Representatives. This title would allow the inclusion of emission offsets from agricultural and forestry sources. These provisions are poor for several reasons. First, it is difficult to quantify offsets from even the most straightforward projects. The risks of double-counting, exaggerated baselines and poor verification are well-known. In the case of agriculture and forestry sources, the quantification and verification of emission offsets are made all the more difficult by the complex nature of biological carbon sequestration and the difficulties of making a complete inventory of all GHG sources and sinks. It is doubtful that a robust methodology could be found to cover these sources – at least one that is cost-effective. The second problem with these provisions is that they stipulate that the offsets form these sources are to be subject to review and administration by the US Department of Agriculture, not by the EPA as is the case with other domestic offsets. The USDA has no experience in managing or certifying offset programmes, whereas the EPA has considerable expertise in the regulation of emission sources. It is to be hoped that these provisions will be removed from the final bill – at least until robust methodologies for quantifying net carbon fluxes from agricultural and forestry activities can be established.
Trade Measures
The Waxman-Markey bill also includes provisions that would require The President, in the absence of an ‘equitable’ international agreement to limit GHG emissions, to introduce a system of international reserve allowances for imported goods. These provisions would effectively extend the proposed cap-and-trade scheme to designated imports. Under such a scheme, importers would have to acquire allowances before products covered by the scheme could be sold in the US. This is effectively an import permit program that subject imported goods to a tax adjustment equal to that imposed on domestic goods under the cap-and-trade scheme. The problem with this measure is one of practicalities. The proposed measure is theoretically consistent with WTO rules. However, it is extremely difficult to see how this measure could be implemented in practice. At the most fundamental level it would be necessary to quantify the GHG emissions associated with the imported product and to do so in terms that are identical to that used for the domestic product. At a practical, logistical and administrative level the scheme is probably unworkable.
Lessons for European Policy Makers
- Expand the coverage of the EU ETS further – include all six greenhouse gases and transport and waste related emissions.
- Put in place a clear and transparent framework for the inclusion of domestic offsets. Move forward quickly to publish guidelines and protocols for the inclusion of domestic offsets to provide clarity and encourage domestic action.
- Make more imaginative use of allocation and publish clear guidelines on how rauction revenue will be used.
- Introduce greater (and consistent) regulation over derivative trading, including the mandatory publication of individual positions and a prohibition on over the-counter derivative trading.
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The following graphs provide some insights into the disposition of allowances under the Waxman-Markey bill. The graphs illustrate just how innovative US policy makers have been in their distribution of allowances under the cap-and-trade provisions of the bill. US policy makers have made the most of the valuable resource that allowances represent. They have drafted a framework which enables them to allocate allowances to the worst-affected liable parties, to encourage the development of clean technologies, to offset the impacts of rising energy prices and to support domestic and international adaptation and reforestation. It is undoubtedly one of the greatest strengths of the bill and European policy makers could learn a great deal from this approach.
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Tags: ACES, Emissions Trading, US, Waxman-Markey
A very quick comparison of the proposed Waxman-Markey Cap-and-Trade Scheme, the EU Emissions Trading Scheme and the Carbon Pollution Reduction Scheme in Australia.
| ELEMENT
|
WAXMAN-MARKEY |
EU ETS |
CPRS |
| EMISSIONS TARGETS | 3% below 2005 levels by 2012.
20% below 2005 levels by 2020. 83% below 2005 levels by 2050. |
21% below 2005 levels by 2020 in absence of global agreement.
30% below 2000 levels by 2020 in event of global agreement. 80% below 2000 levels by 2050. |
108% of 2000 levels by 2012.
5% below 2000 levels by 2020 in absence of global agreement. 15% below 2000 levels by 2020 in event of global agreement. 60% below 2000 levels by 2050. |
| COVERAGE | 86% of US emissions.
Coverage of both upstream and downstream sources, including electricity, iron & steel, cement, paper, refining, transport fuel, natural gas. Excluding aviation. All six GHGs. |
52% of EU emissions from Phase 3.
Covering +12,000 sites. Covering direct downstream sources, including electricity, iron & steel, cement, paper, aviation (from Phase 3). Excluding transport. CO2 emissions in Phase 1. N2O and PFC emissions from selected sources in Phase 3. |
75% of Australian emissions.
Covering 1,000 sites. Focus on upstream sources, including coal, natural gas, transport fuel, iron & steel, cement, paper. Including aviation via upstream fuel use. All six GHGs. |
| ALLOCATION | Gratis allocation of about 20% of allowances to selected liable parties, notably trade exposed industries, declining over time and phased-out by 2035.
Gratis allocation of about 40% of allowances to selected sectors to reduce impact of scheme on consumers, notably electricity, natural gas and heating oil suppliers. Gratis allocation of about 20% of allowances to selected sectors to encourage development of clean technologies, notably state governments, automakers and CCS pilot sites. Remaining allowances auctioned, increasing from 18% in initial years to about 70% by 2030. |
Gratis allocation to most liable parties to date with some limited auctioning on a country-by-country basis.
From phase 3 estimate about 60% of allowances will be auctioned and the remainder allocated gratis to worst-affected sectors. Gratis allocation will be phased out by 2020. |
Majority auctioned with price cap.
Portion reserved for allocation to trade-exposed industries. |
| INDUSTRY SUPPORT | Support provided to trade exposed sectors via gratis allocation of allowances.
Support provided to affected industries via gratis allocation of allowances to offset energy price increases. Financial support provided to low income households and affected workers from revenue from auction of allowances. |
Support provided indirectly via gratis allocation of allowances to energy intensive sectors and new entrant reserves. | Support provided to electricity generators and trade exposed energy intensive industries via gratis allocation of allowances and funding.
Financial support to affected regions and industries from revenue from auction of allowances. Estimated A$23 billion to be transferred to various support programs over first four years of scheme, including A$750 million for indirect assistance to coal mining sector. |
| PRICE CONTROLS | Minimum auction price of US$10, rising at 5% plus CPI each year.
No price cap. |
No price cap. | Price cap of A$40 for first 5 years, rising at twice CPI. |
| COST CONTAINMENT MEASURES | Unlimited banking.
Two-year compliance period with unlimited borrowing within the compliance period. Borrowing up to 15% of allowances from 2 to 5 years ahead at 8% interest. Strategic reserve of 5% (rising to 10%) of allowances available for auction if allowance prices exceed 160% of average price over rolling 3 year period. |
Unlimited banking.
Five-year compliance period with unlimited borrowing within the compliance period. Reserve of 5% of allowances will be retained for new entrants. |
Unlimited banking.
Price cap of A$40/AEU for first 5 years rising at twice CPI. |
| EMISSION OFFSETS | Allow up to 2 billion offsets per year.
Allow up to 1 billion international offsets, rising to 1.5 billion under certain circumstances. Allow up to 1 billion domestic offsets. Offsets from forestry, agriculture and landuse changes are eligible. |
Allow use of CERs and ERUs up to 50% of the emission reduction task, equivalent to about 200 million CERs/ERUs per year over 2008 to 2020.
From Phase 3 domestic offsets are eligible but there are no guidelines yet published. Offsets from forestry, agriculture and landuse changes are not eligible. |
Allow unlimited use of selected Kyoto Instruments (CERs & ERUs).
Provisions exist to expand accepted instruments over time. Offsets from forestry are eligible; offsets from agriculture are not eligible at the outset, but this will be reviewed in 2013. |
| REGULATION OF TRADING | Federal Energy Regulatory Commission responsible for regulation of cash market in allowances and offsets.
Commodity Futures Trading Commission responsible for regulation of derivatives market. Over-the-counter trading of derivatives prohibited. |
Regulation is the responsibility of individual national regulators, such as the Financial Services Authority in the UK, or the Autorité des Marchés Financiers in France.
Over-the-counter trading of derivatives is permitted. |
Derivatives will be defined as financial instruments and regulated under the Australian Financial Services Act. |
| TRADE MEASURES | In absence of international agreement, obligation to introduce an import credit scheme on imported products, linked to the emission trading scheme. | No trade measures proposed. | No trade measures proposed. |
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Tags: CPRS, Emissions Trading, EU ETS, Waxman-Markey
If we take a look at some of the numbers behind the Waxman-Markey Bill, we get a clearer sense of its ambition, its limitations and the winners and losers.
Content of the Bill
From reading much of the coverage of the bill, one might be forgiven for believing that the bill is nothing more than a cap-and-trade scheme. In point of fact it is a lot more than just a trading scheme. The bill includes provisions that mandate emission performance standards for new coal-fired power stations, making it virtually mandatory for such sites to install CCS. It includes a mandatory nationwide renewable energy standard and funding provisions for a range of renewable energy, energy efficiency and clean transport technologies. The bill also sets objectives to reduce tropical deforestation and it would make use of the revenue generated from allowance allocations to fund domestic and international adaptation, as well as international technology transfer. You’ll find an overview of the bill here.
Coverage of Cap-and-Trade
The bill proposes a cap-and-trade scheme which would cover 84.5% of US emissions by 2016. This compares more than favourably with the EU’s coverage of just 52 percent (assuming the proposals to extend the scope of the EU ETS are accepted), or the coverage under the proposed Australian CPRS of about 75 percent. When we take into account that the bill also allows for the participation of domestic emission offsets, it is evident that there will be very few US emissions sources that will not participate in the scheme in one way or another.
Emissions Reductions
The bill would cap emissions from large sources at 17% below 2005 levels in 2020 and at 83% below 2005 levels in 2050. Relative to the EPA’s projected business-as-usual emissions, this is equivalent to an emissions reduction of 1.4Gt-CO2 and 7.1Gt-CO2 respectively. If these targets are met, US per capita emission will fall from their current level of about 24.5t-CO2, to 17.8t-CO2 in 2020 and 3.07t-CO2 in 2050. The latter figure is in line with the attainment of a global emissions target of 27Gt-CO2, assuming all other countries are able to achieve the same per capita emissions. By 2050 the US emissions per unit of GDP would have declined to one-tenth of their current levels.
Role of International Emissions Offsets
The bill allows for liable parties under the cap-and-trade scheme to use up to 2 billion emission offsets per year in order to meet their emissions caps. Half of these emissions offsets may be obtained from international projects. Given the emission reductions that are required to achieve the caps, this would mean that the US could meet its entire emission reduction task using international offsets from the beginning of the scheme through until 2018. Thereafter, the US could meet 70 percent of its emission reduction task in 2020 with the use of international offsets, falling to 14 percent by 2050.
Effects on the Global Carbon Market
In 2016, 5.4 billion allowances will be allocated or auctioned under the proposed scheme. Compare this with the 1.9 billion EU ETS allowances that would be allocated or auctioned in 2016 under the proposals for Phase III of the EU ETS. In terms of the underlying carbon asset, the proposed US scheme would be almost three times the size of the expanded EU ETS.
Renewables Development
The bill mandates the generation of 20 percent of total electricity from renewable sources by 2020, with the possibility to use energy efficiency measures to cover 5 percent of the target. This would equate to a renewable energy target of 650 TWh (given the EIA forecast of electricity consumption in the US in 2020 is 4,311 TWh and assuming energy efficiency measures are used to cover 5 percent of the target). Current renewable capacity in the US (excluding conventional hydro) is about 30 GW and generates about 100 TWh of electricity per year. So to achieve the target, will require the development of about 120GW of new renewable capacity, which is about four times greater than the current installed renewable capacity (excluding conventional hydro). However, the bill is less ambitious than it at first appears. This is because the earlier American Recovery and Reinvestment Act (ARRA) has already provided a significant boost to renewables, which the EIA estimates will be in the order of 50 GW of additional new renewable capacity by 2020. So the bill itself would only add another 70 GW to that figure up to 2020. It is certainly less ambitious than the target proposed under the EU Renewable Energy Directive, which would require about 3,000TWh of installed new renewable generation by 2020 – almost five times greater than that proposed under the bill.
Energy Efficiency Potential
As noted above, the bill would allow States to meet 5 percent of the renewable energy standard using energy efficiency measures (rising to 8 percent under certain circumstances). This means an annual market for energy efficiency improvements of 220 TWh by 2020, which is the equivalent of half of the UK’s annual electricity generation. The bill also sets forth a number of other energy efficiency provisions relating to lighting products, appliances, and commercial furnaces, as well as funding for energy efficiency technologies. Nevertheless, energy efficiency is one area where the bill is relatively unambitious. Even with all measures introduced as proposed in the bill, the EPA estimate that US energy intensity (primary energy consumption per dollar of real GDP) would fall by less than 12 percent by 2050. This is extremely small, when compared with the 46 percent drop in US energy intensity that was achieved between 1975 and 2005. Energy efficiency is the bill’s biggest missed opportunity.
Reductions from CCS
The bill includes provisions that would effectively make it mandatory for new coal-fired power stations to install CCS technology. In their analysis of the bill, the EPA estimates that an additional 56 GW of CCS would need to be installed by 2025, increasing to 162 GW in 2050. That means 56 GW of CCS plant would need to be built in just 17 years – when there is not a single commercially operating example anywhere in the world. Incidentally, this would also mean that approximately 300Mt-CO2e per annum would need to be sequestered by 2025 – that is greater than the total annual emissions from a country like The Netherlands. There is a lot riding on CCS.
The Biggest Winner is Nuclear
While the bill greatly encourages the development of renewable energy, the biggest winner is nuclear. This is not evident from the text of the bill, but it is evident from a study of the EPA and EIA data. In the absence of the bill, the EIA estimated that there would be 7GW of new nuclear capacity by 2025 and 12 GW of new nuclear capacity by 2050. However, if we look at the EPA analysis, they estimate that with the passage of the bill, new nuclear capacity would increase to 34 GW in 2025 and 161 GW in 2050. There is a certain rationale behind these results: fossil fuel generation is forecast to fall dramatically; the renewable energy targets are not massively higher than the EIA was already forecasting; and the energy efficiency measures are very modest. These facts combine to create a significant gap in supply, which (rightly or wrongly) the EPA expect nuclear to fill.
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Tags: Carbon Market, EU ETS, Nuclear, Policy, Renewable, US, Waxman-Markey
The American Clean Energy and Security Act, ACES, H.R. 2454, previously known as the Waxman-Markey climate and energy bill, was recently passed by the US House of Representatives on 26 June 2009. The key elements of the bill are presented below.
Sponsors
The Bill is authored by the House Energy & Commerce Committee and is sponsored by the Committee’s Chairman, Congressmen, Henry Waxman (D-California) and by the Chairman of the Environment & Energy Sub-committee, Ed Markey (D-Massachusetts).
Progress to Date
The Bill was drafted by the House Energy and Commerce Committee. It was released in a draft form in March 2009 and was subsequently amended. It passed the House Energy and Commerce Committee on 21 May 2009. The bill was subsequently sent before eight other congressional committees that have responsibilities relating to the content of the bill. The most important of these committees were the Natural Resources Committee, the Ways and Means Committee and the Committee on Agriculture. These Committees reviewed and endorsed the bill. On 26 June, the Bill was sent to the US House of Representatives, where it was passed by a vote of 219 to 212.
Next Steps
After the summer recess, the bill will be sent to the Senate, which has drafted a comparable bill on energy and climate change. The Senate bill, called the American Clean Energy Leadership Act (ACELA), is a bipartisan bill, authored by the Senate Committee on Energy & Natural Resources under the chairmanship of Senator Jeff Bingaman (D-New Mexico). This bill passed the Senate Energy & Natural Resources Committee on 17 June 2009. In addition, the Senate’s Environment and Public Works Committee, chaired by Senator Barbara Boxer (D-California) has been charged with developing provisions for a cap-and-trade scheme that will be incorporated into the ACELA. The Senate Majority Leader, Harry Reid (D-Nevada) has requested that these provisions, as well as all Committee mark-ups of the ACELA, be completed by 28 September. In all likelihood, for the Waxman-Markey Bill to pass the Senate, it will need to be ‘reconciled’ with the Senate’s ACELA, which will mean further changes and compromises. If this can be achieved, the joint legislation will be sent to both chambers for a final vote, before being sent to the President for signing into law.
Overview of the Bill
The bill comprises five titles.
Title I – Clean Energy: would set standards for conventional and renewable energy technologies and provide funds to support the development of clean energy projects and technologies.
Title II – Energy Efficiency: would mandate new energy efficiency standards for appliances, buildings, transport and industry and provide funds to support energy efficiency projects and technologies.
Title III – Reducing Global Warming Pollution: would create a national cap-and-trade scheme that would reduce GHG emissions from major sources by 17 percent by 2020 and 83 percent by 2050 relative to 2005 levels.
Title IV – Transitioning to a Clean Energy Economy: would provide financial assistance to those industries and persons affected by the Bill’s provisions and protect consumers from increases in energy prices.
Title V – Offsets from Domestic Forestry & Agriculture: would provide opportunities for domestic emissions from the forestry and agricultural sectors.
Overview of Waxman-Markey Bill
The Key Elements of the Bill
Clean Energy
Renewable electricity standard
The bill would create a nationwide renewable electricity standard (RES). States would be required to produce 6 percent of total electricity from renewable sources by 2012 and 20 percent by 2020. Up to 5% of the RES may be met with energy efficiency measures in place of renewables, rising to 8 percent under certain circumstances.
Eligible renewable sources are defined as wind, solar, geothermal, renewable biomass, biogas derived exclusively from renewable biomass, biofuels derived exclusively from renewable biomass, qualified hydropower commissioned after 1992, and marine and hydrokinetic sources.
Performance Standards for New Coal-Fired Power Plants & Carbon Capture and Sequestration
The bill would require coal-fired electricity generators to meet strict emission performance standards. These standards would effectively make the implementation of CCS technology mandatory at new coal-fired power stations. New coal-fired power stations that implement CCS technologies would be eligible to receive federal financial assistance in the form of freely allocated emission allowances, under certain conditions.
| Coal-fired plant permitted between 2009 and 2015 | Must achieve a 50 percent reduction in emissions by 2025. | Would be eligible for federal financial assistance if CCS is implemented within 5 years of commencement of operations. |
| Coal-fired plant permitted between 2015 and 2020 | Must achieve a 50 percent reduction in emissions by 2025. | Would be eligible for federal financial assistance if CCS is implemented upon commencement of operations. |
| Coal-fired plant permitted after 2020 | Must achieve a 65 percent reduction in emissions upon commencement of operations. |
The 2025 deadline may be brought forward in the event that more than 4GW of CCS is installed before this date, or it may be extended by up to 18 months on a case by case basis, at the discretion of the EPA.
Funds of US$1 billion per year would be made available for CCS demonstration and deployment – the proceeds to come from a levy or ‘wire charge’ on electricity produced from fossil fuels.
Investments in Clean Energy Technologies
The bill would direct an estimated US$190 billion through 2025 towards a range of clean energy technologies, including:
- $90 billion to renewable-energy and energy-efficiency programmes;
- $60 billion to carbon capture and sequestration technologies;
- $20 billion to electric and other advanced vehicles technologies; and
- $20 billion for basic research and development.
The bill would also create the Clean Energy Deployment Administration within the federal government to support private investments in clean energy technologies, including nuclear power.
Modernizing the Electricity Grid.
The bill also includes provisions to develop smart grid technologies and to improve the national transmission grid in order to accommodate the growth in renewable electricity sources.
Energy Efficiency
Energy Efficiency Standards for New Buildings
The bill would require State governments to update building codes, which would require new buildings to be 30 percent more energy efficiency by 2012 and 50 percent more efficient by 2016.
Energy Efficiency Standards for Lighting & Appliances
The bill would mandate new efficiency standards for lighting products, commercial furnaces, and other appliances.
Fuel Standards for Heavy Vehicles
The bill would require the EPA to introduce fuel efficiency standards for heave and off-road vehicles.
National Cap-and-Trade Scheme
The bill would create a national cap-and-trade scheme covering 85 percent of US emissions with the long-term goal of delivering an 80 percent reduction in GHG emissions relative to 2005 levels by 2050.
Coverage
Emissions caps would be placed electricity generators, oil refiners, natural gas suppliers, and energy intensive industries such as iron and steel, cement and paper. The caps would cover approximately 85 percent of US GHG emissions by 2016.
Emissions Caps
The proposed scheme would commence in 2012. Emissions caps would be defined relative to 2005 levels and would rise from a 3% reduction by 2012, to 17 percent by 2020, 42 percent by 2030 and 83 percent by 2050.
Allocation of Emission Allowances
At the start of the scheme, approximately 15 percent of emission allowances would be auctioned. This percentage would increase gradually over time. The revenue raised form auctions would be recycled to consumers through a combination of refundable tax credits and electronic benefit payments to minimize the impact of the scheme on low- and middle-income earners. The bill sets a minimum auction price of US$10 in 2012, rising at 5 percent plus inflation in subsequent years.
At the start of the scheme, approximately 85 percent of emission allowances would be allocated gratis. Of those allowances, about one-fifth would be allocated to liable parties, in order to reduce the impact of the scheme on key sectors.
| Party | Free Allocation |
| Liable Parties | |
| Energy intensive industries, such as iron and steel, cement and paper. | 15 percent from 2014, gradually reduced in line with emission reductions, then phased-out after 2025. |
| Coal-fired electricity generators and other electricity generators under long term supply contracts. | 5 percent through 2025, then phased-out by 2030. |
| Oil refineries. | 2 percent through 2025. |
| Electric utilities – CCS technology development | 2 percent through 2017, rising to 5 percent thereafter – to be used to cover the costs of CCS. |
About two-thirds would be allocated to parties not covered by the scheme, in order to support the development of clean technologies and to reduce the impact of the scheme on low- and middle-income households.
| Party | Free Allocation | |
| Affected Parties | ||
| Electricity distributors. | 32 percent through 2025, then phased-out by 2030 | The proceeds to be used to offset increases in retail electricity prices arising from the scheme. |
| State governments. | 10 percent through 2015, then declining gradually to 5 percent by 2022.
1.6 percent through 2025. |
The proceeds to be used to fund renewable energy, energy efficiency, clean transport and transmission infrastructure projects.
The proceeds to be used to offset increases in home heating oil. |
| Natural gas distributors. | 9 percent through 2025, then phased-out by 2030. | The proceeds to be used to offset increases in retail energy prices arising from the scheme and to fund energy-efficiency projects. |
| Vehicle manufacturers. | 3 percent through 2017, then 1 percent through 2025. | The proceeds to be used to fund the development of clean vehicle technologies. |
And about ten percent of allowances would be allocated to help support the transition to a clean economy, adaptation and international technology transfer.
| Party | Free Allocation | |
| Domestic Adaptation | 2 percent through 2012, then 4 percent through 2026, then 8 percent thereafter. | The proceeds to be used to fund domestic adaptation. |
| Preventing Tropical Deforestation | 5 percent through 2025, then 3 percent through to 2030, then 2 percent thereafter. | The proceeds to be used to prevent tropical deforestation and build capacity in this area. |
| International Adaptation | 2 percent through 2021, then 4 percent through to 2026, then 8 percent thereafter. | The proceeds to be used for international adaptation and clean technology transfer. |
| Worker Training | 0.5% through 2021, then 1 percent thereafter. | The proceeds to be used for worker assistance and job training. |
Preliminary modelling by the EPA estimate that allowances will be worth between US$11 to US$15 in 2012 and US$22 to US$28 in 2025. The total value of all allowances would be US$60 billion in 2012 and US$113 billion in 2025.
Cost-Containment Measures
The bill contains a number of provisions that are designed to provide flexibility and contain the costs of the scheme. These include:
- unlimited banking of allowances;
- a two-year compliance period (which permits borrowing one year in advance);
- the right to borrow up to 15% of allowances from years 2 to 5 beyond the current year, but subject to payment of 8% interest;
- a strategic reserve of allowances that are available for auction if allowance prices exceed 160% of their three-year average.
- a minimum price of US$28 in 2012 for allowances auctioned under the strategic reserve provisions, thereafter rising at 5% plus the rate of inflation up to 2014. Thereafter, the minimum price will be 160% of the three-year average price of traded allowances.
Emission Offsets
The bill would permit liable parties to use up to 2 billion emission offsets to meet their obligations under the scheme in any given year.
Half of these offsets must be obtained from domestic sources and half from international sources. In the event that insufficient domestic emission offsets are available, the portion of international offsets may be increased from 50 percent to 75 percent of the total.
The EPA will determine the eligibility of offset projects on the advice of the Offsets Integrity Advisory Panel, which would be established under the Bill.
The US Department of Agriculture (USDA) will oversee the offsets from domestic forestry and agricultural sources.
Penalties for non-compliance
The penalty for failure to comply with the emission cap will be a fine of two times the ‘fair market value’ of the missing allowances.
Interaction with pre-existing Trading Schemes
The bill would require that pre-existing state and regional emissions trading schemes be suspended over the period 2012 to 2017. Allowances issued under these schemes before 31 December 2011, would be redeemed or exchanged for federal allowances.
Regulation of Trading
The bill sets out a framework for the regulation of trading in allowances and their derivatives. The Federal Energy Regulatory Commissions will be charged with the regulation of the cash market in allowances and offsets; while the Commodity Futures Trading Commission will have responsibility for the regulation and oversight of the derivatives market. Notably, the bill would prohibit over-the-counter trading of derivatives.
Transition to a Clean Economy
Cost-Containment Measures
The bill also includes a number of additional measures intended to reduce the impacts of the bill on those persons likely to be the worst affected by the transition to a clean economy. These measures include:
- increased funding for the Energy Worker Training Program;
- entitlements for workers displaced as a result of the Bill; and
- college and university grants to prepare students for careers in the renewable energy and energy efficiency fields.
Trade Measures
The final version of the bill also introduces new trade provisions. These provisions would requrie the President, from 2018 and in the absence of an ‘equitable’ international agreement, to introduce a system of international reserve allowances for imported goods. These provisions would effectively extend the proposed cap-and-trade scheme to designated imports. Under such a scheme, importers would have to acquire allowances before products covered by the scheme could be sold in the US. The price for these international reserve allowances would be set daily so that it was ‘equivalent’ to the auction clearing price for domestic emission allowances. In this sense, it is similar to an import permit program. Provided that these provisions are applied equally to domestic and imported ‘like products’ they would be entirely consistent with WTO rules. Nevertheless, the devil will be in the detail. A great deal will rest upon how embodied CO2 can be included in the definition of ‘like products’ – this will raise a number of extremely complex issues relating to the calculation of embodied CO2 in a manner that is consistent between like products – each of which would conceivably be subject to challenge under WTO rules. The President and the Congress may waive these provisions.
Costs of the Scheme
The Congressional Budget Office (CBO) estimates that the bill would increase government revenues by US$873 billion over the 2010-2019 period and would increase direct government spending by US$864 billion over that 10-year period – creating a net revenue in the order of US$9 billion. The CBO estimates that the bill will increase energy costs for an average American household by US$175 a year.
Useful Sources
US House of Representatives, Committee on Energy & Commerce
Environmental Protection Agency, Analysis of The American Clean Energy and Security Act
Congressional Budget Office, Cost Estimate of The American Clean Energy and Security Act
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Tags: Emissions Trading, Policy, US, Waxman-Markey
The current Australian drought and the government’s response to this crisis, provide striking lessons for how we should respond to climate change.
***
In the last one hundred years Australia has suffered six major droughts and fifteen less severe droughts. The current drought that is ravaging the Australian continent, its inhabitants and its economy is simply the latest and most severe incarnation.
“The Australian inland,” quipped Francis Noble Ratcliffe, “must expect a smashing drought once every decade, and lesser droughts more often”. When Ratcliffe wrote those lines in 1938, in what would turn out to be the founding treatise on Australian conservation, Flying Foxes and Drifting Sands, he would not have expected that it would take us so long to learn from these frequent experiences. But perhaps now, during the worst drought that Australia has experienced in over 100 years, we are beginning to learn our lessons.
In this paper I present a short history of Australian droughts and the government’s response to the current crisis. This narrative is important for two reasons: first, for the striking parallels that we might draw with our attitude to climate change; and second for the lessons we might learn about how best to respond to this challenge.
“This is the death of the earth”[1]
Australia is the driest continent outside of Antarctica and the threat and presence of drought is just a part of life down-under. Since the first recorded drought in 1791 there hasn’t been a single decade when some part of Australia has not been in drought.
Each time that drought has descended on Australia it has ravaged the country. It has wiped out crops, decimated stock numbers, raised terrible, choking dust storms, destroyed outback communities, drained rivers and dams, driven murderous bush fires and marred hundreds of thousands of lives. It has also cost the Australian economy billions of dollars.
The history of Australia is the history of drought. The Federation drought, which began in the mid-1890s and reached its devastating climax in 1902 one year after Federation, threatened water supply in Australia’s largest city, prompting the government to declare 26 February 1902 a day of “humiliation and prayer”. At Bourke the mighty Darling River was reduced to a trickle and in Queensland the State’s sheep flock was all but wiped-out[2].
The 1914-15 drought, which was ushered in by soaring temperatures and widespread bushfires, culminated in the catastrophic failure of the wheat crop. Flows in the Murray River were reduced to just 2% of normal levels and the outback town of Charleville was forced to import water by train.
The World War II drought set-in in 1937 and lasted until 1945. The wheat crop was devastated and sheep and cattle numbers plummeted. Bush fires raged across the States reaching their peak on 13 January 1939 – “Black Friday”. By August 1940, the Nepean dam in New South Wales was empty and water restrictions were put in place in Brisbane, Sydney and Melbourne.
The 1982-83 Drought was short and sharp. Once again the wheat crop failed and stock numbers were decimated. On the 8 September dramatic dust storms, the likes of which Australia had never seen, enveloped the state of Victoria and its capital city Melbourne, and then one week later bush fires added to the misery on what became known as “Ash Wednesday’. In total, the economic losses from the drought were estimated at A$3 billion[3].
“We should all pray for rain,”
The Federation drought was considered to have been the worst drought on record…until now. The current drought, which Australians disarmingly call ‘The Big Dry’, is the most severe drought that Australia has experienced in over 100 years and it is probably the worst since European settlement in 1788.
The drought ‘began’ in 2002 and it is now in its seventh year. It has affected different regions at different times and to differing degrees. By April 2007 the situation was so dire that it prompted the then Prime Minister, John Howard, to appeal to higher powers – “We should all pray for rain,” he said. At that moment, 65 percent of all viable land in Australia was in drought and the water supply in Australian dams had declined to 25 percent of their total capacity[4]. The image below from NASA’s Earth Observatory Satellite, shows the extent of the drought in May 2005. Only the south-west corner of the continent has escaped the ravages of the drought.
Extent of drought, May 2005[5]
Nowhere was the situation more desperate than in the Murray-Darling Basin. The Murray-Darling Basin is the heart of Australia and its precious water its lifeblood. The basin, which covers an area the size of France and Spain combined, comprises more than 150 distinct waterways, supports an agricultural industry worth A$9 billion a year, is home to 16 internationally recognized wetlands and supplies water to more than 3 million Australians[6]. By mid-2007, flows in the Murray-Darling were at 5% of their average, and all along the river system giant red gums were dying from lack of water, fish were floating dead in deoxygenated pools and the precious soil had either been blown away as dust, or baked to concrete[7].
“Man must share the blame with Providence”
We live under the misguided belief that drought is a wholly natural phenomenon over which we have no control. This belief is false. Extremely low rainfall over an extended period of time is a natural phenomenon over which we have no control. But drought arises when this natural phenomenon is combined with a failure to anticipate, plan and adapt.
The drought in Australia was not caused by extremely low rainfall alone. It was also caused by the mismanagement of the country’s water resources over decades and by the public’s casual use of a precious resource and its indifference to the threat. That is not to say that drought could have been avoided even with the most complete planning. Some parts of Australia will always experience severe drought – that is part of the boom-bust cycle that some communities are willing to live with.
It was evident to all concerned that we were heading towards a disaster, yet the Government and the public were unable to take the difficult decisions before the catastrophe was virtually upon us. (And it is worth remembering that for many families the catastrophe was upon them). State Governments were still arguing over the allocation of water rights and citizens in Toowoomba, Queensland were still voting in a referendum against the recycling of their water, when water levels in many of Australia’s largest damns were as low as 15 percent.
It wasn’t until the drought had cost the Australian economy more than A$20 billion, forced 10,000 farming families to flee the land[8], reduced wheat production by more than 60 percent, forced the NSW Government to appropriate water from farmers in order to cover the shortfall in the cities, and caused electricity black-outs because power stations were forced to shut-down production for lack of cooling water, before – finally – there was sufficient will on the part of the Government and the public to act.
Where there is a will, there is a way
As we so often see, where the political will exists, action can be swift. The Australian government and public finally, after years of procrastination, began to respond to the drought with a series of coordinated measures.
These measures included regulatory reform, strict water rationing backed up by heavy penalties, a steep increase in the price of the resource to better correspond with its value, investment in new infrastructure and (critically) a powerful and highly visible public awareness campaign. The response was unprecedented and would have been unimaginable just a few years earlier.
Government cooperation and coordination
After decades of bickering and wrangling over priorities and funding, the Federal and State Governments finally reached agreement on how best to manage Australia’s precious water resources. First came the National Water Initiative, which was signed by the last State government in April 2006[9]. The initiative reforms the way in which Australia’s water resources are regulated and managed, set-outs a framework for water entitlements and the foundation for water trading and underwrites massive funding for water infrastructure programs throughout the country. Then in July 2008, the State and Federal governments finally signed the Intergovernmental Agreement on Murray-Darling Basin Water Reform. It marks the first step to coordinate the management of Australia’s most precious water resource. It is a landmark agreement that has been a long time coming, though many fear that it may have come too late to save the Murray-Darling.
Strict Limits and Penalties
The State governments introduced strict limits on water consumption which they rigorously enforced and backed-up with heavy penalties. These measures placed restrictions on the use of water and in some cases put quantitative limits on household water consumption. Water restrictions were introduced throughout Australia and water consumption targets were introduced in the major urban centres – and on the whole they have been met[10]. Bans were placed on the use of hosepipes, washing your car, watering your garden, or filling your swimming pool. It was made compulsory to install rainwater tanks and water efficient shower heads. Such measures would have been politically unthinkable in other circumstances.
Higher Water Prices
Water prices were increased in most major cities to better reflect the scarcity and value of the resource. Prices in Sydney rose by 20 percent between 2005 and 2006, then by 17 percent in 2008. In Melbourne a 5% levy was introduced. And at the height of the drought, water prices in Brisbane were increased twice within the space of one week[11]. Further price increases are planned by all major water authorities. Water prices in Melbourne will increase by 60 percent over the next four years[12]. By 2018 Brisbane residents will have to pay almost double for their water[13]. And in Sydney, water prices will rise by a further 14 percent between now and 2012[14].
Significant New Investment
The Australian government also made commitments to spend more than A$50 billion on water improvement measures over the next ten years. This will include major projects such as the building of desalination plants and new pipeline infrastructure, as well as investment of A$3.7 billion in water conservation measures in the Murray-Darling Basin. In 2006, Perth became the first Australian city to operate a reverse osmosis seawater desalination plant, which now supplies 17% of Perth’s drinking water supply. Desalination plants are also being planned in other parts of Australia, including Sydney, Melbourne, Adelaide and the Gold Coast. In total, there are hundreds of water improvement projects being funded by government, ranging from the creation of a comprehensive water accounting programme and better water metering in homes, to the construction of massive new water pipelines and improvements to farm irrigation systems[15].
Public Education Campaign
All of the above measures were supported by a powerful and highly visible publicity campaign which stigmatized water misuse. Using water to clean your driveway was now as socially unacceptable as smoking in the office or letting your kids run around in the sun all day without proper sun protection. The drought sensibilised Australian’s to the impact of drought and to the real value of water. Public attitudes to water changed. Between November 2005 and May 2007 (arguably the height of the drought) the percentage of Australians who cited water shortages as their primary concern rose for 22 percent to 55 percent[16]. In a similar vein, in October 2007, on the eve of the national election that unseated then Prime Minister John Howard, NewsPoll ranked water planning as equal second in the nation’s list of political priorities; equal with education, just behind health, and well ahead of national security which ranked eighth. The merits of different shower heads and the best place to find a new rainwater tank became the subject of conversation around dinner tables in most Australian cities.
And the results?
Throughout Australia, water consumption has been reduced. Since the start of the drought, average household water consumption has fallen by more than 40 percent in Brisbane and Canberra and by about 20 percent in Sydney and Melbourne[17]. In Brisbane, at the height of the drought, the average person’s water consumption fell to as low as 116 litres per person per day –compared with levels of 260 before the drought began[18]. In Canberra, water consumption was reduced by 35 percent within the space of just one year. In Melbourne, per capita water consumption in 2008 fell to its lowest level since 1934. And in Sydney, water consumption today is at the same level as it was in 1974, despite 1.2 million additional residents (imagine if we could say the same thing for energy!). These results are even more impressive when you consider that they reverse a nation-wide trend of increasing water consumption between 1993 and 2001, when per capita water consumption increased by 8 percent[19].
Average annual residential water use in selected Australian cities, 2001 to 2007
What can we learn?
What makes the above narrative important are the lessons we might learn for combating climate change. The lessons are striking.
1. The threat of drought was clearly understood, yet implausible as it may seem, the government and public alike were unable to act despite a compendium of scientific evidence and a long history of repeated severe droughts.
2. A decades-long period of wrangling between different state governments, gross mismanagement of the water resource and public apathy, disbelief and inaction led directly to the catastrophe.
3. It was only when this catastrophe was upon us – when the situation was dire – that the government and the public found the collective will to act. Without this near catastrophe, we would have continued to walk into oblivion using too much water in the driest inhabited continent on the planet.
4. But when they did act it was swift. The Government was prepared to put in place and the public were prepared to accept draconian measures that would previously have been considered unthinkable.
5. The response was unprecedented in nature and in scale.
- cooperation across state and federal governments;
- root and branch reform of water management and planning;
- introduction of strict limits on the use and consumption of water;
- increased water prices and the introduction of water trading; and
- massive public investment in new infrastructure.
6. That response was backed up by a powerful public awareness and education campaign that changed the public’s attitude towards drought and made it socially unacceptable to waste water. This social element underpinned the regulatory and market response.
7. The results show that substantial reductions in the use of an essential resource – in the order of 20 to 40 percent – can be achieved in the space of a few years and at relatively low cost.
8. The public was prepared to accept significant price increases in an essential resource – of between 40 to 70 percent – where the reason for that price increase was understood and where the resource represented a relatively small proportion of the household’s total expenditure.
9. Both the invisible hand of the market and the visible hand of strong, government intervention were required to achieve these outcomes.
10. But there can be no ‘quick fix’; the above measures are just a start. We will need many more years of action and many more initiatives before the threat of drought is overcome.
Postscript
There is no happy ending to the above story – not yet. You don’t solve a problem as great as this in a few years. While the drought has broken in some parts of Australia, large parts of the country, particularly the south-east, are still gripped by the Big Dry. Damn levels are still low. The Thomson Dam that was supposed to ‘drought-proof Melbourne’ is still at just 18% capacity[20]. Our responses have not always been the most cost-effective. Studies that examined the cost-effectiveness of different measures found that the cost per megalitre of water saved ranged from A$770 to A$33,395[21]. The Murray-Darling system is “beyond repair” according to the environment minister Penny Wong – a statement quickly denied by other stakeholders and subsequently corrected by the minister herself. The water consumption targets that were introduced have not always been met. Melbourne’s water target of 155 litres per day was exceeded by 15% this summer. Water prices have risen, but Australians still spend less on water than they spend on any other essential services. The typical Australian household spends three times as much on electricity and twenty-five times as much on food and drink as they spend on water[22]. Each year water companies lose large quantities of water due to leaking pipes and overflows. Water losses in Brisbane, Sydney and Melbourne in 2007 were between 107 and 76 litres per connection per day. For the largest water authorities serving populations of more than 100,000 persons, the cumulative water losses amounted to 129 gigalitres – more than the total water consumption in Brisbane[23]. Many of the promised infrastructure projects are delayed or behind schedule or over budget or all three. And finally, in those areas where the drought has ended, there are signs that average daily water use is already creeping back up[24].
In Australia, it won’t be until we have adapted the social and economic order to the natural order that we will have finally overcome the threat of drought. The same will be true for our global response to climate change.
[1] From the second stanza of T. S. Eliot’s poem Little Gidding
There are flood and drought over the eyes and in the mouth,
Dead water and dead sand contending for the upper hand.
The parched eviscerate soil gapes at the vanity of toil,
Laughs without mirth. This is the death of the earth
[2] Sheep numbers fell from 91 million to 54 million, and cattle from 11.8 million to 7 million.
[3] Australian Bureau of Statistics, 1988, Year Book Australia, 1988, Commonwealth Government, Canberra.
[4] CSIRO, 2009, Water Resources Observation Network, Dam Level Index (http://www.wron.net.au/DemosII/DamData/DamNodeView.aspx)
[5] NASA, Earth Observatory Satellite, Vegetation Anomaly Image, May 2005, NASA, Goddard Space Flight Center, Greenbelt.
[6] The Murray-Darling Basin encompasses 14 percent of Australia’s land mass and generates 39 percent of the national farm income. The Basin produces 53 percent of Australia’s cereal grain, 95 percent of its orange crop and 54 percent of its apple harvest. In 2007 the World Wildlife Fund listed the Murray-Darling as one of the world’s top ten rivers at risk.
[7] CSIRO, 2008, Water Availability in the Murray-Darling Basin, CSIRO, Canberra.
[8] Australian Bureau of Statistics (ABS), 2009, The ABS calculated that 10,636 families gave up farming during the most severe drought years between 2001 and 2006.
[9] The National Water Initiative was signed by the Commonwealth and all State Governments, except Western Australia and Tasmania, in June 2004. Tasmania signed the Agreement in July 2005. Western Australia signed the agreement in April 2006.
[10] Targets of 140, 155 and 135 litres per person per day were introduced in Brisbane, Melbourne and Sydney respectively at the height of the drought. The target in Brisbane has since been increased to 170 litres per person per day following the ‘end’ of the drought.
[11] ABC News, Brisbane water price rises again, 12 May 2006.
[12] Essential Services Commission, 2009, Melbourne metropolitan water price review 2009-10 to 2012-13, Essential Services Commission, Melbourne.
[13] Queensland Water Commission, 2009, Bulk Water Prices 2008/2009 – 2017/2018, Queensland Water Commission, Brisbane.
[14] Independent Pricing and Regulatory Tribunal of New South Wales, 2009, Review of Prices for the
Sydney Catchment Authority From 1 July 2009 to 30 June 2012: Water — Determination and Final Report, June 2009, Independent Pricing and Regulatory Tribunal of New South Wales, Sydney.
[15] Investments include A$450 million for the Bureau of Meteorology to set up a comprehensive water accounting programme; A$620 million is proposed to improve water metering; and A$1.6 billion will be made available to improve the efficiency of farm irrigation systems.
[16] Roseth N., 2008, Research Report 48: Community Views on Recycled Water. CRC for Water Quality and Treatment, National Water Commission, Canberra.
[17] National Water Association of Australia (NWAA), 2008, National Performance Report 2006-07, NWAA, Melbourne.
[18] Queensland Water Commission, The Water Report, 15 February 2009, Queensland Water Commission, Brisbane.
[19] Department of Environment, Water, Heritage & the Arts, 2007, State of the Environment, 2006: Indicator: HS-42 Water consumption per capita, Commonwealth Government, Canberra.
[20] CSIRO, 2009, Water Resources Observation Network, Dam Level Index (http://www.wron.net.au/DemosII/DamData/DamNodeView.aspx)
[21]. Crase & Dollery studying the subsidies paid in Melbourne on water-saving investments for households found the cost per megalitre of water saved ranged from $770 for AAA shower roses, through $9,069 for rainwater tanks, to $33,395 for AAA dishwashers. Crase, L. and Dollery, B. 2005, ‘The inter-sectoral implications of ‘Securing Our Water Future Together’’, International Journal of Environmental, Cultural, Economic and Social Sustainability, Vol. 1, No. 5, pp. 13–22.
[22] The low price of water remains a major obstacle to serious water reform. The typical Australian household spends 0.7% of total expenditure on water, 2.6% on electricity and heat and 17% on food and non-alcoholic beverages. Australian Bureau of Statistics, 2004, Household expenditure Survey and Survey of Income and Housing 2003/04, Commonwealth Government, Canberra.
[23] Losses amongst the 11 largest Water Authorities serving populations of more than 100,000 persons were 128,966ML in 2006/07. Water consumption in Brisbane over the same period was 112,935ML. National Water Association of Australia (NWAA), 2008, National Performance Report 2006-07, NWAA, Melbourne.
[24] Queensland Water Commission, The Water Report, 15 February 2009, Queensland Water Commission, Brisbane.
Filed under: Case Studies, Workable Policies | 5 Comments
Whether we are able to address climate change will come down to our ability to develop, commercialise and deploy low carbon technologies. This will not happen miraculously – some type of policy intervention will be necessary, but what type? As a fist step to exploring this subject, I want to look at the lessons that we can draw from other initiatives where policies have been used to support the development and commercialisation of emerging technologies. Such case studies remain the best way of separating fact from fiction. And some of the lessons are surprising.
Take a look at the posts below to follow the story.
Wind Power Technology in Denmark
Atmospheric Fluidised Bed Combustion Technology in the United States
Flue Gas Desulphurisation Technologies in the United States
Government-Industry Partnerships for electronic ballasts lighting systems
The development of strip casting technology in the iron & steel industry
Government policy & the development of electric vehicles in Japan
Filed under: Case Studies | Leave a Comment
Tags: Future, Innovation, Low carbon technology, Policy
Fluorescent lights require ballasts that help the lamps to start and then control the current flowing through the lamp; electromagnetic ballasts were the conventional ballast technology in the 1960s. Solid state electronic ballasts, developed in the 1970s and 1980s, improve the energy efficiency of fluorescent lights by 15% to 30%, but initially failed to gain market support due to poor performance, reliability and high cost. Following a coordinated programme of technology support by the U.S. government, electronic ballasts captured a significant market share – rising from negligible production in 1988 to more than 30 million units produced and a 30% market share within 8 years.
First-generation electronic ballasts were developed and marketed on a small scale in the late 1960s, but these products suffered from performance and reliability problems as well as high cost. Major ballast manufacturers showed little interest in perfecting electronic ballasts, since they had much invested in magnetic ballast production, and the lighting industry in general was satisfied with existing technology.
In 1976, the US Department of Energy (DOE) established a lighting research program at the Lawrence Berkeley National Laboratory (LBL) to accelerate the development and commercialisation of energy-efficient lighting technologies and initiated a joint private-public research programme focused specifically upon the development of electronic ballasts. Following a competitive tendering process, the LBL selected two small independent lighting manufacturers (IOTA Engineering and Stevens Electronics) who quickly developed prototypes that exhibited up to 25% electricity savings, but suffered from reliability problems (Geller et al, 1987).
Following further improvements, the LBL led a field test and evaluation program that confirmed a 25% reduction in energy use – however, the field tests uncovered further design flaws and a significant number of the prototype ballasts failed prematurely. After further improvements, a small number of larger manufacturers began to show an interest in electronic ballasts, and Beatrice Foods, a newcomer to the ballast industry, bought IOTA’s concept and formed a dedicated division within the company to develop and produce the new electronic ballasts. The Stevens design was bought by Luminoptics, a company established to manufacture and market the ballasts.
In 1979, the DOE co-funded another electronic ballast demonstration project with the Veterans Administration. This project involved the successful installation of more than 400 dimmable ballasts in a medical centre in California, following which it became the first federal agency to specify the use of electronic ballasts.
The LBL continued to test the performance and reliability of the electronic ballasts and to disseminate the results of this research and to publicise the benefits of the new technology. It also worked closely with the Federal Communications Commission (FCC) to develop voluntary performance standards. In a similar vein, the LBL served as an intermediary between ballast designers and the American National Standards Institute (ANSI) in helping to establish standards to ensure that electronic ballasts were compatible with fluorescent lamps and fixtures.
The major ballast manufacturers, including Universal, Advanced Transformer and GE were initially uninterested in and even hostile to the concept of electronic ballasts. However, in the mid 1980s they became convinced of the technical and commercial viability of electronic ballasts and began production and in some cases purchased the smaller independent companies that had developed the new technology.
The LBL discontinued its technical support and market development efforts in 1984, having spent a total of US$2.7 million on electronic ballasts over a nine-year period, at which point the performance, reliability and cost of the new technology had been proven. The economic benefits of this public support, reflecting increased revenues to ballast manufacturers and the value of energy saved during the lifetime of electronic ballasts is estimated at more than US$5.6 billion.
Summary
- Public support played a major role in the development of electronic ballasts in the U.S. Most of that support was focused upon joint industry-government support for R&D, field testing and demonstration projects, which were crucial to addressing reliability, performance and cost issues.
- Small, independent companies were the only businesses willing to invest in the development of the first reliable commercial prototypes. Whereas the larger firms, with existing sunk investments in the incumbent technologies were reluctant to invest in the new technology. It wasn’t until the new technology was proven that the larger firms entered the market – in many cases buying out the original designs developed and proven by the smaller firms.
- The joint public-private field tests and demonstrations were crucial to solving the outstanding design issues and demonstrating reliability – thereby winning commercial confidence.
- The US government also provided important niche markets by specifying the use of electronic ballasts in selected federal facilities and played an important role in publicizing the benefits of the new technology.
- Once the reliability, performance and cost issues had been addressed and the larger players entered the market, the strong business case behind the use of electronic ballasts and the credibility given to the new technology by its use in federal facilities, spurred consumer uptake of the new technology.
[1] Geller, H. & McGaraghan, S. (1998) ‘Successful government-industry partnership: the US Department of Energy’s role in advancing energy-efficient technologies’, Energy Policy, 26(3): 167-177.
Filed under: Case Studies, Technology & Innovation | Leave a Comment
Tags: Case Studies, Innovation, Low carbon technology
While everyone is talking about EUA prices, it’s the volumes that we should be watching. They give us the clearest sign yet that the carbon market is evolving towards a genuine commodity market.
If we take a look at EUA volumes (thanks to the tireless work of Michael Szabo at ThomsonReuters) you will see that there are some very interesting developments afoot.
First let’s compare total EUA exchange traded volumes for calendar year 2008, with the first trimester of 2008 and with the first trimester of 2009.
First thing to note: in calendar year 2008 about 2.6 billion EUAs were traded on European exchanges. For the first time, this was greater than the underlying carbon asset – which was about 1.9 billion EUAs in 2008.
Second thing to note: we’ve traded almost as many EUAs in the first trimester of 2009 as we did in all of 2008, and more than 3 times the volume that was traded in the first trimester of 2008. This is remarkable growth by any standard.
Now let’s compare the type of contracts that are being traded.
What does this tell us: most notably that there has been a massive increase in spot trades. The volume of spot trades in the first trimester of 2009 are 72 times higher than in the first trimester of 2008 and they are already more than twice the volume that was traded in all twelve months of 2008.
Consequently, there has been a shift in the dynamics of the market, with spot contracts growing in market share and in importance. While the traded futures have continued to grow and continue to dominate the market – representing about 60% of traded volumes in the first trimester of 2009 – the volumes of spot trades are now a significant part of the market, representing 28% of total traded volumes in the first trimester of 2009, compared with just 1% over the first trimester of 2008 and 9% over the full 2008 calendar year.
Now let’s look at who is capturing the lion’s share of these trades.
Evidently, the EXC continues to see its traded volumes grow significantly – up two and half times on the previous first trimester’s volumes. And it continues to dominate the market – with a market share of 71% in the first trimester of 2009.
But more impressive is the growth in traded volumes on the BlueNext Exchange, where first trimester traded volumes in 2009 are already more than double that of the full twelve months of 2008; BlueNext has captured 27% of the total traded market. The majority of these trades are in spot contracts and it is BlueNext’s success that is the reason behind the remarkable growth in spot contract traded volumes.
And because, predictions are a fool’s game, and we are all expert players, if we extrapolate the first trimester 2009 volumes in line with 2008 figures, we could quite reasonably expect total exchange traded volumes of EUAs to exceed 6 billion EUAs. This would be about three times the previous years’ volumes and three times the size of the underlying carbon asset in 2009.
So, what does this signify?
A number of reasons have been put forward to explain this steep increase in volumes, particularly in the spot market. Some observers have spoken about the ‘flight to cash’ phenomenon (liable parties selling allowances to generate cash in response to the deteriorating economic conditions). This was the case at the end of 2008, but it is no longer the case. Other structural factors might also explain the increase, such as the fact that compliance falls at the end of the first trimester so it is often a very active trading period, or the fact that the Italian and Polish registries did not issue their allowances until December 2008 and therefore prior to that date Italian and Polish liable parties had limited access to trading.
However, for me, this increase in volumes is the natural evolution of the market and the clearest sign yet that the carbon market has changed in nature in 2009; that it is maturing from a compliance market into a genuine commodity market.
More liable parties are entering the market, where previously they had been reluctant to do so, or had had little need to do so. And those liable parties that are entering the market are doing so on a more frequent basis. Access to the market is becoming easier and the number of products available to market participants is increasing. The number of registered members on exchanges is growing, particularly in the case of BlueNext, where the last trimester of 2008 and 2009 saw 18 new members join, among them some potentially very large market participants such as Mitsui, Deutsch Bank, Essent Trading, Fortis, EDP and Commerzbank.
The EUA market is now trading at volumes greater than the underlying physical asset. If volumes continue to grow as we cite above, the EUA traded volumes in 2009 will probably be 3 to 4 times the underlying physical asset; a sure sign that the commoditization of the market is underway. Nevertheless, this is still well below other markets, such as power where the traded volume is 10 to 20 times the physical asset, or oil where trading volumes are 30 to 40 times the physical market. Which shows us just how far the market could develop now that it is maturing – with all the advantages and disadvantages that a genuine commodity market entails.
Filed under: Carbon Market | Leave a Comment
Tags: Carbon Market, EU ETS, EUA
Strip casting technology is a new technology that significantly improves the casting and rolling of steel slab into final products. It has application in primary steel production, where it can deliver significant cost advantages over the existing casting technology.
Strip casting technology has a number of advantages over conventional casting technologies. First, the capital expenditure for producing hot rolled coils is considerably lower than for conventional casting and rolling facilities. Second, the energy required to create the final product is significantly reduced and energy costs decrease accordingly. Third, strip casting also allows small steel mills to produce their final products directly without the need to outsource this final stage to competing facilities, and thus has a strategic advantage over conventional casting technologies that often needed to be outsourced to larger facilities.
While strip casting technology will reduce the amount of energy needed per ton steel and is often characterized as ‘energy-efficient’ technology, its development was only loosely motivated by energy-efficiency considerations. For the majority of steel makers involved in strip casting technology, the principle rationale was always the advantages that strip casting technologies offered in terms of reduced capital costs. The gain in energy efficiency was no more than a positive side effect.
Technology development in strip casting was led by industry and the public sector played only a minor role in promoting and supporting strip casting technology. During the 1980s and 1990s, leading international steel makers took the lead in forming technology networks that led to the development of strip casting technology and its application on an industrial scale. Strip casting technology is now at the threshold of becoming a commercialised technology.
Private Enterprise Research and Development – From around 1975 steel-makers started looking for innovative casting technologies that could extend the advantages of continuous casting. The natural progression was to focus on casting liquid steel in to ‘thinner’ strips and in 1989, the German machine supplier SMS succeeded in introducing thin slab casting technology. R&D efforts continued as steel makers sought technologies that would realise even thinner casting. Between 1975 and 1985 a number of technology networks were formed to address strip casting technology and R&D efforts were announced in almost all the major steel-making countries. By 1990, 11 micro-networks comprising consortia of steel making companies were active in strip casting technology and as research began to converge on a preferred technological approach, the early stage R&D gave way to demonstration projects that were intended to scale up the technology, what the industry referred to as the “hot model” stage. Since then a number of the micro-networks have gone on to demonstrate their technologies at an industrial scale and claim that they are now ready for commercialization. The status of the individual micro-networks and the funding are shown in the tables below.
The status of strip casting technology micro-networks
From the above, it is clear that the development of strip casting technology is a highly international effort. Actors from the US, Canada, Europe, South Korea and Australia were involved and formed themselves into micro-networks which played a crucial role in the development of the technology. In general, each micro-network consisted of a steel-maker and an engineering firm or machine supplier, with the steel-making firms taking the lead as considerable steel-making expertise was required to apply the technology at scale. All the steel-makers that led these micro-networks were large integrated steel firms. The direct contribution of actors such as universities and public research institutes was limited. This underscores the strategic importance of strip casting technology to the steel firms involved in its development. The interaction between the micro-networks was also important. Each micro-network monitored each other’s R&D activities and benchmarked themselves to competing micro-networks in order to create or strengthen firm internal support for continuing R&D. There were several international conferences on thin slab casting and strip casting and during these conferences information was passed between competing micro-networks, without technical details being disclosed.
Three micro-networks spearhead the development: the merged EUROSTRIP micro-network, the Japanese micro-network of Nippon Steel and Mitsubishi, and the effort of the Australian steel-maker BHP and the Japanese machine builder IHI. These three leading micro-networks needed 15–17 years to operate an industrial scale caster. There is some variation in the length of the different phases – hot model, pilot scale caster and industrial scale caster – though each phase took approximately 3–7 years. The up-scaling of strip casting technology was taken with regular and persistent steps. The technology materialised steadily, on the basis of the momentum established by the technology network and micro-networks.
Governments played only a minor role in supporting the development of strip casting technologies. Various governments provided modest funding for strip casting R&D and in some instances they provided grants to support pilot or demonstration scale plants. Though this support was often poorly managed and misdirected and several of the projects that received support were ended before any significant advances were made. Interestingly, of the three micro-networks that achieved the greatest advances, none received anything but marginal external R&D support (i.e. Nippon Steel and Mitsubishi, the Australian BHP micro-network and the European Usinor/Thyssen micro-network). It was the strong economic case for the technology and the momentum created by the micro-networks that underpinned the development of strip casting technology, rather than public financial support.
Summary
- The advantages of strip casting technology was well know to the steel industry as far back as the nineteenth century, but it took more than 140 years for the technology to finally emerge.
- The private sector, namely the large integrated steel makers, took the lead in developing and financing strip casting technology. The principle rationale for this investment was financial, as strip casting technology offered significant reductions in capital costs. The energy efficiency gains were no more than a positive side effect.
- The development of strip casting technology was an international effort driven forward by a number of consortia or micro-networks that generally comprised an integrated steel maker, equipment supplier and engineering firm.
- These micro-networks were crucial to driving forward R&D and scaling up the technology to industrial scale. The micro-networks shared information amongst one another, but at the same time competed with one another and benchmarked their performance against one another. This imparted a very significant momentum to their technology development efforts.
- It took the industry 15 to 17 years to develop strip casting technology to commercial scale. This required a total investment from the private sector estimated at between US$500 and US$700 million or US$30 to US$50 million per year over the period in question. This is equivalent to about 1 to 2% of total R&D expenditure by the industry, which is in turn about 1% of sales.
- The public sector role in supporting the technology was minor. In the case of the three most successful micro-networks, none received more than marginal public support.
[1] Luiten, E. E. M. And Blok, K. (2003) ‘Stimulating R&D of industrial energy-efficient technology; the effect of government intervention on the development of strip casting technology’, Energy Policy, 31: 1339–1356
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Case Study Technology & Innovation – Flue Gas Desulphurisation Technologies in the United States
This second case study looks at the development and deployment of flue gas desulphurisation technologies in the US.
Flue gas desulphurisation (FGD) describes a range of technologies employed to remove SO2 from exhaust flue gases in coal-fired electricity generators. Between the 1950s and the 1990s, the U.S. government employed a number of policy instruments that provided technology-push and demand-pull incentives for the development of FGD technologies in the U.S. The result of these initiatives was to significantly drive the development and deployment of FGD technologies; between 1972 and 2004 the cumulative installed capacity of wet scrubbers had risen from almost zero to more than 200GW around the world – 110GW of that in the U.S.
Research and Development - The US government, via the TVA and the Department of Health, Education, and Welfare (DHEW), began investing in R&D on scrubber technologies in the 1950s. That early R&D focused upon bench and pilot work addressing the cost-effectiveness of different sorbents for wet and dry scrubbing technologies. Federal funding for R&D increased significantly in the 1970s and as a result the TVA, the National Air Pollution Control Administration (NAPCA), the Environmental Protection Agency (EPA) and the DOE all played a role in funding a series of full-scale demonstration projects . In 1971, the TVA built a 1 MW test unit for wet limestone FGD at the Colbert facility in Alabama. In 1972, the EPA funded the construction by Bechtel of three 10 MW prototype scrubbers as the “Alkali Wet Scrubbing Test Facility” at TVA’s Shawnee Steam Plant, which was to become the starting-point for the FGD technology in use today around the world. In addition, the EPA also began funding SO2 control technology evaluations and engaged in cooperative research with both the utilities and the vendors with the aim of addressing concerns amongst these sectors over the reliability and effectiveness of the technologies. The EPA founded the SO2 Control Symposium, which began in 1973, and is widely credited with a crucial role in bringing together the different stakeholders to coordinate work and share information that enhanced the development and commercialization of SO2 technologies.
Federal government funding of SO2 R&D peaked in 1975 at just under US$90 million as the EPA increased its effort to demonstrate conclusively the technical and economic feasibility of wet limestone scrubbers. In the 1980s the OFE initiated the Clean Coal Technology Demonstration Program, a $2.5 billion government-industry cost-sharing program established to demonstrate advanced “clean” coal technologies, including FGD, at a commercially relevant scale.
These various public-private initiatives, combined with the learning gained from the installation of commercial equipment, have helped to drive down capital costs by a factor of two over the last twenty years, and improve the efficiency and reliability of FGD technology.
Regulatory Performance Standards – In parallel with the public support programs described above, the U.S. government introduced a number of demand pull initiatives. The 1970 Clean Air Act (CAA) required the newly formed EPA to establish national ambient air-quality standards for SO2 from all sources without consideration of economic or technical feasibility. Each state was required to develop a state implementation plan (SIP) for controlling existing stationary sources. Almost all of the SIPs submitted in 1972 called for reduction of SO2 emissions requiring utilities to use low sulfur fuels, pre-combustion treatment, or FGD systems. Further government regulation in the form of the 1971 and 1979 New Source Performance Standards (NSPS), and 1977 CAA Amendments led to the introduction of increasingly tighter performance standards for SO2 for both new and existing power stations – all based upon “best available performance” standards. The CAA and NSPS’s strong enforcement powers, national standards-based market signals, and technological flexibility, as well as legal backing from the Supreme court, were all critical to creating an FGD market in the U.S.
Emissions Trading - In 1990 a further round of CAA Amendments established a cap and trade emission allowance trading scheme. The emission limits are not particularly stringent once they are aggregated across a liable party’s installations, and so could be met through the use of low sulfur fuels and pre-combustion cleaning, with limited FGD systems. This effectively killed-off the expectation of a large market for dry FGD, and resulted in a smaller-than-expected market for wet FGD. Consequently, the evidence of innovation in SO2 control technology does not support the superiority of the 1990 CAA and the SO2 trading scheme as an inducement to technological innovation. Repeated demand-pull instruments, in the form of national performance-based standards, along with technology-push efforts, via public R&D funding, had already clearly facilitated the rapid maturation of FGD technology.
Summary
- The US government used a combination of technology push and demand pull measures to encourage the development and deployment of FGD technologies over more than four decades.
- Public support for R&D was crucial to addressing issues surrounding the efficiency, cost and reliability of FGD technologies and in demonstrating FGD technologies at a commercial scale.
- Public R&D was directed at solving specific operational problems with the technology, such as fouling, etc, etc. and this, combined with the support for demonstration scale plant was crucial to reducing capital and operating costs of the new technology and building confidence amongst utilities and vendors.
- The operational experience obtained by utilities also played a vital role in driving down the operating cost of FGD technologies and the SO2 symposium put in place by the EPA was an important conduit for the sharing of knowledge and information amongst stakeholdersHowever, technology-push, as measured by R&D expenditures, was not as important as demand-pull as an inducement of innovation in FGD technology. Without the demand stimulated by government regulation FGD development and deployment would have remained low.The uptake of FGD technology depended critically upon the introduction of the Clean Air Act Amendments, which imposed (at the time) stringent emissions standards on existing and new power stations.
- The 1990 CAA and the creation of the SO2 emissions trading scheme did not accelerate the development or deployment of FGD technologies – this had already occurred prior to the introduction of the trading scheme.
- Indeed, the SO2 trading scheme undermined demand for FGD technologies due in part to the design of the scheme (in particular the way in which the emission caps could be aggregated across a utility’s plant) and the lower cost of alternative abatement options (in particular switching to low-sulphur coals).
[1] Taylor, M. R., Rubin, E. S. and Hounshell, D. A. (2005) ‘Regulation as the mother of innovation: The case of SO2 control’, Law & Policy, 27(2): 348-378.
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