The South African Government’s Department of Energy, announced the Preferred Bidders for Round 2 of the Renewable Energy Independent Power Producer Programme (REIPPP) on 21 May 2012.

Out of the 79 proposals submitted in Round 2, with a total capacity of 3.2 GW, the Department of Energy selected 19 Preferred Bidders, totalling 1,043.9 MW of capacity with a cumulative value of approximately 28 billion ZAR. These projects are made up of nine solar PV projects with a combined capacity of 417.1 MW, seven wind projects representing 562.6 MW, two small hydropower projects of 14.3 MW and one 50 MW CSP project. The project have to achieve financial close by 13 december 2012.

Across the board the proposed tariffs fell and the local content increased between the Round 1 and 2 projects. This was most notably amongst the solar PV projects, highlighting the extent to which the Round 1 PV projects had profited from the above market tariffs under the REIPPP; average prices of solar PV projects fell from 2.75c/kWh (SA Rand) in Round 1 to 1.65c/kWh  (SA Rand) in Round 2.

Technology Summary Preferred Bidders
Solar PV 9 projects417.1MWAvg tariff 165c/kWhAvg local content 47.5%

Cap remaining 32.9 MW

 

-      75 MW Solar Capital De Aar 3;-      74 MW Sishen Solar facility;

-      9 MW Aurora project;

-      8.8 MW Vredendal project;

-      36.8 MW Linde project;

-      69.6 MW Dreunberg venture;

-      75 MW Jasper Power Company development;

-      60 MW Boshoff Solar Park; and

-      8.9 MW Upington Solar PV plant.

 

Wind 7 projects562.2 MWAvg tariff 89c/kWhAvg local content 36.7%

Cap remaining 87.4 MW

 

-      135.2 MW Gouda wind facility;-      137.9 MW Amakhala Emoyeni (Phase 1);

-      94.8 MW Tsitsikamma Community wind farm;

-      90.8 MW West Coast 1 project;

-      23.4 MW Waainek venture;

-      59.8 MW Grassridge project; and

-      20.6 MW Chaba project.

 

CSP 1 project50 MWAvg tariff 251c/kWhAvg local content 36.5%

Cap remaining 0 MW

 

-      50 MW Bokpoort CSP project
Hydro 2 projects14.3 MWAvg tariffAvg local content

Cap remaining 60.7 MW

 

-      4.3 MW Stortemelk hydro scheme; and-      10 MW Neusberg hydroelectric project.

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

Summary Lessons Learned

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



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.

Japan HEV LEV Graph

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.

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

US_Capacity

United Kingdom

UK Capacity

Germany

Germany Capacity

Spain

Spain Capacity

Australia

Australia Capacity

China

China Capacity

Brasil

Brasil Capacity

Europe

Europe_Capacity

World

World Capacity


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.

Low Carbon Development ScenariosThe 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 2050Primary 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.


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.

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.

 

Fig 1 - Perc Allowances

Fig 2 - Million Allowances

Fig 3 - Million Dollars

Fig 4 - Per All vs Auc

Fig 5 - Mill Allow All vs Auc

fIG 6 - Mill Doll All vs Auc




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