Archive for coal

Lack of CDM progress at Poznan will be the major sticking point for negotiations over the next year

Posted in Climate policy with tags , , , , , , , on December 15, 2008 by Dan

CDM reform didn’t get anywhere at Poznan. To me, this is the most worrying outcome of the conference. Although technical discussions and low-level negotiation planning were all anyone expected, there is now very little time to do something about the CDM before the Kyoto Protocol runs out.

There was a lot of discussion about Forestry and CCS. Forestry is unsuitable for the CDM – partly because there are issues with calculating the volume of carbon dioxide a forest absorbs, and mainly because forests would produce far more CERs than Annex I countries could buy (essentially we wouldn’t be able to buy enough carbon credits to protect the forests).

The situation with coal is similar in that the CDM couldn’t support the volumes required (I haven’t done the maths on this but the IEA forecasts that to stabilise at even 550ppm we will require 10 new CCS plants every year), except that CCS will be neither operational nor affordable before 2020. Most estimates show that a carbon price of EUR 40 – 75 will be required to make CCS commercially viable, and CERs are unlikely to enter that range.

There was also discussion on making the CDM more transparent and efficient. These discussions didn’t progress either, but we really need a new approach to technology transfer and funding rather than tweaks to a process that can’t demonstrate additionality.

Despite encouraging statements from China, Brazil and Mexico, the developing world will not sign up to quantified emission reductions without a clear understanding of how rich countries will support them. The ethos behind the CDM needs to switch from reducing the cost of compliance endured by Annex I to structural funding for the developing world to pay for abatement.

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Policy Exchange on CCS

Posted in Energy markets with tags , , , , , on June 17, 2008 by Dan

Policy Exchange has published a report arguing that carbon capture and storage (CCS) is essential to meeting our emission reduction targets. The report explores various ways that the government could support CCS.

If there is a strategic case for CCS the mechanism that I believe to make most sense is:

5. Government underwrites the EU-ETS minimum base price.
This involves a risk for Government, to provide baseline funds of €30 to 60/ton CO2 if the EU-ETS market remains low. It is not clear how the Government recoups its money, except by waiting to sell EU-A at a high price some years later, or by cross-subsidy from the new Phase 3 Auction revenue.

I would argue that the base price be set by auction. The CCS developer that offers the lowest base price would be given by Ofgem the difference between that price and the EUA price for each tonne of CO2 it avoids. This approach is economically similar to the feed-in tariff that Policy Exchange favours but is more likely to determine an appropriate subsidy. Unlike Policy Exchange’s other preferred option – allocating one or two free EUAs to plants for each tonne of CO2 they capture – it maintains the environmental integrity of the EU ETS (see this post for more on multiple EUA allocation).

The government would risk depressing the EUA price by subsidising CCS and thereby inflating the subsidy it would pay for further CCS generation – but this cost would also be borne in the feed-in tariff model. The reduction in the EUA price would filter through to the wholesale energy market, making the feed-in tariff represent a larger subsidy.

The real question is whether there is a strategic case for CCS. New CCS will not create net emission reductions in the short term (unless CCS remains unrecognised in Phase 3 of the EU ETS), so it should only be supported if it is considered integral to decarbonisation in the long term. As Policy Exchange points out, it looks like we will be dependent on coal for decades to come. Perhaps our resources should be concentrated on reducing our dependence.

Funding CCS through proceeds from government EUA auctions

Posted in Climate policy with tags , , , , , , on June 2, 2008 by Dan

Many people think that proceeds from EUA auctions should be hypothecated (ringfenced) and spent on projects that reduce emissions, rather than going into general government funds. The CBI believes that EUA proceeds should be used to fund carbon capture and storage demonstration plants.

Given that coal power stations are within the EU ETS, any reduction in emissions achieved through CCS will allow the coal industry to sell EUAs (or buy fewer), so there would be no net reduction in emissions from CCS specifically (assuming that EUAs are scarce). Public support for CCS would allow other industries within the EU ETS to release more carbon dioxide into the atmosphere and depress the EUA price. It would amount to a subsidy to the coal industry, which, given the rosy outlook for coal over the next few decades, does not seem sensible.

Pragmatically, though, CCS is felt to be necessary for meeting overall emission targets and it is unlikely that the coal industry would do it alone. If governments go ahead and provide funding – whether from EUA proceeds or otherwise – they should build in provisions to reclaim and cancel EUAs matching the avoided emissions from the power stations.

A different option would be to offer auction proceeds as debt finance for CCS (or any long term project that reduces emissions within the EU ETS) and allow the project owners to sell any surplus EUAs. This would encourage industries within the EU ETS to take on riskier, long term reduction projects.

(Or just use the money as grants outside the EU ETS, of course.)

Just for reference – Green NGOs are sceptical about CCS – see see WWF and Greenpeace – pdf.

Carbon capture and storage needs a kick start, but not through double crediting

Posted in Carbon markets, Energy markets with tags , , , , , , on May 7, 2008 by Dan

Chris Davies, a Lib Dem MEP, is pushing the EC to adopt a directive that would require all coal power plants built from now on to have carbon capture and storage by 2030.

He recognises that the market alone will not deliver CCS and public support will be required. The EU budget is locked down to 2013 and he thinks member states are unlikely to pay.

He supports a “double credit system” within the EU ETS. This means that each tonne of captured carbon dioxide is not counted as an emission and the power plant is allocated an additional allowance (or even two). The allowance has a market value and can be sold or used by another of the company’s power plants.

This type of intervention might make sense if there were fears of non-compliance and unenforceability in Phase 2 of the EU ETS, but there are not. If double crediting is sufficient to get CCS off the ground, it will cause a net increase in emissions and a reduction in the allowance price as the additional allowances are sold or used.

Other types of public support (such as a direct subsidy) for CCS would be likely to reduce the allowance price too, but they wouldn’t increase emissions – rather they would move reductions into coal from other sectors.

Coal generation accounts for an estimated 24% of European greenhouse gas emissions. This proportion will increase over the next 20 years. A successful double-credit scheme could more than wipe out the reductions that will be made in the EU ETS.