Technical options and economic drivers to a low carbon future.

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Carbon Trading and the Effect of the Copenhagen Agreement: Technical options and economic drivers to a low carbon future

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The reduction of global carbon emissions is now widely regarded as paramount if the world is to avoid major negative consequences throughout the course of the next century. Current levels of c. 380 parts per million (ppm), represent both a record high and an unprecedentedly rapid rise (by 30 ppm in just 17 years). To avoid adverse consequences – and possible catastrophe – experts believe that urgent action must be taken now to limit peak CO2 to 450 ppm.

Projections, based on current and forecast future emission levels, suggest that such a target is unlikely to be achieved. The interaction between economic growth, consumer demand and new technology is complex, and prediction is uncertain. However, a strong consensus now exists that without more concerted action that target will be exceeded at some point between 2030 and 2050, with most pessimistic assumptions outlooking ranges in excess of 800ppm by the end of the century.

The potential for reducing emissions using state-of-the-art technology is immense. So, too, is the cost (some analysts put it as high as 20 years). Various political initiatives have foundered on unwillingness by nation states to be “first movers”. Attempts to resolve the issue by economic means have included carbon pricing, offsetting and the creation of carbon markets.

Key features of this report

• A review of the current threat to the environment from carbon emissions

• An overview of the nature of that threat by primary energy source (e.g., coal, oil, gas) and by end-use sector (transport, buildings, power generation, etc.)

• A summary and review of the main technological solutions available to reduce emissions: alternative strategies, including Carbon Capture and Sequestration and Land use, land-use change and forestry (LULUCF)

• The theory underpinning economic initiatives to stimulate technology changes: carbon pricing and carbon markets

• Current structures and political critique

Scope of this report

• a quick and comprehensive understanding of the current issues under-lying the climate change debate

• Clear linkage between technological solutions – and the economic framework in which they have to be developed

• Understanding of the barriers to private sector initiatives in tackling carbon emissions

• Understanding of the political dimension that is currently hampering efforts to reach international agreement (e.g., the ethics of offsetting, the inclusion of REDD within offsetting schemes)

Key Market Issues

• Core Issue: Action is needed on carbon emissions: a variety of technological approaches have been identified – but in the absence of any economic incentive for implementation, progress on this front is stalled.

• Theoretical Approach: The international community, at Kyoto in the 1990’s, and at various conferences since, have attempted to create an economic incentive for private action by instituting measures that:

– reflect the environmental cost of carbon emissions through a system of carbon pricing

– Formalise carbon trading through a number of international carbon markets

• Critique: A number of critiques have been put forward in respect of this approach, including the view that the theory itself is unjust (a form of “new colonialism”), that the system has unintended consequences, including support for projects that are non-sustainable or actually embed poor carbon practice, and that forestry should not be included within the calculation for offsetting projects.

– More seriously, it is argued that the current price of carbon is too low to achieve its objective.

Key findings from this report

• Action is required to reduce carbon emissions

• The range of technologies available to mitigate carbon emissions is wide and many technologies are capable of being implemented now: the main obstacle to implementation is cost

• The economic theory underpinning a solution to carbon emissions is based on the allocation of the carbon cost to different activities by means of a worldwide carbon pricing mechanism – and leaving the detailed working out of solutions to market mechanisms.

• The current price is half or less what it needs to be for effective technological solutions to be sought by the business community. Current forecasts suggest that targets initially set for 2020 and 2030 in terms of carbon emissions will not be met.

• This issue has been exacerbated by the failure of the most recent international conference on Climate Change, at Copenhagen in December 2009, to come up with more than a statement of general principles. The international business community is looking for guidance and direction on specifics, as well as some re-assurance of carbon price stability into the short and medium term future.

Key questions answered

• What is the scale of the challenge facing the world in terms of carbon reduction?

• What are the key technological mechanisms available for dealing with these challenges?

• What non-technical solutions (CCS and LULUCF) are available?

• What are the main economic drivers put in place to stimulate technological change (carbon pricing, trading, markets)?

Table of Contents

Carbon trading and the effect of the Copenhagen agreement

Executive summary 10

Global warming: current status 10

The principal components of CO2 emissions 11

Global warming – primary technical solutions 11

Global warming – further technical approaches 12

Global warming – political and economic approaches 13

Global warming – politics and economics in practice 14

Global warming – the likely outlook 16

Conclusions 17

Chapter 1 Introduction 20

Summary 20

Objectives 20

Chapter 2 Global warming: current status 24

Summary 24

Introduction 25

Global warming 25

Current situation: global CO2 generation 27

Drivers of CO2 generation: economic, social and technological trends 28

Emission trends for CO2 generation 32

Overview of recent history 32

CO2 emissions 36

Fossil fuel usage 38

Electricity consumption 40

CO2 intensity 41

Energy intensity 42

Electricity intensity 43

Chapter 3 The principal components of CO2 emissions 46

Summary 46

Introduction 46

Energy sources 47

Energy conversion 51

Transformation and storage 53

Power plants 54

Transportation 56

Energy chain – overview 58

Energy uses 59

Power generation 60

Transport 62

Shipping (including inland waterways) 64

Air travel 65

Buildings and construction 66

Manufacturing industry 67

Chapter 4 Global warming – primary technical solutions 70

Summary 70

Introduction 71

The main physical principles and approaches to CO2 control 71

Counter trends 72

Principal technological approaches 73

Moves toward Smart Grid 74

Zero Energy Building 75

Alternative fuels 75

Fuel supply chain 76

Switching fuels 76

Nuclear and Renewables 77

Mitigation by sector 78

Power generation 78

Energy efficiency – integrated IT solutions and Smart Metering 80

Transport 81

Private cars, road freight and bus and coach 82

Biofuels 84

Natural Gas (CNG / LNG / GTL) 84

Hydrogen/Fuel Cells 84

Electric vehicles 85

Mode shifts 85

Shipping (including inland waterways) 86

Increasing efficiency 86

Advancing technology 87

Improving operations 87

Mode shift 88

Partnering for progress 88

CO2 emission indexing scheme 89

Economic instruments for international shipping 89

Air travel 90

Fuel efficiency 90

Technology developments 90

Engine developments 90

Aircraft 90

Alternative fuels 91

Lower flying 91

RVSM (Reduced Vertical Separation Minimum) 91

Lower flight speeds 92

Reducing aerodynamic resistance 92

Construction 92

Reducing energy consumption and embodied energy in buildings 93

Switching to low-carbon fuels 93

Manufacturing industry 95

Sector-wide efficiencies 95

Process-specific improvements 95

Optimized operating procedures 95

Cross-sector impact 95

Chapter 5 Global warming – further technical approaches 100

Summary 100

Introduction 101

Carbon dioxide capture and storage (CCS) 101

Scope for capture 102

Transmission considerations 104

Costs associated with CCS 105

Land use, land-use change and forestry (LULUCF) 107

Agriculture 107

Technical approaches 107

Potential for carbon reduction 108

Forestry 109

Approaches 111

Potential for Carbon reduction 112

Impact of technology availability 113

Environmental Kuznets Curve hypothesis 116

Chapter 6 Global warming – political and economic approaches 120

Summary 120

Introduction 121

Economic theory 121

Technology alone will not work 121

Economic incentives 122

Political initiatives: structures and framework 124

Intergovernmental Panel on Climate Change (IPCC) 125

UN Framework Convention on Climate Change (UNFCCC) 125

Kyoto 125

Agreed mechanisms for carbon control 127

Copenhagen 128

Copenhagen Accord 129

Chapter 7 Global warming – politics and economics in practice 132

Summary 132

Introduction 133

Emissions trading 133

Trading principles 133

Trading units 134

Carbon markets 135

Carbon trading volumes 138

Voluntary markets 140

Voluntary market trends 141

Carbon pricing 142

Prices stabilizing at lower levels 144

Technology transfer 145

Regional co-operation 146

Issues around current political and economic initiatives 147

General political and economic issues 147

Development 148

Views on the principle of offsetting 150

Impact on forestry 150

Specific criticisms of existing carbon trading mechanisms 152

Carbon surplus 152

Offsets acting counter-productively 153

A long list of criticisms 154

The future of carbon trading 155

Carbon trading best practice 156

Chapter 8 Global warming – the likely outlook 160

Summary 160

Introduction 161

Actions required 161

Agenda for change 162

Quantitative targets 164

More stringent targets 166

Forecasts 168

Economic and social factors 169

Population 169

CO2 emissions 169

Future prices and effects on emissions 172

Outlook/developments since Copenhagen 175

UK Initiative 177

Existing proposals 178

Chapter 9 Conclusions 182

Summary 182

Main achievements 182

Gaps in knowledge 182

What needs to be done – next steps 183

Implications for the future 184

Glossary 185

Index 188

Footnotes 190

List of Figures

Figure 2.1: Impacts of four Kaya factors on world CO2 emissions, 2010 34

Figure 2.2: CO2 emissions by country in 2007 (GtCO2) 38

Figure 3.3: Terminology for energy commodities 48

Figure 3.4: World total final consumption by fuel 49

Figure 3.5: Energy Return on Energy Invested (EROEI) 59

Figure 3.6: CO2 emissions and energy use by mode of transport (2000) 62

Figure 7.7: Carbon prices respond to the recession (€), 2010 143

Figure 8.8: Global economic potential in 2030 (Bottom up): cost categories in US$/tCO2e 173

Figure 8.9: Global economic potential in 2030 (Top Down): cost categories in US$/tCO2e 173

Figure 8.10: Global economic potential in 2030: cost categories in US$/tCO2e 174

List of Tables

Table 2.1: Temperature increase at equilibrium relative to pre-industrial (C) 27

Table 2.2: Key ratios for energy-related CO2 emissions in 2007 30

Table 2.3: Impacts of four Kaya factors on world CO2 emissions, 2010 33

Table 3.4: CO2 emissions by sector (MtCO2), 2007 60

Table 3.5: CO2 emissions by sector (%), 2007 61

Table 3.6: CO2 emissions and energy use by mode of transport (%), 2000 62

Table 3.7: Conversion factors from guidelines for company reporting on greenhouse gas emissions (CO2), July 2005 66

Table 4.8: Reduction in CO2 emissions relative to carbon price (GtCO2/yr) 2030 79

Table 4.9: Reduction in CO2 emissions for buildings relative to carbon price (GtCO2/yr), 2020 and 2030 94

Table 5.10: Reduction in CO2 emissions for agriculture relative to Carbon Price (2030) 109

Table 7.11: Carbon market at a glance, volumes and values in 2008-09 138

Table 8.12: Carbon intensity of G20 economies excluding EU (kgCO2/$GDP), 2008 165

Table 8.13: Classification of recent (post-TAR) stabilization scenarios according to different stabilization targets and alternative stabilization metrics 170

Table 8.14: A view on analysts’ expectations for EU ETS Phase II and Phase III 179

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