Climate change, innovation and the fossil fuel industries - Insights from UK experience and links to TAR Presentation to SBSTA consultation on IPCC Third.

Climate change, innovation

and the fossil fuel industries

- Insights from UK experience and links to TAR

Presentation to SBSTA consultation on IPCC Third Assessment ReportMilan, 27-28 November 2003

Michael Grubb, Associated Director of Policy, The Carbon Trust

Visiting Professor of Climate Change and Energy Policy, Imperial College, London, &

Senior Research Associate, Department of Applied Economics, Cambridge University

Imperial College OF SCIENCE, TECHNOLOGY AND MEDICINE

The energy context: UK is not an obvious choice ..

‘Britain is an island of coal in a sea of oil and gas’

– Common observation in energy studies during the 1970s and 1980s

“ We could defeat climate change if we chose to. Kyoto is right. We will implement it and call upon all other nations to do so. But it’s only a start. With imagination, we could use or find the technologies that create energy without destroying our planet.”

– Tony Blair, UK Prime Minister, October 2, 2001

Driving forces in UK energy policy have changed radically

Predict and provide: Build coal and nuclear to power industrialisationOil imports for transport and power

1960s

Energy security and domestic production:Develop North Sea for energy independence; supportive regime and production tax incentives

1970s – Early 1980s

Mid 1980s – mid 1990s

Competitiveness and Regional environment:Liberalise electricity and gas systemsReduce coal exposure and S etc emissions

Since late 1990s

Integrate low carbon, competitiveness and securityDiversify in face of North Sea plateau and declineDeepen market liberalisationSupport efficiency and innovation for low C techs

The UK Energy White Paper (2003): perspective and goals

First White Paper on energy policy for 20 years Fundamental reorientation: ‘Our energy future – creating a low

carbon economy’ Central goal, accepts Royal Commission recommendations:

– 60% cut in CO2 emissions by 2050– actions guided by need to deliver Kyoto commitments and remain

on path to this long term objective. Three other objectives to be accommodated (Ch.6: Reliability;

Ch.7: Productivity and competitiveness; Ch.8: Energy and the vulnerable, ‘fuel poor’ at home and abroad).

‘To lead the way in Europe and internationally in developing environmentally sustainable, reliable and competitive energy markets that will support economic growth in every part of the world’.

The low carbon challenge is to profit from the opportunity through good near-term investment

Net impact on global GDP growth marginal or potentially positive over the long-term

Tremendous opportunities in rapidly growing global markets

– £200Bn/yr Environmental goods and services industry

– £100Bn/yr capital spending by electricity supply industry

Developing a low carbon industry sector will allow UK to capture a greater share of the value created

Short term capital investment will be required

– transition costs including infrastructure

– capital costs currently higher for renewables than conventional sources (but declining)

Downside impact on a limited number of disadvantaged industrial sectors

– If action is harmonised within EU, impact limited to externally traded goods (~11% of GDP)

Big long-term opportunity… …but some short-term costs

UK Energy White Paper: renewable electricity support system

Reaffirms 10% renewables by 2010 commitment, ‘aim’ to 20% by 2020

Main instrument: Renewable Obligation Certificates (ROCs)– Like Renewable Portfolio Standards in US– Electricity supply companies have to source given percentage

from renewables – ‘Cap’ (buyout) on ROC prices of 3p/kWh

Additional £100m capital grants for renewable energy (£38m announced 2002 + £60m new)

Overhaul planning systems (both onshore and offshore) Review electricity structure, regulation, etc

No specific regulatory structure for non-electric renewables

Dedicated policy measures help technologies traverse the innovation chain

Note: ROC excludes recycling; Capital grant based on maximum of 40% of typical capital costsSource: PIU Working Papers (OXERA II Base case cost decline)

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Wholesale Price

ROC (Buyout)

Capital Grants/ Loans

CCL Exemption

Offshore Wave

Energy Crops

Offshore Wind

Onshore Wind

RD&D Grants

Appropriate economic support for specific technologies will vary as costs decline

General support

Technology specific support

The biggest renewable energy potential in UK is offshore wind energy

Features of UK offshore wind energy

Rapidly developing sector 13 main projects currently in development Almost all are 5 – 10 km offshore Companies include established oil (eg. Shell), electricity

(eg. PowerGen) and offshore engineering service (eg. AMEC) companies

Wind energy investment during next five years expected to average around £1bn/yr

A major contributor to UK renewable energy target (10% by 2010) and longer term goals

First UK offshore wind farm started delivering November 2003

UK Offshore Wind Energy: First wind farm (North Hoyle) now operating

Construction started April 2003, delivered electricity late November 2003

4-5 miles off the North Wales coast

30 wind turbines of 2 megawatts (MW)

electricity to supply 50,000 homes.

Offsets about 160,000 tonnes of CO2 per year

There is rapidly growing involvement from offshore & energy companies as the oil & gas provinces mature

Government established ‘UK renewables’ in Aberdeen (centre of UK oil industry)

Oil industries confirm that offshore wind engineering relatively simple transfer of some core skills – no major engineering problems foreseen

Major issue is stability and duration of government support mechanisms (ROCs currently expire in 2010)

Wider lessons in context of oil and gas reserve / resource profiles?

The carbon in oil and gas reserves is very limited compared to the emissions of most climate scenarios

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Historic coal emissions

Historic gas emissions

Historic oil emissions

Unconventional reserves and resources

Conventional resources (upper estimate)

Conventional reserves

Scenarios

SRES scenarios

Carbon emitted 1990-2100 in various scenarios

OilGas

Coal

Petroleum reserves and climate change

Conventional petroleum is not the problem– Only unconventionals and coal have enough carbon to do

big damage– We are likely to use all the proven petroleum reserves

carbon control raises relative costs of unconventionals and coal, the ‘default’ non-oil alternatives

Important to ensure that any large-scale development of coal-based synfuels, tar sands etc involves CO2 removal and disposal

As conventional oil & gas provinces peak, the industrial opportunities may move towards renewables

Conventional oil and gas could benefit long-term from carbon controls (by making high-carbon backstops more expensive)

Climate change, innovation

and the fossil fuel industries

- Insights from UK experience and links to TAR

Presentation to SBSTA consultation on IPCC Third Assessment ReportMilan, 27-28 November 2003

Michael Grubb, Associated Director of Policy, The Carbon Trust

Visiting Professor of Climate Change and Energy Policy, Imperial College, London, &

Senior Research Associate, Department of Applied Economics, Cambridge University

Imperial College OF SCIENCE, TECHNOLOGY AND MEDICINE

UK Energy White Paper:policy principles and guideposts

Market-oriented – not a return to central planning Need for government to establish the regulatory and

incentive framework Looking for cuts of 10-20% (15-25MtC) below reference

projection by 2020 Non-binding 2020 targets for energy efficiency,

renewable electricity, and CHP No specific proposals for new nuclear build (or other

direct government build) Renewables and efficiency have five years to prove

their potential

UK Energy White Paper:Economic instruments and energy efficiency

Emissions trading: ‘will be at the centre of our energy markets’ entry for key sectors (power stations, refineries, most heavy

industry) into EU scheme from 2005 ambiguity about overall linkage between trading and Climate

Change Levy structures

Energy efficiency ‘develop’ the energy efficiency commitment (EEC) scheme Insulation grant schemes and EECs to secure end to ‘fuel

poverty’ in England by 2010, Britain by 2016-18. Revision of building standards brought forward to 2005, and

push for stronger EU standards on fridges, PCs etc Public sector procurement to ‘set an example’