An interesting debate is brewing in the financial and climate markets. As global financial concerns dominate the media there is growing support for the notion that, at this present time, saving the global economy is more important that saving the climate.
There certainly is some rationality in this view. Households and businesses are more likely to avoid more expensive ‘greener’ products at a time of economic hardship, and recent surveys show that support for climate action is greater when there are fewer, or zero, financial concerns. That being so it would appear that there is a causal correlation between financial and climate/carbon markets.
The problem with following this correlation is that reneging on, or delaying, action to address global warming will only increase the economic cost of taking the necessary climate action in the future. As Lord Stern and other economists have warned, climate action today will cost around 1% of GDP by 2050, yet delaying this action increases the GDP cost on an almost pro-rata basis for each year of climate inaction.
Indeed some economists, including Lord Stern, are now suggesting that the current financial crisis provides an opportunity to promote greater, not reduced, climate action. Economists explain that the seeds of the current financial crisis were sewn between 10 and 15 years ago, and if the seeds of climate action are sewn today the climate benefits, through reduced greenhouse gas emissions, will be apparent within the next 10 to 15 years. This is clearly important, as the first major test of climate action will be to achieve ambitious emission cuts by 2020. And if this interim target is missed then the challenge of achieving the longer-term 2050 emission reduction target increases appreciably.
But what the current financial crisis also reminds us of is the underlying importance of security, and from a climate perspective this security has to be enshrined in energy supply. Therefore energy and climate policy have to be complimentary. It is simply irresponsible to promote an energy sustainability policy if this in turn undermines energy supply security.
Unfortunately, the European Parliament’s Environment Committee has recently voted in favour of an Emission Performance Standard legislation that could have just such an impact. In setting an emission limit at 500g CO2/kWh from 2015, it has effectively ruled out all coal-fired plant not fitted with carbon capture and storage technology and will halt Europe’s plans for around 50 new coal-fired plants.
If the limit, which has to be agreed both by the full European Parliament and the EU member states, is intended as an incentive to accelerate CCS development then it is sadly lacking. A recent study by the consultancy McKinsey forecasts that CCS could be commercially viable by 2030, but that it would require substantial public subsidies to get the 10-12 CCS plants running by 2015 as targeted by the European Commission.
Without public subsidies and with a strict emission limit no new coal plant could be built in Europe from 2015 when the Commission’s Large Combustion Plant Directive ends,
requiring all opted-out plant to close. The consequences from a supply security perspective of such a development could be close to catastrophic. McKinsey said it expects coal to make up 60% of Europe’s power generation by 2030, underlining the importance of fast-tracking the commercial development of CCS technology.
The EU environment committee supports the development of CCS, with MEPs voting to fund a CCS building programme by giving away free EU allowances, with the committee passing an amendment that called for using up to 500m allowances be drawn from a pool set aside for new and expanded factories and power plants. It said the allowances would then be given to European companies that have successfully stored CO2 underground during the third phase of the emissions trading scheme and believes this funding will be sufficient to build up to 12 CCS plants.
But the problem with this approach is its dependence on the success of the trading scheme, which, if the Commission bows to pressure from some member states to increase the cap on carbon offsets – ie the purchase of certified emission reduction and emission reduction units from the respective UN Clean Development Mechanism and Joint Implementation projects – could reduce demand for EU allowances and thus depress the allowance price and reduce the allowance-based funding for CCS.
If CCS is to be commercially developed within the next twenty years there either has to be secure funding or investment incentives in place. With respect to direct funding the current financial crisis makes this unlikely and an incentive programme could be equally problematic.
The problem with CCS is that it is not considered a renewable technology and thus, to date, it has been denied the incentives afforded to both existing and emerging renewable technologies. Yet it could be argued that CCS is an ‘emerging’ technology and thus it should also benefit from incentives or subsidies.
McKinsey calculated that to build a dozen pilot CCS plants would require EU subsidies of up to £8bn over the next few years. But this figure has to placed in context. The UK government, for example, has outlined a renewable revolution that it conservatively costs at £100bn by 2020, twelve times the cost of kick-starting a CCS revolution. And, as McKinsey points out, the cost of CCS could come down from as much as r90/t of CO2 initially to about r30-45/t in 2030, in line with carbon price forecasts.
In the current financial climate companies are understandably reluctant to invest in CCS without funding support. As Vattenfall chief executive Lars Josefsson commented recently: ‘The boards of companies are not allowed to use shareholders’ money recklessly and rack up billions in losses. We will invest in CCS if the funding gap is bridged.’
With the financial crisis set to redefine the rules and operation of financial markets the climate market should similarly take the opportunity to redefine its rules and operations. Central to this has to be how it approaches coal-fired generation and CCS. Without coal-fired generation the world will face an increasing risk of energy supply insecurity. It should not allow security to be compromised by sustainability.
Jeremy Wilcox is managing director of the Energy Partnership, an independent UK-based energy and environment consulting firm.
