Archives for September 2015

COP21: Energy Subsidy Reform, Global Carbon Pricing?

September 26, 2015 By Stewart Taggart

Creating a pathway to global carbon pricing would represent the largest success for the upcoming COP21 meeting.

Between now and 2020, the long-term economic linkages between carbon markets and cross-border infrastructure projects will become increasingly clear.
Source: “State and Trends of Carbon Pricing 2014,” World Bank, 2014

Business wants it, governments want it. Society demands it. Now is the time. Templates exist.

The UN’s climate chief Ban Ki Moon has called for a 50-year plan to fix the climate change problem. The good news is that it shouldn’t take that long.

With proper global energy tax and subsidy reform, as well as five-yearly carbon emission reduction targets — it can be done much quicker than that.

The International Energy Agency’s plan should be the template.

The IEA proposes:

1. Peak in emissions – set the conditions to achieve an early peak in global energy-related emissions.
2. Five-year revision – review national climate targets regularly to test the scope to raise ambition.
3. Locked-in vision – translate the world’s climate goal into a collective long-term emissions goal.
4. Track the transition – establish a process for tracking achievements in the energy sector.

Each of the four is now falling into place.

A growing number of countries have committed to carbon reduction targets. In addition, rapidly-maturing carbon markets are set for liftoff after 2020. This will dramatically change the terms of investment in the global economy. Markets will do of the rest.

The next five year revision will take place in 2020. This can form the basis of binding agreements. By that time, reforms to carbon markets will create credible terms for new investment. That in turn should greater comfort to countries agreeing deeper cuts.

Already, the corporate sector is penciling in carbon prices. For the energy sector, these cluster around $30 and above. The impact this will have on energy market investment is hard to overstate.

As this occurs, a ‘locked in’ vision will emerge in which everyone will benefit. At that point, ‘tracking the transition’ will merely bring the date forward when the problem is solved.

For instance, this will encourage more rapid progress to meeting the IEA’s Bridge Scenario.

1. Increasing energy efficiency in industry, buildings and transport sectors.
2. Progressively reducing the use of the least-efficient coal-fired power plants and banning their construction.
3. Increasing investment in renewable energy technologies in the power sector from $270 billion in 2014 to $400 billion in 2030.
4. Gradual phasing out of fossil-fuel subsidies to end-users by 2030.

In the Bridge Scenario, coal use peaks before 2020 and then declines. Oil demand rises to 2020 and then plateaus. The result: total energy-related greenhouse gas emissions peak around 2020.

If that occurs, the energy intensity of the global economy and the carbon intensity of power generation should improve by 40% by 2030.

In 2014, carbon markets covered a mere 11% of global energy-related emissions. The average price was $7 per tonne of CO2. In 2014, roughly 13% of global CO2 emissions were supported by fossil-fuel subsidies equivalent to roughly US $115 per tonne.

If these subsidies are eliminated, and carbon prices rise to $40 per tonne, a virtuous circle will be created of greater energy efficiency, discouraged carbon emission, recycling of investment funds into infrastructure and clean energy creating long-lived future energy investment returns that can be used to offset the costs of supporting an aging global population.

In other words, a virtuous circle.

Methane Hydrates: China’s Real South China Sea Goal?

September 20, 2015 By Stewart Taggart

Could access to methane hydrates be behind China’s territorial aggressiveness in the South China Sea?

In addition to potentially large resources of oil and gas, the South China Sea’s deeper waters also are believed rich in methane hydrates.
Source: US EIA, Klaudia & Sandler, 2005

Methane hydrates are a form of compressed natural gas lying on the sea bottom.

Developing them is risky and costly. Despite this, methane hydrates are an abundant fossil fuel resource that could last decades — if not centuries. For China, which now sees getting access to sufficient energy as a critical national challenge, that matters.

Estimates of the South China Sea’s methane hydrate potential now range as high as 150 billion cubic meters of natural gas equivalent. That’s sufficient to satisfy China’s entire consumption of oil equivalents for 50 years.

Southeast of Hong Kong, China’s offshore Lingshui 17-2 field shows signs that — all by itself — it could hold 100 billion cubic meters of natural gas equivalent.

Given this, China may be trying to gauge the extent of methane hydrate deposits elsewhere in the South China Sea. This could explain China’s placement of an oil and gas rig off Vietnam twice in the past year. Both locations, lying between North Vietnam and the Paracel Islands, are considered promising places to look for methane hydrates.

In addition to offshore China and northern Vietnam, the Reed Bank area located west of the Philippine island of Palawan may be another South China Sea methane hydrate honey pot.

The Sampaguita Field within Reed Bank may also hold large deposits of natural gas equivalents in the form of methane hydrates, according to Philippine estimates.

Coincidentally, some of China’s current South China Sea reef reclamation efforts are occurring on Mischief Reef and Nansha Island. Both of these are located just south of Reed Bank.

Both Mischief Reef and Nansha Island would be ideal for servicing and providing military security for offshore methane hydrate development in Reed Bank.

For years now, China’s has been investing heavily in offshore oil production technology. China plans begin testing offshore methane hydrates extraction technology in 2017. China plans to begin commercial exploitation of methane hydrates by 2030 — without saying where.

As it happens, methane hydrate resources also exist in territorial contested areas of the East China Sea.

China recently resumed exploration drilling in an area just west of a bilaterally-recognized maritime equidistance line separating China and Japan. In 2008, China and Japan both paid lip service to potential joint development in the area.

Separately, in offshore areas north of Taiwan, the disputed Senkaku Islands may also hold commercial amounts of methane hydrates. To date, however, no exploration activity has occurred there that’s been publicly announced.

Extracting methane hydrates is expensive, technologically-challenging and time-consuming. Developing the resource will require political stability. And that will require either alot of gunboats or a lot of diplomacy.

At present, however, China’s saber rattling over its expansive, unilateral claim to virtually the entire South China Sea is now driving the Philippines and Vietnam closer to a bilateral strategic partnership, one that might later be expanded to include Japan.

At best, this will complicate any Chinese plans to unilaterally develop methane hydrates in disputed South China Sea waters. The reason is that doing so will almost certainly require a overwhelming show of Chinese maritime force to ensure security for its exploration and production efforts.

This will raise the political and economic costs involved in developing methane hydrates. At worst, it could lead to a 1964 Tonkin Gulf-type incident at sea that leads to war. China’s unlikely to want that.

Far better would be for China to deploy its sophisticated technology backed by the deep pockets of its Asian Infrastructure Investment Bank to create ‘partnerships’ with the Philippines and Vietnam to develop these offshore resources.

Indeed, China has often held up the idea of ‘joint development’ in the South China Sea.

For years now, Philippines exploration company Philex has been negotiating with China over Reed Bank.

Separately, China and Vietnam have agreed to jointly explore for oil and gas together on either side of their mutually recognized maritime equidistance line separating North Vietnam from Hainan Island. Both sides also have paid lip service to the concept of joint development in the South China Sea.

Progress in this direction, however, has been hampered by increasingly strident statements by China of ‘indisputable’ claims to virtually the entire South China Sea.

One way for China to restore eroding trust this is causing among its South China Sea neighbors is to create Joint Development Areas for development of methane hydrates.

Joint Development Areas exist all over the world. Two exist in the Gulf of Thailand. They are commonly used by disputing nations to freeze disputes indefinitely over offshore areas while they jointly develop the resources within them.

The economic and political logic behind Joint Development Areas is that they postpone final decisions on disputed sovereignty until far in the future when the stakes are lower because the resources have been developed.

At this point, it’s worth pointing out that developing methane hydrates may ultimately prove either technologically-impossible or economically-unviable. The reason is that methane is a very powerful greenhouse gas, with emissions many times that of coal.

As a result, even with the best technology, the methane emissions released from developing deep sea methane hydrates, if subject to carbon costs, may render investment in the resource uneconomic.

What this means is that a policy of unilateral territorial assertion of sovereignty over South China Sea areas with methane hydrates may not make sense on either economic, military or diplomatic grounds.

That’s because developing methane hydrates may create large greenhouse gas costs, large military outlays to ensure security in disputed waters and/or create large diplomatic fallout hindering Chinese cooperations with her southern neighbors in other areas.

Given the above, creating Joint Development Areas with the Philippines and Vietnam seems a more sensible outcome. It can also set an attractive precedent for resolving other issues in the South China sea, such as fisheries, rights of transit, people smuggling and humanitarian relief.

All of the above have been cited by China to date as motives for its construction of military-style infrastructure on strategically located but contested islands.

These include Mischief Reef, Gaven Reef, Hughes Reef, Subi Reef, Fiery Cross Reef, Johnson Reef, and Cuarteron Reef.

The lack of credibility with which these claims have been received in the international community has led the United States to hint it may engage in maneuvers near disputed islands to demonstrate the principle of ‘free passage’ — which China supports.

China also potentially faces an adverse ruling by a UN-panel next year on the Philippines claim.

Were both of the above to occur, it will put more political pressure on China to make its intent in the South China Sea more clear.

Negotiating with neighbors on Joint Development Areas would create a win-win outcome, and defuse what may escalating rapidly into a regional diplomatic crisis. .

The World’s Improving Carbon Pricing System

September 14, 2015 By Stewart Taggart

By fits and starts, the world’s moving to a credible carbon price signal.

Trading issues are getting resolved. Markets are expanding. Price floors are emerging.

The biggest problem at present in carbon markets is prices remain too low. Most now languish below US$10 per tonne. They may hover around that level until 2020. After that, however, they’ll likely rise rapidly to $30-40 per tonne.

When that occurs, changes to the global energy economy to reduce carbon emissions will pick up speed. As a result, the four-year delay could actually be a good outcome.

Why? It will give industry a bit of time — along with a big warning shot across the bow — to work out comprehensive longer term investment plans in low carbon emissions.

In reducing climate change, what matters is creating and embedding firm, long-term expectations of permanent, dramatically-higher carbon emissions.

Over the the long-term, that will yield smarter, more efficient investment.

This is more desirable than having companies rush to make quick investments in low carbon technologies in pursuit of — for instance — fleeting tax benefits or temporary subsidies.

Ideally, this December’s United Nations Climate Change meeting in Paris, known as COP21, should set long term goals for global carbon reductions. The prospects look promising.

In advance of the meeting a number of countries, including the United States and China, have proposed cuts to greenhouse gas emissions. The goal of COP21 will be to encourage as many other countries as possible to make similar pledges, and make such cuts binding.

The benefits of these commitments to the global economy, global health and to the livability of the planet will be enormous. Just as important, however, is that there’s money — big money — to be made in tomorrow’s carbon driven investment markets if governed by predictable, long-term rules which everyone obeys.

Applied correctly, such rules will supercharge the global economy. They will create the industries of the 21st Century. They will help solve other seemingly unrelated problems such as funding the retirement needs of aging global population.

To get from here to there, two things are needed:

The first is global agreement on reducing carbon emissions, with specific targets for each country. COP21 should achieve this. The second is to meet the above through the price mechanism. This is now broken when it comes to carbon emissions. It needs to be fixed by 2020

To achieve this, two big reforms are needed: eliminating global fossil fuel subsidies and creating carbon ‘price floors’ which ensure a minimum price for carbon. At present, the presence of fossil fuels subsidies and the absence of minimum carbon prices make dirty energy sources artificially cheap.

At present, global fossil fuel subsidies amount to roughly $5.3 trillion, according to the International Monetary Fund. That’s equal to roughly $176 per tonne of greenhouse gas emissions from the production of energy. That’s a huge economic distortion.

The second economic change needed is to create visible, long-term, upwardly trending carbon prices. This help investors choose between competitive long-term low carbon investments in order to maximise return on investment. It will also favor near-term investments because of the long-term carbon emissions savings they will generate.

Happily, carbon markets also are maturing as initial design problems are being fixed. The best example here is the European Union’s carbon ‘cap and trade’ market.

The European Union Emissions Trading System (EU ETS) has been around since 2005. Unfortunately, the market’s rules didn’t include a minimum price for carbon (known as a ‘price floor’).

When the 2008 global financial crisis reduced economic activity around the world, a surplus of carbon permits occurred in the EU ETS that depressed prices.

In 2020, the EU ETS will undergo major reforms in 2020. A big expected reform will be to create a ‘price floor’ for carbon. This can be done in one of two ways. The first is apply a minimum ‘carbon tax’ (say $US20 per tonne) in weak markets. The second is to allow authorities to withdraw carbon permits from the market to boost prices if they fall too low.

Creation of price floors and withdrawal of permits to manage prices are needed reforms that almost certainly will be implemented by the EU in 2020. The likely outcome is that EU carbon prices will double sometime after 2020 (to around $20 per tonne) followed by a 50% rise over the ensuing decade from 2020-2030.

Another post-2020 initiative would be to progressively link together the EU ETS with other carbon markets.

These could include the primary North American carbon market that links California and the Canadian province of Quebec. Those markets in turn could over time deepen their links with the US Northeastern state Regional Greenhouse Gas Initiative (RGGI) states.

Over time, these could deepen their linkages with other regional trading markets such as the one starting up in China, South Korea and Japan.

That in turn will raise the amount of global carbon emissions covered by trading. Over time, carbon trading can be applied to other sectors, like agriculture and forestry (now being pioneered by New Zealand, for instnace).

All of this presents a picture of a world moving in the right direction. The four years between now and the critical year of 2020 are too precious to lose. As a result, this year’s COP21 meeting needs to reach globally-binding agreements on carbon reductions to 2050 and agree markets as the best way to achieve this.

At present, about 6,000 tonnes of carbon are now traded or taxed worldwide, according to the World Bank. That amounts to roughly 12% of gobal carbon emissions. Priced at US$20 per tonne, that’s a market of about $120 billion.

Pricing all the world’s carbon emissions at $20 per tonne implies a market of $1 trillion. That’s roughly the same size as the global biotechnology industry or the global pharmaceutical manufacturing industry.

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Archives for September 2015