3.0 four pathways
The centerpiece of any serious climate policy
is transitioning to low carbon energy systems. And that involves four parallel strategies. One: decrease energy demand. This reduces emissions, and reduces the need for energy infrastructure. Two: end CO2 emissions from electric power generation in whatever way works.
Some parts of the world have fossil fuels, and have a lot of good underground storage for burying CO2. Some parts of the world have wonderful hydropower resources, some have solar resources. And it’s going to be, look, you guys, you have an endowment that’s valuable. If we can figure out a way to get that to zero emissions, then, let’s do that or we’ll do renewables, we’ll do whichever one we can do fastest and cheapest, and that gives the best benefit to our jurisdiction.
Three: switch to zero-carbon propulsion in all modes of transportation. And four: where heat is required for buildings and heavy industry, switch to low carbon fuel systems and manufacturing processes. The technologies needed to implement these strategies are available now.
But several factors determine the speed at which those technologies are adopted. Competition: for certain industries, low carbon technologies are costly. So adopting them would mean losing business in a competitive international marketplace which is only beginning to recognize the economic costs of climate change. Turnover rates: Large industrial facilities have a life span of 50 years or more. Many people keep their cars for 10 to 20 years. Speed of construction, such as retrofits, upgrades, and building infrastructure for electric vehicles. And the time it takes for institutions and individuals to change their behavior.
John Robinson: In my experience the barriers to sustainability are never technical. There are lots of technical solutions, many of them are off the shelf. They are almost never economic, although they are always expressed in economic language, and always look like their economic, but when you peel back the onion a few layers, you discover almost invariably that the problems are institutional. I’ll give you an example. To build a deeply green building, you’ll often in many ways be violating building codes, because the building codes were designed in an era when sustainability wasn’t a factor. And so the alternatives may be available, and they may even be cheaper, but we can’t implement them, they can’t be approved.
I’ll give you another example. We have at UBC some fairly strong sustainability policies. Our staff at the operational level, know about those policies. One of them said to us a few weeks ago at a workshop, “If a hundred horsepower motor goes down, my obligation is to the people in the building. To get it up as fast as possible. So, I’m going to buy the exact same motor that I had before. I know there’s better ones. I know there’s more energy efficient ones. But they would take longer, I’d have to go out and find new vendors, I don’t know if I trust the new vendors. It might take longer to get it delivered. It wouldn’t fit exactly in the hole left by the old one. And then I don’t know if it’s going to work as well, because we’ve never used them before. Meanwhile, while all this is going on, people in the building are screaming at me because whatever it is that broke down isn’t working.” So he said, “Of course I’m going to buy the same one, even if I know there’s something better if I spent the time to go out and study it, and even if I know it would be better to have a different that used less energy…that’s not how I’m judged. That’s not my performance evaluation.” So multiply that by a million times.
So that’s the difficulty. We’re in path dependent systems. Our institutions and our ways of acting are based on rules that have been codified and built into the system. And unless we address those barriers, it’s not enough to simply find the technically better solution. We’ve got to make sure the people who have to prove it, and install it, and run it and operate it are rewarded for making more sustainable choices.
3.1 government interventions
And a government committed to rapid energy transition
will intensify its key role in the so-called innovation chain
– the development process by which technologies reach the marketplace. Government’s role is to invest tax revenue in the early stages, often in partnership with industry. Industry investment increases as the innovation nears the commercialization stage.
Innovation in green energy often means bringing down the cost of existing technologies so they can compete with cheap fossil fuels. Together, the governments of the world’s major economies spend roughly $15 billion annually on such research and development efforts — often in cooperation. The US spends the most by far.
One federal program advances new technologies such as this high performance organic flow battery
that could stabilize electricity from wind and solar. It is being developed at Harvard University, with a private sector partner, and with support from public agencies in the US and Netherlands. Many nations maintain national laboratories dedicated to such work. This project focuses on hydrogen fuel cells
When an innovation has reached the commercialization stage, governments can use regulatory or financial tools
to ensure that the new idea is adopted. A combination of tools may be used to green the grid, for example. Among the most widely used is the Feed In Tariff
. It guarantees grid access to any electricity supplier, large or small, and pays prices that allow for reasonable profit. Another tool is sometimes called a Renewable Portfolio Standard
. It’s a quota system where the percentage of renewable energy used in the grid is set by legislation, and rises over time.
We are growing the amount of renewable that contribute to our energy supply. We hit 20 percent in 2010, we’re growing that to 25 percent in 2016 and 33 percent in 2020.
We have a couple of state laws. We have SB1368
which requires us to not invest in coal plants in the future and to work towards replacing those plants when those contracts expire, and we have a couple of power plants that we need to replace. But also have AB32
which is the greenhouse gas emission reduction law which has a declining cap over time.
Narrator: All such interventions allow for increases in electricity rates.
What it means, though, is that we are basically subsidizing electricity from these renewable sources, and everybody’s contributing by paying a little bit more in their tariff. But again, we have to remember that fossil fuels, if we’re burning coal or natural gas, and are not being charged an emissions charge like a carbon tax, then they’re using the atmosphere as a free waste receptacle, and that’s the biggest subsidy of all.
A price signal is a proven regulatory tool that guides an economy toward a desired outcome. And a price on carbon
emissions is regarded as a policy cornerstone.
Chris Davies : Most of the big engineering companies recognize that we need to develop low carbon technologies. In order to do that we have to put a price on carbon, create the right incentive. If there’s no price, there’s no incentive, we’re not going to develop these new technologies.
A carbon tax
is designed to incent people to seek alternatives, and to do it in a way that works best for them. So instead of putting on a regulation that you have to drive an electric car, or you have to turn your lights off, you can chose to continue driving a gasoline car but you’re going to have to pay a penalty to it.
Now looking across the economy, if the price gets strong enough, you’ll bring your emissions down to your target levels. With a strong carbon tax in place, next time a consumer goes to buy a refrigerator or a car, they consider that in their decision, and perhaps it may make a difference between buying a gasoline car, a hybrid car, or maybe an electric car. Say you make those extra investments up front in a device that’s going to last 20 – 30 years, it could end up paying itself back in 5 – 10 years and then you’re making money after that.
Narrator: The same general principle applies to industrial users of fossil fuel.
Chris Bataille: So say you’re TransAlta, the next time you go and build an electricity generation station in Alberta, given a sufficiently strong carbon tax, perhaps instead of building a coal plant you might build a coal plant with carbon capture and storage, or you might mix into your system some more wind thereby producing the same amount of electricity — it might cost a bit more — but the emissions might be 1/2 or 1/4 of what they might be otherwise.
A carbon tax of at least $50 / tonne, and rising to $100 or more is considered the level needed to drive energy transition in large industries. But such rates need to be phased in.
Chris Bataille: You don’t tomorrow announce a hundred dollars a tonne, because that’s just not fair to firms and consumers who have invested large sums of capital in existing equipment. What you do is send a long-term signal that you will be pricing carbon and that price is going to increase through time.
And then if you have equity issues in your society, at the bottom end you get a credit. Right? So everybody pays the same carbon tax, but then you use your own domestic tax system to provide benefits for poor people who need natural gas for the furnaces, or what have you.
Narrator: Governments can design a carbon pricing system in any number of ways, including making them revenue neutral by lowering other taxes. Or the money can be used to kick start energy transition.
One of the options that we have looked at is actually taking a portion of the penalty or compliance that industry pays for their emissions today and pooling that into what we would call a technology fund
, which is sort of a tipping point for a lot of companies in terms of taking a risk, or piloting a new technology. A good example of that is carbon capture and storage. Our government has put up two billion dollars to partner with industry
to develop and deploy pilot projects at the sort of scale we need to really determine whether carbon capture and storage is a viable option for us long term.
Another way that applies a carbon price is a cap and trade system
, where you create so many effectively licenses to emit emissions. There’s only so many in the economy, and we buy and sell them with each other.
In a perfect system, with no transaction costs, no lawyers (laughs), a carbon price, and cap and trade system should arrive at roughly the same price. A carbon tax is by far the simplest and easiest to administer. And BC actually did it very effectively
. It was just tacked onto our excise tax system. There was no fuss, no muss.
But to be truly effective, carbon pricing has to be a global policy so as to avoid putting any nation at a competitive disadvantage.
: Very few jurisdictions are going to go ahead of anybody else. It’s got to be seen as a level playing field. The US will not do anything until China does something, and China won’t do anything unless the US does something. So the two of them probably have to agree on some very low level to start with say $5 – $10 a tonne. And then mutually work upwards from that. Otherwise, what you end up having to do is if you want to build a carbon restriction regime in your own country, and you don’t want your businesses unfairly penalized, you do have to erect border tariffs with other nations. Some of those are more or less legal under the WTO trade restrictions
3.2 private sector interventions
Climate change… is the greatest and widest-ranging market failure ever seen.
– Nicholas Stern, The Stern Review
While governments set the stage for energy transition, the resources required for transition are largely in the hands of the private sector. And according to the International Energy Agency the private sector needs to invest about $48 trillion in energy transition over the next 2 decades
. A significant part of that investment could be avoided through energy efficiency, and by diverting business-as-usual spending toward energy alternatives that are already available.
By showing the good solutions, delivering the good solutions, and by disseminating the best practices, I think that’s where we need the industry to engage even more, just like you’re doing at an event like this. Because there are so many good solutions out there but they are not always very much known.
And there are ways to guide investment toward energy transition. Changing lending policies is one of them. Some major institutions are phasing out support of new coal-fired electricity generation projects
in favor of low carbon alternatives. And when the cost advantages of clean energy, energy efficiency and energy self-reliance are pointed out, business decisions favour clean energy. This is the finding of CDP
, a non profit organization in the UK, which reports information volunteered by governments and larger companies who see the advantage of a low carbon economy.
Companies are reporting that they are seeing fast paybacks on returns in investments in their emissions reductions activities. Sixty percent of companies report such paybacks over three years. For investors, they can use the report to assess which companies are likely to be the winners and losers from climate change and the transition to a low carbon economy, and to use the information to help guide more sustainable investment decisions.
However, stronger interventions are needed to reduce large industrial emissions, especially in the electricity generation sector. A high price on carbon – or regulations restricting carbon pollution
– would do the job. But in the absence of such policy, there is a work-around. Large pools of capital can be shifted using a financial instrument that’s been around for generations.
In World War One, we issued war bonds in the US and the UK to finance the war. Actually it was an idea that came out of the US Civil War, where the North issued bonds and arm twisted the banks to buy them, to finance things. The South didn’t do that. The North managed to finance their way out of it using bonds. The sewers of London
, in the threat of a cholera epidemic, doctors finally realized what was causing this epidemic, sewers were built in a short amount of time, and entirely financed by bonds.
So what it means is they can take a smaller pool of money and they can recycle it faster and faster and faster. At the moment, they’ve got a small pool of money, and they have to do it slowly, and as their projects get up to speed, they can maybe raise some more equity – it takes much much longer. Let’s say someone like Walmart issues a green bond to put solar on their rooftops, which they can do, and they’re beginning to do. Now if they find that bond buyers really like this sort of stuff, Oh, we could do more of that. That’s really easy to raise money for.
The truth of the matter is bonds are primarily a refinancing instrument.
When the project’s built, and it’s sitting there in the desert earning money, then it’s perfect to sell to a pension fund, because they want something that sits there and earns money for 20 years so they can make sure they can pay your pension fund when the time comes.