In the Green

$100 a barrel, how will this affect transport?

You must certainly have heard that the barrel of oil is now above $100 and that there are good chances it stays at this level (it's a very psychological threshold I agree).
But is a barrel of oil at 100 $ expensive? With a low dollar, it doesn't seem that bad from a European perspective. But in the US, people can directly see the impacts on  the prices at the pump (especially since petrol is so little taxed there). American people that were used to get cheap petrol must not feel at ease right now. Nothing to calm them down after all the bad news about their economy.
But as far as I know, this price doesn't take into account any environmental cost, so I can easily imagine that a fair price could be much higher.
Furthermore, I discovered recently while reading the BP Statistical review of World Energy 2007 something I wasn't aware of. We are already consuming more oil (83.7 million barrels a day) than we produce (81.7 million barrels a day). I am assuming that we have some stocks of oil but still this figure was quite surprising to me. If I understand well, this doesn't mean we are beyond peak oil since peak oil refers to the time when the maximum rate of petroleum production is reached, and oil production still increased by 0.4% between 2006 and 2007. But still, I don't see how oil price can decrease sustainably now.

How will individuals be affected by oil above $100/barrel for transport? It's likely that cyclists won't feel the difference  (maybe less cars on the road, good for them!). Drivers that were reluctant to environmental arguments such as "avoid taking your car for small distances" might start thinking twice before starting off the engine (that's the power of money).
I don't know how it will affect the cost of public transports but it's likely that fares will rise anyway.
Just thinking of Ryanair flights, they might be a bit more expensive than £5 return to Prague in the near future. Sorry for Ryanair fanatics... But at least maybe some people in London will discover that there are some places worth seeing not far in the UK!
From now on, "think local"?

Are we desperate or optimistic?

An  article about UK plans to fight climate chane (and energy security).  I really suggest reading the Readers Comments as well!
Below a couple of extract from the article. It sounds to me one of the first times I read the words underlined and put in bold in such kind of "general-UK-climate-change-policy/commitments-review" article. The reference to solar ("even"!) and concentrated solar power its rather unique in the UK,  I have to say!
are things moving? is the government really considering all possible options? not sure...(yet?)

Also, I wonder what Till would say about the stated  "not commercial viability" of Concentrated Solar Power..Till are you still there?

The goal is ambitious: to install 33 gigawatts (GW) of wind power capacity in the next ten years. [..] But this could just be the start of a huge expansion of renewable energy in the UK, though wave and tidal power and even solar energy would need to be harnessed if the government is to meet its objective of drastically cutting greenhouse gas emissions while also retiring a generation of old, polluting coal and nuclear power stations.

By 2020, the  UK should have 33 GW of wind power and 20 GW of power from nuclear power and clean coal stations. However, peak demand reaches 60 GW and there are no firm plans as of yet for balancing out the electricity system. One option could be for the UK to build electricityinterconnectors with northern European countries to send abroad extra wind energy that can be tapped when it is needed.

The UK government is also looking at the possibility of importing concentrated solar power, but this would require a considerable investment and the technology would need to be commercially viable, something that is still a long way off, according to Heap.

"Concentrated solar power is an interesting technology and there are huge solar resources in countries with hotter climates than the UK, such as, and Spain and  North Africa " Heap said.

Bubble bobble?

Quick follow-up from my PV post last month, to link to an article in Harper's (a great magazine) about asset-price bubbles. Thanks to The Big Picture (great blog) for the heads-up.

The article discusses bubbles in recent years (the internet boom, housing market) and puts them into historical perspective. However, the main reason I wanted to highlight it was this:

We have learned that the industry in any given bubble must support hundreds or thousands of separate firms financed by not billions but trillions of dollars in new securities that Wall Street will create and sell. There are a number of plausible candidates for the next bubble, but only a few meet all the criteria.

There is one industry that fits the bill: alternative energy, the development of more energy-efficient products, along with viable alternatives to oil, including wind, solar, and geothermal power, along with the use of nuclear energy to produce sustainable oil substitutes, such as liquefied hydrogen from water. Indeed, the next bubble is already being branded.

The next bubble must be large enough to recover the losses from the housing bubble collapse. How bad will it be? Some rough calculations: the gross market value of all enterprises needed to develop hydroelectric power, geothermal energy, nuclear energy, wind farms, solar power, and hydrogen-powered fuel-cell technology—and the infrastructure to support it—is somewhere between $2 trillion and $4 trillion; assuming the bubble can get started, the hyperinflated fictitious value could add another $12 trillion. In a hyperinflation, infrastructure upgrades will accelerate, with plenty of opportunity for big government contractors fleeing the declining market in Iraq.

Thus, we can expect to see the creation of another $8 trillion in fictitious value, which gives us an estimate of $20 trillion in speculative wealth, money that inevitably will be employed to increase share prices rather than to deliver “energy security.” When the bubble finally bursts, we will be left to mop up after yet another devastated industry.

Government opposition to Feed-in Tariffs softens

I often though about writing a post about UK Renewable Obligation versus Feed-in-Tariff  (which is also an important part of my research).  I am not going to do it now, but let me just quickly say that there is a quite wide literature which shows how RO is a less efficient policy measure than FIT for renewables deployment (basically lower deployment at a higher society cost) and particularly not effective for microgeneration. The recognition of the effectiveness of FIT has moved from Europe (where many countries have implemented FIT schemes in the last years, following Germany success) to the US, where many states are considering and introducing FIT for the first time (have a look at the messages in this yahoogroup for a good update on US states moves).

In spite of this evidence there is (maybe was?)  a widespread believe that UK government will never consider the introduction of FIT. This probably for many reasons, but the main one I think is the allergy in this country for any policy measure which goes against (or look like going against) the "invisible hand"..

So, I am quite surprised today in reading this.  Maybe the flop of the Low Carbon Building Programme has got to do with it? or it is the first success of the lobbying efforts for FIT?

In any case let's see what will happen. Here we are just talking of a consultation, so a lot still has to be done. Also, RO will definitely remain in place, not clear how the two measures would be able to coexist..

Border Tax Adjustments you say?

The issue of whether a country could, under WTO rules, get away with imposing border tariffs in the name of climate policy has been discussed before on this blog. The legal argument seems to be that there are enough avenues (e.g. in the name of the human health and safety) for a WTO-compliant case to be made. However, the policy would have to be implemented very carefully in order to demonstrate that it did not in fact constitute closet protectionism. Also, there doesn't seem to be a particularly relevant precedent that could indicate whether a given measure would actually be permitted (if anyone knows better, please comment). But the debate moves forward...

Europe

President Sarkozy of France, and different people from the European Commission have, at times, made vague statements about examining the role of trade policy in climate policy (there's one such statement buried here in the working paper accompanying the Commissions latest draft climate and energy policy Directive). Trade Commissioner Peter Mandelson has, in the past, spoken in favour of allowing preferential market access to the cleanest biofuels and environmental goods and services (see blogs passim) but, according to the FT, he is not keen on carbon taxes for fear they might threaten a wider trade dispute.

US

Thanks to IEP Blog for pointing out that the debate on border taxes on carbon and whether they're ok under WTO is now underway in the States as well. This Senate Finance Committee hearing* consists of the International Brotherhood of Electrical Workers (an impressively-named US trade union) lobbying in favour of including trade measures in US Climate Change bills S2191 and S1766. But the impressive thing is that S2191, in its current form, already includes an International Reserve Allowance Programme which requires US importers to purchase carbon credits, pegged at the same price as those produced within the domestic economy, on imports from countries who have not made as much effort as the USA (ahem) in reducing their GHG emissions. So if S2191 stays in its current form, we'll have a form of border carbon tax by 2020 - or sooner if the Brotherhood and their posse get their way.

*The Appendix to the testimony also provides an excellent guide to relevant WTO and GATT legislation that is relevant to this issue.

Carbon tax instituted in British Columbia

Quick post with some remarkable news from Canada - the BC government has initiated a carbon tax scheme in the province. It will start at CDN$10 per ton carbon, and rise to $30 over five years. Households will be given a one-time $100 rebate, and low-income households are eligible for an annual Climate Action Tax Credit to offset the increased costs of the tax. In addition, the provincial government has promised that the tax will be revenue-neutral - and be offset by decreased provincial income taxes.

The tax takes affect July 1 (Canada Day, funnily enough) for individuals, but industrial polluters are given some time before they face the tax - interestingly, the opposite to what happened in Europe. In addition, oil and gas production, and aluminum and cement sectors sectors will be exempt.

The tax is low - but the revenue-neutrality and rebates for low-income households is a good setup. The exemption of oil/gas, aluminum and cement is no doubt political (as was the case here in Europe) - these are high-energy and globally competitive industries that would suffer internationally. It again raises the question of how to deal with these sectors in the context of a world where not everyone has a carbon tax in place. Border tax adjustments anyone?

Read more here and here.

Anything you can do, I can do better...

The Economist's blog, Free exchange, had this post highlighting a recent US Congressional Budget Office report which made several arguments for a preference for a carbon tax over a cap-and-trade system for US climate policy. The CBO deal with estimation of government revenue, debt, and budgets, so I'm not sure how their recommendation plays in the overall scheme for federal policy. At any rate, it was an interesting report that got some attention among the blogs.

The carbon tax vs. cap-and-trade argument brought up by the CBO (summarized here) will be familiar to anyone who has read the academic literature. For those not familiar with the concepts themselves, the best I can do is say that a carbon tax fixes the price of carbon, but doesn't specify how much reduction will be made. The opposite is true for cap-and-trade: we know the reduction, but not the price.

The CBO report made a particularly nice point here:

Analysts generally conclude that a tax would be a more efficient method of reducing CO2 emissions than an inflexible cap. The efficiency advantage of a tax stems from the contrast between the long-term cumulative nature of climate change and the short-term sensitivity of the cost of emission reductions. Climate change results from the buildup of CO2 in the atmosphere over several decades; emissions in any given year are only a small portion of that total. As a result, limiting climate change would require making substantial reductions in those emissions over many years, but ensuring that any particular limit was met in any particular year would result in little, if any, additional benefit (avoided damage). In contrast, the cost of cutting emissions by a particular amount in a given year could vary significantly depending on a host of factors, including the weather, disruptions in energy markets, the level of economic activity, and the availability of new low-carbon technologies (such as improvements in wind-power technology).Relative to a cap-and-trade program with prespecified emission limits each year, a steadily rising tax could better accommodate cost fluctuations while simultaneously achieving a long-term target for emissions.

This is a view that I certainly subscribe to, and one Greg Mankiw's Pigou Club advocates.

On the other hand, however, we have Terence Concoran's NoPigou Club - which seems to be based at Canada's right-leaning National Post (here and here). The objective of the club is to argue against the application of a Pigou tax on carbon. But rather than doing so from the point of view of how we should deal with the problem of climate change (as the Pigou Club does), he instead attempts to polarize the carbon tax debate by continuously naming it an increase in the gasoline price (highly politicized in North America) and a step towards central planning.

A carbon tax will of course lead to higher gasoline prices - but the impact on gasoline will be actually be lower than the impact on coal and gas due to the extremely high taxes that are already in place for gasoline. This means (in part) that much of our future reductions in carbon will likely take place in the electricity and industrial sectors - rather than in road transport. But of course, complaining about rising coal prices doesn't get the angry mobs out like gasoline does, so these are ignored by Concoran.

So how does Concoran suggest we design environmental policy? (Or the market failures associated with the tar sands in his back yard.) He doesn't. In which case, may I suggest he undertake a rebranding to the "DoNothing Club".

London Accord Launched: Cash In, Carbon Out

The London Accord is an open-source collaborative research project between loads of top financial institiutions, universities and Forum for the Future (where I work part-time). All the time and effort was put in for free. I think of it as an applied carbon energy review. It analyses the financial and carbon saving oppurtunities for investing in many low-carbon technologies/options.

There are 25 or so reports. I was an author on report D3 - Investments to Combat Climate Change - Exploring the Sustainable Solutions - it was a tough peice of research as we took on the job of ensuring that important 'non-climatic' impacts were considered. These range from thethe biodiversity impacts of biofuels or the polluntants released in the making of solar panels, to the habitat benefits of carbon sink protection. There's pretty much something for everyone in there.

Also, a big thanks to all of you that provided information and answered my questions. It will be interesting to see what all this infomation will be used for, hopefully to make great investments in a low-carbon economy.

Junk food and drinks junkies: the way forward?

You might wonder what the link is between junk food / junk drinks and a blog on energy/environmental policy. We keep talking on this blog on the policies regarding the sources of energy we use for heating, electricity, or for transport purposes. Well, this time, I want (and Nia too) to talk about the most basic source of energy we use to live, that is the food we consume.

First of all, let's not forget food is a very sensitive subject since it subconsciously refers to breast-feeding and the first needs of our early days. Therefore, there are lots of emotions linked to it. Food also has very strong religious (some foods are banned by some religions) and cultural aspects (all countries have their specialities).

But on average, the first use of food is to feed (provide energy to our body). Then there is a notion of pleasure linked to the taste of the food and finally a notion of sociability. The pleasure is a motivation for people to create new recipes and mix tastes (that's the whole point of spices for example) to make eating food something enjoyable. Finally, the whole point of a meal is for people to share a time of their day with other people. That's why in most countries for example there is a dedicated time for children at school for lunch (rather than snacks between or during classes).

When I use the phrase "junk food / drinks consumption", I don't mean "snacking", which itself is not unhealthy depending on what is consumed (even if I have the intuition that the snacking-only lifestyle is not the healthiest) . I mean eating processed food with poor nutritional value on a regular basis.
It seems to me that consuming junk food / junk drinks on a regular basis is altering these fundamental aspects of food, and I am sorry to see so many (successful) vending machines at Imperial College, and so many people using them on a daily basis.

First of all, this food / these drinks don't provide people with healthy nutrients since they contain:
- lots of fat and / or "simple sugars"
- usually unnecessary or harmful chemicals for colouring, texture, taste (E621: MSG - MonoSodium Glutamate used as a flavour enhancer, E951: Aspartame used as a sweetener, especially in so-called "diet" food...), etc. Possible effects of some of these additives are still unclear, and even less is known on the simultaneous association of several additives in our diet (the effect of one additive on our body when ingested with another).

Secondly, to me, junk food and drinks consumption doesn't provide any pleasure but more likely a  form of compensation (you want a quick kick from food full of simple sugars or fat rather than a more subtle pleasure from a more complex and diverse food).

Finally, the popularity of this type of food prevents people from socializing by promoting individual unhealthy lifestyles: eating while walking, eating alone, eating in front of a computer screen, eating without even knowing what you are eating (most people have no clue on what the ingredients are in crisp bags / soft drinks).

This all leads to what I would call a "disposable society", where people act as individuals not part of a "community" (of friends, colleagues, family...), trying to compensate artificial needs (having 2 cans of coke a day is not a human need)  without experiencing any pleasure from food and without much awareness of their real needs, and finally unnecessary producing a vast amount of waste (from individual packaging).

I can understand people having this food and these drinks every now and then (and I can't say I never crave some crisps) but I don't see how lifestyles based on regular consumption of junk food and drinks can help raise awareness and make our society change to a more enlightened one. The quality of our environment can't improve if we don't endeavour to be more aware of our deeds. As food has an important role in our lives, it wouldn't do any harm if we challenged a bit our ideas on food and had a more responsible approach to what we consume and how we consume it (same with many things I guess). Anybody willing to open an option on organic cooking of local products for the Environmental Technology MSc?

A 21st Century Prize?

A couple of weeks ago, at the World Future Energy Summit, the government of Abu Dhabi announced the launch of the Masdar Initiative, the world’s largest state-sponsored investment project to develop and demonstrate renewable energy technologies.

With a start-up capital investment budget of US$15 billion funded by the government of Abu Dhabi, the initiative is centred upon the development of Masdar City designed by Foster + Partners.

Supposedly, this is to be the world's first zero-carbon and waste-neutral urban development, housing up to 50,000 inhabitants. The city will serve as a show-piece and test-bed for RE technologies, including a US$2 billion project in partnership with BP to develop the world’s largest (500MW) hydrogen-fuelled power station with carbon capture and storage (CCS).

Given the numbers involved, everyone at the ‘summit’ was suitably impressed and excited, though most media attention in the UK centred upon Prince Charles’ zero-carbon holographic address.

Despite UAE’s significant hydrocarbon reserves, Masdar is being promoted as a strategic initiative aimed at establishing an entirely new economic sector based upon low-carbon energy technology innovation and intellectual property. It’s probably worth mentioning here that the country also has the world’s largest sovereign wealth fund with assets worth an estimated US$875 billion, almost three times the size of Norway's 'pension fund'.

Beyond PR-friendly city, the initiative also includes the Masdar Clean Technology Fund. This is a US$250 million private equity fund in partnership with Credit Suisse and Consensus Business Group, set up to invest solely in RE and low-carbon technologies. In particular, Masdar is investing heavily in solar photovoltaic (PV) technologies and CCS. Most recently, the fund invested US$10 million into the Germany-based company Sullfurcell which is pioneering thin-film PV technology. (though read Nathan’s recent post about the PV bubble to see why this may not amount to a hill of beans).

Construction of Masdar city is due to start in February 2008. Plans are in place to first have 60MW of solar PV installed to supply electricity needed to help construct the city, though this seems ambitious to say the least. But if they do pull it off, masdar will pioneer a new form of high-density urban living that is not based around wide roads and cars, but rather a return to traditional narrow streets that maximise shade and cool.

So, while it may appear to be an ironic endeavour, given that the UAE has proven oil reserves totalling 97.6 billion barrels and the third highest per-capita carbon emissions in the world (at 34.1 tonnes, after Qatar and Kuwait), Masdar is progressive and pioneering project and should be celebrated. Indeed, the scale of the initiative is a boost to the global RE industry which still requires significant investments in technology research, design and demonstration in order to make zero-carbon living a viable long-term option.

However, while the design of Masdar city could provide a template for future sustainable living in the Middle East, it is the initiative’s investments in low-carbon energy technologies that are likely to have global implications. Above all, the rapid deployment of the Clean Tech. Fund indicates a potentially significant shift in low-carbon technology innovation and intellectual property rights away from the EU, US, China and Japan, to the Middle East. The speed of this shift is demonstrated by the fact that almost all of the fund’s US$250 million start-up capital has been spent a year ahead of schedule. Doubtless many more billions will follow.

I think it is important (though unsurprising) to mention that neither the UAE, nor any other oil exporting country has a domestic RE industry. In fact, the entire Gulf economies do little more than pump oil and gas, though Dubai has diversified into financial services somewhat now that its oil is running out. Bu anyway, given that the UAE has approximately 100 years of oil and gas reserves (at present consumption and export levels), there is a risk that Masdar could be used as a means to buy up and suppress future low-carbon energy technologies. This could help prolong the demand for oil and gas, the price of which would increase further if viable technological alternatives were not put to market.

That said, this would seem less likely given that the initiative already involves partnerships with foreign corporations seeking a return on their investments, including BP and RioTinto. Further, the city project is likely to attract greater foreign investment, which in the short term is likely to be spearheaded by the demand for PV. In the medium to long-term it is likely that Masdar will act a vehicle for CCS (and to a lesser extent hydrogen) technology, both of which have questionable sustainability credentials, although innovations may allow them to claim ‘zero-carbon’ status leading to rapid global uptake. Certainly it’s a project to keep your eye on.

Is carbon risk displacing low-carbon technologies risk in investment decisions?

In the last couple of years I have heard many times representatives of UK energy industry, utilities and finance arena (in particular during the last Energy Review consultation process) asking for clearer and long term climate change policy commitments to help them in directing low carbon investments decisions. I often did not know how to interpret those statements:

- in some cases I had the feeling that it was just an excuse for not really acting and to maintain status-quo

- in other cases it seemed a “genuine” statement of companies seriously interested in the low-carbon technology business and/or seriously concerned with emission reductions regulations, asking for stronger government actions in order to get clearer market signals and shadow price for carbon.

Generally speaking, if climate change policies and commitments have the necessary medium-long term breathe and, most of all are credible enough, economic actors would start internalising the relative shadow prices in their decisions.

So, probably this news is a very good sign in this respect and another little step toward a sort of “institutional internalization” of the carbon price in western economic systems:

“Three of the world’s leading financial institutions today announced the formation of The Carbon Principles, climate change guidelines for advisors and lenders to power companies in the United States.[..]
The need for these Principles is driven by the risks faced by the power industry as utilities, independent producers, regulators, lenders and investors deal with the uncertainties around regional and national climate change policy […]
The consortium has developed an Enhanced Diligence framework to help lenders better understand and evaluate the potential carbon risks associated with coal plant investments.”

The fact that this is happening in the USA makes the news more encouraging? I just wonder how much the current presidential electoral campaign has got to do with this. Or it’s exactly the opposite? I wonder what Lucas would say about it..

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Anyway, let me add this (on a slightly different note):
Shall we keep fingers crossed (as a dear friend said sending this video) and hope for a change toward more certainties in climate change policy (at least in the USA)?

A rising tide lifts all boats...

Being the non-stop consumer of media that I am, I came across this letter in Saturday's Guardian:

We try to be green and get our electricity via "npower juice", a tariff guaranteed as 100% from wind power. Npower has just written to us to say it has had to raise its prices because of increases in wholesale gas prices, and I have been told that our bills will be around £85 a year higher as a result.

I appreciate the cost of oil and gas has gone up but the wind doesn't cost any more. Why are my bills higher? And do they in fact have the right to charge us more when costs other than the supply we are paying for have risen? We appreciate there may be a tiny increase resulting from, eg the extra cost of fuel in getting boats for the people who service the marine wind farm from time to time, but this would be no more than any other company in the country might experience.

In none of the papers we have been sent or downloaded does it say that the rate for wind power will track the rate for electricity derived from coal, gas or other fuels. When I queried this with the consumer body Energywatch it simply referred me back to npower. Shouldn't it pay to be green?
Ava Greenwell, by email

This is a nice example of textbook economics. In the short run - with fixed capital - when the cost of production in one segment of the firms (i.e. gas electricity) goes up, the remaining firms take the opportunity to raise their prices to match this increased cost. This gives them a nice boost in profit.

Of course, in the long term, higher gas prices will result in changes in investment away from gas power towards coal and wind power - thereby lowering the price of electricity.

External costs of electricity production

The two last posts by Jeremie generated some great discussion.  One of the discussions/arguments between Simon, myself, and Bishop Hill was related to how the price of a good embodied the environmental impact. Reading the comments again, I think that there was was some misunderstanding - although there are still fundamental disagreements. To summarize the viewpoints:

1. We all agree that market externalities occur, and that in principle they should be internalized.

2. Simon and I believe that externalities are significant and real, and emissions pricing should be implemented to internalize them. This, however, is not reflect a preference for any technology (i.e. biofuels).

3. I interpret Bishop's comments last week and comments on his own blog as: Because we are not able to take into account all externalities any partial internalizing will cause more problems. Furthermore, externalities are generally not particularly significant, and thus the market price still is the best indicator of environmental impact. (Bishop, if I've misinterpreted you, do let me know.)

This led me to do some calculations to find out: How much do environmental externalities compare with market prices? Are they significant?

For a quick illustration, I did some calculations on electricity in Germany. I was interested in how the monetized health and environmental impacts of SO2, NOx, PM2.5, and CO2 compared with the variable cost of fossil fuel production. I use variable cost because plants will still operate as long as they have these covered. The calculations assume that generation is undertaken without pollution control (i.e. flue gas desulphurisation, PM filters) to give an indicator of what the emissions taxes should in principle be.

My emissions intensity data comes from the IIASA RAINS model, the monetized impacts of SO2/NOx/PM2.5 comes from the European Commission (low rural estimates for acute/chronic health impacts, structural degradation and crop yield from ozone), the cost of carbon is from both DEFRA and Nordhaus, and costs and efficiencies of electricity production come from a yet unpublished source which I have under embargo.

The assumed shadow price and results of my calculations are as shown here. The calculation for each source is the average of a range of technical assumptions - efficiencies, emissions factors, variable cost - so these are just rough calculations.

As expected, PM2.5 and SO2 are the dominant source of external costs, with CO2 being the lowest. What is unquestionable, however, is that they are all significant (particularly, in this case, because I'm assuming no pollution control). We may not have the entire picture of impacts, but to not act on these externalities is foolish - and the western world has rightly acted upon air quality over the last 30 years.

The European Environment Agency has done some similar calculations of external costs of electricity production in Europe, but this time with pollution control in their assumptions. They too, are significant. Comparing the external costs with the taxes on emissions, they conclude that the externalities from the electricity sector have not yet been fully internalized in Europe.

While this doesn't resolve any of our discussions, it's interesting fodder nonetheless.