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The transition jigsaw: Part 1 – The role of government

Enshrine stability and predictability in law to ramp up investment

The transition from a fossil fuel-based economy to one powered by renewable energy fast enough to stop runaway climate change can only be achieved by action from everybody. In a three-part series we examine the roles to be played by governments, business and investors, and civil society. This week, we focus on the urgent need for administrations around the world to step up and implement the right policies in ambitious legislation that offers market stability

 

Lauded for its historic nature, the Paris climate agreement is just the beginning of the next chapter of global climate lawmaking. The accord is “an international success and vital to drive action forward in the future”, says Nat Keohane, Washington, DC-based senior vice-president at the Environmental Defense Fund, a not-for-profit organisation. But, he adds: “It can only be given life if governments really start leaning in to this. We need to get major emitters not just doing more than they have said they will do, but also leading others.” He cites China’s decisions to introduce emissions trading, reduce emissions intensity (emissions per unit of GDP) and increase its uptake of renewables, plus India’s investments in solar and wind power as “bright spots”. But insists: “Overall the pace is not fast enough.”

Some governments have opted to enshrine their climate goals in law. The UK was the first nation to pass a climate bill with its 2008 Climate Change Act. It set a goal to reduce the six greenhouse gases identified under the 1997 Kyoto climate protocol (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, sulphur hexafluoride and perfluorocarbons) to 80% below 1990 levels by 2050. The original UK act was superseded in June 2019 by the signing into law of the goal to reach net zero emissions by 2050. Turning this into reality will require sweeping changes across the economy.

The UK’s advisory Climate Change Committee warned in early July 2019, however, that efforts to transition from a fossil fuel to a clean energy economy are lagging and deemed the next 18 months as critical. In a parliamentary report, the committee says that meeting the net zero goal “is contingent on early and decisive action to strengthen policy”. It adds: “Actions to date have fallen short of what is needed for the previous targets and well short of those required for the net zero target.”

It was not until 2012 that another country, Mexico, followed suit with climate legislation. Its General Law on Climate Change underpins its 2050 target for a 50% cut in emissions, against 2000 levels. Progress in Mexico has been rocky since the law passed. Climate Action Tracker warned in March 2019 about further backsliding since the 2018 election of Andrés Manuel López Obrador as the country’s president. He has shifted funding from renewable energy programmes, including long-term electricity auctions, to modernising fossil-fuel power plants.

Elsewhere, subnational jurisdictions have been taking the lead when there is a lack of action at national level, particularly in the US. California’s legislature passed its Global Warming Solutions Act, known as AB32, in 2006. It mandates economy-wide emissions cuts, including via an emissions cap-and-trade system. Other US states have introduced mandated renewable energy targets, energy efficiency goals and biofuel regulations as a means to cut emissions in-state.

Minimising costs

“To deliver and trigger the energy transition, you need policies that will keep the cost of investing down,” says Heymi Bahar, senior renewable energy analyst at the International Energy Agency (IEA) in Paris, such as fixed tariffs or power offtake deals. Whatever the policy choice, “stability is absolutely critical”, says Erwin Jackson, director of policy at the Investor Group on Climate Change in Melbourne, pointing to Australia’s erratic climate policy history as an example of what not to do.

Jackson says carbon pricing, renewable energy target programmes and feed-in tariffs (FITs) are some of the policy options available. “The core element that makes these work is stability, durability and predictability,” he says. This is vital for drawing investment to achieve policy objectives, he adds. “Governments around the world have a great opportunity in the next two years to set frameworks for policies that can provide that predictability,” he says, referring to the review of Paris pledges due to be completed by 2020.

“You create levers, which force consumers to change their demand — it is not rocket science,” says Wendy Miles, partner at law firm Debevoise & Plimpton in London, of the role for lawmakers. She cites the City of London’s doubling of its congestion charge in April 2019 for older vehicles as an example. “You create the conditions that give investors the confidence to invest in the harder [to reach] markets.”

Putting a price on emissions
Carbon pricing, and more specifically emissions trading, is increasingly in the headlines around the world. Emissions trading has its roots in the US’s highly successful Acid Rain Program to cut emissions of sulphur dioxide and nitrogen oxides, established by amendments in 1990 to the Clean Air Act. In a 2011 report, the US Environmental Protection Agency found the value of the benefits of these amendments is 30 times more than the costs out to 2020, primarily due to fewer deaths linked to air quality and particulate matter.

In more recent years, emissions trading has been used to target carbon dioxide and, occasionally, other greenhouse gases. The EU’s pioneering cap-and-trade market for carbon emissions began in 2005 and other markets have since launched in New Zealand, South Korea, China and several US states and Canadian provinces, among other jurisdictions.

But it has not been smooth sailing. The EU system, in particular, has suffered from policy overlaps, the global financial crisis and an existential crisis over whether its primary goal is to reduce emissions or send a price signal for investors. This confusion led to a protracted multi-year review and reform process in the early part of this decade. South Korea’s market has also undergone revisions, while New Zealand’s 11-year old system is being reformed to align it with the Paris agreement’s goals. “We have seen a propensity for governments to keep interfering in the market, which does not lend itself to stability … [and] does not allow for the market to do what it needs to,” says Jackson. “We have never given carbon pricing a real hard go in any country.”

The IEA’s Bahar believes the transition needs carbon pricing and that such programmes are already playing a role in transforming economies. He points to Sweden and Denmark — both have had a carbon tax since the early 1990s — as places where carbon pricing is driving a shift away from fossil fuels. “A carbon tax is a good tool, but it is difficult politically,” he says. He attributes the success in the Nordic region, particularly in the heating sector, to the initial low price which rose over time. Sweden’s tax is currently around $142 a tonne of carbon dioxide equivalent, says the World Bank’s carbon pricing dashboard. By contrast, EU ETS prices are around €28 a tonne — an 11-year high, buoyed in recent months by the reforms to remove excess permits from the market.

“Allowing a market to work with a carbon pricing scheme would probably be the most efficient [way to drive the transition],” says Doug Vine, senior energy fellow at the US Center for Climate and Energy Solutions, a not-for-profit organisation with a base in Arlington, Virginia. Design is key. “In the US, if it is just left to markets, people will pursue the lowest-cost option to meet environmental criteria — and if the environmental criteria does not include carbon dioxide emissions, they won’t work to reduce them,” says Vine.

Shell’s chief climate change advisor David Hone cautions that carbon pricing can have limits. “You may reach a pinch point, where the price is very high and you start to get pushback from the economy and the government relaxes the targets,” he says.

Incentivising renewable energy
Beyond a carbon price, governments have tried other policies to encourage renewable energy, such as a myriad of green certificate trading programmes and subsidies, largely with great success. “FITs have been very successful in moving renewable energy from a niche industry, which it was 20 years ago, to be the powerhouse it is today,” says Jackson from Australia’s Investor Group on Climate Change. Renewable energy target programmes, while good from a political perspective, are less transparent, he says. “We are not really seeing who is paying for the cost of that policy.”

Nonetheless, the success of these policies can be seen in the plummeting cost of renewable energies in recent years, which has made cleaner energy competitive with — and, in some cases, cheaper than — fossil fuels. Even newer technologies, such as lithium-ion batteries for storing power to provide grid support, are rapidly becoming more affordable. Analysis released by BloombergNEF (BNEF) in early 2019 found the benchmark levelised cost of electricity (LCOE) for lithium-ion batteries had fallen by 35% since the start of 2018 to $187 a megawatt hour (MWh). Overall, the LCOE for this technology has fallen 76% since 2012.

The research firm also reported falls in the LCOE for onshore wind — down 10% year-on-year to $50/MWh despite its relative maturity— and solar photovoltaic — down 18% over the same period to $57/MWh. BNEF’s New Energy Outlook 2019 report forecasts that wind and solar will power half the grid by 2050, aided by batteries. The report also states that wind or solar is now the cheapest new capacity option for two-thirds of the world and will likely attract $5.3 trillion and $4.2 trillion of new investment respectively out to 2050 to meet rising electricity demand.

“The first tipping point was about three years ago,” says Elena Giannakopoulou, head of energy economics at the firm’s London office, referring to when onshore wind and solar started to compete head-to-head with natural gas and coal for power generation in places such as Germany, the UK, Japan and Australia. “Today, we are not talking about a tipping point, but [instead] a gap that is widening,” even with cheapening gas and no subsidies for solar or wind power.

Giannakopoulou says a shift from FITs to reverse auctions for renewable energy forced developers to squeeze their margins more, which further reduced costs for the technologies. Manufacturing innovation, scale, increased use of battery storage and experience with renewables around the world is all playing a part too, she adds. “These are the major drivers of decarbonisation. Solar and wind compete with coal in India and China and are at parity in the US.”

A desire to show leadership is helping too, says Giannakopoulou, citing the Chinese government’s drive to be the home of solar photovoltaic manufacturing, while Germany supported the technology in its nascency. “You need to support [technology] at the early stages to help it stand on its own feet,” she states.

The impact of the falling cost of renewables is dramatic. Giannakopoulou says that from 2010-2015, two gigawatts (GW) of planned coal-fired generation was cancelled worldwide for every 1 GW commissioned. From 2015-18, cancellations were 6 GW for every 1 GW. In the UK, this shift away from coal saw the country achieve its first coal-free fortnight in May 2019, which finally ended after 18 days. Renewable energy and nuclear accounted for 48% of all power generation in the country from January until the end of May 2019. Coal accounted for just 2.5% over the same period, shows data from National Grid, down from 30.4% in 2009. A shift to gas has helped dent the coal figure, but increased renewables — particularly wind — is also playing a part.

Beyond electricity
While the electricity sector is on a decarbonisation trajectory, emissions from transport, heating and buildings remain a challenge. Bahar adds that the cost competitiveness of renewables is contained to the electricity sector.

Policy makers around the world are looking at electrification to shift away from fossil fuels, with bans on the purchase of new diesel and petrol-powered cars coming in Norway, Sweden, the UK, France, India and Denmark, among other nations, over the next 20 years. Costa Rica – which set itself a goal to be carbon neutral by 2021 – has banned all fossil fuel vehicles from 2021.

BNEF’s New Energy Outlook 2019 report estimates that full electrification of road transport and heating would cut emissions by 126 gigatonnes between 2018 and 2050, due to cleaner electricity grids versus direct combustion in vehicles and boilers. Bahar warns that this policy approach needs to factor in the emissions make-up of the grid. “You want to be sure that more electric cars do not mean more fossil fuels [are burned],” he says.

For this reason, many energy experts suggest governments go for a staged transition, first ensuring the electricity grid is emissions-free, before tackling vehicles and other sectors. “If Greece decides tomorrow [that] all cars must be electric vehicles, our emissions would triple,” says Irene Skoula, Programme Manager, Clean Energy at C40, a not-for-profit organisation.

In the meantime, governments can establish policies to support next-generation biofuels, which do not compete with food crops and which could help transform the environmental profile of haulage, aviation and shipping. Bahar says the EU’s phase-out of crop-based biofuels by 2030 is a good example of how to create demand for the next generation of fuels. These are already cost competitive in some countries, like Brazil, the US and some places in Europe, he says. “But we need more policies to drive the transition in transport,” insists Bahar.

“The discussion has seemed to broaden out in some areas,” says Vine. “I hope it stays broad and people stay open to lots of different technologies because that will provide the flexibility we need for the transition.”

But without buy-in from business, change will stall, says Shell’s Hone. “Obviously, governments can set policies which deliver [the transition], but it is about their engagement with the business community overall … if engagement is positive, it can be really effective,” he says. “If you surprise business, or put in place policies that do not work very well, pushback may undermine the policy framework.”


This three-part series on the energy transition is written by Katie Kouchakji. Read part 2: The role for business and investors and part 3: Citizens, civil society and the courts  

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Matt Chester's picture
Matt Chester on Oct 2, 2019 1:32 pm GMT

Great overview. The government has a great role in the transition, and it's certainly not going to be an easy one. I worry that too many political leaders will shy away from some of the difficult decisions are needed, but those decisions being difficult are precisely why government needs to step up. If the transition were obvious and straightforward, we'd already be well ahead of where we are now!

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