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Posted by: David Hone

Cancun and Beyond: Financing the Energy Future

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Pick up almost any article on climate change today and it won’t be too long before your attention is turned towards the subject of financing. There are also many conferences, seminars and workshops on financing, not to mention the UN High Level Advisory Group on Climate Change Financing. The Copenhagen Accord sets the ambition of $100 billion per annum in climate financing for developing countries by 2020.

But what exactly will be the target of such financing, what will it pay for and how might it be raised? Developed country national budgets are probably not the place to start given the deep deficits and consequent desire to enact spending cuts. Rather, the action needs to be in the carbon markets. 

The Reference Scenario in the IEA 2009 World Energy Outlook provides a useful starting point for this discussion. It shows that in non-OECD countries over the period 2010 to 2020 some 1000 GW of electricity generation will be constructed, of which 500 are coal, 200 are natural gas and the rest non-emitting (hydro, wind, solar, nuclear). Together with increasing energy use in transport, industry and buildings (direct consumption), total non-OECD emissions could rise by nearly 5 billion tonnes in the coming decade.

 

In a post shortly after Copenhagen, I showed the level of emissions actually needed in non-OECD countries to put the world on a 2 deg.C pathway, assuming developed countries were on an 80% reduction by 2050 pathway. Drawing on the data from that, it suggests that non-OECD emissions should be limited to a rise of something like 2+ GT over the period 2010 to 2020 and not the 5 GT in the IEA reference scenario. This suggests that two things have to happen;

  • Some 300 GW of the coal fired power stations planned for the next decade have to include CCS or be something else (e.g. wind, nuclear, CHP natural gas)
  • The increase in direct consumption of fuel needs to be curtailed through efficiency programmes in road transport, industry and buildings.

Arguably, much of the second bullet could be achieved through standards – for appliances, for buildings and vehicle efficiency. This doesn’t necessarily have to cost the countries in question any additional money, or at least not very much. It really requires a strong desire to tackle the issue, something that has become the norm in China today.

But changing the power generation mix or capturing the CO2 emissions will require the input of additional money. For example, while it is still early days for CCS, indications are that this is a ~$50 per tonne of CO2 technology. Any additional costs (vs. standard coal) for other generation technologies depend on a variety of factors such as the specific technology chosen, supply access (e.g. for natural gas) and even geography (e.g. for wind). Nevertheless, at $50 per tonne of CO2 much can be done (albeit recognising that carbon market policy will have to mature significantly for such levels to be reached). The proposed Copenhagen Accord financing is also quite substantial. With $30 billion committed for the period 2010-2012 rising to $100 billion per annum by 2020, it could be as much as $0.5 trillion in total (but for adaptation and mitigation – including forestry).

Switching 300 GW of coal (or capturing the emissions) as discussed above would likely account for a significant portion of this half trillion, but could reduce developing country energy emissions by as much as 1-1.5 GT per annum by 2020. Utilizing a “green bond” structure such as that currently proposed by IETA (International Emissions Trading Association) in combination with an active carbon market to take the flow of credits in the years following construction could deliver the necessary financing for such a shift. A very simple Discounted Cash Flow (DCF) shows that if each $1 billion invested realizes a reduction of 3 million tonnes of CO2 per annum at $50 per tonne over the subsequent 15 years, then the Internal rate of Return (IRR) is 12%.

But this means that the carbon markets in the late 2010s and through the 2020s must be capable of absorbing some 1-1.5 billion credits per annum from power sector projects in developing countries for this to work. Even more importantly, the existence and stability of these markets must be apparent to the investors by 2015 at the very latest and probably much sooner than that. It also means that the CDM, currently the only viable crediting mechanism available, needs to be substantially reformed, not only in scale such that it can tackle such a transformational change, but also in scope such that it recognizes a technology such as CCS and is more targeted at those parts of the abatement curve where this shift will take place.

The task above is very substantial and time is not on the side of it happening, but it almost certainly won’t happen if the negotiators in Cancun cannot begin to deliver in three key areas;

  1. Building on the carbon market architecture which underpins the Kyoto Protocol as they work towards a new international agreement. This in turn drives domestic legislation to a similar solution set.
  2. Reforming the CDM in both scale and scope, including access to technologies such as CCS.
  3. Recognising that private financing through carbon markets and supporting finance structures have the potential to transform the energy infrastructure that will be built in the coming decades.

But it isn’t just up to those in Cancun to get this going, much also has to happen on many domestic fronts in terms of carbon market development.



Authored by:

David Hone

David Hone serves as the Chief Climate Change Advisor for Royal Dutch Shell. He combines his work with his responsibilities as a board member and Chairman of the International Emissions Trading Association (IETA). Additionally, he works closely with the World Business Council for Sustainable Development and has been a lead contributor to many of its recent energy and climate change ...

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September 28, 2010

Rick Engebretson says:

There is a meeting in Minnesota that might discuss a strategy for Carbon capture you have not mentioned. Growing hay crops puts carbon in the soil, makes black dirt, and expands and enhances global agriculture. Biofuels from hay are a stored solar energy available for electric generation with such devices as methanol fuel cells; negative carbon footprint energy technology. Hay crops also produce high protein food. So know some technology options before you extrapolate.

Unless legitimate technology solutions are allowed in the discussion we are chasing our tail.

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September 27, 2010

A guest says:

It is INSANE for the developed countries to both make major investments in carbon emissions reductions within their countries and also make major investments in increasing carbon emissions by developing countries.

I fully realize that the statement above is far from diplomatic. Rather, it is an engineer's commentary on the OBVIOUS.

If it is essential that CO2 emissions be reduced, then invest in reducing CO2 emissions everywhere. Do not fund construction of new CO2 emitters with 40-60 year useful lives in some locations while funding shutting them down in other locations. 

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