The failure of Copenhagen along with the sheer complexity of ETS (one which is going probably do more for financial institutions than the real economy) requires stepping back to re-consider how to achieve the aims of reducing CO2 emissions. In the post "The Fallacy of the Carbon Market" I made the point that market-based reduction methods don't have to be carbon based.
Here I want to look at using a negawatt based market to reduce energy demand. Markets consist of supply and demand. The supply of negawatts is easy - it is all the effiecency changes that can be done (insulation, improved appliances etc.). The sticking point is demand. How to create demand for negawatts?
The renewable energy targets provide the mechanism for creating demand, by allowing negawatts to count towards those targets, power companies can choose to use negawatts rather than other forms of renewable energy to meet their obligations.
Negawatts would be created by doing an audit of end user (household, office, factory etc) to benchmark the energy consumption. The purchaser then pays for improvements (adding insulation, triple glazing the windows, more efficient HVAC etc). The difference in energy consumption after the improvements are installed is benchmarked. The amount of negawatts is the difference between the before and after benchmarks. These negawatts would count to the power companies renewable energy target for 1 to 5 years.
The advantages of this approach are:
Much simpler measurment, audit and verficiation
Doesn't impose large scale price increases on end-users
Increases productivity of the economy generally
Frees up end-user cash for other users
Negawatts address the simple physics problem that we can't build enough renewable energy sources in the time required in order to effectively replace enough carbon based energy production. A sustainable negawatt market will drive the development of new efficiency measures and devices leading to situation that energy demand falls as our ability to generate substantial energy from renewable sources increases. We are addressing the problem from both a supply and demand side, achieving a better overall solution.
The noise surrounding Copenhagen is deafening. Hidden within the noise and light are several elephant sized questions that everyone seems to be ignoring. Firstly, is carbon pricing really an effective market? Secondly, can a market based solution be found that doesn't involve pricing carbon? My answers to those questions are no and yes respectively.
Carbon trading is unlikely to be a very good market. Not only is it hard to monitor, verify and account; the very difficulties in in monitoring, verification and accounting leave the market wide open to gaming and manipulation. It is quite possible that it will cost more to run a carbon market with less improvement in emmissions than to spend the money on direct measures to improve emissions.
So are there other market-based solutions that are as effective if not more effective than carbon trading? Almost certainly. The whole conversation around climate change has become so tunneled vision on carbon trading that other market based solutions are ignored. Lets step back from the particulars of carbon trading to look at what is being trying to accomplish.
The idea is to use price signals to encourage changes in participant behaviour and resource allocation. In the case of climate change it is to reduce greenhouse gas emissions with the price of carbon as the signalling mechanism. Why carbon price was alighted on one can only speculate(special interest groups such as investment banks looking for the next CDO scam comes to mind and green zealots with a messiah complex) but in reality it can be any pricing (or more than one pricing) signal as long as it accomplishes the goal. All that is required is a pricing signal that change the way energy is generated and used.
A fallacy of the debate is that regulatory regimes are inherently, non-market based. That is untrue. If the regulatory regime specifies the mechanisms of reduction then it isn't market-based. But if the regulatory regime specifies the end goal and then leaves it up to the market to produce the most effective solution, that is a market-based solution. Before rushing to say that isn't true bear in mind that is exactly what the carbon trading market is, a regulatory regime that specifies an end goal and leaves it up to market participants to allocate the resources to produce the reduction desired.
A carbon market is one of many possible markets that will produce the goal of changing the way energy is generated and used. Nor is there anything to say it is the most effective regime and I am coming to the conclusion that a carbon market is probably the worst possible market to achieve this goal. The carbon market strays into specifying the mechanism rather than the goal.
An alternative market would be based on a regime that specifies work per unit energy input requirement, or efficiency. A set time points the efficiency requirement would increase contiuning to drive changes in energy production and consumption.
There are several benefits to this market:
it is simpler for people to understand - energy and its use is far more concrete than an invisible gas
measuring & accounting for efficiency is far, far easier than measuring & accounting for emissions
its harder to outsource consumption and generation in an efficiency focus regime
the measure efficiency can be tailored to different industry sectors but still tied back to an overall measure
it is harder for free-riders to prosper as each industry has their own targets
and doesn't fall afoul of the rather significant problem that the physics of converting to a carbon free economy don't stack up
Technically this type of market is viable but is it politically viable? From my persepctive it is. It is easier to explain to sceptical citizens, targets are based on improvements rather than reductions and allows various players to choose the mechanisms that suit them best. Using efficiency targets becomes globally homogeneous avoiding the brutal and almost politically impossible task assigning blame and reductions according to blame. Nor does it require everyone to sign-up initially. As efficiency is measured at point of consumption, if a large proportion of global consumption uses efficiency targets, suppliers and producers will need to adapt to meet those targets in essence becoming part of the solution should those producers and suppliers wish to trade with that market.
There are other possible market-based solutions as well. We would do ourselves and the world a favour to not tunnel vision on carbon markets but to pick the best market-based solution that produces the desired behaviour of changing energy production and consumption.
Saul Griffith of Squid Labs fame recently gave a presentation at Green:Net looking at the engineering challenge that is climate change/energy renewal. It is an informative presentation and one that builds on previous work he has done to quantify the problem. However, since seeing the math on a BBC documentary and then again in this presentation something has been bugging me and I couldn’t put my finger on it.
Saul certainly produced a fine statement of the engineering problem. Saul isn’t the first to layout the problem in that way David McKay of Cambridge University is doing a more comprehensive expose of it. Either way it is a sobering presentation.
Considered in the context of the system, though, I think some to the base assumptions may be wrong. I expect that the carbon reduction is not a linear progression but will grow slowly until a tipping point is reached at which point the carbon in the economy will drop seemingly overnight.
More importantly, the focus on carbon is leading the world astray. The primary problem isn’t carbon per se rather the energy intensity of the global economy is growing. While global energy intensity per unit GDP grows the sources of energy is relatively academic. The core problem remains the growing energy intensity per unit GDP. This is what has been bugging me about Saul's presentation - it was from the context of carbon and not about energy intensity.
To demonstrate what I mean consider Peak Oil. The Peak Oil problem is only a problem above a certain energy intensity of GDP. Below that level two effects are seen, 1) the life of oil reserves increases and (more importantly) 2) substitution for other energy sources becomes easier. By reducing the amount of oil used by reducing energy consumption less carbon is produced. The advantage is that reducing is far easier than substitution.
The answer to climate change is to set in place incentives and processes that reduce the energy intensity faster than the economy grows. Energy consumption can only be reduced when saving energy is worth more per kW than consuming energy. Some ways of doing this are:
Net Present Value in Energy for energy generation schemes: Like Net Present Value for evaluating monetary investment this looks at how much energy is needed over the life of the generator. All generators use energy in order to produce energy. Using NPVE will allow the comparison to see how different generation schemes reduce overall energy intensity.
Energy Audits: The audits would show businesses and consumers where the energy is going and suggest real changes that would make material differences to the energy they use and consume.
Stamp Duties/Sales blocks for low efficiency housing: Energy efficiency is in for homes with steadily rising standards but new homes only make up a small percentage of the housing stock. The biggest impact in home energy consumption will be made in improving existing housing stock. The only way to incentivise owners to improve energy consumption across the board is to either not allow the sale/rental of homes that don’t meet a certain energy standard or add an energy duty onto of the stamp duty that is determined by the energy consumption of the house.
Life-cycle energy labels: Transparency works wonders and the more relevant information consumers have about the products and services they consume the better purchasing decisions they can make. Providing a single number that shows how much energy is tied up in a good or service will help consumers pick products and services that consume less energy over their life and so reduce energy intensity of the economy.
In the final analysis reducing energy consumption will only be self-sustaining when the negawatt is tradable. Ultimately, personnel energy budgets or some sort of cap and trade system will work best. Trading negawatts is far more tangible than trading carbon. Carbon is intangible and there is no daily interaction with it. People understand energy; they use it every day and can see its effect. That single fact will see the far more rapid adoption of energy/negawatt trading than carbon trading.
The EU has announced its climate change policy. What struck me most is the move to stop the exporting of carbon production to other countries. As I have previously posted this is crucial requirement for carbon trading to actual work in reducing carbon emissions.
Implementing carbon trading without something to address the issue of out-sourcing carbon, the price of goods and services in Europe would have gone up without the beneficial reduction in carbon. As many have pointed out, there is no way of making sure carbon stays on the other side of the planet.
This also changes the dynamics of the up-coming discussions on the next climate change treaty. For one, it does reduce the negotiating strength of the BRIC nations against mandatory caps. It also precedes an alliance of OECD nations which go it alone to implement mandatory emission caps and via the mechanism proposed by the EU in effect force mandatory caps on emissions on the rest of the world as the OECD still make up the bulk of the worlds affluent consumers.
I wonder if this announcement signals the tipping point to worldwide mandatory emissions caps whether BRIC nations want it or not.
In much of the discussion on sustainable economy has been focused around energy and carbon. One aspect I find missing from the debate is how the wider shift to sustainable development will effect the fundamentals of economic development that have been the guiding forces since the time of the industrial revolution.
One key economic concept is Economies of Scale. Essentially, building lots of things in one place in order to produce each individual thing cheaper. One of the key determinates of economies of scale is transport costs. The shift to sustainable economy is going to bring in what is currently an externality (carbon) to the equation that determines the economies of scale. As carbon is priced into transport (and to the price of energy) building widgets in massive factory in China (for example) and shipping it to the rest of the world is going to loose economy.
The reduction in the economies of scale will see two major effects. The first is a shift to more factories building the same product as opposed to one big factory shipping to the world. These smaller factories will serve a particular region. The size of the region that the factory supplies will be determined by transport costs. The second shift is that many economies will see a broadening of the manufacturing base. There is likely to be a growth in both the number of jobs in manufacturing and also the diversity of manufacturing operations.
Not only will carbon transport costs effect the location of factories but so will access to low carbon energy. In effect, countries with good internal and regional transport links that are not carbon intensive and have ready access to low carbon energy will greatly benefit from the shift to a sustainable economy. Which leads to the conclusion that China is likely to see its global dominance of manufacturing eroded if it is unable to reduce the carbon intensiveness of is energy and transport. It is China's self interest to reduce the carbon intensiveness of its economy now.
Tony Blair has said there has been a quantum shift in climate change in the US and there is now a possibility of a deal as long as India, China and other similar emerging economies join in (China and India are 2nd and 4th worst emitters respectively). Yet recent comments by an Indian minister seems to think they should still be allowed to emit at their current levels.
Which kind of leaves us in deadlock. The US is not going to accept caps without the major emerging economies also accepting caps. Neither side seems to be willing to shift. Is there anything that break the deadlock?
There is.
The US, Europe and other interested countries sign a treaty to create caps and a global emissions trading scheme. But included in the treaty is an agreed method to calculate the carbon cost of goods and services. This serves as a standard and is used across the economy. Companies (whether in the signatory countries or not) can receive an audit to show they are below the standard. This allows them to purchase less carbon credits as their goods and services fall below the standard (or even sell carbon credits).
Now to deal to recalcitrant countries. All goods and services receive a carbon cost whether they are produced/provided by the signatory countries or not. Here is the key aspect. The goods and services need only to be consumed in the signatory countries. Companies wanting to sell goods and services within signatory countries would have to purchase carbon credits.
The majority of the exports from the emerging countries go to be consumed in the developed world. Without this methodology, carbon caps will only see the carbon production transfered from the developed world to the developing world. Nothing is gained. By requiring carbon credits at point of consumption forces the producing companies to take the lead in reducing their carbon emmissions as they now have an economic incentive to do so.
A side benefit of this methodology is that it will turn the externality of carbon emission generated in the transport of products (currently not included) into an internality. This will allow the price of the good to better reflect the true cost of production.
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