COP21, peak oil and climate policy implementation

COP21, peak oil and climate policy implementation

Surprisingly, there are still engineers who seem to be concerned about the peak oil. Jean-Pierre Jancovici - well-known in French media- made a speech last month at¹ BaptistU in Hong Kong that was mainly on peak oil but with some slides on the textbook IPAT identity² at the end of his presentation in order to reach a climax in the drama: this is the end of growth because we are depleting of oil and on the top of that, he argued, populations are going to be decimated as it is the only way to satisfy the IPAT identity.

Usually I ask such pessimistic speakers how many kids they have to check the consistency of their thinking³... Instead, I made him address the following question: “Which constraint on fossil fuels do you think is the most stringent: the one on climate change or the one exhaustibility?” Indeed the two issues are in some sort mutually exclusive: being short of oil makes it easier to cope with climate change, as less GES will be created. At least, the two problems are not reinforcing each other. He did acknowledge that it was climate change even if he seems convinced that running out of oil is already in the countries’ growth figures (or will be soon…that was not entirely clear to me).

Having engineers now convinced that climate change is the issue number one, should we be optimistic about climate policies that will be implemented in the near future? Nowadays, economists know quite well which environmental policies could allow reaching the first best (or nearly). However, they are hardly implemented. There has been a lot of talking, a lot of debates and a lot of events around COP21. It will now start soon (some will say it is already finished since to avoid a “Copenhagen scenario” a lot of things have been decided in advance) and one may wonder what to expect.

Many people do not expect that much. First note that COP21 implies that 20 COPs already happened! Second, each negotiator’s first objective is to secure the lowest targets possible for his/her country while the second one is to congratulate all participants at the end of the event for such time, energy and money devoted to trying and solve the climate change issue. This is mainly communication. However, climate change is a global issue and there is no way to avoid international negotiation. As a reaction to the expected statu quo, some economists have therefore called for a uniform carbon price in view of COP21. The rationale was to propose a very simple instrument that would then be easier to implement. However it seems quite far form a first best situation. Also note that in Hong Kong, there is nearly no environmental policy (except some environmental education). At the 4th Nobel Laureates Symposium on Global Sustainability, 22-25th April 2015, Christine Loh (under Secretary for the Environment in Hong Kong) publicly said "We now know what we should do but we cannot do it. Anybody who has any ideas should help us". It seems that the main problem is implementation, or political acceptability. Why not design an environmental economics that explicitly accounts for political constraints? For the time, let’s hope COP21 will turn out more ambitious than we thought!

1 The event was co-organized by CEFC. http://www.cefc.com.hk/fr/event/how-does-the-energy-crisis-influence-the-world-economy-and-the-geopolitical-ecosystem/

2 For a refresher: http://www.ipcc.ch/ipccreports/sres/emission/index.php?idp=50

3 Having written a book entitled “Climate change explained to my daughter”, we can infer he has at least one.

The inconvenient truth about China and air pollution in Hong Kong

On june16th, the Environmental Protection Department (EPD) of Hong Kong published the 2013 Emission Inventory for Hong Kong (one would have expected the 2014 one…). According to this report, Hong Kong's total emissions in 2013 were 31 280 tonnes of SO₂, 113 220 tonnes of NO_x, 29 420 tonnes of VOC and some tonnes of other dirty gazes (details can be found there). It is advocated that compared to 2012, the levels of the six major pollutants in 2013 were between 1 and 11 per cent lower, mainly due to a reduction in emissions from vessels and motor vehicles.

But are HK emissions important for HK air pollution? Depending on who you speak with (people who own a car, people from the government, MTR users etc…) the answer does vary. In fact the usual suspect for HK air pollution is mainland China. And the usual answer when you do not have conflict of interest nor any particular information is 50% is coming from HK emissions and 50% is coming from mainland China.

At the School of Energy and Environment, Dr. Nicky Lam and Glory Kwok Lee Kan who is a PhD student have carefully addressed the subject, and are developing a new statistical model to predict the air quality in Hong Kong as well as the source of this pollution. Interestingly, the PM10 mainly come from mainland China (80% in January!). But it is not always true: from May to September included, more than 50% of PM10 are generated by Hong Kong. These are not the most heavily polluted months but it is also true for February and March. Last but not least, HK has to be taken responsible for most NO₂ and SO₂ generation.

And now guess what Hong Kong is doing? Quietly waiting for mainland China to do the job in emission reduction. But with this information about air pollution sources, HK SAR authorities have now to seriously consider doing something too. Which means ultimately understand that pollution is an externality generated by economic activity and is an issue that, by definition, cannot be spontaneously addressed by the market.

The renewable war: geopolitics of a transition towards a green economy.

Prudence Dato (IREGE/ University Savoie Mont Blanc)

Recently, the Australian prime minister’s chief business adviser, Maurice Newman, the chairman of Tony Abbott’s business advisory council has accused the United Nations (UN) of using climate change science to lead a new world order, while Ms Figueres, the top UN climate negotiator is visiting Australia to urge the country to move away from heavily polluting coal production[1]. Although Newman’s statements are habitually provocative and climate change skeptical[2], this questions the geopolitics’ issues of a transition to a green economy.  Geopolitics’ considerations could hinder the transition to a green economy in the sense that energy transition may affect international relations between energy producers and energy consumers by creating a new world order.

The geopolitics of renewable energy may depend on the scarcity of rare minerals that are needed to produce renewable energy[3] and also on innovation in renewable energy technologies.  For instance, China has monopole (97%) on rare earth elements[4], which are critical for the production of renewable energy equipment.  Then an economy that relies on the sole use of renewable energy will give more power to China while it reduces that of the countries that currently dominate oil market. Although the energy transition can potentially improve social welfare, some countries (those having rare mineral resources) are winner while others (those having only oil for instance) are loser. In this regard, one needs to consider those disparities when negotiating international agreements on climate change. Otherwise, some countries may not keep their promises or may not even make promises on reducing or on eliminating their dependency on polluting sources of energy. What if international agreements consider the redistribution of the gain from energy transition to compensate the losers?

Are rare materials enough to dominate the new world order of renewable energy?  Renewable energy is also capital-intensive and its production efficiently depends on innovation. As a result, countries that are not endowed with rare minerals, can count on their capital and /or their investment in innovation. Concerning capital, USA and Germany were the countries that invested the most in 2008 respectively in new clean technologies and in classical renewable equipment (photovoltaic solar panels combined with wind energy). And Germany develops innovation as well as it owned the highest share (24%) of the awarded patents in the wind energy-industry between 2001 and 2005, while in the solar energy-industry Japan owned the highest share (50%) of all patents[5]. Without efficient exploitation of the rare minerals resources to produce the renewable energy, energy transition could not be sustainable[6] and could generate reverse results in the long term. Hence, investments should be more dedicated to innovation so that the transition to a green economy makes less pressure on rare materials and becomes economically, environmentally and socially efficient. 

 But as countries will have to secure energy that is important to support their economic growth, they will explore all the possible means to efficiently get renewable energy. Then, those countries endowed with rare materials, or those having appropriate innovation to produce renewable energy with less cost or those having capital to invest more in renewable energy can probably dominate the new world order. This may well generate political conflicts or war depending on the power concentration. How will poor countries without endowment, capital or innovation act in this new world order?

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[1] http://uk.reuters.com/article/2015/05/08/climate-change-australia-idUKL4N0XZ1I220150508

[2] http://www.theguardian.com/australia-news/maurice-newman

[3] For more details, see the previous post on: http://ethkf.blogspot.fr/2014/12/is-renewable-energy-really-inexhaustible.html

[4] de Ridder, Marjolein. The Geopolitics of Mineral Resources for Renewable Energy Technologies. The Hague Centre for Strategic Studies, 2013.

[5] Criekemans, David. "The geopolitics of renewable energy: different or similar to the geopolitics of conventional energy?." ISA Annual Convention. 2011.

[6] Vidal, Olivier, Bruno Goffé, and Nicholas Arndt. "Metals for a low-carbon society." Nature Geoscience 6.11 (2013): 894-896.

 

Green is the new black

It was unrealistic, it is now fashion.  Lack of realism came from the higher cost of electricity generated by renewables. But now you can find studies concluding that it is no longer the case. For the “fire reinventer” Amory Lovins (read his book “Reinventing fire” or watch his TED conference)[i] it is possible for the US to have a 2.6× bigger economy in 2050 with no oil, coal, or nuclear energy, one-third less natural gas, 82–86% lower carbon emissions, tripled end-use efficiency, and 74% renewable supplies.

 More recently the French Agency ADEME[ii] released a report that is an atomic bomb for France where brand new nuclear power plants are supposed to be built. Actually it is not officially released but you can find it on Mediapart[iii] or summarized in Le Monde[iv] . The main idea is that renewables are not more expensive than nuclear. It is only valid under some scenarios (in particular on demand management) and requires a careful mix but it would not be impossible.  The cost would notably be a convex function of the percentage of renewables implying for instance that electricity cost is lower for 95% of renewables than for 40%.

What about intermittency? Well, Amory Lovins would correct you by stating that renewables are variable not intermittent since predictable and therefore easy to tackle. Even if there is some predictability in wind and sun I do not think weather is perfectly known in advance and even variability is not that easy to compensate for. This is a problem that Germany is already facing and I had a chance to attend a seminar given at CityU HK in March 2015 by researchers from the Chair of Energy Economics (EE2)[v]  at the University of Dresden and from that of Karlsruhe Institute of Technology (KIT)[vi]. Not only are they concerned with not having enough wind or sun when there are demand peaks but they also study what to do to with  excess supply off-peak. Surprisingly they recommend export and storage but curtailing is relevant option as well, due to its lower cost in terms of grid extension and storage. Also note that exports put some stress on the electricity markets of importing countries (how could Switzerland then use its hydro to exploit demand peaks?). Researchers at EE2 also pay attention on the way uncertainty on renewable energy sources has affected different electricity markets and how forecast errors on the renewable energy sources can be tackled. Electricity balancing is the process through which the transmission system operators ensure that they are able to access a sufficient amount of energy to balance the differences between supply and demand that occur in every electricity transmission system. They show that wind and solar should be integrated in balancing markets to add flexibility and allow for forecast errors compensation. This could even strengthen renewable energy integration.

Quite convincingly, the ADEME report has successfully checked the robustness of a 100% electricity generation using renewable, to extreme weather events. And of course a mix of storage capacities (including pumped hydroelectric storage Mr Lovins does not like –hydro is for baseload in his mix- and Switzerland could think of to recycle its capacity) are needed and should be carefully designed for the costs not to be inflated too much. In his TED conference, Amory Lovins keeps saying sun and wind have the lowest marginal cost of energy generation (well, everybody would agree that once solar panels and wind power plants are installed wind and sun are not really expensive). The ADEME report focuses a lot on electricity generation capacity using renewable sources but, at least in the final report, the cost computations (including those of storage capacities) are not a lot detailed. And Germany is thinking about reducing feed-in tariff that helped so much solar energy development.

Anyway, considering the problem in the reverse way has never been so relevant: why not designing the optimal fully green electricity generation (whatever the remoteness of the future) and then design how to optimally get there rather than groping period by period to introduce a little bit of renewable with no idea of the big picture?  The ADEME report obtains a ratio of 1 for sun to 4 for wind when there is 80% renewables (also obtained for Germany by Fraunhofer Institute)[vii]. Any guess for Hong Kong?

 

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[i]               http://www.ted.com/talks/amory_lovins_a_50_year_plan_for_energy?language=en

[ii]               www.ademe.fr

[iii]              http://www.mediapart.fr/journal/france/080415/energie-le-rapport-cache-sur-une-france-100-renouvelable

[iv]              http://www.lemonde.fr/planete/article/2015/04/09/une-france-avec-100-d-electricite-renouvelable-pas-plus-couteux-que-le-nucleaire_4613278_3244.html

[v] www.ee2.biz
[vi]http://www.iip.kit.edu/english/65.php

[vii] EnergieWirtschaftliche Bedeutung der Offshore WindEnergie fûr die EnergieWende, Fraunhofer IWES, 2013

Transition to renewable energy: not quick but better if people are frightened

Prudence Dato, prudence.dato@univ-savoie.fr, IREGE/University of Savoie (France)

The latest climate change news includes both new engagements and enforcement of existing engagements. For instance, the new US commitment aims at reducing their emissions up to 40% (from 2008 to 2025), and increasing up to 30% the share of electricity from clean energy sources. Also, the European Union (EU) leaders agreed to develop innovative strategies for a new generation of renewable energies and increase energy efficiency through the European Energy Union, while China found it more interesting to enforce existing pollution regulation than taking new engagements.[1] However, the full energy transition maybe hindered by some constraints such as the availability of inputs (mostly rare materials) and the need of fossil fuels to produce solar panels or wind turbine as a self-reproducing photovoltaic cells or wind turbine is not possible.

Dato (2015)[2] considers the issue of energy transition in a theoretical growth model that involves both the decision of renewable energy adoption and that of investment in energy saving technologies. The results suggest that the sole adoption of the renewable energy is optimal only in the long run. This result is in line with the asymptotic energy transition argument that states that the transition to "clean" energy only happens in the long run. It may be a consequence of the impossibility of self-reproducing renewable energy. As the economy still needs fossil fuels to produce clean energy, it is efficient to progressively replace fossil fuels with a clean source of energy. Then, a quick and full energy transition is not optimal for the economy, and one should not expect any immediate transition to an economy that only uses renewable sources of energy. Dato (2015) suggests that economic instruments such as taxes on the "dirty" energy or subsidies on the "clean" energy should be designed to meet the requirements of a transition to a sole use of "clean" energy in the long run.

The results of the study also show that the economy that fears pollution is more favorable to the energy transition. This suggests that people must be more sensitized about the potential consequences of their use of fossil fuels. Clearly the “Under the Dome” video[3] does the job for China. What for Europe? For several hours on Wednesday last week, Paris was declared the most polluted city in the world. Scary isn’t it? Well, mainly due to exceptionally good weather conditions in Shanghai…and although car driving is banned on alternate days in Paris, there is still a lack of explanation and of sensitization.

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[1] See previous post in this blog (http://ethkf.blogspot.fr/2015/03/is-china-saving-world.html).

[2] P Dato (2015). Energy transition under irreversibility: a two-sector approach. FAERE Working Paper, 2015.05.

[3]  https://www.youtube.com/watch?v=T6X2uwlQGQM

 

Is China saving the world ?

It seems not. Were China really dealing with pollution then the rest of the world could be relieved because the PRC is really a big fish. But these days, China's Parliamentary Sessions are held in Bejing and nothing exciting about pollution came out so far. As stated by a title in the SCMP:¹ “China makes no new promises in battle to clear the day as it fine-tunes pollution targets”

This seemingly passive position is observed 5 days after the release of Chai Jing's viral documentary, “Under the Dome”.² This documentary is in some way the Chinese counterpart of Al Gore's “Inconvenient Truth”; however its presentation and the scientific facts it reports -such as the list of the chemicals brought by PM2.5 in the lungs- are more rigorous. It is sometimes over-emotional, when it takes the reference to the reporter's daughter. Sometimes, it is over-interpreted, for instance mixing correlation and causality or showing fake econometric models and it is not clear whether the data collected could allow a correct economic analysis. However it remains that it is a very impressive amount of work and of information. Notably, it points out that at least part of the smog issue in China comes from the absence of enforcement of existing regulation.

During the NPC Session, a clear commitment has precisely been made to now fight more illegal polluters as well as those who fail to properly carry out their supervisory duties. As mentioned by Li Yan, Head of Climate and Energy at Greenpeace East Asia "it is now time to convert the words into real actions". But last but not least, the fact that Chai Jing documentary has been released on the internet is maybe the largest proof that China is decided to do something against air pollution. This documentary features important government officers, companies leaders. It thus hard to imagine it can have been released without government approval. And in fact what best way than such a viral movie to make anyone ready to accept the implementation of constraining environmental measures? Eventually, China may well be doing a step towards saving the world.


Notes on what has happened since this post was online:
-  the new Environment Minister (Chen Jining) also declared that the government will go after illegal polluters: "We would publish activities of the government and enterprises, leaving no space for violators to hide from the environmental protection law", he said at a press conference for the thirs session of the NPC.
- after 200 million views, "Under ther Dome" has been deleted from major Chinese video websites (so far, the link below is still valid).

1 http://www.scmp.com/news/china/article/1730461/china-makes-no-new-promises-battle-clear-day-it-fine-tunes-pollution

2 https://www.youtube.com/watch?v=T6X2uwlQGQM for a version with english subtitles.

Non-environmental instruments to tackle environmental issues

Prudence Dato (IREGE/ University Savoie Mont Blanc)

There was a debate at the third conference of the Green Growth Knowledge Platform (GGKP) on "Policies and the Green Economy" in Venice two weeks ago on whether environmental policies are enough to escape the climate change trap. The discussion mainly focused on environmental fiscal policies, but also other important issues such as uncertainty, trust and beliefs, non-environmental instruments, etc. In fact, Greenhouse gas emissions, which cause planetary climate change, represent both an environmental externality and the overuse of a common property resource (atmosphere)¹. Green fiscal instruments, such as environmental taxes, tax incentives and subsidies for green technologies are crucial solutions to reduce those gas emissions and can also help to provide additional revenue for public expenditure.

However, there exist other measures that could be taken to improve the performance of those environmental policies. For instance, it is important to account for non-environmental market-failures (information problem, incomplete property rights, split incentives, etc.), which have environmental implications, by using non-environmental instruments such as signals (Ecolabels), incentives mechanisms and regulation of the housing markets, etc. Generally, labels provide information on the quantity of pollution that a product can generate (green car) or its energy consumption (energy efficiency). They are signals and can be misreported. Then, one needs to additionally use incentives mechanisms to control for this information problem. On top of that, decision-makers also need to trust the information that is revealed through the label. Otherwise, the label will be a useless gadget…In residential sector for instance, split incentives² can hinder energy efficiency. One solution could be a regulation of the housing markets (OCDE, 2007)³ by introducing minimum standards (Gillingham, 2012⁴ and Charlier, 2014⁵).

Another issue is uncertainty or volatility that can limit pro-environmental actions. Sometimes, an environmental instrument can be inefficient due to underestimation of the associated environmental externalities because of lack of awareness and understanding of risk and uncertainty (Hasset and Metcalf, 1995)⁶, There exist many other non-environmental policies (in agriculture, transport, infrastructures, etc.) that could be mixed with environmental instruments to achieve both environmental effectiveness and economic efficiency. Does it mean that environmental economics needs to broaden its scope or that any economist should tackle environmental issues?

1 Harris, J., Codur, A., Institute, G. (2012). Economics of climate change. Retrieved from http://www.eoearth.org/view/article/151943.}

2 For example, when a landlord would bear costs related to investments in energy efficiency improvements, while the benefits of that investment would accrue to the tenant (OECD, 2007).

3 OECD (2007). Instrument Mixes for Environmental Policy, OECD Publishing, Paris.

4 Gillingham, K., M. Harding, and D. Rapson (2012). Split Incentives in Household. Energy Consumption, Energy Journal, 33(2): 37-62.

5 Charlier, D. (2014). Split Incentives and Energy Efficiency: Empirical Analysis and Policy Options. Working papers, ART-Dev 2014-07.

6 Gilbert E. Metcalf. "Energy Tax Credits and Residential Conservation Investment: Evidence from Panel Data (with Kevin Hassett)" Journal of Public Economics 57 (1995): 201-217. Available at: http://works.bepress.com/gilbert_metcalf/19

Smog around Climate Change II: environmental economists should learn about the dimming effect

 Not only fighting air pollution differs from fighting climate change (see previous post November 21^st, 2014), it could imply the reverse! China has never been so concerned with air pollution (Hong Kong starts being upset as well, see SCMP January 25^th 2015)[1] and calls for actions have become even stronger since the “Apec blue”. General opinion seems to view this concern as being rather consistent with the fight against climate change and this is also what is suggested by the recent US-China climate agreement (November 12^th, 2015). As we mentioned in our previous post, it is not that straightforward. In fact it may prove even worse than we thought!

There is now a growing literature on the “dimming” effect that had been observed in the period 1950s–80s:  the decline in surface solar radiation due to aerosol and particles pollution may have outweighed increasing atmospheric downwelling thermal radiation from enhanced greenhouse gases and effectively counteracted global warming (see Wild, 2012).[2]  Notably, such an effect was already reported in 2005 by European scientists in Nature[3]  and is particularly well-known for particles emitted through volcanic eruptions (see the figure below[4]).

A corollary is that too much aerosol removal generates a “brightening effect” that enhances climate change. Such an effect has been recently documented by O’Dowd et alii., 2013 that argue (they demonstrate the direct link between aerosol emissions, concentrations, and surface radiation) that the clean air policies might have resulted in higher temperatures.[5]  

 

Does this mean that we should not worry about pollution generated by fossil fuel since it generates both GHG and particles? It rather calls for more effort to fight climate change because IPPC predictions that do not account for the brightening effect underestimate future climate change. And it will be become worse. Consistent with the intuition, there has been a renewed dimming in China after a phase of stabilization during the 1990s (Wild, 2012). When looking at the air pollution, we can expect -and hope- that China now reduces efficiently air pollution, that will generate a significant brightening effect (note that this provides a fresh perspective on US-China agreements…) which enhances the need for GHG reduction.

 

In the meantime, the dimming effect is clearly ignored by economists. First, to my knowledge, they have never taken it into account explicitly. Second, they often consider that  fossil fuel use directly generates climate change (see van der Ploeg et alii., 2012 for instance,[6] or my work[7]).  It might in fact be crucial to distinguish between GHG and particles that both need to be reduced but affect climate change in opposite ways.

 

 

 

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[1] South China Morning Post, “Every breath you take” January 25^th 2015, Post Magazine. http://www.scmp.com/magazines/post-magazine/article/1689002/air-pollution-practical-tips-how-cope-it

[2] Wild, M. 2012: Enlightening Global Dimming and Brightening. Bull. Amer. Meteor. Soc., 93, 27–37 http://journals.ametsoc.org/doi/pdf/10.1175/BAMS-D-11-00074.1

[3]Meinrat O. Andreae1, Chris D. Jones & Peter M. Cox,  Strong present-day aerosol cooling implies a hot future Nature 435, 1187-1190 (30 June 2005) | doi:10.1038/nature03671

[4] Seminar by Prof. Johnny Chan at City University of Hong Kong,  January 9^th, 2015, http://www.cb.cityu.edu.hk/cityseminar/past/20150109.html

[5] Colin O'Dowd, Darius Ceburnis, Aditya Vaishya, S. Gerard Jennings and Eoin Moran “Cleaner air: Brightening the pollution perspective?” AIP Conf. Proc. 1527, 579 (2013); http://dx.doi.org/10.1063/1.4803337

[6] Van der Ploeg R. and Withagen C. Is there really a green paradox? Journal of Environmental Economics and Management, Volume 64, Issue 3, November 2012, Pages 342–363

[7] Ayong le Kama A. and  Pommeret A., 2015 « Adaptation and mitigation are not enough : turning to mitigation abroad “https://drive.google.com/file/d/0B563l-M03kqnTU9pdlI1R2dQWmc/view?usp=sharing