jeudi 30 mars 2017

Carbon Capture and Sequestration: How to remove the barriers?

Tunç Durmaz[1] and Aude Pommeret
Eight years on since the United Nations IPCC was awarded the Nobel Peace Prize in recognition of its effort in combating climate change, fossil fuel remains the most dominant global energy source. As the total replacement of fossil fuel burning is not expected to take place immediately in the near future, the International Energy Agency (IEA) has repeatedly declared carbon capture and sequestration (CCS) as a key technology for mitigating climate change.[2]
Although CCS is envisioned to play critical role in the fight against climate change, why have these technologies not had an international breakthrough? And what needs to be done for it to happen?
From an economic perspective, there are 3 major barriers for CCS technology development. The first arises from the competition from non-fossil based energy carriers including renewables and nuclear. The second concerns the maturity of the CCS technology. The last is related to the cost of capture and storage.
Let us first consider the competition from other energy carriers. Wind and solar, when coupled with storage technologies to tackle intermittency issue, allow power generation without the emission of greenhouse gases. The same is true for nuclear energy but its public acceptance has been on decline following the Fukushima Daiichi nuclear disaster. Therefore, wind and solar are considered the most serious competitor with the CCS-mitigated fossil fuel. However, the formers’ high costs compared to the fossil fuel render unlikely threats to the use of CCS.
Turning to the degree of maturity of the CCS technology, one has to recall that CCS has three major components: (CO2) capture, transportation (of CO2 in a liquid-like state) and geological storage. Although these three components are in commercial use, their integration and the scaling up of CCS is yet to be seen. The Saskpower’s Boundary Dam CCS project in Saskatchewan, Canada, has been plagued with numerous shutdowns that cost CAD$1.2 million (HKD 7 million) in penalties. Similarly, the CCS facility in Mississippi Power’s Kemper County lignite plant has been struggling with delays, most recently, related to the ash removal system.[3] From these examples, it is evident that the CCS technology has been facing first-of-its-kind risks to costs.
The last barrier, that is, the cost of CCS, is apparent. A lower cost of CCS per ton CO2 will make it more economically feasible. Yet, according to the report of the Office of the Canadian Parliamentary Budget Officer (see p 40), the cost for the Boundary Dam CCS project has come in at CAD$ 917 million (HKD 5.32 billion) — it was originally budgeted to cost CAD$800 million (HKD 4.64 billion)Putting together estimates of revenues and expenditures, the project is expected to generate a loss of CAD$ 1 billion (HKD 5.8 billion).[4]
In order to overcome these barriers, two factors stand out. The first one concerns the carbon policy. The second one is an improved technology that would allow for a successful integration the three major components at a lower cost. 
            Carbon policy is imperative for CCS. Unless CO2 emissions are taxed, a coal-fired power plant will have no incentives for using CCS. It will simply release CO2 into the atmosphere. The same applies if the emission tax is lower than the cost of CCS. It has been estimated that emission tax of CAD$ 57 (HKD 331) per ton CO2 will be necessary to motivate a power plant to undertake a CCS project.
            To improve the technology, an important component is learning-by-doing (LbD). LbD is simply productivity gains through production practice, minor innovations, and specialization. Saskpower stated that LbD can reduce costs by approximately CAD$200 million (HKD 1.16 billion) on its ongoing CCS activities.  In this case, a CAD$47 (HKD 273) per ton CO2 carbon tax will allow the power company to undertake a CCS project.
With the growing number of CCS projects, it is only a matter of time before all the technological drawbacks are properly addressed. Thus, to have CCS, what remains to be seen is a credible carbon policy that can allow investors to undertake CCS projects. This will be crucial in building a global CCS industry to deal with fossil fuels as the dominant energy source in the coming decades.

[1] Econ. Dept. Yildiz Technical University. PostDoctoral Fellow at SEE 2015-2016.
[3] It is estimated that any extension of the in-service date past Feb. 28 can add around $30 million a month to the total cost of the project.
[4] There are also new costs that have been coming out of the operational side of CCS. As an example, the cost of amine, an ammonia derivative used to clean particles of CO2 from exhaust, is much higher than anticipated for Sask Power due to the solvent being degraded much more quickly than expected. The cost of amine, which was budgeted for CAD$5 million per year, is now budgeted for CAD$20 million. See

jeudi 2 mars 2017

Green Growth for the Energy Transition (the French law on energy transition). Act III: what are the financing mechanisms?

Prudence Dato (IREGE/ Savoie Mont Blanc University)

As a follow-up to the economic analysis of the French law on energy transition, we devote this third note to the financing mechanisms of energy transition. The scenes in the act III draw attention to the limits of current public policies and to the role of financial sectors in the transition to a low-carbon economy.

Act III; scene 1: Current policies are not doing the job.

The public funds that are directed to support the energy transition comprise both public budget and fiscal policies. Public budget is used to subsidy low-income households: it concerns energy subsidies and social electricity tariffs, for instance. Fiscal policies take the form of tax credit and eco-loans that are supposed to motivate renovation of buildings and adoption of energy-efficient equipment. Are these measures efficient in a long term? Unfortunately, Tyszler et al. (2013) finds that they do not provide a long term solution for lifting a household out of fuel poverty.[1] One reason is that their implementation is complex because of administrative issues, lack of bank’s expertise in evaluating home renovations, etc. Also, they reduce the borrowing capacity of the household to face non-energy issues. So, what could be the solution? Promoting “collective eco-loan” for residents living in the same building or imposing home renovations during private residential property transactions for instance, could serve as solutions. This is now the time when the financial sector appears on stage…

Act III; scene 2: Trying to go beyond a green image.

Although there has been a growing awareness of the role of the financial sector in the transition to a green economy, most of the banks and insurers are mainly concerned with their image instead of structured strategies.[2] Is “green image” the solution? Their strategies should be beyond communication on the green projects they have financed or on their direct environmental impact.  Why not consider the indirect environmental impact of the business activities they have financed (coal mining businesses and coal-fired power plants, for instance)?  Consequently, banks and insurers would account for the potential impact of climate change on financial stability. As stated by Carney (2015), “an abrupt resolution of the tragedy of horizons is in itself a financial stability risk”.[3] This is now the time when central banks appear on stage to help finance the energy transition…

Act III; scene 3: Are the central banks the happy ending?

Central banks are bound by their financial stability macroprudential mandates that refrain them from driving the transition to a low-carbon economy. But the good news is that, given the large commitment of countries for the Paris Agreement, we can now start believing that governments will adapt the mandate of central banks to the risks of climate change. For instance, Green Quantitative Easing (GQE) programs could drive green bonds deployment…

[1] Tyszler, J., Bordier, C., & Leseur, A. (2013). Combating Fuel Poverty: Policies in France and the United Kingdom. CDC Climat Research, CDC Climate Report (41).
[3] Carney, M. (2015). Breaking the tragedy of the horizon—climate change and financial stability. Speech given at Lloyd’s of London, September, 29.