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Tough lower carbon targets expected for Europe

The approaching COP 21 talks in Paris have focused the minds of Europe’s energy producers and consumers on future regulations and their own competitiveness

European negotiators at the UN-backed climate change talks (COP21), which start in Paris at the end of November, are expected to remain true to the form of previous meetings. They will push for tougher emissions reductions targets than most of the rest of the world is likely to accept.

In September, EU ministers agreed that the bloc would call in Paris for measures to achieve a 40% cut in global greenhouse gas emissions by 2030 compared with 1990 levels, and a binding 30% target for renewable energy. It is also pushing for global emissions to peak no later than 2020.

Poland and other eastern European nations, whose power industries are heavily reliant on coal, the most polluting fossil fuel, wanted the targets watered down, but they did not have enough political clout to affect the outcome materially.  

EU climate change commissioner Miguel Arias Canute was bullish on prospects, telling a press conference: “We stand ready to conclude an ambitious, vast and binding global climate deal and we will settle for nothing less.”

Despite the bold words, Canute is well aware that, as with previous UN climate change talks, it will almost certainly be impossible to reach a meaningful global agreement based on such demanding targets.

Indeed, the days when the main objective of these annual talks was to produce a legally binding pact, with the threat of sanctions to the non-compliant, appear to be over – largely because the result of this approach in the past was heavily watered-down agreements and sanctions that proved impossible to enforce. 

Christiana Figures, head of the UN Climate Change Secretariat, says that the approach at the Paris talks, would be more collaborative. “Even if you do have a punitive system, that doesn’t guarantee that it is going to be imposed or would lead to any better action,” she said in an interview with Reuters. 

At the heart of the Paris conference is likely to be a pledge-and-review system, under discussion since the 2009 edition of the talks in Copenhagen, which failed to muster sufficient support for the imposition of a global carbon price or joined up emissions trading systems. Efforts to promote the widespread adoption of emissions trading – as pioneered in the EU (see below) – has had some success, being adopted on a piecemeal basis in parts of North America, China and elsewhere. But the potential costs to companies or to economic growth rates have made it an unpopular solution in many countries. 

Pledge and review

With a pledge-and-review proposal up for discussion in Paris, countries would set their own emissions reductions targets and the actions to achieve them. These plans are then re-visited every five years to check against progress towards a goal of halving global greenhouse gas emissions by 2050. 

The hope is that a combination of peer pressure and a global consensus that concerted action to fight climate change is needed will bring countries into line more effectively than the threat of sanctions – or what some governments regard as intrusive oversight. If it works, this could generate a so-called “race to the top.” 

In part, this strategy aims to address a rift between some developed and developing countries, which has scuppered serious progress in previous climate change talks. The case made frequently by developing nations is that most man-made global warming has been caused by industrialised countries, so they should shoulder most of the burden. But industrialised countries say developing countries such as China and India are catching up and are now among the major producers of carbon emissions, so should play a greater part in reducing them.

Pledge-and-review would enable governments to introduce green measures, but on their own terms – an important aspect for some developing states unused to allowing much international scrutiny or control of their actions, such as China and India. 

However, it is not only the big developing countries that have such reservations. The US, the world’s largest CO2 emitter after China, does not favour any form of formal international oversight of progress on emissions reduction. Meanwhile, neither Australia – one of the world’s largest carbon emitters on a per capita basis – nor Japan have favoured the imposition of punitive sanctions to laggards in recent years.  

Critics say pledge-and-review is a toothless system, which allows countries to shirk their climate change responsibilities and makes it very difficult to compare one country’s actions with another’s.

But those formulating policy for COP21 claim this less combative approach has produced a greater level of cooperation between countries than seen in the run up to previous annual summits.

Canute said in mid-October that 149 nations had already published plans to curb carbon emissions – Intended Nationally Determined Contributions (INDCs) – calling the response “quite astounding”. He also noted that the talks would involve countries responsible for almost 90% of the global GHG carbon emissions. The now-obsolete Kyoto Protocol – the first attempt to produce an international climate change agreement in the 1990s – involved just 35 countries, covering 14% of global emissions, and resulted in an agreement to which the then-largest emitter, the US, was not party.  

Conference organisers can also point to China as an example of a country that is voluntarily introducing tougher emissions targets in an effort to stem pollution endemic in its major cities. 

But perhaps the strongest argument in favour of a voluntary system is that if pledge-and-review produces a broad-based agreement in Paris, which acknowledges the urgency of the problem and that all countries have a role to play in carbon emissions reduction, it would be better than achieving no agreement at all.

Tough task ahead

As David Hone, climate change advisor to Shell, points out, the INDCs reveal widely differing timetables for emissions reductions. China has positioned itself to reach peak emissions around 2030 or earlier, but India, which has spent less time industrialising, is on a different trajectory. India’s pledge to reduce CO2 intensity – the amount of CO2 released per unit of energy produced – by 33-35% by 2030 would mean a considerable improvement in energy efficiency, but it would still mean energy-related emissions would roughly double from 2012 levels to around 4 bn mt/y by 2030. This could be partially offset by plans to increase the amount of forest sinks to absorb CO2, but is unlikely to represent a peak in emissions.

The precise details of what will be discussed in Paris were still being nailed down just a month or so before the talks. A cumbersome 89-page document, used as the basis of negotiations for most of 2015, since the fractious climate change talks in Peru last year was whittled down to one of just 20 pages, which formed the basis of the final round of preliminary talks in late October. However, those involved said more than 200 issues remained to be resolved before the Paris talks started.

Greater discussion and cooperation between the major protagonists – notably the US and China – over the last 18 months augur well for a more joined up approach to emissions reductions, but negotiators are still going to have their work cut out to get a workable deal out of Paris. 

Gas struggles to find its place as bridging fuel

European efforts to blaze a trail for the renewable energy sector have paid dividends, with countries such as Germany, Spain, Italy, Denmark and the UK registering large rises in either solar or wind power usage that have helped cut the continent’s greenhouse gas emissions. 

The expectation remains that fossil fuels will play a major role in providing power and heat for years to come, bridging the energy gap, while renewables are being ramped up and technologies to counter the intermittency of wind and solar power are being developed. In this regard, natural gas has been seen as the obvious choice to take the strain. It is fairly cheap, ubiquitous and produces around half the carbon emissions that coal does to create the same amount of energy.

In the UK, for example, gas has retained its dominant role, gained through decades when domestic gas reserves fuelled the economy. While those reserves are now dwindling, they have been replaced by LNG imports from Qatar and other countries. An extra carbon levy imposed by the UK government, in addition to costs accrued under the EU emissions trading system (ETS), has helped ensure that gas remains an attractive option compared with coal, but with limited success.

But across large swathes of the continent, things haven’t gone the way some of the architects of the EU’s climate change strategy had envisaged. While renewables use has risen, gas consumption has gone down and coal consumption has barely changed since 2008. 

Countries such as Germany and Poland have been unable to shake off their traditional addiction to coal, much of which can be produced domestically at low cost, and which is politically attractive, because of the large-scale employment the industry provides.

Meanwhile, the low level of the carbon price that underpins the EU ETS means that scheme has barely made a dent in the profits of the coal industry in some countries or rewarded lower carbon alternatives, providing little incentive to switch to relatively clean gas (see ETS article).

When Germany, the EU’s powerhouse economy, decided to phase out its nuclear power programme in response to safety concerns in the wake of the Fukushima disaster in Japan, it was coal – mainly lignite, one of the dirtiest types – that filled much of the power generation gap, supplemented by renewables, pipeline gas, LNG and electricity imports from – paradoxically – nuclear-powered France, among other places. 

Conflicting views

Despite the coal addiction, Germany and many of its European neighbours remain highly committed to securing pipeline gas supply from Russia, even as western sanctions against parts of the Russian economy remain in force. 

But regional observers say EU policy is unclear over the long-term role of gas on the continent.

“I think the EU is somewhat schizophrenic in its energy policy. It is very concerned about security of gas supply, but on the other hand it appears to believe that gas is just another fossil fuel, like coal and oil, which will decline over time and so is not worth making a fuss about,” says the director of the natural gas programme at the Oxford Institute for Energy Studies, Howard Rogers.

Given the ambitious emissions targets set by the EU (see panel), it seems inconceivable that gas will not play a key part in the energy mix, if they are to be met. 

The International Energy Agency (IEA) has modelled what would happen if various measures to achieve a peak in global greenhouse emissions in 2020 – a highly ambitious target – were put in place around the world. The result of this “bridging scenario” in Europe was an increase in the share of gas in the overall energy and power mixes in 2030 compared to now – albeit waning from a peak in the mid-2020s – while a limited decline for oil was indicated.

Industry on the offensive

The energy industry is now, perhaps somewhat belatedly, developing a coordinated effort to push home the message that gas should feature large in Europe’s – and the world’s – energy mix for years to come. 

The chief executives of seven European companies – BG Group, BP, Eni, Repsol, Shell, Statoil and Total – along with those of Mexico’s Pemex, India’s Reliance Industries and Saudi Aramco, issued a statement and report in mid-October supporting the objectives of November’s Paris climate change talks in limiting global warming. They called for a switch from coal to gas and the implementation of a global carbon pricing system to incentivise use of lower carbon technologies and carbon capture and storage. They also said the energy industry needed to reduce its emissions further, for example by reducing gas flaring and reducing methane escapes.

“Policy makers are not convinced in many countries that gas is part of the solution for climate change, we in the industry need to speak up,” Patrick Pouyanné, Total’s chief executive, told a gas and power conference in Paris in October.

Whether this initiative will come to be regarded as anything more than window dressing for the industry will depend on whether the companies now set and meet new targets to extend progress made so far and match their rhetoric.

The absence of any US firms from the initiative might reflect a trans-Atlantic schism over how oil and gas firms should approach global warming issues.

ExxonMobil chairman Rex Tillerson said earlier this year that he didn’t intend to “fake it” on climate change. He has expressed doubts about the reliability of existing climate models used to predict the outcome of rising temperatures. He has also said that if any measure were to be introduced to curb fossil fuel use in the US, he would prefer a carbon tax, rather than cap-and-trade carbon pricing.

At the Oil & Money conference in London early October, he said that thanks to the competitive US power-generation market, the US’s emissions of carbon dioxide were back to 1990 levels, as cheap gas had displaced coal. 

“What roles can governments bring to the effort of cutting CO2?” he asked. “We’ve proven that competitive, free markets will spur us to invest and innovate.” Governments work best when they provide a sound tax and regulatory framework and companies can operate on a level playing field. He said a revenue-neutral carbon tax would be the best way to achieve the goal of cutting emissions – a view that Pouyanné told the conference was not far removed from his own. 

Renewables spending wobbles

Renewable energy capacity in the EU energy mix has risen fast over the last ten years, bolstered by falling equipment and installation costs and subsidies in countries such as Germany, Spain and the UK.

The eurozone crisis and reduced government spending during the economic slowdown have seen subsidies – feed-in tariffs, tax breaks and so on – across Europe become less attractive in recent years. In the UK, the government cited falling costs as a reason for ending its current subsidy regimes for renewables earlier than planned.

Solar and wind energy firms have complained that subsidies have been reduced too soon and their loss will render some projects unviable in what was already a tough marketplace.

That view was backed up by figures showing spending already tailing off. Bloomberg New Energy Finance (BNEF) said clean energy investment in Europe during the third quarter 2015 fell 48% from the same quarter in 2014 to $5.8bn, down 48% from the third quarter of last year and representing its lowest level since late 2004.

Angus McCrone, a senior analyst at BNEF, said that this fall reflected “in part a lull in offshore wind financings in Q3, after no fewer than three deals worth more than $2bn off the coasts of the UK and Germany in the second quarter. But it is also the case that support policies have become less friendly to wind and solar investors in several countries, including Italy, Germany, Denmark and, most recently, the UK.” 

However, BNEF also recently released a study suggesting renewables are becoming much more competitive with fossil fuels globally. The global average levelised cost of electricity for onshore wind now stands at around $83/megawatt-hour, while that for crystalline silicon photovoltaic installations is around $122/MWh. 

The levelised cost of coal-fired generation in Europe is around $105/MWh, while for combined-cycle gas turbine generation it is around $118/MWh, according to BNEF. The levelised cost takes into account factors such as operating and decommissioning costs across the lifetime of an energy project, as well as construction costs, in an effort to make the overall costs of different types of energy easier to compare.

What remains to be seen is whether the cost of renewables can keep falling fast enough relative to fossil fuels for the sector to remain economically viable and maintain growth over coming years without heavy subsidies.

EU seeks to kick start ailing emissions scheme 

The EU emissions trading scheme, perhaps the most important weapon in Europe’s fight to drastically reduce greenhouse gas emissions, has thus far proved woefully ineffective. A scheme drawn up prior to the dip in emissions caused by the 2008 economic downturn – and already intended to be generous to big emitters in the early stages of its development – resulted in a carbon price too low to inspire rapid change in the behaviour of power companies and energy-intensive industries.

A glut of EU carbon allowances (EUAs) on the market has meant the financial benefits of amassing and trading these carbon credits have not been sufficient to make the expense of converting to lower carbon technologies – and thus earning more credits – seem worthwhile. 

That seems poised to change – later rather than sooner – following a September agreement by members of the EU Environment Council to introduce a market stability reserve (MSR) that will remove surplus EUAs from January 2019 to reduce the supply glut and consequently raise the price of carbon credits. The MSR will remove 12% of the net surplus of allowances each year, while that surplus remains above 833m mt.

The outcome represents a compromise between countries with starkly differing views on the pace of carbon emissions reductions within Europe. Some EU states, including the UK and Germany, wanted the MSR to start earlier, in 2017. Others, mainly in eastern Europe, where coal is a major feedstock for power generation, wanted a later start, in 2021. Five countries – Poland, Bulgaria, Romania, Croatia and Hungary – said they remained strongly opposed to the compromise agreement, claiming the way it is being implemented will create uncertainty in the carbon market. 

The prospect of tighter EUA supply has already had an effect on the carbon price, which has risen since it became clear an agreement was on the way.

EUAs were trading at over €8/mt of CO2 in mid-October, compared with around €6.75/mt six months earlier and below €3/mt in April 2013. Consultancy Thomson Reuters Point Carbon has forecast the carbon price will rise steadily to around €18/mt by 2020, as EUA supply reduces, and could rise to around €30/mt in 2030. 

However, even €30/mt may still be below what is needed to stimulate a rapid switch from fossil fuels to less carbon-intensive forms of energy, especially if costly measures such as carbon capture and storage are to be employed. Some analysts say the price needs to be above €40/mt to do that. 

The UK has already decided to introduce an extra emissions tax to speed up the process and the German government said in October it was also considering implementing an additional emissions tax to help meet CO2 emissions targets. 

Western European leaders have always been big on rhetoric when it comes to emissions reduction, claiming the continent should set an example for the rest of the world. However, there is the dangers of rendering European industry uncompetitive if other countries around the world do not introduce similarly tough rules.

That possibility was highlighted by a change in rules in the UK. In 2013, the government unilaterally introduced a floor price on for CO2emissions of £16 (€21.5)/mt, under which companies are effectively taxed for the difference between that level and the prevailing (lower) EU ETS rate.

That cost was cited as a factor in a decision to halt production at the UK’s second largest steel plant in Redcar, northern England, with a possible loss of 2,000 jobs, announced in September. 

The owner, Thai steelmaker Sahaviriya Steel Industries (SSI), attributed the closure to an oversupplied global steel market and competition from cheap Chinese steel. They were followed by Tata. But UK Steel, an association representing the industry, said the sector’s competitiveness was hit by the higher carbon costs prevailing in the UK and that urgent government action was needed to compensate for them. Other UK steelmakers may follow SSI’s example.

While a high carbon price may only be one of several factors affecting the UK steel industry’s economics, this example shows that one of the key challenges for participants at the Paris UN climate change meeting remains persuading governments and industry that measures taken by individual nations or regions to combat climate change will not seriously affect their global economic competitiveness. 

CCS: vital, but elusive

It’s a mantra oft-repeated that the scale of carbon emissions reductions envisaged by the EU over the next 35 years can only be achieved with the development of large-scale carbon capture and storage (CCS) projects. 

However, although the continent is littered with possible CO2 storage sites, CCS remains mired, as it has been for years, at the pioneering stage, stymied by a lack of the funding needed to bring the various technologies and infrastructure together to prove it can work.

Environmental issues have also held up CCS development in some parts of continental Europe. Concerns over potential leakage of stored CO2 over the longer term have produced local opposition – and sparked concerns within industry over the costs of any potential liability they may have should leaks occur.

Such opposition is frustrating for developers, given storage sites are often depleted gas reservoirs, which have contained methane for millions of years with only small amounts of leakage, and so might be expected to successfully contain CO2 for the foreseeable future. 

Statoil’s 19-year old Sleipner test project, which involves injecting 1m mt/y of CO2 separated from natural gas into a sandstone formation under the North Sea, has produced no evidence of leakage so far. 

Putting CO2 under the sea – and away from people – removes some of the environmental worries, but even there, CCS is struggling to gain traction.

In September, Drax, which operates the UK’s largest coal-fired power station, said it would withdraw funding from a £1bn-plus project designed to prove CCS technology worked at a commercial scale, once preliminary work had been completed. 

The company cited less favourable government clean energy regulations and incentives (see above) and its own reduced profitability. 

The project, known as White Rose, is exploring the feasibility of capturing 90% of carbon emissions from a planned 448-MW coal-fired plant next to Drax’s existing power station in northern England and storing them beneath the North Sea. The other participants in the project, Alstom and the Linde group’s BOC, say they still want to push ahead with the project, but Drax’s decision would seem to limit the possibility of the project moving beyond the preliminary stage, which is due to end within the next year, analysts say.

In the absence of significant progress on CCS, a coalition of EU industry stakeholders, called the Zero Emissions Platform (ZEP), released a plan in September outlining how what it described as EU inertia on CCS could be ended. Besides measures to improve the funding and logistics of projects, ZEP also called on EU member states to do more to underwrite the risk involved in developing them.

While the industry criticises the lack of EU and government support for the development of CCS, some observers say power companies themselves could have done more to make it happen.

“It’s easy to say the technology is unproved, but I don’t buy that. It’s all about demonstrating it on a large scale and by now the gas industry should have realised that CCS is so crucial to its long-term survival that it should have formed a consortium to fund the first commercial-scale plant’” says Rogers of the Oxford Institute for Energy Studies and a chemical engineer by background. 

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