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Developing world beefs up climate action

Carbon emissions are continuing to climb, despite more than two decades of climate change talks and a severe economic slowdown, but there is evidence that political will to tackle the problem is strengthening

Global emissions rose by 1.4% to 31.6 billion tonnes in 2012, despite a decrease in emissions in the US, the second largest emitting nation, due to a switch away from coal to relatively clean shale gas in power stations.

Meanwhile, the amount of carbon dioxide (CO2) in the atmosphere continues to climb to levels not seen for several million years. In June, the level recorded by the US National Oceanic and Atmospheric Administration (NOAA) at its Mauna Loa observatory was around 398.5 parts per million, 5% higher than a decade earlier.  

While countries attending UN-backed global climate change talks are seeking to reach a meaningful agreement at the end of 2015, paving the way for a coordinated effort to stem carbon emissions after 2020 (see Climate change talks nudge forward), action may be needed sooner than that if global temperature rises are to be held within safe limits.

World Bank president Jim Yong Kim, speaking at a London conference in June, called for urgent action to stave off catastrophe in poorer countries, saying it was time to accept that manmade global warming was real and to take steps both to try to reduce it and combat its negative effects, which are likely to be stronger in the developing world. He stressed the importance of pro-active financing polices.

“The world needs to find innovative ways to set an appropriate price on carbon and roll back fossil fuel subsidies. If we can get prices right, we can redirect finance to low carbon growth,” he said.

Earlier this year, the IMF called for an end to fossil fuel subsidies by governments around the world, which its energy Subsidy Reform report estimated at around $1.9 trillion a year, or 8% of all government revenue.

Progress on that front is being slowed by public protests against the higher consumer energy prices resulting from fossil fuel subsidy cuts. Countries, such as Nigeria and Egypt have rolled back or delayed price rises to assuage public concern. However, this is not just a developing world problem – the IMF report noted that 40% of fossil fuel subsidies are applied in developed economies.   

A UN Environment Programme-backed study published in June - Global Trends In Renewable Energy Investment 2013 - showed global investment in renewable energy fell to $244bn in 2012 from $279bn in 2011. While, this decline was partly due to falling costs in the solar and wind sectors, it was also caused by less favourable policies in some industrialised countries, the report said.

Although renewables spending in industrialised countries fell by 29% to $132bn, that in the developing world rose by 19% to a record $112bn, driven by action in countries such as China, South Africa, Morocco, Mexico, Chile and Kenya. The gap between developed and developing world spending is also at its narrowest at just 18%. This is a big shift from five years previously, when industrialised countries spent 2.5 times as much as developing countries on renewables. The studies also noted that two-thirds of the 138 countries that now have clean-energy targets are in the developing world. These trends suggest it will be the developing world that will drive renewables investments in the future.

Overall, renewables capacity continued to rise, with 30.5 gigawatts (GW) of photovoltaic installations and 48.4GW of wind capacity in place globally. The IEA’s Medium-Term Renewable Energy Market Report, published in June, said renewable power was set to become increasingly cost-competitive with new fossil-fuel generation and that capacity would rise by around 40% over the next five years by when renewables, excluding hydropower, should account for around a quarter of global power generation. In its Medium-Term Gas Market Report. Also published in June, global gas demand was forecast to increase by almost 16% in the same period.

China’s carbon trading experiment

China’s prolific pace of industrialisation and reliance on coal for much of the expansion of its power sector has made the country, by some distance the world’s largest carbon emitter, producing almost a quarter of all manmade carbon emissions.

However, heavy spending on renewable energy and, now, tentative experiments with emissions trading suggest Beijing is taking the problem more seriously. China spent $67bn on renewable energy in 2012, or 27% of the global total. In addition, China is also pushing gas as a transport fuel, partly because it promises to be cheaper than diesel, but also as a way of reducing serious urban pollution problems and cutting carbon emissions.  

While Chinese CO2 emissions rose by 3.8% in 2012, the increase was the lowest in a decade and translated into a reduction in carbon intensity – CO2 emitted per unit of GDP – of some 3.6%. China has a goal of cutting carbon intensity by 40%-45% from 2005 levels by 2020.

China also launched its first pilot carbon emissions exchange in mid-June. Covering the Shenzhen area, it is one of seven regional exchanges due to open by the end of 2014. If they are deemed a success, a nationwide rollout would follow.

The Shenzhen exchange covers the local operations of around 635 participating industrial and construction companies, including state oil firm Petrochina and private power producer Hanergy, which made the first two trades, valued at around $4.50 per ton of Carbon.

As the exchange will only deal with around 30m tonnes of emissions, its activities will make virtually no impact on China’s overall emissions, which totalled some 8bn tonnes in 2012. But, despite this modest start, the move does show willingness by the Chinese government to address its emissions problems and establish a mechanism for emissions controls.

If the seven regional exchanges are opened as planned, carbon trading could make a significant dent in China’s emissions, as it would account for 800m tonnes of carbon, making it the world’s second largest ETS after that in Europe. The Chinese government has suggested a nationwide exchange with a workable cap on emissions could be in place by 2020, but regional observers say the economic and technical hurdles to be overcome mean that goal is unlikely to be achieved before the mid-2020s at the earliest.

Also, the extent to which China is prepared to subordinate economic growth to costly climate change measures remains to be seen. Chinese heavy industries are already feeling the pinch due to weak demand and oversupply, so much may depend on the strength of a global economic recovery.

EU ETS struggles for traction

China’s adoption of carbon trading, even if limited, is a boost for an emissions reduction mechanism whose reputation has been sullied by the collapse of the carbon price on the EU ETS, due to lower than anticipated EU carbon emissions as a result of the global economic slowdown and an oversupply of EU emissions allowances (EUAs) traded on the ETS, which is likely to persist until 2020.

EUAs – each worth a tonne of carbon – have been trading below €5 in mid-2013, compared to over €30 ($39) in 2008 and well below a level likely to push companies to pay for significant emissions reductions measures. 

The European Commission is now engaged in trying to keep the scheme afloat while EU leaders debate an overall emissions reduction target for 2030. The bloc currently has a target of a 20% cut from 1990 levels by 2020 and the commission is pushing for a 40% target for 2030. That would provide the foundation for a future revision of the ETS, with fewer EUAs available and thus a higher carbon price.

As a short-term initiative, the commission wants to introduce “backloading”, a measure which would enable the temporary withholding of allowances due to come on to the market in 2013-15. After initial rejection by the European Parliament in April, an amended version of the proposal, cutting the number of EUAs to be withheld, was approved by the European Parliament Environment Committee in June.

That improves prospects for a parliamentary vote in favour in early July, but even if backloading is implemented, it is not expected to make much impact on the carbon price given its diluted form and the fact that the withheld allowances will be reinjected back into the market later in this decade, increasing oversupply again. The carbon price would only rise to around €8 by 2020, even with backloading, according to Thomson Reuters Point Carbon (TRPC), which also estimates there would still be an oversupply of EUAs equivalent to around 2.4bn tonnes of carbon by then. 

“If backloading is implemented it will show there is political goodwill to keep this market alive, but fundamentally it changes very little,” says Marcus Ferdinand, an analyst at TRPC. The measure, whose precise parameters are unlikely to be defined for several months, also adds uncertainty into carbon trading for investors, he adds.

Obama’s bold initiative

Political will over climate change measures has also been evident in the US, which has been surpassed by China as the world’s leading carbon emitter, but still produces over three times as many carbon emissions as China on a per capita basis. President Barack Obama unveiled a new slate of climate change measures in late June, including plans to limit emissions from power plants, as the country seeks to meet a commitment to cut carbon emissions by 17% from 2005 levels by 2020 (see Obama’s climate conundrum article).

The measures are likely to speed up a switch away from coal-fired power towards gas and renewables. But TRPC analysts say that, while this is a welcome achievement, it is unlikely to achieve the reductions that would result from federal cap-and-trade scheme along the lines of the EU ETS.

Efforts to introduce cap-and-trade at a nationwide level in the US Congress have foundered due to opposition from politicians representing US states reliant on coal production and heavy industry, whose economies may struggle as a result. Obama plans to introduce his new measures through an executive order to the Environmental Protection Agency, effectively circumventing Congressional opposition.

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