SESSION III – CLIMATE CHANGE: HOW WILL THIS DETERMINE INVESTMENT CHOICES ?

International Climate Regime in the Making ? - Richard Kinley

Richard Kinley - Videoclip 1

“The worst consequences of climate change can still be avoided with concerted and decisive action. You are the industry that powers economic growth and your leadership is required!”,  Richard Kinley,  Deputy Executive Secretary to the United Nations Framework Convention on Climate Change (UNFCCC),  told the audience as he opened Session III of the conference.  Mr Kinley gave an update on the state of climate change research and action,  underlining: “it is now clear that humanity,  and the planet we all share,  are subject to the most significant consequence of economic development: climate change.  The world economy must shift to a low-emissions path.  The most stringent scenario drawn up by the Intergovernmental Panel on Climate Change,  which would stabilise temperature increases at around 2-2.4C above pre-industrial levels,  requires greenhouse gas emissions to peak in the next 10-15 years,  then decline by 25-40% over 1990 levels by 2020.  By 2050,  there needs to be an overall reduction of 50% over 2000 levels.  These are huge challenges,”  he added.

Mr Kinley looked forward to the UNFCCC meeting in Copenhagen in December 2009,  when a new international agreement on climate change action is expected to be agreed.  However, with global energy demand set to rise 60% by 2030,  not only governments but also business,  including the energy sector - and the electricity industry in particular - has a major role to play,  he stressed,  urging the industry professionals present to drive forward energy efficiency,  use of alternative energy sources, and carbon capture and storage technology. “Your insights for an agreement that offers economic opportunities for greening the energy sector are important. Governments need to craft an agreement that makes sense from a business point of view and we need your active and enthusiastic engagement,”  he underlined.

Richard Kinley - Videoclip 2

the eu ets - where are we now ? - peter zapfel

Peter Zapfel - Videoclip 1

Peter Zapfel, Policy Coordinator for emissions trading and economic analysis at the European Commission’s Environment Directorate,  outlined the results of the EU Emissions Trading System (ETS) so far,  and the Commission’s proposals now on the table to enhance its effectiveness. Mr Zapfel stressed that the first trading period was a learning period and the system was too complex.  For the second period,  the cap on emissions has been tightened and the carbon price created by the ETS is now  “more stable”.  The ETS review,   which fed into the overall energy-climate package of legislation proposed by the Commission in January,  is designed to improve harmonisation,  transparency and predictability.  The new Directive will provide for a single EU cap on emissions and auctioning will become the main method of allocating allowances,  with scope for relief for sectors identified as at risk from  “carbon leakage”  he explained.  Mr Zapfel stressed that the EU carbon market - estimated to be trading around €2 trillion by 2020 - is a  “tool,  not a goal in itself’”  but pointed out that  “the EU is moving faster than the rest of the world”  on climate change. However,  the full benefits of trading can be exploited only through a more harmonised regulatory framework at European level,  he underlined.

Peter Zapfel - Videoclip 2

The audience voting session made an important input to the panel discussion that followed.  Almost two thirds of the delegates were of the opinion that the EU ETS does not provide sufficient predictability for long-term investment decisions,  although this showed greater confidence in emissions trading than at last year’s Annual Conference,  when practically three quarters of the voters expressed a negative view.  Looking at the trend in the global climate change regulatory framework for the next ten years, the audience also saw growing convergence in policies, lthough trust in international negotiations is still low.  A majority identified climate change as one of the key issues for long-term investment,  although the audience was split over whether decarbonising should be seen as an asset or a liability.  Delegates also largely saw uncertainty and/or incoherence in energy policies and regulation as the most serious investment challenge for the ten years ahead.

Panel Debate:  new global regime

For the panel,  which was chaired by Merribel Ayres,  President of Lighthouse Consulting Group,  the speakers were joined by Dr William Kyte,  OBE,  who chairs the EURELECTRIC Environment & Sustainable Development Committee;  Ian Marchant,  Chief Executive of Scottish and Southern Energy;  Brad Page, CEO of the Energy Supply Association of Australia;  Esteban Morras,  Board Member of Acciona and Board Member and Chief of Strategy of Endesa;  Ricardo Cordoba,  President of GE Energy Western Europe;  and Michael Grubb,  Chief Economist at The Carbon Trust.

Merribel Ayres - Videoclip 1
Ms Ayres opened the panel by giving an outlook on future policy developments on climate change in the United States,  predicting that from January 2009,  once the newly elected Congress and Senate is fully operative,  climate change would be at the top of the US political agenda.  In the meantime a general consensus has been reached on carbon capture and sequestration (CCS) as the future technology for combating emissions. However, the question remains how to cope with the transitional period. She then asked the panellists what lesson leaned from the EU ETS they would wish to share with U.S. politicians.
Merribel Ayres - Videoclip 2

Dr Kyte advised the US politicians:  “Don’t be afraid of a ‘cap and trade’ mechanism” mechanism.  The “EU ETS has not failed, ” data showing that business-as-usual has been affected.  He also warned against the temptation of addressing too many social issues in the emissions reduction scheme:  Keep it simple,  keep it simple, keep it simple”,  he stressed.

Mr Page singled out two main issues relating to the ETS that the US government should take into consideration.  First, data accuracy:  experience has shown the importance of this for the reliability of the system.  Second,  the identification of a  “credible independent body” for the release of allowances,  in order to avoid the domination of vested interests at national level.

Mr Grubb agreed with Mr Page on data predictability and transparency,  stressing that:  “It has to be clear who takes decisions about allocations and the method used”.

Mr Zapfel closed this first round of responses by suggesting the US administration should develop their model by thinking about the global market not only at national aspects of carbon reductions.  He advocated opening up the future US scheme to the use of credits from Clean Development Mechanism projects.

Ms Ayres then moved the discussion on to the technologies needed to reduce greenhouse gas emissions from power generation.

Brad Page - Videoclip 1
Mr. Page stressed that the main concern in Australia,  whose electricity production is heavily dependent on coal,  is that electricity prices would rise too high and too soon.  Australia can rely on cheap and clean domestic coal,  while gas has to be imported.  “The real risk for our coal assets”,  he specified,  “is if there is a too aggressively high CO2 price in the short term,  we will see a phase-out from coal to gas,  which would affect both the development of CCS and our security of supply”.

Ricardo Cordoba - Videoclip
According to Mr Cordoba, the real obstacle preventing fast development of CCS technology is the lack of certainty about the legal framework regulating the underground storage of carbon and related liabilities. As for the technology mix in future energy scenarios, “nuclear will be part of the panorama, together with CCS, renewables and, at least for a transitional period, gas”.

Esteban Morras - Videoclip 1
Mr Morras had a rather different view on future technologies for electricity production. He was of the opinion that the carbon-based model developed in the last century was coming to an end.  “We have to define a new energy system for the next two billion years!”,  he declared,  which would basically mean a future fully based on renewable energy sources.

Ian Marchant - Videoclip 1
Mr Marchant argued that the current decade would be crucial in setting the right regulatory framework for investing in a low carbon economy for the next twenty years.  He also pointed out the urgency of this issue,  given that  “people in the UK are already spending more than 10% of their income on energy, struggling to avoid energy poverty, and prices are expected to increase further in the near future”. In setting the scenario for the next technology development,  he saw the 2010-2020 decade as the period for developing renewable energy sources and the 2020-2030 period for developing nuclear power and CCS.  He also pointed out that  “we can improve the carbon performance of the electricity sector by decarbonising transport”.

As a last round for the panellists,  new EURELECTRIC President Lars Josefsson asked what would be the minimum criterion for declaring as successful the forthcoming international agreement in Copenhagen.

Ian Marchant - Videoclip 2
Mr Marchant said the agreement would be successful if it set clear targets,  clear deadlines (possibly 2030) and clear commitments.

Mr. Kinley wanted to see ambitious targets set that would  “change business as usual,”  plus some compliance mechanisms involving the new US administration and some packages with strong actions and finance provided for developing countries.

Esteban Morras - Videoclip 2
Mr Morras would like to see concrete measures for the promotion of energy efficiency and renewables through to 2020.  In addition,  there should be a clear long- term vision for economic development.

Mr Cordoba was of the opinion that success means a strong commitment to targets and actions by other industrialised countries,  not only from the European Union.

Brad Page - Videoclip 2
Mr Grubb and Mr Page shared the view that a key point would be the development of electricity production in China and India in a way that would not allow the US room to look for some exemptions from the terms of the international agreement.

William Kyte - Videoclip
Mr Kyte argued that it was now essential to  “demonstrate that we can decarbonise our electricity sector at reasonable cost and show the developing countries the way. The time for debate is over, now we need action. It’s time to put up and shut up!”,  he concluded.

Ms Ayres agreed that a more robust engagement by the US government would be a key factor in the success of future international negotiations but that its international competitiveness required that China and India also come on board.

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