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The carbon conundrumLegislation that has created a trading market in emissions has
also created a series of investment and business opportunities,
writes Paul Garrett. Twenty years ago nobody registered carbon emissions in the company business plan. Now global warming has put it top of the agenda – across the world’s energy sector, and beyond into other industries. As the carbon agenda provides the backdrop to the world’s economy, all businesses must define their carbon strategy. What are the policy priorities, how will future electricity generation gaps be filled in a low-carbon way, is there a role for clean coal, are new nuclear and renewable realistic, how will world carbon prices develop? European climate change and energy policy goals provide a guide as to how carbon policy could develop worldwide. There are six basic planks of policy which set out to reduce carbon emissions across the continent. These are: * The EU GHG Burden Sharing Agreement
* The EU Emissions Trading Scheme (EUETS)
* The EU Renewable Sources Directive
* The EU Geological Storage of CO2 Directive
* The EU End-Use Efficiency and Energy
Services Directive
* The EU Cogeneration Directive. Other member states have supplemented this with their own legislation. Britain has the Climate Change Bill, the Energy Bill, the Planning Bill, and the Renewables Energy Strategy.These are all aimed at trying to hit the UK’s target of 20 per cent of electricity from renewable sources by 2020, comprising about 32 per cent of energy supply (a very ambitious target), 14 per cent of heat demand and 20 per cent of transport energy. John McElroy, Head of Environment Strategy at RWE npower, says that in all markets climate change and related energy policy needs to deliver a diverse energy mix to maintain secure, reliable and affordable energy supplies while satisfying challenging greenhouse gas emission reduction targets. ‘In Europe a stable, transparent, long-term EU Emission Trading Scheme (EU ETS) framework to underpin the carbon price and build investor confidence remains the key priority for the energy sector,’ he says. ‘What’s also needed is a robust long-term renewables support mechanism to support costeffective achievement of ambitious renewables targets. This means removing the barriers to delivery such as planning, grid access, and managing long-term liabilities.’ McElroy says that in Europe and beyond, this means governments showing a clear commitment to scale up support for existing and emerging low-carbon technologies, including carbon capture and storage, and marine renewables. As part of this carbon strategy, emerging markets will be interested in clean coal. Economies such as China and South Africa are being powered by coal right now and will be reluctant to relinquish such an indigenous resource. Coal if de-carbonised, can contribute to security of supply, affordability – and if the carbon is sequestrated, carbon emissions targets too. All over the world, new fossil fuel generation plants are being built or planned. Many are needed to provide base load backup to intermittent renewable generation, such as wind – or to deal with demand growth as economies expand. Most new coal plants being built around the world have carbon emissions which are around 25 per cent lower than older coal-fired power stations. But for coal to have a future in a lowcarbon world, a greater commitment to carbon capture and storage – where CO2 is extracted from fossil fuel stations and placed securely in underground repositories where it can do no
harm – is needed. Key markets here are China and India, which are seeing exponential growth in coal fired power generation. These markets offer tremendous opportunities for businesses which can develop and market proven carbon capture and storage technology. Increasingly across the world the price of carbon will be driven by a complex mix of factors. John McElroy sees these from a European perspective, but as carbon markets link up. These could play out further afield. ‘Carbon prices,’McElroy predicts,‘will be driven by the trajectory for the overall EU ETS cap including the final EU 2020 greenhouse gas reduction goal, whether it is 20 per cent or 30 per cent. The impact of the expansion of EU ETS to include new sectors such as aviation and shipping and linkage to other international trading schemes is also crucial. ‘Other factors are the state of the European economy (and other economies), the development of fossil fuel process – oil and gas – the level of access to international project credits, and the design and implementation of allowance auctioning (where it exists).’ McElroy concludes that in establishing a carbon strategy, energy sector companies worldwide must try to manage uncertainty. There are a number of ways of doing this:
* They can have a range of investment options to diversify risk – such as CCGT gas, clean coal, nuclear and renewables
* They can pursue planning permission and grid access in order to underpin investment choices – easier in some markets than others
* They can invest in research, development, and demonstration of emerging technologies, such as carbon capture and storage, wave and tidal stream technologies and perhaps hydrogen in the future. With such developed carbon markets in Europe, international businesses may think they should relocate to other markets which offer less stringent carbon constraints. Other emerging markets may go to cap and trade, or to carbon taxation – but it is likely they will find the carbon agenda chasing them.The current global financial turmoil could dilute the carbon agenda, but eventually the credit crunch will be mitigated – and for business worldwide, the global warming and carbon agenda won’t.
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