Climate change, innovation and the fossil fuel industries

1. Climate change, innovation and the fossil fuel industries - Insights from UK experience and links to TAR Presentation to SBSTA consultation on IPCC Third Assessment Report Milan, 27-28 November 2003 Michael Grubb, Associated Director of Policy, The Carbon Trust Visiting Professor of Climate Change and Energy Policy, Imperial College, London, & Senior Research Associate, Department of Applied Economics, Cambridge University

2. The energy context: UK is not an obvious choice .. • ‘Britain is an island of coal in a sea of oil and gas’ • Common observation in energy studies during the 1970s and 1980s • “ We could defeat climate change if we chose to. Kyoto is right. We will implement it and call upon all other nations to do so. But it’s only a start. With imagination, we could use or find the technologies that create energy without destroying our planet.” • Tony Blair, UK Prime Minister, October 2, 2001

3. Driving forces in UK energy policy have changed radically Predict and provide: Build coal and nuclear to power industrialisation Oil imports for transport and power 1960s Energy security and domestic production: Develop North Sea for energy independence; supportive regime and production tax incentives 1970s – Early 1980s Competitiveness and Regional environment: Liberalise electricity and gas systems Reduce coal exposure and S etc emissions Mid 1980s – mid 1990s Integrate low carbon, competitiveness and security Diversify in face of North Sea plateau and decline Deepen market liberalisation Support efficiency and innovation for low C techs Since late 1990s

4. The UK Energy White Paper (2003):perspective and goals • First White Paper on energy policy for 20 years • Fundamental reorientation: ‘Our energy future – creating a low carbon economy’ • Central goal, accepts Royal Commission recommendations: • 60% cut in CO2 emissions by 2050 • actions guided by need to deliver Kyoto commitments and remain on path to this long term objective. • Three other objectives to be accommodated (Ch.6: Reliability; Ch.7: Productivity and competitiveness; Ch.8: Energy and the vulnerable, ‘fuel poor’ at home and abroad). • ‘To lead the way in Europe and internationally in developing environmentally sustainable, reliable and competitive energy markets that will support economic growth in every part of the world’.

5. Net impact on global GDP growth marginal or potentially positive over the long-term Tremendous opportunities in rapidly growing global markets £200Bn/yr Environmental goods and services industry £100Bn/yr capital spending by electricity supply industry Developing a low carbon industry sector will allow UK to capture a greater share of the value created Short term capital investment will be required transition costs including infrastructure capital costs currently higher for renewables than conventional sources (but declining) Downside impact on a limited number of disadvantaged industrial sectors If action is harmonised within EU, impact limited to externally traded goods (~11% of GDP) The low carbon challenge is to profit from the opportunity through good near-term investment Big long-term opportunity… …but some short-term costs

6. UK Energy White Paper: renewable electricity support system • Reaffirms 10% renewables by 2010 commitment, ‘aim’ to 20% by 2020 • Main instrument: Renewable Obligation Certificates (ROCs) • Like Renewable Portfolio Standards in US • Electricity supply companies have to source given percentage from renewables • ‘Cap’ (buyout) on ROC prices of 3p/kWh • Additional £100m capital grants for renewable energy (£38m announced 2002 + £60m new) • Overhaul planning systems (both onshore and offshore) • Review electricity structure, regulation, etc • No specific regulatory structure for non-electric renewables

7. Offshore Wave Energy Crops Offshore Wind Onshore Wind Dedicated policy measures help technologies traverse the innovation chain Appropriate economic support for specific technologies will vary as costs decline Technology specific support RD&D Grants Capital Grants/ Loans ROC (Buyout) General support CCL Exemption Wholesale Price Note: ROC excludes recycling; Capital grant based on maximum of 40% of typical capital costs Source: PIU Working Papers (OXERA II Base case cost decline)

8. The biggest renewable energy potential in UK is offshore wind energy

9. Features of UK offshore wind energy • Rapidly developing sector • 13 main projects currently in development • Almost all are 5 – 10 km offshore • Companies include established oil (eg. Shell), electricity (eg. PowerGen) and offshore engineering service (eg. AMEC) companies • Wind energy investment during next five years expected to average around £1bn/yr • A major contributor to UK renewable energy target (10% by 2010) and longer term goals • First UK offshore wind farm started delivering November 2003

10. UK Offshore Wind Energy: First wind farm (North Hoyle) now operating Construction started April 2003, delivered electricity late November 20034-5 miles off the North Wales coast 30 wind turbines of 2 megawatts (MW) electricity to supply 50,000 homes. Offsets about 160,000 tonnes of CO2 per year

11. There is rapidly growing involvement from offshore & energy companies as the oil & gas provinces mature • Government established ‘UK renewables’ in Aberdeen (centre of UK oil industry) • Oil industries confirm that offshore wind engineering relatively simple transfer of some core skills – no major engineering problems foreseen • Major issue is stability and duration of government support mechanisms (ROCs currently expire in 2010) • Wider lessons in context of oil and gas reserve / resource profiles?

12. The carbon in oil and gas reserves is very limited compared to the emissions of most climate scenarios Coal Oil Gas

13. Petroleum reserves and climate change • Conventional petroleum is not the problem • Only unconventionals and coal have enough carbon to do big damage • We are likely to use all the proven petroleum reserves • carbon control raises relative costs of unconventionals and coal, the ‘default’ non-oil alternatives • Important to ensure that any large-scale development of coal-based synfuels, tar sands etc involves CO2 removal and disposal • As conventional oil & gas provinces peak, the industrial opportunities may move towards renewables • Conventional oil and gas could benefit long-term from carbon controls (by making high-carbon backstops more expensive)

14. Climate change, innovation and the fossil fuel industries - Insights from UK experience and links to TAR Presentation to SBSTA consultation on IPCC Third Assessment Report Milan, 27-28 November 2003 Michael Grubb, Associated Director of Policy, The Carbon Trust Visiting Professor of Climate Change and Energy Policy, Imperial College, London, & Senior Research Associate, Department of Applied Economics, Cambridge University

15. UK Energy White Paper:policy principles and guideposts • Market-oriented – not a return to central planning • Need for government to establish the regulatory and incentive framework • Looking for cuts of 10-20% (15-25MtC) below reference projection by 2020 • Non-binding 2020 targets for energy efficiency, renewable electricity, and CHP • No specific proposals for new nuclear build (or other direct government build) • Renewables and efficiency have five years to prove their potential

16. UK Energy White Paper:Economic instruments and energy efficiency Emissions trading: • ‘will be at the centre of our energy markets’ • entry for key sectors (power stations, refineries, most heavy industry) into EU scheme from 2005 • ambiguity about overall linkage between trading and Climate Change Levy structures Energy efficiency • ‘develop’ the energy efficiency commitment (EEC) scheme • Insulation grant schemes and EECs to secure end to ‘fuel poverty’ in England by 2010, Britain by 2016-18. • Revision of building standards brought forward to 2005, and push for stronger EU standards on fridges, PCs etc • Public sector procurement to ‘set an example’