Strategies to Lower Carbon Dioxide (CO2) Emissions

Carbon dioxide emissions from Annex I countries have established since 1990 but are growing rapidly in developing countries (non Annex I countries) at a rate of approximately 4% per year which is reflected in the world emissions which are growing roughly 600 million tons of CO2 per year.

Carbon dioxide emissions are the dominant component of greenhouse gas emissions, but represented in 2006 only 69,6% of the total emissions. The remaining 30.4% are methane (CH4), nitrous oxide (N2O) and fluorinated gases with high global warming potential (GWP) which are: SF6 (sulphur hexafluoride), HFCs (hydrofluorcarbons) and PFCs (perfluorcarbons). (Figure 4).

Usually one expresses GHG emissions in CO2 equivalent. Total emissions in 2005 were approximately 45 Gtons of CO2.equivalent of which 30 Gtons of CO2.

To reduce CO2 and other GHG emissions became thus one of the most urgent tasks we are facing today. There are two approaches to handle this problem:

1. use energy more efficiently, consequently emitting less CO2 and extending the life of fossil fuels reserves.
2. increase the contribution of renewable energies in the world energy matrix

National governments as well as some sectors of the productive system (industry, transportation, residential and others) can adopt these solutions in differentiated degrees.

• In industrialized countries, which have already reached a high level of energy consumption “per capita”, energy efficiency is the “low hanging fruit” approach that can be more easily implemented. Renewable energies can also play a significant role.
• In developing countries where energy consumption “per capita” is low, and the need for the growth for energies services is inevitable, it can be done incorporating early, in the process of development, clean and efficient technologies as well as renewable energies, following a different path than that done in the past by today’s industrialized countries

We will discuss hereafter the potential of energy efficiency, renewable energies and emissions trading schemes in achieving the objectives of reducing greenhouse gas emissions.

RENEWABLE ENERGIES

Table I lists the renewable energy used in the world at the end of 2008 by all types of renewable sources, as well their yearly growth rates. Traditional biomass is left out of this table because it is used mainly in rural areas as cooking fuel or charcoal in ways that are frequently non renewable, leading to deforestation and soil degradation

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Renewables (including large hydro) represented, in 2008, approximately 5% of the world?s total primary energy consumption but are growing at a rate of 6.3% per year while total primary energy supply is growing at a smaller rate of approximately 2% per year.

Taking into account the appropriate efficiency and capacity factors* the numbers in Table I can be converted into the total primary energy contribution from renewables (Table II) and Figure 6.

An extrapolation of the contribution of renewables up to 2030 on the basis of the rates of growth in the last 10 years is shown in Figure 7.

To give an idea of the effort that would be needed to curb CO2 emissions up to 2050 the IEA produced recently two scenarios of what would be required in terms of renewables in the electricity sector. The results are shown in Table III.

In the IEA Scenarios nuclear energy and coal and gas fired thermal power plants (with carbon capture and storage CCS) are included.

These numbers are very large but give an idea of the effort required to prevent a catastrophic climate change.

The main policy instruments used to accelerate the introduction of renewables in the energy system of a number of countries are “feed in tariffs” and “renewable portfolio standards” (RPS)

• “Feed-in” tariffs: this is a policy adopted by governments to accelerate the introduction of renewable energy sources in their matrixes. Power companies are obliged to buy renewable energy from independent producers, at a fixed price above the average cost of production. These incremental costs of renewable energy over fossil fuels can be transferred to consumers. Germany has had striking success with feed-in tariffs over the last two decades, supplying 15% of its energy needs through renewable sources. The German approach involves guaranteed fixed payments for 20 years designed to deliver a profit of 7 to 9 percent. The rates charged vary by energy source and are tied to the cost of production. The rates paid for new contracts decline annually, forcing the green energy sector to innovate.
• Renewable Portfolio Standards: such approach places an obligation on electricity supply companies to produce a specified fraction of their electricity from renewable energy sources (typically 10-20%). Certified renewable energy generators earn certificates for every unit of electricity they produce and can sell these along with their electricity to supply companies. RPS-type mechanisms have been adopted in the UK, Italy and Belgium, as well as in 27 States in the US and the District of Columbia. Regulations vary from state to state, and there is no federal policy. Four of the 27 states have voluntary rather than mandatory goals. Together these 27 states account for more than 42 percent of the electricity sales in the country.

Renewable energies are being introduced in a significant way in many countries particularly in Europe in the form of distributed generation* ( ) (mostly renewable) which seems to be the approach to be used in large scale in the future. (Figure 8)

ENERGY EFFICIENCY

The amount of energy required to provide the energy services needed depends on the efficiency with which the energy is produced, delivered and used.

Gains in energy efficiency are usually measured by indicators, one of which is called energy intensity and defined as the energy necessary (E) per unit of gross domestic product (GDP).

I = E/GDP

Reduction in the energy intensity over time indicate that the same amount of GDP is obtained with a smaller energy input as shown in Figure 9.

In terms of CO2 emissions for the OECD countries means a reduction of emissions of roughly 350 million tons of CO2 per year.

The reasons for such decline are a combination of the following factors.

• structural changes in industrialized and transition countries which can come from increased recycling and substitution of energy-intensive materials improved material efficiency and intensified use of durable and investment goods,
• shifts to services and less energy-intensive industrial production, and
• saturation effects in the residential and transportation sectors (i.e., a limit to the number of cars, refrigerators, television sets, etc., that a society can absorb).

Since more than 80% of the energy used in the world today comes from fossil fuels the reduction in energy intensity is reflected in a reduction in carbon intensity (I=CO2/GDP) which is shown in Figure 11.

As can be seem there is a steady decline in the carbon intensity in OECD countries. In non-OECD countries there was also a decline but it has stabilized after the year 2000.

Over the next twenty years the amount of primary energy required for a given level of energy services could be cost-effectively reduced by 25 to 35 percent in industrialized countries. Reductions of more than 40 percent are cost-effectively achievable in transitional economies within the next two decades. In most developing countries ? which tend to have high economic growth and old capital and vehicle stocks ? the cost-effective improvement potential ranges from 30 to more than 45 percent, relative to energy efficiencies achieved with existing capital stock.

The combined result of structural changes and efficiency improvements could accelerate the annual decline in energy intensity to perhaps 2.5 percent. How much of this potential will be realized depends on the effectiveness of policy frameworks and measures, changes in attitude and behavior, as well as the level of entrepreneurial activity in energy conservation and material efficiency.

Standards (e.g., building codes; well-informed consumers, planners, and decision makers; motivated operators; market-based incentives such as certificate markets; and an adequate payments system ( ) for energy) are central to the successful implementation of energy efficiency improvements.

EMISSIONS TRADING

In addition to national efforts to curb GHG emissions through increased energy efficiency measures and the use of renewable energy source trading emissions is a strategy used to control pollution by providing incentive s for achieving reductions in the emission of pollutants. Usually it is called a ?cap and trade? system and the way is works is the following:

A central authority (usually a government or international body) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups are issued emission permits and are required to hold an equivalent number of allowances (or credits) which represent the right to emit a specific amount. The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their emission allowances must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions. An early example of an emission trading system has been the SO2 trading system under the framework of the Acid Rain Program of the 1990 Clean Air Act in the U.S. Under the program, which is essentially a cap-and-trade emissions trading system, SO2 emissions were reduced by 50 percent from 1980 levels by 2007. Some experts argue that the “cap and trade” system of SO2 emissions reduction has reduced the cost of controlling acid rain by as much as 80 percent versus source-by-source reduction?.( )

At the international level the Kyoto Protocol (KP) adopted in 1997 and which came into force in 2005, binds most developed nations to a cap and trade system for the six major greenhouse gases. In spite of being a signatory of the United Nations Framework Convention on Climate Change (UNFCCC), the United States is the only industrialized nation (i.e., under the KP Annex I) which has not ratified and therefore is not bound by it. Emission quotas were agreed by each participating country, with the intention of reducing their overall emissions by 5.2% of their 1990 levels by the end of 2012. Under the Treaty, for the 5-year compliance period from 2008 until 2012, nations that emit less than their quota will be able to sell emission credits to nations that exceed their quota through use of the following flexibility mechanisms:

• Joint Implementation projects (JI)
• Clean Development Mechanism (CDM)
• International Emissions Trading (IET).

The second commitment period of the KP, together with a long-term cooperative action under the UNFCCC, will be discussed by nations at the end of 2009.

THE EUROPEAN UNION EMISSIONS TRADING SCHEME (EU ETS)

The European Union Emission Trading System (EU ETS) is the largest multi-national, emissions trading scheme in the world, and is a major pillar of EU climate policy.

Under the EU ETS, the governments of the EU Member States agree on national emission caps which have to be approved by the EU commission, allocate allowances to their industrial operators, track and validate the actual emissions in accordance against the relevant assigned amount.

In the first phase (2005-2007), the EU ETS includes some 12,000 installations, representing approximately 40% of EU CO2 emissions, (2.4 billion tons of CO2 equivalent) covering energy activities (combustion installations with a rated thermal input exceeding 20 MW, mineral oil refineries, coke ovens, production and processing of ferrous metals, mineral industry (cement clinker, glass and ceramic bricks) and pulp, paper and board activities.

The scheme, in which all 15 member states that were then members of the European Union participated, nominally commenced operation on January 1st, 2005, although national registries were unable to settle transactions for the first few months.

The first trading period of the EU ETS ran for three years, from January 1st, 2005 until the end of 2007. With its termination first phase allowances became invalid. The goal of the trial period was primarily to gain experience with key elements of the trading system in order to have a fully operational system for 2008-2012 when compliance with binding reductions would be required under the Kyoto Protocol. (Table IV)

The price of allowances increased more or less steadily to its peak level in April 2006 of about ?30 per tonne CO2, but fell in May 2006 to under ?10/ton on news that some countries were likely to give their industries such generous emission caps that there was no need for them to reduce emissions. When the publication of 2005 verified emissions data in May 2006 highlighted this over-allocation, the market reacted by substantially lowering the price of allowances. Prices dropped precipitously to ?1.2 a tonne in March 2007, declining to ?0.10 in September 2007, because allowances could not be carried over or ?banked? and used in the next trading period.

Although the first phase ended disastrously, because the allowances could not be banked to the next phase, it did not impact on the prices for contracts for 2008, the first year of the second phase. Market participants knew already in 2007 that phase II would be more stringent in relation to the cap and less lenient in relation to allowances, which explains the high prices for 2008 allowances.

The first EU ETS Trading Period expired in December 2007. Since January 2008, the second Trading Period is under way which will last until December 2012. Currently, the installations get the allowances for free from the EU member states’ governments. Besides receiving this initial allocation on a plant-by-plant basis, an operator may purchase EU allowances from others (installations, traders, the government).

In January 2008, the European Commission proposed a number of changes to the scheme, including centralized allocation (no more national allocation plans) by an EU authority, a turn to auctioning a greater share (60+ %) of permits rather than allocating freely, and inclusion of other greenhouse gases, such as nitrous oxide and per-fluorocarbons. These changes are still in a draft stage; the mentioned amendments are only likely to become effective from January 2013 onwards, i.e. in the third Trading Period under the EU ETS. Also, the proposed caps for the third Trading Period foresee an overall reduction of greenhouse gases for the sector of 21% in 2020 compared to 2005 emissions. The EU ETS has recently been extended to the airline industry as well, but these changes will not take place until 2012.

In addition, the third trading period will be both more economically efficient and environmentally effective. It will be more efficient because trading periods will be longer (8 years instead of 5 years), and a substantial increase in the amount of auctioning (from less than 4% in phase 2 to more than half in phase 3). The environmental effectiveness will be guaranteed by a robust and annually declining emissions cap (21% reduction in 2020 compared to 2005) and a centralized allocation process within the European Commission.

A robust “secondary” market for carbon certificates exists through which investors bank on the future value of the EU ETS certificates changing many times. However the ETS doesn?t include transport, thus this action is limited to industrial process and energy sector.

JOINT IMPLEMENTATION (JI)

Joint implementation is one of flexibility mechanisms set forth in the Kyoto Protocol to help countries with binding greenhouse gas emissions targets (so-called Annex I countries) meet their obligations. In this mechanism any Annex I countries can invest in emission reduction projects (referred to as “Joint Implementation Projects”) in any other Annex I country as an alternative to reducing emissions domestically. In this way countries can lower the costs of complying with their Kyoto targets by investing in greenhouse gas reductions in an Annex I country where reductions are cheaper, and then applying the credit for those reductions towards their commitment goal.

The process of receiving credit for JI projects is somewhat complex. Emission reductions are awarded credits called Emission Reduction Units (ERUs), where one ERU represents an emission reduction equaling one tonne of CO2 equivalent. The ERUs come from the host country’s pool of assigned emissions credits, known as Assigned Amount Units, or AAUs ( ).

After a long preparatory process JI projects began to take shape. As of June 2009, 207 projects have been submitted. If all implemented they will lead to emissions reduction of 338,048 million times CO2 equivalent in the period 2008-2012. The great majority of the projects are in the Russian Federation and Eastern European countries. The number of JI projects by type is given in Figure 14.

So far the only certificates issued (ERUs) emissions reduction units are 651 thousand CO2 equivalent for coal bed/mine methane.

CLEAN DEVELOPMENT MECHANISM (CDM)

The Clean Development Mechanism is an arrangement under the Kyoto Protocol allowing industrialized countries with a greenhouse gas reduction commitment (called Annex B countries) to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries. A crucial feature of an approved CDM carbon project is that it has established that the planned reductions would not occur without the additional incentive provided by emission reductions credits, a concept known as “additionality”.

The CDM allows net global greenhouse gas emissions to be reduced at a much lower global cost by financing emissions reduction projects in developing countries where costs are lower than in industrialized countries.

The CDM is supervised by the CDM Executive Board (CDM EB) and is under the guidance of the Conference of the Parties (COP/MOP) of the United Nations Framework Convention on Climate Change (UNFCCC).

By June 1 2009, 4,417 projects have been submitted which if all implemented correspond to 2,931,813 million tons of CO2 equivalent. It represents roughly 1% of the total necessary effort to curb GHG emissions until 2050.

Roughly 75% of the CDM projects are in China.

In contrast to emissions trading schemes which are actively traded in the stock market JI and CDM are project-based transaction.

THE STIMULUS PACKAGE

A significant amount of the stimulus package adopted by a number of governments to face the financial crisis of 2007/2008 is made of investments in so called ?green? activities. They amount to 6% of the total recovery packages announced by governments (US$184.9billion dollars). (Figure 17)

China and the US remain the leaders, in nominal terms, of the green stimuli activities, earmarking US$ 68.7 billion and US$ 66.6 billion respectively.

The sector break-down shows that energy efficiency (Figure 18) remains at the heart of the low-carbon fiscal stimuli. Accounting for as much as 36% of the total US$ 184.9 billion, the sector will receive a boost of some US$ 65.7 billion globally, mainly via building efficiency projects. In addition to that, US$ 7.9 billion has been announced for research and development in energy efficiency. The second major winner is electricity grid infrastructure. More than US$ 48.7 billion has been earmarked for its development and upgrade, accounting for some 26% of the total funds.

The Department of Energy has already disbursed US$ 41.9 million in grants for fuel cell energy projects.

Furthermore, US$ 101.5 million has been directed to wind energy research and detailed plans have been disclosed on US$ 2.4 billion to be spent on carbon capture and storage and US$ 4 billion for grid upgrades. Details of almost US$ 1.3 billion, out of US$ 2 billion to support energy science research, have also been confirmed and there are now only some US$ 725 million remaining to be allocated.