COP27. REPARATIONS AND CLEAN DEVELOPMENT

Historic guilt and reparations are a hard sell, for obvious reasons, but self-interest points in the same direction. But aid will have to be consistent with climate-related objectives.

 

COP27 has just ended, and the failure to do better on targets for phasing out fossil fuels will be widely regarded by many as a possibly disastrous failure for humanity. Its most substantial success appears to have been in recognition of the necessary financial transfers from rich nations to poorer ones. Even this, however, faces some serious headwinds in implementation, based, as it has been, on the linked concepts of “reparations” and “historic responsibility”. Neither will be straightforward.

 

Beginning with historic responsibility, this should clearly be a measure of cumulative emissions, but there are multiple hard to resolve questions. One is, in a world of international trade, whether responsibility lies with the country where the fossil resource was extracted, where it was refined or converted, the domicile of the owners of energy industries or their bankers, or where the final products were consumed. In other words is it producers or consumers who are responsible? In a world of complex supply chains, this is problematic.

 

A second question, for the legitimate assignment of responsibility, is to choose an appropriate starting date from which to measure cumulative emissions? The date matters a lot in terms of assigning responsibility, particularly for the relative contribution of China and India. 

 

1992 was the year of the first earth summit in Rio de Janeiro, which led to the establishment of the United Nations Framework Convention on Climate Change (UNFCCC).  1990 was the baseline chosen for the Kyoto Protocol targets. So it equates, approximately, to the time when the climate science began to offer irrefutable evidence of the causes and dangers of unmitigated climate change, and their recognition by governments.  

 

Arguments that measurement should start from earliest recorded history ignore the uncomfortable truth that energy use, especially via electricity, is responsible not just for economic growth but for most of the positive features of the modern world, including science and medicine, as well as its problems. Without those advances in science and measurement we would not even be aware of the problem we have.

 

As difficult as measuring historic responsibility is the assignment of moral responsibility, at the level of the nation state, for historic events. Apart from factors such as migration, are individuals really responsible for their nation’s past? And what responsibility do we assign for current and past population growth, the elephant in the room for political discussions, but a prime cause for a substantial part of actual emissions growth over recent decades, as well as “baked in” future emissions? 

 

Finally a massive share of responsibility for current atmospheric concentrations rests with those parties, governments (most notably of fossil-rich states), businesses, other vested interests, and individuals, who have sought to subvert and delay effective action. Few of them are volunteering to make “reparations”. In the case of businesses, the feasibility of extracting compensatory sums on any scale is low or negligible.

 

For all these reasons the terminology of reparations and historic guilt will make transfers a hard sell politically in the developed world, and even more so given perceptions of energy and financial inequality even within that world.  A more easily justifiable and politically more saleable argument for financial transfers from rich to poor, though, should be simple self-interest. 

 

We are facing the increasing likelihood, post COP27, that targets for cumulative emissions consistent with a liveable human environment will not be met, and the only remedy left will be direct extraction of carbon from the atmosphere.  Inevitably the only parties capable of mustering the financial resources for this are the same wealthy nations called upon to pay for “loss and damage”. 

 

But viewed in cost benefit or cost effectiveness terms, the promotion of clean development will almost always prove to be much cheaper than having to pay for direct air carbon capture (DACC), the ultimate fall-back as climate change becomes an existential threat. A good example is provided by the theoretical case for financial support of rural electrification to limit use of charcoal and firewood, a major source of both emissions and environmental degradation across developing economies, and the subject of a previous post. This is easily justified in global cost benefit terms, but of course with a global externality like CO2 emissions, the benefits are global, but the costs local.

 

What this means is that there is a clear self-interest for the wealthiest countries to provide financial support for clean development. Of course it also means that donors will want to ensure that support is directed towards climate related objectives, and not seen simply as a payment in compensation for loss and damage. This could have major implications for the governance and direction of any new dedicated fund, as donors will demand a say in how funds are spent, but the likely outcome is perhaps that there will be relatively few specific alterations to processes and priorities due to “loss and damage” per se.

The massive tasks of mobilising aid and finance for mitigation, adaptation and clean development, much of which is “behind the scenes”, should, and indeed must, continue.

 

HOPES AND FEARS FOR COP 26

 

Alok Sharma, acting as President for COP 26, will no doubt do his best for positive outcomes from this climate summit, not least by announcing his personal conversion to vegetarianism in the interests of our planet, or rather human and animal life on it. 

Climate politics has shifted. The rapid increase in public awareness and concern, both in the UK and internationally, and resulting pressures on governments, make the very real issues impossible to ignore. And as I indicated in my last post, the current government deserves some plaudits at least in respect of the late conversion of its members to acceptance of the climate science, its proposed general direction of travel to net zero, and against the many residual sceptics and deniers in its own party.

But there are big areas for concern.

UK leadership. The Brexit legacy is a first order disaster.

More than most general international agreements, progress and action on promises of emissions reduction depend heavily on a high degree of trust between major players. For COP 26 the behaviour and standing of the host nation are important. We have come a long way down since Tony Blair put the UK on the moral high ground as the first nation to enshrine serious climate targets in law. In particular the UK has    

·         shown a willingness to break solemn treaty commitments (the NI Protocol) within months of signing

·         seeks trade deals with major climate culprits Australia, without climate conditionality, and

·         ignores consequence of substantial additional carbon emissions from shipping, with such deals

·         chosen to support an extremist Polish government of climate denialists against the EU

·         has been at best ambivalent over development of its own coal, oil, and gas resources.

·         chosen in the last week to reduce taxation on internal flights

·         wasted time and goodwill on an irrelevant and trivial spat over fishing rights with a supposed ally

The Big Emitters. China, India, Russia and the USA.

China and India have huge populations and the potential for disastrous levels of future emissions. The USA, as the biggest historical emitter, remains an equally serious concern, mainly because of the irresponsibility of Trump and the American Right, while Russia is another major power with huge fossil fuel interest. But for all these countries COP 26 sits in the frame of other internal and external political agendas.

If the world’s biggest polluters – America, China, industrial Europe, India, Russia and others – meet their responsibilities fully then the worst of the climate catastrophe can be averted. (Independent)

And there are causes for hope. India and China are also among the countries at the greatest risk from the impacts of climate change, and are perhaps making more progress than is normally recognised in the Western media. Russia has a 2060 net zero target and argues correctly that cumulative emissions matter more than arbitrary dates for zero. Whether all this translates into meaningful headline commitments at Glasgow is much more doubtful.

All about the money. Jeffrey Sachs: ‘I see no financial obstacles to getting to net zero by 2050’

A consistent theme in international climate negotiations has been the necessity for large scale financial transfers to the Global South. Since the responsibility for limiting climate change to 1.5^o or 2.0^o will ultimately and inevitably fall on the wealthier countries with the deepest pockets, aid to support low carbon initiatives will turn out to be more cost effective, for the donors of aid, than the ultimate alternative of direct carbon capture. The issue here is not whether those transfers happen, but how large they need to be, division of the burden, and how we can be sure the resources are deployed effectively.

The other financial dimension will be domestic resources for low carbon infrastructure – for decarbonising power, electric vehicles and low carbon heat systems. But, as discussed previously, the scale of this is of similar or lower order than many other challenges such as late 20^th century oil price shocks. There will be similar “Who pays?” questions but they sit within the wider framework of policies to limit inequality and protect the poor.

One easy win. But will we get it?

Bitcoin and other crypto-currencies impose huge carbon footprints for activities with no real value. International agreement in Glasgow to discourage these should be a simple win-win agreement between governments. But will it happen?

The last chance saloon?

Huge hopes are invested in COP 26, but whether it succeeds or fails, itself hard to measure, it will not be the end of the story. With "success" it may perhaps be the end of the beginning. But "failure" will just mean the issues will just need to be pushed with even more persistence in the years ahead.

 

STAKEHOLDER DECISION-MAKING: UNDERSTANDING SIERRA LEONE'S ENERGY SECTOR

 

The Sierra Leone power sector suffers multiple problems of inadequate capacity and finance. Most of the population does not have access to electricity, and supply is often unreliable. At the same time the country has been trying to implement significant structural and economic reforms, aimed both at government policy objectives and more market-driven operation. The focus of the paper is to achieve a better understanding of current decision making processes and issues, in terms of their impact on inception, planning, and implementation of projects and on operations. This should assist consideration of organisation and governance for the sector. Key findings relate to the conflicting frameworks of market driven pressures and government or policy driven objectives, and lack of a clear pathway for change. Resulting problems include misaligned goals, un-clear or inconsistent communication channels and ambiguous responsibilities. The final open access version of a recent article by Malcolm McCullough’s Oxford team on this subject is now available online. See link below.  Stakeholder decision-making: Understanding Sierra Leone's energy sector

https://authors.elsevier.com/sd/article/S1364-0321(21)00381-6

THE IPAT EQUATION AND THE KAYA IDENTITY. A CONVENIENT MEASURE FOR UNDERSTANDING CLIMATE ISSUES?

 

What Matters Most?  Population, GDP Growth or Technology.

A common theme in popular discussion of climate change, or rather of whether mitigation is feasible, is its attribution to different factors, notably population growth or economic growth, and the reliance of solutions on technology. This also affects any discussion of historic responsibility for CO2 emissions. It is a highly emotive subject, particularly in relation to population control or the limitation of growth, so it is at least worth a cursory look at what the hard statistics tell us.

The so-called IPAT equation represents a general description of human influence on the environment: IMPACT (of CO2) = [POPULATION] X [AFFLUENCE] X [TECHNOLOGY]. A popular and useful way of interpreting this for CO₂ emissions for the energy sector is the so-called Kaya Decomposition. Affluence is measured as GDP per capita and technology is further decomposed as energy per unit of GDP, and CO2 emitted per unit of energy. The Kaya identity[1] is:

Global Picture. The IPCC Fifth Assessment Report (2014) provided a useful breakdown of changes in global CO₂ emissions over several decades, based on this identity:

In the three decades from 1970 to 2000, population growth and increasing incomes contributed similar amounts to the rise in emissions, but the energy intensity of GDP fell quite sharply contributing a significant saving to the level of emissions that might otherwise have been expected.

The energy intensity of GDP was a significant offsetting factor, whose importance rose in 1990-2000, possibly reflecting the longer term impact of higher energy prices and uncertainties in the 1970s and 1980s. However efforts to reduce the carbon emissions associated with energy use played only a limited role in reducing emissions. This is unfortunate since reduction of dependence on fossil fuels  this is a key component of emissions reduction hopes, and this factor actually moved in the wrong direction from 2000-2010, again reflecting in part the Chinese dependence on coal.

From 2000 to 2010 the importance of rising incomes rose relative to population factors, reflecting inter alia the rapid growth of the Chinese economy. The overall outcome was particularly depressing as the decade showed a sharp increase in emissions and lessening impact of the mitigating factors.

Major regional and temporal differences

But this decomposition can change significantly over time. Global averages also conceal major differences  between countries, and there are some optimistic signals. A similar but more recent chart for China (Safonov reference below) shows overall reductions (to 2016), and significantly more reductions attributable to less energy intensive GDP and less carbon intensive energy. For China, population growth has not been a significant factor over this period, but income growth continues to be so.

China recent emissions

Similarly more optimistic trends have been observed in the USA to 2015, but with higher influence from population, less from economic growth, and significant reductions attributable to less energy intensive GDP and less carbon intensive energy consumption. 

An interesting comparison of country by country decomposition for periods before and after the financial crash of 2008 is given in a fairly recent paper by Sadorsky, referenced below. It shows huge diversity in findings between countries, exemplified in the following chart for four countries:

NB. This chart has a rather more complex interpretation, as it represents the changes between two very distinct periods. The reader is referred to the Sadorsky article

Kaya factors. The future.

Given the pace of reduction required to reach net zero by 2050, the Kaya emphasis will have to shift to much greater emphasis on decarbonising energy. Population cannot be subject to substantial percentage reduction, and the drive for higher incomes is unlikely to stop. There is some scope for further weakening of the link between affluence and energy use, but the heavy lifting will depend very substantially on decarbonisation of energy, starting with the power sector and expanding the power sector into transport and heating.

References:

IPCC Fifth Assessment Report.

George Safonov's Lab. National Research University Higher School of Economics, Moscow. Long-term, Low-emission Pathways in Australia, Brazil, Canada, China, EU, India, Indonesia, Japan, Republic of Korea, Russian Federation, and the United States. December 2018.

Sadorsky, P. Energy Related CO₂ Emissions before and after the Financial Crisis. Sustainability 2020, 12, 3867. https://doi.org/10.3390/su12093867

Dr Ajay Gambhir, Neil Grant, Dr Alexandre Koberle, Dr Tamaryn Napp. The UK’s contribution to a Paris-consistent global emissions reduction pathway. Grantham Institute. Imperial College. 2 May 2019.

Public Utilities Fortnightly. First Look at 2015 CO2 Emission Trends for the U.S.

For a fuller “actuarial explanation and justification for the Kaya identity, this reference may help  Kaya identity_JC Final 050219.pdf (actuaries.org.uk)

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[1] Since the identity is multiplicative, a logarithmic transformation is usually used in the calculation of the factor contributions.

Principles for the effective integration of renewable or low carbon energies into national or regional power systems.

This is the substance of a recent talk I was asked to give at a recent COP26 roundtable in Turkmenistan. It is an attempt to summarise, for policy makers, some of the general principles we have learned in the course of the Oxford Martin School Integrate project.

…………………………………………………………………….

First, the context. A low carbon power sector has a central role in reducing CO2 emissions and making progress towards zero carbon. This is not just because fossil-based power has high emissions and we already have numerous technologies for low carbon generation. A low or zero carbon power sector means we can progressively use electricity solutions to reduce CO2 emissions in other major categories, notably transport and heat.

The task then is developing and integrating renewable and other low carbon energy resources into power systems that deliver what we need and expect. The main factors that have to be respected and reconciled are the following:

·         Power systems require flexible responses to balance real time supply and demand.

·         Low carbon sources (mostly) lack the flexibility of traditional thermal generation plant using coal oil or gas.

·         Renewables output can be intermittent and unpredictable

Today I am going to summarise some of the general principles we have learned in the Oxford Martin School. The principles apply not just to the UK but in virtually all power systems. However, lesson one is that every country and every network is different, in terms of its available resources, its climate, weather and seasonal effects, and the needs of its consumers. So the best choices for the future will also be different.

Framing the Policy Choices

We have used this diagram to represent the task, and the large number of questions that need to be addressed. The potential resources and activities that we can manage, the options available to the power sector, are shown in the top row - generation, storage, networks and consumption. Costs are generally coming down.

The policy instruments that we have to manage these options can be categorised, in the left-hand column, in terms of technology and innovation, the wise use of markets and price signals, social engagement in the process of change, and finally the whole framework of law, organisation, policy, regulation and governance on which the sector depends.

There are 16 cells in this 4x4 matrix, and there will be important questions in almost all of them.

Starting with the resources, choices involve selection from a long menu, much of which I am showing on this slide. Virtually all the items here feature in the UK as part of our likely solutions, and they are all potentially important. I will just comment on a few highlights.

·         When we look ahead to planning the power sector, we have to look not only at the current use and applications of electricity but also at its substitution for other fuels in new applications, especially transport and the provision of heat. This implies coordination across sectors.

·         Electric vehicles especially have the potential to play a huge part in the operations of the power sector.

·         Interconnection. The recent power crisis in Texas has highlighted the importance of interconnection and the risk of isolation.

·         Solving the storage problem is one of the most challenging parts of the exercise, at least from a technical and economic perspective.

·         Consumers are also a vital part of the system, technically, economically, and politically. They merit a separate conference on their own.

Technical and technology choices

The choices have to be complementary rather than exclusive. This will involve substantial computer modelling of alternative combinations to find out what works best.

So the balance, getting the right mixture, of solar, wind, biomass and other sources is essential. For the UK, for example, meeting seasonal variations is very important, implying a higher ratio of wind to solar.

Storage is going to be important everywhere. Battery technology and pumped hydro, possibly some interconnection, combined with the ability to make use of more time-flexibility in consumer demands, will mostly be more than adequate for smoothing daily variations. But inter-seasonal storage is potentially a much bigger problem, unless the capital cost per unit of energy stored can be greatly reduced. The most promising answer appears to be conversion of renewables output into high energy forms which can be stored more cheaply. Hydrogen may be the preferred long term storage option at the present time, but there are other contenders.

In the UK, a bigger issue than seasonal storage may turn out to be risk of prolonged periods of low wind. Some modelling has simulated the effects using weather data over the last 40 years, and this has proved a useful exercise.

Markets and prices

These issues have related to technical planning, and available innovations, but there are also major implications for markets, governance, and the management and control of the sector. Turkmenistan and the UK have very different starting positions. Turkmenistan starts from a position of government ownership and control of the power sector, and supply to many consumers has been free. The UK has private ownership and some market structures but also has increasing government involvement in underwriting new low carbon investments, and in ensuring coordination within the sector. Despite these differences, I believe that there are some important common principles.

One is how to choose the most efficient plant to operate. In the UK we call this the merit order. As we progress towards low carbon economies, this will normally imply the plant with lowest CO2 emissions per kWh. In the UK and Europe this means that a price has to be attached to emissions and that must impact on the economic choices made for the sector. But it is also true that the task of managing power systems effectively with high renewables presents new challenges. In the UK we are also having to re-examine the methods that we use to get the most efficient operation of the system. The optimisation methods designed for a world of coal and gas generation are not necessarily the right ones for a low carbon system.

Consumer tariffs are very important. They are central to the ecology of the power sector as the primary means of communication between production and consumption. The priority attaching to reduced emissions is such that this should be reflected in cost reflective pricing. Tariffs are even more important if we need to promote more flexible demand. We expect to see some profound changes in the nature of the services provided by electric power in meeting consumer needs.

Finance and Governance

My last big economic issue is financing. It is widely held that collectively the world has a glut of savings waiting to be invested in useful projects. Also, the cost of capital is at historically low levels. But to access that capital, for any country or industry dependent on external or private finance, it will be essential to demonstrate that the investment is going to be well managed. The institutional structure is important for that and also for successful implementation.

This means ensuring a good and stable legal and institutional framework within which low carbon investments can be delivered, and one that banks, the World Bank and others, or other investors, can rely on. That of course depends on the commitment of governments, in the UK as much as anywhere, to low carbon objectives.

ASTRAZENECA AND THE VACCINE CONTRACT. VON DER LEYEN’S INEXCUSABLE BLUNDER

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Prima facie the contract, now published in redacted form, is pretty clear and appears to support the  Astrazeneca position. Meanwhile the Commission’s threats to intervene across a range of vaccine export arrangements not only represent the worst kind of vaccine nationalism, but also threaten the wider credibility of governments (not just in the EU) across a range of vital public policy concerns, from public health to energy and climate.

The basics are well known. Astrazeneca has hit production problems at its European plants, a common problem with new pharma products, and has had to reduce its estimated deliveries in the next few months. Most such contracts, with a new product and new facilities, necessarily include best endeavours clauses to protect the producer, and this is no exception. Interpretation of such clauses can give rise to legal disputes, but the main issue between the parties in this case appears to be whether those best endeavours can be deemed to include the diversion of supplies promised to other parties under earlier contractual obligations. Since this at the centre of the dispute, it is worth understanding the detail.

If AstraZeneca had made multiple promises which were in conflict with one another, there might be a cause for a major contractual dispute. But in this case, at least on first inspection and according to the EU, the question seems to be the slightly simpler one of whether best endeavours under the contract should oblige AstraZeneca to divert supplies already under production to satisfy its UK client, including those produced in UK plants. If AstraZeneca’s claims are correct then the EU Commission is guilty of the worst kinds of vaccine nationalism and government bullying.

Read the contract! It tells you exactly what AstraZeneca promised!

The specific obligation that is set out in the contract appears under the heading Manufacturing and Supply. It reads as follows:

5.1. Initial Europe Doses. AstraZeneca shall use its Best Reasonable Efforts (BRE) to manufacture the initial Europe doses within the EU for distribution, and to deliver to the Distribution Hubs .... following authorisation ….  [my italics]

Prima facie this is an obligation of BRE in respect of EU manufacturing plants (which do not include those of the UK). This does not appear to confer a right to access supplies ordered much earlier by the UK.

Game over. Or is it?  Two other claims have been made: first that the UK should be deemed to be part of the EU, and second that UK manufacturing plant is mentioned in the contract. Unfortunately for Von der Leyen and Kyriakides, both claims are demolished by a careful reading of a later section.

The relevant section in this case is 5.4 – Manufacturing Sites. In summary it is dealing with the question of where AstraZeneca is permitted to produce under the contract, reflecting the obvious concern that any such facilities should meet European standards. In summary it obliges AstraZeneca to make BRE to use EU or UK sites as far as possible. They may use other non-EU non-UK sites, but only after obtaining EU permission. It also states another remedy for the EU, if production is delayed. This is that the EU may present to AstraZeneca a list of firms (CMOs) with whom they can contract.  AZ is to use BRE to contract with these CMOs to boost production capacity within the EU.

This clause also defines the UK as part of the EU, but only for the purpose of this clause, 5.4. In other words the EU in 5.1 cannot be considered to include the UK. Clause 5.4 does not refer to any obligation on the delivery of the initial dose. It is solely concerned with permissions for where AstraZeneca should be allowed to manufacture, and possible steps if production is delayed.

Personally, therefore, I have found it very hard to find an interpretation of the contract that supports the Commission’s position, although no doubt other legal challenges and arguments may be made.  This contract is of course only one element in the pandemic crisis, and we all know that ultimately solutions depend on international cooperation. As it happens, the UK vaccine bets have paid off and it should soon be in a position to share some of its good fortune, whether with its EU neighbours or through the offices of the WHO, with others.

The Political Fallout is Bad News

I have long been an enthusiastic supporter of the European project, but the Commission’s inept management of the EU vaccine programme, followed by its abysmal tantrum over a not-for-profit contract with a firm that has developed one of the world’s leading vaccines, is utterly inexcusable. To assert an unsustainable interpretation of a contract makes it worse. With its clumsy and hastily reversed Article 16 intervention on the Irish border issue, it has undermined the Northern Ireland Protocol, with potentially disastrous ramifications for the Irish peace process and its own single market. It has damaged the credibility of Western democracies just at a time when they should be recovering from the twin disasters of Trump and Brexit. Fury at the Commission’s performance will not be confined to the UK, is widespread in the member states, and we need to see some high-level resignations, preferably soon.

Falling Credibility in Government and international Bodies is also a Disaster for Climate Policies

The damage cannot be confined to the immediate issue. International agreements depend on good faith, and investment in climate measures depends on the ability of governments to commit to and honour contracts. The Commission has managed to damage both these fundamental building bricks at the same time. This is bad news for the COP 26 climate conference later this year, and its longer term effects may well play out in higher than necessary costs of capital for the climate-related investments we all need to make. A climate coalition with Europe should have been the UK’s best policy. That now looks increasingly problematic.

GLOBAL BRITAIN. IS COP 26 THE GREAT OPPORTUNITY?

 

It ought to be, but our government is hamstrung by its own ideologies, its recent history, and our decision to cut adrift from Europe.

The next climate summit COP 26 is so important for our collective future that we should all hope for  a resounding success. The question will be whether the UK is up to the task of delivering on the promise, and achieving worthwhile agreements and commitments. A lot depends on the ability of the summit host to persuade and cajole. Alok Sharma, the Business Secretary has been charged to work full time on preparations for COP 26, and, encouragingly, is quoted as recognising that “the biggest challenge of our time is climate change and we need to work together to deliver a cleaner, greener world”.

On the positive side, the UK does bring some strengths. Tony Blair gave the UK a genuine world first in the 2008 Climate Change Act, targeting an 80% reduction (from 1990 levels) in emissions, the first time such a national target had been introduced into law. The UK is able to claim significant reductions in its own emissions, even if these largely reflect the special circumstances of its gas for coal transformation of the power sector and the off-shoring of emissions that resulted from the Thatcherite de-industrialisation of the 1980s and 1990s. And it has important strengths both in policy formation and in science, both vital for the future.

And growing environmental awareness provides an auspicious international backdrop for climate action. 2020 saw some of the highest global temperatures on record, alarming heat and record wildfires in the Arctic, and record tropical storms in the Atlantic. Even if these and the Australian bush fires are not all directly attributable to global warming, and other factors are indeed often at work, the impact on the public consciousness has been huge.

Even the covid pandemic plays into the wider Green agenda that our failure to protect our global environment has been a huge mistake, with the indications of connections between declining wildlife habitat and the probability of viruses jumping the species barrier.

Finally 2020 has seen the stunning electoral defeat of arch science denier and fossil fuel promoter Donald Trump. Covid-19 has proved not to be a hoax, and so has climate science. The biggest single obstacle to international progress, the intransigence of the USA on climate issues, has softened even if not wholly removed, at least for now.

But this is also where the credibility problems of the current UK government begin. It is not helped by its poor and embarrassing record in appeasing the disgraced Trump, partly in its desperation to find international, and particularly US, support for Brexit.  “… this opportunity is dependent upon Mr Trump’s presidency. Without him the US would be offering no support for Brexit and would be seeking to frustrate it.” (Rees-Mogg, 2018)

The bigger problem is that the Tory party has over a long period been the home of the most vocal climate sceptics – Lawson, Redwood and many others. Moreover “climate hoax” claims,  and more muted efforts to reject or ignore the implications of climate science, are strongly associated with the tendency to theological belief in Brexit (with Lawson fronting the Brexit campaign), an observation I made in this blog in 2016, and which many others, including The Economist, have made subsequently.

Nor is the Tory ideological commitment to low public spending and a small state easy to sustain in the face of the kind of crisis provoked by climate change (or by covid-19 for that matter). Action to reduce emissions, to promote electric vehicles and alternative heat provision, and to mitigate the effects of climate change, are all going to require huge infrastructure spending, policy interventions, and financial commitment by governments everywhere.

But the more interesting challenges for British commitment to climate goals will come in relation to its ambitions for international trade, and its fragile trading relationship with Europe. In July 2020, the EU launched a consultation on proposals for a border carbon adjustment mechanism, effectively a carbon tax imposed on imports from countries deemed to have less rigorous emissions policies than the EU. This provoked predictable outrage from Trump and much of corporate America, but the concept will also have longer lasting and more subtle effects on trade. There are powerful arguments for this kind of tax, to allow a “level playing field” in trade, and to prevent carbon and jobs “leakage” to countries that refuse to cooperate with low carbon goals.

It is very likely that a such a carbon tax, applied at borders, would impact initially only on highly energy intensive sectors such as steel, aluminium and cement. My own view is that pushing it down to other sectors may prove much more difficult in terms of measuring carbon content, with complexities that may make current issues with “rules of origin” look comparatively simple. But the effect on trade negotiations is likely to be more subtle, with pressures to imitate and endorse EU climate targets.

The consequence is that for the UK to operate successfully as the host of COP 26, this initiative is likely to push it closer to the EU position on convergence of trade policy and climate objectives. This is almost certainly in the UK’s short, medium and long term interest anyway, but may be a hard pill to swallow in the aftermath of the bitter divisions, internal and external, of the last four years. Even if the USA, under Biden, adopts a much more progressive position, major players, such as India, Brazil and others, will be much more resistant. The Brexiter reliance, at least in terms of political rhetoric, on new friends and trading partners, will make effective international  influence more difficult. But that of course is just one more negative consequence of leaving the world’s largest free trading block in the first place. A climate coalition with Europe remains the UK’s best policy.

CARBON EMISSIONS AND TRADE WITH CHINA

Should we be doing more to limit our trade with China, if we are serious about having a global effect on emissions rather than concentrating on purely domestic issues?

[Third in a series originating in a set of questions put by sixth form students. 
I should also thank Environmental Change Institute colleagues. 
Their ideas have inspired a number of my comments.]

Trade and climate connections are many, so a full answer has several dimensions. They relate to the amount of CO2 emissions embedded in the manufactured goods we process, to comparison of manufacturing methods and energy policies in different countries, to fuel use in shipping, to the international norms that govern trade, and potentially to the enforcement, if any, of international agreements.  

In the current international system of accounting for greenhouse gas emissions, they are generally attributed to the country where they enter the atmosphere, regardless of where any final products go.  This limits our understanding of the full impacts of our own national consumption.  One illustration is the apparently very substantial reduction in UK emissions since 1990. Closer examination reveals this was due, not just to the coal to gas transition or the growth in renewable energy, but in large measure to the de-industrialisation of the UK in the 1980s and 1990s under the Thatcher government. In other words since 1990 the UK has exported much of its manufacturing industry and the CO₂ emissions that went with it. The reduction in our carbon footprint is less than we occasionally pretend.

So it is sensible to look beyond the patterns of energy use within the UK, as well as beyond our own personal choices within the home and in personal travel. There will be an embedded carbon footprint in all the goods and services we purchase. If we all reduced our consumption of manufactured goods, but especially those that have a high carbon content, then that would certainly be an important impact. It is not always easy to tell which are the worst industries in causing emissions, but one recent report by the World Bank has claimed that the fashion industry is responsible for 10% of global emissions, more than aviation and shipping combined.

[1]

 Policies on trade

 It’s almost impossible for individual consumers to make meaningful calculations of the carbon footprint of different products, but we can collectively make sensible choices through trade policy. It will be important to trade with countries that have strong environmental policies and are willing to take action on reducing emissions, and setting meaningful targets, like the European Union. Goods produced in those countries will, over time, tend to have a significantly lower carbon footprint than others, especially as their emissions reduction policies start to bear fruit.

Those policies are now starting to impact on, and create tensions for, trade policy. As the EU seeks to avoid simply exporting its own manufacturing to countries with less commitment to reducing emissions, it is proposing measures that will ultimately amount to a carbon adjustment tax at the border, for countries that are not part of the EU’s own ambitious emissions reduction programme. We should expect to see this, and its reconciliation with WTO rules on trade, as a major source of controversy over the next few years.

And imports from China?

However most of the UK’s international imports (and their embodied carbon) are not from China.^[2]  China accounts for only about 7% of UK imports, about the same as France but with a higher proportion of manufactures, and significantly less than the USA and Germany at about 11% each. A further complication is that the carbon footprint of your purchase will depend on how what you are buying is manufactured in China, and whether the process there results in more or less carbon emissions than it would if you were buying a similar product from somewhere else. 

But we should be careful not to overstate the negative impact of China on our carbon footprint. China currently has a very high share of the world's manufacturing and the emissions that go alongside; and they also have what is almost certainly an excessive amount of coal-fired capacity, much of which is under-utilised and may eventually be retired early. On the other hand they have also been very active in developing and promoting low carbon technologies, including wind, solar and nuclear. And they are themselves very vulnerable to climate change so they have some strong incentives to improve. 

Shanghai, 2011. Coal barges on the Yangtse.

China has other emissions problems, particularly with city air pollution.  The Chinese city of Shenzhen, with a population similar to London, has 17,000 electric buses (in part to improve air quality), whereas London has 200.  In terms of emissions generated per head of population, China ranks well below Saudi Arabia, Australia, the United States and many other countries, although surprisingly it is above France.

Does distance matter?

Surprisingly, and although shipping is a significant contributor to global emissions, the carbon footprint of the freight involved in trade will be a small part of the total and will usually be less important than the footprint involved in manufacture. Other things being equal it makes sense to trade with your neighbours, but other than for obvious bulk items or sometimes for lower value perishable items where air freight is involved, the distance to market will not usually be a critical factor.

Benito Mueller gives an interesting example.^[3]  “According to DfID, … the emissions produced by growing flowers in Kenya and flying them to the UK can be less than a fifth of those grown in heated and lighted greenhouses in Holland.”

But emissions from freight and food miles are topics for another day.

And the lessons from this analysis?

The carbon footprint of the manufactured goods we buy does matter.

“Fast fashion” accounts for a surprisingly high proportion of global emissions.

We cannot avoid the connections between climate-related issues and trade policy.

China accounts for quite a small proportion of our total imports.

Distance will usually be less important than the carbon content of the means of production in different countries. Food miles will not always be a good indicator of environmental credentials..

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[1] I have not so far found an authoritative estimate of the contribution of motor manufacturing, but its contribution appears to be less than 10%, although it is clearly one of the larger contributors.

[2] Parliamentary research briefing. Number 7379, 5 November 2019. Statistics on UK trade with China.  https://researchbriefings.files.parliament.uk/documents/CBP-7379/CBP-7379.pdf

[3] Food Miles or Poverty Eradication: The moral duty to eat African strawberries at Christmas. Benito Mueller. Oxford Energy and Environment Comment. October 2007.  https://www.oxfordenergy.org/publications/food-miles-or-poverty-eradication-the-moral-duty-to-eat-african-strawberries-at-christmas/?v=79cba1185463

DEATH OF THE WASHINGTON CONSENSUS

From the pure doctrines of neoliberal thinking the intellectual pendulum has been moving back from market fundamentalism towards more ambivalent and centrist positions on the role of policy interventions by the state. Nowhere is this more true than in the vitally important power sector and its pivotal position in addressing climate issues. A major review from within the World Bank confirms this trend.

The phrase Washington Consensus was first used in 1989 by the economist John Williamson to describe prescriptions on policies for macroeconomic stabilization, opening of markets to trade and investment, and the expansion of market forces within domestic economies. Subsequently, and to his dismay, it was given a wider meaning, to refer to a more general orientation towards a strongly market-based approach (sometimes described as market fundamentalism or neoliberalism). The distinction is huge, and Williamson has argued  that his original, narrowly defined prescription is now  broadly taken for granted, enjoying the status of "motherhood and apple pie", but that the broader meaning, as a kind of neoliberal manifesto, "never enjoyed a consensus in Washington or anywhere much else" and can reasonably be said to be dead.^[1]

We are now seeing the gradual but measurable decline in influence of the more fundamentalist market philosophies that have dominated the last 30 to 40 years. For much of that time, the power sector, long a natural monopoly, has been in the nature of a laboratory for market-centric philosophies. A  main obsession of policy makers in the power sector has therefore been pursuit of a so-called market liberalisation agenda. Nowhere was this more prevalent than in major international institutions. These included the Energy Directorate of the Commission of the European Union, in its vision for a single integrated European energy market, and the World Bank, in its prescriptions for developing countries. The prescriptions were often strongly influenced by what came to be known, perhaps inaccurately, as the Washington Consensus. For electric power this meant several key characteristics:

·         vertical and horizontal unbundling of what were often fully integrated utilities; corporate separation of generation from the wires businesses of the transmission (high voltage) and distribution (low voltage) networks, and also from retail supply, and also division into multiple entities in generation and distribution.

·         the establishment of an independent regulator for the sector, and formal regulation of the residual elements of natural monopoly.

·         privatisation of all the unbundled entities.

·         ensuring the maximum of competition in all aspects of the sector, but particularly in generation and supply.

Paradoxically for an industry that had always, due to its combination of economies of scale and real time command and control, been regarded as a natural monopoly, reforms to open up the sector also became something of an icon for free market enthusiasts. If this industry could be converted to a collection of markets then anything was possible.

Progress in Europe

The UK had led the way when it came to reform. In 1990 the UK wholesale market was deregulated, competition was promoted and the industry was privatised. The European Commission enthusiastically encouraged other EU countries to follow this lead and liberalise their electricity markets. This was the dominant direction of travel, even if progress was both slow and partial. In France, in particular, the market is dominated by state-owned nuclear power, has a single transmission and a single distribution company, and remains one of the most successful power sectors in Europe, as is indicated by the comparative price figures shown below.

Meanwhile the UK, after attaining something close to theoretical perfection by the late 1990s, has, over the last 10 to 15 years, abandoned a number of the basic tenets of the fundamentalist philosophy. Government has intervened both through the introduction of price caps[2] and by making major decisions on, as well as underwriting of, new investment in generating capacity. Unsurprisingly leading free market enthusiasts such as Carlo Stagnaro[3] now write that “…in the EU, and the UK in particular, the liberalisation of the electricity market is rapidly being reversed and replaced by old-fashioned command-and-control policies.”

There are a number of good (as well as less good) reasons for this dramatic shift in policy direction.[4] An important one is the increasing emphasis on policy for reducing CO₂ emissions, where the EU’s emissions trading scheme (ETS) has proved inadequate to the task of generating realistic carbon prices consistent with ambitious emission reduction policies. Another is the intrinsic failure of liberalised market structures to provide the incentives necessary to induce new investment in long life generation assets. A third is a failure to adapt spot markets designed by and for fossil generation plant operators as they become increasingly unworkable in a world dominated by the technical characteristics of renewables, nuclear and energy storage. A fourth is that even in its most liberalised form the power market has always retained significant elements of command and control, as well as a significant and complex role for the network operators who remain as natural monopolies.  And, finally, competitive retail markets, where they exist, have not delivered significant benefits to consumers and do not command widespread public approval.

But the bottom line is that the paradigm of energy markets free of significant intervention has been quietly dropped. Certainly, privatisation of the monopoly network components of the sector, with effective regulation, has brought some efficiency gains. But governments have also recognised their continuing responsibility for maintaining reliable and sustainable supply. In the UK there has been a dawning realisation of the need to reverse direction and head downhill from the sunlit uplands of the reform purists, and will shortly see it meeting an EU still struggling half-heartedly towards the summit.

And in developing economies? A recent ESMAP[5]  (World Bank) review suggests a major loss of faith in the Washington Consensus.

In the home of the Washington Consensus, the World Bank has long been attempting to improve power sector governance in developing countries, often using the liberalised market paradigm as an ideal. The typical underlying problems in much of the developing world are well known. They include arbitrary and inconsistent political interference in the sector, inadequate cost recovery (which in turn limits funds available for investment), and managerial inefficiency in state monopolies. World Bank prescriptions invariably contain many sensible proposals to remedy these problems, but they also pushed the comprehensive free market agenda far too hard in a sector that had always been recognised as one of the most difficult in which to create a genuine and effective competitive market. The  results were predictable. An extremely valuable recent review[6]  by ESMAP reviewed experience across a wide range of countries. The lessons are revealing. 

Only one in five countries implemented both vertical and horizontal unbundling of utilities, separating generation transmission and transmission from distribution and creating multiple generation and distribution utilities. Restructuring is intended primarily as a stepping stone to deeper reforms, and countries that went no further tended not to see significant impacts. Indeed, restructuring of power systems that are very small and/or poorly governed … can actually be counter-productive by reducing the scale of operation and increasing its complexity.

Only one in five developing countries has been able to introduce a wholesale power market during the past 25 years. … A demanding list of structural, financial, and regulatory preconditions for power markets prevents most other developing countries from following suit.

Many countries announced reforms that did not subsequently go through, and some countries enacted reforms that later had to be reversed.

Although many countries enacted solid legal frameworks, the practice of regulation continues to lag far behind. For example, while almost all countries give the regulators legal authority on the critical issue of determining tariffs, this authority is routinely overruled by the governments in one out of three countries. … cost recovery remains an elusive goal.

Among the best-performing power sec­tors in the developing world are some that fully implemented market-oriented reforms, as well as others that retained a domi­nant and competent state-owned utility guided by strong policy mandates, combined with a more gradualist and targeted role for the private sector.

Where distribution utilities were privatized, countries were much more likely to adhere to cost-recovery tariffs. This however is a confusion of cause and effect. It will normally only be possible to persuade private investors to participate if financial viability has already been guaranteed by tariff reforms. Requiring a newly privatised business to implement tariff reforms will tend to discredit the private sector by blaming it for higher prices. 

Market reforms can be helpful in improving the overall efficiency and financial viability of the power sector, and in creating a better climate for investment. However, they cannot—in and of themselves—deliver on these social and environmental aspirations. Complementary policy measures are needed to direct and incentivize the specific investments that are needed.

This is a complex and revealing story of modest successes and disappointing failures. The theoretical ideals of unfettered competitive markets and minimal state involvement have proved to be less important than much more basic goals of good governance, limiting arbitrary political interference and patronage, introducing cost covering tariffs and improving revenue collection (eg by reducing illegal abstraction). Much of this depended simply on making power sector entities into commercial organisations rather than organs of government.  All these basic reforms were in any case preconditions for the success of more ambitious targets, such as privatisation or functioning spot markets for energy trading. And developing countries will be under international pressures to face the same policy challenges as the developed world in terms of sustainability; this will continue to limit the scope for “hands off” policies for the energy sector.

The Way Ahead

To a very large extent the power sector is the future of low carbon energy provision, and its organisation is therefore a vitally important matter to everyone. The “Washington Consensus” will have had some notable achievements in promoting independent regulation, transparency, formal separation from government and a more commercial approach. But the more ambitious aspirations, for pure market structures free of policy interventions, have remained out of reach. The central importance of the sector, especially in the context of sustainable policies to address the issues of climate change, mean that governments are increasingly likely to play a major role in monitoring and supporting low carbon policies for the power sector.

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[1] This summary paraphrases a Wikipedia article on this subject which also references Williamson’s observations on the subject.

[2] Earlier posting of April 2016. PRICE CAPS.  HYPOCRISY GOES INTO OVERDRIVE, BUT ARE WE WITNESSING THE DEATH OF NEO-LIBERAL PRINCIPLES FOR THE ENERGY SECTOR?

[3] Stagnaro  is a Senior Fellow of the Italian free market think tank Istituto Bruno Leoni. His comments can be found in a 2016 article Whatever happened to electricity market liberalisation?

[4] A much fuller discussion of these issues can be found using the tab LOW CARBON POWER on the top bar

[5] The Energy Sector Management Assistance Programme of the World Bank. “ESMAP is a partnership between the World Bank Group and 18 partners to help low and middle-income countries reduce poverty and boost growth, through environmentally sustainable energy solutions. ESMAP’s analytical and advisory services are fully integrated within the WBG’s country financing and policy dialogue in the energy sector.”

[6] Rethinking Power Sector Reform in the Developing World, ESMAP Background Paper, September 2019. https://www.esmap.org/rethinking_power_sector_reform