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Sector-Based Approach for “Post-2012”: Electricity Sector and Major Industries Jake Schmidt, International Program Manager Ned Helme, President Pedro Barata, Senior Fellow Center for Clean Air Policy ******* IEA-ENEL Workshop: Sectoral Approaches for Greenhouse Gas Mitigation in the Power Sector 30-31 October 2006 Rome, Italy Presentation Outline ● Sector-based approach » What is it? ● Overview of sector GHG emissions and projections » Global, Non-Annex I ● Overall structural options » Sector-wide & Country-based sectoral ● “Straw” sector proposal » Covered sectors and countries » Establishing the “No Lose” Target » Technology Finance Package » Application to Developed Countries, Emissions Trading/CDM ● Sectoral Program’s potential to maintain 450ppm path » Three Global Scenarios & Preliminary Results About the Center for Clean Air Policy Non-profit Washington, DC, Prague, and Brussels based environmental think-tank committed to advancing pragmatic and cost- effective air quality and climate policy through analysis, dialogue, and education Leader in several international climate initiatives on international emissions trading, the CDM, and post-2012 options » Dialogue on Future International Actions to Address Global Climate Change (the FAD) brings together senior climate negotiators from 30 countries to discuss options for post-2012 climate regime Involved in a number of capacity building and analytical projects in developing countries, including China, India, Brazil, Mexico, and the Caribbean Lead analyst on project to help design the EU CO2 emissions trading system and MRV program. What is a Sectoral Approach to Post-2012 GHG Reductions? ● Bottom-up method for encouraging developing country sectoral (e.g. steel, cement, electricity) pledges and for deriving Annex I country targets ● Based on analysis of what is technologically feasible and economically cost-effective in each industrial sector both globally and in each country ● For developing countries, goal is no-lose target – pledge to reach intensity level in given sector, rewarded if achieved, no penalty if not achieved ● For A1, creates building block for next national target Global Sector GHG Emissions (without LUCF) & Sectoral CO2 Projection 2000 Projections Unallocated Non- 40000 CO2 Gas 3% Other sectors Electricity 35000 6% 25% Residential & 30000 Commercial 8% 25000 20000 Agriculture 14% Unallocated 15000 Autoproducers 3% 10000 Other Energy Industries, 7% 5000 Transport Iron & Steel, 2% 15% 0 Chemical & Other 2000 2010 2020 2030 Petrochemical, Industries, 4% Aluminum, 0% 2% Cement, 3% Year Paper, Pulp and Non-CO2 Printing, 0% Industrial Energy Industry Transpo rtatio n Other Sectors* Processes, 2% Source: Author’s calculation, see Schmidt et al., 2006 Non-Annex I Sector GHG Emissions (w/o LUCF) & Sectoral CO2 Projection 2000 Projections 20000 Unallocated Non- Electricity CO2 Gas 21% 17500 9% Other sectors 15000 9% 12500 Unallocated Residential & Autoproducers Commercial 1% 10000 5% Other Energy 7500 Industries, 8% Iron & Steel, 3% 5000 Chemical & Agriculture 2500 Petrochemical 19% 3% Aluminum, 0% 0 Cement, 6% 2000 2010 2020 2030 Transport Paper, Pulp and Year 9% Other Printing, 0% Non-CO2 Industries Industrial 6% Processes, 1% Energy Industry Transportation Other Sectors* Source: Author’s calculation, see Schmidt et al., 2006 Establishing the “No-Lose” Sector Target ● A voluntary “no lose” intensity target (e.g., CO2 / ton of steel) is established » No penalty for not meeting the pledge ● Emissions reductions beyond the “Contribution to the Atmosphere “voluntary pledge” are eligible for Eligible for Sale sale » As emissions reductions credits (ERCs) for sale to developed countries » Voluntary intensity target effectively becomes the country’s crediting (“CDM”) baseline “Technology Financing and Assistance Package” ● Industrialized countries, international financial institutions (IFIs), and export credit agencies (ECAs) provide a package of technology finance and assistance incentives to help participating non-Annex I countries establish and meet more aggressive “no lose” targets Designed to make these new technologies available to firms in developing countries while providing reasonable profits and property rights protections for the industrialized-country entities that provide the technologies. Scope of amount based upon bottom-up assessment in targeted sectors » Designed to leverage private sector finance » Differing financing tools (e.g., “soft” loans, grants, etc.) would be utilized as appropriate » Financing will decline (and end) over time as these technologies become commercially viable due to economies of scale (e.g., German wind costs) Package could include: » commitments to demonstration and pilot projects » a pool of concessionary financing with WB, ECAs, loans, grants, & securitization » support for development of small- and medium-sized enterprises » Capacity building » Etc. Negotiation Process Negotiation of the program could proceed as follows: 1) Agree on which countries will participate – minimum global coverage needed in each sector 2) Independent agency defines energy intensity benchmark for a given sector as starting point for negotiations – a la Triptych EU process 3) Negotiate a GHG intensity using such factors as the energy intensity BAT, fuel mix, and cost – one for new facilities and one for existing in each sector 4) Link the program to a technology finance package – assistance from tech finance is incentive to stronger pledge levels 5) Link to Annex I target setting process 6) Agree on structure of trading, link to CDM Key Operational Questions? ● What sectors? ● Country-based or Industry-based? ● Structure of the target? ● Creation of emissions reduction credits? ● What role for Annex I? ● Role and structure of a “technology financing and assistance package”? ● How does the sectoral pledge and financing package relate to the CDM? Which Sectors Covered? ● Program could focus on the Energy and Major Industry Sectors » electricity, iron & steel, aluminum, oil refining, cement & lime, paper, pulp & printing » relatively small number of entities, easier data collection, relatively homogenous products (except oil refining and pulp & paper), and operate in international trade (except electricity) » 33% of non-Annex I emissions (2000; w/o LUCF) » 20% of global emissions (2000; w/o LUCF) » Bottom-up definitions (e.g., electricity facilities >20 MW) used to define individual facilities involved in the system » Only direct emissions (e.g., on-site fuel combustion) included for the sectors Source: Author’s calculation, see Schmidt et al., 2006 Small # of Large Electricity Facilities Number of Non-Annex I Facilities with Greater than 100 KT CO2/year (“top 20”) » 1140 facilities in the “top 10” countries; additional 304 facilities in the “top 20” countries Power 500 462 450 400 350 # of 300 250 193 200 150 101 100 68 71 73 56 50 40 40 55 44 50 26 26 11 27 13 29 50 9 0 of of be K) Pa bia iA a an a ela M tan Ni a Re a Th i n a Ko ne d p. za eria sia Ar ta n na Is ndo co Re l a ud fric lo t bi Uz PR ic si p. a, zi Ve ilan Co yp di ra st m e re zu i m re Bra nt i s ay ex Ch kis Sa h A In Eg ki la n Ka g kh (D a ge al M ut n, I So Ko Ira Source: IEA GHG CO2 Database v.2006 Country – based Structure ● Program will aim to include all major developing countries, but at least 80% of sector’s emissions » Country responsible for tracking and ensuring “no lose” targets met ● Variety of approaches could be used: » Ten developing countries w/ the highest emissions in each sector » Sufficient countries to cover 80% of sector’s DC emissions ● Key is to cover enough of the sector to address leakage concerns ● Select internationally competitive industry sectors - for many sectors, small number of countries account for a large share of emissions Possible Thresholds: “Top 10” Small number of non-Annex I countries account for sizeable share of non-Annex I and global emissions for these sectors 20 15 10 Number of Countries 4 7 10 6 5 10 9 2 2 7 3 4 4 0 y teel al e ing ri ci t &S em ic i num to n rin t El ec t roch Al um mes &P Iron P et & Li ulp al & en t er, P mi c Cem Pap Che 80% of NA1 Sectoral Emissions 90% of NA1 Sectoral Emissions Number of participating countries required to cover 80-90% of non-Annex I GHG emissions in particular sectors in 2000. Source: Author’s calculation; see Schmidt et al., 2006 Note: non-metallic minerals is cement and limestone; non-ferrous metals is mostly aluminum Note: See appendix for list of countries implied by this threshold Alternative Structure: Global Industry-based ● Covers all or major actors in the global sector to address concerns of: » Leakage: e.g., firms moving operations from covered to non-covered countries » Competitiveness: e.g., one firm is covered, but its competitor are not We suggest that a sectoral approach be country-based since: » A small number of countries generally responsible for the vast majority of the GHG emissions in each sector – thus competition concerns addressed through participation of small number of countries » Countries have much clearer legal authority to ensure that firms operating within their borders comply with program requirements – establishing a new legal institution to enforce sector-wide targets would likely require lengthy and contentious international negotiations. How is the Target Established? Experts assess and define energy-intensity benchmarks in each sector to use as a starting point for discussions. » Defined as energy intensity of commercially available technology – Separate benchmarks could be established one based upon technological potential and the other reflecting cost – Separate benchmarks for new and existing facilities » Reflects a limited number of the major processes within the sector » Updated regularly to reflect changes in technology Non-annex I countries pledge a carbon-intensity level that they can meet without assistance. » based upon the benchmark, fuel mix, impact on competitiveness of their products, and other factors (e.g., energy security, air quality, and sustainable development) Annex I countries negotiate with developing countries on specific financial and other support–through a Technology Finance and Assistance Package– to encourage non-Annex I countries to ultimately commit to stricter “no-lose” emissions intensity levels. ⇒ Likely negotiation will produce different “no lose” targets for each country, but will begin from the same starting point—the benchmark Emissions Trading ● Emissions Reduction Credits (ERCs) » Earned sector-wide; managed by individual participating countries » Need to be converted from rate-based to a fixed quantity of reductions ● Ex-post conversion conducted every two years » ERCs equal difference b/t “no lose” target and actual intensity target multiplied by actual operations in previous two years » Therefore ERCs calculated two years into the five year target period and at the end ● ERCs eligible into other trading systems (e.g., EU ETS) Developed Countries ● Retain “hard economy-wide targets” (e.g., 30% below 1990 levels)– use Benchmarks as building block similar to the EU Triptych approach » Bottom-up development of the sectors AAUs (e.g., national allocation plans) using the energy-intensity benchmark » Other sector’s targets would be developed and added to the electricity and major industry AAUs to come up w/ the nat’l target ● Helps “Levels the playing field” since the covered sector in both developing and developed countries start w/ the same basis for their target setting » Some differentiation is likely, but moves the int’l process forward in “leveling the playing field” ● Trading allowed to provide covered sectors flexibility to improve cost-effectiveness, helps to offset disadvantage that DCs have sectoral intensity targets rather than hard targets ● Further, for some sectors developing countries are as or more efficient than their developed country counterparts Emissions Implications of the Sectoral Program ● “Top-down” analysis conducted by ECOFYS » Evaluated implications of sector-based proposal on emissions level in key countries & global CO2 stabilization trajectories ● Data, Sectors, & Countries used in the analysis » Data: physical production, energy use, and GHG emissions » Sectors: electricity, iron & steel, cement 91% of emissions covered in this proposal » Countries: – Annex I: EU-15, USA, Japan, Canada, Russia – Non-Annex I: Brazil, China, India, Mexico, South Africa, South Korea 72% of total global emissions; 79% of three sectors’ global emissions ● Three Global Scenarios » “Mild,” “Strong,” and “Sectoral Only” Three Global Scenarios Scenario Condition -15% below 1990 level in Annex I excl. USA 2020 Reduce carbon intensity of production “Mild” +10% above 1990 level in (C/kWh) by 3% per year; growth in USA Electricity 2020 electricity production reduced by 0.5% for EE improvements Non-Annex I Reference -30% below 1990 level in Convergence in CO2/t steel by 2025 to Annex I excl. USA Iron & Steel 2020 0.80 (today’s avg. 1.63) “Strong” USA +0% at 1990 level in 2020 Convergence in CO2/tcement by 2020 to Cement “Sectoral” for electricity, iron & 0.60 (today’s avg. 0.78) Non-Annex I steel and cement “Sector “Sectoral” for electricity, iron & All countries only” steel and cement ● Annex I countries’ economy-wide emissions are limited to fixed quantities » NOT implied that emissions reductions must be achieved » Domestic emissions could exceed these levels if additional ERCs were purchased Annex I countries can purchase ERCs from both covered sectors w/ “No Lose” target or other sectors (e.g., transportation through sectoral CDM) Preliminary Results: Through 2020 52500 Reference 6000 50000 Mild 5000 47500 Only s ectoral Strong 45000 4000 MMtCO2 42500 3000 MMtCOe 2 40000 2000 37500 1000 35000 0 32500 Iron and steel Cement Electricity 30000 27500 Reference Case Sector Program 1990 2000 2010 2020 Non-Annex I country model GHG emissions in 2020 in the electricity, cement, and iron and steel sectors. Global GHG emissions under the sectoral scenarios. Implications for Emissions Stabilization Levels: Preliminary Results 14 12 10 Global CO2 emissions (GtC) 8 6 Reference 4 Mild Only sectoral 2 Strong 0 1990 2000 2010 2020 2030 2040 2050 Global CO2 emissions required to stabilize atmospheric CO2 concentrations at 450 ppmv in the sectoral models. Required reductions for global CO2 stabilization levels after 2020: » 450ppm—Strong: 2.2% per year; Mild: 6.5% per year » 550ppm—Strong: 0.6% per year; Mild: 0.9% per yea Source: Höhne et al., 2005 Conclusions ● Sectoral No-Lose target approach can maintain needed progress in 2020 to stay on course for 450 ppm CO2 concentration goal provided A1 countries take strong targets for 2020 ● No-lose target has political and cost-effectiveness attractions – simplifies current CDM issues ● “No lose” sectoral targets have garnered significant interest among developing countries and other Parties » Mentioned in several interventions to the UNFCCC Dialogue (e.g., Mexico and South Africa) and garnered quiet interest among other countries in CCAP FAD Begins to move int’l process forward by: » Recognizing and encouraging “unilateral actions” by developing countries (e.g., China’s vehicle efficiency standard) » Addressing leakage and competition since all the major players in a given sector participate and starting point for target setting is same energy intensity benchmark » Covering all facilities in a given sector (not just the ones reducing emissions as in the CDM) » Encouraging developing country “contributions to the atmosphere” » Providing specific and targeted technology finance for advanced and more expensive technologies Potentially viable for other secotrs as well, e.g.: » Vehicle efficiency » Appliance and lighting effiiciency References For more information, visit our website: www.ccap.org/international/future.htm Paper on proposal: Schmidt, J., N. Helme, J. Lee. (2006). Sector-based Approach to the Post-2012 Climate Change Policy Architecture. Future Actions Dialogue Working Paper. August. Available at: http://www.ccap.org/international/Sector%20Straw%20Proposal%20- %20FINAL%20for%20FAD%20Working%20Paper%20%7E%208%2025%2006.pdf Hmphreys, K. and M. Mahasenan (2002). Toward a Sustainable Cement Industry: Substudy 8: Climate Change, commissioned by the World Business Council for Sustainable Development, Battelle. IEA. (2003). CO2 Emissions from Fuel Combustion, 1970-2001. Paris, France. IEA. (2006). IEA GHG CO2 Emissions Database, v.2006. Marland, G., T.A. Boden, and R. J. Andres. (2003). "Global, Regional, and National Fossil Fuel CO2 Emissions." In Trends: A Compendium of Data on Global Change. Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory, U.S. Department of Energy, Oak Ridge, Tenn., U.S.A. Available online at: http://cdiac.esd.ornl.gov/trends/emis/meth_reg.htm. Schaefer, D. O., D. Godwin, and J. Harnisch (2004). "Estimating Future Emissions and Potential Reductions of HFCs, PFCs, and SF6." Energy Journal. Scheehle, E. A. and Kruger, D. (2004). “Global antropogenic methane and nitrous oxide emissions”. Energy Journal Dialogue on Future International Actions to Address Global Climate Change (the FAD) Brings together senior climate negotiators from approx. 15 developed and 15 developing countries » Meets face-to-face biannually and through workgroups via conference call to develop specific ideas in b/t meetings. Informal, off-the-record forum to discuss mitigation and adaptation options for a possible post-2012 international framework for climate policy Funding for the project supported by governments of 15 countries. CCAP produces FAD working papers and will produce a compendium in 2006 on the project and options discussed. For all presentations and finalized working papers from the process, see: www.ccap.org/international/future.htm Annex A: Global Sector Emissions in 2000 (without LUCF) World Annex I Non-Annex I -2500 0 2500 5000 7500 10000 12500 15000 17500 20000 22500 25000 27500 30000 32500 35000 MMTCO2 Electricity Unallocated Autoproducers Other Energy Industries Iron & Steel Chemical & Petrochemical Non-Metallic Minerals Non-CO2 Industrial Processes Other Manufacturing Industries & Construction Transport Agriculture Residential Other sectors Unallocated Non-CO2 Gas Source: Author’s calculation, see Schmidt et al., 2005; IEA, 2002; Scheele and Kruger, 2004; Schaefer et al., 2004 Annex B: “Top 10” Non-Annex I Countries for Covered Sectors Top Ten Developing Country GHG Emitters for the Electricity and Major Industrial Sectors Chemical & Cement & Paper, Pulp & Electricity Iron & Steel Aluminum Petrochemical Limestone Printing China China China China China China India India India Brazil India Brazil South Africa Brazil U.A.E. India South Korea South Korea South Korea South Africa South Africa Venezuela Brazil India Mexico Mexico South Korea Chile Indonesia Indonesia Iran South Korea Brazil Argentina Mexico Mexico Saudi Arabia Venezuela Mexico Bahrain Thailand Colombia Kazakhstan Indonesia Iran Kazakhstan Pakistan Thailand Indonesia Kazakhstan Indonesia South Korea Egypt Argentina Thailand Iran Venezuela Macedonia Iran Chile Source: Author’s calculation, see Schmidt et al., 2006 Annex C: “No Lose” Target and CDM ● New pledge process would replace CDM in the sectors and countries participating » ERCs in these sectors generated by exceeding the sectoral intensity target ● For sectors not included in the proposal, CDM would proceed as in the past, but: » Energy-intensity benchmark developed in pledge process would become minimum threshold for CDM baseline for new facilities » CDM Meth process would continue to set precedents for the final CDM project baseline on a project, country, or regional basis as appropriate » Sectoral pledge could create a new sectoral CDM process for these countries Annex D.1: Electricity Generation Efficiency Coal Generation efficiency coal Oil Generation efficiency oil Gas Generation efficiency gas 0.45 0.50 0.60 0.40 0.45 0.40 0.50 0.35 0.30 0.35 0.40 0.30 0.25 0.25 0.30 0.20 0.20 0.15 0.20 0.15 0.10 0.10 0.10 0.05 0.05 0.00 0.00 0.00 EU15 Japan Canada Russia China India Mexico EU15 Brazil USA South Korea Japan Canada Russia China India Mexico EU15 Brazil USA South Korea Japan Canada Russia China India Mexico Brazil USA South Korea South Africa South Africa South Africa Source: Hoehne et al., 2005. Annex D.2: Electricity GHG Intensity CO2-intensity total 100% 1 90% 0.9 80% Renew able 0.8 70% 0.7 kgCO2/kWh Nuclear 60% 0.6 Fossil 50% 0.5 40% 0.4 30% 0.3 20% 0.2 10% 0.1 0% 0 EU15 Japan Canada Russia China India Mexico Brazil USA South Korea Mexico USA South Africa Brazil South Africa EU15 Japan India Canada China South Korea Russia Source: Hoehne et al., 2005. Annex D.3: Electricity GHG Reference Case Emissions 14000 ROW 12000 South Korea South Africa 10000 Mexico India 8000 China MtCO2eq. Brazil Russia 6000 Canada Japan 4000 USA EU-15 2000 0 1990 1995 2000 2005 2010 2015 2020 Source: Hoehne et al., 2005. Annex D.4: Electricity Scenarios Analyzed Scenario Condition Convergence in thermal Aver. Max Converg. efficiency Coal 0.34 0.40 0.42 Oil 0.35 0.44 0.45 Gas 0.37 0.48 0.54 Convergence in CO2/kWh per Aver. Min Converg. fuel Coal 0.96 0.73 0.69 Oil 0.68 0.39 0.4 Gas 0.52 0.27 0.28 Convergence in CO2/kWh Aver. Min Converg. 0.52 0.05 0.45 Reduction on CO2 intensity Reduce by 3% per year Growth in electricity production from IMAGE implementation of SRES scenarios for regions applied to countries. Reduced by 0.5% for improvements in energy efficiency in appliances Annex D.5: Sectoral Scenarios All Countries: Electricity 14000 12000 10000 Mt CO2eq. 8000 6000 Reference Converging thermal efficiency 4000 Convergence of CO2/kWh per fuel Convergence of CO2/kWh 2000 Reduction in CO2 intensity 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: Hoehne et al., 2005.
"Sector-Based Approach for “Post-2012” Electricity Sector and "