Public authorities need to provide the right financial, regulatory and legal framework in order to boost the development of technologies that capture or sequester CO2 produced by coal-fired power plants, according to Shell Vice President Jeremy Bentham and Chief Economist Steven Fries. The pair spoke to EURACTIV following the presentation of Shell’s 2008 Energy Scenarios.
Jeremy Bentham is vice president for the Global Business Environment at Royal Dutch Shell. Dr. Steven Fries (no image shown) is the company’s chief economist.
With your new Energy Scenarios to 2050, you have introduced a new concept, TANIA (There Are No Ideal Answers), which takes account of the inertia of the current energy system and that no big changes can be expected in the energy system in the short to medium term. The big challenge at the moment, however, is that answers need to be found rather quickly. What is Shell’s take on this?
Bentham: If I could just take a step back and take two steps forward. The TANIA acronym was There Are No Ideal Answers. It really speaks to the fact that many people hope for a silver bullet that resolves the tensions of the three hard truths: demand, supply and environmental tensions. They look to a single technology that they advocate, or a single regulatory process, that they hope will resolve all the tensions. But there are no single silver bullets. There will be a portfolio of actions that in better or worse ways can address the tensions.
Is this a reference to the EU’s very ambitious targets on renewable energies?
Bentham: Indeed, if you read the press or look at what is in the popular media, you will naturally find people who are advocating various forms of energy. Whether that’s nuclear, wind, solar, biofuels or heavy oils, we look at it and don’t say it’s ‘either or’, these are both ‘and’. The tensions in the energy system will take both the development of complementary energies and also the attention to energy efficiency to manage those tensions. So rather than talking about a silver bullet, and may I use an Americanism here, we talk about silver buckshot. There are a number of things, all of which have to contribute.
How would that look in proportional terms given the EU’s 20% renewable energy target? Do you think it is realistic? How would you describe the different proportions between renewables, energy efficiency, nuclear etc.?
Bentham: If I take it very broadly to the whole scenario period to 2050, if there was no action taken and there was a business as usual scneario, if there weren’t any environmental or supply/demand constraints, then by 2050 you’d have about 2.5 times the amount of carbon dioxide being emitted as now. You’d be using over twice the amount of energy that you’re using now.
Under the realities of the three hard truths, the ‘scramble’ outlook has about 80% more energy use than now. There is a huge impact on energy efficiency, and the blueprints outlook has about 60% more than now.
So another big step is energy efficiency. And both of the outlooks have about 30% of energy coming from renewable resources. So that is the kind of change that takes place over time. These things take time simply because of the natural investment periods of the energy system. I like to take the example of a car. In twenty years, a car will still be driving somewhere in the world if it has just come onto the road now.
Even the ‘blueprints’ scenario looks rather gloomy. You are pointing to 60% more energy use and therefore more CO2 emissions…
Bentham: No, not 60% more CO2 emissions. The energy use, the energy mix and application of key technologies such as carbon capture and storage (CCS), the development and deployment at scale of electric vehicles, as well as renewables developments, means that by 2020 you begin on a downward path of emissions. So emissions still continue to grow up to 2020, but then they begin a downward path. So in that outlook, they are approximately the same as the level in 2000 by 2050.
How do you see the respective roles of governments in industry in accelerating this change? You obviously feel more threatened by regulation than ever before, isn’t that right?
Bentham: Threatened? No no! We believe that regulatory action is a pivotal part of being able to accelerate the developments that are required.
How do you see those regulatory initiatives taking shape?
Bentham: I think there are probably two areas.
Critical areas are technology policy and CO2 pricing in one form or another. Clearly if you are going to manage something that you believe is valuable, like the CO2 space in the environment, you need price signals that channel investment decisions. So CO2 pricing is the mechanism for shaping the choices that people make amongst the available options.
But the available options aren’t enough. You actually need to bring forward the additional options. So you need a technology policy that brings forward developments such as CCS, because there is no framework for that at the moment. You have to have the developments around the permitting and liabilities. But you actually have to have the developments that will create channels for investment.
In our scenario of really aggressive accelerated change, by 2050 you have 90% of fossil fuel power stations in the OECD equipped with CCS. You have 50% of those in the emerging economies, meaning thousands of applications. Currently there are zero, and there are no incentives for channeling investment that way.
So how can this be done in a global context? There are initiatives to accelerate technology transfers as part of the global negotiations launched in Bali. How do you see that taking shape?
Bentham: There are different views on different instruments. One of the things about our blueprints scenario is that you begin to see a patchwork of instruments being tried out, and then the ones that are more successful are the ones that are adopted. So which instruments are tried out depends on a complex set of political matters.
Fries: I think the crucial challenge is to have the intellectual property, the new ideas, the new technologies developed and demonstrated. I think you need a mixture of instruments to push that technology forward. A range of fiscal supports that can help accelerate the outlays on research and development and demonstration of these new technologies. There is no simple formula for founding the right fiscal mechanisms to do that. There are a range of possibilities, but it is important that access to fiscal supports comes through some form of competitive process.
Could you be a bit more specific perhaps? Do you mean fiscal support in the form of tax breaks?
Fries: State subsidies in one form or another. In the UK example, the funding mechanism for their CCS demonstration project is particularly interesting, where it is essentially encouraging consortia to bid on the amount of top-up you would require on the future CO2 price in order to pool CCS. So it’s a way of structuring the top-up on the CO2 prices. So that is building on the cap-and-trade mechanism, not competing with it. It is taking some of the risk away from early investment. So I think that is a concrete example of how policy is designed.
Would you see this rolled out to other European countries?
Fries: Fiscal policymaking differs between countries. One type of funding mechanism might work well in one country but not in others. The UK has a long experience of private finance mechanisms or public-private partnerships. That reflects the design of that particular mechanism. But other countries may be less comfortable in going down that route. It is imperative that these mechanisms are brought forward either on a member state level or at the EU-wide level to accelerate technology development, be it CCS or other forms of renewables. Then there is a separate issue of how you facilitate the transfer of technology to the developing world. But you have to first get the technology before you think about transferring it.
Bentham: It is clear there are very important links between energy policy, environment policy and fiscal and budgetary policy. These do tend to get looked at in isolation. It is no surprise that, over time, the European energy system, if you look at it in terms of being an advanced economy with so much coming out of the service economy and so much coming out of energy efficiency, is twice as efficient as the US economy in terms of energy per head. That is partly the impact over time of applying fiscal policies that have valued energy more highly and hence encouraged a lower energy consuming economy.
These things need to be looked at in parallel. If I can just step back to your question on what industry can do and what regulators can do. I think it is about looking at focus areas like cap-and-trade, CCS and reduced CO2 emissions in the transport sector, notably through the use of tighter efficiency standards and second-generation biofuels.
Concerning CCS, the EU is hoping to realise 12 demonstration projects by 2015. You mentioned tax incentives. Is that one of the ways to accelerate it or do you see other ways?
Bentham: The demonstrations are only partially about technology demonstrations. But there also have to be some on how you go about permitting and managing the liabilities of these areas, and ultimately point towards a long term funding mechanism. Currently, EU policy is in a situation where it is saying “We need to have these, we want to have these demonstration projects, we don’t have the funding mechanism”. That doesn’t work. You need these mechanisms that bring together private and public finance to make these demonstrations happen.
Fries: I understand the current situation in the EU. Essentially, the budgetary allocations are fixed to 2013, so the first fiscal opportunity to increase support in this area would be after that period of time. So if you want to bring forward the demonstration of CCS then you need to look at either ways of committing future budget spending which is essentially what the British did, or the alternative that we suggested is to allow multiple emission allowances under the EU ETS, as a way of providing what is in effect an off-budget subsidy.
But as far as I understand the multiple EU ETS allowances option has already been ruled out…
Fries: Yes, but the important point here is that the development of these technologies and demonstration is accelerated in some way. We’re going to have to be creative in finding the mechanisms that accelerate this.
Jeremy Bentham: Look there are three ways you can do it. Either you can find space on the budget which seems to be ruled out; you can make future budgets which is what the British have done; you can move off budget, you fund it through ETS, or the alternative way is you increase costs to consumers and so you allow CCS to be used to fill your renewable obligation, considered a low carbon obligation rather than a renewable obligation.
We can have discussions, and want to have discussions, with the regulators about how different instruments would work. But our ultimate focus is to say what we can do in the technology, and how we can collaborate in bringing forward these demonstration units, given that the instruments are there.
Moving on to the research policy area, isn’t that one of the major areas where there is improvement to be made at EU level?
Jeremy Bentham: Research is always an important area, but we are technology companies, so we think research is very important. We think of four Ds. If we think something is going to have an impact at scale in the next 50 years, it is already out of the lab. This is about demonstration and deployment.
Jeremy Bentham: What the really smart competitive area is now is looking at how to accelerate demonstrations and deployment as much as what we need to get new things in the lab.
Which one do you think in particular? You mentioned hydrogen…
Jeremy Bentham: I think they will be determined as much by lobbying and policy development as by the intrinsic technologies themselves; so again you look towards a level playing field in terms of encouraging deployment of technology, rather than something that excuses one way or the other.
How do you see the public funding of research? Isn’t it time to come up with a clear model?
Steven Fries: We’re active and supportive collaborators in a number of programmes, the technology platform, and we have seen progress through those in terms of bringing different industries together, and the public and private sector together. These are now good building blocks for moving forward. But I do see that they are all running to the same issue.
The next step is the financing of deployment at scale so you have the creation of a joint technology initiative which commits funds into the next stage. That’s still a large pre-deployment phase of activities. Labeling something ‘biofuels’ clearly isn’t enough because there are more or less sustainable biofuels.
In the power sector the long term encouragement of renewables through consistent policy is important and effectively stops as you create uncertainties discouraging investment. There’s a huge amount of energy efficiency developments in buildings and appliances that are feasible. On many energy efficiency issues, I wouldn’t say it’s a fiscal issue, there are other impediments to consumers. If you look at the straight economic aspect, then investments in energy efficiency pay off. The fiscal supports are more critical when you’re looking at the development of alternative forms of energy. More needs to be done to bring down the costs of the alternatives more quickly and perfect these technologies.
Energy efficiency improvements are often delayed because they happen on a very small, individual consumer scale. Can you describe one or two ways to address this?
Steven Fries: For the individual consumer these are complex areas, so people look into institutions to help simplify and help manage complexities. When you mention buildings, then at the point when the building is built, the permitting frame around that is very important and the difference in energy efficiency of buildings in different places and different countries of the world. The turnover of buildings in the economy is low. Refurbishment happens frequently, so when something is up for refurbishment, there is a requirement that it is refurbished.
Concerning impacts on energy prices and consumers: did you put a price tag on your blueprints scenario? Can you give an indicator?
Jeremy Bentham: Naturally people think that if I have, say, a CO2 price, then that directly increases the cost to the consumer of this energy. We actually work through the dynamics of the scenarios. What you saw was the combination of that and other energy efficiency activities, and the impact of that in the decision processes is of energy exporting nations that ultimately the price to the end consumer in our blueprints scenario actually was lower than the price to the end consumer in the scramble scenario. So this is because you increase that, but the playing through of that on longer term incentives for energy efficiency and then stop on the decision processes of an exporter who is seeing the exporting markets are getting more efficient. Pricing their resources earlier leads to overall pricing dynamics that are effectively more neutral for the consumer. So that was an interesting discovery.