Shell executive: We must reform the Emissions Trading System


Shell has joined with other ‘progressive’ businesses to lobby the EU for a much stronger carbon price to incentivise clean energy investments. But Graeme Sweeney insists that it will not compromise on its support for tar sands, gas, and opposition to new efficiency and renewables targets.

Graeme Sweeney is Shell’s Special CO2 Advisor. Until last month, he was the energy giant’s Executive Vice President for Future Fuels and CO2.

He spoke to EURACTIV’s Arthur Neslen at Shell’s Brussels office.

To see a shortened version of this interview click here.

In your meeting with the European Commission president José Manuel Barroso, you argued for green growth as a way of exiting the current recession. How does that square with Shell’s decision not to invest in North Sea offshore wind power because “the numbers don’t stack up”?

We need a growth agenda and the low carbon economy can be part of that. I led the wind business at the time when we made that decision. I think that the lessons we learned building NordZee Wind meant that it was clear to us that others would do this better. Not all solutions will be pursued by everyone, so there’s a matter of the relevance for these things.

Are there any UK government actions like tax concessions or feed in tariffs that might change the macro-economic picture on which you based your decision?

There is a considerable amount of conversation taking place at the moment under the electricity market reform and Shell supports the introduction of carbon floor prices, albeit on the European and not the member state level. We’ve also supported the introduction of the contracts for difference on a technology-neutral basis to allow various responses to the decarbonisation challenge. At the least we need clarity over medium-term targets. It would be extremely helpful to have a conversation now around the level of decarbonisation that is required by 2030 and to have that stated as an overall target, rather than as particular approaches to particular sets of technology.

What was the most positive thing that Mr Barroso told you today?

There are a significant group of companies who are keen to be progressive in seeking solutions to a number of these challenges. The wish for action now was articulated and there is, I believe, clarity over what needs to be done and a way forward around the emissions trading scheme (ETS). I think we’re aligned in the need to get it recalibrated in the context of growth.

Were any specifics talked about?

We discussed the size of the change that’s required – and suggested we’d need to set aside more than a billion allowances from the system. I think that was the key quantification. Lots of business voices are saying they shouldn’t take action so its quite important for the [Commission] to have a conversation with another set of business folk who say actually you should be taking action and not only that, here it is: Here’s what we’d do if we were in charge.

Did you get a positive response to that advice?

The commission are clearly aware that that’s the size of the task and are positively inclined to work to achieve it.

Which of the options being considered by the EU to fix the ETS do you support?

The ‘first principles’ answer to that is: change the cap. But this is not feasible. So we propose a pragmatic way forward which is that we have a set-aside now to resolve the short term issues [that is] substantial enough to impact the price. To create medium term stability, we [must] reform the ETS so that we put in a reserve price at auction and that’s a carbon floor price isn’t it? And the critical point about that is that it manages downside risk from the point of view of investors.

Of course BusinessEurope, which represents confederations of European employers, has taken a strong position against any recalibration of the ETS. Are they speaking for all EU industry?

It must be obvious that it can’t be all of European industry given that it wasn’t the view held by a number of the folks who attended this morning. They take their view on the basis of whatever processes they use internally to derive them.

What particular climate targets would you like to see for 2030 and 2040?

The important conversation here is about the nature of the targets. As we move into the period of commercial deployment, we should have a single target for 2030 for an overall reduction of CO2 greenhouse gas emissions, so that it becomes technology-neutral. In the power sector, by the 2030s you’d want to see that clean technology commands a price that drives the choice for decarbonisation. Maybe the ‘contracts for difference’ in the UK give you an easy transition between the phases.

Would you like to see non-binding targets?

I think the 2030 target should be explicitly binding. It should be expressed as a required reduction in the CO2 content.

Would you prefer low carbon targets to renewable ones?

Renewables are not the same as low carbon. Renewables and efficiency are both low carbon. CO2 capture and storage is low carbon. I think that a decarbonisation target for 2030 will create a mix of technologies and deploy all of these. We need a decarbonisation agenda which has legitimately different ways of stimulating growth in the early stages and, in the period of commercial deployment, a target and instruments that are technology-neutral.

‘Gas with CCS [carbon capture and storage]’ has been talked up as the necessary way of bridging the gap to a decarbonised economy to 2050, but at present the only CCS investments seems to be going to EOR [Enhanced Oil Recovery] projects. Why is that?

Progress on CCS has been slower than we all hoped. The recession has had an impact here. I think that the appetite of everyone for risk has been reduced in the last years. But beyond the EOR opportunity, it’s still part of the long term solution even though it’s likely that the amount of EOR storage space is small compared to the amount that will need to be stored. In the end we may have less CCS demonstration projects than we’d originally planned and they are going to be somewhat later than we hoped. But I think globally there will be enough that – if the knowledge is shared – we’ll still be on track to deliver a commercially viable product by 2030 and I think that’s early enough.

If it’s missed, do you think we’re going to miss the 2 degrees trajectory?

The work done by the IEA suggests we are in a fairly tight window of opportunity now.

What trajectory of global warming do you think we’re currently on?

It is really a task for the climate scientists to give us advice on the consequences of our emissions set. We know that the rate at which we have collectively been making progress is less than that which was suggested by the last IPCC report.

How much concern do you think there really is among the top executives at Shell about that?

It is significant that in 2011 our gas production surpassed our oil production. That’s a substantial change in the nature of our portfolio. Our approach is properly driven from a business perspective. We see this as part of the business environment in which we operate and we see that society’s wish to reduce emissions becomes expressed in the end as a regulation of some kind – whether it is market-based or a mandate. So it’s necessary for us to respond to that changing environment and provide some leadership. We have a multi-billion dollar programme to improve the efficiency of our assets.

In the power sector, we propose a pathway to utilise the abundant supplies of natural gas to decarbonise now, complemented by CCS. We have a billion dollar programme in CO2 capture and storage, and the $12 billion investment in Brazil. The final leg of the story is that we use a $40 a tonne price on carbon in all our forward investment decisions.

What carbon price is needed to incentivise green investment in your view?

I think you need to ask individual investors. The barriers to improved efficiency aren’t really anything to do with the carbon price. The carbon price is a bonus for an energy efficiency investment. It’s in the money anyway and there are other reasons why folk don’t do those kind of investments, all the way through to it’s clear that if the carbon price was the only support for certain kinds of technologies they wouldn’t occur. That’s true.

Can CCS technology survive with the carbon price where it is at the moment?

The requirement for significant member state investment if CCS is to move forward is clear. The carbon price, as it currently is, cannot sustain a demonstration phase for CCS. It’s clear that the member state contribution needs to rise and you’ve seen in the UK a response to that through the introduction of a carbon floor price which benefits CCS and the proposed electricity market reforms, where a contract for differences would be made available to a variety of technologies. It’s clear that CCS needs support in the demonstration phase above the current price of carbon.  

In our last interview you lauded the UK’s carbon price floor and said that Shell would be “looking for jurisdictions in future which are most favourable to execute there”. If the ETS is unable to raise the carbon price effectively, which ‘executions’ would Shell consider moving to the UK and under what circumstances?

The UK’s position on support for CCS is probably the most developed in Europe. As a result we’re working with SSE in Peterhead to put forward a proposal for the UK competition.

How would you respond to people who say that ‘green growth’ is a misnomer because almost any kind of growth now will put us out of whack with a 2 degrees trajectory?

I think that growth – or more accurately, welfare – is key here. I think that we will need to improve the welfare of the many. Over the next 20-30 years we foresee a substantial increase in the number of middle income families, all benefiting from a level of welfare which reasonably replicates that which we benefit from. That inevitably has a call on energy and it will necessarily be more efficient than the historical call.

If we have to effectively double the energy system by 2050, engineering constraints on solutions mean that a renewables industry which grows to the current size of the oil and gas industry in 30 years, compared with 120 years, is going to be a very substantial achievement. As a result of that, there will still be a substantial number of fossil fuels in that forward energy mix, and we believe that there’s a substantial role for gas in that. That’s what leads me to the conclusion that to reconcile those goals, we will need a very substantial deployment of CCS from 2030 onwards. It’s the mechanism which allows that reconciliation.

Does Shell invest in biodiesels?

That’s an interesting question. We do not have a large scale investment in biodiesel production but we do of course purchase biodiesel to meet the European mandate and so on.

Do you find that frustrating when bioethanol is a much better-performing biofuel – and you have a bigger stake in it? 

We support the requirement to have a fuel standard. We’d argue that you need to have a vehicle standard and, if such a thing existed, a consumer driving behaviour standard, to reduce the number of vehicle kilometres travelled, and of course that would also involve more mass transit, wouldn’t it? The vehicle price appears in terms of tailpipe emissions standards and overall efficiency standards and in that context, the hybridisation of vehicles is going to be significant. Our position on that is that you should reward those [fuels] that produce the highest levels of greenhouse gas emissions reductions. It’s clear that volume targets don’t meet all of those goals.

So what would you like to see in the EU’s ILUC [Indirect Land Use Change] proposal for biofuels that’s currently being considered?

It should be based on science and properly measured and there should be a process crediting those who perform to appropriate sustainability standards, rather than one in which you punish everyone for the alleged over-average level of performance in the industry.

Which specific biofuels do you think should be credited?

We believe that sugar cane ethanol is one of the best performers across a number of parameters including the land management issues.

What would you say to people who argue that ‘it’s all very well Shell saying this in an interview but they’re not supporting wind power, they’re not doing much for solar. They only want a strong carbon price to prop up their CCS investments. This is just self-interest wrapped up in green packaging’?

I think we should look to have folks do what they’re good at, rather than insist that they should do everything.

Do you have any sympathy for the EU’s attempts to put a default value on tar sands?

It seems to us that any process which singles out any particular source or process for systematically different treatment from that which is accorded to everything else is flawed.

But environmentalists will say that there’s a contradiction between your stated commitment to decarbonisation, and your complaints that tar sands are being singled out?

Our objection to it is not that its oil sands but that it has been treated differently from all other production methods. It’s not a level playing field. And by the way, I’d point out that we’re about to invest a large sum of money in CO2 capture and storage for exactly the same set of oil sands. That’s the mitigation to the overall level of emissions, isn’t it?

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