Friday, November 23, 2012

This Energy Bill is all about tax revenues from North Sea gas

The Energy Bill compromise is about revenues to the Treasury to help pay off the budget deficit before the next election.

The position on renewables in Britain stands in stark contrast to that north of the border.

The Scottish Government is hoping for independence after 2014. 90% of Britain's oil and gas is in Scottish territory. The Institute of Fiscal Studies is arguing that revenues after the possible independence would be split between the two nations proportionately on the basis of population.

But oil and gas production dropped 18% last year. It will continue this inexorable decline in years to come.

The Scots know this. That's why they are aiming for 100% renewable electricity by the end of this decade. They reckon they will even have more to spare. Perhaps to sell to England and Wales. At this rate, England and Wales are going to need it.

Perversely, George Osborne, David Cameron and the rest of the Conservatives are determined to hitch the UK's wagon to Qatar, from which most of our gas flows: there was a moment two weeks ago when almost 100% of Britain's gas fired power stations were running on gas imported from that Arab country.

But why would they do that?

Many authorities have commented on the volatility of gas prices. They are only likely to rise, affecting each and every one of us and the economy as a whole.

The Committee on Climate Change, in its report, Household energy bills – impacts of meeting carbon budgets, said "Of the total £455 increase [in typical household energy bills between 2004 and 2010] (i.e. 75%, compared to general price inflation of 16% over the same period), by far the largest contributor was the increase in the wholesale price of gas, which added around £290 to bills.”

And Ofgem agrees. In Why are energy prices rising?, we read: “Higher gas prices have been the main driver of increasing energy bills over the last eight years”.

But, forget this. Forget, even, Qatar. This decision is directly related to what the Exchequer receives from North Sea gas extraction.

A dash for gas means a market for Scottish-English gas as well. High gas prices mean higher revenues for the Treasury.

I have prepared this chart of Government revenues from UK oil and gas production, available from figures published here.

North Sea Gas and oil Revenue

Most of this revenue comes from the Ring Fence Corporation Tax, rated at 30% and separate from other corporation tax, which was introduced under New Labour. This prevents taxable profits from oil and gas extraction in the UK and UKCS being reduced by losses from other activities or by excessive interest payments.

It explains why George Osborne gave away £500 million towards further gas and oil offshore exploration in September. As he said at the time, it's because he will get it back in spades from revenue to come: “It will give companies the incentive to get the most out of older fields, creating jobs and delivering more revenue for taxpayers.“

The revealing thing is what happens if you plot oil and gas revenues against total tax revenues.

Then we find, that in the crunch tax year, 2008-2009, oil and gas revenues were at their highest as a proportion of all tax revenue: 2.56%.

As the recession hit, it fell again. The following two years it was at 1.37% and 1.67%, but it has begun to rise again to 2.04% in the current financial year. There have only been three years in the last 20 when it is gone above 2%.

Here are the full figures:

Year% of revenue from oil and gasTotal revenue (£bn)

Treasury predictions for the next four years show this percentage to fall dramatically, but this is only because there are wildly optimistic expectations for tax revenue to increase in this period, to £70.4 billion in 2016/17, compared to £55 billion in this financial year.

Now consider this: renewable energy does not provide such an income. In fact it’s a cost, because of the subsidies.

Conclusion: the Energy Bill compromise is not about what happens after 2020. That couldn’t be further from Osborne’s mind. It's about revenues to the Treasury to help pay off the budget deficit before then.

To put it bluntly, it's about who wins the next election, since it will most likely be determined by how well Osborne has managed the economy.

Monday, November 12, 2012

Britain's carbon capture dream is over after EU cash refused

Chris Davies, the Liberal Democrat MEP who led discussion of the funding in the European Parliament
""That's nearly £500 million of investment in northern England and Scotland that George Osborne just threw away," tweeted Chris Davies, the Liberal Democrat MEP who led discussion of the funding in the European Parliament.

A failure by the British Government to provide details of funding guarantees means that none of the carbon capture and storage (CCS) projects it put forward will receive funding from the European Union.

According to Chris Davies, the Liberal Democrat MEP who led discussion of the funding in the European Parliament, an EU official speaking on condition of anonymity said the reason for the decision was “a lack of funding detail".

A spokesman for the Department of Energy and Climate Change (DECC) said it had not been informed of the decision and refused to comment.

Under the NER300 competition, governments of Member States propose CCS and renewable energy projects for financial support from sale of greenhouse gas emission allowances from the EU European Emissions Trading Scheme by the European Investment Bank.

Chris Davies said the failure was "a devastating blow" to British hopes of becoming a world leader in CCS technology.

"The government has no excuse,” he said. “The EU funding mechanism was only introduced as a result of British pressure and for us not to take advantage of it is simply woeful."

CCS, which captures carbon emitted from the generation of electricity by burning fossil fuels and places it underground, is supposed to play a key part in the British Government's plans to meet its carbon emission reduction targets, especially under the Energy Bill.

Funding details may have been omitted from the application to the EIB pending finalisation of the contents of this Bill, which is due at the end of this month, and which is the subject of continued conflict between the Treasury and DECC.

"That's nearly £500 million of investment in northern England and Scotland that George Osborne just threw away," tweeted Chris Davies on hearing the news.

The Government submitted two projects at the end of October: Progressive Energy consortium's pre-combustion coal gasification project on Teesside and Alstom's 'White Rose' oxyfuel capture system at Drax's proposed new 304 MW coal-fired power station in North Yorkshire.

It is not clear if the same decision applies to the Sound of Islay tidal renewable energy project that was put forward for funding by the Government.

Britain's attempts to become a world leader in this currently unproven technology is now in a complete shambles.

Firstly, a previous competition which it held to fund pilot schemes fell apart over a year ago, as it proved too expensive and had to be relaunched.

There was no shortage of applicants in the second round, but, to much astonishment, the favourite project was not selected by the Government last month. This was the Don Valley Power Project, which had already earned first place among all NER300 CCS proposals.

DECC might have taken this unexpected decision because it wanted to maximise the UK’s overall financial return from NER300. NER300 support for Don Valley would have amounted to €130 million only, while the project replacing it, UK Oxy CCS Demo, would have got funding of €337 million.

Now it looks like DECC won't get any funding at all.

Europe must adopt a 30% emissions reduction target

With any luck we are about to see a shift in action on curbing carbon emissions.

It's not just that the annual United Nations climate change talks, COP-18, begin at the end of this month at Doha in Qatar. Nor is it that with the re-election of Barack Obama there will be a renewed impetus in the American Senate to get a climate change bill passed.

Over on the other side of the world, Australia's Climate Change Minister Greg Combet has said his country will sign up to a second round of the Kyoto Protocol, joining the European Union and just a handful of other major greenhouse gas emitters in recommitting to the world's only climate treaty.

The Kyoto Protocol, negotiated in 1997, required wealthy nations to limit their emission of greenhouse gases by 5.2% on average for the period 2008-2012 from 1990 levels. It is due to expire at the end of this year.

Through the UN climate change negotiations, countries are attempting to thrash out a replacement treaty. If successful, it would be agreed by 2015 and take effect in 2020, and it would include emissions targets for developing nations such as China and India as well as developed countries.

To date, only the European Union and a handful of other small developed nations have signed up to Kyoto 2, which is intended to start in 2013 and continue until such time as when a new agreement comes into effect.

Japan, Russia, Canada and, currently, the US are among the countries refusing to sign up to Kyoto 2. They want a non-binding agreement.

New Zealand has already said it will not follow Australia.

But Kyoto 1 and 2 has been widely criticised. The main candidates for alternative action are a carbon tax activated at national levels, and a network of regional emission trading schemes.

Already, a carbon tax is back on the agenda in the US and the UK.

Republicans are not expected to be enthusiastic; they dislike taxes. The main American proponent of a carbon tax is prominent NASA climate scientist James Hansen. His proposal is to tax carbon at source, whether oil, gas or coal, with a 100% dividend returned to citizens in equal shares, under the principle of the “commons", that every citizen has an equal right to a portion of the sky.

It is estimated that citizens would each get $3,000 to spend as compensation for the tax.

A similar tax has been in place in Canada's British Columbia for four years and is currently under review. The income from the tax is spent on public works.

But how high would a carbon tax need to be to make a significant difference in the consumption of fossil fuels? Consider the amount of tax (60%) already on a litre of petrol. Does it deter us from driving?

Would it make a difference if the price of a barrel of oil was doubled with a $100 tax? That would put up the cost of a litre of petrol to almost £2.

You can imagine the public reaction, even with a cash dividend. The thing is, it’s a blunt instrument. It affects some people more than others.

British Columbia's tax has been introduced gradually and reaches about 5% of the price of fuel. The review will tell us whether or not it has made any difference at all to consumption levels. The jury is yet out.

Hansen distrusts "cap and trade" agreements such as the Kyoto Protocol, and says why in chapter 9 of his book Storms of My Grandchildren.

But that isn't stopping Korea and China from going ahead with their own local schemes emissions trading schemes. On November 15 a presidential decree in Korea will see a mandatory ETS introduced from 2015 for 60% of South Korea’s total greenhouse gas emissions.

The purpose of an ETS is to minimise the cost of meeting a set emissions target. The Korean ETS and most of the Chinese pilot schemes have watched the European Union's ETS become swamped with excess credits and the price of carbon bomb to an ineffectual level.

To prevent this happening in their schemes, they plan to include the use of market stabilising checks and balances to enable them to adjust to external factors such as significant and sustained changes in gross domestic product. These are said to include: a strategic reserve, limitations on banking and borrowing and a ceiling and/or floor price.

Japan has its own scheme, as do Switzerland, New Zealand, California and a number of other American and Canadian states linked together in the Regional Greenhouse Gas Initiative and the Western Climate Initiative.

If such schemes become more common and the European scheme can overcome its current problems, international trading in permits is an attractive way of achieving reductions at the lowest possible cost. This is because it is cheaper to abate or eliminate a ton of carbon dioxide in some countries than in others, and the market automatically gravitates towards the cheapest solution.

In other words, is not such a blunt instrument. On the other hand, a huge amount of money gets wasted and goes into the wrong pockets.

The question is, whether any of these proposals will get us where we want to be fast enough. The answer depends upon the level of political ambition for the level at which an overall target for, or cap on carbon emissions is set, which in turn depends on the amount of public concern.

European environment ministers met at the end of October to discuss the European Union negotiating position at Doha, and what to do about the EU ETS' glut of allowances.

It emerged from their talks that Europe has already beaten its target of 20% emission reductions by 2020 with eight years to spare.

A leaked draft of the Commission's report on the EU ETS says that there will be a surplus of at least two billion allowances next year, rising in the following years. Removing just 1.4 billion of these would be sufficient to let Europe reach a 30% target by 2020.

This would align the scheme with Europe's 2050 climate goal of reducing emissions up to 95% below 1990 levels.

It's this kind of ambition, at least, which is necessary.

The British government supports a 30% target. It should do, it is already ahead of the game. Officials have been arguing for it for some time.

Europe should immediately adopt such a position and, in three weeks time, take it to Doha and challenge the world to follow suit.

Monday, November 05, 2012

Obama must win for the world to have a chance of beating climate change

Here's the logic of this post:
  1. The latest science says we're heading for over 6 degrees C warming.
  2.  Romney will do nothing but make this worse
  3.  Obama must win
  4. Then go to Doha and help broker a global pact on limiting emissions.

Following Hurricane Sandy, and more bad news on climate change today , there has never been so much at stake in an American election for the rest of the world.

If this is not a wake-up call, I don't know what is.

Hurricane Sandy was the worst storm to hit the eastern seaboard of the United States in living memory.

In one dramatic moment, that will end up costing American taxpayers billions of dollars, it has succeeded in doing something by powerful demonstration that no other amount of evidence or eloquence has succeeded in doing: it has brought climate change, at the last moment, into the presidential election agenda.

In its wake, the mayor of New York, Michael Bloomberg, has thrown his support behind Barack Obama. The latest issue of Bloomberg BusinessWeek carries on its cover the slogan: “It's climate change, stupid!"

In an editorial, it says: "Climate deniers exploit scientific complexity to avoid any discussion at all. Clarity, however, is not beyond reach. Hurricane Sandy demands it: At least 40 U.S. deaths. Economic losses expected to climb as high as $50 billion. Eight million homes without power. Hundreds of thousands of people evacuated. More than 15,000 flights grounded. Factories, stores, and hospitals shut. Lower Manhattan dark, silent, and underwater."

The latest scientific climate change research, arriving with chilling timing in my e-mail box today, points to disaster for the planet unless something drastic is done. Current rates of decarbonisation mean that global average temperatures are heading to a disastrous 6oC of warming. This would render much of the planet uninhabitable.

The news comes from fresh analysis by financial consultants PwC. Their Low Carbon Economy Index measures the progress of developed and emerging economies towards reducing emissions linked to economic output. Its latest issue says "To limit global warming to 2oC would now mean reducing global carbon intensity by an average of 5.1% a year – a performance never achieved since 1950, when these records began". [For a copy of the report contact Rowena Mearley, Tel: +44 207 213 4247 or e-mail]

It adds that any investments in long term assets or infrastructure, particularly in coastal or low-lying regions need to address far more pessimistic scenarios.

This message seems almost pointedly directed at the East Coast of the United States this week.

On October 31, the New York Times published an article which explicitly linked Hurricane Sandy to climate change.

It said “the storm surge along the Atlantic coast was almost certainly intensified by decades of sea-level rise linked to human emissions of greenhouse gases. And [scientists have] emphasized that Hurricane Sandy, whatever its causes, should be seen as a foretaste of trouble to come as the seas rise faster, the risks of climate change accumulate and the political system fails to respond". It quotes in support Thomas R. Knutson, a research meteorologist with the government’s Geophysical Fluid Dynamics Laboratory in Princeton, N.J.

Hurricane Sandy came hot on the heels of the intense summer drought, which also powerfully affected much of the United States.

Americans now know first-hand some of the effects of climate chaos. It's not happening in some remote atoll of the Pacific Ocean, or in the estuarine delta of a poor, developing country. It's happening right in their homes. It is affecting their power supply, the price of their food, their livelihoods. It's costing lives. It's going to put up insurance premiums.

Most Europeans have not been subject to the same ideologically-driven debate over climate change as Americans have in the last decade. They have not been deprived of the true facts of the situation, or misled by compromised politicians.

Facts have a great way of cutting through ideology. During the Cultural Revolution in China, millions died as a result of ideologically-driven policies on agriculture. The authorities responded with denial and cover-up, because the alternative was to admit that their leaders were wrong. But now we know the truth, sadly too late for those peasants who suffered death by starvation.

Americans need to know that their leaders have been wrong, before it is too late.

There is no doubt that Obama's policies on climate change are better than Romney's, who said in his acceptance speech for the GOP nomination: “President Obama promised to slow the rise of the oceans and to heal the planet. My promise ... is to help you and your family”. That phrase should return to haunt him now.

But for Obama to have spoken out loudly on climate change before now would have, paradoxically, worked against his best interests. Instead, he has during his campaign repeatedly shown support for oil, natural gas, shale gas and coal as well as renewables.

That has not been an obstacle for Bill Clinton, who is on the campaign trail himself. On Tuesday he said: “All up and down the East Coast, there are mayors, many of them Republicans, who are being told, ‘You’ve got to move these houses back away from the ocean. You’ve got to lift them up. Climate change is going to raise the water levels on a permanent basis. If you want your town insured, you have to do this.’ In the real world, Barack Obama’s policies work better”.

The president of the World Resources Institute, a former special envoy for climate change at the World Bank, who also happens to be British, has commented on the fact that both presidential candidates have largely avoided mention of climate change by saying: “Political discourse here is massively out of step with the rest of the world, but also with the citizens of this country. Polls show very clearly that two-thirds of Americans think this is a real problem and needs to be addressed.”

We have to hope that Obama wins the poll this week. Romney has opposed Democratic initiatives to regulate emissions from power plants and vehicles. He has promised to reverse Obama’s air quality regulations. He has said he will renegotiate the auto efficiency standard of 54.5 miles per gallon by 2025 that automakers agreed to this year.

Obama, speaking last week in Iowa, has promised to continue support for wind power projects and federal tax breaks for them, which Romney wants to end. “My plan will keep these investments, and we’ll keep reducing the carbon pollution that’s also heating the planet, because climate change isn’t a hoax. The droughts we’ve seen, the floods, the wildfires, those aren’t a joke. They’re a threat to our children’s future. And we can do something about it.”

He is right. Romney is wrong. It's as simple as that.

Obama must not just win a second term. He must then lead the world in the COP 18 climate change negotiations this December in Doha to a proper, legally binding agreement.

America, the world's greatest polluter, has avoided this responsibility for over a decade, and the PwC report reveals the consequence of this.

There has never been so much at stake for the rest of the world in an American election.

The world is heading for a ”carbon cliff” - PwC

PwC's Jonathan Grant
PwC's Jonathan Grant says "we are heading for a carbon cliff" unless habits are changed.
PwC is warning today that the world is heading for 6°C warming unless emissions of greenhouse gases go into reverse.

The annual rate of reduction of carbon emissions per unit of GDP needed to limit global warming to 2°C has passed a critical threshold according to new analysis in the PwC Low Carbon Economy Index, published today. This measures developed and emerging economies' progress towards reducing emissions linked to economic output.

It demonstrates that at current rates of emissions growth, at least 6°C degrees of warming could be possible by the end of the century, which would result in large parts of the world becoming uninhabitable.

While last month, Britain topped a European league table for reduction of greenhouse gas emissions, it is by no means clear that this reversal will continue, as Government policy is to maximise oil, gas and coal extraction, and to build a new generation of gas-fired power plants.

The PwC report

The PwC report shows that to limit global warming to 2oC would now mean reducing global carbon intensity by an average of 5.1% a year, a performance never achieved since 1950, when these records began.

PwC's director of sustainability and climate change, Jonathan Grant, says that "we are heading for a carbon cliff" unless habits are changed. "Even doubling our current annual rates of decarbonisation globally every year to 2050, would still lead to 6oC, making governments’ ambitions to limit warming to 2oC appear highly unrealistic.”

Andrew Sentance, PwC's senior economic advisor, says that "Government policies must radically change", and that for business this "represents an opportunity as well as a risk".

“The challenge now is to implement gigatonne scale reductions across the economy, in power generation, energy efficiency, transport and industry, as well as REDD+ in forested nations,” added Grant.

With less than four weeks to the UN Climate Summit in Doha, the analysis illustrates the scale of the challenge facing negotiations. The issue is further complicated by a slow market recovery in developed nations, but sustained growth in E7 economies which could lock economic growth into high carbon assets.

Emerging markets’ previous trends on carbon emissions reductions linked to growth and productivity have stalled, and their total emissions grew by 7.4%.

By contrast, the UK, France and Germany achieved record levels of annual carbon emissions intensity reductions, but were helped on by milder winters.

Examining the role of shale gas, PwC’s report suggests that at current rates of consumption, replacing 10% of global oil and coal consumption with gas could deliver emissions savings of around 3% a year (1gt C02e per annum).

However the report warns that while it may “buy some time”, it reduces the incentive for investment in lower carbon technologies such as nuclear and renewables, and could lock in emerging economies with high energy demand to a dependence on fossil fuels.

America has been exporting the coal it would have burnt had shale gas not displaced its domestic use, so, globally, a shift to shale gas in one country alone makes little difference to overall emissions.

This underlines the importance of reaching a global deal at Doha, PwC says.

UK oil, gas and coal extraction

At home, British policy on reducing carbon emissions no longer appears as consistent as it did until recently.

On 25 October, Energy Minister John Hayes announced 167 new North Sea oil and gas licences, saying that every last economic drop of oil and gas from the North Sea will be extracted.

In answer to a question from Green MP Caroline Lucas last Friday, about whether the effect of this on achievement of the UK's domestic carbon budgets had been calculated, he gave no indication that it had, instead repeating that the Government “aims to secure over time the maximum economic recovery" of the "20 billion barrels of oil equivalent left on the Continental Shelf".

If all this were to be burnt, it would lead to the emission of 872 trillion kgCO2.

Meanwhile, despite a decline in the demand for coal caused by six British power stations having to close by 2016, the coal industry, through CoalPro, their producer’s association, hopes that the industry will be able to maintain a total of approximately 36 working surface mines across the UK, according to the Loose Anti Opencast Network (LAON).

LAON’s latest review of the stage at which 22 current and possible opencast planning applications across the UK have reached, has just come out.

LAON is calling on the Government to align its planning policy with its energy policy. Steve Leary, its coordinator, says: “It is the Government's intention to phase out the use of coal for power generation purposes, leading to a 75% decline in the use of coal for such a purpose over the next 10 years, whilst at the same time, through provisions in the Growth and Infrastructure Bill, it is possibly making it easier to dig the coal out".

He says this coal would probably be exported if not burnt at home.

This morning, activists from the No Dash for Gas campaign who have been protesting at the Government's policy to build a new generation of 20 gas-fired power stations, are ending a seven day occupation of the 300 foot high chimneys of EDF's West Burton 1,300MW Combined Cycle Gas Turbine (CCGT) plant, currently under construction in Nottinghamshire.

Energy and Climate Change Secretary, Ed Davey, has guaranteed that if built, these stations will be exempted from emissions regulations and can continue emitting CO2 unabated until 2045.

Call to decarbonise
In a timely move, the Carbon Capture and Storage Association, the Nuclear Industry Association and RenewableUK have today issued a joint call to Energy Secretary Ed Davey to largely decarbonise the power sector by 2030.

The three associations, representing over 1,000 corporate members, make the request  in a letter  copied to the Chancellor, Prime Minister, Business Secretary and Deputy Prime Minister and Minister of State at the Cabinet Office.

The letter states that including a reference to the objective to largely decarbonise the power sector by 2030 in the Bill would reassure potential investors by lowering political risk and bring the cost of capital down for lower carbon generation.

The organisations stress, however, that any target set in legislation should serve a specific and necessary purpose and not contribute to so-called "target fatigue" in the energy sector; and it