The low-hanging fruit waiting in Paris: increasing climate ambition is cheaper than not
Save money – and carbon: Developed nations will save their citizens $160 billion by increasing funding for the renewable energy plans of developing countries.
Nations will save $160 billion by increasing funding for the renewable energy plans of developing countries. By allowing UN-approved carbon credits to co-fund solar and wind projects in emerging markets, OECD countries can contribute to an additional 8 Gigatons of greenhouse gas savings already before 2030, equal to 28% of the total reduction pledges made by the industrialized countries for the Paris climate summit.
New national climate change plans
Most developing countries have tabled plans to increase climate action for the United Nations Paris climate talks currently taking place. There is now an unprecedented commitment from these countries to increase share of renewables in total energy-mix, but availability of funding slows implementation. One of India’s chief negotiators was even quoted in Paris saying the country will cut back on its investments in coal if the new climate deal due to be struck next week delivers more money to help it shift to cleaner sources of energy such as solar power. (FT 3/12)
The International Energy Agency, in its New Energy Outlook 2015, believes these plans will lead to nearly 700GW of new solar and wind energy built across Asia (excluding China), Latin America and Africa ("AECLA"). Implementation would provide clean, renewable energy supplies in much needed areas, create millions of new jobs and dramatically cut countries' dependence on imported oil and diesel.
But implementation itself requires investment and the plans remain largely un-funded. To highlight the issue, the African Union earlier this week in Paris called for $20 billion in funding to build 10GW of new renewable energy by the end of the decade, yet this call is yet to be fully funded.
This funding gap has led the IEA to conclude that full realization of these plans will take until 2040, by which time renewable energy supplies will still only make up 9% of total consumption of electricity.
Global Carbon Budget
At the same time, the UN’s scientific advisory body, the IPCC, has specified in its fifth assessment report that all nations must limit emissions to 1,000 Gigatons of greenhouse gases after 2011 to meet universally agreed temperature targets.
The IPCC has also warned that the longer the world waits to make emissions cuts to stay within this de-facto carbon budget, the more expensive it will become. The IPCC’s least cost scenario recommended requires that emission cuts begin now and proceed at a pace of 1.6% per year. Yet climate plans tabled by all countries ahead of the Paris summit, while ambitious compared to business as usual, delay most of the cuts needed until after 2030.
In a recent report summarizing the cumulative effect of these plans, the United Nations stated that, by 2030, up to 770 Gigatons of greenhouse gas will have already been spewed into the atmosphere, meaning only 230 Gigatons will be available for the people and generations that will inhabit the world after 2030.
The economics of more climate ambition
There is a commonly held but flawed belief that cutting carbon emissions is prohibitively expensive. This can lead to some countries being less ambitious than they might have been. What the IPCC, the United Nations Climate Panel, says is the opposite: that delaying action is going to increase the costs in future.
A concrete example of what the IPCC means is available in Europe and the US. Many of the new coal- and gas-fired power plants under preparation in developing countries run the of risk of being shut down earlier than their investors expect, due to competition from cheaper wind and solar and the much higher annual rate of carbon reduction needed after 2030 if action is not scaled up today. The cost of writing off capital invested into high-carbon plant is as unnecessary as it is wasteful.
Similarly, failing to invest in urban transportation systems today will dramatically increase developing countries' cost from oil-based fuel product imports and car emissions in the decades to come.
Consensus among economists, however, is that costs can be reduced even further if governments used so-called market-based approaches. That is, ambitious climate targets should allow trading of emissions quotas between countries, so that innovative companies and individuals can scour the world to develop and invest in lowest cost reductions.
In Figure 1 below, we have listed the reduction targets proposed by the main developed countries in the national actions plans submitted to COP21 in Paris. The table reveals that the cumulative effort tabled by the industrialized countries amount to around 28 Gigatons of CO₂ by 2030.
Figure 1 – INDC emissions cuts put forward by selected OECD countries
More than half of all the developing countries furthermore say they wish to use carbon markets – that is tradable certificates for additional and verified mitigation outcomes – to help achieve their climate action plans. It is surprising then that the two largest emitters – the United States and the European Union – have to date not included any use of markets in their plans. In parallel, environmental groups are criticizing developed countries for not being ambitious enough with climate targets.
By offering additional market-based finance for accelerated deployment of renewables in emerging markets, negotiators can steer the discussion towards an easily deployable win-win solution for all parties concerned.
Accelerating renewable energy in developing countries
The authors have analyzed an alternative scenario with accelerated deployment of wind and solar in AECLA countries. The key enabler is here the willingness of industrialized countries to commit to a higher level of ambitions for greenhouse gas reductions up to 2030 – and to allow for the use of carbon markets to achieve those new climate goals.
To validate our analysis we have furthermore studied government plans and market developments in countries across nations of Sub-Saharan Africa as well as India, Brazil, Colombia, Mexico, Egypt, Pakistan, Bangladesh, Philippines and others. What we found in these markets was a long list of solar and wind projects waiting to reach some additional funding before final contract negotiations and construction.
The results in the analysis are staggering. Under the accelerated deployment scenario, instead of waiting until 2040 to achieve almost 700GW of new plants as predicted by the IEA, climate funding is used to bring forward these plans by 15 years to 2025.
We have found that this acceleration would lead to an increase in the share of solar and wind in developing countries' total electricity consumption – from less than 1 % today to 11% by 2025 – rather than just 9% in 2040. This is illustrated in Figure 2 below.
Figure 2 – Comparison of IEA New Policy Scenario (IEA NPS) and the authors’ Accelerated Deployment Scenario (ADS)
The accelerated deployment scenario leads to almost a doubling of the renewables share in the electricity mix in 2025, compared to IEAs scenario based on the national action plans.
The authors have found that this would lead to up to 8 Gigatons of additional carbon cuts before 2030, buying almost two years more time for future generations after 2030. If financed by the developed world via a flexible mechanism, this kind of reduction would imply an increase by 28% of the cumulative reduction targets tabled by all industrialized countries in their national action plans through 2030.
The solution offered will not only save carbon, it will save money as well.
We have estimated that the accelerated deployment of wind and solar projected here can be achieved with a carbon price of no more than $20 per ton. Therefore under the accelerated deployment scenario, richer nations would buy 8 billion carbon credits for up to $20 each to provide about $160 billion of the $800 billion of finance needed for 677GW of wind and solar capacity in developing nations.
Should rich nations wait until after that year (2030) to make the same reductions, they would cost at least $40 (present value equivalent) each because delayed action consumes more of the global carbon budget requiring steeper decline after 2030 and necessitating early retirement of fossil-fuel plant.
This finding is very much consistent with the IPCC’s least cost scenario.
The accelerated development scenario would create some $400 billion in additional investment into clean energy in developing countries, leading to jobs and improved living standards. Based on recent research from South Africa and India, we have furthermore estimated that the construction and operation of 700 GW of wind and solar will create millions of new jobs in AECLA countries.
Not enough to say carbon pricing: more detail is needed
Calls for carbon pricing are increasing within the public and private sectors the world over. But for project investors this is simply not enough yet to become the basis for influencing today’s investment decisions. Therefore the authors take this opportunity to put forward some important clarifications for what is needed of the carbon price, for which so many are now calling, as guidance to policy makers.
Firstly, all projects to be implemented should be required to prove that they are additional in two ways. The projects must represent a genuine fast tracking of previously announced plans, which would illustrate that the earlier start increases short-term climate action. Projects should also demonstrate that they were previously unfunded in the specified host countries.
Secondly, the regulatory system needed for approving these projects as additional must be available as soon as possible. Initiatives to develop new mechanisms under the Paris agreement are laudable, however it is likely they will need years to be designed. This could delay implementation until at least 2020.
At the same time, there are systems already in place with the United Nations that could be used immediately for this purpose – such as the Clean Development Mechanism (CDM). Countries should therefore consider redoubling efforts under the United Nations negotiations to enhance the CDM, rather than contemplate its full replacement.
Finally, countries must find a way to commit to longer timeframe of existence of the regulatory system. Wind and solar project investments are made over 15 to 20-year timeframes. Project investors need to know that the regulatory system has a longer-term life than the five years that was available under the Kyoto Protocol, and that they will have the means to hedge carbon prices over an extended timeframe.
This is perhaps one of the most important reforms needed to the CDM, yet it is not visible in the Paris text.
Such reforms would allow solar and wind energy, whose costs are decreasing rapidly, to outcompete fossil based alternatives on the basis of price. The carbon price would also support needed investments in the electricity networks required to accommodate the accelerated deployment scenario.
The Paris climate summit: an opportunity to unleash the power of markets
The message to climate negotiators is clear. More climate ambition among developed countries will mean less cost for its own citizens if it is accompanied by the use of markets that allow cuts to take place in developing countries.
As the Paris agreement already contemplates the use of a sustainable development mechanism to allow such cuts to take place, the challenge is now squarely with the developed countries to approve and then use the mechanism. While considerations are made, countries should recall the needs of private sector investors into solar and wind projects who, to achieve the results set out in this paper, need the mechanism now and not in five years.
If these issues can be resolved in Paris, an exciting, efficient, equitable and sustainable energy future awaits us all.
