Energy Economics: Electricity Markets and Renewable Energy. G Cornelis van Kooten

Transcription

1 Energy Economics: Electricity Markets and Renewable Energy G Cornelis van Kooten

2 Background Policy: Global temperature rise <2 o C (450 ppm CO 2 ) Current level: > 400 ppm CO 2 Global GHG emissions (hereafter in CO 2 terms) to be reduced by 50% from 1990 levels by Rich country emissions to be reduced by 80% How did we get to this numbers? 2 o C appears to have been picked out of a hat 2006: California s Global Warming Solutions Act and Executive Order S : G8 meeting in L'Aquila, Italy agreed to 80% reduction by 2050 EU objective to reduce its emissions by 80-95% by 2050 compared to 1990 (European Commission 2014)

3 Background (cont) Kyoto Protocol (1997) COP-3 Overall reduction in CO 2 emissions of slightly more than 6% from 1990 levels during 1 st Commitment Period ( ) Relatively successful due to global recession, switch from coal to natural gas in U.S. power generation, and other factors Canada failed to meet its 6% reduction target Paris Agreement (2015) COP-21 Essentially retains the Kyoto process Intended Nationally Determined Contributions (INDCs) Shaming the main mechanism to enforce compliance Annual confabs to keep countries on track Russia: reduce emissions by 70-75% (1990 to 2030): 20-30% by emissions reduction, rest by forestry activities; but already 35% below 1990 levels USA: make best efforts to reduce emissions by 26-28% (2005 to 2025). China: begin reducing CO 2 emissions no later than 2030; focus on lowering emissions intensity (CO 2 per unit of GDP) Canada: reduce emissions by 30% (2005 to 2030): reduce coal, rely on forestry activities

4 Outline Purpose: To demonstrate difficulty of reducing fossil fuel use and the problems this entails 1. Examine trends 2. Economic and technical feasibility of intermittent wind energy 3. Prospects for biomass energy Ontario has retrofitted coal plants to burn biomass In EU, biomass accounts for 65% of renewable energy; solid biomass responsible for 46% of all renewable energy Primary focus on electricity because of its flexibility.

5 1. Trends and Forecasts Lesson: Any future projections can be just as wrong!!

6 Million tonnes Global oil production

7 Million tonnes oil equivalent Global coal production

8 Million tonnes oil equivalent Global gas production

9 Million tonnes oil equivalent Global nuclear production

10 Million tonnes oil equivalent Global hydropower output

11 Million tonnes oil equivalent Global renewables (other than hydro)

12 Million tonnes oil equivalent Putting this in perspective and getting the scales right ( ) 5000 Global primary energy production Oil Gas Coal Nuclear Hydro Other renewables Renewables account for about 2.8% of primary energy

13 Gt CO2 Carbon dioxide emissions from energy, selected countries & Europe, China 6.0 USA Europe India 1.0 Japan Source:

14 Carbon dioxide emissions from energy, selected countries & Europe, ,500 Mt CO2 8,550 7,600 USA Europe Japan Russia/CIS India China 6,650 5,700 4,750 3,800 2,850 1,

15 Percent Putting in perspective, % ( ) 50% % of global primary energy production by source 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Oil Gas Coal Nuclear Hydro Other renewables NOTE: Oil proportion is down, coal is up slightly

16 Coal and the Generation of Electricity More than 40% of global electricity is generated from coal. Coal is ubiquitous, cheap, safe, but is the largest emitter of CO 2 other than biomass, and some other sources Surprisingly, many countries subsidize production of electricity from coal Largest coal exporters are Indonesia, Australia, U.S., Canada, Russia, many developing countries U.S. and Canada intend to eliminate all coal-fired generation. Problem: Coal will be exported In some years coal is the single largest commodity exported from British Columbia, ahead of lumber

17 Mmillions of Tonnes Coal Consumption, Selected Countries, Year US Germany China India Russia Japan

18 Coal Consumption, Selected Countries and Regions, ,000 Mtoe 1,750 USA Europe Japan Russia/CIS India China 1,500 1,250 1,

19 USD per million btu USD per tonne 20 Prices of Various Fuels LNG Japan NG EU NG Alberta OECD oil Coal EU

20 $US per MWh Historical Prices of Fuel in the U.S., $ crude oil natural gas coal

21 Historical Price of Crude Oil, , US$

22 % of BC Exports BC s Trading Partners (% of exports) United States Japan China 10 EU

23 BC Exports ($ billions) 17.5 BC exports by major groups, Forestry Ag&Fish Metals Energy All Other

24 Mt coal C$/tonne Exports of coal from BC and price of exports, Quantity Price

25 Per Capita Emissions, Selected Countries (tco 2 per person) EUROPE UK France Germany Russia China Japan India U.S. Canada

26 $ billions U.S. Trade Deficit China and India TOTAL

27 Gt CO2 U.S. CO 2 Energy Emissions Trade adjusted emissions Domestic energy emissions

28 Consider first Germany s Energiewende Electricity Production by Energy Source, Germany, January 2014 (GWh) TOTAL = 51,171 GWh Consumption 46,099; Difference 5,072 approx. equals wind/solar: wind constitutes about 12% of production; solar, 1.4%

29 BP Forecast of Global Energy Production by Source, 2014 to 2035 Proportion of Total a Growth Energy Source Annual rate Percent Renewables (wind, solar) Bioenergy Hydroelectricity Nuclear Coal Natural gas Oil a Total energy production in 2014 was 13,122.0 Mtoe; production in 2035 is projected to be 17,279.4 Mtoe. (1 Mtoe = 11,630,000 MWh) Source: BP Energy Outlook to 2035

30 International Energy Agency (2014) Projections of Primary World Energy Demand by Fuel: 2012 & Future Scenarios (Mtoe) 2012 Central Scenario New Policies 450 Scenario Fuel Coal 3,879 4,457 5,860 4,211 4,448 3,920 2,590 Oil 4,194 4,584 5,337 4,487 4,761 4,363 3,242 Gas 2,844 3,215 4,742 3,182 4,418 3,104 3,462 Nuclear , , ,677 Hydro Bioenergy 1,344 1,551 1,933 1,554 2,002 1,565 2,535 Wind, solar ,526 Total 13,361 15,317 20,039 14,978 18,293 14,521 15,629 Fossil fuel share 82% 80% 80% 79% 74% 78% 59% Central: growth rate of energy consumption falls from 2% to 1% after 2025 New Policies: assumes full implementation of INDCs 450 Scenario: caps concentration of CO 2 at 450 ppm to stabilize projected temperature increase at 2 o C.

31 What do the Shared Socioeconomic Pathways tell us about the future?

32 GDP is projected to grow at a similar rate to past 25 years % per annum 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% Productivity Population 0% World China India Africa OECD Other

33 Increasing global prosperity drives growth in energy demand Growth in GDP and primary energy % per annum billions 6% 5% 4% 3% 2% 1% 0% -1% GDP Primary energy Energy intensity Growth in urban population by region Other OECD Other Asia India China -2% -3% Africa

34 Non-combusted use of fuels (e.g., feedstock for petrochemicals, lubricants ) grows in importance Final energy consumption growth: noncombusted versus industry % per annum 5% 45% Non-combusted share of total oil & gas consumption growth Share of growth,% 4% Non-combusted Industry* 40% 35% 30% 3% 25% 2% 20% 15% 1% 10% 5% 0% 0% *Industry excludes non-combusted use of fuels

35 Passenger cars Passenger cars by type Fuel economy of new cars Billions of vehicles Litres/100km** 2.5 Battery electric 10 Plug-in hybrid 2.0 ICE* 8 EU China US *ICE vehicles includes hybrid vehicles which do not plug into the powergrid **Based on the NEDC (New European Drive Cycle), gasolinefuel

36 Shares of total power generation 100% 80% Hydro Nuclear Renewables 60% Gas 40% Oil 20% Coal 0%

37 Growth of power generation, Thousand TWh China India & Other Asia Other -2-3 OECD Renewables Nuclear Gas Hydro Coal Oil

38 Shares of primary energy 50% 100% Coal 40% 80% 30% 60% 20% 40% Oil Renewables 10% Hydro 20% Gas 0% Nuclear 0% Non-fossils

39 2. Future Prospects for Wind Energy Intermittency is the main problem with wind: it is unreliable and cannot be used to service baseload demand U.S. econometric studies by Cullen (2013), Kaffine et al. (2013) and Novan (2015) find that wind displaces a disproportionate amount of gas generation and not as much coal. This is supported by many engineering models and the approach I have been using (see Working Paper at I will look at the Alberta grid as it is fossil fuel dependent and has good ties to BC

40 Installed Global Wind Generating Capacity, Top Ten Countries & Rest of World, 2015

41 Load (MW) Economics of Electricity Grids: How does intermittent wind enter electricity grids? 24,000 Begin by looking at a load duration curve 20,000 PEAK LOAD 16,000 LOAD FOLLOWING 12,000 8,000 BASE LOAD 4, hours Hour

42 Screening Curves C g (h) = (fc g + fom g ) + vc g h g C g = total cost to operate asset g for one year (or annual revenue required per unit of capacity (MW) for generator g; fc g = annualized capital cost; fom g = annual fixed O&M costs; vc g = variable cost component (slope of screening curve); h g = duration (measured in hours per year) that asset g will generate power

43 Base Scenario: No wind Capacity Cost ($/MW) Peak Co-fire (15%) Natural Gas Coal Capacity ($/MW) Hours/Year Peak Natural Gas Coal Hours/Year

44 No wind Scenario: Tax Carbon Capacity Cost ($/MW) Co-fire (15%) Peak Natural Gas Coal Peak Capacity ($/MW) Hours/Year Natural Gas Coal Co-fire (15%) Hours/Year

45 No Wind Scenario: Feed-in-tariff (FIT) for biomass Capacity Cost ($/MW) Co-fire (15%) Peak Natural Gas Coal Peak Capacity ($/MW) Hours/Year Natural Gas Coal Co-fire (15%) Hours/Year

46 Base Scenario: Wind Capacity Cost ($/MW) Screening curves CT peak gas CC gas Coal Wind Capacity (MW) Operating hours Peak CC gas Load following Coal Base load Load duration curve 1,800 hrs Demand duration (hours)

47 Wind Scenario: Carbon Tax Capacity Cost ($/MW) Screening curves CT peak gas CC gas Coal Wind Capacity (MW) Operating hours Peak CC gas Load following Load duration curve Wind & CC/CT gas Base load Demand duration (hours)

48 Wind Scenario: FIT Capacity Cost ($/MW) Screening curves CT peak gas CC gas Coal Wind Capacity (MW) Operating hours Peak gas CC gas Wind & CC/CT gas Load duration curve Base load Demand duration (hours)

49 Illustrative Example Load duration: D(h) = 24, h, 0 h 8760 where D = system load (MW), h = hours system load reaches that load (8760 hours in year) Screening curves: C g (h) = fc g + vc g h g, where C = total cost incurred to operate asset g for one year ($/MW) fc = fixed cost ($/MW) vc = variable costs ($/MWh)

50 Annualized Capital Costs ($/MW per year) Operating Costs ($/MWh) Generation Technology Baseload $200,000 $4.5 Load following $90,000 $26.0 Peaking $55,000 $45.2 Wind $240,00 $0.0 Base data for screening curves

51 Costs ($) wind Peaking Intermediate Screening curves Base Find MWh each asset expected to operate during year given by the area underneath load duration curve in bottom panel: Capacity (MW) 24,000 Peak Load following Baseload 21,295 16,408 11,000 0 k g d a h e b f c 8760 Operating Hours Load duration curve Demand Duration (hours) Baseload: area (a+b+c+d+e+f) Output = TWh Peaking asset: area k Output = TWh Total operating cost = approx. $5.025 billion/year. Base case with no carbon tax or feed-in tariff

52 Base Case (No tax or FIT): Least Cost Mix of Generating Technologies, Running Times & Costs Total Costs ($ billions) Generation Technology Capacity (MW) Running hours Fixed Variable TOTAL Baseload 16, $3.282 $0.602 $3.884 Intermediate 4, $0.440 $0.441 $0.881 Peaking 2, $0.149 $0.111 $0.260 Total 24,000 $3.871 $1.154 $5.025

53 Assumed Values for the Screening Curves under a Carbon Tax Generation Technology Annualized Capital Costs ($/MW per year) Operating Costs including tax ($/MWh) Baseload $200,000 $30.0 Intermediate/load following $90,000 $39.5 Peaking $55,000 $63.2 Wind $240,00 $0.0

54 Costs ($) Peaking Intermediate Base Screening curves wind With a carbon tax Capacity (MW) 24,000 Peak Load following Wind 21,808 18,365 Operating Hours Load duration curve Baseload 11, Demand Duration (hours)

55 Carbon Tax: Least Cost Mix of Generating Technologies, Running Times & Costs Generation Technology Capacity (MW) Running hours Total Costs ($ billions) Fixed Variable Tax TOTAL Baseload 11,000 0 $2.200 $0.434 $2.457 $5.091 Intermediate 3, $0.310 $0.236 $0.123 $0.669 Peaking 2, $0.121 $0.073 $0.029 $0.223 Wind 7, $1.768 $0.000 $0.000 $1.768 Total 24,000 $4.399 $0.743 $2.653 $7.751 System costs = $7.751 billion Income transfer from fossil fuel producers & ratepayers to government = $2.653 billion Annual operating costs = $5.142 billion, $117 million more than cost to produce same electricity in the absence of government intervention

56 Costs ($) Intermediate Base wind Capacity (MW) 24,000 Peak Load following Wind 21,295 18,365 Screening curves Operating Hours Load duration curve With Feed-in Tariff: Assume fixed subsidy rate that gives same result as within the case of the carbon tax. Subsidy = $13.505/MWh Baseload 11, Demand Duration (hours)

57 Feed-in Tariff: Least Cost Mix of Generating Technologies, Running Times & Costs Generation Technology Capacity (MW) Running hours Total Costs ($ billions) Fixed Variable Subsidy b TOTAL Baseload 11,000 0 $2.200 $0.434 n.a. $2.634 Intermediate 3, $0.310 $0.236 n.a. $0.546 Peaking 2, $0.121 $0.073 n.a. $0.194 Wind 7, $1.768 $0.000 $0.624 $2.392 Total 24,000 $4.399 $0.743 $0.624 $5.766 Generation cost = $5.766 billion, of which $0.624 billion is a subsidy paid by taxpayers and/or ratepayers. True cost to society = $5.142 billion, but, due to subsidies, generating sector incurs costs of $4.518 billion.

58 Merit Order or Supply Stack

59 Stacked supply and rents (no demand response) 1 $/MWh Supply D N D* D 0 G3 P 0 G2 QR0 QR1 0 Baseload coal, nuclear G0 q* G1 q 0 Megawatts (MW) Monday, November 19,

60 Stacked supply and rents; demand response 1 $/MWh Supply D* G3 P 0 G2 QR0 QR1 0 Baseload coal, nuclear G0 q* G1 q 0 D 0 Megawatts (MW) Monday, November 19,

61 Stacked supply and rents 2 $/MWh Supply D* G3 P 0 a SR2 c G2 b QR0 QR1 0 Baseload coal, nuclear G0 q* G1 D 0 Megawatts (MW) D 1 Monday, November 19,

62 Stacked supply and rents 3 $/MWh P 1 c Scarcity Rent SR0 SR1 SR3 SR3 Supply G3 QR2 QR0 QR1 G2 G1 D N G0 0 q* D* Megawatts (MW) Monday, November 19,

63 $/MWh Market Merit Order (no wind) Supply D* Hydro for Export Diesel 1 P P OCGT 3 OCGT 2 OCGT 1 0 Base-load coal, nuclear CCGT 1 q* Coal 1 Biomass CCGT 2 Demand Megawatts (MW) Monday, November 19,

64 $/MWh Market Merit Order (with wind) Supply D* Hydro for Export Diesel 1 P P P F OCGT 1 OCGT 2 OCGT 3 0 Biomass CCGT 2 Base-load coal, nuclear plus wind CCGT 1 q* q o Coal 1 Demand Megawatts (MW) Monday, November 19,

65 Market Merit Order $/MWh D 0 S 0 S W D B G9 (export) G8 P 0 G7 P W G6 G5 G4 G3 G2 0 G0 q B G1 q 0 Megawatts (MW) Monday, November 19,

66 Market Merit Order $/MWh D 0 S 0 S W D B G9 (export) G8 P 0 G7 P W G5 G6 D M G4 G3 G2 0 G0 q* G1 q 0 Megawatts (MW) Monday, November 19,

67 The Reserve Market Reserves consist of Regulating reserves: deal with short-term (seconds up to 10 minute) fluctuations in load are met Base-load plants have a little bit of wiggle room Gas/diesel generators operating at part capacity Standby reserves (spinning reserves) Load following reserves deal with anticipated changes in load over an hour Contingent reserves: WECC rules require sufficient reserves to meet failure of largest unit on line plus some % of thermal generation [WECC: Western Electrical Coordinating Council] Generators bid into the reserve market

68 Capacity payment $/MW S Potential quasi-rent D C C4 CP 3 C3 (OCGT#2 ) CP 2 C2 (OCGT#1) CP 1 C1 (hydro) Megawatts (MW) Monday, November 19, 2018 G Cornelis van Kooten 68

69 $/MW D C D CW S Import B G11 Import A G10 OCGT Hydro Megawatts (MW) Monday, November 19, 2018 G Cornelis van Kooten 69

70 Market for Regulating and Contingent Reserves $/MWh D C D C Import B S Generators receive payment for reserve position, plus the market clearing price if called upon. Diesel 2 Import A OCGT 3 Diesel 1 Hydro Additional reserves due to wind, even if overall system capacity is unchanged. Megawatts (MW) Monday, November 19,

71 Managing Wind Resources Difficult to integrate wind into electricity grids Wind is variable and intermittent Too little or too much wind output drops suddenly to zero. Capacity Factor: CF = Actual generation in one year / (Rated Capacity 8760 hrs) Capacity factors for wind rarely exceed 20-25% CFs for nuclear power = 95% CFs for coal and CCGT = 85-90% Wind penetration = Wind capacity / Non-wind capacity Alternative definition: Wind penetration = Wind generation capacity / Peak load

72 Comparison of generating mixes, 2015 ALBERTA British Columbia Max capacity Generation type (MW) Coal 6,271 Closed-cycle gas 1,716 Simple-cycle gas 944 Cogeneration gas 4,483 Hydro 894 Wind 1,434 Biomass & other 409 TOTAL 16,151 [accessed January 6, 2015] Max capacity Generation type (MW) Coal - Gas 1,464 Hydro 13,649 Wind 248 Biomass & waste heat 369 TOTAL 15,730 [accessed January 12, 2015] In Alberta, construction of a 900 MW gas plant is underway to add more capacity to entire grid and to backstop intermittent wind. AB: 0 wind on January 6, 14:23, but 646 MW (45%) on January 12, 16:34 Monday, November 19, 2018 G Cornelis van Kooten 72

73 Interties BC-Alberta intertie is rated at 1,200 MW into BC (but operates at only 800 MW) and rated at 1,000 MW into Alberta (but tends to operate at about 650 MW) We assume 650 MW and 1300 MW (both directions) BC has an intertie with the U.S. rated at 3,150 MW capacity (2,850 MW west side, 300 MW east side), while the import capability is 2,000 MW Alberta has an intertie with the U.S. rated at 300 MW in both directions Monday, November 19, 2018 G Cornelis van Kooten 73

74 MW MW Load (solid line) Load minus Wind (a) 10-minute intervals Load (solid line) Load minus Wind (b) 10-minute intervals Alberta Load and Wind Generation at 10-minute Intervals, First 10 Days in 2010 (top panel) and Last 10 Days in 2010 (bottom panel) Monday, November 19, 2018 G Cornelis van Kooten 74

75 Alberta Load and Wind Generation at 10-minute Intervals, First and last 10 Days in 2014 (Wind below 100MW Jan 1, 3, 5, 7; Capacity factors = 33.5% and 38.1%) Monday, November 19, 2018 G Cornelis van Kooten 75

76 Alberta Load Duration Curve, 2015

77 Capacity and Generation, Alberta Electric System, 2014 Capacity Generation Fuel Source MW Share GWh Share Coal 6, % 44, % Natural Gas 7, % 28, % Hydro % 1, % Wind 1, % 3, % Biomass a % 2, % Other b % % Total 16, % 80, % a Co-gen biomass accounts for MW of capacity, biogas for 8.8 MW and other biomass for the remainder. b Includes fuel oil and waste heat, which is a by-product of existing industrial operations with the heat otherwise escaping from an exhaust pipe. Source: Alberta Energy at [accessed June 3, 2016].

78 Installed Capacity (MW) Alberta Electricity Production Capacity, MW, ,000 7,000 6,000 5,000 4,000 Coal Natural gas 1,600 1,400 1,200 1, ,000 2,000 Co-gen ,000 Wind (right axis)

79 Proportion of capacity Proportion of Time an Alberta Aggregated Wind Farm Produces less than 1 MW, 1-2 MW and more than 2 MW of Electricity, < 1 MW 1-2 MW >2 MW

80 Background Data Years to build Construction Costs ($/kwh) Variable Costs ($/MWh) Decommission as % of overnight O&M Fuel Emissions (tco 2 /MWh) Ramp rate % of capacity per hour c Asset Overnight Nuclear Biomass Coal Wind n.a n.a. Hydro n.a n.a. CCGT OCGT Source: Various including The Economist, Conrad Fox, AESO, etc. Monday, November 19, 2018 G Cornelis van Kooten 80

81 Load and Price Data British Columbia Mid- Columbia Alberta Load (MW) Average 8, Maximum 10, Minimum 6, Energy Price ($/MW) Average Maximum 1, Minimum 0-0 Alberta s system ramps at 600 MW per hour; BC 200 MW per minute! Monday, November 19, 2018 G Cornelis van Kooten 81

82 Model AESO maximizes profit subject to load, trade and engineering constraints: = T P ( OM + b + ) Dt i i i Qi,t + i (( PA,t Pk,t k ) M t + ( Pk,t PA,t k ) X t ) t= 1 k BC,MidC A,t i ( a d ) i i C i P = price, D = demand or load, OM = operating costs, b = fuel costs, τ = carbon tax, φ = conversion factor (fuel into CO 2 ) on per MWh basis, Q = power production (MWh), M = imports, X = exports, a = per unit cost of adding capacity ($/MW), d = per unit cost of decommissioning capacity ($/MW), C = capacity (MW)

83 Demand is met in every hour: Ramping up constraint: i Q + ( M X ) D, t =,..., T i,t k,t k,t t 1 k Q i,t Q i,(t 1) C i R i, i, t=2,,t k {BC, MID, SK} Ramping down constraint: Q i,t Q i,(t 1) C i R i, i, t=2,,t Capacity constraints: Q i,t C i, t, i Import transmission constraint: M k,t TRM k,t, k, t Export transmission constraint: X k,t TRX k,t, k, t Non-negativity: Q i,t, M k,t, X k,t 0, t, i, k

84 Results: Optimal Capacity by Generator Type Nuclear Coal CCGT OCGT Wind Initial No trade between Alberta and BC $ $ $ $ $ , (Nuke) $200(Nuke) Alberta-BC trade along 1300MW-capacity intertie $ $ $ $ $ , (Nuke) $200(Nuke)

85 Power output by generator type (GWh) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Nuclear Coal CCGT OCGT Hydro Wind No trade with adjacent jurisdictions Monday, November 19, 2018 G Cornelis van Kooten 85

86 Trade along 650 MW, AB-BC Intertie (GWh) 6,000 5,000 4,000 3,000 2,000 1,000 0 Exports Imports Monday, November 19, 2018 G Cornelis van Kooten 86

87 12,000 10,000 8,000 6,000 4,000 2,000 0 Trade along 1300 MW, AB-BC Intertie (GWh) Exports Imports Monday, November 19, 2018 G Cornelis van Kooten 87

88 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 GWh Low intertie capacity 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 GWh High intertie capacity Nuclear Coal CCGT OCGT Hydro Wind

89 A Measure of Potential Wasted Renewables as a Result of Integrating Carbon-free Generating Assets into an Electrical Grid, GWh No Alberta-BC trade Low capacity intertie High capacity intertie Carbon tax Wind Only Wind & Nuclear Wind Only Wind & Nuclear Wind Only Wind & Nuclear $ $ $ $ $ $ $ Monday, November 19, 2018 G Cornelis van Kooten 89

90 Tax ($/tco2) Costs of reducing CO 2 emissions Mt CO2 Saved Wind Only Wind&Nuclear TradeWindOnly TradeWind&Nuclear Monday, November 19, 2018 G Cornelis van Kooten 90

91 3. Forestry Activities and UN FCCC Process COP-7 in 2001 at Marrakech, Morocco: Promoted afforestation and reforestation to remove CO 2 from the atmosphere to offset CO 2 emissions Gave credence also to preventing deforestation in developing countries Acronym: ARD Current discussions expand preventing deforestation to REDD and REDD+: Reduced Emissions from Deforestation and forest Degradation with + denoting benefits of protecting biodiversity REDD+ ideas carried over from poor to rich countries: Voluntary carbon markets (Voluntary Carbon Exchange) rely on REDD In BC, Pacific Carbon Trust purchases and resells credits from not harvesting forests

92 Instruments 1. Carbon tax: Economists prefer tax on carbon emissions and subsidy for carbon removal. 2. Carbon offsets: create all kinds of problems that we really cannot properly address Transaction costs Governance and contracting Principal-agent (PA) problem.

93 Carbon Offset Markets Carbon offset: a reduction in CO 2 emissions, or an equivalent removal of CO 2 from the atmosphere, that is realized outside a compliance market and can be used to counterbalance greenhouse gas emissions from a capped entity. Carbon offsets reduce emitters costs of complying with emission reduction targets, while buying time to enable them to develop and adopt emission-reducing technologies. Because offsets lower the cost of emitting CO 2, they reduce incentives to invest in emission-reducing technologies. Carbon offsets are fraught with problems related to uncertainty and corruption

94 $ per t CO 2 MC CO2 EmissionsAbatement a P Derived Demand t CO 2 E 0 C t CO 2 Emissions Abatement Sector Carbon Offset Sector

95 $ per t CO 2 MC CO2 EmissionsAbatement a P MC CarbonOffsets b P * e d DD t CO 2 E E * 0 C * C t CO 2 Emissions Abatement Sector Carbon Offset Sector

96 Pitfalls: International Climate Accords and Forestry Activities (some well known): 1. Additionality 2. Leakage Micro: farmer plants trees on one field, clears trees on another Macro: farmers in one region plant trees, price of land in agriculture rises, and landowners elsewhere convert forestland to agriculture 3. Double dipping: Landowner receives payment for biodiversity, plus carbon credits Afforestation in China: one country claims CERs under CDM, China claims a reduction in its emissions 4. Plethora of instruments 5. Transaction costs and governance

97 Three types of offsets EUA: European unit allowance is the difference between a firm s emissions-reduction target and its actual emissions; similar to global AAU (assigned amount unit) which is the difference between a Kyoto Annex B * country s target and its actual emissions CER: Certified emission reduction earned under the Clean Development Mechanism through investments in developing countries ERU: Earned reduction unit is a credit earned in an economy in transition (Russia and its ex-states) resulting from an Annex B country s investment in emission reductions in one of those countries (shared between the two countries) * Annex B of Kyoto Protocol: List of industrial countries who agreed to reduce voluntarily their CO 2 emissions by some 5.4% below 1990 levels by

98 Closing Price ( per tco2) CER ERU EUA Aug-08 4-Feb Jul Jan Jul Jan-11 8-Jul-11 1-Jan Jun-12 Date

99 Forest Carbon Offset Credits Difficult to monitor due to uncertainty, additionality, leakage (between 6 and 93%), and duration To implement carbon uptake in forestry projects in developing countries under the CDM, temporary and long certified emission reductions were defined as having 1-year and 5-year (compliance-period) terms

100 4. Biomass Energy and Carbon Offsets Types of carbon markets Emissions trading with cap on emissions Emissions trading with cap on emissions but with carbon offsets (EU-ETS) Carbon offset trading with no cap Government sponsored (Pacific Carbon Trust) Voluntary markets How do carbon offset markets function? Well There is only one rule: Follow the money! Governance is the main obstacle to cap-and-trade, and to the establishment of carbon offsets in forestry

101 tco 2 First growth function Second growth function tcer 2 lcer tcer 1 tcer 3 0 T 1 T 2 = T 1 +5 T 3 = T 2 +5 Time after planting

102 Since V is the discounted release of carbon at the time of harvest, the amount stored at time of harvest is given by: C d r r C d r d V C V c c c Cstored + = + = = 1 If r c =0, then no carbon is stored because it is all released. If d=0, then all the carbon is retained regardless of the rate used to weight carbon.

103 0 M No urgency Time N Carbon dividend: CO 2 reduction relative to fossil fuel F CO 2 released by burning fossil fuels Carbon debt: CO 2 debt relative to fossil fuel Great urgency K Effective CO 2 in atmosphere BioCO 2 removed from atmosphere by forests, other vegetation and oceans

104 CO 2 Emissions Cumulative fossil fuel CO 2 Cumulative biomass CO 2 Carbon debt Carbon dividend 0 M N Time

105 0 Time No urgency CO 2 released from burning fossil fuel per unit of energy Biomass CO 2 debt relative to fossil fuel Great urgency Effective CO 2 in atmosphere Change in terrestrial plus ocean bioco 2 uptake

106 Change in carbon stored (tco 2 /MWh) White spruce (picea engelmannii) % 1.0% 5.0% Bituminous Coal Years Projected volume (m 3 ha 1 ) in Dawson Creek forest of Prince George district with average slope of 10% & initial density of 1,600 trees ha 1

107 Change in carbon stored (tco 2 /MWh) Lodgepole pine (pinus contorta) % 1.0% 5.0% Bituminous Coal Projected volume (m 3 ha 1 ) in Dawson Creek forest of Prince George district with average slope of 10% & initial density of 1,600 trees ha 1

108 Change in carbon stored (tco 2 /MWh) Hybrid poplar (Northwest: P. balsamifera x P. deltoides or Walker: P. deltoides X P. petrowskyana ) % 5.0% 20.0% 0.00 Bituminous Coal Years Projected cumulative carbon flux associated with fossil fuel and biomass energy production for select climate change urgencies for hybrid poplar