Handbook of Climate Change Mitigation [1 ed.] 9781441979902, 9781441979919

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Handbook of Climate Change Mitigation

Wei-Yin Chen, John Seiner, Toshio Suzuki and Maximilian Lackner (Eds.)

Handbook of Climate Change Mitigation

With 586 figures and 205 tables

Editors Wei-Yin Chen Department of Chemical Engineering University of Mississippi Mississippi USA John Seiner National Center for Physical Acoustics University of Mississippi Mississippi USA Toshio Suzuki National Institute of Advanced Industrial Science and Technology (AIST) Nagoya Japan Maximilian Lackner The Vienna University of Technology (TU Vienna) Wien Austria

ISBN 978-1-4419-7990-2 e-ISBN 978-1-4419-7991-9 DOI 10.1007/978-1-4419-7991-9 Springer New York Dordrecht Heidelberg London Library of Congress Control Number: 2011938953 © Springer ScienceþBusiness Media, LLC 2012 All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, LLC, 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Printed on acid-free paper Springer is part of Springer ScienceþBusiness Media (www.springer.com)

This Handbook is dedicated to two colleagues of ours, Dr. John M. ‘‘Jack’’ Seiner and Dr. Marie W. Wooten. Both of them were devoted educators and researchers, with special interests in activities surrounding climate change issues, including this Handbook. It is still a great shock to us that they abruptly left us within a tragic six-day period in fall 2010.

Dr. John M. ‘‘Jack’’ Seiner, 66, director of the Jamie Whitten National Center for Physical Acoustics (NCPA) at the University of Mississippi, died October 31, 2010 in Oxford, Mississippi. For over 30 years, he studied jet noise and how to reduce it. Jack spent the first 25 years of his career in jet noise research at the National Aeronautics and Space Administration’s Langley Research Center in Hampton, Va., first as a research engineer in the Noise Control Branch, then as leader of the Jet Noise Team of the Aeroacoustics Branch. While at NASA, he conducted research that not only earned the respect of his colleagues but also more than 20 awards for his achieveJohn M. ‘‘Jack’’ Seiner ments, leadership, and service. After retiring from NASA in 1998, Seiner moved to Oxford to become NCPA’s associate director of applied research. At Ole Miss, he worked to build NCPA’s facilities and a graduate program in aeroacoustics in conjunction with the Department of Mechanical Engineering. His aeroacoustics research group at NCPA conducted a variety of research projects sponsored by the United States Army, Navy and Air Force, and Jack was elevated to NCPA director in 2009. In his 12 years at NCPA, Seiner was responsible for more than $43 million in contracts and grants. ‘‘Jack had an extraordinary ability to use sophisticated science to develop practical solutions to important real-world problems,’’ said Dr. Alice Clark, UM’s vice chancellor for research and sponsored programs. ‘‘He was, throughout his career, a very highly regarded scientist, a committed educator and an enthusiast for innovation and discovery’’. Jack was enthusiastic about the sustainable energy and environmental activities at the University of Mississippi that were initiated in the fall 2007. He constantly offered his advice on the development of new courses, research collaborations, outreach programs, and was an invaluable editor of this handbook. His tireless efforts have no doubt profoundly influenced both faculty and students. When we offered the climate change class for the first time at the University of Mississippi, he not only gave an informative lecture on energy efficiency in transportation systems, but also voluntarily served as a judge for students’ presentations. His lecture slides are posted on the web (see Chapter 54), and his partially finished chapter (see Chapter 37) on this topic was completed by two of us (Maximilian Lackner and Wei-Yin Chen). Jack is survived by his wife of 42 years, Mary Lois Seiner; daughters, Pamela Hart (Jason), Karena Seiner and Sandra Crouse (Matt); son, John M. Seiner Jr. (Jo); brother, George Seiner (Faye); sister, Marie Fleming (Bob); six grandchildren; and many nieces and nephews.

Dr. Marie Wright Wooten, 53, passed away tragically November 5, 2010. She was Dean and Professor of the College of Sciences and Mathematics (COSAM) at Auburn University. Marie grew up in the ‘‘Land Between the Lakes’’ in northwestern Tennessee where she developed a strong interest in nature and science; her childhood heroes were Eleanor Roosevelt, Madame Curie, and Amelia Earhart, which formed the basis for her later passion in advancing opportunities for women in science, technology, engineering, and mathematics. Marie earned a B.S. in microbiology at the University of Memphis in 1979 and a Ph.D. in molecular biology Marie W. Wooten at Texas Woman’s University in 1983. Marie honed her research skills as a post-doctoral associate at the Medical College of Georgia and the Cold Spring Harbor Laboratory in New York, prior to her becoming a COSAM faculty member in biological sciences at Auburn in 1987. She served as Acting Head of the Department of Zoology and Wildlife from 1995-1997, and later became Associate Dean of Research in COSAM in 2000, a position she held until becoming Dean of COSAM in 2010. In addition to her strong commitment to administration at Auburn, Marie was an outstanding leader, role model, and mentor in research, teaching, and service. Marie lived for her research and for her students. She embodied the ideal that to be successful students ‘‘should be life-long learners and individuals who make a difference.’’ Among her many hobbies, Marie was an avid runner, being particularly proud of completing the ‘‘Sprint Triathlon’’ where she finished first in her age group. We got acquainted with Marie during the initial stage of the Handbook project in early 2009. She already had a climate change literacy project sponsored by NASA, and immediately accepted the offer to write a chapter about her NASA project (see Chapter 30). She later agreed to collaborate with the University of Mississippi on other climate change outreach activities. Her proposal for exchanging mutual visits between the UM and Auburn faculties will most likely materialize after this book project is finished. Marie is preceded in death by her parents, James Roy Wright and Lucy Reyes Wright. She is survived by her husband of 31 years, Michael C. Wooten, and cousin Joe Reyes. Wei-Yin Chen Toshio Suzuki Maximilian Lackner

Foreword With scientific evidence mounting that human activities have begun to change global climate, attention is turning to the options available for dealing with that change. Actually only three options are available to us: mitigation, adaptation, and suffering. Mitigating climate change means cutting and sequestering emissions of greenhouse gases to prevent further increases in their atmospheric concentrations and then reducing concentrations to levels deemed less unsafe than the ones to which they have been driven since the start of the industrial revolution. What are safe concentrations is a topic of vigorous debate because we do not yet fully understand the coupled earth system and human system dynamics that will play themselves out in a world of unprecedented greenhouse gas concentrations. How high is too high will be known well after the point of no return has been reached. And so, the extent to which we embrace mitigation, in part, reflects our aversion – or desire – to take risks in matters pertaining not just to the stability of global climate conditions but the global human condition more broadly. It is against this backdrop that contributions from internationally renowned authors from industry and academia have been gathered in this volume to illuminate humanity’s mitigation options by giving broad coverage of climate change and mitigation. There is an urgent need for such work - it is a timely and rich resource. The Handbook of Climate Change Mitigation is the first and only book to collect in a single source information on all technologies related to the reduction of CO2 emission, from utilization of renewable energy and improvement of energy efficiency to establishing a sustainable society and stabilizing the environment. From the handbook’s coverage. it is quite obvious that there is no magic knife with which to cut emissions, because the sources of emissions are varied and intricately woven into the very fabric of our society and economy. Movement from oil, coal, and natural gas, for example, to biological feedstocks for the production of fuels and chemicals is an essential strategy to decarbonize our economies, but the effect of this strategy hinges on the extent to which production of biomass can decouple itself from fossil-based generation of fertilizers and pesticides, minimize land conservation, and prevent the associated release of carbon from soils and impacts on biodiversity. Decarbonization, even when combined with the most aggressive efficiency improvements in the end uses of materials and energy, only translates to net reductions in emissions if other influences do not overwhelm the rates at which these improvements are realized. Among these other influences are economic growth, generating ever larger production of output, population growth, demanding ever more goods and services, and climate change itself, triggering a demand for surplus production to built up our safety nets – from personal insurance to large-scale flood control systems – that can help us weather adverse climate conditions. Despite all efforts to stabilize and perhaps even

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reduce, in the long run, atmospheric greenhouse gas concentrations, humans have already committed themselves to decades of temperature changes and centuries of sea level rise. Since the heat budget of the globe will be disturbed, the frequency and severity of extreme weather events will likely increase. Disruptions in biophysical conditions will trigger, and be triggered by, changes in ecosystems – including changes in the productivity of managed forests and croplands, as wells as changes in the distribution of pests and diseases. The associated tightening of resource constraints will undermine the livelihoods of people, displace populations, and inflict pain and death. There are unlikely to be long-term winners from climate change. None of the places already suffering from shortages in water and food, for example, or flooding and crumbling infrastructures will, in the long run, be better off because of climate change. Climate will not stop changing once optimal conditions are reached, and benefits in one sector will soon be overwhelmed by costs imposed on other parts of the economy and society. This handbook is valuable precisely because it is the first book that discusses climate change mitigation from political, anthropological, educational, technological and journalistic points of view, thus offering variety of possible solutions and challenges Each chapter is written by internationally known experts and contains a section called Future Directions that speculates about the future. The Handbook of Climate Change Mitigation guides students to the direction of considering the climate mitigation when they start working in industry or academia. Understanding the role of mitigation and choosing the proper mitigation strategies is essential, and the Handbook of Climate Change Mitigation is valuable not only because it offers up-to-date knowledge based upon sound science, but also because it suggests specific actions on mitigation of climate change. These techniques run the gamut from proven techniques to novel technologies. The handbook is edited and written in a fashion that ensures that it can be easily followed by students, practitioners, and concerned citizens. The Handbook of Climate Change Mitigation speaks to each of us and will be widely read. Furthermore, the reader will understand the true meaning of climate mitigation; that is not simply reduction of CO2 but also the attitude of each of us towards the issue. Matthias Ruth

Editors-in-Chief Dr. Wei-Yin Chen Department of Chemical Engineering University of Mississippi Mississippi USA

Dr. Toshio Suzuki National Institute of Advanced Industrial Science and Technology (AIST) Nagoya Japan

Dr. John Seiner National Center for Physical Acoustics University of Mississippi Mississippi USA

Dr. Maximilian Lackner The Vienna University of Technology (TU Vienna) Wien Austria

Table of Contents Dedication . . . . . . . Foreword . . . . . . . . Editors-in-Chief . . . List of Contributors

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Volume 1 1 Introduction to Climate Change Mitigation . . . . . . . . . . . . . . . . . . . . . . . . 1 Maximilian Lackner . Wei-Yin Chen . Toshio Suzuki

Section 1 Scientific Evidences of Climate Change and Societal Issues 2 Life Cycle Assessment of Greenhouse Gas Emissions . . . . . . . . . . . . . . . . 13 L. Reijnders

3 Climate Change Legislation: Current Developments and Emerging Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 C. Moore

4 International Efforts to Combat Global Warming . . . . . . . . . . . . . . . . . . 89 Karen Pittel . Dirk Ru¨bbelke . Martin Altemeyer-Bartscher

5 Ethics and Environmental Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 David J. Rutherford . Eric Thomas Weber

6 Mass Media Roles in Climate Change Mitigation . . . . . . . . . . . . . . . . . . 161 Kristen Alley Swain

7 Sustainable Development: Ecology and Economic Growth . . . . . . . . . . 197 Arif S. Malik

8 Emissions Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 Roger Raufer . Sudha Iyer

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9 Promotion of Renewables and Energy Efficiency by Politics: Case Study of the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 Itziar Martı´nez de Alegrı´a Mancisidor . M. Azucena Vicente Molina . Macarena Larrea Basterra

10 Implications of Climate Change for the Petrochemical Industry: Mitigation Measures and Feedstock Transitions . . . . . . . . . . . . . . . . . . 319 Simon J. Bennett

11 Venture Capital Investment and Trend in Clean Technologies . . . . . . . 359 John C. P. Huang

Section 2 Impact of Climate Change 12 Carbon Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411 Yoshihiro Fujii

13 Impacts of Climatic Changes on Biogeochemical Cycling in Terrestrial Ecosystems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433 Dafeng Hui . Hanqin Tian . Yiqi Luo

14 Sea-Level Rise and Hazardous Storms: Impacts on Coasts and Estuaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471 Yan Ding

15 Impact of Climate Change on Biodiversity . . . . . . . . . . . . . . . . . . . . . . . 505 David H. Reed

16 Impacts of Climatic Changes on Water Quality and Fish Habitat in Aquatic Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 531 Xing Fang . Heinz G. Stefan

17 Climate Change Impacts, Vulnerability, and Adaptation in East Africa (EA) and South America (SA) . . . . . . . . . . . . . . . . . . . . . . . . 571 Anne Nyatichi Omambia . Ceven Shemsanga . Ivonne Andrea Sanchez Hernandez

Volume 2 Section 3 Energy Conservation 18 Energy Efficient Design of Future Transportation Systems . . . . . . . . . . 623 John Seiner . Maximilian Lackner . Wei-Yin Chen

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19 Thermal Insulation for Energy Conservation . . . . . . . . . . . . . . . . . . . . . 649 David W. Yarbrough

20 Thermal Energy Storage and Transport . . . . . . . . . . . . . . . . . . . . . . . . . 669 Satoshi Hirano

21 Greenhouse Gas Emission Reduction Using Advanced Heat Integration Techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 701 Kailiang Zheng . Helen H. Lou . Yinlun Huang

22 Advanced Real-Time Optimization of Power Plants for Energy Conservation and Efficiency Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . 749 Pal Szentannai

23 Mobile and Area Sources of Greenhouse Gases and Abatement Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 775 Waheed Uddin

24 Energy Efficiency: Comparison of Different Systems and Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 841 Maximilian Lackner

Section 4 Alternative Energies 25 Biomass as Feedstock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 911 Debalina Sengupta . Ralph Pike

26 Biochemical Conversion of Biomass to Fuels . . . . . . . . . . . . . . . . . . . . . 965 Swetha Mahalaxmi . Clint Williford

27 Thermal Conversion of Biomass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1001 Zhongyang Luo . Jingsong Zhou

28 Chemicals from Biomass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1043 Debalina Sengupta . Ralph W. Pike

29 Hydrogen Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1091 Qinhui Wang

Volume 3 30 Nuclear Energy and Environmental Impact . . . . . . . . . . . . . . . . . . . . . 1133 K. S. Raja . Batric Pesic . M. Misra

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31 Fusion Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1183 Hiroshi Yamada

32 Harvesting Solar Energy Using Inexpensive and Benign Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1217 Susannah Lee . Melissa Vandiver . Balasubramanian Viswanathan . Vaidyanathan (Ravi) Subramanian

33 Solar Concentrators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1263 Anjaneyulu Krothapalli . Brenton Greska

34 Wind Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1295 Manfred Lenzen . Olivier Baboulet

35 Geothermal Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1325 Hirofumi Muraoka

36 Hydropower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1355 Jingsheng Jia . Petras Punys . Jing Ma

Section 5 Advanced Combustion 37 Reducing Greenhouse Gas Emissions with CO2 Capture and Geological Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1405 J. Marcelo Ketzer . Rodrigo S. Iglesias . Sandra Einloft

38 Chemical Absorption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1441 Mengxiang Fang . Dechen Zhu

39 Oxy-fuel Firing Technology for Power Generation . . . . . . . . . . . . . . . . 1515 Edward John (Ben) Anthony

40 Integrated Gasification Combined Cycle (IGCC) . . . . . . . . . . . . . . . . . . 1545 Lawrence J. Shadle . Ronald W. Breault

41 Conversion of Syngas to Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1605 Steven S. C. Chuang

42 Chemical Looping Combustion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1623 Edward John (Ben) Anthony

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Volume 4 Section 6 Advanced Technologies 43 Low-Temperature Fuel Cell Technology for Green Energy . . . . . . . . . . 1657 Scott A. Gold

44 Solid Oxide Fuel Cells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1703 Nigel M. Sammes . Kevin Galloway . Mustafa F. Serincan . Toshio Suzuki . Toshiaki Yamaguchi . Masanobu Awano . Whitney Colella

45 Molten Carbonate Fuel Cells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1729 Takao Watanabe

46 Photocatalytic Water Splitting and Carbon Dioxide Reduction . . . . . . 1755 Jacob D. Graham . Nathan I. Hammer

47 Technological Options for Reducing Non-CO2 GHG Emissions . . . . . . . 1781 Jeff Kuo

48 Thermoacoustics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1821 Matthew E. Poese

49 Reduction of Greenhouse Gas Emissions by Catalytic Processes . . . . . 1849 Gabriele Centi . Siglinda Perathoner

50 Integrated Systems to Reduce Global Warming . . . . . . . . . . . . . . . . . . 1891 Preben Maegaard

51 Reducing Personal Mobility for Climate Change Mitigation . . . . . . . . 1945 Patrick Moriarty . Damon Honnery

Section 7 Education and Outreach 52 Bringing Global Climate Change Education to Alabama High-School Classrooms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1983 Ming-Kuo Lee . Marllin Simon . Kevin Fielman . Luke Marzen . Yu Lin . Roger Birkhead . Cathy Miller . Paul Norgaard . Matthew Obley . Jennifer Cox . Laura Steltenpohl . Emily Wheeles . Regina Halpin . Chris Rodger . Marie Wooten

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53 Climate Change: Outreaching to School Students and Teachers . . . . . 2029 Dudley E. Shallcross . Timothy G. Harrison . Alison C. Rivett . Jauyah Tuah

54 An Introductory Course on Climate Change . . . . . . . . . . . . . . . . . . . . . 2077 Wei-Yin Chen

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2111

List of Contributors Martin Altemeyer-Bartscher Department of Economics Chemnitz University of Technology Chemnitz Germany

Roger Birkhead Alabama Science in Motion Program Department of Physics Auburn University Auburn, AL USA

Edward John (Ben) Anthony CanmetENERGY, Natural Resources Canada Ottawa, ON Canada

Ronald W. Breault U.S. Department of Energy National Energy Technology Laboratory Morgantown, WV USA

Masanobu Awano Advanced Manufacturing Research Institute, National Institute of Advanced Industrial Science and Technology Nagoya Japan

Gabriele Centi Dipartimento di Chimica Industriale ed Ingegneria dei Materiali University of Messina and CASPE-INSTM Messina Italy

Olivier Baboulet ISA, School of Physics-A28 The University of Sydney NSW Australia

Wei-Yin Chen Department of Chemical Engineering University of Mississippi Mississippi USA

Simon J. Bennett Imperial Centre for Energy Policy and Technology Imperial College London UK

Steven S. C. Chuang FirstEnergy Advanced Energy Research Center, Department of Chemical and Biomolecular Engineering The University of Akron Akron, OH USA

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Whitney Colella Sandia National Laboratories Albuquerque, NM USA Jennifer Cox Stanhope Elmore High School Millbrook, AL USA Yan Ding National Center for Computational Hydroscience and Engineering The University of Mississippi University, MS USA Sandra Einloft CEPAC – Brazilian Carbon Storage Research Center Pontifical Catholic University of Rio Grande do Sul Porto Alegre, Rio Grande do Sul Brazil and FAQUI – Chemistry Faculty Pontifical Catholic University of Rio Grande do Sul Porto Alegre, Rio Grande do Sul Brazil Mengxiang Fang Institute for Thermal Power Engineering Zhejiang University Hangzhou, Zhejiang China Xing Fang Department of Civil Engineering Auburn University Auburn, AL USA

Kevin Fielman Department of Biological Sciences Auburn University College of Sciences and Mathematics Auburn, AL USA

Yoshihiro Fujii Graduate School of Global Environmental Studies Sophia University Tokyo Japan

Kevin Galloway Department of Metallurgical and Materials Engineering Colorado School of Mines Golden, CO USA

Scott A. Gold Department of Chemical and Materials Engineering University of Dayton Dayton, OH USA

Jacob D. Graham Department of Chemistry and Biochemistry University of Mississippi Oxford, MS USA

Brenton Greska Sustainable Energy Technologies, LLC St. Cloud, FL USA

List of Contributors

Regina Halpin Program Evaluation and Assessment Consultants Auburn, AL USA Nathan I. Hammer Department of Chemistry and Biochemistry University of Mississippi Oxford, MS USA Timothy G. Harrison Bristol ChemLabS School of Chemistry, University of Bristol Bristol UK Satoshi Hirano Thermal and Fluids Systems Group Energy Technology Research Institute National Institute of Advanced Industrial Science and Technology (AIST) Tsukuba Japan Damon Honnery Department of Mechanical and Aerospace Engineering Monash University Melbourne, Victoria Australia Yinlun Huang Lab for Multiscale Complex Systems Science and Engineering, Department of Chemical Engineering and Materials Science Wayne State University Detroit, MI USA

John C. P. Huang Focus Capital Group Cupertino, CA USA

Dafeng Hui Department of Biological Sciences Tennessee State University Nashville, TN USA

Rodrigo S. Iglesias CEPAC – Brazilian Carbon Storage Research Center Pontifical Catholic University of Rio Grande do Sul Porto Alegre, Rio Grande do Sul Brazil and FENG – Engineering Faculty Pontifical Catholic University of Rio Grande do Sul Porto Alegre, Rio Grande do Sul Brazil

Sudha Iyer Cerebronics, LLC Princeton, NJ USA

Jingsheng Jia International Commission on Large Dams (ICOLD) Paris France and China Institute of Water Resources and Hydropower Research Beijing China

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J. Marcelo Ketzer CEPAC – Brazilian Carbon Storage Research Center Pontifical Catholic University of Rio Grande do Sul Porto Alegre, Rio Grande do Sul Brazil Anjaneyulu Krothapalli Department of Mechanical Engineering Florida State University Tallahassee, FL USA Jeff Kuo Department of Civil and Environmental Engineering California State University Fullerton, CA USA Maximilian Lackner The Vienna University of Technology (TU Vienna) Wien Austria Macarena Larrea Basterra Researcher for the Energy Working Group University of the Basque Country Leioa Spain Susannah Lee Department of Chemical and Metallurgical Engineering, Chemical and Materials Engineering Department, LME 310, MS 388 University of Nevada Reno, NV USA

Ming-Kuo Lee Department of Geology and Geography Auburn University Auburn, AL USA Manfred Lenzen ISA, School of Physics-A28 The University of Sydney NSW Australia Yu Lin Department of Physics Auburn University Auburn, AL USA Helen H. Lou Dan F. Smith Department of Chemical Engineering Lamar University Beaumont, TX USA Zhongyang Luo State Key Laboratory of Clean Energy Utilization, Zhejiang University Hangzhou, Zhejiang P. R. of China Yiqi Luo Department of Botany and Microbiology University of Oklahoma Norman, OK USA Jing Ma China Institute of Water Resources and Hydropower Research Beijing China

List of Contributors

Preben Maegaard Nordic Folkecenter for Renewable Energy Hurup Thy Denmark

Swetha Mahalaxmi Department of Chemical Engineering University of Mississippi Oxford, MS USA

Arif S. Malik Department of Electrical and Computer Engineering College of Engineering, Sultan Qaboos University Al-Khod Sultanate of Oman

Itziar Martı´nez de Alegrı´a Mancisidor Engineering School of Bilbao University of the Basque Country Bilbao Spain

M. Misra Center for Materials Reliability, Chemical and Materials Engineering University of Nevada Reno, NV USA

C. Moore Alcoa Inc. Knoxville, TN USA

Patrick Moriarty Department of Design Monash University Melbourne, Victoria Australia

Hirofumi Muraoka North Japan Research Institute for Sustainable Energy (NJRISE) Hirosaki University Aomori Japan

Luke Marzen Department of Geology and Geography Auburn University Auburn, AL USA

Paul Norgaard Alabama Science in Motion Program Department of Physics Auburn University Auburn, AL USA

Cathy Miller Alabama Science in Motion Program Department of Physics Auburn University Auburn, AL USA

Matthew Obley Alabama Science in Motion Program Department of Physics Auburn University Auburn, AL USA

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Anne Nyatichi Omambia National Environment Management Authority Nairobi Kenya Siglinda Perathoner Dipartimento di Chimica Industriale ed Ingegneria dei Materiali University of Messina and CASPE-INSTM Messina Italy Batric Pesic Materials Science and Engineering University of Idaho Moscow, ID Russia Ralph W. Pike Minerals Processing Research Institute Louisiana State University Baton Rouge, LA USA Karen Pittel Ifo Institute for Economic Research and University of Munich Munich Germany Matthew E. Poese Applied Research Laboratory State College, PA USA Petras Punys Water Management Department Water & Land Management Faculty Lithuanian University of Agriculture Kaunas-Akademija Lithuania

K. S. Raja Center for Materials Reliability, Chemical and Materials Engineering University of Nevada Reno, NV USA Roger Raufer Independent Engineer Cinnaminson, NJ USA and Wharton School University of Pennsylvania Philadelphia, PA USA and Institut Franc¸ais du Pe´trole Rueil–Malmaison France Dirk Ru¨bbelke Basque Centre for Climate Change (BC3) Bilbao Spain and IKERBASQUE, Basque Foundation for Science Bilbao Spain David H. Reed Department of Biology University of Louisville Louisville, KY USA L. Reijnders IBED University of Amsterdam Amsterdam The Netherlands

List of Contributors

Alison C. Rivett Bristol ChemLabS School of Chemistry, University of Bristol Bristol UK

Mustafa F. Serincan Department of Mechanical Engineering University of Connecticut Storrs, CT USA

Chris Rodger Department of Mathematics and Statistics Auburn University Auburn, AL USA

Lawrence J. Shadle U.S. Department of Energy National Energy Technology Laboratory Morgantown, WV USA

David J. Rutherford Department of Public Policy Leadership University of Mississippi University, MS USA Nigel M. Sammes Department of Metallurgical and Materials Engineering Colorado School of Mines Golden, CO USA Ivonne Andrea Sanchez Hernandez Dosquebradas, Risaralda Colombia John Seiner National Center for Physical Acoustics The University of Mississippi Mississippi USA Debalina Sengupta Chemical Engineering Department Louisiana State University Baton Rouge, LA USA

Dudley E. Shallcross School of Chemistry University of Bristol Bristol UK Ceven Shemsanga Department of Eco-tourism and Nature Conservation Sebastian Kolowa University College Tumaini University Lushoto-Tanga United Republic of Tanzania Marllin Simon Department of Physics Auburn University Auburn, AL USA Heinz G. Stefan St. Anthony Falls Laboratory Department of Civil Engineering University of Minnesota Minneapolis, MN USA Laura Steltenpohl Auburn High School Auburn, AL USA

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Vaidyanathan (Ravi) Subramanian Department of Chemical and Metallurgical Engineering, Chemical and Materials Engineering Department, LME 310, MS 388 University of Nevada Reno, NV USA

Toshio Suzuki National Institute of Advanced Industrial Science and Technology (AIST) Nagoya Japan

Kristen Alley Swain Meek School of Journalism and New Media University of Mississippi University, MS USA

Pal Szentannai Department of Energy Engineering Budapest University of Technology and Economics Budapest Hungary

Hanqin Tian International Center for Climate and Global Change Research School of Forestry and Wildlife Sciences Auburn University Auburn, AL USA

Jauyah Tuah Secretariat of Brunei Darussalam Technical and Vocational Education Council, Permanent Secretary Office (Higher Education) Ministry of Education Bandar Seri Begawan Brunei Darussalam Waheed Uddin Department of Civil Engineering University of Mississippi University, MS USA Melissa Vandiver Department of Chemical and Metallurgical Engineering, Chemical and Materials Engineering Department, LME 310, MS 388 University of Nevada Reno, NV USA M. Azucena Vicente Molina Economics and Business Administration School University of the Basque Country Bilbao Spain Balasubramanian Viswanathan National Center for Catalysis Research Indian Institute of Technology Madras Chennai India Qinhui Wang Institute for Thermal Power Engineering Zhejiang University Hangzhou Zhejiang China

List of Contributors

Takao Watanabe Energy Engineering Research Laboratory Central Research Institute of Electric Power Industry (CRIEPI) Yokosuka, Kanagawa Japan

Toshiaki Yamaguchi Advanced Manufacturing Research Institute, National Institute of Advanced Industrial Science and Technology Nagoya Japan

Eric Thomas Weber Department of Public Policy Leadership University of Mississippi University, MS USA

David W. Yarbrough R&D Services, Inc. Cookeville, TN USA

Emily Wheeles Benjamin Russell High School Alexander City, AL USA Clint Williford Department of Chemical Engineering University of Mississippi Oxford, MS USA Marie Wooten Department of Biological Sciences Auburn University College of Sciences and Mathematics Auburn, AL USA Hiroshi Yamada Department of Helical Plasma Research National Institute for Fusion Science Toki, Gifu Japan

Kailiang Zheng Dan F. Smith Department of Chemical Engineering Lamar University Beaumont, TX USA

Jingsong Zhou State Key Laboratory of Clean Energy Utilization, Zhejiang University Hangzhou, Zhejiang P. R. of China

Dechen Zhu Institute for Thermal Power Engineering Zhejiang University Hangzhou, Zhejiang China

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1 Introduction to Climate Change Mitigation Maximilian Lackner1 . Wei-Yin Chen2 . Toshio Suzuki3 The Vienna University of Technology (TU Vienna), Wien, Austria 2 Department of Chemical Engineering, University of Mississippi, Mississippi, USA 3 National Institute of Advanced Industrial Science and Technology (AIST), Nagoya, Japan

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Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Greenhouse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Anthropogenic Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Effects of Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Climate Change – What Will change? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Impact of Climate Change Mitigation Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Climate Change Adaption Versus Climate Change Mitigation . . . . . . . . . . . . . . . . . . . . . . . 6 Handbook of Climate Change Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Why This Book Is Needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audience of the Handbook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Climate Change There has been a heated discussion on climate change in recent years, with a particular focus on global warming. Instrumental recording of temperatures has been available for less than 200 years. Over the last 100 years, a temperature increase of 0.5 C could be measured [1] with rather different regional patterns and trends [2]. Over the last several million years there have been warmer and colder periods on Earth, and the climate fluctuates for a variety of natural reasons, as data from tree rings, pollen, and ice core samples have shown. However, human activities on Earth have reached an extent that they impact the globe in potentially catastrophic ways. In [3], Bruce D. Smith is quoted as saying: ‘‘The changes brought over the past 10,000 years as agricultural landscapes replaced wild plant and animal communities, while not so abrupt as those caused by the impact of an asteroid as the Cretaceous-Tertiary boundary some 65 million years ago or so massive as those caused by advancing glacial ice in the Pleistocene, are nonetheless comparable to these other forces of global change.’’ At the Earth Summit in Rio de Janeiro in 1992, over 159 countries signed the United Nations Framework Convention on Climate Change (FCCC, also called ‘‘Climate Convention’’), in order to achieve ‘‘stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system’’ [4]. In 2001, the Intergovernmental Panel on Climate Change (IPCC) [30] wrote: ‘‘An increasing body of observations gives a collective picture of a warming world and other changes in the climate system. . . There is new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities.’’ In its fourth assessment report of 2007, the IPCC stated that human actions are ‘‘very likely’’ the cause of global warming. More specifically, there is a 90% probability that the burning of fossil fuels and other anthropogenic factors such as deforestation and the use of certain chemicals have already led to an increase of 0.75 in average global temperatures over the last 100 years, and that the increase in hurricane and tropical cyclone strength since 1970 also results from man-made climate change. The position of the IPCC has been adopted by several renowned scientific societies, and a consensus has emerged on the causes, and partially on the consequences, of climate change. The history of climate change science is reviewed in [5]. There are researchers who oppose the scientific mainstream’s assessment of global warming [6]. However, the public seems to be unaware of the high degree of consensus that has been achieved in the scientific community, as elaborated in a 2009 World Bank report [7]. In [8], there is a treatment of the mass media’s coverage of the climate change discussion with a focus on rhetoric that emphasizes uncertainty, controversy, and climate skepticism.

The Greenhouse Effect A greenhouse, also called a glass house, is a structure enclosed by glass or plastic which allows the penetration of radiation to warm it. Gases capable of absorbing the radiant energy are called the greenhouse gases (GHG). Greenhouses are used to grow flowers,

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vegetables, fruits, and tobacco throughout the year in a warm, agreeable climate. On Earth, there is a phenomenon called the ‘‘natural greenhouse’’ effect, or the Milankovitch cycles. Without the greenhouse gas effect, which is chiefly based on water vapor in the atmosphere (i.e., clouds that trap infrared radiation), the average surface temperature on Earth would be 33 C colder [9]. The natural greenhouse effect renders Earth habitable, since the temperature which would be expected from the thermal equilibrium of the irradiation from sun and radiative losses into space (radiation balance in the blackbody model) is approximately 18 C. On the moon, for instance, where there is hardly any atmosphere, extreme surface temperatures range from 233 C to 133 C [10]. On Venus, by contrast, the greenhouse effect in the dense CO2-laden atmosphere results in an average surface temperature in excess of 450 C [11, 12]. The current discussion about global warming and climate change is centered on the anthropogenic greenhouse effect. This is caused by the emission and accumulation of greenhouse gases in the atmosphere. These gases (water vapor, CO2, CH4, N2O, O3 and others) act by absorbing and emitting infrared radiation. The combustion of fossil fuels (oil, coal and natural gas) has led mainly to an increase in the CO2 concentration in the atmosphere. Preindustrial levels of CO2 (i.e., before the start of the Industrial Revolution) were approximately 280 ppm, whereas today they are above 380 ppm with an annual increase of approximately 2 ppm. According to the IPCC Special Report on Emission Scenarios (SRES) [13], by the end of the twenty-first century, the CO2 concentration could reach levels between 490 and 1,260 ppm, which are between 75 and 350% above the preindustrial levels, respectively. CO2 is the most important anthropogenic greenhouse gas because of its comparatively high concentration in the atmosphere. The effect of other greenhouse-active gases depends on their molecular structure and their lifetime in the atmosphere, which can be expressed by their greenhouse warming potential (GWP). GWP is a relative measure of how much heat a greenhouse gas traps in the atmosphere. It compares the amount of heat trapped by a certain mass of the gas in question to the amount of heat trapped by a similar mass of CO2. With a time horizon of 100 years, the GWP of CH4, N2O, and SF6 with respect to CO2 is 25, 298 and 22,800, respectively [14]. But CO2 has a much higher concentration than other GHGs and it is increasing at a higher rate due to burning of fossil fuels. Thus, while the major mitigating emphasis has mainly been placed on CO2, efforts on mitigating CH4, N2O, and SF6 have also been active.

Anthropogenic Climate Change The climate is governed by natural influences, yet human activities have an impact on it as well. The main impact that humans exert on the climate is via the emission of greenhouse gases. Deforestation is another example of an activity that influences the climate [15]. > Figure 1.1 shows the share of greenhouse gas emissions from various sectors, taken from [16]. The energy sector is the dominant source of GHG emissions.

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Waste 2.5% Agriculture 8%

Energy* 84%

CO2 95%

Industrial processes 5.5% CH4 4% N2O 1%

. Fig. 1.1 Shares of global anthropogenic greenhouse gas emissions (Reprinted with permission from [16])

According to the International Energy Agency (IEA), if no action toward climate change mitigation is taken, global warming could reach an increase of up to 6 in average temperature [17]. This temperature rise could cause devastating consequences on Earth, which will be discussed briefly below.

Effects of Climate Change Paleoclimatological data show that 100–200 million years ago, almost all carbon was in the atmosphere as CO 2, with global temperatures being 10 C warmer and sea levels 50–100 m higher than today. Photosynthesis and CO2 uptake into the oceans took almost 200 million years. Since the Industrial Revolution, i.e., during the last 200 years, this carbon is being put back into the atmosphere to a significant extent. This is a rate which is 107 times faster, so there is a risk of a possible ‘‘runaway’’ reaction greenhouse effect. > Figure 1.2 shows the timescales of several different effects of climate change for the future. Due to the long lifetime of CO2 in the atmosphere, the effects of climate change until a new equilibrium has been reached will prove long term. A global temperature increase of 6 C would be severe, so the IEA has developed a scenario which would limit the temperature increase to 2 C [17] to minimize the effects. Sea level rise will indeed be the most direct impact. Other impacts, including those on weather, flooding, biodiversity, water resources, and diseases are discussed here.

Climate Change – What Will change? An overall higher temperature on Earth, depending on the magnitude of the effect and the rate at which it manifests itself, will change the sea level, local climatic conditions, and the

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Sea-level rise due to ice melting: several millennia Sea-level rise due to thermal expansion: centuries to millennia

CO2 emissions peak: 0 to 100 years

Temperature stabilisation: a few centuries CO2 stabilisation: 100 to 300 years

CO2 emissions Today 100 years

1000 years

. Fig 1.2 Time scales of climate change effects based on a stabilization of CO2 concentration levels between 450 and 1,000 ppm after today’s emissions (Reprinted with permission from [16])

proliferation of animal and plant species, to name but a few of the most obvious examples. The debate on the actual consequences of global warming is the most heated part of the climate change discussion. Apart from changes in the environment, there will be various impacts on human activity. One example is the threats to tourism revenue in winter ski resorts [20] and lowelevation tropical islands [21]. Insurance companies will need to devise completely new business models, to cite just one example of businesses being forced to react to climate change.

Impact of Climate Change Mitigation Actions The purpose of climate change mitigation is to enact measures to limit the extent of climate change. Climate change mitigation can make a difference. In the IEA reference scenario [17], the world is headed for a CO2 concentration in the atmosphere above 1,000 ppm, whereas that level is limited to 450 ppm in the proposed ‘‘mitigation action’’ scenario. In the first case, the global temperature increase will be 6 C, whereas it is limited to 2 C in the latter [17]. The Intergovernmental Panel on Climate Change has projected that the financial effect of compliance through trading within the Kyoto commitment period will be limited at between 0.1 and 1.1% of GDP. By comparison, the Stern report estimated that the cost of mitigating climate change would be 1% of global GDP and the costs of doing nothing would be 5 to 20 times higher [14, 22].

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Climate Change Adaption Versus Climate Change Mitigation Individuals [23], municipalities [24, 25], businesses [20], and nations [26, 27] have started to adapt to the ongoing and expected state of climate change. Climate change adaptation and climate change mitigation face similar barriers [29]. To best deal with the situation, there needs to be a balanced approach between climate change mitigation and climate change adaptation [21, 24, 29]. This will prove to be one of mankind’s largest modern challenges.

Handbook of Climate Change Mitigation Motivation The struggle in mitigating climate change is not only to create a sustainable environment, but also to build a sustainable economy through renewable energy resources. ‘‘Sustainability’’ has turned into a household phrase as people become increasingly aware of the severity and scope of future climate change. A survey of the current literature on climate change suggests that there is an urgent need for a comprehensive handbook introducing the mitigation of climate change to a broad audience. The burning of fossil fuels, such as coal, oil, and gas, and the clearing of forests, has been identified as the major sources of greenhouse gas emissions. Reducing the 24 billion metric tons of carbon dioxide emissions per year generated from stationary and mobile sources is an enormous task that involves both technological challenges and monumental financial and societal costs with benefits that will only surface decades later. The Stern Report (2007) provided a detailed analysis of the economic impacts of climate change and the ethical ground of policy responses for mitigation and adaptation. The decline in the supply of high-quality crude oil has further increased the urgency to identify alternative energy resources and develop energy conversion technologies that are both environmentally sound and economically viable. Various routes for converting renewable energies have emerged – including energy conservation and energy-efficient technologies. The energy industry currently lacks an infrastructure that can completely replace fossil fuels in the near future. At the same time, energy consumption in developing countries like China and India is rapidly increasing as a result of their economic growth. It is generally recognized that the burning of fossil fuels will continue until an infrastructure for sustainable energy is established. Therefore, there is now a high demand for reducing greenhouse gas emissions from fossil fuel–based power plants. The pursuit of sustainable energy resources has become a complex issue across the globe. The Handbook on Climate Change Mitigation is a valuable resource for a wide audience who would like to quickly and comprehensively learn the issues surrounding climate change mitigation.

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Why This Book Is Needed There is a mounting consensus that human behaviors are changing the global climate and that its consequence, if left unchecked, could be catastrophic. The fourth climate change report by the Intergovernmental Panel on Climate Change (IPCC 2007) has provided the most detailed assessment ever on climate change’s causes, impacts, and solutions. A consortium of experts from 13 US government science agencies, universities, and research institutions released the report Global Climate Change Impacts in the United States (2009), which verifies that global warming is primarily human induced, and climate changes are underway in the USA and are only expected to worsen. From its causes and impacts to its solutions, the issues surrounding climate change involve multidisciplinary sciences and technologies. The complexity and scope of these issues warrants a single, comprehensive survey of a broad array of topics, something which the Handbook on Climate Change Mitigation achieves by providing readers with all the necessary background information on the mitigation of climate change. The handbook introduces the fundamental issues of climate change mitigation in independent chapters, rather than directly giving the detailed advanced analysis presented by the IPCC and others. Therefore, the handbook will be an indispensable companion reference to the complex analysis presented in the IPCC reports. For instance, while the IPCC reports give large amounts of data concerning the impacts of different greenhouse gases, they contain little discussion about the science behind the analysis. Similarly, while the IPCC reports present large amounts of information concerning the impacts of different alternative energies, the reports rarely discuss the science behind the technology. There is currently not a single, comprehensive source that enables the readers to learn the science and technology associated with climate change mitigation.

Audience of the Handbook Since the handbook covers a wide range of topics, it will find broad use as a major reference book in environmental, industrial, and analytical chemistry. Scientists, engineers, and technical managers in the energy and environmental fields are expected to be the primary users. They are likely to have an undergraduate degree in science or engineering with an interest in understanding the science and technology used in addressing climate change and its mitigation.

Scope This two-volume handbook offers a comprehensive collection of information on climate change and how to minimize its impact. The chapters in this handbook were written by internationally renowned experts from industry and academia. The purpose of this book

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is to provide the reader with an authoritative reference work toward the goal of understanding climate change, its effects, and the available mitigation strategies with which it may be tackled: ● ● ● ● ● ● ●

Scientific evidence of climate change and related societal issues The impact of climate change Energy conservation Alternative energy sources Advanced combustion techniques Advanced technologies Education and outreach

This handbook presents information on how climate change is intimately involved with two critical issues: available energy resources and environmental policy. Readers will learn that these issues may not be viewed in isolation but are mediated by global economics, politics, and media attention. The focus of these presentations will be current scientific technological development, although societal impacts will not be neglected.

References 1. Le Houe´rou HN (1996) Climate change, drought and desertification. J Arid Environ 34:133–185 2. Folland CK, Karl TR, Nicholls N, Nyenzi BS, Parker DE, Vinnikov KYA (1992) Observed climate variability and change. In: Houghton JT, Callander BA, Varney SDK (eds) Climate change, the supplementary report to the IPCC scientific assessment. Cambridge University Press, Cambridge, pp 135–170 3. Ehrlich PR (2000) Human natures: genes cultures and the human prospect B&T. Island Press, Washington, DC. ISBN 978-1559637794 4. United Nations (UN) (1992) United framework convention on climate change. United Nations, Geneva 5. Miller FP, Vandome AF, McBrewster J (eds) (2009) History of climate change science. Alphascript, Mauritius. ISBN 978-6130229597 6. Linden HR (1993) A dissenting view on global climate change. The Electr J 6(6):62–69 7. Worldbank (2009) Attitudes toward climate change: findings from a multi-country poll. http://siteresources.worldbank.org/INTWDR2010/ Resources/Background-report.pdf 8. Antilla L (2005) Climate of scepticism: US newspaper coverage of the science of climate change. Global Environ Change Part A 15(4):338–352

9. Karl TR, Trenberth KE (2003) Modern global climate change. Science 302(5651):1719–23 10. Winter DF (1967) Transient radiative heat exchange at the surface of the moon. Icarus 6 (1–3):229–235 11. Sonnabend G, Sornig M, Schieder R, Kostiuk T, Delgado J (2008) Temperatures in Venus upper atmosphere from mid-infrared heterodyne spectroscopy of CO2 around 10 mm wavelength. Planet Space Sci 56(10):1407–1413 12. Zasova LV, Ignatiev N, Khatuntsev I, Linkin V (2007) Structure of the Venus atmosphere. Planet Space Sci 55(12):1712–1728 13. IPCC (2010) Special Report on Emission Scenarios (SRES), http://www.grida.no/climate/ipcc/emission/ 14. IPCC (2010) Intergovernmental panel on climate change. http://www.ipcc.ch/ 15. McMichael AJ, Powles JW, Butler CD, Uauy R (2007) Food, livestock production, energy, climate change, and health. Lancet 370:1253–1263 16. Quadrelli R, Peterson S (2007) The energy– climate challenge: recent trends in CO2 emissions from fuel combustion. Energy Pol 35(11): 5938–5952 17. International Energy Association IEA (2009) World energy outlook 2009. International Energy Association (IEA), Paris. ISBN 9789264061309

Introduction to Climate Change Mitigation 18. Kotter JP (1996) Leading change. McGraw-Hill, New York. ISBN 978-0875847474 19. Luecke R (2003) Managing change and transition (Harvard business essentials). McGraw-Hill, New York. ISBN 978-1578518746 20. Hoffmann VH, Sprengel DC, Ziegler A, Kolb M, Abegg B (2009) Determinants of corporate adaptation to climate change in winter tourism: an econometric analysis. Global Environ Change 19(2):256–264 21. Becken S (2005) Harmonising climate change adaptation and mitigation: the case of tourist resorts in Fiji. Global Environmental Change Part A 15(4):381–393 22. Stern N (2007) The economics of climate change: the stern review. Cambridge University Press, Cambridge. ISBN 978-0521700801 23. Grothmann T, Patt A (2005) Adaptive capacity and human cognition: the process of individual adaptation to climate change. Global Environmental Change Part A 15(3):199–213 24. Laukkonen J, Blanco PK, Lenhart J, Keiner M, Cavric B, Kinuthia-Njenga C (2009) Combining climate change adaptation and mitigation measures at the local level. Habitat International 33(3):287–292

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25. van Aalst MK, Cannon T, Burton I (2008) Community level adaptation to climate change: the potential role of participatory community risk assessment. Global Environ Change 18(1):165–179 26. Næss LO, Bang G, Eriksen S, Vevatne J (2005) Institutional adaptation to climate change: flood responses at the municipal level in Norway. Global Environ Change Part A 15(2):125–138 27. Stringer LC, Dyer JC, Reed MS, Dougill AJ, Twyman C, Mkwambisi D (2009) Adaptations to climate change, drought and desertification: local insights to enhance policy in southern Africa. Environ Sci Pol 12(7):748–765 28. Nielsen JO, Reenberg A (2010) Cultural barriers to climate change adaptation: a case study from Northern Burkina Faso. Global Environ Change 20(1):142–152 29. Hamin EM, Gurran N (2009) Urban form and climate change: balancing adaptation and mitigation in the U.S. and Australia. Habitat Int 33(3):238–245 30. Intergovernmental Panel on Climate Change (IPCC), IPCC Fourth Assessment Report: Climate change 2007 (AR4), Vol. 3, Cambridge University Press (2007)

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Section 1

Scientific Evidences of Climate Change and Societal Issues

2 Life Cycle Assessment of Greenhouse Gas Emissions L. Reijnders IBED, University of Amsterdam, Amsterdam, The Netherlands Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 What Is Life Cycle Assessment and How Does It Work? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Goal and Scope Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Inventory Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Impact Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Life Cycle Assessments Focusing on Greenhouse Gas Emissions, or a Part Thereof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Simplified Life Cycle Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Published Life Cycle Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Main Findings from Life Cycle Studies of Greenhouse Gas Emissions . . . . . . . . . . . . . . . 25 Energy Conversion Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Products Consuming Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Conventional and Unconventional Fossil Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Green Energy Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Biofuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Plastics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Crop-Based Lubricants and Solvents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Recycling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Nanotechnology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Reduction of Life Cycle Greenhouse Gas Emissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Future Directions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Change in Carbon Stocks of Recent Biogenic Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Indirect Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

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Comprehensives of Dealing with Climate Warming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Consequential Life Cycle Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

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Abstract: Life cycle assessments of greenhouse gas emissions have been developed for analyzing products ‘‘from cradle to grave’’: from resource extraction to waste disposal. Life cycle assessment methodology has also been applied to economies, trade between countries, aspects of production and to waste management, including CO2 capture and sequestration. Life cycle assessments of greenhouse gas emissions are often part of wider environmental assessments, which also cover other environmental impacts. Such wider ranging assessments allow for considering ‘‘trade-offs’’ between (reduction of) greenhouse gas emissions and other environmental impacts and co-benefits of reduced greenhouse gas emissions. Databases exist which contain estimates of current greenhouse gas emissions linked to fossil fuel use and to many current agricultural and industrial activities. However these data bases do allow for substantial uncertainties in emission estimates. Assessments of greenhouse gas emissions linked to new processes and products are subject to even greater data-linked uncertainty. Variability in outcomes of life cycle assessments of greenhouse gas emissions may furthermore originate in different choices regarding functional units, system boundaries, time horizons, and the allocation of greenhouse gas emissions to outputs in multi-output processes. Life cycle assessments may be useful in the identification of life cycle stages that are major contributors to greenhouse gas emissions and of major reduction options, in the verification of alleged climate benefits and to establish major differences between competing products. They may also be helpful in the analysis and development of options, policies, and innovations aimed at mitigation of climate change. The main findings from available life cycle assessments of greenhouse gas emissions are summarized, offering guidance in mitigating climate change. Future directions in developing life cycle assessment and its application are indicated. These include: better handling of indirect effects, of uncertainty, and of changes in carbon stock of recent biogenic origin; and improved comprehensiveness in dealing with climate warming.

Introduction This handbook is about climate change mitigation. In decision making about climate change mitigation, question marks about proper choices regularly emerge. Is going for electric cars a good thing, when power production is largely coal-based? Do the extra inputs in car production invalidate the energy efficiency gains of hybrid cars? Should a company focus its greenhouse gas management on its own operations or on those of raw material suppliers? Is materials recycling better or worse for climate change mitigation than incineration in the case of milk cartons? And what about biofuels: should their use be encouraged or not? Regarding all these questions assessment of the life cycle emission of greenhouse gases, or more in general the environmental burden, is important for giving proper answers. Life cycle assessments may lead to anti-intuitive results. This can be illustrated by the case of liquid biofuels [1]. It has been argued that biofuels are ‘‘climate neutral’’ (e.g., [2, 3]). The CO2 which emerges from burning biofuels has been recently fixed by photosynthesis, so, it has been argued, there should be no net effect of burning biofuels on the atmospheric

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concentration of CO2. However, if one looks at the ‘‘seed to wheel’’ life cycle of biofuels, a different picture may emerge. Consider, e.g., corn ethanol used as a transport biofuel in the USA. In the actual production thereof there are substantial inputs of fossil fuels [4, 5]. Corn cultivation also leads to emissions of the major greenhouse gas N2O [6]. And corn cultivation is associated with changes in carbon stocks of agro-ecosystems [5]. Considering the life cycle emissions of greenhouse gases leads to the conclusion that bioethanol from US corn is far from ‘‘climate neutral,’’ but is rather associated with larger greenhouse gas emissions than conventional gasoline [5, 7]. This has clearly implications for making good decisions about mitigating climate change linked to fuel choice [1]. Against this background this chapter will consider current life cycle assessment, with a focus on the life cycle emission of greenhouse gases. First, it will be discussed what life cycle assessment is and how it is done. It will appear that such assessment may give rise to substantial uncertainty. Notwithstanding such uncertainty, life cycle assessments can be helpful in making proper choices about climate change mitigation. To illustrate this, main findings from available peer-reviewed life cycle assessments of greenhouse gas emissions will be summarized.

What Is Life Cycle Assessment and How Does It Work? Life cycle assessment has been developed for analyzing current products from resource extraction to final waste disposal, or from cradle to grave. Apart from analyzing the status quo, life cycle assessments may also deal with changes in demand for, and supply of, products and with novel products. The latter type of assessment has been called consequential, as distinguished from the analysis of status quo products, which has been called attributional [8, 9]. The assessment of novel products has also occasionally been called: prospective attributional [10, 11]. Different data may be needed in attributional and consequential life cycle assessment. Whereas in attributional life cycle assessment one, e.g., uses electricity data reflecting current power production, in consequential life one needs data regarding changes in electricity supply. For the short term, assessing a marginal change in capacity of current electricity supply may suffice to deal with changes in electricity supply. When the longer term is at stake, major changes in energy supply, including complex sets of energy supply technologies, should be assessed [12]. When novel products go beyond existing components, materials, and processes, knowledge often partly or fully relates to the research and development stage or to the limited production stage. These stages reflect immature technologies. Comparing these with products of much more mature technologies may be unfair, as maturing technologies are optimized and tend to allow for better resource efficiency and a lower environmental impact [13, 14]. Also, novel products may be subject to currently uncommon environmental improvement options and may have to operate under conditions that diverge from those that are currently common [8, 9]. The latter conditions may, e.g., include constraints on resource availability which currently do not exist, new infrastructures, budget

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constraints, higher resource costs which are conducive to resource efficiency, and strict caps on greenhouse gas emissions. A solution to such divergence from ‘‘business as usual’’ may be found in assuming technological trajectories and/or constructing scenarios which include assumptions about the environmental performance of future mature technologies under particular conditions [9, 14–16]. It should be realized that the assumptions involved lead to considerable uncertainty regarding the outcomes of consequential life cycle assessments, as these assumptions may be at variance with ‘‘real life’’ in the future. Life cycle assessment is generally divided in four stages [17, 18]. – – – –

Goal and scope definition Inventory analysis Impact assessment Interpretation

Goal and Scope Definition In the goal and scope definition stage, the aim and the subject of life cycle assessment are determined. This implies the establishment of ‘‘system boundaries’’ and usually the definition of a ‘‘functional unit.’’ A functional unit is a quantitative description of service performance of the product(s) under investigation. It may for instance be: the production of a Mega Watt hour (MWh) of electricity. This allows for comparing different products having the same output: e.g., photovoltaic cells, a coal-fired power plant, a gas-fired power plant, and a wind turbine. It should be noted though, that the functional unit may cover only a part of the service performance, because products may have special properties. For instance, in the case of power generation the production of a MWh of electricity as a functional unit does not take account of the phenomenon that a coal-fired power plant is most suitable for base load and a gas-fired power plant for peak load. In the goal and scope definition stage, a number of questions have to be answered. For instance, the life cycle of products usually includes a transport stage. As to transport the question arises what to include into the assessment: production of the transport vehicle? road building? building storage facilities for products? Similarly, in the life cycle assessment of fishery products questions arise such as: should one include: the by-catch of fish which is currently discarded? the energy input in shipbuilding and ship maintenance? and/or the energy input in building harbor facilities? In the goal and scope definition stage, one should also consider the matter of significant indirect effects of products. A well known example thereof is the rebound effect in the case of more energy-efficient products with lowered costs of ownership. Such products may for instance increase use of the product and my lead to spending of money saved by the energy-efficient product, which in turn may impact energy consumption, and associated greenhouse gas emissions [19–21]. Another case in point concerns biofuels from crops

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that currently serve as source for food or feed. When carbohydrates or lipids from such crops are diverted to biofuel production, this diversion may give rise to additional food and/or feed production elsewhere, because demand for food and feed is highly inelastic [5]. This, in turn, may have a substantial impact on estimated greenhouse gas emissions. Similarly the use of waste fat for biodiesel production may have the indirect effect of reducing the amount of fat available for feed production, which in turn might lead to an increased use of virgin fat, which will impact land use and may thus change carbon stocks of recent biogenic origin. However, indirect effects of decisions about biofuels do not end with the consideration of indirect effects on land use. It may, for instance, be argued that not expanding biofuel production may increase dependency on mineral oil, and that this may increase military activities to safeguard oil installations and shipping and associated emissions of greenhouse gases [3]. Still another example of indirect effects regards wood products. These may have the indirect effect of substituting for non-wood products, and including such substitution has a significant effect on estimated greenhouse gas emissions [22]. Decision making about significant indirect effects is not straightforward. This has led some to the conclusion that including indirect effects is futile (e.g., [3]), whereas others have argued that including at least some indirect effects is conducive to good decision making (e.g., [5, 22]). System boundaries refer to what is included in life cycle assessment. In general, system boundaries are drawn between technical systems and the environment, between relevant and irrelevant processes, between significant and insignificant processes, and between technological systems. An example of the latter is for instance a boundary between the motorcar life cycle and the life cycle of the building in which the car is produced. The choice of system boundaries may have a substantial effect on the outcomes of life cycle assessments (also: [23, 24]).

Inventory Analysis The inventory analysis gathers the necessary data for all processes involved in the product life cycle. This is a difficult matter when one is very specific about a product: for instance the apples which I bought last Saturday in my local supermarket. However, databases have been developed, such as Ecoinvent [25], the Chinese National Database [26], Spine (www. globalspine.com), JEMAI [27], and the European Reference Life Cycle Data System [28], which give estimates about resource extraction and emissions that are common in Europe, China, the USA, and Japan for specified processes (for instance the production and use of phosphate fertilizer). Also, there are databases which extend to economic input–output analyses and give resource extraction and emissions data at a higher level of aggregation than the process level [29]. A study of de Eicker et al. [30], which also gives a fuller survey of available databases, suggests that among available databases the Ecoinvent database is preferable for relatively demanding LCA studies. If only greenhouse gas emissions are considered, the 2006 Guidelines for national greenhouse gas inventories of the IPCC (Intergovernmental Panel on Climate Change; www.ipcc.ch/) were found to be useful [30].

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Available databases do not always give the same emissions for the same functional units. For instance according to a study of Fruergaard et al. [31], data about the average emission of greenhouse gases linked to 1 kWh electricity production in 25 EU countries varied between databases by up to 20%. For similar estimates in the USA, an even greater between-database uncertainty (on average 40%) was found [32]. Though such uncertainties are substantial, they should not detract from using databases such as Ecoinvent, Spine, and JEMAI, if only because between-process differences often exceed uncertainty. This may be illustrated by the geographical variability in greenhouse gas emissions linked to electricity production. For instance, country-specific average emissions of greenhouse gases per kWh of electricity in such databases vary by a factor 160 [31]. For marginal emissions of greenhouse gases per kWh of electricity (which are used to assess changes in supply or demand as needed for consequential life cycle assessment) variations were even larger: up to 400–750 times [31]. In the inventory stage of life cycle assessments of greenhouse gas emissions, the focus is evidently on the latter emissions. In wider ranging life cycle assessments, the inventory may comprise all extractions of resources and emissions of substances causally linked to the functional unit for each product under consideration, within the system boundaries that were established in the stage of goal and scope definition. Such wider ranging life cycle assessments have a benefit over life cycle assessments, which only focus on greenhouse gas emissions. First, they give a better picture of the overall environmental impact, for which life cycle greenhouse gas emissions may well be a poor indicator [33–35]. Also, such wider ranging LCAs allow for considering ‘‘trade-offs’’ between environmental impacts, and the occurrence of co-benefits linked to reducing greenhouse gas emissions [36–40]. For instance, Walsmsley and Godbold [40] concluded that stump harvesting for bioenergy may not only impact greenhouse gas emissions but may have the co-benefit of reducing fungal infections and may have negative co-impacts linked to erosion, nutrient depletion and loss, increased soil compaction, increased herbicide use, and loss of valuable habitat for a variety of (non-pest) species. Many current transport biofuels have larger life cycle greenhouse gas emissions than the fossil fuel which they replace, but have the benefit that dependence on mineral oil is reduced [7]. A large part of the impacts which go beyond climate change can be covered by standard wider ranging LCAs. Aspects of environmental impact which are, apart from the emission of greenhouse gases, often covered by such wider ranging life cycle assessments are summarized in > Box 2.1. In evaluating buildings, the indoor environment may also be a matter to consider [41, 42]. New operationalizations of some of the aspects of environmental impact mentioned in > Box 2.1 and additions to the list of > Box 2.1 are under development. The latter include: ecosystem services [43, 44] and the impacts of fresh water use [45]. Adding to the aspects often covered in wide ranging LCAs, a proposal has been published for the inclusion into life cycle assessment of change in albedo, characterized in terms of CO2 equivalents [46], which is relevant to climate [47]. As yet, no proposal could be found for the quantitative inclusion of black carbon emissions (characterized in terms of CO2 equivalents), which also impact climate.

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In life cycle assessments, the problem arises that many production systems have more than one output. For instance, rapeseed processing not only leads to the output oil, which may be used for biodiesel production, but also to rapeseed cake, which may be used as feed. Similarly, mineral oil refinery processes may not only generate gasoline, but also kerosene, heavy fuel oil and bitumen, and biorefineries produce a variety of product outputs too [48]. In the case of multi-output processes, extractions of resources and emissions have to be allocated to the different outputs. There are several ways to do so. Major ways to allocate are based on physical units (e.g., energy content or weight of outputs) or on monetary value (price). There may also be allocation on the basis of substitution. In the latter case, the environmental burden of a co-product is established on the basis of another, similar product. Different kinds of allocation may lead to different outcomes of life cycle assessment [7, 23, 31, 49]. The usual outcome of the inventory analysis of a wide ranging life cycle assessment is a list with all extractions of resources and emissions of substances causally linked to the functional unit for the product considered and, apart from the case of nuisance, commonly disregarding place and time of the extractions and emissions. Box 2.1: Aspects of Environmental Impact Which Are Often Considered in Wide Raging Life Cycle Assessments Resource depletion (abiotic, biotic) Effect of land use on ecosystems and landscape Desiccation Impact on the ozone layer Acidification Photo-oxidant formation Eutrophication or nutrification Human toxicity Ecotoxicity Nuisance (odor, noise) Radiation Casualties Waste heat

Impact Assessment The next stage in life cycle assessment is impact assessment. This firstly implies a step called characterization. In this step, extractions of resources and emissions are aggregated for a number of impact categories. When only greenhouse gas emissions are considered, the aggregation aims at establishing the emission of other greenhouse gases in terms of CO2 equivalents (CO2eq), which means that the emission of greenhouse gases like N2O, CH4, and CF4 are recalculated in terms of CO2 emissions. To do so, one needs to choose a time

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. Table 2.1 Estimated global warming potentials (GWP) in CO2eq of CH4 and N2O for time horizons of 20, 100, and 500 years as proposed by the Intergovernmental Panel on Climate Change (IPCC) [50]. Only direct effects are considered Gas/time horizon

20 years

100 years

500 years

CO2

1

1

1

CH4 N2O

72 289

25 298

7.6 153

horizon (e.g., 25 years, 100 years, 104 years), because the greenhouse gas effect of emitted greenhouse gases may be different dependent on the time horizon chosen (see > Table 2.1). The time dependent differences in > Table 2.1 reflect differences in atmospheric fate of greenhouse gases. For instance, the removal of CH4 from the atmosphere is much faster than the removal of CO2 [50]. In practice, often a time horizon of 100 years is chosen and the global warming potentials (GWP) from the corresponding column of > Table 2.1 are commonly used in life cycle assessments. > Table 2.1 considers only direct impacts or effects of the greenhouse gases. There are however also indirect impacts. For instance the emission of CH4 may affect the presence of ozone, which is also a greenhouse gas. There have been proposals for including such indirect effects in global warming potentials. Using a 100 years time horizon and assuming the GWP of CO2 to be 1, Brakkee et al. [51] proposed for instance a GWP for CH4 of 28, and for non-methane volatile organic compounds a GWP of 8. The latter have a direct GWP of 0. A number of estimated examples of global warming potentials calculated with and without indirect effects are in > Table 2.2. One may note that Brakkee et al. [51] give an estimate for the GWP of CH4 (direct effect only), which is different from the value in > Table 2.1. Still another possibility is to calculate GWPs on the basis of a similar percentage of greenhouse gas remaining in, or lost from, the atmosphere. This is exemplified by > Table 2.3, with values as calculated by Sekiya and Okamoto [52]. In the case of life cycle assessment of greenhouse gas emissions, calculating the emission in terms of CO2eq is where the impact assessment stage often ends, though there is also the option to quantify the impact in terms of damage to public health (e.g., [37]), damage to human health and ecosystems [53], and in terms of negative effects on the economy (e.g., [54]). Such damage-based characterizations facilitate weighing of trade-offs and co-benefits, when a variety of environmental impacts (cf. > Box 2.1) are included in life cycle assessment. Having CO2eq emissions as an outcome of life cycle assessment is often sufficient to guide the selection of product life cycle options, policies, and innovations aimed at mitigation of climate change, because the emission of greenhouse gases is in a first approximation directly causally linked with environmental impact (climate change).

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. Table 2.2 Estimated global warming potentials (GWP) with a time horizon of 100 years relative to the GWP of CO2 for a number of gases as calculated by Brakkee et al. [51] Gas/type of GWP

GWP, direct effect only; time horizon 100 years

GWP, including indirect effects; time horizon 100 years

CH4 CO

18 0

28 3

Non-methane volatile organic 0 compounds (NMVOC) Chlorofluorocarbon (CFC) 11 4800 Chlorofluorocarbon (CFC) 12 11000

8 3300 6100

Chlorofluorocarbon (CFC)113 CF4 CO2

4700 6100 1

6200 6100 1

. Table 2.3 Global Warming Potentials in CO2eq for a number of gases Gas/Global Warming Potential CH4 Chlorofluorocarbon (CFC)11 CF4 CO2

GWP assuming only direct effects and GWP assuming 70% removal from atmosphere a time horizon of 100 years as calculated by Brakkee et al. [51] (direct effect only) [52] 10.6 2249

18 4800

1560558 1

6100 1

Still, it should be noted that the temporal pattern of greenhouse emissions may affect the rate of climate change, which in turn is, e.g., a major determinant of impact on ecosystems. When the temporal pattern of the emissions is important, as for instance in the case of land use change or capital investments in production systems, it is possible to adapt life cycle assessment by including the estimated temporal pattern of greenhouse gas emissions linked to the object of life cycle assessment (cf. [55, 56]). Also, one may note that effect of activities on climate may go beyond the emission of greenhouse gases. For instance, agricultural activities may change albedo, evaporation and wind speed, which may in turn affect climate [7]. Also, the greenhouse effect of air traffic may be different than expected solely on the basis of CO2, N2O, and CH4 emissions, because air traffic triggers formation of contrails and cirrus clouds [57]. A direct causal link between emission and impact for greenhouse gas emissions may be at variance with other environmental impact categories. For instance, lead emissions which do not lead to exceeding a no-effect level for exposure of organisms will have no

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direct environmental impact. Also, specificity as to time and place can be very important for other impacts than climate change caused by greenhouse gases, such as the impacts of the emissions of hazardous and acidifying substances [58–61]. It may be noted, however, that in such cases time- and place-specificity may be introduced by adaptation of life cycle assessment or combining life cycle assessment with other tools (e.g., [59, 62, 63]).

Interpretation The interpretation stage connects the outcome of the impact assessment to the real world. Much of the practical usefulness of life cycle assessments of greenhouse gas emissions in this respect depends upon the uncertainty of outcomes, which has a variety of sources (e.g., [23, 64–68]). These can be categorized as uncertainties due to choices, uncertainties due to modeling, and parameter uncertainty [64, 65]. Parameter uncertainty and uncertainty due to choice (e.g., regarding time horizon, type of allocation, system boundaries, and functional unit) would seem to be the most important types of uncertainty in the case of estimating life cycle greenhouse gas emissions. Uncertainty in the outcomes of life cycle assessments of greenhouse gas emissions partly depends on the reliability of input data (categorized as parameter uncertainty). As pointed out above, databases regarding fossil fuel use industrialized countries such as the USA, China, Japan, and EU countries allow for substantial uncertainties in this respect [2, 31]. Similar data regarding other countries tend to be still more uncertain. Greenhouse gas emissions linked to land use, N2O emissions, and animal husbandry are also characterized by a relatively large uncertainty [7, 69]. Additional variability in outcomes of life cycle assessments of greenhouse gas emissions may originate in different choices regarding system boundaries. This has for instance been shown by Christensen et al. [70] and Gaudreault et al. [24], who analyzed life cycle greenhouse gas emissions of forestry products. They found that different assumptions about the boundary to the forestry industry and interactions between the forestry industry on one hand and on the other hand the energy industry and the recycled paper market might lead to substantial differences in outcomes of life cycle assessments. Choices regarding time horizons and the allocation of greenhouse gas emissions to outputs in multi-output processes may also have major consequences for such outcomes [7]. Sensitivity analysis may be part of the interpretation stage and for instance consider the dependence on different assumptions regarding allocation and time horizon. Similarly uncertainty analysis may be part of the interpretation stage. Several approaches to uncertainty analysis have been proposed, using Monte Carlo techniques [65, 71], matrix perturbation [72], or Taylor series expansion [73]. In practice uncertainty analysis has been applied in a limited way. Also in the interpretation stage, conclusions can be drawn. For instance, stages or elements of the product life cycle can be identified, which are linked to relatively high greenhouse gas emissions. These can be prioritized for emission reduction options and policies. Also it may be established that, given a functional unit and specified assumptions,

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one product has lower greenhouse gas emissions (in CO2eq) than another. Examples of conclusions which can be drawn from life cycle assessments are given in > section ‘‘Main Findings from Life Cycle Studies of Greenhouse Gas Emissions.’’ Though life cycle assessment has been developed for products, in practice the methodology has been applied more widely (cf. ‘‘> Published Life Cycle Assessments’’). To the extent that life cycle assessment methodology, which does not focus on products, essentially assess parts of product life cycles (e.g., the nickel industry, waste incineration, and CO2 capture and sequestration), the usefulness of assessment may be similar to the assessment of products: one may find, prioritize, and validate emission reduction options. Some of the applications of life cycle assessments, which go beyond products, give rise to additional problems. For instance, applying life cycle assessments to state economies and trade may give rise to double counting of emissions [74]. On the other hand, e.g., expansion of life cycle assessments to trade between states may give useful insights about the actual environmental impacts of imports and exports. This is a useful addition to climate regimes such as the Kyoto protocol, which focus on greenhouse gas emissions within state borders. Also, economy-wide LCAs may help in prioritizing product categories or economic sectors for policy development [75].

Life Cycle Assessments Focusing on Greenhouse Gas Emissions, or a Part Thereof The emergence of climate change as a major environmental concern has led to a rapid increase in life cycle assessments focusing on the emission of greenhouse gases. However, it should be pointed out that there are also life cycle assessments which cover only a part of the greenhouse gases. In this context, one may note the growing popularity of ‘‘carbon footprinting’’ (e.g., [67, 76–79]). There is no generally agreed upon definition of carbon footprinting. In practice, the focus of carbon footprinting is often on the emission of carbonaceous greenhouse gases, if the footprinting is not being ‘‘slimlined’’ to covering CO2 only (e.g., [79]). Also, there is an increasing interest in life cycle assessments focusing on the cumulative input of fossil fuels, which in turn is closely related to the life cycle emission of the major greenhouse gas CO2 [35, 36]. The focus on carbonaceous greenhouse gases may lead to outcomes which substantially deviate from overall greenhouse gas emissions. As several authors [6, 7, 35, 36] have pointed out, cumulative energy demand may be substantially at variance with overall environmental performance and life cycle emissions of greenhouse gases, in the case of agricultural commodities and in other cases in which life cycles impact land use. The same will hold in the case of a number of compounds, such as adipic acid, caprolactam, and nitric acid, when syntheses are used which generate N2O in a poorly controlled way [80, 81]. Also there can be a major divergence of ‘‘carbon footprinting’’ from overall life cycle greenhouse gas emissions when there are substantial emissions of halogenated greenhouse gases. The latter, e.g., applies to the case of halogenated refrigerant use [82], the use of halogenated blowing agents for the production of insulation [83], to primary aluminum

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production, which is associated with the emission of potent fluorinated greenhouse gases such as CF4 [80, 84], and to circuit breakers using SF6 and magnesium foundries [80, 85]. In the following only assessments will be used which give an estimate of all greenhouse gas emissions, recalculated as CO2eq emissions.

Simplified Life Cycle Assessments Full life cycle assessments require extensive data acquisition, which tends to be laborious and time consuming, and this may well be beyond what practice in industry and policy requires [86]. This has led to the emergence of simplified tools for the life cycle assessment of greenhouse gas emissions, such as screening LCAs. These tend to focus on major causes of life cycle greenhouse gas emissions (‘‘hotspots’’) and are often useful in identifying and prioritizing emission reduction options [87, 88].

Published Life Cycle Assessments A wide variety of products has been the object of life cycle assessments of greenhouse gas emissions. Examples range from teddy bears to power generators, from pesticides to motorcars, from tomato ketchup to buildings, and from a cup of coffee to tablet e-newspapers. Products have not been the only objects of life cycle assessments of greenhouse gas emissions. Life cycle assessment has also been used for state economies, trade between countries, branches of industry, industrial symbiosis, aspects of production and product technologies, networks, soil and groundwater remediation, and waste management options, including CO2 capture and sequestration.

Main Findings from Life Cycle Studies of Greenhouse Gas Emissions Though, as pointed out in > section ‘‘Goal and Scope Definition,’’ there are substantial uncertainties in assessments of life cycle greenhouse gas emissions, some outcomes of such assessments are robust to such an extent that they provide a sufficiently firm basis for conclusions. The latter are summarized here, assuming a time horizon of 100 years, using the values for global warming potentials as given by IPCC [50] (see > Table 2.1), and focusing on direct effects only, unless indicated otherwise. After this summary, options for life cycle greenhouse gas emission reduction which commonly emerge from life cycle assessments will be briefly discussed.

Energy Conversion Efficiency Improvements in efficiency of the conversion of primary energy to energy services, including reduction of heat loss, often lead to lower life cycle greenhouse gas emissions

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for energy services (e.g., [89–93]) when only direct effects are considered. There are some exceptions. Phase change materials, which may be used in buildings to improve energy conversion efficiency, have been shown to not significantly reduce the life cycle greenhouse gas emission of buildings in a Mediterranean climate [94]. Electric heat pumps, though generally giving rise to lower life cycle greenhouse gas emissions for space heating, may increase life cycle greenhouse gas emissions when electricity generation is coal-based [95]. Also the III/V solar cells, which contain, e.g., In (indium) and Ga (gallium) and have higher conversion efficiencies for solar energy into electricity than Si (silicium)-based photovoltaic cells, do not appear to have lower life cycle greenhouse gas emissions per kWh than multicrystalline Si solar cells [14]. Noteworthy is the potential for indirect effects linked to improvements of energy efficiency. As noted before: in the case that improvements in energy conversion lead to lower costs of ownership, there may be a rebound effect on energy use because money linked to such lower costs tends to be spend on increased use of the product or elsewhere, which in turn entails additional energy consumption and emission of greenhouse gases [19–21]. Lower costs may also be conducive to economic growth [20]. When only microeconomic effects of improved energy efficiency are considered, life cycle greenhouse gas emissions tend to be still lowered, though less so than when only the effect of energy efficiency by itself is considered [19, 21]. Including economy-wide rebound effects in life cycle assessments of improved energy conversion efficiency has as yet no firm empirical basis [20].

Products Consuming Energy Life cycle greenhouse gas emissions of products which consume energy are often dominated by emissions during the use stage of the life cycle, when shares of fossil fuels in the production and consumption stages are similar [91, 93, 96–103]. There are exceptions, however, such as for instance a personal computer for limited household use [104], mobile phones [105], and very energy efficient dwellings [92]. The latter illustrates a more general point. To the extent that energy conversion efficiency in the use stage improves, energy embodied in the product (e.g., [106, 107]), and in the case of transport also energy embodied in infrastructure (e.g., [108]), often become a more important factor in life cycle greenhouse gas emissions. It may be noted though, that there are exceptions as to the growing importance of energy embodied in the product, such as CMOS chips for personal computers and other electronics [93, 100].

Transport At continental distances in the order of Box 2.2. Many of these elements mentioned in > Box 2.2 are uncontroversial and often also serve the reduction of other environmental problems, but some may give rise to discussion about the net benefit, including the reduction of life cycle greenhouse gas emissions. Controversies about the use of ‘‘biobased’’ products, such as biofuels, have been referred to earlier in this section. There is also controversy about the net effect of climate compensation. For instance, planting trees has been argued to not properly provide climate compensation for the use of fossil fuels, because the life time of trees is limited, if compared with the 30,000–35,000 years needed for the complete removal of CO2 emitted by burning fossil fuels, because ongoing existence of forests over this period cannot be guaranteed and because tree planting projects often give rise to ‘‘leakage’’: land use changes in which trees are cut [163]. Box 2.2: Elements That Are Often Included in Programs for the Reduction of Product Related Life Cycle Greenhouse Gas Emissions – – – – –

– – –

– –

Reduced life cycle fossil energy use Use of energy supply with low greenhouse gas emissions per Joule Reduction of land use change Lower non-energy inputs in production Lowering non-product outputs (‘‘wastes’’ and emissions) of production processes, especially emissions with a relatively large ‘‘greenhouse effect’’ (e.g., of halogenated compounds, CH4, N2O) Dematerialization of products Increased recycling Reduced ‘‘downstream’’ greenhouse gas emissions linked to improved energy efficiency, e.g., using means of transport that have relatively low greenhouse gas emissions per tonkilometer, by increasing electronic retailing, or improving energy efficiency of products which consume energy Reduction of transport distances, more efficient logistics Increased carbon sequestration and/or ‘‘climate compensation’’

Future Directions There is a growing societal interest in life cycle assessments of greenhouse gas emissions and related assessments, such as life cycle carbon footprinting (e.g., [164]). This seems to

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be paralleled by a trend to simplification (see e.g., > section ‘‘Simplified Life Cycle Assessments’’). However, one should be aware that there are several methodological issues that have substantial relevance to the correspondence of the outcomes of life cycle assessments and impact on climate change in the real world. These issues will be briefly addressed. They are partly in the domain of those involved in methodology development and partly in the domain of those applying life cycle assessment.

Change in Carbon Stocks of Recent Biogenic Origin Changes in carbon stocks of recent biogenic origin have turned out to be very important to life cycle greenhouse gas emissions of food and biofuels. However, their inclusion in life cycle assessments of food and biofuels is so far patchy. Also one might expect such changes to be important in other ‘‘biobased’’ products, such as ‘‘bioplastics’’ and cropbased lubricants, solvents, and other chemicals. However, their inclusion of life cycle assessments of such products is rare. Buildings, roads, hydroelectric dams, and other infrastructural works might also be expected to impact carbon stocks of recent biogenic origin, but again their inclusion in life cycle assessments is very rare. Studies thoroughly evaluating impacts of changes in carbon stocks of recent biogenic origin on life cycle greenhouse emissions would be welcome. These might provide better knowledge regarding the cases that such changes have at least a substantial impact on life cycle greenhouse gas emissions.

Indirect Effects Product life cycles may have indirect effects which are substantial when evaluating their life cycle greenhouse gas emissions. Indirect effects of biofuels on land use change, linked to the inelasticity of demand for food and feed (see > section ‘‘Published Life Cycle Assessments’’), are a case in point. The same holds for the rebound effect linked to lowered costs by improved energy (see > section ‘‘Published Life Cycle Assessments’’). Relations between economic activities as reflected in input–output tables constructed by economists may also be important [165]. A more thorough study and discussion of the question when which indirect effects should be within the system boundaries drawn for life cycle assessment would seem appropriate.

Uncertainty As pointed out in > section ‘‘Interpretation’’, there is substantial uncertainty regarding the outcome of life cycle assessments of greenhouse gas emissions, largely originating in parameter uncertainty and uncertainty due to choices. Transparency about the actual uncertainties regarding the outcome of life cycle assessments of greenhouse gas emissions

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is in practice very limited. Comprehensive uncertainty and sensitivity analyses are rare. However, it is important that societal stakeholders get at least a rough indication of the uncertainties in the outcomes of life cycle assessments presented to them.

Comprehensives of Dealing with Climate Warming As noted in > section ‘‘Inventory Analysis,’’ a proposal has been made to include changes in albedo linked to land use change into life cycle assessment [46]. Also there have been proposals for the quantitative inclusion of the climate effects linked to contrails and cirrus clouds in the climate impact estimates for air traffic [57]. However, there is still some way to go for a comprehensive coverage of climate warming in life cycle assessment. On a timescale of centuries, there are changes in albedo, which will probably contribute to further warming, following from climate change (e.g., due to loss of ice and desertification) [166]. These changes in albedo are as yet not covered by life cycle assessments. A contributor to climate change currently absent from life cycle assessment of climate impact is black carbon or soot [167–170]. Black carbon has a variety of effects which are relevant to climate [167–170]. When emitted, black carbon absorbs and scatters solar radiation, and may affect humidity profiles (cloud formation) and droplet size in clouds. When deposited, black carbon may have an effect on surface albedo. It is currently estimated that the net effect of black carbon emissions on climate is warming [170]. For comprehensiveness in dealing with life cycle impacts on climate, it would seem proper to include both black carbon emissions and long-term changes in albedo in life cycle assessment.

Consequential Life Cycle Assessment In mitigating climate change, changes in products and technologies are much more important than studies of existing products and technologies. Such changes are the object of consequential life cycle assessment. As pointed out in > section ‘‘What is Life Cycle Assessment and How Does It Work?,’’ consequential life cycle assessment is a relatively recent development. The methodological approach, such as constructing scenarios and technological trajectories, deserves substantial attention, if only to provide a more solid basis for more widespread application in the development of new products and technologies.

Concluding Remarks Life cycle assessments of greenhouse gas emissions may be helpful in the analysis and development of options, policies, and innovations aimed at mitigation of climate change. The main findings from available life cycle assessments summarized in > section ‘‘Main

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Findings from Life Cycle Studies of Greenhouse Gas Emissions’’ provide for guidance in that respect. It can be noted that in several cases indirect effects have significant effects on the overall climate impact of products, and including those effects in considering options, policies and innovations aimed at mitigation of climate change would seem important. For any product, or part of the product life cycle, life cycle assessment can be useful in identifying the aspects of production which are main contributors to life cycle greenhouse gas emissions. This can provide a focus for trying to identify or develop options which might reduce such emissions and for life cycle management. Furthermore, life cycle assessments may help in providing guidance for future research and development work, though it should be noted that such guidance may be characterized by relatively large uncertainties.

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3 Climate Change Legislation: Current Developments and Emerging Trends C. Moore Alcoa Inc., Knoxville, TN, USA Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 International Climate Change Mitigation Policy Development . . . . . . . . . . . . . . . . . . . . . . 47 Two Major Steps in International Climate Change Mitigation: Kyoto and Copenhagen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Kyoto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Copenhagen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Measures Available for Climate Change Legislation and Regulation . . . . . . . . . . . . . . . . 55 Potential Legislative Alternatives for Climate Change Mitigation . . . . . . . . . . . . . . . . . . 56 Traditional Command and Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Cap and Trade Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Cap and Dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Carbon Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Subsidies and Other Levers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Renewable Energy Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Major International and Regional GHG Mitigation Programs . . . . . . . . . . . . . . . . . . . . . 63 European Union’s Emission Trading Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 The Northeast Regional Greenhouse Gas Initiative (United States) . . . . . . . . . . . . 65 The Western Climate Initiative (United States and Canada) . . . . . . . . . . . . . . . . . . . 66 Midwestern Regional Greenhouse Gas Reduction Accord (United States and Canada) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 California Climate Change Scoping Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 New Zealand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Wei-Yin Chen, John Seiner, Toshio Suzuki & Maximilian Lackner (eds.), Handbook of Climate Change Mitigation, DOI 10.1007/978-1-4419-7991-9_3, # Springer Science+Business Media, LLC 2012

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Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 United States Environmental Protection Agency Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Greenhouse Gas Endangerment Finding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Light-Duty Motor Vehicle Emission Standard for CO2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Greenhouse Gas Tailoring Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Mandatory Greenhouse Gas Reporting Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Summary of Sectors Covered in the GHG Reporting Rule . . . . . . . . . . . . . . . . . . . . . 76 What the Rule Requires . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 United States National Environmental Policy Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 United States Federal GHG Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 American Energy Security Act (Waxman–Markey: June 2009) . . . . . . . . . . . . . . . . . . . . . 79 Clean Energy Act of 2009 (November 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Clean Energy Partnerships Act of 2009 (November 4, 2009) . . . . . . . . . . . . . . . . . . . . . . . 80 Carbon Limits and Energy for America’s Renewal (Cantwell–Collins: December 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 American Power Act (Kerry–Lieberman: May 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Compromise Proposals in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Impact of Federal Legislation on Current GHG Cap and Trade Programs . . . . . . . . . . 82 Future Directions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

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Abstract: Over the past 3 decades from the 1980s forward, the subject of climate change has progressed from general study and media interest to a daily hot topic discussion in all aspects of society worldwide. In the same way, carbon management programs, climate change legislation, energy legislation, and similar mitigation programs and reduction initiatives have moved from the planning process to reality in many federal, state, and local governments throughout the world. Legislative approaches and carbon management strategies have, thus, become a topic of great interest in businesses, industries, and local communities across the globe that will be impacted by both the effects of climate change and the cost to mitigate carbon emissions. In recent years, various legislative programs and mitigation approaches have been introduced with the intent to reduce the levels of carbon dioxide (CO2) and other greenhouse gas (GHG) pollutants emitted into the atmosphere that have global warming potentials above thresholds of concern. The major driver for legislative approaches to mitigate emissions of these pollutants is the belief that continued increases of the GHG emissions from man-made sources (e.g., industrial emission sources, electricity generation facilities, on-road and off-road mobile transportation sources, etc.) are contributing to increases in global temperatures that could have dramatic climate and, subsequently, environmental impacts. The myriad of legislative approaches and regulatory programs in consideration or already implemented are vast, diverse, ever-changing, and excessively politically charged. The intent of this chapter is to summarize the historical background of climate change policy development and potential legislative strategies, review current climate change legislation proposals and regulatory programs including major regional and international GHG emission reduction programs in place or in development, and discuss emerging trends in worldwide climate change legislation.

Introduction From the 1980s forward, the science of climate and climate change has evolved extensively to the point where climate change legislation, energy legislation, and carbon management have become topics of daily interest and debate in businesses and communities across the globe. Once a distant consideration, legislation of greenhouse gas (GHG) emissions at the local, state, federal, and international levels is moving forward at a brisk pace. The major driver to reduce GHG emissions is the belief that continued increases of these pollutant emissions from man-made sources (e.g., industrial sources, electricity generation facilities, on-road and off-road mobile sources, etc.) are contributing to increases in global temperatures that could have dramatic climate, and subsequently, environmental impacts. In recent years, various local, state, federal, and international programs have been introduced, proposed, and adopted with the intent to implement measures to reduce the

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levels of carbon dioxide (CO2) and other greenhouse gas (GHG) pollutants emitted into the atmosphere. The key GHGs under consideration in the most common legislative strategies are: ● Carbon dioxide (CO2) from fossil fuel burning, wood and other fuel burning, chemical manufacturing, and mobile source fuel combustion ● Methane (CH4) from the production and transport of coal, natural gas, and oil; from livestock and other agricultural practices; and decay of organic waste in municipal solid waste landfills ● Nitrous oxide (N2O) from agricultural and industrial activities and combustion of fossil fuels and solid waste ● Hydrofluorocarbons (HFCs) from industrial processes ● Perfluorocarbons (PFCs) from industrial processes ● Sulfur hexafluoride (SF6) from industrial processes Given the need for consistent international evaluation of GHG emissions and to enable a universal standard of measurement for climate change impacts, GHG emissions are commonly referred to in terms of ‘‘carbon dioxide equivalents’’ or CO2e. A specific global warming potential (GWP) has been developed for each identified GHG. The GWP is a measure of the impact of the emissions of the specific GHG’s climate change influence relative to a similar amount of CO2 over a consistent timeframe. The GWPs for the key GHGs (assuming a 100-year timeframe) are summarized in > Table 3.1 [1]. The type of pollutant and its specific GWP is an important aspect in the planning of legislative and regulatory approaches to mitigate climate change. A myriad of studies have been completed, evaluated, and re-evaluated in the past 3 decades that are now being relied upon heavily to develop and implement sound, reasonable legislative approaches and regulatory programs that are vast, diverse, ever-changing, and excessively politically charged. Debate about the basis of the climate science and the cost to minimize GHG emissions are the key cogs in how climate change policy and legislation is crafted. A representative of the Pew Center on Global Climate Change (a leader in global climate change policy issues and climate change research) recently made the following statement regarding legislative efforts to mitigate climate change, ‘‘Climate change lacks . Table 3.1 Global warming potentials of key greenhouse gases Greenhouse gas

Global warming potential

Carbon dioxide (CO2) Methane (CH4) Nitrous oxide (N2O)

1 21 310

Hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs) Sulfur hexafluoride (SF6)

140–11,700 23,900

For example, in a 100-year timeframe, 1 t of nitrous oxide will impact climate change 310 times more significantly than 1 t of carbon dioxide

Climate Change Legislation: Current Developments and Emerging Trends

3

a silver bullet solution; no single policy, practice, or technology is sufficient to handle the scope of the problem. Instead, climate change requires a ‘silver buckshot’ approach that includes a full suite of solutions pursued by a wide range of actors, including policymakers from all levels of government. Ultimately, an international climate change agreement will be necessary to achieve the GHG emission reduction levels that scientists have determined are required to avoid the most dangerous climate change impacts, but all levels of government can and should play a role in achieving these reductions’’ [2]. The regulatory and legislative landscape has been filled with both traditional and innovative ideas as the world’s policy makers, governments, corporations, nongovernmental organizations, and communities seek to find solid solutions and reasonable compromises to what has been characterized by many organizations and individuals to be the largest global environmental challenge the entire world has ever faced. The intent of this chapter is to summarize the historical background of climate change legislation, review current climate change legislation and regulatory programs including regional and international GHG cap and trade programs, and discuss emerging trends in climate change legislation. With all the science and political debate, the landscape of legislation is fluid, volatile, and ever-changing. The final approaches on all levels are very uncertain as any one legislative approach could derail others in motion depending on the manner in which the governments of the world choose to act.

International Climate Change Mitigation Policy Development In the early 1980s, the United States directed the completion of a study of worldwide environmental challenges that included a detailed study of climate change impacts. Although no specific actions resulted from this early study of climate change and related issues, in 1988, ‘‘because of the need of broad and balanced information about climate change’’ and ‘‘to provide the governments of the world with a clear scientific view of what is happening to the world’s climate,’’ the Intergovernmental Panel on Climate Change (IPCC) was established by the United Nations World Meteorological Organization (WMO) and the United Nations Environment Program (UNEP) [3]. The IPCC was tasked per the UNEP to: ● Prepare a comprehensive review and recommendations with respect to the current state of knowledge of the science of climate change. ● Evaluate the current and projected social and economic impacts of climate change. ● Determine possible response strategies and elements for inclusion in a potential future international convention on climate. The scientific evidence produced in the first IPCC Assessment Report of 1990 revealed the importance of climate change as a future topic of interest for environmental policy and planning. In the years following, the IPCC has produced additional assessment reports as directed and as necessary to update previous conclusions with new or revised climate change data and information. The IPCC’s work has been and continues to be key in developing policies to address climate change mitigation.

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Following development of the IPCC, the United Nations Framework Convention on Climate Change (UNFCCC) was commissioned at the United Nations Conference on Environment and Development (UNCED) in Rio de Janeiro, Brazil, in June of 1992. The United States and 153 other countries signed the UNFCCC that committed all parties to voluntarily reduce GHG emissions to reasonable levels in future years. The UNFCCC was then tasked ‘‘to begin to consider what can be done to reduce global warming and to cope with whatever temperature increases are inevitable’’ [4, 5]. Following ratification of the UNFCCC, annual meetings of all included parties have been conducted in meetings generally referred to as conferences of the parties (COP). Other related meetings have flowed out of the COP meeting process as well. Major COP meetings to date are briefly summarized in > Table 3.2.

Two Major Steps in International Climate Change Mitigation: Kyoto and Copenhagen Kyoto Perhaps the most significant development resulting from all of the COP meetings since the inception of the UNFCCC was the Kyoto Protocol adopted in Kyoto, Japan, on December 11, 1997, and entered into effect on February 16, 2005. The Kyoto Protocol is generally seen as an important first step toward a complete international GHG emission reduction program that will stabilize GHG emissions, provide the essential architecture for any future international agreement on climate change, and enable efficient mitigation and adaptation programs to be developed and implemented. The major achievement of the Kyoto Protocol is that it established binding GHG emission reduction targets for 37 industrialized nations and the European community. These reductions amount to an average of 5% against 1990 emission levels over the 5 year period from 2008 to 2012. The major distinction between the Kyoto Protocol and the Montreal Convention is that while the Montreal Convention ‘‘encouraged’’ countries to stabilize GHG emissions, the Kyoto Protocol ‘‘committed’’ each country to certain levels of GHG emission reductions. The Kyoto Protocol places a larger burden on more developed nations under the principle of ‘‘common but differentiated responsibilities’’ based on the belief that developed countries are ‘‘principally responsible’’ for the levels of GHG emissions in the atmosphere and should assume a greater burden for mitigation of emissions [6]. Under the Kyoto Protocol, countries are required to meet their GHG emission reduction targets primarily through federal and regional measures; however, the Kyoto Protocol offers them an additional means of meeting their reduction targets by way of three market-based mechanisms including: ● GHG emission trading ● The clean development mechanism (CDM) ● Joint implementation (JI)

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. Table 3.2 Summary of major UNFCCC COP meetings [4, 5] COP No. Date

Location of COP meeting

Significant developments and highlights of the meeting

1

1995

Berlin, Germany

2

1996

Geneva, Switzerland

3

1997

Kyoto, Japan

This was the first meeting of UNFCCC COP; established assessment phase known as the Berlin Mandate to develop control options for countries; implemented a 2-year analytical and assessment phase to define specific climate change mitigation options for countries Declaration on scientific basis for climate change by acceptance of IPCC second assessment; defined flexible strategy to mitigate climate change; called for legally binding targets for GHG emission reductions The Kyoto Protocol was adopted during this COP meeting; agreement on legally binding GHG emissions reduction targets by most industrialized countries on an average of 6–8% below 1990 GHG emission levels; the United States signed the protocol, however, US Senate resolutions blocked further action. Note that the Bush administration openly rejected the Kyoto Protocol in 2001 (more detailed summary included below)

4

1998

Buenos Aires, Argentina

5

1998

6

2000

6

2001

7

2001

There was an expectation that unresolved issues from Kyoto would be resolved in Buenos Aires, however, no significant developments; a 2-year plan of action was adopted to move efforts forward on mechanisms for implementing the Kyoto Protocol Bonn, Germany The 1998 Bonn meeting was primarily a technical and administrative meeting with no significant developments or conclusions resulting The Hague, Extensive high-level political negotiations amid major Netherlands controversies (primarily with the United States) such as credit for carbon sinks, consequences for countries not meeting emission reduction targets, and financial assistance obligations. Talks essentially ceased with no significant progress Bonn, Germany The ceased negotiations from The Hague resumed in Bonn. With the United States attending only as observers, agreement was reached on many of the issues of concern identified in The Hague meeting including flexible mechanisms, carbon sinks, compliance, and financing issues Marrakech, Completed work on the Buenos Aires plan of action from Morocco COP-4 setting the stage for ratification of the Kyoto Protocol; the United States continued as observers only and declined to be active in the negotiations amid hope that the United States would reengage the process; continued focus on mitigation mechanisms and global climate mitigation policy issues

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. Table 3.2 (Continued) COP No. Date

Location of COP meeting

8

New Delhi, India

2002

Significant developments and highlights of the meeting

Progress updates on current issues and future planning; no significant developments occurred during the meeting 9 2003 Milan, Italy Progress updates on current issues and future planning; no significant developments occurred during the meeting 10 2004 Buenos Aires, Progress updates on current issues and future planning; Argentina no significant developments occurred during the meeting First ‘‘meeting of the parties’’ (MOP-1) to the Kyoto 11 2005 Montreal, Canada Protocol since initial Kyoto meeting in 1997; one of the largest climate change meetings ever held; discussion of the ratified Kyoto Protocol including discussion of emissions trading systems and other aspects of global emissions policy development; meeting resulted in the Montreal Action Plan that extended the life of the Kyoto Protocol beyond the original 2012 expiration date with deeper GHG emission cuts planned 12 2006 Nairobi, Kenya Combined COP12 and MOP-2; progress updates on current issues and future planning; no significant developments occurred during the meeting 13 2007 Bali, Indonesia Combined COP13 and MOP-3; agreement reached on implementation timelines and structured negotiation on post-Kyoto 2012 timeframe; successful adoption of Bali Action Plan 14 2008 Poznan, Poland Combined COP-14 and MOP-4; agreements reached on financing to help poor nations cope with climate issues through adaptation and financial assistance; approval of forest protection mechanism to combat climate change impacts in heavily impacted forest areas 15 2009 Copenhagen, The original goal of COP-15 and MOP-5 was a global Denmark climate agreement for the period after the Kyoto Protocol expires in 2012; however, worldwide political pressure and the current economic struggles watered down the goal to hopes of less binding agreement; representatives of 192 countries participated (more detailed summary included below) 15-1 June 2010 Bonn, Germany Follow-up meeting to COP-15 in Copenhagen in 2009; continued discussions on long-term climate strategy and preparations for COP-16 meeting in Cancun, Mexico, later in 2010 16 December Cancun, Primary outcome was the incorporation of the elements 2010 Mexico of the COP-15 Copenhagen Accord into the UNFCCC

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These three market-based mechanisms were established to help stimulate significant green investment and technology advancement while also helping all countries meet their GHG emission reduction targets in an efficient and cost-effective manner. Each of the market-based mechanisms is defined in more detail below. GHG Emissions Trading

As noted previously, countries that are party to the Kyoto Protocol have agreed to targets for reducing their GHG emissions during the 2008–2012 initial commitment period [7]. Emissions trading, as established in Article 17 of the Kyoto Protocol, allows countries to sell excess GHG emission credits to other countries that exceed their committed target level of GHG emissions. Beyond actual GHG emission reduction credits, other units are available for trading under the program including: ● A removal unit (RMU) on the basis of land use, land use change, and forestry (LULUCF) activities (e.g., reforestation) ● An emission reduction credit generated by a joint implementation (JI) project ● A certified emission reduction generated from a clean development mechanism (CDM) project Under the Kyoto Protocol, each country’s actual GHG emissions have to be accurately monitored and detailed records maintained of carbon market activity through carbon registries and other means. GHG emission trading schemes may be established in regional or national markets under the guidelines established in the Kyoto Protocol. Clean Development Mechanism

The CDM is essentially a global clearinghouse of acceptable GHG emission offset programs that have been successfully implemented and are thereby certifiable for GHG emissions credits. Designed to stimulate sustainable development and GHG emission reductions, the CDM provides a means of added flexibility for industrialized countries to meet their GHG emission reduction targets and comply with associated limitations. The CDM allows emission reduction projects in developing countries to earn certified emission reduction (CER) credits. Each CER credit is equivalent to 1 t of CO2. These CERs can be traded and sold on the international market and utilized by industrialized nations to meet their GHG emission reduction targets under the Kyoto Protocol [8]. CDM projects must pass a detailed and rigorous qualification process through a public registration and issuance process designed to ensure real, measurable, and verifiable GHG emission reductions. The CDM is overseen by a CDM Executive Board that ultimately answers to the countries that ratified the Kyoto Protocol. In order to be considered for registration, a project must first be approved by the Designated National Authorities (DNA). The CDM has been operational since the beginning of 2006. Since its inception, the CDM has already registered more than 1,000 offset projects and it is anticipated that the CDM will produce CERs amounting to more than 2.7 billion tons of CO2e in the first commitment period of the Kyoto Protocol from 2008 to 2012.

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Joint Implementation

Joint implementation (JI) as defined in Article 6 of the Kyoto Protocol allows a country with a GHG emission reduction or limitation commitment under the Kyoto Protocol to earn emission reduction units from an emission reduction project in another country that is party to the Kyoto Protocol to be counted toward the specific country’s GHG emission reduction target [9]. Joint implementation, thus, allows countries under the Kyoto Protocol the flexibility to invest in other countries through capital projects and technology transfer. A joint implementation project must provide a measurable GHG emission reduction and be approved by all relevant parties under the Kyoto Protocol. Joint implementation projects started as early as 2000 may be considered although the emission reduction credit will be issued for years following 2008. Kyoto Protocol Adaptation Fund

The Kyoto Protocol is also designed to provide assistance to any country in adapting to any adverse effects of climate change through facilitating the development and deployment of strategies that can help a country’s population in an effective response and adaptation to the impacts of climate change that cannot be mitigated. The Adaptation Fund was established to finance adaptation projects and programs in developing countries that are involved with the Kyoto Protocol and that are especially vulnerable to the adverse effects of climate change [10]. The Adaptation Fund is financed from income from CDM projects and other available sources of funding. The share of proceeds amounts to 2% of the certified emission reductions (CERs) issued for a CDM project activity. The Adaptation Fund is supervised and managed by the Adaptation Fund Board (AFB) which is composed of 16 members and 16 alternates that meet twice annually. Country Classifications Under the Kyoto Protocol and UNFCCC

An important aspect of implementation of the Kyoto Protocol and planning under the UNFCCC is how each country is classified. Country classifications determine the level of responsibility under the Kyoto Protocol and are defined as: ● Annex 1 ● Annex 2 ● Developing countries Annex 1 countries that have ratified the Kyoto Protocol have committed to reduce their GHG emissions to targets based on 1990 emission levels. Annex 1 countries are listed in > Table 3.3. Annex 2 countries are essentially a subgroup of the Annex 1 countries and include members of the Organization for Economic Cooperation and Development (OECD) excluding those economies that were in transition as of 1992. These countries, listed in > Table 3.4, are developed countries that will be responsible to pay for mitigation and adaptation costs of developing countries. The final classification is developing countries. These countries are not required to reduce GHG emissions unless developed countries in Annex 1 or 2 provide sufficient

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. Table 3.3 Countries classified as Annex 1 under the UNFCCC Australia Bulgaria

Austria Canada

Belarus Croatia

Belgium Czech Republic

Denmark Germany Ireland Liechtenstein Netherlands

Estonia Greece Italy Lithuania New Zealand

Finland Hungary Japan Luxembourg Norway

France Iceland Latvia Monaco Poland

Portugal Slovenia Turkey

Romania Spain Ukraine

Russian Federation Sweden United Kingdom

Slovakia Switzerland United States

. Table 3.4 Countries classified as Annex 2 under the UNFCCC Australia Denmark Greece

Austria Finland Iceland

Belgium France Ireland

Canada Germany Italy

Ireland Japan Norway Switzerland

Italy Luxembourg Portugal United Kingdom

Japan Netherlands Spain United States

Latvia New Zealand Sweden

funding and technological investment. The basis to not establish short-term reduction goals for developing countries under UNFCCC includes: ● Avoidance of restrictions on development given GHG emissions are a product of industrial capacity ● Ability for these countries to sell emissions credits to Annex 1 or 2 countries who need credits to achieve GHG emission goals ● Enhanced opportunities for financial and technological investment from Annex 1 or 2 countries Developing countries may volunteer to become Annex 1 countries when they are sufficiently developed.

Copenhagen As negotiated in Kyoto, by the end of the first commitment period of the Kyoto Protocol in 2012, an updated international framework was slated to have been developed, negotiated,

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and ratified that would deliver the GHG emission reductions that the IPCC had deemed necessary. The United Nations Climate Change Conference in Copenhagen, Denmark, in December 2009 became the focal point for the development of this new international framework. Copenhagen was an enormous undertaking and included the following sessions: ● Fifteenth session of the Conference of the Parties (COP 15) ● Fifth session of the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol (CMP 5) ● Thirty-first session of the Subsidiary Body for Implementation (SBI 31) ● Thirty-first session of the Subsidiary Body for Scientific and Technological Advice (SBSTA 31) ● Tenth session of the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol (AWG-KP 10) ● Eighth session of the Ad Hoc Working Group on Long-term Cooperative Action under the Convention (AWG-LCA 8) Although prospects looked dim early in the meeting for any type of agreement, near the conclusion of the COP-15 meetings government leaders negotiated with focused intensity to reach a global agreement on climate change on the last day of the meeting. In describing the newly touted Copenhagen Accord, US President Obama commented that there was ‘‘a meaningful and unprecedented breakthrough here in Copenhagen.’’ President Obama went on to comment that while the international community has come a long way, there is still a long way to go to reach consensus on climate change mitigation policy. The Copenhagen Accord calls for the United States and 185 other nations to reduce GHG emissions levels, invest in clean energy technology, and implement advanced adaption programs in light of the effects of climate change. A key aspect of the Accord is that it acknowledges for the first time in history that staying below 2 C may not be sufficient to mitigate climate impacts and includes a planned technical review in 2015 to determine if there is a need to consider staying below 1½ C or an atmospheric CO2 concentration of 350 parts per million (ppm). Key aspects of the Copenhagen Accord include [11]: ● Countries are required to increase their national and international actions to combat climate change while recognizing the scientific view that an increase in global temperatures should be kept below 2 C. ● All parties to the Copenhagen Accord were required to submit country-specific GHG emission reduction goals by a January 31, 2010, deadline. ● Developing countries agreed to report their climate mitigation actions through a system of ‘‘international consultations and analysis.’’ ● The Copenhagen Accord states that short- and long-term financial support will be provided to developing countries for forest conservation, adaptation, technology development and transfer, and capacity building.

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● Long-term funding will be directed through the ‘‘Copenhagen Green Climate Fund’’ which was formally established by the Copenhagen Accord; however, it still lacks substantial details on funding mechanisms and other aspects. ● The Copenhagen Accord builds in a new scientific assessment of GHG emissions reductions by 2015 that will aid in future considerations on the potential need to strengthen the long-term global goal of limiting the average rise in temperature to 1½ C. ● The Copenhagen Accord affirms the continuing role of the UNFCCC for financial governance, GHG emissions reporting and monitoring, and formal scientific review. Although there has been an incredible amount of effort and many critical steps taken to move forward with an international approach to mitigate climate change, a significant international policy with full cooperation of all parties is still in its infancy. In the midst of continued controversy and debate over climate science and the most effective mechanisms to mitigate and adapt to climate change that may occur, the COP, MOP, and other related conferences and meetings through the UNFCCC continuing annually and more frequently as needed have and will continue to serve an important role in continuing the development of climate change legislation and regulation on the international level.

Measures Available for Climate Change Legislation and Regulation As discussed previously, combating climate change has taken two primary forms [12]: ● Preventative measures ● Adaptive measures Preventative measures are those that lead to reductions or mitigation of GHG emissions and their subsequent impacts. Examples of preventative measures to reduce GHG emissions include: ● Add-on GHG emission controls for industrial facilities, electrical generation facilities, and mobile emission sources ● Reducing activities and energy consumption that drive creation of GHG emissions ● Carbon sequestration and similar techniques for carbon control Many proposed and adopted legislative solutions have focused on the use of preventative measures in a market-based program to combat climate change. From cap and trade to carbon fuel taxes to traditional and innovative GHG emission control technologies, there will be a need to utilize any and all proven technical and political options in crafting reasonable and workable legislative approaches. Many of the potential measures for carbon capture and emissions control are discussed in detail in other chapters within this publication.

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Adaptive measures are those measures that deal with the impacts of climate change including: ● Community and country-specific education and detailed instruction on climate change and its predicted impacts ● Ensuring adequate protections are in place should drought or similar environmental upset conditions occur ● Protecting shoreline living areas through the use of sea walls and barriers ● Implementing local reaction plans as necessary In other words, adaptive measures are those steps taken to help people and nations successfully adapt to a changing climate impacted by GHG emissions. Even with sweeping technical and economic changes, it is anticipated that most areas of the world also need to implement adaptive measures in one form or fashion as part of a comprehensive climate change program.

Potential Legislative Alternatives for Climate Change Mitigation The legislative challenge to regulate GHG emissions and reduce international levels of CO2e is daunting to say the least. As alluded to in the previous section, preventative measures and adaptive measures are both important components in legislative and regulatory strategies on how to mitigate emissions of GHG emissions. A myriad of potential alternatives is available for the planning of future regulation of GHG emissions including: ● Mobile source GHG emission standards and transportation sector controls that reduce GHG emissions at the engine level ● Electrical generation and industrial point source GHG emission controls that reduce GHG emissions at the outlet of the emission source stacks ● Renewable energy standards that enable growth in cleaner forms of energy production ● Use of alternative fuels in transportation, power, and industrial sectors ● Increased use of nuclear energy ● Increased use of solar energy ● Mandatory energy-efficiency audits and incentives for energy-efficiency programs ● Increased mass transit ● Carbon market-based pricing options such as cap and trade, cap and dividend, and carbon taxes As with all political decisions, a major question in the regulation of GHG emissions is how much is it going to cost? To determine the merits of a potential GHG emission control or mitigation measure, the cost to implement and maintain the measure must be fully evaluated. The predominant method utilized to evaluate climate change mitigation methods is the use of marginal abatement cost (MAC) curves. A MAC curve will aid policy

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and decision makers in the evaluation of the costs of certain control measures versus the measures resulting in the reduction of GHG emissions. MAC curves can be used to compare different control technologies as well as different carbon pricing schemes such as a cap and trade program versus a carbon tax. Another use of the MAC curve is comparison of regional, national, and international price structures for overlapping control programs. > Figure 3.1 provides a detailed example of a MAC curve followed by a thorough explanation of how to read MAC in > Fig. 3.2 [13]. As indicated in > Fig. 3.2, the width of the curve for the potential abatement option is the amount of CO2e that can be reduced by this option. The height of the curve is the amount the option would cost to avoid an equivalent 1 t reduction of CO2e as measured against a standard reference case. A negative cost would be represented by a line going below the axis and would imply a cost savings over the life cycle of the option versus a positive cost (as reflected in > Fig. 3.1), where there would be measureable costs to implement the option versus the reference case. Most of the current strategies to mitigate climate change include many of these alternatives in their planning. The application of the abatement options will vary by location depending on economic, social, and other factors. A summary of some potential legislative options is presented with a focus on the specific carbon pricing options (more particularly, cap and trade programs) in a market-based system given their prominence in regional and international carbon mitigation strategy.

Traditional Command and Control One potential mechanism available to policy makers is the use of the concept of traditional command and control. Command and control simply implies that the government establishes a level of emissions that it deems acceptable and then implements regulations accordingly to mandate applicable sources of GHG emissions to lower their emissions to these mandated levels. Command and control has been utilized by governmental agencies in many nations for many years including the United States. The major disadvantage as described in the sections below is that while straightforward, a command and control approach reduces opportunities for innovation and flexibility of the emission sources covered in the program.

Cap and Trade Program While there are many different approaches and options available, the most utilized lever for climate change mitigation and a key component of almost all GHG emission mitigation legislative efforts to date is a basic cap and trade program. A cap and trade program is a market-based approach that is built upon the economic concepts of supply and demand. One reason for the prominence of a cap and trade program in climate mitigation approaches is the successful and efficient use by the United States of a cap and trade program to reduce sulfur dioxide emissions under the Acid Rain provisions of the 1990 Clean Air Act Amendments.

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0

0.6

0.8

1.0

1.2

1.4

1.6

Commercial buildings – new shell improvements

1.8

2.4

2.6

Solar CSP

3.2

Coal-to-gas shift – dispatch of existing plants

Car hybridization

Potential Gigatons/year

3.0

Coal power plants – CCS rebuilds

Coal power plants – CCS new builds

Onshore wind – medium penetration

Coal power plants – CCS new builds with EOR

Reforestation

2.8

Onshore wind – Industry – high penetration CCS new builds on Biomass power – carbonintensive cofiring processes

2.2

Distributed solar PV

Winter cover crops

2.0

Afforestation of Natural gas pastureland and petroleum systems management

Onshore wind – low penetration Industry – combined heat and power Cellulosic Manufacturing – biofuels Existing power HFCs mgmt plant Residential conversion buildings – efficiency new shell improvements improvements Conservation tillage Commercial buildings – CFL lighting

0.4

Fuel economy packages – cars

Commercial buildings – LED lighting

Commercial electronics

0.2

. Fig. 3.1 Example of MAC curve (Adapted from [13])

–230

–120

–90

–60

–30

0

Industrial Residential process Fuel economy Coal mining – buildings – Active forest improvemanagement packages – light methane shell 60 ments trucks mgmt retrofits Residential Commercial Nuclear Commercial electronics Residential buildings – buildings – newwater control combined build 30 Residential heaters systems heat and buildings – power lighting

3

90

Cost Real 2005 dollars per ton CO2e

Abatement cost Fig. 3.3 [15]. Industries would annually be allowed to emit a certain amount of CO2. Plants that emitted less than the cap would be able to sell their letover allowances to industries that exceed caps. The government would gain revenue by auctioning allowances permitting industries to discharge a set amount of greenhouse gases.

Excess CO2

CAP Leftover allowance for sale

CO2 TRADE wances Allo Money

Innovative companies that develop ways to reduce emissions earn income by selling unneeded allowances.

Economic pressure encourages companies that exceed caps to find ways to cut emissions.

. Fig. 3.3 Illustration of how a typical cap and trade program functions

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As indicated in the figure, a key aspect of a cap and trade program is the continual incentive to implement innovative technological solutions that reduce GHG emissions and increase opportunities to gain from those reductions. This financial incentive is not directly present in traditional command and control programs. A company that acts early and can afford the technology investment may benefit if and when a cap and trade program is implemented. Likewise, a company that elects not to implement GHG emissions reduction technology will feel the economic pressure of having to purchase allowances for each and every ton of CO2e emitted. Cost containment mechanisms are extremely important in the design of the cap and trade program. Mechanisms available include: ● ● ● ●

Offsets Borrowing and banking Safety valves Linkage

Offsets refer to projects undertaken outside of the sources involved in the cap and trade programs that enable sources covered in the program to purchase reduction credits from sources not covered in the program. This provides an opportunity to harvest lowcost emission reductions that are quantifiable and defined from a broad range of sources. The CDM established under the Kyoto Protocol established an offset market between developed and developing countries on an international level. Banking and borrowing of allowances are two other mechanisms for cost containment in a cap and trade program. Banking is the process where a source may keep excess or unused allowances for future use or sell. Borrowing is the concept where a source may borrow allowances from the program to cover current year’s emissions with the guarantee that the allowances will be paid back through future emission reductions. Safety valves generally refer to a predetermined allowance cost cap that once reached would trigger other cost containment mechanisms. Choosing a reasonable safety valve is very challenging as setting a trigger too low would diminish economic incentives for innovative technology growth to reduce GHG emissions and setting a cap too high would never realistically impact carbon costs. Finally, as mentioned previously, linkage to other emission trading systems and programs could help to efficiently expand carbon markets without significant changes to programs already in effect. Additional issues with program linkage are addressed in the section below on preemption of current programs.

Cap and Dividend A cap and dividend program starts with a ‘‘upstream’’ economy-wide cap on carbon suppliers as opposed to a downstream cap on carbon emission sources as referred to in the cap and trade discussion above. As noted previously, there are two possible places to implement a cap in a carbon economy:

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● Where CO2 leaves the economy and enters the atmosphere (downstream) ● Where carbon enters the economy in the form of a fossil fuel (upstream) As discussed in detail in the previous section, traditional cap and trade programs place the cap on the downstream end where the emissions actually occur. On the other hand, capping carbon on the upstream as it enters the economy requires the ‘‘first sellers’’ of carbon fuels such as oil, coal, and natural gas to purchase carbon allowances equal to the carbon content of their fuels. Annually, these companies would reconcile their carbon allowances and potentially pay fines if enough allowances have not been purchased to meet their allotted quantity of allowances. When fuel companies purchase carbon emission allowances, these costs will certainly be passed on to consumers of these fuels; thus, the cost of emitting the CO2 is paid by the ultimate consumer of the fuel. In general, the revenues in a cap and dividend program are placed into a trust fund for payment of dividends to consumers and to finance clean energy, energy-efficiency programs, and investment in innovative carbon mitigation strategies.

Carbon Tax Carbon taxes are fairly straightforward and basically the same as the cap and dividend program, without the direct dividend. Basically, a tax would be placed on a per unit basis of any carbon-derived fossil fuels resulting in higher prices for consumption of carbonbased fuels. On paper, the higher prices would drive increased energy conservation and the demand for alternative energy development and implementation into the marketplace. Additionally, a tax may drive increased demand for lower carbon fuels such as natural gas, propane, and other nontraditional fuels in the transportation sector. A carbon-based fuel tax would impact most economic sectors either directly or indirectly given the use of fuels in every aspect of society. Carbon taxes strongly create incentives for consumers and manufacturers to reduce the use of traditional fuels and to consider alternative fuels to help minimize the burden of the carbon tax costs. While several countries in Europe including Sweden, Denmark, Ireland, and Finland have already instituted carbon tax programs, there is general opposition to a European Union-wide carbon tax. France shelved a proposed carbon tax in May of 2010 and other countries are openly opposed to the concept. In the United States, carbon taxes have been discussed in the development of several of the legislative proposals to date; however, cap and trade or cap and dividend programs remain the most prominent option in US GHG emissions mitigation legislation.

Subsidies and Other Levers Government-funded subsidies and other federally funded levers for climate change must obviously have a funding mechanism. Thus, these initiatives will always be coupled with

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programs such as cap and trade or cap and dividend. Governments will carefully study the impacts of economic and control efforts and their impact on the public. Subsidies will be used primarily to help minimize the costs associated with the financial impacts from the primary means of climate change mitigation.

Renewable Energy Standards Many states in the United States have established specific standards requiring electric utilities to generate a certain amount of electricity from renewable or alternative energy sources [16]. These requirements, referred to as a ‘‘renewable portfolio standard’’ (RPS) or ‘‘alternative energy portfolio standard’’ (AEPS), require a certain percentage of an electric utility’s power plant capacity or generation to be derived from renewable or alternative energy sources within a specified timeframe. The standards range from modest to aggressive. Some states also include ‘‘carve-outs’’ (requirements that a certain percentage of the portfolio be generated from a specific energy source, such as solar power) or other incentives to encourage the development of particular resources. While the first RPS was established in 1983, the majority of states passed or strengthened their standards after 2000. Although the strengthened requirements are still new, these efforts are starting to increase the use of renewable energy. Many states allow electric utilities to comply with the RPS or AEPS through emissions trading credits. The success of various state efforts to increase renewable or alternative energy production greatly depends in large measure on emerging federal legislation and policy development to effectively encourage clean energy generation.

Major International and Regional GHG Mitigation Programs As alluded to previously, the major focus of initial legislative and regulatory initiatives has been implementing an effective cap and trade program amid the many pitfalls that exist. Many of the current and developing international, regional, and state-specific (within the United States) GHG programs implemented or being developed to date are summarized in > Table 3.5 and then expanded upon in more detail in the section below.

European Union’s Emission Trading Scheme The European Union’s Emission Trading Scheme (EU ETS) was developed over the past decade and is based on aiding European countries in the quest to meet the GHG emission reduction targets established under the Kyoto Protocol by the year 2012. Formally launched in 2005, the EU ETS remained in a ‘‘trial period’’ through 2007 before formally entering a second phase in 2008 where the EU ETS would be utilized to meet European targets under the Kyoto protocol [17].

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. Table 3.5 International, national, regional, and state-specific greenhouse gas mitigation programs Program or country

Origination date Geographic coverage

European Union’s Emission Trading Scheme (EU ETS) The Northeast Regional Greenhouse Gas Initiative (RGGI) The Western Climate Initiative (WCI)

2005

European Union

2009

Northeastern United States

2007

Midwestern Regional Greenhouse Gas Reduction Accord

2007

Western United States and Canadian Provinces Midwestern United States

California

2008

Florida Australia

2008 2009

California coverage only; linkage to the WCI Florida Australia

New Zealand China India Brazil

2008 2007 2008 2008

New Zealand China India Brazil

Indonesia South America Canada

2008 2008 2008

Indonesia South America Canada (tied closely to United States)

Implementation of the EU ETS is intended to achieve significant reductions in GHG emissions and other goals including: ● Reduction in CO2e emissions of 20% by 2012 ● Increase in renewable energy usage of 20% by 2010 ● Improvements in overall energy efficiency by 20% before 2010 As a traditional cap and trade system, the EU ETS was designed and tailored after the US trading schemes for sulfur dioxide and nitrogen oxides under the Clean Air Act (CAA). Aspects of the EU ETS include: ● An absolute cap on CO2e emissions on many types of facilities ● Free allowance distribution to the covered facilities in the initial implementation phase ● Requirements that facilities in the program must determine CO2e emission levels, report those emissions, and surrender allowances for each ton of CO2 emitted More than 11,000 energy-intensive facilities are included in the program across the 27 European Union member states. The EU ETS presently includes only the power sector,

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specified industries, and large combustion operations. This represents about half of the CO2e emissions in the European Union. Although allocations under the program are currently free allocations, during the third phase (years of 2013–2020) the EU ETS will begin to move toward auctioning of allowances. Also during Phase III, a larger number of facilities will be included in the program as well as adding other GHGs beyond CO2 such as nitrous oxide and perfluorocarbons.

The Northeast Regional Greenhouse Gas Initiative (United States) The Northeast Regional Greenhouse Gas Initiative (RGGI), the first mandatory cap and trade program in the United States for CO2, became effective on January 1, 2009, with a goal of reducing CO2 emissions by 10% from 2009 levels by the year 2018. The program encompasses ten participating Northeast and Mid-Atlantic states including: ● ● ● ● ● ● ● ● ● ●

Connecticut Delaware Massachusetts Maryland Maine New Hampshire New Jersey New York Rhode Island Vermont

RGGI established a cap of 188 million tons of CO2 for the ten states and covers fossil fuel-fired electric power plants that are 25 MW or greater in power generation capacity. This represents about 225 facilities in the ten state regions. Each participating state is provided a CO2 budget based on its share of emissions that is managed accordingly to ensure total capped emissions are not exceeded [18]. Allowances are auctioned under the program on a quarterly basis. Key stated goals to be accomplished by RGGI include: ● Initial stabilization of CO2 emissions in early phase of program ● Reduction of CO2 emissions of approximately 2½% per year as the program matures ● Support of a green economy by using auction revenues for investment in energy efficiency, renewable energy, and accelerating a regional shift to a clean energy economy ● Promotion of energy independence by providing a means for investment in energy efficiency ● Providing a model for national and international programs being designed to reduce CO2 emissions

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The Western Climate Initiative (United States and Canada) The Western Climate Initiative (WCI) kicked off in early 2007 and covers the following US states and Canadian provinces: ● ● ● ● ● ● ● ● ● ● ●

Arizona California Montana New Mexico Oregon Utah Washington British Columbia Manitoba Ontario Quebec Similar to the other established GHG programs, the goals of the WCI include:

● Reduction of GHG emissions ● Spurring the growth of new clean energy technology ● Reducing use and dependence on nondomestic fuel supplies Under the WCI, emissions from 90% of the facilities in the region will be captured in the program including: ● ● ● ● ●

Electricity generation Industrial and commercial fossil fuel combustion Industrial process emissions Gas and diesel consumption for transportation Residential/commercial fuel use

Reporting of emissions will begin in 2011 and will be based on calendar year 2010 emissions with the first phase of a cap and trade beginning in 2012. Beginning in 2015, the program will be expanded to include the remaining 10% of facilities not covered in the initial phase [19]. Once again, cap and trade is the primary driver for the program that includes allowance banking and offsets. The WCI is designed to be fully incorporated into a national GHG trading program, if and when the program is established.

Midwestern Regional Greenhouse Gas Reduction Accord (United States and Canada) The Midwestern Regional Greenhouse Gas Reduction Accord (Midwest Accord) was initiated on November 15, 2007, by the Governors of:

Climate Change Legislation: Current Developments and Emerging Trends

● ● ● ● ● ● ●

3

Illinois Iowa Kansas Michigan Minnesota Wisconsin The Premier of Manitoba

An advisory group was formed including a mix of individuals representing interests from across the region such as governments, business and industry, academia, agriculture, and environmental groups with the intent of developing recommendations for the Midwest Accord. Design principles were utilized to determine the recommendations for reduction targets and the cap and trade program design [20]. The signed Midwest Accord calls for: ● 2020 targets to be established for GHG emission reductions of 20% below 2005 levels and 80% reduction below 2005 levels by 2050 ● Coverage of electricity generation, industrial combustion sources, process emission sources, and fuel use in both commercial and transportation sectors ● Implementation of a stand-alone cap and trade program that also could easily link to the other existing cap and trade programs in the United States and in Europe Members of the Midwest Accord prefer a federal approach to GHG emission limits and a cap and trade program; however, members plan to continue to evaluate the prospects of federal plans and act accordingly within the member states/territories as necessary.

California Climate Change Scoping Plan Adopted in 2009, California’s Climate Change Scoping Plan referred to as the AB32 Scoping Plan (AB32) is the state’s roadmap to achieve GHG emission reductions to reduce impacts of global warming. AB32 includes: ● A cap and trade program covering 85% of the state’s GHG emissions ranging from electricity generation to industrial and transportation sources ● Linkage to WCI program for maximum flexibility and program benefit ● Transportation measures to initially reduce vehicle GHG emissions by 30% by 2016 ● Electricity and energy standards including a goal of 33% renewable energy usage by 2020 ● Identifying pertinent industry standards to reduce GHG emissions ● Focus on the GHG with highest GWP ● Forest and agriculture projects ● Waste gas recycling

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AB32 will be the key cog of California’s development of a green economy by driving efficient growth, increasing venture capital opportunities in the energy sector, producing green jobs, and producing new clean energy technologies [21].

Florida On June 25, 2008, Florida Governor Charlie Crist approved House Bill 7135, which requires the Florida Department of Environmental Protection to create a cap and trade regulatory program to reduce greenhouse gas emissions from major emitters, but sets no specific limits and requires any program to be ratified by the legislature. The Florida Climate Action Team was formed and continues to consider actions that the state can take to develop climate change policy based on other regional and federal programs in the United States [22].

Australia The Government of Australia has been preparing to introduce a comprehensive climate change plan for many years. In announcing its Carbon Pollution Reduction Scheme, the Australian Government believes it ‘‘is acting to reduce carbon pollution, create the jobs of the future and secure Australia’s future prosperity.’’ Through its commitment under the Kyoto Protocol, Australia is on target to slow the growth of the country’s GHG emissions to 108% of 1990 levels by 2012 [23]. The Australian government has established stringent targets to lower the country’s GHG emissions with a goal to reduce emissions to 25% below 2000 levels by 2020. The Australian target is contingent on other industrialized nations agreeing to implement similar long-term commitments for GHG emission reductions. Key aspects of the Australia Carbon Pollution Reduction Scheme include: ● Strengthening efforts to prepare Australia for a low carbon pollution future through the use of renewable energy ● Research and development of clean energy technology ● Measures to help households, businesses, communities, and regions transition and adapt to a low carbon economy

New Zealand New Zealand was party to the Kyoto Protocol and, thus, has agreed to reduce GHG emissions accordingly. Legislative efforts in New Zealand have focused on the development of the New Zealand Emissions Trading Scheme (NZ ETS) similar to the EU ETS. The NZ ETS, which became law in New Zealand in 2008, places the burden of carbon market costs on the producers or carbon emissions. Funds from the NZ ETS will be used to [24]:

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● Reduce GHG emissions through legislative controls ● Invest in clean technology and renewable power operation ● Plant trees for carbon sequestration Sectors included in the NZ ETS include: ● ● ● ● ● ● ●

Forestry Transport fuels Electricity production Industrial processes Synthetic gases Agriculture Waste handling

The NZ ETS began in 2010 with a transition phase through 2012. In the transition phase, emitters of GHG would be required to purchase emission credits from the NZ ETS. Additionally, energy, industrial, and fossil fuel sectors will be required to surrender one credit for every 2 t of GHG emissions produced.

China Although China is a non-Annex 1 country under the UNFCCC and Kyoto Protocol and is not required to reduce GHG emissions, it is included in the CDM established under the Kyoto Protocol and has been a major player in developing CDM credits. While the Chinese government continues to study appropriate levels of GHG emission reductions and believes in ‘‘common but differentiated responsibilities,’’ there are developing policies that show potential for future GHG emissions reductions including [25]: ● Energy efficiency and conservation programs including energy intensity targets, high performer programs, closure of inefficient power plants, and inefficient industrial facilities ● Transportation initiatives primarily in the form of fuel economy standards ● Renewable energy targets and incentives ● Policies including export taxes on energy-intensive products and promotion of advanced clean energy technologies ● Reforestation projects ● Energy diversification in nuclear, natural gas, and hydropower ● Advanced coal initiatives

India India is in the same category as China as a non-Annex 1 country with no binding GHG emission limits under the Kyoto Protocol. Similar to China as well, India is a participant in

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the CDM and is second to China in the number of projects to date. In June 2008, India released a National Action Plan on Climate Change that included programs on climate change mitigation and adaptation [26]. This plan established eight core ‘‘national missions’’ through 2017 focused on: ● ● ● ● ● ●

Renewable energy including solar, wind, and hydropower Clean coal Nuclear power Energy efficiency and conservation Transportation issues including alternative fuels, clean engines, and mass transit Forest and tree cover projectsx

Brazil As part of its stated commitment to sustainable development, the Government of Brazil presented a proposal at the Copenhagen COP-15 meeting that would result in a 36–39% reduction in GHG emissions by the year 2020 [27]. Efforts in Brazil will focus on the reduction of deforestation in the Amazon and initiatives in the agriculture industry. Brazil has developed a National Plan on Climate Change that includes the following primary actions [28]: ● ● ● ● ● ● ●

Stimulate energy efficiency in various economic sectors. Maintain gains in renewable energy growth in the electricity generation matrix. Encourage further growth in the sustainable use of bio-fuels for transportation sector. Seek sustained reduction in deforestation rates. Eliminate net loss of forest coverage in Brazil by 2015. Strengthen inter-sector adaptation actions for vulnerable population groups. Identify potential impacts from climate change to assist in development of an appropriate response strategy.

Brazil passed a National Policy on Climate Change in December 2009 following in step with the National Plan on Climate Change. A National Fund on Climate Change was also instituted to address budgetary aspects of climate change management in Brazil.

Indonesia In September 2009, the Indonesian Minister of National Development Planning and the Minister of Finance launched the Indonesia Climate Change Trust Fund (ICCTF) [29]. The ICCTF focuses on: ● The energy sector including renewable energy and improved energy efficiency ● Sustainable forest management ● Reducing the vulnerability of agriculture, water, and coastal zones

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The goal of the ICCTF is to advance investment in technologies to reduce GHG emissions and adaptation to climate change impacts. The ICCTF is designed to develop grant funding and technological investment from various sources. The United Kingdom, the Netherlands, Australia, Norway, and Sweden have already agreed to participate in the ICCTF.

South Africa The South African Government completed a long-term mitigation scenario (LTMS) in 2006 to study the impact of climate change and to begin to consider strategy options for climate change mitigation and GHG emissions reductions. This effort included input from various stakeholders from the Government, business, communities, and the labor force. Elements of the South African vision for a climate change mitigation strategy include [30]: ● ● ● ● ● ● ●

Energy efficiency and conservation Ambitious targets for GHG emissions reductions Use of a carbon tax or carbon cost scheme Diversifying energy mix away from coal Developing a zero carbon electricity sector Consideration of carbon capture and storage options Transportation elements

Canada The Canadian Government has committed to reduce GHG emissions by approximately 17% from 2005 levels by 2020 and will work closely with US commitments on GHG emission reduction initiatives. As noted above, certain provincial governments within Canada have already engaged with groups in the United States such as the WCI and the Midwest Accord to address GHG emission reductions. Overall, the Government of Canada is committed to [31]: ● ● ● ●

Build a clean energy system and be a leader in clean energy technology Introduce regulations to limit GHG emissions Invest in technology for environmental improvements Support and play an active role in the UN climate change meetings and process

As shown above, the actions by various countries and regions regarding climate change mitigation and legislative actions are different to an extent; however, generally, the mitigation options and GHG emission reduction programs under consideration are consistent in countries around the globe. Although each country is acting somewhat independently, the path to linkage of GHG emission management programs and

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consistency in climate change legislation is fairly straightforward as there are only a limited number of effective options available.

United States Environmental Protection Agency Actions While admitting that the best overall solution to regulation of GHG emissions is federal and international legislation, the United States Environmental Protection Agency (USEPA) believed it could not afford to wait any longer for a legislative mechanism; thus, in 2009, the USEPA initiated a series of actions toward regulation of GHG emissions apart from federal congressional action. Key actions or developments in the USEPA GHG regulatory process include: ● ● ● ● ●

Greenhouse Gas Endangerment Finding Light-Duty Motor Vehicle Emission Standards for CO2 Greenhouse Gas Tailoring Rule Mandatory Greenhouse Gas Reporting Rule National Environmental Policy Act (applicable to US government agencies)

Greenhouse Gas Endangerment Finding The tidal wave of GHG regulatory actions by the USEPA started rolling on April 2, 2007, per Massachusetts v. EPA, 549 US 497 (2007), when the US Supreme Court ruled that GHG emissions are ‘‘air pollutants’’ as defined by and subject to be regulated under the US Clean Air Act (CAA). The Supreme Court said that the USEPA must determine if GHG emissions from new motor vehicles cause or contribute to air pollution which may reasonably be anticipated to endanger public health or welfare, or whether the science is too uncertain to make a reasoned decision. The USEPA had to follow the specific language of section 202(a) of the CAA. The Supreme Court decision resulted from a petition for rulemaking under section 202(a) filed by more than a dozen environmental, renewable energy, and other organizations [32]. This Supreme Court decision quickly led to a challenge in November of 2008 of a prevention of significant deterioration (PSD) permit on the basis that the permit was issued by USEPA Region 8 but did not include best available control technology (BACT) limits for CO2. The United States Congress established the PSD regulations as part of the new source review (NSR) program in the 1977 Clean Air Act Amendments and modified the regulations in the 1990 Clean Air Act Amendments. NSR is a preconstruction permitting program that: ● Ensures the maintenance of national ambient air quality standards ● Assures that new emissions do not slow progress toward reaching attainment in those areas that do not currently meet the national ambient air quality standards

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● Ensures that appropriate air pollution control technology is installed at new plants or at existing plants that undergo major modifications On December 18, 2008, the USEPA issued a memorandum referred to as ‘‘EPA’s Interpretation of Regulations that Determine Pollutants Covered by Federal Prevention of Significant Deterioration (PSD) Permit Program’’ (known as the ‘‘Johnson Memo’’ or the ‘‘PSD Interpretive Memo’’). Whether a pollutant is ‘‘subject to regulation’’ is important for the purposes of determining whether it is covered under the CAA permitting programs. The PSD Interpretive Memo established that a pollutant is ‘‘subject to regulation’’ only if it is subject to either a provision in the CAA or regulation adopted by EPA under the CAA that requires actual control of emissions of that pollutant. In late December 2008, the USEPA received a petition of reconsideration for the position taken in the Johnson memo from various environmental organizations. The petition questioned the validity of the memo for use in making regulatory determinations. Following the presidential administration change from George W. Bush to Barack Obama in January 2009, the USEPA granted the petition of reconsideration and reopened comment on the endangerment issue in February 2009. Then on December 7, 2009, new USEPA Administrator Lisa Jackson signed two distinct and historic findings regarding GHG under section 202(a) of the CAA: ● GHG Endangerment Finding ● GHG Cause or Contribute Finding The USEPA found that the current and projected atmospheric concentrations of the six key GHGs – CO2, CH4, N2O, HFCs, PFCs, and SF6 – ‘‘threaten the public health and welfare of current and future generations.’’ The USEPA also determined that the combined emissions of the six key GHGs from new motor vehicles and new motor vehicle engines ‘‘contribute to the GHG pollution which threatens public health and welfare.’’ Although this determination, published by the USEPA on December 15, 2009, did not impose any new requirements on industry or other entities, the determination was a prerequisite to finalizing the GHG standards for light-duty vehicles. In this determination, USEPA Administrator, Lisa Jackson commented that, ‘‘After a thorough examination of the scientific evidence and careful consideration of public comments, the U.S. Environmental Protection Agency (EPA) announced today that greenhouse gases (GHGs) threaten the public health and welfare of the American people. EPA also finds that GHG emissions from on-road vehicles contribute to that threat. GHGs are the primary driver of climate change, which can lead to hotter, longer heat waves that threaten the health of the sick, poor or elderly; increases in ground-level ozone pollution linked to asthma and other respiratory illnesses; as well as other threats to the health and welfare of Americans. These long-overdue findings cement 2009’s place in history as the year when the United States Government began addressing the challenge of greenhousegas pollution and seizing the opportunity of clean-energy reform. Business leaders, security experts, government officials, concerned citizens and the United States Supreme Court have called for enduring, pragmatic solutions to reduce the greenhouse gas

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pollution that is causing climate change. This continues our work towards clean energy reform that will cut GHGs and reduce the dependence on foreign oil that threatens our national security and our economy’’ [32]. As expected, on March 29, 2010, the USEPA followed the GHG endangerment finding with a notice conveying the USEPA’s decision to continue applying the PSD Interpretive Memo’s interpretation of ‘‘subject to regulation’’ and concluded that the ‘‘actual control interpretation’’ is the most appropriate interpretation. The USEPA established that CAA permitting requirements apply to a newly regulated pollutant at the time a regulatory requirement to control emissions of that pollutant ‘‘takes effect’’ (rather than upon promulgation or the legal effective date of the regulation containing such a requirement). Based on the anticipated promulgation of the light-duty vehicle rule, the notice stated that the GHG requirements of the vehicle rule would trigger CAA permitting requirements for stationary sources on January 2, 2011.

Light-Duty Motor Vehicle Emission Standard for CO2 Falling in line with the previous decisions, in April 2010, the USEPA and the Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) finalized a joint rule to establish a national program consisting of new standards for model year 2012 through 2016 light-duty vehicles that will reduce GHG emissions and improve fuel economy. ‘‘EPA is finalizing the first-ever national greenhouse gas (GHG) emissions standards under the Clean Air Act, and the NHTSA is finalizing Corporate Average Fuel Economy (CAFE) standards under the Energy Policy and Conservation Act’’ [33]. Based on the regulatory framework now in place, through the setting of the light-duty vehicle standard, GHG emissions would now be formally considered regulated pollutants. Key aspects/considerations of the light-duty motor vehicle rule include: ● Vehicles must meet a combined average emissions level of 250 g of CO2 per mile in model year 2016 equivalent to 35.5 miles per gallon (15 km/l). ● Manufacturers must build a single light-duty national fleet that satisfies requirements of the Federal and State of California standards. ● Provisions for nationwide energy and environmental benefits while maintaining consumer vehicle options.

Greenhouse Gas Tailoring Rule In light of the light-duty motor vehicle rule that established a standard for GHG emissions and, thereby, made GHG a formally regulated pollutant, the USEPA issued a final rule on May 13, 2010, to address GHG emissions from many industrial and electrical generation sources under the traditional CAA permitting programs in place since the 1970s.

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The USEPA rule sets new thresholds for GHG emissions to determine when air permits currently issued under the USEPA NSR PSD and CAA Title V Operating Permit programs are required to include GHG emissions [34]. The USEPA rule is called a tailoring rule because it ‘‘tailors’’ the requirements of these traditional air-permitting programs to clarify the sources required to obtain permits for GHG emissions. The USEPA’s stated goal is to insure that GHG emissions sources in this revised permitting program will include the United States’ largest GHG emitters such as electrical generation plants, chemical plants, refineries, and other production facilities. Emissions from smaller sources with much lower GHG emission levels will be excluded in the initial round of CAA permitting efforts. Although the tailoring rule includes a timeline that initially zeroes in on the largest of GHG emission sources, the rule has future plans built in to evaluate additional GHG emission source coverage in the years ahead. Traditional permitting thresholds for criteria pollutants including sulfur dioxide, nitrogen dioxide, volatile organic compounds, lead, carbon monoxide, etc., have been in the range of 100–250 tons per year (t/year). Permitting GHG emissions at these same levels would result in permits for many very small sources; thus, while ‘‘these thresholds are appropriate for criteria pollutants, they are not feasible for GHGs because GHGs are emitted in much higher volumes.’’ Without this tailoring rule, the lower emissions thresholds would take effect automatically for GHGs on January 2, 2011. PSD and title V requirements at these thresholds would lead to potentially tens of thousands of PSD permits and millions of title V permits. State, local, and tribal permitting authorities would be overwhelmed and the programs’ abilities to manage air quality would be severely impaired. Thus, the USEPA has elected to phase in the CAA permitting requirements for GHGs in two initial steps. Step 1 includes the timeframe from January 2, 2011, to June 30, 2011. Highlights of step 1 include: ● Only emission sources currently subject to the PSD permitting program (i.e., sources that are newly constructed or modified in a way that significantly increases emissions of a pollutant other than GHGs) would be subject to permitting requirements for their GHG emissions under PSD. ● For new projects, only GHG emission increases of at least 75,000 t of GHG per year on a CO2e basis would need to determine the best available control technology (BACT). ● Only sources currently subject to air permitting would be subject to air-permitting requirements for GHG. ● During this phase, no sources would be subject to air-permitting requirements only for GHG emissions. Step 2 is the timeframe from July 1, 2011, to June 30, 2013. Highlights of step 2 include: ● PSD permitting requirements will now cover new construction projects that emit GHG emissions of at least 1,00,000 t/year even if they do not exceed the permitting thresholds for any other pollutant.

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● Modifications at existing facilities that increase GHG emissions by at least 75,000 t/year will be subject to permitting requirements, even if they do not significantly increase emissions of any other pollutant. ● For the first time, air permit requirements will apply to emission sources based on their GHG emissions even if they would not apply based on emissions of any other pollutant. Facilities that emit at least 1,00,000 t/year of CO2e will be subject to title V permitting requirements. In the rule, the USEPA leaves open the possibility of considering additional rulemaking that could begin in 2011 and may include: ● Additional emission sources for GHG permitting ● Provisions for certain smaller sources to be permanently excluded from permitting of GHG emissions ● A range of opportunities for streamlining future GHG permitting that have the potential to significantly reduce permitting burdens

Mandatory Greenhouse Gas Reporting Rule Parallel to the efforts by the USEPA to regulate GHG emissions under the CAA, the USEPA promulgated the mandatory GHG reporting rule under 40 CFR Part 95 on October 30, 2009, and finalized the rule in December 2009. While reporting of GHG emissions has been required in the programs noted previously and many companies have been reporting emissions voluntarily for many years, the new GHG reporting rule is the first national effort to mandate reporting in the United States. The rule requires various electric generation and industrial facilities to report emissions of GHG from plant operations beginning with calendar year 2010 [35]. USEPA’s purpose in promulgating the GHG reporting rule is that the rule will ‘‘provide EPA, other government agencies, and outside stakeholders with economywide data on facility level (and in some cases corporate level) GHG emissions, which should assist in future policy development’’ (Federal Register; October 30, 2009; page 56265). There is great uncertainty regarding what type of policy development and the extent of the impact. However, one thing is certain: Mandatory reporting of GHG emissions begins this year.

Summary of Sectors Covered in the GHG Reporting Rule Applicability is based on industry-type and/or level of emissions. Facilities required to report regardless of emission levels include: ● Electric generation ● Adipic acid production

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● ● ● ● ● ● ● ● ● ● ● ● ● ●

3

Aluminum production Ammonia manufacturing Cement production HCFC-22 production HFC-23 destruction processes Lime manufacturing Nitric acid production Petrochemical production Petroleum refineries Phosphoric acid production Silicon carbide production Titanium dioxide production Municipal solid waste landfills Manure management systems

Additional source categories required to report if combined emissions exceed 25,000 t of CO2e include: ● ● ● ● ● ● ● ● ● ● ●

Ferroalloy production Glass production Hydrogen production Iron and steel production Lead production Pulp and paper manufacturing Zinc production Underground coal mines Industrial wastewater treatment facilities Industrial waste landfills Magnesium production facilities

Finally, facilities that operate stationary combustion units with combined GHG emissions that exceed the 25,000 CO2e level must report.

What the Rule Requires After verifying that reporting is required, a facility must determine if existing monitoring systems are sufficient to provide accurate parameter data needed to complete emission calculations. The applicable subpart and general provisions will dictate the data requirements. In many cases, new or enhanced monitoring systems may need to be installed. Provisions are in place to obtain additional time (through 2010) to use best available data while implementing more robust monitoring systems. One caution is to insure all accuracy requirements such as meter certification and calibrations are met as the GHG reporting rule could be more stringent than current requirements for parameters such as natural gas supply.

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Each facility must maintain a GHG monitoring plan that includes: ● Summaries of methods to monitor, record, and maintain data ● Details of emission calculation procedures ● The organizational structure for GHG data management and review The first GHG emissions reports are due in March 2011 for calendar year 2010 emissions. The details of an individual facility’s report will vary based on facility type and emissions level. Following the initial report in 2011, emission reports will be due to the USEPA annually. With emissions reporting no longer solely a voluntary effort, the bar is being raised for accurate management of GHG emissions including: ● Moving to third-party data verification for the basis of regional emissions reporting rather than internal company-only review ● Satisfying future allowances and emissions trading financial accounting requirements ● Future Securities and Exchange Commission (SEC) reporting ● Federal compliance with the USEPA GHG reporting rule

United States National Environmental Policy Act Following the Supreme Court’s 2007 Massachusetts v. EPA decision, the effort to include GHG emissions evaluation in National Environmental Policy Act (NEPA) evaluations picked up momentum. On February 18, 2010, the White House Council on Environmental Quality (CEQ) issued guidance to federal agencies to consider the following in future NEPA decisions: ● Consider climate change and GHG emissions. ● Implement climate mitigation strategies and monitoring of results. ● Determine if exclusions from including GHG emissions exist for certain projects. This is a highly controversial subject as this guidance will now require policy makers to rely on subjective data to make decisions on public projects. At the time of writing, this guidance was still in a proposed state [36].

United States Federal GHG Legislation With all of the efforts by the USEPA to move forward with GHG emission regulations, there is still a highly probable outcome that the federal government will eventually pass legislation to regulate GHG emissions at a national level and in a consistent manner with other international programs in effect or development as alluded to previously. Some useful definitions related to federal climate legislation include [37]:

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● Allowance – a limited authorization by the government to emit 1 t of pollutant ● Auctions – used in market-based pollution control schemes to raise program revenues and fund various facets of reduction programs ● Banking – the process where allowances can be used or traded in a future year ● Carbon leakage – decreases in GHG emissions or benefits outside the boundaries of a defined regulatory program In 2009 and 2010, there has been a myriad of legislative approaches put forth in the United States including: ● ● ● ● ●

American Energy Security Act (Waxman–Markey: May 2009) Clean Energy Act of 2009 (November 2009) Clean Energy Partnerships Act of 2009 (November 4, 2009) Carbon Limits and Energy for America’s Renewal (Cantwell–Collins: December 2009) American Power Act (Kerry–Lieberman: May 2010) Each of these approaches is summarized briefly below.

American Energy Security Act (Waxman–Markey: June 2009) In June 2009, the 112th Congress of the United States passed the first major climate change bill in US history referred to as the American Energy Security Act or more commonly, the Waxman–Markey bill given that the bill was cosponsored by Representatives Henry Waxman (Democrat from California) and Ed Markey (Democrat from Massachusetts). The Waxman– Markey bill establishes CO2 reduction targets, a federal cap and trade program, a renewable electricity standard (RES), requirements for coal-fired power plants, energy-efficiency standards, worker transition programs, smarter cars, and smarter electricity grids [38]. Emission reduction goals starting in 2012 and based on 2005 emission levels include: ● ● ● ●

A 3% reduction by 2012 A 17% reduction by 2020 A 42% reduction by 2030 More than 80% reduction by 2050

Coverage of the program initially includes approximately 85% of the overall economy including electricity producers, oil refineries, natural gas suppliers, and multiple industry categories. Facilities with CO2 emissions above 25,000 t/year would be required to acquire a permit for their emissions or, in other words, obtain emission allowances for all CO2 emissions on an annual basis. Facilities can trade these allowances to other facilities that need allowances or bank them for future usage. Eighty-five percent of the allowances would be given away under the current plan to major energy users; however, the free allowances will gradually be decreased over the first 20 years of the program. The remaining 15% of the allowances would be auctioned off. Within 20 years from program implementation, essentially all allowances would become part of an auction program. Current projections of CO2 allowances expect the per ton cost in 2012 to be around $20–25 increasing to $50/t by 2025.

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Revenue from the auctioning of allowances under the cap and trade program would be used to: ● ● ● ● ●

Invest in clean energy technology research and deployment Offset increased energy costs for low-moderate income households Prevent international deforestation Fight climate change in other nations Fund worker transition from fossil fuel–dependent industries

Clean Energy Act of 2009 (November 2009) The Clean Energy Act (CEA) of 2009 was introduced on November 16, 2009. The CEA focuses on the creation of incentives and financing programs for nuclear and alternative energy projects under the assumption that broad development will result in GHG reductions. The CEA would amend the current Energy Policy Act of 2005 to expand the flexibility of loan guarantees for various technologies, set aside $10 billion for incentives for innovative technologies, and put into motion the development of further nuclear energy production facilities and associated educational programs to insure a properly trained workforce is available [39].

Clean Energy Partnerships Act of 2009 (November 4, 2009) The Clean Energy Partnerships Act (CEPA) of 2009 addresses various areas of climate change legislation including: ● ● ● ●

Offset Credit Program for Domestic Emission Reductions Carbon Conservation Rural Clean Energy Resources Agricultural and Forestry Research for GHG Mitigation

Under the CEPA, a GHG Reduction and Sequestration Advisory Committee will be established to advise on the establishment and implementation of an offset program. A major focus of the committee would be to establish a program to govern the creation of credits from emission reductions and define eligible projects that generate offset credits [40].

Carbon Limits and Energy for America’s Renewal (Cantwell–Collins: December 2009) The Carbon Limits and Energy for America’s Renewal (CLEAR) Act was proposed on December 11, 2009. The CLEAR Act includes GHG reduction standards as follows: ● Reduction to 80% of 2005 levels by 2020 ● Reduction to 70% of 2005 levels by 2025

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● Reduction to 58% of 2005 levels by 2030 ● Reduction to 17% of 2005 levels by 2050 Other key facets of the CLEAR Act include [41]: ● A fossil carbon limitation program would be moved forward to distribute carbon; shares via monthly auctions develop a market for carbon auctions. ● Carbon share prices would initially be set between $7 and $21 per ton in 2012 and then fluctuate based on inflation rates and other factors. ● Dividend programs are included for US residents to receive distribution of approximately 75% of all revenues. ● Remaining revenues would be invested in the Clean Energy Reinvestment Trust Fund (CERT Fund) and used for program development and incentives related to clean energy and related initiatives.

American Power Act (Kerry–Lieberman: May 2010) On May 12, 2010, another comprehensive climate and clean energy bill was introduced by Senators John Kerry (Democrat from Maryland) and Senator Joe Lieberman (Independent from Connecticut). The Kerry–Lieberman bill, known as the American Power Act (APA) of 2010, is similar in many aspects to the Waxman– Markey Bill put forward in 2009. The APA would go into effect in 2013 for electrical generation facilities and fuel distributors with a 2016 date for industrial sources and natural gas facilities. The APA includes a 15-year transition period that focuses on renewable energy, maximizing energy efficiency, transportation. The APA includes support for nuclear energy and natural gas investment. The APA looks to achieve rapid mitigation of higher intensity GHGs and black carbon and includes adaptation programs [42]. No later than 2025, the APA would look very similar to a refund-based auctionedallowance system promoted by President Obama and advocates of cap and dividend programs. Key aspects include: ● Most regulated sources would be required to purchase emission allowances or offset credits through federal auctions or a regulated market. ● For gasoline and other refined products, fixed allowances would be set quarterly. ● During the period from 2012 to 2025, free allowances would be distributed to sources of GHG emissions to enable a cost-efficient transition for consumers, electrical generation facilities, and fuel suppliers, as well as buffer the impact of carbon economy costs on ‘‘trade-vulnerable’’ industries and petroleum refineries. ● Public facilities may receive some allowances as well during the initial transition period. ● In the years following 2025, an increasing number of allowances would be auctioned and proceeds distributed to US consumers through income tax credits.

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As noted, the APA is heavily based in revenue sharing and sends roughly two-thirds of all revenues not dedicated to US deficit reduction issues back to consumers. The remainder of program income is to help the transition for American businesses and for investment in projects and technologies to reduce GHG emissions and advance energy security. As the program matures, more dividends will go directly back to consumers under the program. The APA: ● Invests in technology to harness domestic power supplies and reduce our dependence on foreign oil ● Invests in innovation across all energy sources by rebuilding our energy infrastructure as we reinvigorate our manufacturing base ● Includes separate, targeted mechanisms for the three major emitting sectors: power plants, heavy industry, and transportation ● Only addresses the largest sources of carbon pollution and provides predictability to businesses and consumers through a hard price collar and the creation of a single, clear set of rules ● Does preempt state and regional GHG cap and trade programs and would formally exclude GHGs from regulation under the CAA as discussed in detail previously. Table 3.6 includes a comparison of reduction targets and allowances in the APA and Waxman–Markey bills. >

Compromise Proposals in the United States In seeking to move forward with a Senate version of a climate change bill that would eventually be merged with the Waxman–Markey bill, there has been significant negotiation and discussion in the US legislative bodies and the presidential administration in 2010. Various proposals would incorporate strategies from the current myriad of legislative approaches summarized above in addition to new concepts and ideas. Limiting the coverage of national program to only electric utilities was one approach that had some initial momentum; however, this approach like many others has not been successful to date.

Impact of Federal Legislation on Current GHG Cap and Trade Programs A key word in the interaction of current regional GHG programs and possible future programs is ‘‘preemption.’’ Preemption refers to the process where a new, broader national or even international legislative effort would supersede current regional programs. In comparing the current GHG cap and trade programs with the program included in the Waxman bill, the general tone of the legislation is consistent with current trading

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. Table 3.6 Comparison of key reduction targets and allowance/offset requirements of APA and Waxman–Markey Bills [43] Provision

APA

Waxman–Markey

GHG emission reduction targets

4.75% by 2013 17% by 2020 42% by 2030

3% by 2012 17% by 2020 42% by 2030

83% by 2050 2013 – Electric power, transportation fuels, heating oil, industrial gas producers, CO2 sequestration sites 2016 – Industrial sources, natural gas distributors

83% by 2050 2012 – Electric power, transportation fuels, heating oil, industrial gas producers, CO2 sequestration sites 2014 – Industrial sources 2016 – Natural gas distributors

Transportation fuels and refined products

Purchase allowances directly from EPA; price set quarterly

Participate in allowance and offset market like other covered sources

Banking of allowances to meet future obligations Borrowing allowances with future effective dates to meet current compliance obligations

Unlimited

Same

No limit on borrowing from next year; limits on amount that can be borrowed from future years and interest payments

Same

Cap and trade phase in

programs. A likely outcome assuming eventual passage of a federal cap and trade bill is that existing US programs will be rolled into a national program (i.e., the existing regional programs are superseded by the federal program). This approach may provide the most flexibility and assurance for industry and utilities. Consistent with the CAA, the Waxman–Markey bill protects the individual states rights to be more stringent than federal requirements. This could be an issue if one of the existing groups of states such as RGGI, WCI, or the Midwest Accord concludes that a federal rule does not go far enough to reduce CO2 emissions or that the rule does not have a strong cap and trade program. If a state or group of states chooses to implement a more stringent program, it could result in more expensive state and regional allowances on a per ton basis depending on the quantity of CO2 emissions and the types of facilities covered by the state and regional program. Depending on the will of the states, as the final federal legislation emerges, there could be an option where regional programs remain intact with linkage to the federal program. This hybrid approach may provide opportunities for those states or regions who believe they will have a more effective program if managed within the state or region and yet have common elements with the federal program.

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In the APA bill from the Senate, the federal program would essentially preempt all regional cap and trade programs while maintaining the State’s rights to regulate mobile source emissions. Regarding how participants in each program may be required to manage, verify, and report GHG reductions and subsequent CO2 allocations, there is still significant uncertainty. Given that the recently proposed USEPA GHG Reporting Rule was designed based on significant review of the existing regional and international programs and other accepted GHG calculation and reporting protocols, this could alleviate many potential problems by not deviating significantly from current efforts.

Future Directions Climate change mitigation and associated legislation has become and will remain a major topic of national and international debate and discussion. While many aspects of state, federal, and international climate change legislation remain very much in flux, there is growing consistency in the GHG emissions reporting requirements and GHG emission mitigation options that will ultimately be included in each nation’s climate legislation strategy and any future international climate agreements that are reached. These consistencies are the outcome of the intense international discussion and negotiation in the UNFCCC and IPCC meetings such as Kyoto and Copenhagen. While these international meetings have grown significantly in scope and attendance since their humble beginnings, the conference of the parties and similar meetings remain the key mechanism to reach international consensus and develop reasonable and acceptable policy that helps steer a course toward workable GHG emission mitigation policies for all entities involved. Continued international cooperation is a key component of moving forward a fair and equitable solution given the overlapping issues associated with a global environmental issue like climate change. ‘‘Common but differentiated responsibilities’’ remains a challenge as the world’s economies grow. COP and MOP meetings along with frequent meetings at local, state, national, and international level will be critical and essential in maintain consistent approaches to the complicated issue of internal climate change mitigation. Various international programs and policies continue to emerge as countries around the globe determine their own course of action for climate change mitigation and adaptation. Many countries and geographical regions have developed plans, programs, and even regulations for emissions of GHG. Even if there are no formal programs or legislative actions in progress, most countries are addressing the issue as a regular course of business within their government. Current federal legislation in the United States has drawn upon the significant work completed both internationally as well as regionally in the United States and also from input from various stakeholder groups in industry, electricity generation, environmental groups, academia, and the public. These efforts should help to minimize the transition to either move from regional programs to a federal program or to enable a regional program

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to be managed within a corresponding federal program. In the same way, programs will continue to evolve to enable global connectivity in climate mitigation legislation. Likewise, consistency in regional, national, and international GHG emission trading programs is imperative for both domestic and international corporations worldwide who need consistency and certainty for managing the interaction of business goals and carbon management requirements into the future. Carbon leakage is also a key concern for many industrialized nations and must be properly addressed for any GHG emission management program to be effective worldwide. Legislative approaches that protect against imbalance in worldwide GHG emissions concentrations are essential. Economic factors such as the recent worldwide economic crisis will certainly influence the path of future climate change legislation. Many efforts that were building momentum were slowed by the difficult business conditions of recent years. Political movement and government administration changes throughout the world are other key variables especially in light of the debate over climate issues. While the regulatory and legislative path to define, develop, and implement sound environmental policy for carbon and GHG emission legislation is still uncertain, it is clear that a carbon-regulated economy is certainly in the international community’s future.

References 1. United States Environmental Protection Agency Greenhouse gas equivalents calculator. http:// www.epa.gov/cleanenergy/energy-resources/calculator.html 2. Anna Motschenbacher, Pew Center on Global Climate Change (2009) Pew Center perspective on state climate programs, Air and waste management’s environmental manager. April 2009, p. 6 3. Intergovernmental Panel on Climate Change (2010) History of intergovernmental panel on climate change. http://www.ipcc.ch/organization/organization_history.htm. June 2010 4. United Nations Framework Convention on Climate Change. In: Wikipedia, The Free Encyclopedia. http://en.wikipedia.org/wiki/United_Nations_ Framework_Convention_on Climate Change. Accessed 18 June 2010 5. Zaikowski L (2007) Global climate change: major scientific and policy issues. eoearth.org. http://www.eoearth.org/article/Global_Climate_ Change:_Major_Scientific_and_Policy_Issues 6. United Nations Framework Convention on Climate Change (2010) Kyoto protocol background. http://unfccc.int/kyoto_protocol/items/2830.php

7. United Nations Framework Convention on Climate Change (2010) Background on the emissions trading. http://unfccc.int/kyoto_ protocol/mechanisms/emissions_trading/items/ 2731.php 8. United Nations Framework Convention on Climate Change (2010) Background on the clean development mechanism. http://cdm.unfccc.int/ about/index.html 9. United Nations Framework Convention on Climate Change (2010) http://unfccc.int/ cooperation_ and_support/financial_mechanism/ adaptation_ fund/items/3659.php 10. United Nations Framework Convention on Climate Change (2010) Background on joint implementation. http://unfccc.int/kyoto_protocol/mechanisms/joint_implementation/items/1674.php 11. United Nations Framework Convention on Climate Change (2010) Copenhagen COP-15 and Copenhagen accord summary. http://unfccc.int/ meetings/cop_15/items/5257.php 12. Harris JM, Codur AM (2008) Policy responses to climate change. eoearth.org. http://www.eoearth. org/article/Policy_responses_to_climate_change

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13. Environmental Health Perspectives (Content Partner); Sidney Draggan (Topic Editor) (2009) ‘‘Climate change abatement strategies’’ In: Cutler J. Cleveland (ed) Encyclopedia of Earth. Environmental Information Coalition, National Council for Science and the Environment, Washington, D.C [First published in the Encyclopedia of Earth July 13, 2009; Last revised July 13, 2009; Retrieved August 6, 2010]. http://www. eoearth.org/article/Climate_change_abatement_ strategies 14. Pew Center on Global Climate Change (2009) Climate change 101: cap and trade. http://www. pewclimate.org/report/climate-change-101-series 15. Washington post, cap and trade: how it would work. http://www.washingtonpost.com/wp-dyn/content/ graphic/2009/02/26/GR2009022600572.html 16. Pew Center on Global Climate Change (2009) Renewable and alternative energy portfolio standards. http://www.pewclimate.org/ what_s_being_done/in_the_states/rps.cfm 17. Ellerman AD, Joskow PL, Massachusetts Institute of Technology (2008) The European union’s emission trading system in perspective, Pew Center on global climate change. May 2008 18. Regional Greenhouse Gas Initiative, Regional Greenhouse Gas Initiative Fact Sheet (2009) http://www.rggi.org/docs/RGGI_Executive%20 Summary_4.22.09.pdf 19. Western Climate Initiative (2009) The western climate initiative cap and trade program. http:// www.westernclimiateinitiative.org/the-wci-capand-trade-program 20. Midwestern Greenhouse Gas Reduction Accord, Advisory Group Draft Final Recommendations. June 2009 21. California Air Resources Board (2010) California’s climate plan fact sheet, http://www.arb.ca.gov/cc/ facts/scoping_plan_fs.pdf 22. State of Florida, Climate Change Action Team (2010) http://www.dep.state.fl.us/ClimateChange/ team/ 23. Australian Government Department of Climate Change and Energy Efficiency, Carbon Pollution Scheme. http://www.climatechange.gov.au/ 24. Government of New Zealand, New Zealand Emissions Trading System. http://www.climatechange. govt.nz/emissions-trading-scheme/about/ 25. Pew Center on Global Climate Change (2007) Climate change mitigation measures in China.

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http://www.pewclimate.org/publications/brief/ climate-change-mitigation-measures-china Pew Center on Global Climate Change (2008) Climate change mitigation measures in India. http:// www.pewclimate.org/publications/brief/climatechange-mitigation-measures-india Government of Brazil Ministerio do Meio Ambiente (2009) Brazil presents its proposal for the UN convention on climate change. http://www.mma.gov. br/sitio/en/index.php?ido=ascom.noticiaMMA&id Estrutura=8&codigo=5329 Government of Brazil, National Plan on Climate Change for Brazil (2008) http://www.mma.gov. br/estruturas/imprensa/_arquivos/96_111220080 40728.pdf Local Government Climate Roadmap (2009) Indonesian Government launches climate change trust fund. http://www.iclei.org/index. php?id=10426 Government of South America, Government Outlines Vision, Strategic Direction and Framework for Climate Policy (2008) http://www.environment.gov.za/HotIssues/2008/LTMS/medStment_ 28072008.html Government of Canada (2010) Canada’s action on climate change. http://www.climatechange.gc. ca/default.asp?lang=En&n=72F16A84-1 United States Environmental Protection Agency, Endangerment and Cause or Contribute Findings for Greenhouse Gases under Section 202(a) of the Clean Air Act Press Release (2009) http://yosemite. epa.gov/opa/admpress.nsf/0/08D11A451131BCA58 5257685005BF252 United States Environmental Protection Agency (2010) EPA and NHTSA to propose greenhouse gas and fuel efficiency standards for heavy-duty trucks; begin process for further light-duty standards fact sheet. http://epa.gov/otaq/climate/regulations.htm United States Environmental Protection Agency (2010) Final rule: prevention of significant deterioration and title V greenhouse gas tailoring rule fact sheet. http://www.epa.gov/NSR/actions. html#may10. May 10, 2010 United States Environmental Protection Agency (2009) Final rule: mandatory reporting of greenhouse gases fact sheet. http://www.epa.gov/ climatechange/emissions/ghgrulemaking.html Dustin Till and Svend Brandt-Erichsen, Marten Law (2010) CEQ Marks 40th anniversary

Climate Change Legislation: Current Developments and Emerging Trends of NEPA with new guidance on greenhouse gas impacts, mitigation and categorical exclusions, Marten Law. https://www.martenlaw. com/newsletter/20100222-nepa-climate-changeguidance 37. McGinley M (2007) Climate change: greenhouse gas reduction bills in the 110th congress. eoearth.org. http://www.eoearth.org/article/Climate _change: _greenhose_gas_reduction_bills_in_the_110th Congress 38. Pew Center on Global Climate Change (2009) Pew Center Waxman-Markey short summary. http:// www.pewclimate.org/federal/analysis/congress/ 111/acesa/waxman-markey-short-summary 39. Pew Center on Global Climate Change (2009) Pew Center summary of the clean energy act of 2009 (Alexander-Webb). http://www. pewclimate.org/federal/congress/111/alexanderwebb-clean-energy-act

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40. Pew Center on Global Climate Change (2010) Pew Center summary of the clean energy partnerships act of 2009 (Stabenow). http://www. pewclimate.org/federal/congress/111/stabenowclean-energy-partnerships-act-2009 41. Pew Center on Global Climate Change (2010) Pew Center summary of the CLEAR act (Cantwell-Collins). http://www.pewclimate.org/ federal/congress/111/clear-act-cantwell-collins 42. Pew Center on Global Climate Change (2010) Summary of the American Power Act (Kerry-Lieberman). http://www.pewclimate. org/federal/analysis/congress/111/pew-center-summary-american-power-act-2010-kerry-lieberman 43. Svend Brandt-Erichsen and Dustin Till, Marten Law (2010) Comparison of Kerry–Lieberman bill to house greenhouse bill, Marten Law. https://www. martenlaw.com/newsletter/20100514-senate-climatebill-comparison

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4 International Efforts to Combat Global Warming Karen Pittel1 . Dirk Ru¨bbelke2,3 . Martin Altemeyer-Bartscher4 Ifo Institute for Economic Research and University of Munich, Munich, Germany 2 Basque Centre for Climate Change (BC3), Bilbao, Spain 3 IKERBASQUE, Basque Foundation for Science, Bilbao, Spain 4 Department of Economics, Chemnitz University of Technology, Chemnitz, Germany

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Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 International Climate Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Global Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 The UNFCC and the Kyoto Protocol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Global Warming Potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Concentration in the Atmosphere . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Lifetime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Critique Concerning the Kyoto Protocol and Flexible Mechanisms . . . . . . . . . . . . . . . . 96 Asia-Pacific Partnership on Clean Development and Climate . . . . . . . . . . . . . . . . . . . . . . 97 Why Efficient Climate Protection Is So Difficult to Achieve . . . . . . . . . . . . . . . . . . . . . . . . 100 Welfare Optimum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 International Negotiations in Normal Form Games . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Integration of Ancillary Benefits into the Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Price Ducks: An Approach to Break the Deadlock? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 Appendix A.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 Appendix A.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

Wei-Yin Chen, John Seiner, Toshio Suzuki & Maximilian Lackner (eds.), Handbook of Climate Change Mitigation, DOI 10.1007/978-1-4419-7991-9_4, # Springer Science+Business Media, LLC 2012

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Abstract: This chapter sheds some light on the international efforts to curb the global warming threat. The dominant climate agreement to date is the Kyoto Protocol, although competing – or allegedly complement – international climate protection schemes like the Asia-Pacific Partnership on Clean Development and Climate also exist. After describing the main features of these schemes and their failure to establish an efficient global climate protection regime, the disincentives for countries to commit to efficient climate protection efforts in an international agreement are elaborated on. The negotiation situation faced by national governments is depicted in game theoretic settings and private ancillary benefits of climate policy are identified to raise the likelihood for countries joining an international agreement. Yet, it remains quite disputable to which extent ancillary benefits can be an impetus for more action in international climate policy. Finally, after dedicating a large part of the chapter to agreements that, like the Kyoto Protocol, stipulate abatement quantities, alternative schemes are presented which were coined ‘‘price ducks’’ since they influence the effective prices of climate protection. By manipulating prices, e.g., via an international carbon tax, incentives are generated for producing higher climate protection levels. Recently, so-called matching schemes influencing effective prices of climate protection raised much attention in the scientific literature. Such schemes may attenuate free- or easyrider incentives in international climate policy and may even induce a globally efficient climate protection level.

Introduction Global environmental problems have gained much attention in the political as well as the scientific arena during recent decades. Among the most prominent examples of such environmental problems are global warming, the destruction of the ozone layer, the pollution of international waters, and the loss of biodiversity. These problems are likely to have an important impact on the quality of life on earth: ‘‘Traditionally, the next generation’s wellbeing improves compared with that of preceding generations as knowledge, capital, and other assets are passed down. If environmental deterioration continues to destroy the earth’s assets, this tradition will end’’ ([86], Preface). By the time the Brundtland Commission presented its report ‘‘Our Common Future’’ [99] at the latest, the necessity to stop international environmental deterioration had become largely undisputed. Nevertheless, the way to achieve this is subject to an extremely controversial discussion. A main cause of this dispute lies in the fact that, in contrast to local environmental problems, international challenges cannot be counteracted by regulations invented by a coercive central authority. Because of this lack of a coercive authority that can force sovereign nations to take protective actions, international environmental policy crucially depends on the decisions made by the individual countries. These decisions are unlikely to produce a globally efficient level of protection efforts, because countries have incentives to take an easy ride with respect to the protection of global commons like the atmospheric system. International environmental problems have been regularly addressed by international negotiations aiming at agreements on protection efforts. With respect to climate change,

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which will be the central global challenge analyzed in this chapter, a landmark has been the Framework Convention on Climate Change that was signed by more than 150 countries at the Rio ‘‘Earth Summit’’ in 1992. However, this convention only stipulates strategies for protecting the climate, as well as general principles, but it does not specify targets for greenhouse gas emission reductions. The following meetings of the Conference of Parties to the Framework Convention on Climate Change were assigned to make decisions on specific obligations for climate protection. Meanwhile, several of such meetings have already taken place. Outstanding was the third meeting in Kyoto 1997 where the so-called Kyoto Protocol was agreed upon. The Protocol stipulates that the parties included in Annex I to the Framework Convention (industrialized countries and European economies in transition) have to reduce their greenhouse gas emission levels within a specified time frame. Currently there are intense international efforts under way to develop a post-Kyoto agreement on climate change, because the Kyoto Protocol will expire by end of 2012. As Edenhofer et al. [30] point out: ‘‘achieving deep emission reductions requires a comprehensive global effort which includes both a complete change in the energy supply of industrialized countries and the establishment of low-carbon systems in developing countries and emerging markets – in essence, nothing short of a full-scale transformation towards a carbon-free economic system.’’ Hence, international negotiations pursuing an efficient global agreement on climate change present an immense challenge. This chapter will describe past international efforts to curb the global warming threat and it will also outline why the past efforts have failed to yield an efficient global climate protection scheme. Finally, ‘‘price ducks’’ are presented which are international policy regimes targeting the rise in international climate protection efforts by manipulating the effective prices of such efforts. These schemes represent an interesting alternative to ‘‘quantity ducks’’ like the Kyoto scheme which primarily focus on the agreement of greenhouse gas abatement quantities. This chapter is organized as follows. > Section ‘‘International Climate Policy’’ provides an overview of past international agreements on climate change. It does not consider national agreements like the British Climate Change Agreements and largely disregards other national instruments like the British emission trading scheme, although it was launched even before the European Emissions Trading Scheme started. For a discussion of the British Climate Change Agreements, see, e.g., Glachant and de Muizon [40], and for an analysis of the UK Emissions Trading Scheme, see, e.g., Smith and Swierzbinski [91]. Policies like carbon taxes, matching grants, or side-payments are only discussed in an international context. In > section ‘‘Why Efficient Climate Protection Is So Difficult to Achieve’’, the public good properties of climate protection are outlined and the conditions and interplays which lead to a suboptimal low level of climate protection efforts on a global scale are explained. Due to these conditions and interplays and the lack of a global coercive authority, the attainment of an efficient global agreement on climate change is a very difficult task. Alternative negotiation schemes, which differ from the Kyoto concept of negotiating emission reduction quantities, are described. These schemes, so-called price ducks, draw on manipulating prices in such a way that it becomes rational

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for the individual countries to raise their climate protection efforts up to a globally efficient level. > Section ‘‘Conclusions’’ summarizes the chapter and draws some conclusions.

International Climate Policy Global Challenges After the UN Conference on the Human Environment took place in Stockholm in 1972, research gradually found alarming facts about the development of the earth’s state. One among the several hints of the deterioration of the earth’s condition was given by the chemists Mario Molina and Sherwood Rowland from the University of California who published a scientific paper [66] in 1974 which stressed that the emission of chlorofluorocarbons (CFCs) might deplete the stratospheric ozone layer. CFCs are very stable artificially generated gases whose production is rather inexpensive. They were used as, e.g., propellants in spray cans, refrigerants in air-conditioning systems, and solvents in cleaning processes. Stratospheric ozone, which is indeed destroyed by CFCs, absorbs a large part of hostile ultraviolet radiation from the sun and thereby renders possible human life on earth. The depletion of stratospheric ozone causes the so-called ozone holes which are areas in the stratosphere where the concentration of ozone declines below 200 Dobson units and where damaging ultraviolet radiation can advance to a larger extent toward the earth’s surface. Among the negative impacts of the penetration of short wave ultraviolet radiation is the more frequent occurrence of skin cancer and of eye impairments. The problem of the ozone layer depletion had already been addressed in 1987, when the Montreal Protocol was opened for signature. In the Montreal Protocol, which entered into force in 1989, and its amendments, reductions and bans of CFCs were agreed upon on an international level. These international environmental agreements were the first, in whose negotiation process multinational companies (like the globally largest producer of CFCs in 1988, i.e., Du Pont) were involved ([89]: 557). The international efforts to curb CFC emissions have been complemented by a reinforcement of the CFC producing companies’ efforts in researching and developing environmentally friendly substitutes for CFCs. While the problem of ozone layer depletion is largely regarded as solved, there are many other international environmental problems which are still threatening the earth. These threats have been addressed by the United Nations Conference on Environment and Development (UNCED) which took place in Rio de Janeiro, Brazil, from June 2–14, 1992. Five major agreements are associated with this conference: (1) Rio Declaration on Environment and Development, (2) Agenda 21, (3) Statement of principles for the Sustainable Management of Forests, (4) United Nations Convention on Biological Diversity, and (5) United Nations Framework Convention on Climate Change. The Rio Declaration on Environment and Development contains a set of 27 legally nonbinding principles which are designed to commit governments to ensure environmental protection and responsible development. The Agenda 21 is an international plan

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of action for sustainable development which outlines key policies for achieving sustainable development that meets the needs of the poor and recognizes the limits of development to meet global needs. The Statement of Forest Principles is the first global agreement concerning sustainability of forest management and the United Nations Convention on Biological Diversity stipulates the aims of the conservation of biological diversity, the sustainable use of its components, and the fair and equitable sharing of the benefits arising out of the utilization of genetic resources. Since the United Nations Framework Convention on Climate Change (UNFCCC) is the document of the UNCED which is of main importance for the analysis in this chapter, the UNFCCC and its offspring agreement, i.e., the Kyoto Protocol, will be discussed in a separate subsection.

The UNFCC and the Kyoto Protocol The United Nations Framework Convention on Climate Change stipulates general strategies for protecting the climate as well as general principles, but it does not specify concrete targets for greenhouse gas emission reductions. The following meetings of the Conference of Parties to the Framework Convention on Climate Change were assigned to make decisions on specific obligations for climate protection. Meanwhile, several sessions have already taken place. At the third meeting in Kyoto in 1997, the so-called Kyoto Protocol was agreed upon. The Protocol stipulates that the parties included in Annex I to the Framework Convention (industrialized countries and European economies in transition) have to reduce their greenhouse gas emission levels within a specified time frame. The EU-15, e.g., has agreed to cut its emissions by 8% between 1990 and 2008–2012, but reduction obligations vary among individual EU countries as well as among Annex-I parties in general (as stipulated in Annex B to the Protocol). The EU-15 has agreed to share the burden of its overall Kyoto target as depicted in > Fig. 4.1 (so-called Burden Sharing Agreement). If the sub-targets of the individual countries are compared with the GDP per capita in these countries in 1998 (see > Fig. 4.2), when the burden sharing was negotiated, it is conspicuous that the poorest countries (Spain, Portugal, and Greece) have the largest tolerance for emission changes. And indeed the political decision about reduction loads within the EU-15 was made taking into account different country-specific characteristics among which were the economic development circumstances in the individual EU countries: ‘‘The
8% target for the EU as a whole has been shared out amongst Member States so as to allow for different economic development patterns’’ ([28]: 2). Dessai and Michaelowa [23] point out regarding the climate policy process at the EU level that it tends to prefer less stringent emission targets for countries with lower per capita income. The overall emissions of the Annex-I parties should be at least 5.2% below the 1990 levels in the commitment period 2008–2012. However, for the Protocol to come into effect, at least 55 parties had to sign it. Among these, there must be Annex-I countries that together account for at least 55% of the 1990 CO2 emissions of the whole group of Annex-I parties. At the sixth session of the Conference of Parties in Bonn 2001, most

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. Fig. 4.1 Burden sharing in the EU-15

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. Fig. 4.2 GDP per capita in the EU-15 in 1998 (Data from Eurostat 2006)

industrialized countries agreed upon the ratification of an undermined version of the Protocol; the USA has not ratified the Protocol. The Kyoto Protocol, which limits emissions of the greenhouse gases carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6), entered into force on February 16, 2005. These gases have different properties,

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which will be illustrated by considering the examples of carbon dioxide, methane, and nitrous oxides. The gas mainly responsible for the anthropogenic greenhouse effect is CO2. Estimates of its contribution to the anthropogenic greenhouse effect vary widely, predominantly in the range of 50–80%. Other pollutants contributing to the anthropogenic greenhouse effect are CH4, N2O, and CFCs, ([33]: 35, 75; as well as [47]: 22). The contribution of CFCs to the anthropogenic greenhouse effect will decline in the future, since their reduction and phasing out were agreed on in the Montreal Protocol and its amendments. Tropospheric ozone (O3) also plays an important role in aggravating global warming ([32]: 216, [33]: 33–36), yet its importance is difficult to quantify because of the strong variability in its concentration as a consequence of its short lifetime ([8]: 23–24). Dickinson and Cicerone [27] explain that ozone ‘‘is of considerable interest because of its important roles, its complex behavior, and its susceptibility to human-induced global change.’’ The importance of the respective greenhouse gases, i.e., their contribution to the anthropogenic greenhouse effect, depends on the following three ‘‘properties’’:

Global Warming Potential The IPCC [48] defines global warming potential (GWP) ‘‘as the cumulative radiative forcing between the present and some chosen time horizon caused by a unit mass of gas emitted now, expressed relative to that for some reference gas.’’ The radiative forcing is defined as ‘‘the change in average net radiation at the top of the troposphere . . . which occurs because of a change in the concentration of a greenhouse gas’’ ([47]: 22–23). With CO2 representing the reference gas and for a time horizon of 100 years, the GWPs of CH4 and N2O are 21 and 310 respectively ([48]: 22); of course, from the definition it follows that the GWP of CO2 equals unity. Yet, as Smith and Wigley [92] point out, global warming potentials are accurate only for short time horizons.

Concentration in the Atmosphere The atmospheric concentration of CO2 has grown significantly from about 280 ppmv in preindustrial times (about 1750 AD) to 379 ppm in 2005 [50]; ppmv stands for parts per million by volume. The IPCC [50] reports a CH4 concentration of 1.774 ppmv and a N2O concentration 0.319 ppmv in 2005. Preindustrial concentrations of CH4 and N2O were about 0.7 ppmv and 0.275 ppmv respectively [48].

Lifetime CO2 prevails for 50–200 years in the atmosphere, CH4 only for 12  3 years, and N2O for about 120 years ([48]: 15, 19). Thus, the importance of single greenhouse gases varies

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depending on the time horizon of investigations. Short horizons tend to understate the importance of greenhouse gases which prevail for a long time in the atmosphere. Since CO2 represents the most important greenhouse gas, environmental policies that induce reductions of CO2 emissions and concentrations are attractive means for mitigating climate change. Therefore, the main focus in this chapter will be on these policies. Anthropogenic CO2 emissions are – except for emissions by deforestation and to a lower extent by cement production – almost entirely generated by the burning of fossil fuels. With it, many other pollutants like sulfur dioxide (SO2) and nitrogen oxides (NOX) are emitted. In contrast to the local/regional pollutants SO2 and NO2, the emissions of CO2 can still not be removed from post-combustion exhaust in a cost-effective way. Thus, major remaining reasonable approaches to mitigate CO2 concentrations are the reduction of the combustion of substances or the shift to fuels or energies with lower CO2 content. Sequestration of carbon is another option. As Lal [53] explains, soil carbon sequestration is not only an option for mitigating climate change, but it is also a strategy to achieve food security through improvement of soil quality.

Critique Concerning the Kyoto Protocol and Flexible Mechanisms There have been intense disputes about whether the Kyoto Protocol represents a promising approach to global climate protection. Nordhaus [68] criticizes: ‘‘Given the lack of political support, the Kyoto Protocol is a dead duck. Given its inefficiency, it probably deserves to be a dead duck. We need to go back to the duck drawing board.’’ The Kyoto Protocol does not prescribe greenhouse gas (GHG) reductions to developing countries and this fact is employed by opponents to the Kyoto Protocol to stress its inefficiency, since GHG emission mitigation options can regularly be exploited more cheaply in the developing world. The USA which refused to ratify the Protocol demands for participation of developing countries in international GHG emission reduction efforts. This demand is rejected by the developing world because of the economic burden which such efforts would imply. Furthermore, developing countries argue that the industrialized world is mainly responsible for the current dimension of the global warming threat. ‘‘North America and Europe have produced around 70% of CO2 emissions from energy production since 1850, while developing countries – non-Annex 1 parties under the Kyoto Protocol – account for less than one quarter of cumulative emissions’’ ([94], Chap. 7). Therefore, from the developing world’s perspective, it is mainly the industrialized world’s responsibility to combat global warming. Yet, the Kyoto Protocol integrates a mechanism which addresses both opponent views. This mechanism, the Clean Development Mechanism (CDM), allows industrialized countries to fulfill their GHG abatement obligations partly by mitigating GHG emissions in developing countries, where mitigation options can be exploited in a cheaper way. The CDM-associated costs of climate protection are borne by the industrialized world. ‘‘With the already huge and growing amount of greenhouse gas emissions and a great deal of

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low-cost abatement options available, China is widely expected as the world’s number one host country of CDM projects’’ [102]. According to Zhang [101], about 60% of the total CDM flows in 2010 will go to China. As Rive and Ru¨bbelke [80] show for CDM transfers from Europe to China, this mechanism may not only help to improve the efficiency and to raise the level of international climate protection, but it may also support development in poor countries. Yet, as they find out, the level of success of the mechanism in supporting development depends to a large extent on the domestic environmental regulations in the host country of CDM projects. The CDM is only one of three flexible mechanisms scheduled by the Kyoto scheme, the other two being Joint Implementation and Emission Permit Trading (or for short: Emissions Trading). (‘‘The Kyoto mechanisms include international emissions trading, Joint Implementation (JI), the Clean Development Mechanism (CDM), and some would argue joint fulfilment’’ ([24]: 150). Hence, some would also regard the Burden Sharing Agreement within the EU-15 as an application of a flexible Kyoto mechanism (joint fulfillment)). Joint Implementation (JI) allows Annex-I countries to fulfill their GHG abatement obligations partly by mitigating GHG emissions in other Annex-I countries (industrialized countries and European economies in transition). Laroui et al. ([54]: 901) describe the mutual benefits arising for JI investor countries and for host countries of JI projects. For investing countries, JI means a contribution to meeting the emissions reduction targets at lower cost than could be achieved by their own national measures. Furthermore, they argue that it creates new business opportunities for renewables, efficiency technologies, management tools, products, and consultants. According to Laroui et al. ([54]: 901), JI provides opportunities for the host country, e.g., to attract foreign investments, to create incentives for starting new businesses in the sectors for renewable and efficiency technologies and to enhance energy security and independence by lessening demand for energy use. The key idea of Emission Permit Trading is to stipulate an allowed amount of GHG emissions, to partition this amount, and to allocate the parts on tradable emission permits. By allowing transferability of these permits, an emission permit market is constituted. The owners of permits can relinquish their permits and sell them to other agents. Hence, while the total amount of emission permits is preassigned, the permit price is formed in the market. In environmental economics, permit schemes are known as options to cost-efficiently internalize externalities. In the EU, the GHG emissions trading scheme started on January 01, 2005. Despite its flexible mechanisms, the Kyoto Protocol does not generate an efficient global climate protection level. Before the reasons for the difficulties in reaching an efficient international environmental agreement are discussed, an alternative international scheme to protect the environment, i.e., the Asia-Pacific Partnership on Clean Development and Climate, is shortly described.

Asia-Pacific Partnership on Clean Development and Climate The Asia-Pacific Partnership on Clean Development and Climate (APP) was announced in July 2005 and formally launched in January 2006. In fact, Australia and the USA were

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the driving forces behind the APP and convinced China, India, Japan, and South Korea to join the Partnership; Canada joined in 2007. The APP partners have agreed to work together and with private sector partners to meet goals for energy security, national air pollution reduction, and climate change in ways that promote sustainable economic growth and poverty reduction. Hence, according to McGee and Taplin [62]: ‘‘No longer is Kyoto the ‘only game in town’ in terms of national participation in international climate-change initiatives.’’ For a discussion of further non-UN climate change initiatives, see McGee and Taplin [63]. The APP focuses on expanding investment and trade in cleaner energy technologies, goods and services in key market sectors. Projects supported by the APP typically involve small amounts of government funding in conjunction with private investment ([56]: 282). The APP is remarkable not only because it constitutes an additional ‘‘game in town,’’ but also because of the fact that the involved seven partner countries collectively account for more than half of the world’s economy, population, and energy use. They produce about 65% of the world’s coal, 62% of the world’s cement, 52% of world’s aluminum, and more than 60% of the world’s steel (see: http://www.asiapacificpartnership.org/english/ default.aspx). Hence, the APP gathers powerful countries. Without these countries, no solution to the global warming threat is attainable, since their economies cause the threat to a large extent. The Partnership has established eight public–private task forces to develop and implement action plans as depicted in > Fig. 4.3. The Policy and Implementation Committee oversees the APP as a whole, guides the task forces, and reviews their work. The Administrative Support Group coordinates

Policy and implementation committee

Administrative support group

Aluminium task force

Buildings and appliances task force

Cement task force

Cleaner fossil energy task force

Coal mining task force

Power generation and transmission task force

Renewable energy and distributed generation task force

. Fig. 4.3 Organizational structure of the partnership (Figure adopted from [4]: 3)

Steel task force

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the APP’s communications and activities and supports the Policy and Implementation Committee as well as the Partnership more broadly ([4]: 3). In contrast to the Kyoto Protocol, the APP formulates no legally binding commitments on greenhouse gas reduction or the placing of a price upon greenhouse gas emissions. Instead, the individual members of the APP are free to set their own targets based upon individual national circumstances; there are no compulsory contributions to funding climate protection projects. The voluntary national targets aim at reductions of greenhouse gas intensities, rather than commit to emission reductions in absolute terms. As Pezzey et al. ([75]: 107) point out with respect to the APP: ‘‘Unrealistic assumptions were made about how much innovation can be achieved by voluntarism and cooperation supported by only paltry funding, in the absence of either market price incentives or mandatory measures.’’ McGee and Taplin [62] see the real problem posed by the APP in the diversion of attention away from absolute GHG reduction targets. If the Partnership ‘‘takes hold as a fully-fledged alternative climate-change regime, or as a modifier of the future shape of Kyoto, there will be no absolute global emissions reduction and hence a greater risk of dangerous climate change’’ ([62]: 192). The motivation behind launching a scheme – which was described by its founders as a complement to the Kyoto Protocol – has been questioned by many researchers. McGee and Taplin [62] draw the conclusion from their analysis that the regime interaction between APP and Kyoto scheme is most likely to be obstructive and competitive and consequently the claims of complementarity between both regimes are not justified. As Lawrence ([56]: 282) argues, ‘‘Australia’s strong advocacy of the APP in this early period was linked to coal and energy-intensive industry interests.’’ And Karlsson-Vinkhuyzen and van Asselt ([52]: 202) point out that in February 2005, when the world was celebrating the entry of the Kyoto Protocol ‘‘into force in a sort of defiant support of multilateralism after the US rejection, it is quite natural that the US wanted to improve its reputation and show some initiative. It seems logical that the US sought the support of the other Kyoto ‘defector’ in the enterprise’’ (that is Australia, which initially did not ratify the Kyoto Protocol either). Yet, although the initial motivations to launch the APP may have been dubious, this does not mean that the proposed scheme may not have positive effects or may develop into a more effective one. However, given the enormous challenge of global warming, the relatively low number of APP projects set up since its inception ‘‘makes us question the likelihood of the APP significantly contributing to climate change mitigation, even if it could make a contribution to technology transfer’’ ([45]: 314). Furthermore, as Karlsson-Vinkhuyzen and van Asselt ([52]: 206) argue, there are political signs which could be interpreted as unequivocal support for the UN climate regime. Australia has meanwhile ratified the Kyoto Protocol and there are also affirmative signals from the US side concerning the UN climate regime. Yet, despite the softness of the APP arrangement, ‘‘there is considerable inertia in closing down institutionalised activities’’ ([52]: 206) and it is not unlikely that the APP will continue its work, not least because of the lack of a post-Kyoto UN-protocol. Yet, nevertheless one might be tempted to say – in Nordhaus’ terminology – that the APP

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is a dead duck with respect to the objective of launching an international agreement effectively protecting the global climate.

Why Efficient Climate Protection Is So Difficult to Achieve Global climate protection is persisting on a suboptimal low level. This is due to the occurrence of market failures. Climate protection has global public good properties, i.e., climate protection exerts positive externalities which are not compensated via markets. This in turn causes a suboptimal low provision of the public good ‘‘climate protection.’’ In the economics discipline, a pure public good is considered to have two distinguishing properties: (1) non-excludability of consumption and (2) non-rivalry in consumption; in contrast, a private good has none of these two properties (see Cornes and Sandler [20]: 3). Non-excludability with respect to climate protection means that every country in the world benefits from climate protection activities, regardless where these activities have been accomplished. Hence, for a country it does not make a difference whether GHGs are abated in Australia, China, the UK, or the USA, the abatement will positively affect the global climate and no country can be excluded from the respective benefits. Non-rivalry in the consumption of climate protection means that one country enjoying the benefits of the mitigation of global warming does not affect the benefits received by another country from this mitigation.

Welfare Optimum If countries individually decide about the provision of such public goods like climate protection, they will provide – from a global perspective – a suboptimally low amount since they face so-called free-rider incentives. Because non-excludability of benefits from climate protection prevails (a country A cannot force another country B ‘‘not to enjoy’’ the benefits of the climate protection produced by country A), no price can be charged on a market for these benefits. Since production of climate protection is costly, while its consumption is free of charge, countries prefer that others produce more climate protection while they themselves prefer to contribute less. In general, the notion of ‘‘free-riding’’ is employed in the scientific literature in order to characterize such a situation. But in contrast to, e.g., agreements on climate change where countries may take a ‘‘free ride’’ from participation, the problem regarded here is one of degree. As can be shown, it is rational for each single country to provide the public good up to the level where its marginal abatement benefits coincide with its marginal abatement costs. Hence, it might be more appropriate to employ the expression ‘‘easy riding’’, since this is not equivalent to ‘‘not providing anything to the public good.’’ Therefore, Cornes and Sandler ([20]: 30) suggest using the notion ‘‘easy riding’’ in such contexts. In the economics discipline, efficiency or optimality describes a situation where welfare is maximized. In the following, the maximization problem which the government of an individual country i faces is illustrated, or put differently, the case where the national

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government intends to act in the way that maximizes the welfare of the country’s residents is regarded. The national welfare function characterizes the preferences of the residents and the government can enhance the residents’ welfare by allocating the country’s resources in such a way that the respective function is maximized subject to the national income constraint. It is supposed that the income can be spent on two different groups of commodities: The first commodity is a private good yi and the second is the public good climate protection xi. Due to the public good property of climate protection, the total level X of climate protection consumable by country i can be expressed as the sum of all countries’ or regions’ individual contributions to climate protection. In a world of n countries (with i = 1, . . . ,n), the total level of climate protection is X ~i X ¼ xi þ x ¼ xi þ X (4.1) i6¼j j ~i is the sum of climate protection by all countries except for the climate protection where X xi provided by the regarded country i. The preferences of country i concerning both goods are represented by the utility function which is continuous, strictly increasing, strictly quasi-concave, and everywhere twice differentiable. The individual country i maximizes its welfare Ui ~i Þ ¼ Ui ðyi ; XÞ max Ui ðyi ; xi þ X

(4.2)

yi þ xi c ¼ Ii

(4.3)

yi ;xi

s.t.

where Ii is the monetary income of country i. For all countries, the unit price of the private commodity is set equal to unity and the unit price of climate protection is set equal to the constant price c (with c > 0). In the maximization the Nash assumption is employed, i.e., the welfare-maximizing country supposes that its choices do not affect the behavior of the ~i is exogenous. other countries, i.e., X The following first-order condition is obtained @Ui @X @Ui @yi

¼c

(4.4)

Consequently, the individual country will provide climate protection up to the level where the marginal rate of substitution (left-hand side of (> 4.4)) between public good and private good becomes equal to the unit price ratio (right-hand side of (> Eq. 4.4)) between public and private good. This provision level is efficient from an individual country’s point of view, but it is not efficient from a global perspective. Global welfare could be raised by deviating from the provision levels associated with condition (> 4.4). In order to illustrate this, global welfare is maximized in a next step. The respective welfare maximization problem is

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max U ðU1 ðy1 ; XÞ; U2 ðy2 ; XÞ; :::; Un ðyn ; XÞÞ

y1 ;:::;yn ;X

(4.5)

s.t. n X

yi þ cX ¼

i¼1

n X

Ii

(4.6)

i¼1

Let us – for simplicity – assume that each individual country’s welfare has an equal weight with respect to global welfare, i.e., U ðU1 ðy1 ; XÞ; U2 ðy2 ; XÞ; :::; Un ðyn ; XÞÞ ¼ U1 ðy1 ; XÞ þ U2 ðy2 ; XÞ þ ::: þ Un ðyn ; XÞ. Then, optimization yields the Samuelson condition (see [84, 85]) n @Ui X @X @Ui i¼1 @yi

¼c

(4.7)

Therefore, in order to maximize global welfare, an individual country has to provide climate protection up to a level, where the sum of all countries’ marginal rates of substitution between the public and the private good becomes equal to the unit price ratio between the two goods. Such outcomes, where no country can improve its welfare without harming another one, are called Pareto optima. Condition (> 4.7) deviates from condition (> 4.4), since – without international coordination – an individual country would only take its own marginal rate of substitution between public and private good into account when it decides about its climate protection efforts, while Pareto efficiency requires that countries also consider the spillovers exerted on other countries. Therefore, also the other countries’ marginal rates of substitution between the public and private good have to be included in the efficiency condition. On a national level, efficient public good provision can be enforced by the government, but on the global level there is no central coercive authority which can enforce an efficient global climate protection level. Therefore, the only option to approach an efficient global climate protection level is that individual countries voluntarily negotiate a climate protection agreement.

International Negotiations in Normal Form Games Such international negotiations on climate change can be comfortably depicted in a gametheoretical setting. Regularly, such negotiations are described as a Prisoner’s dilemma game which captures the free-rider incentives associated with the provision of public goods. A normal form game in the shape of a Prisoner’s dilemma (PD) situation with two agents or countries is presented in > Fig. 4.4. Both considered countries have the choice between ‘‘participation’’ in an international climate protection agreement (or climate protection efforts) and ‘‘no participation’’ in international climate protection efforts. In the matrix, the numbers in front of the commas represent the payoffs for country A, while

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B’s strategy No participation

Participation

No participation

0, –1

6, –3

Participation

–4, 7

5, 6

A’s strategy

. Fig. 4.4 Prisoner’s dilemma (PD) game

the numbers behind the commas stand for the payoffs received by country B. In the Prisoner’s dilemma case, the dominant strategy for each agent is to choose ‘‘no participation’’ in an international climate protection agreement. A dominant strategy is a strategy which always yields the highest payoff for the agent choosing this strategy, regardless of the choice of the opponents. The Nash equilibrium, the equilibrium where no country has anything to gain by changing only its own strategy unilaterally, is prevailing where both agents do not participate in international climate protection efforts and the payoffs of countries A and B are 0 and
1, respectively. ‘‘From an economic viewpoint an ideal state of cooperation has two features: It is a Pareto-optimum and it is stable’’ ([11]: 82). The Nash equilibrium in the depicted PD situation is of course not Pareto-optimal. Both agents will obtain a higher payoff if they would simultaneously participate in the international agreement. Alternatively, a Chicken game setting can be employed in order to illustrate the negotiation situation. Lipnowski and Maital [59] provide an analysis of voluntary provision of a pure public good in general as the game of Chicken. In fact, a Chicken game tends to describe international negotiations on the provision of the specific public good ‘‘climate protection’’ in a more adequate way than the Prisoner’s dilemma game (see Carraro and Siniscalco [16]). The case of a Chicken game, which belongs to the group of coordination games, is depicted in > Fig. 4.5. In contrast to the PD situation, there exists no dominant strategy. The main difference between both games, i.e., between PD and Chicken games, can be described as follows: While the agents in the PD situation obtain the lowest payoffs when they play unilateral ‘‘participation’’, in the Chicken game, the agents face the lowest payoffs if they mutually play ‘‘no participation.’’ There are a couple of papers investigating the differences associated with the two, PD and Chicken, games. Ecchia and Mariotti [29] investigate coalition formation in international environmental agreements and compare different versions of the two game types

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B’s strategy No participation

Participation

No participation

–6, –6

6, –3

1–p

Participation

–3, 6

3, 3

p

1–q

q

A’s strategy

. Fig. 4.5 Chicken game

using simple three-country examples. In their paper, Rapoport and Chammah [79] stress the difference between both games with respect to the attractiveness of retaliation decisions. Snyder [93] examines differences in the logic and social implications of PD and Chicken games in the context of international politics. Lipman [58] as well as Hauert and Doebeli [44] analyze how the evolution of cooperation differs in the two games. Rabin [78] investigates fairness in these settings. Pittel and Ru¨bbelke [77] depict negotiations on climate change in (3  3)-matrices in which they integrate both Chicken and PD settings simultaneously. Hence, in their study they allow for a broader range of choices for the involved countries. The reason why the Chicken game tends to describe international negotiations in a more proper way is that in case of mutual nonparticipation the whole world is threatened by a global warming catastrophe. This catastrophe can be prevented in the best way by means of mutual cooperation in international climate protection. However, if the other agent refuses to cooperate, then unilateral participation in international climate protection efforts would be the best choice since this is the only remaining way to prevent the global warming catastrophe. Yet, if the other agent provides climate protection (and thus chooses ‘‘participation’’), it would be best to choose ‘‘no participation’’ and thus to take a free ride. Each agent hopes that the other agent provides climate protection, such that he himself can take a free ride in climate protection. As can be observed from > Fig. 4.2, there exist multiple Nash equilibria, which are associated with pure and mixed strategies. The Nash equilibria in connection with pure strategies prevail where the payoffs (
3, 6) and (6,
3) arise. Given possible uncertainties regarding the countries’ behavior, mixed strategies become germane. Agents form probabilities about the other agent’s behavior. Country A assesses the likelihood with which country B will participate (q) or not participate (1
q) – and vice

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versa for country B (p and 1
p). In order to determine the mixed strategies in the Chicken game situation in > Fig. 4.5, the likelihood q∗ (resp. p∗) of participation by country B (country A) has to be calculated, which makes country A (country B) indifferent between playing ‘‘participation’’ and ‘‘no participation’’. Probability q∗ is determined by calculating the level of q, where the expected payoffs of both strategies of A (‘‘participation’’ and ‘‘no participation’’) balance. This is the case if
3ð1
qÞ þ 3q ¼
6ð1
qÞ þ 6q

(4.8)

The left-hand side represents A’s expected payoff from participation and the righthand side reflects A’s expected payoff from defection. Analogously p∗ can be specified
3ð1
pÞ þ 3p ¼
6ð1
pÞ þ 6p

(4.9)

The mixed-strategy equilibrium requires q ¼ p  ¼

1 2

(4.10)

If country A or country B is uncertain whether the other country will participate or defect, then it should cooperate (participate) provided it expects the antagonist to play ‘‘participation’’ with a probability of less than one-half.

Integration of Ancillary Benefits into the Negotiations Climate policies regularly generate side effects. Afforestation and reforestation, e.g., do not only mitigate CO2-induced global warming by sequestering carbon (C), these measures also increase the habitat for endangered species. Furthermore, forests can serve as recreational areas and reduce soil erosion. As Ojea et al. [71] stress, forests’ ‘‘provision of goods and services plays an important role in the overall health of the planet and is of fundamental importance to human economy and welfare.’’ Furthermore, Sandler and Sargent [87] point out that tropical forests provide a bequest value which the current generation derives from passing on the forests to future generations. Concerning the case of Brazil, Fearnside ([36]: 180) stresses: ‘‘The environmental and social impacts of mitigation options such as large hydropower projects, mega-plantations or nuclear energy, contrast with the ‘ancillary’ benefits of forest maintenance.’’ An overview of studies assessing the co-effects of afforestation is provided by Elbakidze and McCarl ([31]: 565). The implementation of more efficient technologies, the reduction of road traffic, and the substitution of carbon-intensive fuels cause a decline in carbon dioxide emissions. Ancillary or secondary benefits induced by activities reducing carbon dioxide emissions accrue from the mitigation of non-CO2 emissions, for example, (see > Fig. 4.6). There are a number of terms which convey the idea of ancillary or secondary benefits. The others are co-benefits and spillover benefits (see IPCC [49]). The main difference is the relative emphasis given to the climate change mitigation benefits versus the other benefits ([61]: 489). Climate change mitigation can be regarded as one of two pillars of climate policy;

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Climate policy (e.g.,Carbon-tax)

GHG abatement measures

Climate protection

Primary (Climateprotection related) benefits

Reduction in local air pollution

Ancillary benefits

. Fig. 4.6 Climate policy generating primary and ancillary benefits, see Ru¨bbelke [81]

adaptation to climate change is the other pillar which will – however – play no role in this chapter. For a discussion of positive co-effects of adaptation policies in the shape of desired distributional effects, see Aakre and Ru¨bbelke [1, 2]. In fuel combustion processes, CO2 emissions are accompanied by emissions of, e.g., NOX, SO2, N2O, and others (for effects of these pollutants, see > Appendix 4.1). Therefore, fuel combustion reductions do not only cause a decrease in CO2 emissions but also diminish the emissions of other pollutants. In general, positive health effects of air pollution reduction that accompany climate protection measures are assessed to represent the most important category of secondary benefits. (However, Aunan et al. ([6]: 289) annotate that ‘‘some particulate air pollution has a cooling effect on the atmosphere, reducing it may exacerbate global warming.’’) Further negative impacts of air pollution, like accelerated surface corrosion, weathering of materials, and impaired visibility are mitigated by fuel combustion reductions too. Road traffic mitigation does not only produce ancillary benefits by reducing the emission of air pollutants but it is also accompanied by lower noise levels and reduced frequency of accidents, less traffic congestion, and less road surface damage. Mostly, ancillary benefits are local or regional ([48]: 217; [72]: 5). They represent domestic public goods for individual countries. (An exception is, for example, the abatement of the greenhouse gases chlorofluorocarbons (CFCs), as the ancillary effect of ozone layer protection and the respective ancillary benefits can be enjoyed globally.) E.g., local air pollution mitigation generated by climate policy can be exclusively enjoyed by the protecting country. Therefore, ancillary effects can be considered to be private to the host country of a climate policy. Consequently, they contrast to climate protection–related primary benefits which exhibit global publicness. Primary benefits accrue from the prevention of climate change–induced damages. Such damages would arise, e.g., from droughts caused by global warming. Ru¨bbelke and Vo¨gele [83] recently analyzed the effects of such droughts on the power sector.

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B’s strategy

No participation

Participation

No participation

–6, –6

6, –3 + ABB

Participation

–3 + ABA, 6

3 +ABA, 3 + ABB

1–q

q

4

A’s strategy

1–p

p

. Fig. 4.7 Chicken game with ancillary benefits

Several studies ascertaining the level of ancillary benefits found that such benefits even represent a multiple of climate protection–related primary benefits, as Pearce [73] illustrates in an overview. In the next stage, ancillary benefits can be explicitly introduced into the normal form game. It will be taken into account that ancillary benefits are enjoyed (mainly) privately by the host country of the climate protection activity. Ancillary benefits arise regardless of the behavior of the antagonist. In > Fig. 4.7, ancillary benefits (ABA, ABB) are explicitly included into the matrix of the Chicken game, where it is assumed that ABA < ABB. Analogously to the procedure concerning the Chicken game situation without ancillary benefits, the mixed strategies can be investigated here. Again, probability q∗ is determined by identifying the level of q, where the expected payoffs of both strategies of A (‘‘participation’’ and ‘‘no participation’’) balance. This is the case if ð
3 þ ABA Þ ð1
qÞ þ ð3 þ ABA Þ q ¼
6 ð1
qÞ þ 6q

(4.11)

∗

Analogously p can be specified ð
3 þ ABB Þ ð1
pÞ þ ð3 þ ABB Þ p ¼
6 ð1
pÞ þ 6p

(4.12)

From (> 4.11) and (> 4.12), q∗ and p∗ can be derived. Scientific studies largely assess that there are especially important co-benefits of local/regional air pollution reduction in developing countries; an overview of a selection of studies investigating ancillary benefits in developing countries can be found in the > Appendix 4.2. Neglecting potential differences in the primary benefits and supposing that A represents the group of industrialized countries, while B represents the developing world, we obtain: 1

1

2

2

q ¼ þ ABA =6 < p ¼ þ ABB =6

(4.13)

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If country A (country B) is uncertain whether the antagonist participates or defects, then it should participate provided it expects the antagonist to play ‘‘participation’’ with a probability of less than ½ + ABA/6 (½ + ABB/6). Comparison of the (> Eqs. 4.10 and > 4.13) yields the result that q∗ and p∗ rise due to the inclusion of ancillary benefits into the analysis. Consequently, for the Chicken game example illustrated above it is found that taking into account ancillary benefits will increase the likelihood of cooperative behavior in international negotiations on climate change. According to (> 4.13), the inclusion of ancillary benefits into the reasoning brings about an increase in the likelihood that developing countries will participate in international climate protection efforts (for a more general analysis of the influence of ancillary benefits in international negotiations on climate change see [76]). Consequently, these results confirm Halsnæs and Olhoff ([43], p. 2324) who stress that ‘‘the inclusion of local benefits in developing countries in GHG emission reduction efforts will [. . .] create stronger incentives for the countries to participate in international climate change policies.’’ Yet, in their analysis of qualitative and strategic implications associated with ancillary benefits, Finus and Ru¨bbelke [37] find a more moderate influence of co-benefits on the participation in international climate agreements and on the success of these treaties in welfare terms. They employ a setting of noncooperative coalition formation in the context of climate change. According to their results, ancillary benefits will not significantly raise the likelihood of an efficient global agreement on climate change to come about although ancillary benefits provide additional incentives to protect the climate. The rationale behind this result is that countries taking the private ancillary benefits to a greater extent into account will undertake more emission reduction, irrespective of an international agreement. However, if we consider the high local/regional pollution levels in developing countries it remains at least highly disputable whether developing countries conduct efficient local/ regional environmental policies. Hence, the commitment in an international climate protection agreement will most likely help to raise the efficiency in local/regional environmental protection in these countries. Consequently, ancillary benefits – although not being the major impetus for immediate action – may take the role of a catalyst to climate policy (rather than that of a direct driver). Joining international climate protection efforts may become politically more feasible for developing countries (like China and India) which face serious local/regional pollution problems, when ancillary benefits are included in the political reasoning.

Price Ducks: An Approach to Break the Deadlock? Due to the inefficiency of the Kyoto Protocol scheme, which is a quantity duck since it stipulates emission reduction quantity targets, there arose an intense discussion about general alternatives to such quantity ducks (and which are more than just

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technology-focused climate policy partnerships like the APP). Nordhaus ([69]: 31) points out: ‘‘Unless there is a dramatic breakthrough or a new design the Protocol threatens to be seen as a monument to institutional overreach.’’ Price-influencing international climate protection schemes have been proposed by Nordhaus [69] as a proper successor of the quantity approach of the Kyoto type. ‘‘This is essentially a dynamic Pigovian pollution tax for a global public good’’ (Nordhaus [69]: 32). An international carbon tax scheme where no international emission limits are dictated is considered to have several significant advantages over the Kyoto mechanism. This scheme could also contain side-payments in order to motivate countries to participate: ‘‘Additionally, poor countries might receive transfers to encourage early participation,’’ ([69]: 32). Such a scheme is a price duck, because via the taxes, the prices of polluting activities are increased, such that there are additional incentives to mitigate the level of such polluting activities. Instead of taxing polluting activities in order to protect the climate, prices can also be influenced by subsidizing climate protecting activities (e.g., energy-efficient appliances or carbon sequestration measures could be subsidized). The subsidy will reduce the effective price of climate protecting activities and hence the agents receiving the subsidy will raise their provision level of climate protection. Recently, Altemeyer-Bartscher et al. [3] elaborated Nordhaus’ proposal of an international carbon tax scheme and analyzed how individual countries or regions could negotiate the design of such a tax scheme in a decentralized way. In the scheme they suggest, countries offer side-payments to their opponents that are conditional on the level of the environmental tax rates implemented in the transfer-receiving opponent country. As can be shown, such a side-payment scheme might yield the first-best optimal tax policy and hence an efficient global climate protection regime. The scheme does not require the coercive power of a central global authority. Instead, the individual countries implement carbon taxes voluntarily. Other price-influencing schemes which work in a similar way and do not require an international coercive authority are matching schemes which were first developed by Guttman [41, 42]. Danziger and Schnytzer [22] provide a general formulation of Guttman’s matching idea which allows for income effects, nonidentical players, and nonsymmetric equilibria. Guttman’s matching approach has been applied to the sphere of international climate agreements by Ru¨bbelke [82]. Guttman’s basic scheme consists of two stages. Each agent i’s contribution xi to the public good can be written as: xi ¼ ai þ bi

n X

aj

(4.14)

j ¼1 j6¼i

where ai is agent’s unconditional or flat contribution to the public good (in our case ‘‘climate protection’’) and bi is his matching rate, which he provides for each unit of flat public good contributions by other agents. Therefore, the agent’s matching contribution is

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aj ðwith j 6¼ iÞ. The unit costs of the goods are supposed to be equal to unity. The

budget constraint of the agent in the shape of the income restriction is: yi þ ai þ bi

n X

aj ¼ Ii

(4.15)

j ¼1 j6¼i

Here, I stands for the monetary income of the considered agent i. In the first stage of the game, each agent makes a decision on the level of matching rates he wants to offer to the other agents. It could be assumed that this decision is stipulated in an international agreement on matching rates, where all negotiating agents or decision makers – as representatives of their nations – agree on the matching rates their countries will provide (see [82]). All the agents’ actions in both stages of the game are guided by welfare maximizing behavior, i.e., the agents aim to maximize their individual countries’ welfare as represented by the function in (> 4.2). In the second stage, all agents will make decisions about their flat contributions. Total public good contribution of all agents then becomes equal to: 0 1 n n X X B C X¼ ðaj ÞA (4.16) @ai þ bi j ¼1 j6¼i

i¼1

Given the matching rates of the other agents, the considered agent will contribute flat contributions to the public good up to the level where the marginal rate of substitution between public and private good is equal to the effective price of the public good, i.e., where MRSi ¼

1þ

1 Pn

j ¼1 j6¼i

bj

(4.17)

The decline in the effective price, from unity to the level specified on the right-hand side of (> Eq. 4.17), induces an increase in the private provision of the public good. Comparison of the right-hand sides of (> Eq. 4.4) (for which it is assumed that c = 1) and (> Eq. 4.17) shows that in the matching scheme the considered agent or country faces a decline in the effective price of the public good ‘‘climate protection’’ as long as at least one other agent provides a positive matching rate bj. As Bergstrom [9] illustrated, there are indeed incentives to announce positive matching rates. Consequently, the matching scheme has a price-influencing effect (similar to that of a subsidy) which the quantity targets stipulated by the Kyoto Protocol do not exert. Due to the decline in the effective price the agent tends to raise the level of his public good provision. Put differently, within the matching scheme, individual countries manipulate (via their matching commitments) the effective price of climate protection from other countries’ point of view in order to influence these opponent countries to raise their public good provision levels. And as Boadway et al. ([10]: 1682) point out, ‘‘the notion that countries might attempt to influence other countries’ contributions by preemptive

International Efforts to Combat Global Warming

4

matching commitments is not far-fetched in light of recent examples of disaster relief or international campaigns to combat the effects of infectious diseases.’’ In the case of identical agents, summing (> 4.17) over all agents, generates n X i¼1

MRSi ¼ n

1þ

1 Pn
1 j ¼1 j6¼i

bj

(4.18)

Hence, a Pareto optimum is attainable if each agent chooses bi = 1. As Buchholz et al. [12] demonstrated, matching may work better if there is a large number of agents/countries (than when there is a small number of agents), which is an important result if it is taken into account that international negotiations involve many countries.

Conclusions The Kyoto Protocol has been an inefficient agreement, although its flexible mechanisms (CDM, Joint Implementation, ETS) helped to mitigate this inefficiency. Efficiency would require that the cheapest GHG abatement options are abated first, which is not generally the case under the Kyoto Protocol. Furthermore, the largest greenhouse gas emitter among the industrialized countries, i.e., the USA, did not commit to emission reduction targets under the Protocol, but sought pretexts for taking an easy ride in climate protection. The immense threat of global warming necessitates an improved global climate protection regime, since otherwise the world might experience dramatic and life-threatening consequences. Among the possible negative effects are the melting of glaciers, a decline in crop yields (especially in Africa), rising sea levels, sudden shifts in regional weather patterns, and an increase in worldwide deaths from malnutrition and heat stress ([94], Chap. 3). An improved future international climate protection regime has to organize climate protection more effectively and it has to stipulate significant GHG emission reductions for all major polluters. Developing countries like China and India belong to the group of major emitter countries. Consequently, if the international climate policy should become capable to succeed in combating global warming, then developing countries will also have to commit to emission reductions under a global agreement. Yet, as the international negotiations on climate change in Copenhagen in 2009 indicated, international policy is stuck in a deadlock. This deadlock has to be broken soon, since the Kyoto Protocol will expire already by the end of 2012 and global GHG emission levels are forecasted to continue to rise in the years to come. Since there is no global coercive authority which could enforce countries to conduct efficient climate protection in future, mutual voluntary negotiations are the only means by which international coordination in climate protection can be accomplished. Put differently, ‘‘international treaties have to rely on voluntary participation and must be designed in a self-enforcing way’’ ([35]: 74). Yet, international easy- or free-rider incentives which are due to the global public good property of climate protection make the agreement on such an international treaty and the breaking of the deadlock in international climate policy a difficult task.

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Another way to protect the global climate, which deviates from the Kyoto concept of stipulating GHG emission reduction quantities, is the negotiation of international priceinfluencing regimes. These regimes manipulate effective prices via taxes, subsidies, or matching grants in order to conduct the behavior of individual countries in such a way that they produce globally efficient climate protection levels. An international carbon tax, as suggested by Nordhaus [69], might indeed yield a more efficient outcome, but due to the lack of will in the political arena to launch such a tax it might be more promising to base the future global climate protection architecture on the already established structures associated with the Kyoto scheme. Yet, the advantages of price ducks like matching schemes are remarkable and international price-influencing concepts like the global carbon tax or matching schemes should not be dismissed with levity. Given the immense threat to our planet which global warming constitutes, a partnership like the Asia-Pacific Partnership on Clean Development and Climate which focuses exclusively on technological aspects of climate protection while ignoring the ‘‘[k]ey inconvenient truths . . . about the economics of climate policy, especially the need to use emission pricing soon to stimulate both cost-effective abatement actions now, and enough technological innovation for the future’’ ([75]: 107), is no real alternative to the Kyoto scheme. Private ancillary benefits may take the role of a catalyst to climate policy rather than a direct driver to international climate negotiations. Joining international climate protection efforts may become politically more feasible for developing countries (like China and India) which face serious local/regional pollution problems, when ancillary benefits are included in the political reasoning. Not only co-effects in terms of reduced local/ regional air pollution are relevant, but also co-benefits in the shape of, e.g., economic development, energy security, and employment.

Appendix Appendix A.1

. Table 4.1 Information taken from Ru¨bbelke [81] Pollutant

Sources

Health effects

Carbon monoxide (CO)

Fuel combustion; industrial processes; natural sources like wildfires

Reduction of oxygen delivery to the body’s organs and tissues; visual impairment; reduced work capacity; reduced manual dexterity; poor learning ability; difficulty in performing complex tasks

Visibility and other effects Acceleration of the greenhouse effect indirectly by reactions with other substances

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4

. Table 4.1 (Continued) Pollutant

Sources

Lead (Pb)

Fuel combustion; Adverse affection of the kidneys, liver, nervous system, metals and other organs; processing neurological impairments such as seizures; mental retardation, and/or behavioral disorders; changes in fundamental enzymatic, energy transfer, and homeostatic mechanism; high blood pressure; and subsequent heart disease Burning of natural gas; coal mining; oil production; decomposition of waste; cultivation of rice; cattle breeding Irrigation of lungs and causing Combustion lower resistance to respiratory processes in automobiles and infections; increased incidence of acute respiratory power plants; diseases in children home heaters and gas stoves also produce substantial amounts

Methane (CH4)

Nitrogen oxide (NOX)

Nitrous oxide (N2O)

Burning of fossil fuels; agricultural soil management

Health effects

Visibility and other effects Deposition on the leaves of plants, and with it, representing a hazard to grazing animals

Acceleration of the greenhouse effect; contributes to increased level of tropospheric ozone

Gaseous NOX absorbs light, reduces the visual range; important precursor to ozone and acidic precipitation; impact on PM concentration; causing severe injury to plants; acceleration of the greenhouse effect by contributing to ozone generation Acceleration of the greenhouse effect; reduces the stratospheric ozone layer

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. Table 4.1 (Continued) Pollutant

Sources

Health effects

Ozone (O3)

No direct emission but formation by the reaction of VOCs and NOX; therefore, ozone is indirectly caused by combustion processes

Increased hospital admissions and emergency room visits for respiratory causes; higher susceptibility to respiratory infection and lung inflammation; aggravation of preexisting respiratory diseases; significant decreases in lung function; increase in respiratory symptoms; irreversible changes in the lungs

Particulate matter (PM)

Emission directly by a source or formation by the transformation of gaseous emissions; combustion processes cause direct emissions

Sulfur dioxide (SO2)

Burning of coal and oil; metal smelting and other industrial processes

Premature death; increased hospital admissions and emergency room visits; increased respiratory symptoms and disease; decreased lung function; alterations in lung tissue and structure and in respiratory tract defense mechanisms; lung cancer Effects on breathing; respiratory illness; alterations in the lungs’ defenses, and aggravation of existing cardiovascular disease

Visibility and other effects Reduction in agricultural and commercial forest yields; reduced growth and decreased survivability of tree seedlings; plants’ higher susceptibility to diseases, insect attack, harsh weather, and other environmental stresses; acceleration of the greenhouse effect Important cause of reduced visibility; airborne particles cause soiling and damage to materials

A major precursor to PM, which is a main pollutant impairing visibility together with NOX, a main precursor to acidic deposition

Appendix A.2 . Table 4.2 Ancillary benefit studies regarding developing countries Study

Country

Pollutants (local/regional) Model/Approach

Aunan et al. [6] China

PM, SO2, TSP

Aunan et al. [7] China

SO2, particles

Comparison of studies that comprise a bottom-up study, a semi-bottom-up study, and a top-down study using a CGE model Analysis and comparison of six different CO2-abating options

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4

. Table 4.2 (Continued) Study

Country

Aunan et al. [5] China [13] India

Cao [14]

China

Cao et al. [15]

China

Pollutants (local/regional) Model/Approach NOX, TSP NOX, particulates, SO2 SO2, TSP NOX, particulates, SO2

Chen et al. [17] China Cifuentes et al. [18] Cifuentes et al. [19]

Chile Brazil, Chile, Mexico

Dadi et al. [21] China Dessus and Chile O’Connor [25] Dhakal [26] Nepal

CO, PM, NOX, SO2 Ozone, particulates

CGE model CGE model

Technology assessment, sensitivity to discount rate Integrated modeling approach combining a top-down recursive dynamic CGE model with a bottom-up electricity sector model Comparison of partial and general equilibrium MARKAL models No economic modeling Development of scenarios that estimate the cumulative public health impacts of reducing GHG emissions

Eskeland and Xie [34]

Chile, Mexico

Garbaccio et al. [38]

China

SO2 CO, lead, NO2, ozone, PM, SO2 CO, HC, NOX, SO2, particles, lead NOX, particulates, SO2, VOCs PM, SO2

Gielen, Chen [39] Ho, Nielsen [46] Kan et al. [51] Larson et al. [55]

China

NOX, SO2

China

SO2, TSP

China China

Particulates SO2

Shanghai MARKAL model MARKAL of energy sector; base vs. advanced technology scenarios for controlling CO2 and SO2

Li [57] Markandya et al. [60]

Thailand China, India

Particulates Particles

Dynamic recursive CGE model Use of the POLES and GAINS models as well as of a model to estimate the effect of PM2.5 on mortality on the basis of the WHO’s Comparative Risk Assessment method Analysis of five pollution control options in Mexico City Project-by-project analysis

McKinley Mexico et al. [64] Mestl et al. [65] China

CO, HC, NOX, particulates, SO2 PM, SO2

Linear programming model CGE model

MARKAL, technology assessment, and alternative policy scenarios CGE model

Analysis of long-range energy system scenarios

Technology and cost-curve assessment

CGE model

115

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. Table 4.2 (Continued) Study

Country

Morgenstern China et al. [67] O’Connor et al. China [70] Peng [74] China Rive, Ru¨bbelke China [80] Shrestha et al. [88]

Thailand

Smith and Haigler [90] Van Vuuren et al. [95]

China China

Pollutants (local/regional) Model/Approach SO2 NOX, SO2, TSP

Survey of recent banning of coal burning in small boilers in downtown area of Taiyuan CGE model

Particulates, SO2 SO2, development benefits

RAINS-Asia for local, and GTAP for economywide effects CGE model

NOX, SO2

Four scenarios, use of end-use-based AsiaPacific Integrated Assessment Model (AIM/ Enduse)

SO2

Sample calculations regarding interventions in the household energy sector Simulation model

Vennemo China et al. [96] Wang and China Smith [97], [98]

SO2, TSP

West et al. [100]

Linear programming model CO, HC, NOX, particulates, SO2

Mexico

particulates, SO2

Synthesis of a significant body of research on co-benefits of climate policy in China No economic modeling

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5 Ethics and Environmental Policy David J. Rutherford . Eric Thomas Weber Department of Public Policy Leadership, University of Mississippi, University, MS, USA Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 Understanding Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Terminology and Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Weather and Climate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 The Climate System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Climate Variability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 Global Warming and Global Average Temperature . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 Climate Forcing and Climate Feedback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 Global Warming Versus Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 Thresholds and Tipping Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 Defining and Communicating Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Adaptation and Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 Perceptions, Communication, and Language of Climate Change . . . . . . . . . . . . . . . . . . . 138 Future Directions: The State of Climate Change Knowledge and Future Predictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 Types of Mitigation Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 Uncertainties and Moral Obligations Despite Them . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Ethics and Reporting About Climate Science . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 Avoiding the Fallacy of Appealing to Ignorance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 The Limits of Challenges About Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 Traditions and New Developments in Environmental Ethics . . . . . . . . . . . . . . . . . . . . . . . 147 Sources of Value in Environmental Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 Persons Who Experience Benefits and Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 New Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

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Abstract: This chapter offers a survey of important factors for the consideration of the moral obligations involved in confronting the challenges of climate change. The first step is to identify as carefully as possible what is known about climate change science, predictions, concerns, models, and both mitigation and adaptation efforts. While the present volume is focused primarily on the mitigation side of reactions to climate change, these mitigation efforts ought to be planned in part with reference to what options and actions are available, likely, and desirable for adaptation. > Section ‘‘Understanding Climate Change,’’ therefore, provides an overview of current understanding of climate change with careful definitions of terminology and concepts along with presentation of the increasingly strong evidence that validates growing concern about climate change and its probable consequences. > Section ‘‘Uncertainties and Moral Obligations Despite Them’’ addresses the kinds of uncertainty at issue when it comes to climate science. The fact that there are uncertainties involved in the understanding of climate change will be shown to be consistent with there being moral obligations to address climate change, obligations that include expanding the knowledge of the subject, developing plans for a variety of possible adaptation needs, and studying further the various options for mitigation and their myriad costs. > Section ‘‘Traditions and New Developments in Environmental Ethics’’ covers a number of moral considerations for climate change mitigation, opening with an examination of the traditional approaches to environmental ethics, then presenting three pressing areas of concern for mitigation efforts: differential levels of responsibility for action that effects the whole globe; the dangers of causing greater harm than is resolved; and the motivating force of diminishing and increasingly expensive fossil fuels that will necessitate and likely speed up innovation in energy production and consumption that will be required for human beings to survive once fossil fuels are exhausted.

Introduction Few subjects are as complex and as frequently oversimplified as climate change. After big snowfalls in winters past, news outlets have featured various observers of these local events, who dismiss the idea of global warming with statements such as, ‘‘So much for the global warming theory’’ [1]. On the other hand, climate scientists note that Earth’s average temperature has risen over time, and as a result, they predict increases in temperature extremes and vaporization of water that, in turn, lead to an expectation of increased snowfall in some years. Problems of understanding and misunderstanding such as these are important causes of confusion in discussions about climate change, and those problems and that confusion combine with the complexity of the issues at stake to add considerable challenge to addressing the topic of focus in this chapter: the ethics of climate change mitigation. This chapter will argue that despite limitations to knowledge about the complexities of the climate system, certain efforts must be undertaken to prepare for and address the developments in climate change. The science on the subject is growing increasingly

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compelling, showing that there is need to work toward mitigating the causal forces that are bringing about climate change along with preparing adaptations to changes in climate, some of which have already begun [2]. Furthermore, the existence of uncertainties with respect to climate science calls for more study of the subject of climate change, with greater collaboration than is already at work. Calling for further study of the subject, however, does not imply the postponement of all or any particular measure of precaution and potential action. This chapter will examine the current knowledge about climate change as well as the moral dimensions at issue in both seeking to minimize those changes and working to prepare for the changes and their effects. When the term ‘‘mitigation’’ arises in this chapter, it is important to keep in mind a consistent meaning. To mitigate something generally means to make it less harsh and less severe, but in relation to climate change, mitigation carries a more precise meaning. The term refers to human actions taken to reduce the forces that are believed responsible for increase of the average temperature of Earth. The primary concern with climate change is the increase of global average temperature, and mitigation is aimed at decreasing the rate of growth of this global temperature and stabilizing it or even decreasing it should it rise too high. Mitigation is sometimes referred to as abatement. Generally, the idea of abatement is to reduce either the rate of growth that is or will likely be problematic, or to actually reverse the trend and reduce global average temperature. In contrast to mitigation, a second category of response to climate change is to find ways of adapting life to new conditions, the method of adaptation. Adaptation refers to adjustments made in response to changing climates that moderate harm or exploit beneficial opportunities [3]. The interesting issue that arises in focusing on climate change mitigation – the efforts to decrease the causal forces of rising global temperatures – is that subtle changes in temperature might be the kind to which some or even many people will be able to adapt relatively easily. For instance, if people live on coastal lands that are increasingly inundated, there are ways of reclaiming land from water or places to which people can move in adaptation to the climate changes. Other adaptations might include systems of planned agricultural crop changes prepared to avoid problems that could arise in growing food for the world’s increasing population. An important consideration about adaptation is that while humans may be able to change and adjust to changing climates, natural ecosystems and habitats may not, a point that will also be addressed in this chapter. There are certainly reasons to worry about sudden, great changes, but more gradual and less severe changes raise a host of ethical issues. For instance, it is reasonable to ask whether a farmer has the moral right to grow a certain crop. If so, then it may be that people have a responsibility to avoid changing the climate. Belief in such a right, however, could be considered highly controversial. What if farmers could reasonably expect some help in adapting the crops that they raise to new conditions? This idea would lessen the moral concern over the ability to grow a certain crop in a particular region, and thus a matter of adaptation would have bearing on the moral dimensions of climate change mitigation. It is likely that the best solution to address the ill effects of climate change will require a combination of mitigation and adaptation strategies. A central claim of this chapter,

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therefore, is that the ethics of climate change mitigation must not be considered in isolation from the options available for adaptation. Of the two, however, the more controversial, morally speaking, are abatement efforts, or mitigation. This is because when climate conditions change, there will be no choice for people but to adapt to new circumstances if presented with serious challenges for survival, at least until humans are able to exert control in a desirable way on the trends in global climate. But abatement efforts, on the other hand, require sacrifices early, before certainty exists about the exact nature and extent of the problems to come and whom the problems, benefits, and mitigating efforts will most affect, and how. Accompanying the problem of complexity that exists in climate change is a necessary challenge of uncertainty. The approach of addressing change through adaptive measures can be started early, and is also possible as some more gradual changes occur, such as in the evacuation of islands that slowly disappear under the rising level of the sea. Other problems, however, are predicted to occur swiftly, such as in the potential disruption of the Ocean Conveyor, a ‘‘major threshold phenomenon’’ that could bring ‘‘significant climatic consequences,’’ such as severe droughts ([4], pp. 562–563). The problem of knowledge, of the limits to human abilities to identify where suffering or benefits will occur, under what form, by which mechanisms, implies that preventive adaptations may be impossible in the face of sudden changes in global climates. Furthermore, if there existed no idea of changes that might occur, this limited knowledge might render the effects of changing conditions less troubling morally speaking. But the fact is that today many scientists have devised models that suggest potential outcomes of climate change and so undercut the option of ignorant dismissal or avoidance of moral obligation. Limited knowledge about climate change first and foremost calls for increasing the knowledge and study of the subject, but it also demands consideration of the kinds of problems that can be expected, weighed against the anticipated costs of alleviating the worst of the threats. This chapter will offer a survey of a number of important factors for the consideration of the moral obligations involved in confronting the challenges of climate change. The first step is to identify as carefully as possible what is known about climate change science, predictions, concerns, models, and both mitigation and adaptation efforts. While the present volume is focused primarily on the mitigation side of reactions to climate change, these mitigation efforts ought to be planned in part with reference to what options and actions are available, likely, and desirable for adaptation. > Section ‘‘Understanding Climate Change,’’ therefore, provides an overview of current understanding of climate change with careful definitions of terminology and concepts along with presentation of the increasingly strong evidence that validates growing concern about climate change and its probable consequences. Next, > section ‘‘Uncertainties and Moral Obligations Despite Them’’ will address the kinds of uncertainty at issue when it comes to climate science. The fact that there are uncertainties involved in human understanding of climate change will be shown to be consistent with there being moral obligations to address climate change. As mentioned above, these are obligations to know more than is currently known, to develop plans for a variety of possible adaptation needs, and to study further the various

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options for mitigation and their myriad costs. Plus, Gardiner [4] presented a convincing case for the weighing of options that concludes in accepting the consequences of a small decrease in GNP from setting limits on global greenhouse gas emissions. Gardiner’s argument is compelling even in the face of uncertainty. After all, the uncertainties involved in climate change resemble uncertainties that motivate moral precaution in so many other spheres of human conduct. Finally, > section ‘‘Traditions and New Developments in Environmental Ethics’’ covers a number of moral considerations for climate change mitigation. This section opens with an examination of the traditional approaches to environmental ethics, then presents three pressing areas of concern for mitigation efforts: differential levels of responsibility for action that effects the whole globe; the dangers of causing greater harm than is resolved (with geoengineering efforts among others); and the motivating forces of diminishing and increasingly expensive fossil fuels that will necessitate and likely speed up innovation in energy production and consumption that will be required for human beings to survive once fossil fuels are exhausted.

Understanding Climate Change Given the complexity of addressing global climate change, it is crucial to clarify the meaning of a number of key terms, forces, and strategies for mitigation, so this first section will begin with a description of central terms and concepts at issue. The section then covers perceptions and methods for describing climate change because ideologies and affective influences on discourse about climate change can be used to mislead the public about the nature and the state of climate science. After that, the section examines the state of scientific knowledge and the predictions that the scientific community has presented about the future of climate change. This is important in order to grasp the extent of concern that world leaders and publics ought to feel about the future of the world’s climates. Finally, this section will close with a brief description of the various proposals that have been considered for mitigating climate change.

Terminology and Concepts Uncertainty, confusion, and misunderstanding result from poorly or ambiguously defined terminology and concepts, and this is especially the case with the topic of climate change. Climate change is complex and often elicits heated and impassioned public discourse. To reduce such problems, this section provides definitions for terms and concepts that are essential for both an explanation of what is known about climate change and for consideration of the broader topic of ethics and climate change mitigation. Some of these definitions are contested, and in such cases, the preferred definitions presented here will be contrasted with other definitions found in the literature, along with provision of an explanation for the selections made.

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Weather and Climate The term ‘‘weather’’ refers to short-term atmospheric conditions occurring in a specific time and place and identified by the sum of selected defining variables that can include temperature, precipitation, humidity, cloudiness, air pressure, wind (velocity and direction), storminess, and more. Weather is measured and reported at the scale of moments, hours, days, and weeks. Climate, on the other hand, is defined (in a narrow sense) as the aggregate of day-to-day weather conditions that have been averaged over longer periods of time such as a month, a season, a year, decades, or thousands to millions of years. Climate is a statistical description that includes not just the average or mean values of the relevant variables but also the variability of those values and the extremes [5, 6].

The Climate System Understanding climate entails more than consideration of just the aggregated day-to-day weather conditions averaged over longer periods of time. Those average atmospheric conditions operate within the wider context of what is called the climate system that includes not just the atmosphere but also the hydrosphere, the cryosphere, the Earth’s land surface, and the biosphere. ● The atmosphere is a mixture of gasses that lie in a relatively thin envelope that surrounds the Earth and is held in place by gravity. The atmosphere also contains suspended liquid and solid particles that ‘‘can vary considerably in type and concentration and from time to time and place to place’’ ([7], p. 37). On average, 50% of the atmospheric mass lies between seal level and 5.6 km (3.48 miles or 18,372 ft) of altitude. To highlight how thin this is, consider that the peak of Mt. McKinley in Alaska is 6.19 km (20,320 ft) above sea level, and as a result, the density of air is less than 50% of that available at sea level, or that the peak of Mt. Everest at 8.85 km (29,029 ft) has less than 32% of the air density that is available at sea level. Commercial jet airliners generally fly at about 10.5 km (35,000 ft) above sea level, and humans would lapse into unconsciousness very quickly if cabin pressure were to decrease suddenly at this altitude [8]. ● The hydrosphere consists of liquid surface water such as the ocean, seas, lakes, and rivers, along with groundwater, soil water, and importantly, water vapor in the atmosphere. ● The cryosphere consists of all snow, ice (glaciers and ice sheets), and frozen ground (including permafrost) that lie on and beneath the surface of the Earth. ● Earth’s land surface consists of the naturally occurring rock and soil along with the structures (buildings, roads, etc.) that humans have constructed. ● The biosphere consists of all living organisms, both plant and animal, on land, in fresh water, and in the ocean, including derived dead organic matter such as litter, soil organic matter, and ocean detritus.

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The climate system functions by means of complex interactions among these five components in which flows and fluxes of energy and matter take place through myriad processes such as radiation, convection, evaporation, transpiration, chemical exchanges, and many more [9]. Given this complexity, climate science is an interdisciplinary endeavor that necessarily involves the interactions and contributions of a wide range of the physical sciences such as physics, chemistry, biology, ecology, oceanography, as well as the atmospheric sciences. Moreover, because human existence involves interactions with climate, the social sciences such as psychology, political science, and sociology also play important roles in human understanding. In addition, climate operates over time and space, so the synthesizing disciplines of history and geography have much to contribute as well. Furthermore, as shown later in this chapter, the humanities contribute to the understanding of the social dimensions of climate systems when it comes to considering the moral implications of various situations and actions in response to climate change.

Climate Change The most recent definition of climate change developed by the Intergovernmental Panel on Climate Change (IPCC) will be used in this chapter: "

Climate change refers to a change in the state of the climate that can be identified (e.g., by using statistical tests) by changes in the mean and/or the variability of its properties, and that persists for an extended period, typically decades or longer ([9], p. 78; see also [10]).

Importantly, this definition is solely descriptive and includes no reference to causation, particularly no indication of the extent to which any changes in climate result from natural or human (anthropogenic) causes. Other definitions of climate change include causation, such as the United Nations Framework Convention on Climate Change: "

‘‘Climate change’’ means a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods ([11], p. 3).

The first definition was selected for use in this chapter because it focuses on identifying and describing observed changes in climate and specifically refrains from assigning causation to either natural or anthropogenic processes. As a result, it draws attention to the distinction between two aspects of inquiry: (1) questions related to the presence, extent, and direction of changes in climate, and (2) questions about causation of any observed changes, especially, determinations of natural or anthropogenic causes. Views about (2) are often disconnected from questions about presence, extent, and direction of change and also tend to generate more contentious debate, especially in public and political discourse. As means to reduce contention, it is helpful to make the clear distinction between these two aspects of inquiry, and such clarity is especially important in this chapter, considering issues of ethics, mitigation, and adaptation. Additionally, and importantly, the selected definition implies no specific type of change(s) but instead fosters recognition that changes can occur in all

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manner of the variables that constitute climate such as temperature, precipitation, humidity, cloud cover, etc. (this point is further elaborated below with respect to the term ‘‘climate change’’ and ‘‘global warming’’). An additional reason to clarify the difference between (1) and (2) is that consideration of (1) generally engenders less controversy, while the task of determining who should act in addressing any needs that arise from climate change will depend in part on how one addresses issue (2). As such, (2) is not to be ignored in addressing the ethics of climate change, but after untangling (1) from (2), the problems to be addressed can be recognized for what they are more easily.

Climate Variability Most definitions of climate variability found in the literature differ little from the above definitions of climate change. For example, as defined in the Synthesis Report for the IPCC Fourth Assessment ([9], pp. 78–79), the two terms actually seem synonymous in that they both refer to changes occurring on time scales of multiple decades or longer and they both allow for natural and anthropogenic causes. Other definitions of climate variability retain the focus on time scales of multiple decades or longer but limit climate variability to only natural causes [12, 13]. In this chapter, however, the term will refer to something different from either of these uses. The term ‘‘climate variability’’ is used in this chapter in recognition that the long-term, statistical averages of the variables that define climates can contain substantial variation around the mean. Droughts, rainy periods, El Nin˜o events, etc., occur in time periods of a year to as much as 3 decades within climates that are considered to be stable as well as within climates that are experiencing changes in the longer term. This variability is different from extreme weather events such as floods and heat waves that occur on time scales of hours, days, and weeks, and it is also different from the long-term climate changes that occur on scales that span multiple decades to millions of years (which have already been defined above as ‘‘climate change’’). The reasons to differentiate climate variability from climate change in this way are twofold. First, climate variability can generate considerable ‘‘noise’’ in the data that can lead to erroneous conclusions about climate change. For example, > Fig. 5.1 shows two levels of variability – interannual and multi-decadal – that are present in the observed global temperature record that extends from 1880 to 2009. Inter-annual variability (variability from year to year) is as much as 0.3 C (0.54 F), a range that could be expressed as 1 year with a very hot summer and a mild winter followed by a second year with a mild summer and a very cold winter. The conditions present in either of these years could lead people to make poor judgments about climate. In particular, the long-term warming trend that the graph shows occurring across the full 119 year period is sometimes dismissed because people generally give greater weight in decision making and opinion formation to immediate affective sensory input over cognitive consideration of statistics [14] (more will be said below about human decision making that is affect-based compared to a basis on statistical description). The

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Global land-ocean temperature index

Temperature anomaly (°C)

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. Fig. 5.1 A line plot of the global land-ocean temperature index from 1880 to 2009, with the base period 1951–1980. The dotted black line is the annual mean and the solid black line is the 5-year mean. The gray bars show uncertainty estimates [16]

variability over several decades is exhibited in > Fig. 5.1 for the time period 1940–1980, which shows a plateau within the longer term, 119-year warming trend. During this shorter time period, media reports and even a few researchers erroneously forecast ‘‘global cooling’’ based on the observational record at the time that included inadequate and uncertain data from years earlier than this time period and, obviously, no data beyond 1980 ([15], p. 85). The second important reason for distinguishing between climate variability and climate change in the way defined in this chapter is related to dynamic equilibrium in ecosystems. Dynamic equilibrium results as ecosystems adapt to dynamic, ongoing forces that are not so extreme as to produce catastrophic changes. This dynamic equilibrium occurs because the change forces are not dramatic enough (or they cancel each other out), so that relative stability in the ecosystem can be perpetuated as the organisms (plants and animals) and the physical environment respond with adjustments that are within their adaptive capacities. In general, ecosystem adaptive capacity is not exceeded (and dynamic equilibrium is maintained) as a result of climate variability as defined here, but climate change, on the other hand, often exceeds this capacity and leads to fundamental alterations of the ecosystems. Such fundamental alterations occurring in natural ecosystems include processes such as species extinction, changes in community compositions, changes in ecological interactions, changes in geographical distributions, etc. Fundamental alterations can also occur within ecosystems upon which humans depend, leading to such changes as increases/ decreases in agricultural productivity and the availability of water, changes in storm patterns, etc. [3]. These effects on both natural and human ecosystems will be discussed in more detail in what follows, but the important point here is that climate variability rarely produces such fundamental alterations whereas climate change frequently can.

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Global Warming and Global Average Temperature Global warming is defined as an increase in the average temperature of Earth’s surface [17]. As > Fig. 5.1 illustrates, this average surface temperature has increased by 0.75 C 0.3 C (1.35 F0.54 F) between 1880 and 2009. While this change might seem small, the paleo-climate record demonstrates that even ‘‘mild heating can have dramatic consequences’’ such as advancing or retreating glaciers, sea level changes, and changes in precipitation patterns that can all force considerable changes in human activity and push natural ecosystems beyond dynamic equilibrium [18]. The graph in > Fig. 5.1 comes from NASA’s Goddard Institute for Space Studies Surface Temperature Analysis (GISTEMP) database which contains temperature observations from land and sea from 1880 to the present [19]. It is one of three such large databases of Earth surface atmospheric observations that all begin in the mid-to-late nineteenth century and extend to the present. The National Oceanic and Atmospheric Administration (NOAA) maintains the second database that is titled the Global Historical Climatology Network (GHCN), and while this database contains observations from land stations only, it includes precipitation and air pressure data as well as temperature [20]. The third database is abbreviated HadCRUT3 which reflects the source of the dataset being a collaborative project of the Met Office Hadley Center of the UK National Weather Service (‘‘Had’’) and the Climate Research Unit (‘‘CRU’’) at the University of East Anglia. The Hadley Center provides marine surface temperature data and the Climate Research Unit provides the land surface temperature data. These three databases are not completely independent because they share some of the same observation stations, but nevertheless, some differences in the raw data exist, and the three centers work independently using different approaches to the compilation and analysis done on the datasets. As such, the comparisons of results from the different databases allow for verification. Considerable consistency is apparent across the databases, especially in the overall trend of global warming since 1880. The different centers "

. . .work independently and use different methods in the way they collect and process data to calculate the global-average temperature. Despite this, the results of each are similar from month to month and year to year, and there is definite agreement on temperature trends from decade to decade. Most importantly, they all agree global-average temperature has increased over the past century and this warming has been particularly rapid since the 1970s [21].

> Figure 5.2 shows the temperature record for each of the three datasets superimposed upon one another, and the consistency among them is clear. In addition, research has been done to identify and quantify uncertainty in the data, and good estimates of the uncertainty indicate that the data are valid. As one such study stated: "

Since the mid twentieth century, the uncertainties in global and hemispheric mean temperatures are small, and the temperature increase greatly exceeds its uncertainty. In earlier periods the uncertainties are larger, but the temperature increase over the twentieth century is still significantly larger than its uncertainty ([22], p. 1).

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Anomoly (°C) relative to 1961–1990

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0 -0.2 -0.4 -0.6 -0.8 1850

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. Fig. 5.2 Correlation between the three global average temperature records. All three datasets show clear correlation and a marked warming trend, particularly over the past 3 decades. The HadCRUT3 graph shows uncertainty bands which tighten up considerably after 1945 [23]

The temperature records shown in > Fig. 5.2 for each of the three centers are developed as each center uses its dataset to calculate a ‘‘global average temperature,’’ both for the past and for monthly updates, and it is these values that are displayed on the graphs in the figure. While these calculations are done differently at the three centers, all three use the following general procedure. First, they expend considerable efforts to obtain the most accurate data possible and define the uncertainty that remains in those data. Then, the monthly average temperature value for each reporting station is converted into what is called an ‘‘anomaly.’’ The anomaly of each reporting station is calculated by subtracting the monthly average value from the average value that the station has maintained over some relatively long-term ‘‘base period’’ (For example, the HadCRUT3 uses the period 1961–1990 as its base period). The reason for using anomalies is stated as follows: "

For example, if the 1961–1990 average September temperature for Edinburg in Scotland is 12 C and the recorded average temperature for that month in 2009 is 13 C, the difference of 1 C is the anomaly and this would be used in the calculation of the global average.

"

One of the main reasons for using anomalies is that they remain fairly constant over large areas. So, for example, an anomaly in Edinburgh is likely to be the same as the

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anomaly further north in Fort William and at the top of Ben Nevis, the UK’s highest mountain. This is even though there may be large differences in absolute temperature at each of these locations. "

The anomaly method also helps to avoid biases. For example, if actual temperatures were used and information from an Arctic observation station was missing for that month, it would mean the global temperature record would seem warmer. Using anomalies means missing data such as this will not bias the temperature record ([21], see [24] for additional explanation of the calculation and use of anomalies as used for the National Climate Data Center’s GHCN system).

Even though using anomalies produces the most accurate record of Earth’s global average temperature, it is still interesting to calculate one single absolute ‘‘global average temperature.’’ Using the GHCN dataset [25], the average value for the last 10 years, the warmest decade on record [16, 26, 27], produces a global average temperature for planet Earth of 14.4 C or 58 F.

Climate Forcing and Climate Feedback Climate forcing refers to the processes that produce changes in the climate. The word force is generally defined as ‘‘strength or energy that is exerted or brought to bear [and that often] causes motion or change’’ [28]. With respect to Earth’s climate system, a variety of forces cause climates to change. These are called ‘‘climate forcings,’’ and they are all related to Earth’s ‘‘energy balance,’’ that is, the balance between incoming energy from the Sun and outgoing energy from the Earth. The forcings can be internal or external. ‘‘Internal forcings’’ occur within the climate system and include processes such as changes in atmospheric composition or changes in ice cover that causes different rates of absorption/reflection of solar radiation. ‘‘External forcings’’ originate from outside the climate system and include processes such as changes in Earth’s orbit around the sun and volcanic eruptions. Forcings can be naturally occurring, such as those resulting from solar activity or volcanic eruptions, or anthropogenic in origin, for example, the emission of greenhouse gases or deforestation ([3], p. 9). A feedback is defined as a change that occurs within the climate system in response to a forcing mechanism. A feedback is called ‘‘positive’’ when it augments or intensifies the effects of the forcing mechanism or ‘‘negative’’ when it diminishes or reduces the effects caused by that original forcing mechanism ([3], p. 875). Forcing and feedback mechanisms often interact in complex ways that make it difficult to decipher the processes and dynamics of climate change. This difficulty also frequently frustrates policymakers, the media, and the public, and it can result in the dissemination of misinformation, both intentional and unintentional, into the public discourse. One example of this relates to the relationship between carbon dioxide (CO2) and temperature. While it is relatively easy to understand that increasing concentrations of atmospheric CO2 can increase the naturally occurring Greenhouse

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Effect thereby causing global warming, confusion and misinformation result when research brings to light a climate record in which changes in the atmospheric CO2 level lag behind changes in temperature by 800–1,000 years. The legitimate question arises as to how it could be possible that CO2 causes global warming if the rise in temperature occurs before the increase in the atmospheric concentration of CO2. While the question is legitimate, unfortunately, some who are disposed to doubt claims of global warming neither seek answers to the question or pursue additional investigation. Instead, they simply assert the premise that because CO2 lags temperature it cannot possibly be the cause of global warming. However, a more objective review of the scientific literature emphasizes the importance of distinguishing between forcings and feedbacks. The initial, external forcing that begins the temperature changes observed in the climate record stems from fluctuations in the orbital relations between the Sun and Earth, and these fluctuations produce rather small changes in the amount of solar radiation reaching Earth [29]. This relatively weak forcing action causes small temperature changes that are then amplified by other processes [30]. One such amplifying process that appears to be quite significant occurs because ocean temperature changes also change the ocean’s capacity to retain soluble CO2. As this capacity changes, it causes CO2 to either be released from the oceans into the atmosphere (during times of warming temperatures) or removed from the atmosphere and dissolved into the oceans (during times of cooling temperatures). Consequently, CO2 operates in these situations as a positive feedback mechanism that augments the temperature change. In other words, it enhances the Greenhouse Effect and amplifies temperature increases during times of warming and reduces the Greenhouse Effect and reinforces temperature decreases during times of cooling [31]. Careful analysis therefore suggests that a climate record which shows CO2 operating as a feedback mechanism neither negates nor renders less likely the potential that CO2 could operate as an initial forcing mechanism as well. Considering that the atmospheric concentration of CO2 has increased by 25% in the last 50 years [32], it is entirely possible that this increasing CO2 concentration is functioning as the forcing agent for contemporary global warming. Simply put, it is a false premise to claim that CO2 could not be causing contemporary global warming because CO2 has been observed to lag behind temperature changes in the past. This false premise has been lampooned by the analogous statement that, ‘‘Chickens do not lay eggs, because they have been observed to hatch from them’’ [33].

Global Warming Versus Climate Change The terms ‘‘global warming’’ and ‘‘climate change’’ have been defined above and those definitions will not be repeated here. But it is important to emphasize the difference between the two terms and the significance of exercising precision in use of them. While ‘‘global warming’’ is a useful way to refer to the increase of global average temperature that strong scientific evidence shows has occurred over the last 130 years (> Fig. 5.2), for some

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people, the term carries the automatic connotation that human activity is the cause of this observed temperature increase. As stated earlier, a clear distinction should be made between questions that, on the one hand, relate to the changes in climate, if any, that are occurring, and on the other hand, the causes of any identified changes, specifically, naturally occurring or anthropogenic. Because the term ‘‘global warming’’ carries the more polemical and politicized connotation, it poses a higher probability of conflating the two questions than does the term ‘‘climate change’’ which has not yet attracted such politicized interpretations. Consequently, in general, the term ‘‘climate change’’ is preferable. A second deficiency with the term ‘‘global warming’’ is the one dimensional and totalizing change that it implies. Although the average temperature of planet Earth is increasing, the temperature change that any particular place on the Earth might experience could be cooling instead of warming, or perhaps, might be experiencing no change in temperature at all. But the term ‘‘global warming’’ is easily, and perhaps most naturally, understood to mean that all places on the Earth will experience warming. Moreover, even if the term is explained, it does not readily lend itself to the broader understanding that although the global average temperature is increasing, it is not necessarily the case that temperature is increasing at any given place on Earth. The term ‘‘climate change,’’ on the other hand, does not imply this uniform nature of change and thus possesses greater capacity to communicate the potential for different changes occurring in different places and regions. In addition, the term ‘‘global warming’’ implies a narrow view of the nature of changes that can occur in the climate system, namely, an exclusive focus on temperature. But the possible changes to climate are not restricted to just the climate variable of temperature, and the observed increase in global average temperature has been associated with changes in a range of other climate variables that include precipitation amounts, timing, and patterns, cloudiness, humidity, wind direction and velocity, storminess, and more. While the term ‘‘global warming’’ places the focus on temperature, the term ‘‘climate change’’ offers a much richer capacity to incorporate these other types of changes as well, and as a result, is generally emerging as the preferred term.

Thresholds and Tipping Points The term ‘‘threshold’’ in ecology and environmental science means ‘‘a fixed value at which an abrupt change in the behavior of a system is observed’’ ([34], p. 450). In climate science, the term ‘‘climate threshold’’ means the point at which some forcing of the climate system ‘‘triggers a significant climatic or environmental event which is considered unalterable, or recoverable only on very long time-scales, such as widespread bleaching of corals or a collapse of oceanic circulation systems’’ ([3], p. 872). Substantial research indicates that climate changes are prone to such thresholds, or ‘‘tipping points,’’ at which climate on a global scale or climates at regional scales can suddenly experience major

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change [35, 36]. A wide number of complex systems exhibit similar threshold events – financial markets, ecosystems, and even epileptic seizures and asthma attacks – in which the system seems stable right up until the time when the sudden change occurs [37]. Research has provided general ideas on where these thresholds or tipping points might operate with respect to climate – the loss of Arctic sea ice or Antarctic ice shelves, the release of methane into the atmosphere from the melting of Siberian permafrost, or the disruption of the ‘‘oceanic conveyor belt’’ – but this knowledge is rudimentary at best. Scheffer and colleagues [37] report tentative efforts to identify ‘‘early warning signs’’ that precede threshold events, and with respect to climate, they state that ‘‘flickering,’’ ‘‘rapid alterations,’’ or increased weather and climate ‘‘variability’’ seem to have preceded sudden changes observed in the climate record. But at present, predicting these climatic thresholds is vague at best. One of the authors explained the idea of thresholds and the uncertainty about them in an interview with Time magazine, ‘‘Managing the environment is like driving [on] a foggy road at night by a cliff.. . .You know it’s there, but you don’t know where exactly’’ [38].

Defining and Communicating Uncertainty Clearly, climate science contains uncertainties that are endemic to the data sources used; to the understanding of processes involved; and to predictions of future trends, impacts, and outcomes. Consequently, it is essential to accompany any study of climate change with careful, explicit, and candid assessments of the levels of certainty or confidence associated with the findings or claims made. Indeed, reports or studies are suspect if they fail to include such information and/or if they make unequivocal statements about ‘‘proving’’ their points. To some extent, the same can be said about commentaries, news reports, or various information sources. While the politicized environment in which climate change is debated might encourage strong and definite affirmations, such statements can prove counterproductive if they are perceived or exposed as exaggerated [14, 39]. Numerous approaches exist for defining and communicating uncertainty, and this brief discussion here does not attempt a comprehensive overview. Instead, it focuses on the approach that the IPCC has developed for its assessment reports. The main function of the IPCC is to ‘‘assess the state of our understanding and to judge the confidence with which we can make projections of climate change, its impacts, and costs and efficacy of options,’’ but in its first and second assessments (1990 and 1995 respectively), the IPCC gave inadequate attention to ‘‘systematizing the process of reaching collective judgments about uncertainties and levels of confidence or standardizing the terms used to convey uncertainties and levels of confidence to the decision-maker audience’’ ([40], p. 5 emphasis added). Consequently, the IPCC conducted a comprehensive project to rectify these inadequacies [41, 42], and the result was the following system for defining and communicating uncertainties in the Fourth Assessment Report published in 2007.

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. Table 5.1 Conceptual framework for assessing the current level of understanding [40, 43] Increasing level of agreement or consensus

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Established but Incomplete High agreement / Limited Evidence

Well Established High agreement / Much evidence

Speculative Low agreement / Limited evidence

Competing Explanations Low agreement / Much evidence

Increasing amounts of evidence (theory, observations, models)

The first step is to present a general summary of the state of knowledge related to the topic being presented. This summary should include (1) the amount of evidence available in support of the findings and (2) the degree of consensus among experts on the interpretation of the evidence [43]. > Table 5.1 illustrates how these two factors form interacting continua that produce qualitative categories. The IPCC guidance notes for addressing uncertainty ([43], p. 3 emphasis in original) state that in cases where the level of knowledge is determined to be ‘‘high agreement, much evidence, or where otherwise appropriate,’’ additional information about uncertainty should be provided through specification of a level of confidence scale and a likelihood scale. The level of confidence scale addresses the degree of certainty that the results are correct, while the likelihood scale specifies a probability that the occurrence or outcome is taking place or will take place. The IPCC guidelines state that the level of confidence scale ‘‘can be used to characterize uncertainty that is based on expert judgment as to the correctness of a model, an analysis or a statement. The last two terms in the scale should be reserved for areas of major concern that need to be considered from a risk or opportunity perspective, and the reason for their use should be carefully explained’’ ([43], p. 4). > Table 5.2 shows the scale. The likelihood scale is used to refer to ‘‘a probabilistic assessment of some well defined outcome having occurred or occurring in the future’’ ([43], p. 4).

Adaptation and Mitigation The terms ‘‘adaptation’’ and ‘‘mitigation’’ were briefly discussed in the introduction to this chapter, but the more detailed definition and explanation in > Table 5.3 outlines important distinctions that will be helpful for the sections of the chapter that follow.

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. Table 5.2 Scales of uncertainty used in the IPCC fourth assessment report, 2007. None of these are statistically significant because no tests are conducted to determine the values. Instead, they are based on expert judgment Qualitatively calibrated levels of confidence [43] Terminology

Degree of confidence in being correct

Very high confidence

At least 9 out of 10 chance in being correct

High confidence Medium confidence Low confidence Very low confidence

About 8 out of 10 chance in being correct About 5 out of 10 chance of being correct About 2 out of 10 chance of being correct Less than 1 out of 10 chance of being correct

Likelihood scale [6] Terminology

Likelihood of the occurrence or outcome (%)

Virtually certain

>99

Extremely likely Very likely Likely More likely than not

>95 >90 >66 >50

About as likely as not Unlikely Very unlikely Extremely unlikely

33–66 section on ‘‘Alternative Economic Approaches to Promote Sustainability’’ seems to be the answer to limit the harmful effects of usury and capitalism. But the struggle should continue to challenge the usurious system in place. Only fair and just economic system can guarantee sustainability. Justice is the key to the future of sustainability. Humanity must devise an economic system: ● ● ● ●

That takes on a holistic view and does not exploit the weak and oppressed In which usury is completely forbidden in all its forms and manifestations Which focuses on distribution of wealth instead of growth In which the distinction is drawn between public property and private property. The basic necessities of life especially water, air, and energy should be under public control (Owning a deep mine of minerals or petroleum fields is not the same as owning a house or a piece of land; neither is owning petrochemical plants or various

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large energy-generating units or a weapons manufacturing facility the same as owning a garment factory or a candy shop; and neither is owning a railway network similar to owning a car. On the recent Deepwater Horizon oil spill in the Gulf of Mexico, Costanza et al. in Solution Journal commented [66]: ‘‘The continuing oil spill from the Deepwater Horizon is causing enormous economic and ecological damage. Estimates of the size and duration continue to escalate, but it is now the largest in U.S. history and clearly among the largest oil spills on record. One major lesson is that our natural capital assets and other public goods are far too valuable to continue to put them at such high risk from private interests.’’ In [15] the author writes: ‘‘Developers, corporations, and ordinary citizens have maximized private benefit at the expense of shared public goods – including the quality of our cities and towns, not to mention the environment. Individualism has triumphed over collective well-being. In a conservative era dominated by free market philosophies, there has been little political interest in recognizing that someone, usually the public sector, must stand up for the common good. Government, which exists in large part to protect and advocate for public interests, is routinely attacked by those who would like to privatize everything. Individualistic attitudes have been institutionalized through law, government policies, corporate practice, advertising, the media, and many other structural elements of our society. These structural forces also reinforce individualistic, consumption-oriented values, types of behavior, and modes of thought within individuals.’’ [emphasis added] In which big corporations do not exploit the world resources in poor and disadvantaged countries (In part it is a problem of a usurious system, having to do with the growing power of global corporations and the decline of smaller-scale businesses that could form a more locally oriented, socially responsible economy) Based on mutual welfare, trust, and partnership in which both the supplier of capital and the user of capital become partners in profit and loss (equity financing instead of debt-financing) In which business dealings are fair, free from speculations, and not tied up to any particular currency In which the medium of exchange is gold and silver coins (Any crisis in the dollar badly affects the currencies of other countries. Also paper currency is a form of exploitation and is part and parcel of the usurious system. To avoid such fiscal crises and be fair and just to all bimetallic coins of gold and silver medium of exchange should be adopted which have their own intrinsic value) In which businesses that exploit society such as gambling casinos, prostitution, etc., are completely forbidden

Is there a model of such a system? Indeed such a system did exist and has worked for centuries until the beginning of twentieth century. The legal framework of the Islamic economic system for a commercial environment totally free of the machinations of usurers is still entirely in place and is just waiting to be re-implemented. It would be utterly unjust if this system were not taken seriously, without looking at its merit, simply because it has the word Islamic in it

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which may have a connotation of an ‘‘old system’’ or as having religious underpinnings. The value system and attitudes that the Islamic system of economics promotes is the belief in the sacredness of the natural world, meaning that all things exist in their own right as creations of their Lord and can be made use of by man provided he treats them with the respect due to them. It encourages simplicity, modesty, charity, mutual help, and cooperation and discourages miserliness, greed, extravagance, and unnecessary waste. It not only strongly prohibits money-lending with interest but also remedies the causes leading to the existence of this evil institution in human society. It acknowledges that man has the right to own property but that right is not absolute or arbitrary or boundless as personal ‘‘wealth’’ cannot be used to produce collective ills or to spread disorder on Earth. It recognizes that livelihood is necessary and indispensable, but that cannot be the true purpose of life and that all true reward lies in the next world (hereafter). There is no isolation of purely economic phenomena from the fabric of life. This is neither a place nor time to discuss the entire conceptual framework of the Islamic economic system but suffice it to say that it has all the attributes of a fair and just system discussed above. A great deal of literature on the Islamic economic system already exists; see for example [67–70]. What is clear from this is that there is a need for a paradigm shift – a complete change in perspective. Awareness of sustainability has opened up discussion on many fronts and that necessarily includes a usurious banking and financial system. There is a need to engage meaningfully in understanding the harmful effects of usury. While the full implications of the quantum change in perspective have yet to filter down to the level of general consciousness the forest has been cleared and the path is open. No doubt, there may be reluctance due to powerful vested interests related to both cognitive belief systems and to the institutional position. But with courage and commitment the harmful effects of untrue economic theory can be challenged. Since collectively the entire social, political, and economic edifice is entrenched in profiting from interest, it is impossible to completely insulate oneself from its poisonous dust particles. However, here are some practical suggestions of what can be considered at the individual and social level [71]: ● Consider avoiding direct involvement in any transaction based on interest. If you are employed in an organization whose business dealings require giving out or taking interest, maybe it is good idea to start looking for another job. ● Think about keeping only interest-free current (Checking) account at the bank. Bank lockers or safes may also be used instead. ● Be concerned about not taking a loan on interest for business, construction, or for buying any item or article of convenience. ● Consider avoiding buying a house with a mortgage, if possible. ● Consider using cash or a debit card for transactions and avoid using a credit card to fall into the debt trap. Total US revolving debt, 98% of which is made up of credit card debt, is $796.5 billion, as of November 2010 [72]. If for some reason, you use a credit card for online shopping then ask the issuer of your credit card to deduct 100% from your bank account whenever the payment is due. (Of the most mischievously ingenious tools created by the banking system is the credit card, whereby people are able

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to buy what they want through an electronic network without carrying any cash.) Credit card companies charge high interest rates for the service they provide. Through this, the banks and financial institutions are able to control the residual liquidity of the depositors. Thus all the cash of consumers is within the financial system for the use of the bank, and thereby, the use of the rich [67]). Think about raising awareness among your family and relatives, colleagues and companions, neighbors and acquaintances about the evils of interest. Consider turning conversations away from idle gossiping and table talk to a serious exchange of ideas about interest, discussing its forms and manifestations, its harmful effects on society, and how it can be avoided. All major world religions condemn usury. Whether you are a Jew or a Christian or a Muslim or a Hindu or a Buddhist, consider distributing the holy verses of your scriptures that condemn usury and usurious practices to your friends and acquaintances (Many of the early Western philosophers including Plato, Aristotle, Cato, Cicero, Seneca, and Plutarch were critics of usury [52]). Think about joining an organized struggle for deconstructing the interest-based system at work. In addition, consider inviting people to join the cause so that the critical mass necessary for an effective public protest is reached. All peaceful forms of agitation and public pressure including demonstrations, protest marches, and civil disobedience demanding the governments to overhaul the system may be used. Consider joining an organized struggle to call for waiving off the international debt of those countries where the principal amount has already been paid back. Remember by eliminating the interest charges in society the world is

● ● ● ● ● ●

Reducing the environmental risk Reducing poverty in the developing world Reducing the gap between rich and poor Reducing the unemployment problem Reducing the problem of inflation Promoting a culture of charity and sacrifice and condemning the culture of greed and selfishness ● Doing justice to nature ● Increasing the economic efficiency ● Safeguarding the interest of future generations and so on

Acknowledgments The author would like to thank Prof. Masudul Alam Choudhury, College of Commerce, Sultan Qaboos University, for reading the draft and providing valuable suggestions. The author would also like to acknowledge Jim Hesson, Director Academic English Solutions (Academicenglishsolutions.com), for editing and proof reading the article and providing valuable comments and feedback.

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8 Emissions Trading Roger Raufer1,2,3 . Sudha Iyer4 1 Independent Engineer, Cinnaminson, NJ, USA 2 Wharton School, University of Pennsylvania, Philadelphia, PA, USA 3 Institut Franc¸ais du Pe´trole, Rueil-Malmaison, France 4 Cerebronics, LLC, Princeton, NJ, USA Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 The Evolution of Emissions Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 Emissions Trading Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 The US Acid Rain Program (ARP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 Carbon Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 Flexible Mechanisms of the Kyoto Protocol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 Clean Development Mechanism (CDM) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 Design Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 Joint Implementation (JI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251 International Emissions Trading (IET) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 International Cap-and-Trade Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 The European Union Emissions Trading Scheme (EU ETS) . . . . . . . . . . . . . . . . . . . 253 EU ETS Phase I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254 The Linking Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 EU ETS Phases II and III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 Other Cap-and-Trade Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 Voluntary Carbon Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 The Over-the-Counter (OTC) VER Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 Carbon Financial Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 Renewable Energy and Energy Efficiency Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 Renewable Energy Certificates (RECs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 Energy Efficiency Certificates (EECs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 Future Directions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

Wei-Yin Chen, John Seiner, Toshio Suzuki & Maximilian Lackner (eds.), Handbook of Climate Change Mitigation, DOI 10.1007/978-1-4419-7991-9_8, # Springer Science+Business Media, LLC 2012

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Abstract: Climate change is being exacerbated by the emissions of globe-warming greenhouse gases (GHGs) as a consequence of economic activities associated with energy, industry, transportation, and land use. From an economic viewpoint, the Earth’s climate is a public good, and pollution a negative externality; such change therefore constitutes market failure. Controlling air pollution by utilizing economic mechanisms represents an important change in environmental thinking – literally a paradigm shift away from historical command-and-control (CAC) engineering systems. Today, this new approach is being utilized to mitigate the emissions of GHGs, addressing the pollution externality by putting a price on carbon. The international carbon market, largely developed as a result of the Kyoto Protocol, had a total value of $144 billion in 2009. The largest component of that market, the European Union’s Emission Trading Scheme (ETS), was worth $118 billion; it represents a regional market designed to assist Europe in achieving compliance with the Protocol’s requirements, and also has links to the Protocol’s project-based mechanisms, the Clean Development Mechanism (CDM) and Joint Implementation (JI) which help minimize compliance costs. These project-based components themselves were valued at $2.7 billion and $354 million, respectively. Further, other carbon markets created in numerous countries (e.g., the Regional Greenhouse Gas Initiative [RGGI] in the USA and the Greenhouse Gas Abatement Scheme in New South Wales, Australia) were worth $2.3 billion, while the global voluntary market was estimated to be in the $350–$400 million range (a significant drop from the previous year’s $700 million figure). This chapter discusses the structure of these emissions trading carbon markets, the theory behind their development, their historical evolution, ongoing governance challenges, and future prospects.

Introduction The issue of global climate change is as much an economic conundrum as it is one of science and regulatory policy. Climate change is exacerbated by the emissions of globewarming greenhouse gases (GHGs) as a consequence of economic activities associated with energy, industry, transportation, and land use. Historically, polluters have not had to directly bear the social costs of emitting substances into the atmosphere – and therefore they have had no incentive to reduce such emissions. In economics, the Earth’s climate is considered a ‘‘public good,’’ that is, a good that can be consumed by everybody in a society, where those who fail to pay for the good cannot be excluded from enjoying its benefits. An ‘‘externality’’ is the impact of an economic transaction on a party that is not a direct participant of the transaction, and the price therefore does not reflect the full cost of a certain good. Human-induced climate change, then, is a ‘‘negative externality,’’ since the emitter of GHGs does not pay the cost of detrimentally altering a public good (i.e., the Earth’s climate). This means that climate change, from an economic viewpoint, is a market failure; in fact, the British government’s Stern Review, a well-known economic analysis of climate change, called it a ‘‘market failure on the greatest scale the world has seen’’ [38].

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While the fundamental theory of public goods and externalities forms the basis of any economic approach, there are a few facets of global warming that make a market solution to the problem of climate change even more challenging: The climate change externality is global; the impacts are persistent and develop over time because some GHGs remain in the atmosphere for hundreds of years; and, since there is no accurate way of predicting the change in the climate system due to increases in atmospheric GHGs, there are considerable uncertainties and risks in developing a mitigation strategy based upon economic theory. In standard economic theory, the marginal abatement cost (MAC) of pollution control should equal the marginal social benefit (MSB) of such abatement. This means that the goal of the economic control program should be to set a control level such that the next dollar spent on pollution control purchases exactly one dollar’s worth of environmental amenities. > Figure 8.1 illustrates the marginal abatement cost (MAC) and marginal social benefit (MSB) curves. Economists then offer two approaches to arrive at that point: ● A price-based mechanism, also called a Pigouvian tax ● A quantity-based mechanism, commonly referred to as emissions trading The Pigouvian tax approach was first developed by Arthur Cecil Pigou (1877–1959), a British economist who was a professor at Cambridge. Pigou discussed the concept of externalities in his book The Economics of Welfare (1920), and argued that a tax should be imposed on negative externalities such as pollution in order to discourage them. In the case of climate change, a Pigouvian solution would introduce a tax on GHG emissions. If the MAC of a polluter is higher than the tax, the polluter will find it more cost-effective to pay the tax and continue emitting. If the MAC is lower than the tax, then the polluter will try to abate the pollution as opposed to paying the tax (> Fig. 8.2).

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A Pigouvian tax is now considered a well-known and traditional means of bringing a modicum of market forces and therefore better market efficiency to economic situations where externalities exist. Such a tax will make it more expensive to pollute, and will ensure a change in behavior by the polluting entity – forcing the polluter to either pay the tax or implement technologies to reduce pollution, whatever is more cost-effective. Despite being an efficient solution to controlling pollution, taxes introduce a political dynamic that raises questions about wealth transfer from industry to government, the distribution of this revenue, lobbying of the government by special interest groups, polluters, etc. Economists have attempted to address this wealth transfer by linking the tax with subsidies (and utilizing the revenue generated by the tax to fund such efforts); by removing other taxes (so that there is tax neutrality); and similar schemes. The quantity-based market approach, on the other hand, is modeled on the work of John Dales, Professor of Economics at the University of Toronto, in his classic 1968 book Pollution, Property and Prices. In that work, Dales proposed a new market-oriented policy instrument for tackling pollution problems. Dales’ idea was to have an environmental authority issue a limited number of rights (or permits) to emit a specified pollutant, and then leave the determination of the price of these permits to emitters within a market. Today, transactions in such markets are commonly called ‘‘emissions trading.’’ A regulator sets an overall emission limit (‘‘cap’’), which is the total quantity of a pollutant that the participants in the scheme are allowed to emit. That quantity is then divided into a number of ‘‘allowances,’’ and polluters are allowed to trade (i.e., buy and sell) such allowances in a market. Such ‘‘cap-and-trade’’ schemes have become quite popular over recent decades, and their success has led to the development of carbon markets under the Kyoto Protocol. In the figure below, a cap is set at the point where MAC = MSB, which is at the point where 55% of the pollution is controlled. The ‘‘cap’’ of 45 units of pollution could be divided into 45 allowances, which could be bought and sold by polluters. Note

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that those with low marginal costs of control will put on control, rather than purchase such an allowance, and society will ultimately end up at the point where MAC = MSB; the figure also shows that those with higher marginal costs should ultimately end up holding the allowances (> Fig. 8.3). There are several advantages to such ‘‘cap-and-trade’’ programs, the most obvious being that it is an economically efficient way to control pollution without the government having to worry about setting prices. It also has considerable flexibility in addressing the political issues associated with the wealth transfer noted above – allowance allocation schemes can call for 100% auctioning (creating a transfer similar to that of a Pigouvian tax); or distribute the allowances for free to existing polluters (typically called ‘‘grandfathering’’); or utilize any combination in between. This gives the government considerable political leverage in addressing distributional concerns, and politicians can (and have) utilize(d) this to minimize political resistance to the pollution control program. Importantly, such quantity-based systems also limit the total amount of pollution, shifting the burden of dealing with growth on polluters. Under the ‘‘cap,’’ individual emitters participating in the scheme have the flexibility of determining how best and where to deliver emission reductions. A significant cap-and-trade program was introduced in the USA in the early 1990s for acid rain control, but this was not the first Emissions Trading Program (ETP). Earlier, in the 1970s, a baseline-and-credit trading emissions trading system had been established. In baseline-and-credit trading, the regulator defines a specific set of acceptable conditions (the baseline) for an emission source. Depending upon preset rules, improvements to this situation may qualify for ‘‘credits’’ (called Emission Reduction Credits [ERCs] in the US program) which could then be used for various purposes – to either offset new emissions, to reduce the control requirement on other units, or be sold to others who might have

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. Fig. 8.4 Allowances versus credit trading (Adapted from [33])

trouble meeting their own baseline requirements. > Figure 8.4 illustrates the difference between cap-and-trade and baseline-and-credit trading schemes. Later sections will make clear that both of these emissions’ trading approaches play an important role in the international carbon market. The key aim of market-based approaches toward climate change policy is to ensure that those generating GHGs face cost for emissions that reflects the damage they cause (i.e., what economists call ‘‘internalizing the externality’’). In ideal market conditions, both price and quantity-based mechanisms, if designed correctly, can be used to create such a price for carbon, and both approaches have the potential to deliver emission reductions efficiently. This chapter seeks to analyze the role that quantity-based approaches play in mitigating climate change, and the resulting compliance and voluntary carbon markets that have been developed and are in operation around the world. This chapter is organized in such a manner as to provide the reader a historical framework for the development of such

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market approaches – beginning first with traditional engineering approaches to pollution control, and then moving toward implementation of the economists’ ideal, in order to see how carbon markets obtained their current structure. It then profiles the compliance carbon markets and the complementary, but increasingly important, secondary and related markets in operation today.

The Evolution of Emissions Trading The development of markets to address environmental issues represents a strategic shift in the thinking behind environmental management. Pollution control has a long evolutionary history, beginning with traditional engineering approaches and subsequently developing into the economic realm with market-based approaches. Historically, most governments have utilized ‘‘command-and-control’’ (CAC) types of regulations to address pollution problems. As the name suggests, the government would issue some form of ‘‘command’’ – typically a mandate for a pollution source to use some type of technology, or meet some specific pollution level. The government then faced the problem of ensuring that the command was actually followed out – and this required active ‘‘control.’’ ‘‘Control’’ typically includes the monitoring, reporting, and verification (MRV) of emissions, as well as punishment for a failure to meet ‘‘commands.’’ The absolute form of ‘‘command’’ is prohibition, which is used if the potential damage to the environment is severe and difficult to remediate, (e.g., use of polychlorinated biphenyls [PCBs]). More frequently, however, technology-based requirements are employed, typically requiring polluters to meet some emission limit or performance standard for their equipment. Monetary fines, or perhaps imprisonment for egregious cases, are now the norms for ‘‘control.’’ In an 1874 amendment to Britain’s Alkali Act of 1863, polluters faced a requirement to utilize the ‘‘best practicable means’’ (BPM) of pollution control. From an engineer’s perspective, if everyone was utilizing BPM, then whatever happened to the environment simply happened – after all, everyone was doing the best they could with technology. An alternative regulatory approach was adopted in the USA in the 1960s, however. This alternative suggested that the goal of pollution control systems was not simply to use the best technology, but rather, to focus on achieving environmental quality. Technology was just a means of accomplishing such an end, not the goal itself. Environmental goals were thus developed in terms of environmental quality standards, and the technology-oriented requirements became recognized as the means to accomplish such goals. The resulting CAC programs developed in the 1970s therefore adopted the ‘‘traditional’’ (i.e., engineering) approach outlined in the left side of > Fig. 8.5. Economists had a different idea, however, as discussed earlier and as noted on the right side of > Fig. 8.5. From their theoretical perspective, the goal is to develop a program where marginal costs of pollution abatement is equal to the marginal social benefit (i.e., MAC = MSB). All of the information used by the regulators to set environmental quality

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standards in the traditional approach would somehow have to be incorporated into the marginal social benefit curves outlined in the right side of that figure. This obviously would be a very difficult task. > Figure 8.5 suggests that two transitions are occurring today – a shift from an engineering to economic worldview in environmental management, and a secondary shift from price to quantity-based mechanisms. There are important caveats associated with both transitions, however. For the first, the transition is only occurring in the bottom portion of the figure – within the regulatory means, not environmental goal setting. Governments fully recognize the difficulties associated with developing accurate MSB curves, and thus tend to stay with environmental quality standards or depend upon political compromise to set goals. However, they increasingly recognize the strength of using the economic regulatory means (i.e., Pigouvian taxation and emissions trading) as tools to help accomplish such goals. Any portend of a price to quantity shift within economic instruments must similarly be heavily qualified. Economists make choices about the appropriate price or quantity instruments to use based upon the slopes of the MAC and MSB curves, confidence in the data used to estimate them, and similar information. Certainly many governments – and economists – are more comfortable using price-based instruments, and it has frequently been suggested that these are a more appropriate tool for dealing with climate change (see, e.g., [13, 31]). Nonetheless, the political flexibility of quantity-based systems noted above, and the increasing difficulty faced by many governments in imposing taxation schemes, has led to such a longer-term shift over recent decades. Further, many believe

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that it is more appropriate for the government to focus on the physical goal (i.e., the quantity) and have prices respond than the converse. The EU has made cap-and-trade its predominant policy mechanism for dealing with climate change, and prospective US legislation has been following a similar path, as discussed below.

Emissions Trading Programs The US Environmental Protection Agency (EPA) introduced the concept of emission markets in 1976, as a means for new emission sources to locate in areas with unhealthy air quality (i.e., areas that did not meet the National Ambient Air Quality Standards). The new sources were required to use stringent control technology (i.e., Lowest Achievable Emission Rate), but were also required to ‘‘offset’’ the additional pollution they created by a greater than 1:1 ratio. Thus, the new source would help clean up the nonattainment area even though it was adding new pollution. Some economists realized that this created a new asset: Emission reduction ‘‘credits’’ from an existing source were now worth something to a new source hoping to locate within the nonattainment area such as Los Angeles. This emissions trading scheme was expanded in 1979 to include existing sources as well as new ones through the ‘‘bubble’’ policy, which allowed sources to put an imaginary bubble over their facility, and then meet CAC requirements in the most cost-effective manner under the bubble (i.e., based upon their own determination of MAC rather than the government’s embedded within the CAC requirements). It was expanded as well that same year through ‘‘netting,’’ a simplified-permit strategy for replacing old with new equipment; and ‘‘banking,’’ which provided firms the flexibility of storing their emission reductions over time. These four regulatory provisions were collectively brought together in a draft Emissions Trading Program (ETP) in 1982, and finalized in 1986. The US EPA’s ETP did not change the CAC requirements – it merely introduced a new and more flexible means for emission sources to meet them. The time and costs associated with completing a specific ERC transaction have been high, however, and while thousands of ERC trades have occurred, high transaction costs have hobbled this market. The resulting baseline-and-credit ETP is shown in > Fig. 8.6, and remains in effect today.

The US Acid Rain Program (ARP) The ETP laid the groundwork for a pioneering acid rain allowance-trading program that is the predecessor of quantity-based trading programs in operation today. In 1980, rising concern about the extensive environmental impacts of acid rain (i.e., acid deposition) prompted the US Congress to establish the National Acid Precipitation Assessment Program, an interagency organization designed to study its causes, effects, and potential control. With the Clean Air Act amendments in 1990, Congress addressed the control issue and sought to achieve major reductions of the primary components of acid rain:

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. Fig. 8.6 The US EPA’s initial emission trading program

ten million tons of sulfur dioxide (SO2) and two million tons of oxides of nitrogen (NOx) below 1980 levels by the year 2000. In doing so, it established a new paradigm for environmental protection, since it was the first major emissions control program utilizing the economists’ idea of a quantity-based emissions trading mechanism. The centerpiece of the Acid Rain Program (ARP) is a cap-and-trade system for SO2. The NOx reduction program initially took a command-and-control approach, but later a cap-and-trade NOx program was developed in the US Northeast in 1999 (primarily for ozone-control purposes). A two-phased tightening of restrictions on fossil fuel-fired power plants was adopted: Total emissions in 1995 (under Phase I) were 25% below 1990 levels, and more than 35% below 1980 levels [6]. Phase II, which began in 2000 and is currently ongoing, represents a significant 50% cut from 1980 SO2 levels [43]. A recent analysis of the ARP estimates annual benefits of the program in 2010 to be $122 billion, and costs to be only $3 billion (50% of the figure estimated by the EPA in 1990) – a 40-to-1 benefit/cost ratio [42]. Such numbers illustrate why The Economist (July 6, 2002) called it ‘‘probably the greatest green success story of the past decade.’’ A key element of the ARP market design was that it kept the existing ETP (with emission reduction credits) to protect local air quality and public health near the power plants, while superimposing a cap-and-trade scheme (with emission allowances) to deal with total loading of the pollutant. This dual ‘‘baseline-and-credit’’ and ‘‘capand-trade’’ market scheme was a forerunner of the international carbon market, which would similarly use both types of instruments to accomplish desired environmental goals.

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Carbon Markets The foundation for the international carbon market began at the ‘‘Earth Summit,’’ in Rio de Janeiro, Brazil in 1992. The Earth Summit, formally called the UN Conference on Environment and Development, addressed a wide range of environmental and governance issues, including biodiversity, the management of toxic chemicals, and similar issues – but it is perhaps best remembered today for establishing the United Nations Framework Convention on Climate Change (UNFCCC). The UNFCCC committed the signatory governments to a voluntary, nonbinding effort to reduce GHGs with the goal of ‘‘preventing dangerous anthropogenic interference with the earth’s climate system.’’ The UNFCCC came into force in 1994, after 50 countries had ratified it, in accordance with the terms of the treaty. Since the treaty has no end date, there is no set expiry time to the international regime under the treaty. Signatory countries of the UNFCCC agreed to ‘‘common but differentiated responsibilities’’ for addressing emissions, recognizing that the largest share of historical and current emissions was generated from developed countries (i.e., as a result of more than 150 years of industrial activity), and that the share of emissions from developing countries would need to grow to meet their social and developmental needs. This resulted in a division among the signatory countries into two principal groupings: Annex I countries, which are industrialized nations and nations with economies in transition such as Russia and Ukraine, and Non-Annex I countries, which are the remaining (mostly developing) nations. [NB: There is also an Annex II grouping, consisting of OECD members and the European Union, which have a ‘‘special obligation’’ to provide financial resources and facilitate technology transfer to developing countries.] The Kyoto Protocol was adopted in 1997 in Kyoto, Japan, during the third annual meeting of the UNFCCC (called the Conference of Parties [COP]), and, while it opened for signature on March 14, 1998, the Protocol only came into force on February 16, 2005. As of 2010, 189 countries and one regional economic integration organization (the European Community) have ratified the treaty. A major feature of the Kyoto Protocol is that it sets binding GHG emission constraints for the Annex I countries (in Article 3 and Annex B). These are equivalent to an average 5.2% emissions reduction from a 1990 baseline over the first 5-year commitment period (2008–2012). Thus, while the UNFCCC encouraged industrialized nations to reduce GHG emissions, the Kyoto Protocol commits them to doing so. Even though the USA initially introduced the idea of emissions trading and was an ardent proponent of market-based mechanisms to address climate change (based upon its successful experience with the ARP), it never ratified the Kyoto Protocol. As a participant, the USA would have been required to reduce GHG emissions by 7% below 1990 levels. The USA experienced rapid economic growth during the late 1990s, however, and that 7% reduction would have amounted to approximately 30% in real terms for the 2008–2012 commitment period, as growth continued. The USA disagreed with other parties about how the market-based ‘‘flexibility mechanisms’’ should be implemented, as well as other policy issues (e.g., the role of forestry ‘‘sinks’’), and subsequently withdrew from the

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process completely in March 2001. The Australian government similarly decided not to ratify the Protocol in its initial stages, but ultimately did so in December 2007. The USA did pursue domestic initiatives to reduce emissions, however. A number of state/regional cap-and-trade programs to reduce GHGs have been set up or are under development within the country (as described below). In 2005, the USA signed the Asia Pacific Partnership on Clean Development and Climate (APP), with Australia, India, Canada, China, South Korea, and Japan. Together, these countries emit 50% of the world’s GHGs and have agreed to work together with private sector partners to meet goals for energy security, national air pollution reduction, and climate change in ways that promote sustainable economic growth and poverty reduction. Even though the APP describes itself as a partnership, which will ‘‘complement, but not replace the Kyoto Protocol’’ [1], APP critics have tended to see it as an alternative (and thus a threat) to the Kyoto Protocol.

Flexible Mechanisms of the Kyoto Protocol The Kyoto Protocol is a binding agreement to regulate six GHGs: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), perfluorocarbons (PFCs), hexafluorocarbons (HFCs), and sulfur hexafluoride (SF6). The emissions of these GHGs are primarily associated with the generation and use of energy, industrial processes, municipal wastes, and land-use activities such as deforestation. For reporting and tracking purposes, the global warming potential (GWP) in the atmosphere of each gas is expressed in terms of a CO2 equivalent (CO2e). Methane, for example, has a GWP that is 21 times that of CO2. The Protocol sets individual GHG emission reduction targets for Annex I countries under the UNFCCC. These targets are specified in Annex B of the Kyoto Protocol. For the Annex I countries that ratified the Protocol, their assigned GHG emission amounts act as a legally binding cap on emissions between 2008 and 2012, the first commitment period. Annex B countries can meet their emission reduction targets either through national measures (e.g., regulations, taxes or environmental markets), or through the use of three flexible market mechanisms incorporated into the Protocol. Described in Articles 6, 12, and 17 of the Protocol, these flexible mechanisms allow Annex B countries to pursue opportunities to cut emissions or sequester carbon more cheaply in other countries than within their own domestic market. Article 6 of the Protocol defines the mechanism known as Joint Implementation (JI), which allows emission reduction or removal projects in Annex I countries to generate Emission Reduction Units (ERUs), which can then be used to meet the emission reduction or limitation commitments of other Annex B countries. Each ERU is equivalent to 1 t of CO2, and can be counted toward Kyoto target requirements. Article 12 defines the Clean Development Mechanism (CDM), which allows similar carbon credits known as Certified Emission Reductions (CERs) to be generated from projects in developing (i.e., Non-Annex I) countries. The International Emissions Trading (IET) mechanism is outlined in Article 17 of the Protocol, and allows Annex B parties to trade Assigned Amount Units (AAUs) in

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order to meet their commitments. Countries in Annex B that have spare (i.e., permitted but not used) AAUs can thus sell them to countries that exceed their targets. As discussed below, as these flexible mechanisms evolved over time, the CDM was the first to be implemented, since projects under the mechanism could start generating credits relatively quickly (i.e., before the first commitment period began). This was followed by the JI, and thirdly, IET. These latter mechanisms did not fully commence until the start of the first commitment period in 2008. Thus, an Annex B country has several options to reduce emissions in order to comply with its Kyoto Protocol targets: ● Limit emissions through domestic policy, such as implementing direct regulation, Pigouvian taxation, or setting up domestic emissions markets (note: the role of regional markets such as the EU ETS is discussed below). ● Set up eligible projects in Non-Annex I countries under CDM, and use the CER carbon credits generated from these projects. ● Set up eligible projects in Annex I countries under JI, and use the ERU carbon credits from these projects. ● Utilize the IET program to buy/sell AAUs. As an example, Britain, which has a relatively high reduction target of 12.5%, could achieve this target by implementing a portfolio of domestic regulatory policies, such as improving building codes; employing price instruments such as a petrol taxes to reduce emissions from the transportation sector; and using emissions markets (in this case, the EU ETS) to reduce pollution from the power sector. Over and above such domestic efforts, the country could purchase AAUs from Russia or Ukraine, or invest in CDM or JI projects abroad (either through the EU ETS, or separately). The overall market framework for the Kyoto Protocol flexibility mechanisms is shown in > Fig. 8.7. These mechanisms are indeed flexible, and countries are at liberty to employ one or all of these mechanisms, in any combination, depending upon their emissions constraints and economic situation.

Clean Development Mechanism (CDM) Since climate change is a global problem and the physical nature of the pollutant makes the location of emissions reductions irrelevant, CO2 emission reductions can be obtained anywhere – and usually at lower cost in the developing world. Article 12 of the Kyoto Protocol provides for such reductions, and the Clean Development Mechanism outlined in that article has two goals: to reduce GHG emissions and to foster sustainable development. CDM is a project-based mechanism that allows public or private entities to invest in GHG-mitigating activities within developing countries, and to earn abatement credits for those projects. These credits, called CERs and equivalent to 1 t of CO2, can then be applied against their own emissions or sold in the marketplace. Buyers in other Annex I countries, for example, might purchase them to assist in meeting their own GHG reduction goals.

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. Fig. 8.7 The Kyoto Protocol flexibility mechanisms

Prior to the generation of CERs from a CDM project, the developers of the project must go through a formal and rather complex process. They interact with three institutions: the CDM Executive Board (EB), the Designated National Authority (DNA) of the host country, and at least one Designated Operational Entity (DOE), which is an independent private company that serves as an auditor. The CDM EB, which was formed in 2001, is authorized under the Protocol to implement and supervise the CDM. Its ten members are appointed by the COP, and the Board meets no less than three times a year. The DNAs are set up by host countries to review and approve CDM projects, and to provide specific guidance about the operations of CDM (e.g., for sustainable development criteria) within their host country. DOEs are companies which have been certified by the EB to conduct validation and verification of the specific projects undertaken. In order to qualify to receive CERs, projects have to have begun after January 1, 2000, and must submit a Project Design Document (PDD) which includes at least the following information: ● A general description of the project activity. ● The application of an UN-approved baseline methodology for that specific activity. Baseline methodologies have now been approved for many standard renewable energy and energy efficiency applications, but any novel technology or application will first require such an approval. ● The selection of a crediting period. Project developers can select either a fixed 10-year baseline period, or three 7-year baselines with adjustments at the end of the first and second periods (with the exception of afforestation and reforestation sink projects).

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● A monitoring methodology and plan. ● The estimation of GHG emissions and reductions. ● An assessment and demonstration of ‘‘additionality’’ (i.e., that emissions reductions are above and beyond those that would have happened anyway – they are ‘‘additional’’ or ‘‘surplus’’). Additionality is important because developing countries are not required to reduce emissions under the Kyoto Protocol, and Annex I countries utilizing CERs from these countries will take credit for such reductions. This is usually the most difficult criterion for CDM projects to meet and document. ● Documentation that the project meets the DNA’s sustainability criteria for projects within that host country. ● Other relevant data (e.g., contact information for project participants, stakeholder comments, and information on the use of public financing). The CDM project process is outlined in > Fig. 8.8. Note that after the PDD is completed in the design stage, it is validated by the DOE, which will make a recommendation to the EB to register the project. Later, a second DOE will verify that the project has performed as expected, based upon the monitoring plan submitted as part of the PDD – and will recommend that the appropriate number of CERs be issued. Only if all of these criteria are met will the project then be issued CERs, which can be sold in the international carbon market.

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. Fig. 8.8 Carbon credits from the clean development mechanism (CDM) of the Kyoto Protocol (http:// cdm.unfccc.int/CommonImages/ProjectCycleSlide.jpg)

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As of the first quarter 2010, CDM projects in the pipeline are expected to deliver more than 2.7 billion tons of CO2 equivalent in offsets during the first commitment period (2008 to 2012), which makes it the mechanism generating the largest number of emission reductions in the world. There are now more than 4,900 projects included in UNEP Risoe’s CDM Pipeline database [40]. China has accounted for the major share of confirmed transactions in the primary CDM market, with 72% in 2009; all other countries had single digit percentages [45]. With London representing the world’s major center for carbon financing, the UK led transactions on the buyer’s side with 37% of the primary CDM and JI market in 2009. There is an active secondary market associated with CERs, which supports the sale of issued CERs either bilaterally over the counter (OTC), typically through brokers or through exchanges. Since only delivery and counterparty risks are factors in the secondary market when compared with the primary market (where the transaction is directly between the project developer and the buyer), prices of secondary CERs (sCERs) are typically higher. In 2008, there were confirmed transaction volumes of 389 MtCO2e traded (down 30% from 2007) in the primary market, and CER prices averaged at $16.78 for a total value of $6.5 billion. The secondary market, however, continued to grow exponentially, with a total volume of more than one billion sCERs transacted for a value of $26.3 billion. Since the Kyoto Protocol entered into force in 2005, the CDM has developed very rapidly, mobilizing billions of dollars in public and private investment to reduce emissions in developing countries. However, the mechanism has not been without its challenges, and suffers from a number of concerns in its design.

Design Concerns A number of questions about the design of the CDM have been raised, including concerns about the environmental integrity of project transactions, complex governance procedures in the registration of projects, the limited role of technology transfer, an unequal regional distribution of projects, and the CDM’s contribution to sustainable development. A fundamental concern (some consider a flaw) in the market design of the CDM has been the determination of additionality of a project. Defined in paragraph 5c, Article 12 of the UNFCCC, emissions from a CDM project should be ‘‘. . . additional to any that would occur in the absence of such activities.’’ This statement, however, is vague and has been subject to many different interpretations. The idea behind additionality is that the project should owe its existence to the prospective earnings from carbon credits sold in the CDM market, that is, the emission reductions should go beyond what it would be in the absence of the CDM. In general, determining additionality has proven to not only be cumbersome, but has also resulted in increased transaction costs, liability, and risk for investors. Friends of the Earth has estimated, for instance, that 75% of all approved CDM projects were already up and running at the time they were approved by the CDM EB [18]. David Victor, formerly head of Stanford’s Energy and Sustainable Development Program, estimated that between a third and two-thirds of CDM offsets may not represent actual emission cuts [26].

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In mid-2009, the CDM EB ordered an unprecedented review of whether a number of Chinese wind projects satisfied additionality requirements. Now referred to as the ‘‘Chinese wind controversy,’’ ten projects were rejected outright just before COP15 in Copenhagen, sending shockwaves through the CDM investment community. The Chinese government publicly attacked the UN’s oversight of the CDM, and threw doubt on the verification of credits in the world’s largest CDM market [25]. Large hydroelectric power projects in the CDM have also been controversial. Hydro projects constitute a quarter of all CDM projects, and 67% of these are in China. Hydroelectric projects are typically expected to replace power generation that would otherwise have been sourced from fossil fuels. Yet, most of the hydro projects submitted for CDM validation are expected to start generating CERs within 12 months of their validation, when it would normally take several years to build a hydro plant. This points to the likelihood that several of these projects were already underway prior to the commencement of their CDM validation process [39]. The evolution of the CDM market also had its share of challenges in the HFC-23 (trifluoromethane) controversy, which the CDM EB has since attempted to fix. HFC-23 is a highly potent and long-lived greenhouse gas with a global warming potential of 11,700 times that of CO2, which means that every ton of HFC-23 destroyed produces 11,700 CERs for sale in the CDM market. The destruction of HFC-23 (a by-product of HCFC-22 [chlorodifluoromethane] production, which is used as a refrigerant) saw windfall profits created in several projects (especially in China). The NY Times reported that industrialized nations could end up paying $800 million a year to buy CERs, even though the cost of building and operating incinerators would only be approximately $31 million per year [32]. In response to such windfall profits, China imposed a 65% tax on CER revenue generated by HFC-23 projects. Furthermore, the CDM EB has not accepted new projects for HFC-23 destruction in recent years. Moreover, the bulk of CDM projects have been focused on India and China, with only a small percentage (122 out of 4968, or 2.5%) of all projects in the developing world sourced from Africa [40]. With its slow pace of economic development, and poor industrial base, Africa offers fewer investment opportunities compared with China or India. Given the time-consuming project approval process, and delays and conflicting rulings in administration, there are considerable questions about the Mechanism’s future. Ken Newcombe, founding head of the World Bank’s carbon finance unit, questioned whether ‘‘the CDM was capable of delivering emission reductions on the scale necessary in the future when there are large gaps which it fails to address’’ [9]. It can be said without doubt that the CDM market is still evolving, and the challenges outlined above did not get resolved in the COP15 summit in Copenhagen in December 2009.

Joint Implementation (JI) Joint Implementation is a project-based mechanism that assists UNFCCC Annex I countries in meeting their Kyoto commitments by participating in projects in other

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Annex I countries. Entities may partake in JI projects to generate emission credits, known as ERUs, in order to use them for compliance with their emissions targets or to sell in the international carbon market. Similar to the CDM, JI offers parties a flexible and costeffective means of fulfilling part of their Kyoto commitment, while the host party benefits from foreign investment and technology transfer. Unlike CDM, however, projects could only begin generating ERUs in 2008. To be eligible to qualify as a JI activity and to receive ERUs, projects must be undertaken between Annex 1 countries; must provide a reduction that is additional to any that would otherwise occur in the absence of the project; and must be supplemental to domestic actions to reduce greenhouse gas emissions. The lifecycle for projects to be eligible for JI ERUs similarly begins with the preparation of a PDD, following JI guidance established by the JI Supervisory Committee (SC). Then, an Accredited Independent Entity (AIE) determines if the emission reductions were correctly estimated, and if necessary procedures were established to monitor the project performance during its implementation. At this stage, the JI Supervisory Committee will consider the quality of the project and, after 45 days, the project automatically acquires a status of JI project. As with CDM, most countries involved in JI establish their own national Designated Focal Points (DFP) in charge of JI project approval. There are two main tracks by which projects qualify for generating ERUs: Track 1, where a host party meets all eligibility requirements and verifies that emission reductions from the project are additional to a baseline scenario (i.e., the project implementation is largely left up to the participating states); and Track 2, where a host party meets only a limited set of eligibility requirements (verified by an Accredited Independent Entity) and verification of the emission reduction as being additional has to be done by the JI SC. The Netherlands, Denmark, and Austria are currently among the most active buyers in JI projects, mainly through different governmental purchase programs or participation in carbon funds. From the sellers’ side, countries like Bulgaria, Czech Republic, Romania, and Poland moved early in promoting JI projects, while the potential ‘‘big suppliers,’’ Russia and Ukraine, have more recently started to engage in JI initiatives and are rapidly increasing the number of prospective JI projects. As of February 1, 2010, Track 1 has a total of 97 registered projects and Track 2 has 16 projects registered in the JI pipeline [40]. The World Bank reports that the JI market was worth $294 million in 2008, with just 20 MtCO2e confirmed transactions, and equal to just half of the volumes transacted in 2007. Through 2008, the JI market continued to concentrate on Russia, with a 68% market share of transacted volumes and Ukraine, with an 18% market share. However, in early January 2009, the UN suspended Russia from the International Transaction Log (ITL) because it failed to pay the required fees. This made the country unable to transfer emission rights or Emission Reduction Units to a foreign buyer. A prominent carbon market analyst firm, Point Carbon, projects a declining JI market in coming years for several reasons. The global economic slowdown has made investors more risk averse, and the conditions for JI in Russia – especially since the suspension of the nation by the UN from the ITL – have become less attractive. Delivery risk also appears high due to the number of delays most JI projects face.

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International Emissions Trading (IET) The Kyoto Protocol provides for a quantity-based cap-and-trade scheme called International Emissions Trading that is limited to Annex B countries. The national allocations used in the emissions trading are expressed as levels of allowed emissions, or Assigned Amount Units (AAUs). Although these are national allocations and commitments, in practice, individual countries devolve their emissions targets and requirements down to major industrial entities such as power plants and large emitters. Therefore, the ultimate market participants may be individual companies that expect their emissions to exceed their quotas. Russia, Ukraine, and the Central and Eastern European countries have an estimated 8–12 billion tons surplus of AAUs for the 2008–2012 Kyoto commitment period associated with the collapse of the former Soviet Union, which occurred after the Kyoto Protocol’s 1990 base year. This surplus is often pejoratively referred to as ‘‘hot air.’’ Annex I countries could theoretically achieve compliance by purchasing ‘‘hot air,’’ but many buyers are reluctant to do so since that would merely represent payment for economic collapse which occurred nearly 20 years ago, with little ongoing environmental benefits. Green Investment Schemes (GIS) have been introduced to address this ‘‘hot air’’ situation. Under GIS, revenues from the sale of surplus AAUs are invested in environmental improvements (or ‘‘green’’ activities) in the selling nation, even though such activities might not strictly qualify for carbon credits (e.g., training energy auditors). This way, purchased AAUs become linked to GHG mitigation efforts, and many GIS schemes have begun to mirror CDM and JI carbon credit mechanisms, paying detailed attention to additionality, sustainable development criteria, etc. [27]. The World Bank reports that the AAU market in 2008 was valued at approximately $211 million, with about 18 MtCO2e traded [45].

International Cap-and-Trade Programs The Kyoto Protocol enabled Annex I nations to join together to form regional ‘‘bubbles’’ (i.e., which established an overall emission cap, and treated the countries as a single entity for compliance purposes). The states of the European Union formed just such a bubble and created the EU ETS, currently the world’s largest mandatory cap-and-trade scheme, which subsequently became a model for several other national and regional programs around the world.

The European Union Emissions Trading Scheme (EU ETS) Although the EU was initially skeptical about emissions trading, it has become a driving force behind its implementation on a worldwide basis. In January 2005, the EU ETS commenced operation as the largest multicountry, multi-sector GHG trading scheme worldwide. It was thus the first International Emissions Trading scheme, and is many

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times larger than the US Acid Rain Program. There are currently three defined phases in the Scheme: Phase I from 2005 to 2007, also called the trial period; Phase II from 2008 to 2012, coinciding with the first commitment period of the Kyoto Protocol; and Phase III from 2013 to 2020. The EU ETS established a mandatory CO2 cap-and-trade system, which addressed emissions from major sources throughout the EU; it represented about 45% of the CO2e, from more than 11,000 major sources. Sources were allocated a certain number of emission allowances, based on historic performance and other parameters. Specific national targets were established by national governments in what were called National Allocation Plans (NAPs), which specified how many allowances would be awarded to emitters in each regulated industry, and the distribution of such allowances. As is characteristic of a cap-and-trade market, participants who reduced their emissions below their allocation could sell the resulting excess allowances. Those companies who found that reducing their emissions internally was cost-prohibitive could purchase allowances in the open market. Companies were required to provide an independently audited report of their emissions. Those who did not hold sufficient allowances to match their actual emissions at the reconciliation date were fined €40 per ton of CO2 emitted in Phase I, which rose to €100 per ton of CO2 in Phase II. It is important to note that while the EU ETS was designed to meet the goals of the Kyoto Protocol, it is operated by the EU, and is independent of the UN. The EU ETS was enacted before the Kyoto Protocol came into force, and the EU made clear that it would operate the market even if the Kyoto Protocol did not enter into force. Although the Scheme was conceived as a means of ensuring the EU’s compliance with the Protocol during 2008–2012, its first phase fell completely outside the Protocol’s commitment period. Similarly, the EU has announced that it will proceed with Phase III of the ETS, regardless of the actions of other countries in post-2012 climate negotiations.

EU ETS Phase I Phase I of the EU ETS (2005–2007) was established as a ‘‘trial’’ or ‘‘learning’’ phase, before the Kyoto Protocol’s targets came into effect. It was designed to provide companies and governments with experience in developing, operating, and participating in carbon markets. Phase I covered CO2 emissions from more than 11,000 installations in several major emission sectors across the European Union, as well as three non-EU countries (Norway, Iceland, and Lichtenstein). The sectors included energy (combustion installations >20MW, mineral oil refineries, coke ovens); ferrous metals; factories making cement, brick, glass, ceramics; and pulp and paper. Tradable ‘‘European Union Allowances’’ (EUAs) were distributed to these facilities (typically for free), with the sum of distributed allowances equal to the total cap. The amount of emissions allowed by the cap itself was determined through a number of separate decisions made on a country-bycountry basis; each member state proposed a quantity of EUAs, which was reviewed and approved by the EU commission [15].

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The transportation and building sectors were excluded in Phase I. In cases of force majeure, such as exceptionally low winter temperatures, additional emission allowances could be issued by national authorities. Member states also had the flexibility of opting out individual facilities. A notable feature of Phase I of the EU ETS was that there was effectively no restriction on banking or borrowing of allowances within any given multiyear period, but this did not hold between trading periods. While each member state maintained its own registry to record the creation, transfer, and surrender of allowances, a central registry, called the Community Independent Transaction Log (CITL) recorded transfers of EUAs among installations in different member states – in this way, the EU Commission would be able to block transfers from any member state that failed to gain approval of its NAP.

The Linking Directive Another important design feature of the Emissions Trading Scheme is the Linking Directive, which was formally adopted in 2004. Up to a certain limit, it allows entities to comply with emission caps by submitting qualifying credits for emission reductions accomplished outside of the EU through the CDM and JI mechanisms. Credits generated from certain CDM activities such as those from projects associated with nuclear power or CO2 sinks were not allowed. > Figure 8.9 illustrates the role of the Linking Directive. The Linking Directive provided a strong stimulus for the development of CDM projects, and made their use an important means of compliance in the EU ETS. It helped EU Kyoto protocol compliance (i.e., GHG reduction)

Goals

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. Fig. 8.9 The Linking Directive

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to accelerate the carbon marketplace, that is, the EU ETS provided demand in 2005, and the Linking Directive allowed the Kyoto Protocol’s flexible mechanisms to provide supply. Thus, the carbon market was up and running well before the Kyoto Protocol’s first commitment period. As the EU ETS Phase I went into effect on January 1, 2005, a price between €8 and €12 a ton emerged for EUAs in the EU ETS market. Prices then climbed to over €30 a ton for several reasons, including a cold winter spell in early 2005, a dry summer in southern Europe, and high natural gas and oil prices that made coal more attractive. Another reason was that companies with installations that were short allowances and needed to cover their emissions were disproportionately greater in number than those that held long positions [15]. > Figure 8.10 illustrates the price movement of EUAs in Phase I. In April 2006, however, within a span of a week, EUA prices fell sharply from over €30 a ton to €20 for Phase II EUAs and €15 for Phase I EUAs. The precipitating event was the reporting of 2005 emissions by several member states, with emission levels that were significantly less than expected. For the trial period, allowances had been distributed based on an estimate of aggregate emissions, rather than actual emissions. In addition, the restriction on trading between Phases I and II caused prices to decline sharply after September 2006, effectively making trading during the trial period self-contained. OTC markets were the dominant form of trading. However, trading in organized exchanges has gained popularity over time, where it now supports greater than one-third of trades. The European Climate Exchange (ECX) is by far the largest single platform for trading, experiencing tremendous growth – ECX 2009 volumes increased by 82% year-on-year,

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. Fig. 8.10 Evolution of European Union Allowance (EUA) prices 2005–2007 [15]

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equivalent to €62 billion (European Climate Exchange) – and it has now captured 99% of futures trading in EUAs. Ultimately, the ‘‘learning by doing’’ phase did exactly what it was expected to do – it established the necessary infrastructure and created a carbon market for the free trade of emission allowances across the EU. There were several lessons learned from the exercise: The lack of verified emissions data caused difficulties in setting compliance targets; the free distribution of allowances resulted in windfall profits for several power companies, who received allowances for free, yet charged electricity consumers based upon their market price; and the haphazard release of emissions data by individual governments was problematical, since market positions could be affected by such information. The process for setting the cap made it difficult to ensure scarcity in the market, given the uncertainty about the emissions data, as well as the fact that national governments were under considerable pressure from companies not to be too stringent – after all, their competitors in the USA, China, and other major economies were not operating under such constraints. The total EU-wide allocation in Phase I was estimated to be only 1% below projected ‘‘business as usual’’ scenarios. In fact, during 2005, 2,088 million allowances were issued, but actual emissions were only 2,007 million tons resulting in 80 million surplus allowances [2]. These issues were addressed in the design of subsequent phases of the EU ETS.

EU ETS Phases II and III The EU ETS Phase II is currently in operation, lasting 5 years (2008–2012) and coinciding with the Kyoto Protocol’s commitment period. Phase II had a number of changes from Phase I, but most of the significant revisions in the scheme are planned for Phase III. Phase II removed the force majeure provisions, and raised the auctioning limit from 5% to 10%. The penalty for noncompliance increased from €40 to €100. More installations are covered in Phase II, including crackers, carbon black, flaring, furnaces, and integrated steel works. In addition, the aviation sector will be added to the EU ETS in 2012. Importantly, targets specified in the NAPs now reflect actual 2005 reported emissions, as opposed to estimates (i.e., the case in Phase I). Moreover, in order to ensure that a significant portion of the expected emission reductions occurs within each country, the use of CERs and ERUs for meeting compliance requirements is limited within the ETS Phase II as a percentage of the allocation to an installation. Phase III of the EU ETS contains reforms that aim to make it a more efficient, harmonized, and a fairer trading system. Among the major changes in Phase III, NAPs have been abolished in favor of an EU-wide cap that provides a reduction of 11% beyond the Phase II cap [16]. In addition to CO2, nitrous oxide emissions from the production of nitric, adipic, glyoxylic acid, and perfluorocarbons from the aluminum sector will be included in the scheme, and allowances for these sectors will be given free in the same way as the other sectors already covered. Carbon capture and geological storage will also be included. Still another important change is that most of the allowances will be auctioned,

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instead of given away, as in Phases I and II. Eighty-eight percent of the allowances to be auctioned by each member state will be distributed on the basis of the member state’s share of historic emissions under the EU ETS. For purposes of solidarity and growth, 12% of the total quantity will be distributed in a way that takes into account GDP per capita and the achievements under the Kyoto Protocol. The power sector will be subject to full auctioning, but may receive free allowances for district heating and high-efficiency cogeneration activities. The market is also being expanded to include aviation, a sector thus far not covered until 2012. The overall use of CDM and JI credits is capped at 50% of the EU-wide emission reductions over the period 2008–2012, and 50% of the EU-wide reductions below 2005 levels of new sectors and aviation for the period 2013–2020. There are also other proposed provisions on CERs and ERUs in Phase III, including a provision that would require newly registered CDM projects after 2012 to be located in a country included in the UN’s listing of ‘‘least developed countries’’ (unless there was a bilateral agreement between the EU and the other host country). The EU ETS remains the largest carbon market compared to other market segments (such as the CDM and JI), accounting for a full two-thirds of carbon market volume and three-quarters of the value. In the EU ETS market, 6.3 GtCO2e were traded in 2009, with a total value of $118.5 billion [45]. The economic recession in Europe and elsewhere in 2008 and 2009 led to lower demand for housing, cement, automobiles, steel, etc. As demand and commodity prices collapsed, cement and steel companies substantially cut back their production and power consumption. Emissions were therefore lower, as was the need to purchase carbon allowances. Some companies holding substantially more allowances than needed for compliance chose to sell their EUAs on the market to raise cash in a very difficult credit environment. Higher supply and lower demand for allowances brought substantially lower prices for EUAs, and although there has been some rebound in 2010, prices remain well below prerecession ones.

Other Cap-and-Trade Programs Several other cap-and-trade programs are in operation elsewhere in the world. Australia’s New South Wales GHG Abatement Scheme (GGAS) commenced on January 1, 2003 in the province of New South Wales (NSW), Australia. GGAS aims to reduce greenhouse gas emissions associated with the production and use of electricity by establishing annual statewide greenhouse gas reduction targets, and then requiring individual electricity retailers and certain other parties who buy or sell electricity in NSW to meet mandatory benchmarks based on the size of their share of the electricity market. The GGAS program will remain in force until 2012. Another such regional cap-and-trade scheme is the US’ Regional Greenhouse Gas Initiative (RGGI), which is the first mandatory market-based effort in the USA to reduce GHG emissions. Ten Northeastern and Mid-Atlantic states have capped emissions from the power sector, and are expecting reductions of 10% by 2018. Allowances are auctioned and the proceeds are supposed to support low-carbon intensive solutions, such as energy

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efficiency and renewable energies – although individual states have already utilized such proceeds to address state budget shortfalls. The Western Climate Initiative (WCI) is a collaboration of independent jurisdictions in the USA, Canada, and Mexico with a commitment to tackle climate change at the regional level. These jurisdictions participate in the program either as partners (seven US states, four Canadian provinces) or observers (six US states, three Canadian provinces, and six Mexican states). The centerpiece of the WCI is a cap-and-trade program with an aim of reducing GHG emissions by 15% below 2005 levels by 2020. When fully implemented in 2015, this multi-sector program will cover nearly 90% of GHG emissions from electricity, industry, transportation, residential and commercial fuel use in WCI partner states and provinces. However, Arizona and Utah, two founding members of the WCI, announced in early 2010 that they would no longer participate in the WCI cap-andtrade program, and other partner states (i.e., Montana, Washington, and Oregon) have indicated that they might not meet the 2012 start date. An Emissions Trading Scheme in New Zealand has been designed to support efforts to reduce all six GHG emissions by 2015. The program will include all sectors of the economy and can be internationally linked. There will be a ‘‘transition phase’’ from 2010 to 2012 when participants will be able to buy emission units from the government for a price of 25 NZD. The Scheme covers forestry, transport fuels, electricity production, industrial processes, synthetic gases, agriculture, and waste. South Korea, Asia’s fourth largest economy, is hoping to launch a national emissions trading scheme by 2013, and is expected to introduce its carbon trading laws into parliament during the first quarter of 2011. The program is expected to be a threephase cap-and-trade scheme, with the first phase running from 2013 to 2015, with subsequent phases starting from 2016 running for 5 years each. Operators emitting over 25,000 t of CO2 per year, representing approximately 60% of South Korea’s total GHG emissions of just over 600 million tons a year are expected to participate [19]. In addition to these efforts, national, regional, and local carbon market trading schemes have been proposed or are under development in the USA, Australia, Japan, and numerous other countries. Given the difficulties in extending a Kyoto Protocol-type international carbon market evident at the Copenhagen COP, the future might well hold instead a mix of regional, national, and other subnational carbon trading schemes, supplemented by voluntary carbon markets, as well as other structured policy markets designed to accomplish carbon reductions through increased use of renewable energy, energy efficiency, etc. These other market types are discussed in sections below.

Voluntary Carbon Market In addition to the ‘‘compliance’’ markets created by the Kyoto Protocol that were explored in detail in the prior sections, a corollary, voluntary market has been developed that supports carbon trading for companies, individuals, and other entities not subject to mandatory limitations, but still wishing to offset their GHG emissions [3]. As the name

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implies, the voluntary carbon market includes all carbon offset trades that are not required by regulation. Over the past several years, this market has not only provided an opportunity for consumers to alleviate their carbon footprint, but also provided an alternative source of carbon finance. The instrument of trading is called a Voluntary Emission Reduction (VER), although it should be noted that some market participants consider this acronym to mean ‘‘Verified Emission Reduction.’’ While still very much smaller than the Kyoto compliance market ( Table 8.1. Each standard has a slightly different focus in terms of project goals, and addresses each of the above characteristics according to those goals. While the VCS provides a minimum quality-level for VERs and is the most popular, premium carbon verification standards such as the Gold Standard and CCAR attract the highest prices for VERs accredited to them. VERs tend to sell at a discount to CERs or other compliance market project-based carbon credits, and the average carbon credit price on the OTC market in 2009 was $6.5/tCO2e – a figure well below the $12.7/tCO2e for CERs for that same year. There was a very wide price range for VERs, however, from $0.3/ tCO2e to $111.0/tCO2e (BNEF, 2010). Gold Standard VER premium prices averaging $11.1/tCO2e were relatively close to CER pricing. Voluntary carbon credits may be traded bilaterally, OTC, or in organized exchanges. There are several exchanges throughout the world that support voluntary carbon trading, with the most significant (and perhaps most well known) being the Chicago Climate Exchange (CCX). Others include the Tianjin Climate Exchange; the Multi Commodity Exchange of India, Ltd. (MCX); and the China Beijing Environment Exchange. Both the Tianjin Climate Exchange and MCX are affiliated with CCX, and while most of the business for all of these developing country exchanges currently lies within the voluntary

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. Table 8.1 Major certification standards in the voluntary market (Source: Adapted from Making Sense of the Voluntary Carbon Market; A Comparison of Carbon Offset Standards, Stockholm Environmental Institute, 2008) Standard name

Goals

CDM

Part of the Kyoto Protocol and aims to create economic efficiency while also delivering development co-benefits for poorer nations Aims to enhance the quality of carbon offsets and increase their co-benefits by improving and expanding on the CDM process. For large-scale projects, GS requirements are the same as those of the CDM. However, GS also requires the CDM additionality tool for small projects as well The VCS aims to provide a minimum, basic quality threshold for all carbon credits on the voluntary market Very similar approach to CDM for projects types that fall outside the scope of the CDM Sets standards for the listing of credits (including those from offset projects) on their exchange, including the requirement of a CCX approved third-party verifier VOS closely follows CDM requirements and aims to decrease risks for offset buyers in the voluntary market Created to support land management projects that sequester GHG, support sustainable development, and conserve biodiversity Most widely accepted certifier of Renewable Energy Certificates (RECs) Develop and promote credible, accurate, and consistent GHG reporting for organizations to measure and monitor, third-party verify and reduce their GHG emissions consistently across industrial sectors and geographical borders

Gold Standard

Voluntary Carbon Standard (VCS) VER+ CCX

Voluntary Offset Standard (VOS) Climate, Community, and Biodiversity (CCB) Green-e California Climate Action Registry (CCAR)

marketplace (and is therefore discussed within this section), most have plans to play a larger role in future compliance regimes. The CCX claims to be the world’s first legally binding, rules-based GHG emissions trading system. Its holding company Climate Exchange Plc (CLE) has three significant operating businesses: the European Climate Exchange (ECX), which operates an exchange that focuses on compliance certificates for the EU ETS; the Chicago Climate Futures Exchange (CCFE), which is a regulated exchange in the USA with a portfolio of environmental futures contracts; and the CCX. Members voluntarily join the CCX and sign up to its legally binding reductions policy. Since it began operations in 2003, CCX has grown to include some 300 members, including 11% of the Fortune 100 companies in the USA, and 20% of the country’s largest CO2 emitters. The CCX’s unit of trade is the Carbon Financial Instrument (CFI), which represents 100 tCO2e.

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Despite the fact that CCX pioneered the first voluntary cap-and-trade system for GHGs in North America, some criticism has focused on its standards for agricultural offsets and the additionality requirement. In a number of cases, farmers apparently received offset revenues for practicing ‘‘no-till’’ agriculture (which is a means of growing crops on a yearly basis without mechanical agitation of the soil), despite the fact that they had already been utilizing such no-till practices for many years. Other questions have been raised about how CCX calculated emissions reductions, and its relative lack of transparency. CCX responded to this criticism by making its rulebook and many of its methodologies available on its Web site. Climate Exchange Plc was acquired by Intercontinental Exchange Inc. in mid-2010. [7], and announced in October of that year that CCX would conclude its emission reduction program at the end of 2010, but would continue with an offsets registry program. The Tianjin Climate Exchange is a joint venture between the CCX, the municipal government of Tianjin, and PetroChina, and opened on September 2008 in the City of Tianjin, China. Located about 75 miles southeast of Beijing, Tianjin recorded its pilot trades in carbon emissions allowances in February 2010 in a trial program covering heating suppliers serving more than 21.5 million square feet of residential buildings. Citigroup Inc. and Russia’s OAO Gazprom bought energy-intensity credits from three heating utilities that had surpassed efficiency targets. The energy savings were packaged as ‘‘carbon emissions allowances’’ that could be sold to other utilities or to buildings in the city that could not yet meet municipal goals. Also connected with the CCX is the Multi Commodity Exchange of India, Ltd., which entered into a strategic alliance with CCX in September 2005. MCX is a nationwide electronic multi-commodity futures exchange with recognition from the government of India for facilitating online trading, clearing, and settlement operations for futures market across the country. The exchange started operations in November 2003 and is now the top commodity exchange in the country. The China Beijing Environment Exchange (CBEEX) is an environmental equity transaction institution authorized by the Beijing Municipal Government. In 2009, the CBEEX signed a deal with BlueNext to build a trading platform for carbon credits, and at the Copenhagen COP announced the Panda Standard, the first voluntary standard created specifically for the Chinese VER market. The CBEEX also traded the first VER transaction in China in August 2009.

The Over-the-Counter (OTC) VER Market Almost all carbon credits in the voluntary market originate from emissions reduction projects, and thus represent offsets. Since these offsets are not traded in a formal exchange, they are usually termed OTC trades. While VERs are the primary instruments of trade in the voluntary market, OTC buyers may also purchase credits from compliance markets such as the CDM. There are two main types of buyers in the OTC VER market: pure voluntary buyers (i.e., those who simply purchase credits to offset their own emissions,

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and ‘‘retire’’ their credits immediately upon purchase), and ‘‘pre-compliance’’ buyers (i.e., those who hope to obtain credits at a low price that will subsequently be useful in future regulatory regimes). Buyers in the voluntary market have a diverse range of offset project types to choose from. The popularity of project types in the voluntary market has been driven by factors on both the supply and demand sides of the equation. > Figure 8.11 shows the transaction volume of the OTC market in 2008, broken down by project type. On the supply side, renewable energy projects had the biggest market share, with hydropower, landfill gas, and wind capturing 32%, 16%, and 15% of the transaction volume in 2008, respectively. This is because these renewable energy projects are candidates for CDM, often stuck in the bottleneck created by the complicated process of CDM project registration, and would also explain why Asia accounted for 45% of the credits in the OTC market. With 28% of the OTC transactions, the USA was the single largest country supplying offset credits. On the demand side, buying was shaped by entities building portfolios of credits in anticipation of a US regulatory cap-and-trade system, and a general preference by pure voluntary and pre-compliance buyers for noncontroversial credits verified to third-party standards [14]. Interestingly, however, more than half of sold volumes (53%) in the voluntary market went to European buyers, despite the large compliance market in Europe, indicating that the presence of a compliance market does not adversely affect trading in the voluntary market.

Not Specified 2%

RE: Hydro

13%

Landfill Other Types 2%

3% 32%

3% Fugitive Emissions 2% Avoided Deforest 1%

4%

Aff/Ref Conservation Geological Seq

5%

Coal Mine 1% Aff/Ref Plantation 1% Fuel Switching 1% Forest Management 1% Ind. Gas 1% Ag Soil 1%

RE: Wind

Energy efficiency 7%

RE: Biomass Ag Methane 15%

16% Other

Source: Ecosystem Marketplace, BNEF, 2009

. Fig. 8.11 Transaction volume by project type (2008) (Ecosystem Marketplace, BNEF, 2009)

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Carbon Financial Derivatives In anticipation of a price on carbon emissions and the associated market growth created by a cap-and-trade scheme, a number of financial instruments and derivatives based on carbon as a commodity have been developed. These have led to increased carbon trading activity in financial markets. While government officials are responsible for designing effective cap-and-trade systems, and polluters participate in the resulting market to comply with emissions constraints, carbon derivatives trading brings commodities traders, speculators, hedge funds, financial firms, and exchanges into the fray. Derivatives are financial instruments whose cash flow is derived from an underlying instrument. There are several types of derivatives, including future and forward contracts, which are fundamental derivatives that represent an agreement to sell a certain commodity in the future at a fixed price; options, which are slightly more complicated derivatives where the buyer is given the right (but not the obligation) of purchasing the commodity depending on the price of the commodity in the future at a price (agreed upon at the present time); and swaps, in which two counterparties exchange certain benefits of one party’s financial instrument for those of the other party’s instrument. Derivatives can be used for a variety of purposes. They can be used to hedge a transaction, (i.e., reduce risk exposure), and derivatives markets are thus risk transfer mechanisms. They facilitate the transfer of risk from those exposed to it but who do not wish to bear the risk (i.e., hedgers) to others not naturally exposed to it, but willing to bear the risk (i.e., speculators). Derivatives also contribute to price discovery; since individuals with information can buy or sell derivatives, their trades affect prices and these prices reflect their information. Derivatives may be traded bilaterally, or in the OTC market through brokers, or in organized exchanges such as the New York Mercantile Exchange (Nymex). Compliance carbon markets can also support the trading of such derivative products, including futures, options, and swaps. Currently, most carbon is sold in futures or forward contracts. These contracts contain promises to deliver carbon allowances or credits in a certain quantity, at a certain price, by a specified date. In the case of the EU ETS, the forward and futures markets have developed faster than the spot market. Approximately 95% of the total volume in the European carbon market is seen in derivatives trades, with the remaining in spot trades. According to the ECX, this may partly be explained by the initial delay of national registries and final allocations in many of the EU member states, which prevented the execution of instant delivery for spot contracts. Another reason may be that in such a new and volatile market, derivative instruments are crucial tools to optimize the value of an emissions portfolio. There is also a futures market for CERs. CER futures prices traded between €10 and €15 a ton toward the end of 2009. The market for futures, options, and spot transactions for sCERs was valued in excess of $26 billion (€18 billion) in 2008 in various exchanges, representing the largest growth rate of all the segments in carbon markets with more than a 350% increase in traded volumes over 2007 [45]. Carbon derivatives are also traded in the voluntary marketplace, in exchanges such as the Chicago Climate Futures Exchange.

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Carbon derivatives trading was severely affected by several factors in 2009. The economic recession slowed down manufacturing and other industries, causing reduced economic output, and hence lower emissions and a surplus of allowances. A large sell-off of EUAs started in September 2008, as companies realized that the allowances they had received at no charge could help provide liquidity, particularly in the midst of a financial credit crunch. The EUA sell-off, mostly on the spot market, was followed by a discernible increase in trading of EUA options (more calls than puts, on average), showing the intent of some installations to hedge any anticipated 2008–2012 compliance exposure [45]. Failure by governments to achieve a solid agreement on climate change negotiations in Copenhagen in December 2009 added to the downward trend of carbon markets, with carbon prices falling nearly 10% (the biggest decline in 2009) immediately after the summit. The uncertainty about the future of emissions trading after the Kyoto Protocol’s first commitment period expires in 2012, and the continued absence of a national capand-trade program in countries such as the USA and Australia, depressed prices even further. Reuters reported that the global carbon market would have reached $2 trillion by 2020 if nations had agreed to a new climate pact curbing greenhouse gas emissions and if the USA introduced its own federal cap-and-trade scheme [37]. However, because neither case seemed probable in the near term, banks and investors started pulling out of the carbon market and emptying their carbon trading desks in early 2010 [22]. To make matters worse, the EU ETS was hit by two significant controversies in 2009 and 2010. In December 2009, Europol announced that the EU ETS had been the victim of fraudulent traders over a period of 18 months, resulting in losses of approximately €5 billion for several nations [17]. Traders would collect Value Added Tax (VAT) on carbon market transactions, but then not submit the collected revenue to national governments. They would then disappear without a trace, leading to the phrase ‘‘missing trader fraud’’ to describe the crime. In early 2010, there were also market disruptions because of the resale of 2 million surrendered CERs by the Hungarian Government. The Hungarian government first covered the CERs (which had been surrendered by Hungarian companies to comply with the emissions cap under the EU ETS) with AAUs, because the CER price exceeded that of an AAU. They then signed a deal to sell those same CERs to a trading firm, and some of these ‘‘recycled CERs’’ eventually came back into the European market. A number of exchanges were thus forced to shut down, until the integrity of their CERs could be fully established. This loophole is being closed through the establishment of technical barriers that will prevent the entrance of recycled CERs into the EU ETS in the future. The recent financial crisis caused by subprime mortgages and financial derivatives such as credit default swaps based on questionable risk profiles raised other questions about carbon derivatives trading. For example, the potential for ‘‘subprime carbon’’ credits, that is, relatively high-risk contracts to deliver carbon that might not mature to fruition [11], was noted by some analysts. Carbon offset aggregators bundle small offset projects for buyers, and increased demand might give rise to exotic derivatives and structured products, similar to the situation in mortgage-backed securities. In November

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2008, Credit Suisse announced just such a securitized carbon deal in which credits from 25 offset projects were bundled. These were then securitized into three tranches of different risk levels and sold to investors. Of concern here is that the fact that 25 projects were at various stages of UN approval, spread across three different countries and five project developers [11]. Such off-balance sheet products, albeit profitable in the short term, are highly risky and require close regulatory oversight. Needless to say, carbon markets face several challenges en route to becoming mature and effective systems that will ultimately satisfy the environmental objectives they are designed to accomplish.

Renewable Energy and Energy Efficiency Markets While pollution presents policy makers with a negative externality, some energy technologies might be thought of as generating positive externalities because they are easily replenished and nonpolluting in nature, are decentralized, and can increase system resiliency, etc. Consequently, in a mirror image of emissions trading, ‘‘positive externality’’ instruments providing support for renewable energy systems and energy efficiency are growing in popularity.

Renewable Energy Certificates (RECs) The market-based instrument employed in renewable energy markets is the Renewable Energy Certificate (REC), also called a ‘‘green tag.’’ It typically represents 1 MWh of electricity generated from a renewable energy source. A REC is an environmental commodity, and may be sold separately from the underlying electricity generated. Buyers can select RECs based on the generation source (e.g., wind, solar, geothermal), as well as the location of the renewable generator. RECs may be used in both compliance and voluntary markets. In the USA, compliance markets have been established by state Renewable Portfolio Standards (RPS), which require utilities to meet a certain quota of their electricity from renewable sources by a certain date. This quota is often increased over time, the converse of an emissions cap being lowered to reduce GHG emissions. An RPS provides states with a mechanism to increase renewable energy generation using a cost-effective, market-based approach that is administratively and economically efficient. The goal of an RPS is to stimulate market and technology development so that, ultimately, renewable energy will be economically competitive with conventional forms of electric power. Currently, 29 US states plus the District of Columbia, accounting for more than half of the electricity sales in the country, have RPS policies in place (five more have nonbinding goals). California, for instance, requires 33% of its electricity to be generated from eligible renewable sources by the year 2020. Maine has a goal of 40% by 2017 and New York 24% by 2013 [41]. It is important to note that not all states permit REC trading for compliance

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with their RPS. An important feature of the REC compliance market in the USA is that the goals differ from state to state; therefore, prices of RECs also differ. Compliance buyers are generally indifferent to the type of resource that created the REC, but are limited to the geographical area where the REC can be produced. The US Department of Energy’s National Renewable Energy Laboratory (NREL) expects demand in the RPS market for renewable energies to grow from 22,296 GWh in 2008 to 156,527 GWh in 2015 [4]. European Union nations have similar schemes to comply with an EU target of 20% energy from renewable sources by 2020. In the UK, a scheme similar to the RPS has been set up where Renewable Obligation Certificates (ROCs), each representing one MWh, are tradable green certificates issued to an accredited generator for eligible renewable electricity generated and supplied to customers within the country. Late in 2010 the government proposed switching over to a price-based feed-in tariff system, however, which would mark a major shift in Britain’s pro-market regulatory reform [5]. Sweden’s ‘‘Electricity Certificate System’’ aims to increase the production of renewable energy with 17 TWh of new ‘‘green’’ power by 2016. The share of electricity certificates (quota) that the renewable supplier is to submit varies each year. As a result, an increased demand for renewable electricity and RECs are created. There is also an active voluntary REC market, spurred by companies, government agencies, and private consumers who have opted to support ‘‘green power’’ either by buying renewable energy directly, or through a variety of retail programs. In many cases, buyers purchase the ‘‘green attributes’’ of the REC associated with energy generation. Several factors motivate demand in the voluntary renewable energy market, including corporations seeking to differentiate themselves from competitors by environmental means, as well as environmentally minded consumers of electricity. Although much smaller than RPS compliance markets, voluntary REC markets are growing rapidly in the USA and in Europe. The voluntary purchase of RECs accounted for 46% of US consumer green power sales in 2005, and REC markets are growing faster than other segments of green power markets. The advantage of RECs in voluntary markets is that they can be sold unbundled from electricity, and so their market is national, while green power markets tend to be tied to local providers [20]. Data from the NREL and the Department of Energy’s Green Power Network indicate that the number of utilities with green power pricing programs grew from 45 in 2003 to 184 in 2009 [12]. Currently, more than 750 utilities and marketers offer green power products to electricity consumers in most states of the USA. If the voluntary market continues to grow at a rate of 35% annually, it is expected to reach about 40 million MWh by 2010 and represent about one-quarter of the total demand from voluntary and compliance markets [4]. Prices of certificates from eligible renewable facilities under an RPS scheme (compliance RECs, or C-RECS) differ from RECS generated in the voluntary market (V-RECs) because the drivers of demand differ [21]. Prices of RECs in the voluntary market may also vary based on resource type. For instance in 2007, solar RECs commanded between $10 and $20; biomass/low-impact hydro between $1 and $3; wind varied anywhere between $0.75 and $15; and geothermal energy-based RECs were priced between $1 and $10 [28].

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Voluntary market purchases rely on certification programs to verify that the RECs were indeed generated by the renewable resource that is claimed, and that a REC is not sold to more than one buyer. The Green-e program is a nationally recognized standard that helps consumers identify environmentally qualified RECs. The dynamics of linking renewable energy markets with emissions trading schemes brings up interesting questions, and controversies. Because RES emit little-to-no pollutants, they are economically advantaged by any policy that puts a cost on emitting pollutants within the power sector. The issue of converting RECs to carbon offsets has produced heated debates in the voluntary carbon markets, especially in the USA [14]. While the REC market essentially operates independently of the carbon market, RECs are sometimes viewed as tons of carbon dioxide avoided, and are sold into the voluntary carbon market as a carbon offset. The controversy in this practice revolves around the accuracy of carbon calculations, the additionality and ownership terms operating in different markets, and the potential for double counting in two markets with different (but often complementary) policy goals. Voluntary green power and GHG offset markets both lack standardized commodities and regulation, resulting in a great deal of confusion for consumers wishing to offset their emissions associated with energy consumption. Because RECs are typically less expensive (mostly due to differences in additionality requirements) than offset credits, they are generally favored for purchase. The renewable energy market nevertheless grew robustly in 2008, with the USA overtaking Germany as the largest wind-power provider with 25 GW. Investment in renewable energies grew to $120 billion worldwide; double that of the $63 billion investment in 2006 [36]. This increased investment and the improvement in technology performance has resulted in increasing scales of production and use of renewable energies, which in turn, has resulted in lower renewable energy costs.

Energy Efficiency Certificates (EECs) Energy Efficiency Certificates (white tags, or white certificates, as they are sometimes called) are similar to RECs, except that they represent a unit of energy not used. White tags are usually created through energy conservation projects such as equipment upgrades, retrofits, combined heat and power (CHP), or cogeneration and demand-side management. A market for energy efficiency is created by setting an energy-saving obligation on entities in the energy supply chain, with preset rules for trading, monitoring, and verification. EECs are awarded to entities that create more energy savings than the target (typically in terms of electricity or oil equivalent energy units), and these EECs may then be sold or traded in the marketplace to those entities that are unable to meet their obligations. Energy savings are usually cost-effective and efficient ways to reduce GHG emissions, in addition to providing energy security and independence. The process of measuring the energy efficiency savings requires establishing a baseline for energy use and/or demand

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before and after the implementation of an efficiency project. The approach to doing this depends on the specific market design rules, and can include ‘‘deemed savings’’ figures (i.e., standard figures for projects where the expected savings are well understood), engineering calculations, and direct measurement. Many compliance markets require third-party verification using a MRV protocol. The protocol may vary depending on policy decisions about program implementation cost, ease of compliance, and other factors. Currently, EEC markets exist in Italy, the UK, France, and several other nations in Europe. Twenty-one US states have energy efficiency targets either through Energy Efficiency Resource Standards (EERS) or Renewable Energy Standards (RES), and EEC markets are in the process of being implemented at the national level in India. White tags are a type of offset credit instrument because they require the application of projectbased accounting rules, with baseline, additionality, leakage, and ownership constraints. White tags often may be used as part of an RPS scheme (where entities could use energy efficiency investments as a compliance strategy), or may be implemented under a separate portfolio standard. India, the fourth largest polluter in the world, is expected to start a market to trade energy-savings certificates in mid-2010, worth an estimated $16 billion by 2015. The exchange-traded system may help India meet its target of cutting carbon intensity, or the amount of carbon dioxide released per unit of gross domestic product (GDP), by as much as 25% from 2005 levels by 2020 [8]. The proposed ‘‘Perform, Achieve and Trade’’ (or PAT) scheme will cover 714 installations in nine energy-intensive industrial sectors. Under the scheme, the Indian Bureau of Energy Efficiency (BEE) will issue energy-savings certificates (ESCerts) to designated consumers surpassing energy efficiency targets set for them. The targets will be made increasingly stringent over time. The European Action Plan for Energy Efficiency, which aims for a 20% energy saving by 2020 across the European Union, has spurred a number of European countries to introduce market-based mechanisms. In the UK, the Carbon Emissions Reduction Target (CERT) is an ambitious program that is the third 3-year phase of a domestic energy supplier obligation program. This program requires domestic energy suppliers whose customer bases are in excess of 50,000 customers to make savings in the amounts of carbon dioxide emitted by householders. The trading of EE Certificates (called obligations in the UK) also had a strong social focus called the ‘‘fuel poverty strategy,’’ which mandated that at least 50% of energy savings occur in the so-called priority group, which consists of households that receive certain income-related benefits or tax credits [30]. The CERT program, which runs from 2008 to 2011, seeks to double the EEC program commitment. Italy implemented a similar Tradable White Certificate (TWC) energy end-use saving scheme in January 2005, which aimed for a target of 230 PJ in the 5-year period between 2005 and 2009. Electricity savings of 77% and natural gas savings of 19% were achieved, with a total of 3.7 million tons of oil equivalent (toe) saved against a target of 3.3 million tons. Key questions that remain to be answered include how such trading would develop in an EU-wide EEC trading scheme (currently being discussed);

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how the EEC and REC markets would ultimately come together with the EU ETS cap-andtrade emissions program; and how the fungibility and harmonization of instruments in these various markets would work.

Future Directions The year 2008 was pivotal from a climate change perspective, marking the beginning of the Kyoto Protocol’s first commitment period, as well as the start of the EU ETS Phase II (i.e., the non-trial period). President Obama’s election in November 2008 indicated that much-awaited climate change regulation in the USA might actually become reality. The upheaval in financial markets in the latter part of the year also presaged a 2009 that included the global economic recession. This not only depressed carbon prices, but also resulted in fewer emissions due to reduced industrial and production activity, and lower fuel and electricity consumption. December 2009 saw 45,000 persons, including 120 heads of States and Governments, descend on Copenhagen, Denmark for the 15th session of the Conference of the Parties (COP15). Much was expected from COP15, including a comprehensive global treaty to supersede the Kyoto Protocol, whose first commitment period expires in 2012. Things did not play out quite as expected, however. The Copenhagen Accord, drawn up in the meeting’s final hours by the USA, India, China, Brazil, and South Africa, was viewed by many as a repudiation of Europe’s strong, rules-based, global carbon market approach. The Accord ‘‘recognizes’’ the scientific case for keeping temperature rise to no more than 2 C but does not contain specific commitments to emissions reductions to achieve that goal [24]. Instead, countries commit to voluntary ‘‘Nationally Appropriate Mitigation Activities’’ (NAMAs), whose MRV requirements were the subject of considerable (and ongoing) dispute. The Copenhagen Accord does call for spending as much as $100 billion a year to help emerging countries adapt to climate change and develop low-carbon energy systems; to bring energy technology more quickly to the developing world; and to take steps to protect tropical forests from destruction. The USA pledged to reduce greenhouse gas emissions by 17% by 2020 (from a 2005 base), contingent on Congress’s enacting climate change and energy legislation. US officials called the deal a ‘‘meaningful agreement,’’ but even Obama admitted that the ‘‘progress is not enough’’ [23]. India and China formally agreed to the Accord in March 2010, bringing the total number of countries signing the Accord to 107. China agreed to reduce its ‘‘carbon intensity’’ (emissions of carbon dioxide per unit of economic growth) by 40–45% by 2020, compared with 2005 levels. India set a domestic emissions intensity reduction target of 20–25% by 2020, compared with 2005 levels, excluding its agricultural sector. Broadly speaking, the goal of any climate change negotiation is to set policies that will prevent runaway climate change. The motto leading up to COP15 was ‘‘failure is not an option.’’ In the eyes of many, COP15 was a failure for having concluded with no binding

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commitments from countries to reduce emissions. Nevertheless, the Copenhagen Accord did represent a breakthrough, because it is the very first time that major economies (including developing countries) of the world have made commitments (albeit nonbinding) to curb global warming pollution. Since Copenhagen, there has been a lot of uncertainty over how a legally binding treaty to reduce GHG emissions might be reached. Such a deal did not occur at the follow-up COP at Cancun, Mexico in 2010, and the prospects for the next COP’s session in South Africa in 2011 seem no more encouraging. The mood for a US national climate change agreement is no less uncertain. With the financial crisis having wreaked havoc with US banking and financial regulation, and fear of carbon markets evolving into the next ‘‘subprime’’ markets, ‘‘cap-and-trade’’ has become a somewhat disreputable phrase. The weak economy, lingering unemployment, and the financial crisis, linked with real and perceived abuses in the financial markets, caused great suspicion in peoples’ minds about markets in general, and trading in particular. The hostility toward carbon cap-and-trade markets is also exacerbated by a mistrust of the climate change agenda as a whole. Leaked e-mails from climate scientists in late 2009 raised questions in the public mind about scientific objectivity, and a Pew Research Center Poll on Public Priorities for 2010 marked global warming at the bottom of the list. Just 28% of Americans considered it a top priority, down 10% from 2007 [34]. This lack of public enthusiasm for environmental action would explain why there has been so little political support for meaningful climate policy in Washington, and this has been strengthened by the election of many Republican climate change ‘‘doubters’’ in the mid-term elections of 2010. Further, since cap-and-trade systems are the most developed, they tend to act as a ‘‘lightning rod’’ for those who want to see absolutely no regulation at all. Regardless, the nation’s EPA has moved forward on GHG regulations for stricter fuel standards in the transportation sector, and is finalizing rules on further controlling emissions from large stationary sources such as power plants. Climate change is a global problem, however, and the possibility of linking up a diverse, robust mixture of ‘‘bottom-up’’ trading systems has appeal, even if the ‘‘topdown’’ post-Kyoto system sought in Copenhagen cannot be developed in coming years. From an economic perspective, cost savings will be greatest in a situation where participants face very different marginal abatement costs. Linking emissions trading systems will tend to equalize abatement costs faced by companies around the world, thus significantly reducing costs as well as competitiveness concerns. There are numerous difficulties associated with linking up emissions trading programs across the world, of course, including MRV concerns, enforcement, and the potential for fraud already seen in developed economy carbon markets. In emissions trading, the integrity of these factors is magnified because the commodity being traded owes its existence to governmental mandates. Interestingly, two economists who very early propounded the concepts of emissions trading, John Dales and Thomas Crocker (who, at the University of Wyoming, was among the first to discuss markets for air pollution), both expressed skepticism that cap-andtrade is the most effective way to go about reducing carbon. Crocker believes that capand-trade is better suited for discrete, local pollution problems, not for a global problem

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like CO2. The latter has a myriad of sources, it is difficult to enforce an international permit system, and the economic damage from global warming is fraught with uncertainty and nearly impossible to quantify [44]. On the other hand, anyone who has seen how income tax schemes have operated within the USA and Europe will recognize that alternative economic systems are no less subject to abuse and special interests – and the idea of implementing a comprehensive carbon tax across all countries of the world is not likely to be a politically viable strategy either. The efficiency and distributive aspects of quantity-based schemes have some very real appeal – and they have already been successfully implemented to tackle environmental problems. The churning, volatility, self-interest of participants, and seeming chaos of dynamic markets can be uncomfortable, and can pose considerable regulatory challenges – particularly in externality markets specifically constructed by governments. But such markets are ultimately crucial in harnessing entrepreneurial skills for an energy technology revolution, and for delivering the scale of behavioral, technological, and social change sought in Copenhagen. Climate change presents a unique challenge on a global scale to humanity in general, and to economics in particular: The problem is global; it deals with long time horizons, has major risk and uncertainty at its core and requires unprecedented, immediate, collective action. Economics can provide a strong foundation for developing policies to guide action and reducing costs by providing flexibility on how, where, and when emissions are reduced. But pricing the pollution externality and developing robust carbon markets represent only part of the economic task involved in mitigating climate change. Policy frameworks that promote the development and deployment of new, cleaner technologies (i.e., what economists refer to as ‘‘induced technological change’’) and changing behavior in energy consumption (perhaps utilizing new ‘‘behavioral economics’’ and even ‘‘neuro-economic’’ techniques) will be needed as well. One thing is for certain, the costs of reducing emissions enough to limit global warming to 2 C may be high but doing so will provide certain obvious benefits that will clearly outweigh the costs. Indeed, the cost of not acting is likely to be very high.

References 1. Asia-Pacific Partnership on Clean Development and Climate (2010) About the Asia-Pacific partnership on clean development and climate. http://www.asiapacificpartnership.org/english/ about.aspx. Acccessed 21 Mar 2010 2. Baker, McKenzie (2008) Overseas emissions trading experience. http://carbonexpo.com.au/ uploads/file/08/presentation/WED/Katherine% 20 Lake%20wed%20wshop%205%20and%206. pdf. Accessed July 2010 3. Bayon R, Hawn A, Hamilton K (2007) Voluntary Carbon Markets. Earthscan, London, UK

4. Bird L, Hurlbut D, Donohoo P, Cory K, Kreycik C (2009) An examination of the regional supply and demand balance for renewable electricity in the United States through 2015. NREL, U.S. Department of Energy 5. Bird P (2010) Will Britain Abandon Its Quota System in Favor of Feed-in Tariffs? Renewable Energy World, December 6. Burtaw D, Evans D, Krupnick A, Palmer K, Toth R (2005) Economics of pollution trading for SO2 and NOx. RFF Discussion paper 05–05, Resources for the Future, Washington, DC

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7. Business Week (2010, April 30) Sandor exits CO2 trade, sells climate exchange to ICE. http://www.businessweek.com/news/ 2010-04-30/ sandor-exits-co2-trade-sells-climate-exchange-toice-update3-.html. Accessed 7 May 2010 8. Business Week (2010, January 14) India plans $16 billion energy-saving credit market. http://www. businessweek.com/globalbiz/content/jan2010/ gb20100114_100416.htm. Accessed 12 April 2010 9. Carbon Finance (2008, May 7) Carbon finance – news and analysis of market solutions to climate change. Time to rethink CDM additionality – Newcombe. http://www.carbon-financeonline. com/index.cfm?section=lead&action=view&id= 11223. Accessed 2 April 2010 10. CDM Rulebook (2008) Clean development mechanism rules, practice and procedures. http:// cdmrulebook.org/715. Accessed 12 April 2010 11. Chan M (2009) Subprime carbon? Rethinking the world’s largest new derivatives market. http://www.foe.org/pdf/SubprimeCarbonReport. pdf. Accessed July 2010, Friends of the Earth, Washington DC 12. Cook O, Karelas A (2009) Number of utilities with green power pricing programs grew from 45 in 2003 to 184 in 2009. Center for Resource Solutions, San Francisco, CA 13. Cooper R (2008) The case for charges on greenhouse gas emissions. http://belfercenter.ksg.harvard.edu/files/CooperWeb4.pdf. Accessed July 2010. Harvard University, Cambridge MA 14. Ecosystem Marketplace (2009) Fortifying the foundation: state of the voluntary carbon markets 2009. http://www.ecosystemmarketplace.com/documents/cms_documents/StateOfTheVoluntaryCarbonMarkets_2009.pdf. Accessed July 2010 15. Ellerman D, Joskow P (2008) The European Union’s Emissions Trading System in Perspective. Massachusetts Institute of Technology; Pew Center for Global Climate Change, Washington DC 16. European Union (2008, January 23) Questions and answers on the commission’s proposal to revise the EU emissions trading system. http://europa.eu/rapid/pressReleasesAction.do? reference=MEMO/08/35. Accessed 20 April 2010 17. Europol (2009, December 09) Carbon credit fraud causes more than 5 billion euros damage for European taxpayer. http://www.europol.europa. eu/index.asp?page=news&news=pr091209.htm. Accessed 30 Mar 2010

18. Friends of the Earth (2009) Trading in Fake carbon credits: problems with the clean development mechanism (CDM). http://www.foe.org/trading-fake-carbon-credits-problems-clean-development-mechanism-cdm. Accessed Oct 2010 19. FuturesPros.com (2010). http://www.futurespros. com/news/futures-news/factbox-south-korea%27splanned-emissions-trading-scheme-1000005225. Accessed 7 Feb 2011 20. Gillenwater M (2008) Redefining RECs – Part 1: untangling attributes and offsets. Energy Policy 36(6):2109–2119 21. Gillenwater M (2008) Redefining RECs - Part 2: untangling certificates and emissions markets. Energy Policy 36(6):2120–2129 22. Guardian (2010, January 24) Copenhagen dampens banks’ green commitments. http:// www.guardian.co.uk/environment/2010/jan/24/ carbon-emissions-green-copenhagen-banks. Accessed 30 Mar 2010 23. Guardian (2009, December 19) Low targets, goals dropped: Copenhagen ends in failure. http:// www.guardian.co.uk/environment/2009/dec/18/ copenhagen-deal. Accessed 17 Mar 2010 24. Reuters (2010, February 23) U.N. says emissions vows not enough to avoid rise of 2 degrees C. http://www.reuters.com/article/idUSTRE61 M23G20100223. Accessed 17 April 2010 25. He G, Morse R (2010) Making Carbon Offsets Work in the Developing World: Lessons from the Chinese Wind Controversy. Stanford University, Freeman Spogli Institute for International Studies 26. International Rivers (2008) Rip-offsets: the failure of the Kyoto protocol’s clean development mechanism. http://www.internationalrivers.org/ node/3498. Accessed Oct 2010 27. Joanneum Research (2010) Green investment schemes: first experiences and lessons learned. http://www.joanneum.at/climate/Publications/ Solutions/JoanneumResearch_GISWorkingPaper_ April2010.pdf. Accessed Oct 2010 28. Kolchins A (2007) Overview of REC markets and pricing. Evolution Markets Inc. http://apps3.eere. energy.gov/greenpower/resources/pdfs/0907_rec_ kolchins.pdf. Accessed Oct 2010 29. McCombs School of Business (2007, February) University of Texas at Austin. Wal-Mart determined to lead in corporate social responsibility. http://www.mccombs.utexas.edu/news/pressrele ases/Blackwell07.asp. Accessed 2 April 2010

Emissions Trading 30. Mundaca L (2007) Transaction costs of Tradable White Certificate schemes: The Energy Efficiency Commitment as case study. Energy Policy 35(8): 4340–4354 31. Nordhaus W (2009) Economic issues in a designing a global agreement on global warming. http:// nordhaus.econ.yale.edu/documents/Copenhagen_ 052909.pdf. Accessed July 2010 32. NY Times (2006, December 21) Outsize profits, and questions, in effort to cut warming gases. http://www.nytimes.com/2006/12/21/business/ 21pollute.html?pagewanted=2&_r=1. Accessed 20 April 2010 33. OECD (1997) Greenhouse gas emissions trading annex I expert group on the UNFCCC, Working Paper No. 9. OECD/GD(97)76 34. Pew Research Center for the People & the Press (2010, March) Survey reports. Public’s priorities for 2010: economy, jobs, terrorism. http://people-press.org/report/584/policy-priorities2010. Accessed April 2010 35. Raufer R (2008) Carbon markets and emissions trading in Asia. In: Loh C, Stevenson A, Tay S (eds) Climate change negotiations can asia change the game? Civic Exchange, Hong Kong 36. REN21 (2009) Renewables global status report. Renewable energy policy network for the 21st century. http://www.ren21.net/Portals/97/documents/GSR/RE_GSR_2009_Update.pdf 37. Reuters (2009) Carbon trade on brink of boom – or backwater. http://www.reuters.com/article/ idUSTRE5AH2U420091118?sp=true. Accessed 30 Mar 2010

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38. Stern N (2006) The economics of climate change: the stern review. HM Treasury, Office of Climate Change, UK 39. UN NGLS (2009) UN non-governmental liaison service. Climate justice for a changing planet: beyond carbon trading. http://www.un-ngls.org/ spip.php?page=article_s&id_article=1736. Accessed 2 Apr 2010 40. UNEP Risoe Center (2010, February 1) UNEP Risoe CDM/JI pipeline analysis and database. http://www. cdmpipeline.org/overview.htm. Accessed 18 Apr 2010 41. US Department of Energy (2009, June 16) States with renewable portfolio standards. http://apps1. eere.energy.gov/states/maps/renewable_portfolio_ states.cfm. Accessed 9 Apr 2010 42. US EPA (2010) Acid rain program benefits exceeds expectations. http://www.epa.gov/ capandtrade/documents/benefits.pdf. Accessed Oct 2010 43. US EPA (2002) Clearing the air: the facts about capping and trading emissions. http://epa.gov/ airmarkt/presentations/docs/clearingtheair.pdf. Accessed Oct 2010 44. Wall Street Journal (2009, August 13) Capand-trade’s unlikely critics: its creators. http:// online.wsj.com/article/SB125011380094927137. html. Accessed Oct 2010 45. World Bank (2010) State and trends of the carbon market 2010. http://siteresources.worldbank.org/ INTCARBONFINANCE/Resources/State_and_ Trends_of_the_Carbon_Market_2010_low_res. pdf Accessed 28 May 2010, Washington, DC

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9 Promotion of Renewables and Energy Efficiency by Politics: Case Study of the European Union Itziar Martı´nez de Alegrı´a Mancisidor1 . M. Azucena Vicente Molina2 . Macarena Larrea Basterra3 1 Engineering School of Bilbao, University of the Basque Country, Bilbao, Spain 2 Economics and Business Administration School, University of the Basque Country, Bilbao, Spain 3 Researcher for the Energy Working Group, University of the Basque Country, Leioa, Spain Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 Energy Model and Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 Conventional Energy Model: Features and Threats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 Basis for a More Sustainable Energy Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282 Reasons for the Promotion and Support of Renewable Energy Sources (RES) and Energy efficiency (EE): The European Union (EU) Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 Externalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 Estimation of External Costs of Energy: Objectives and Instruments . . . . . . . . . 288 Uses and Complexity of External Cost Estimation and Main Critics . . . . . . . . . . 290 Main Barriers for RES and EE Technologies and Instruments to Remove Them . . . . 291 Main Barriers for RES and EE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291 Instruments to Promote RES and EE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291 European Union Policy for a Low Carbon Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 Toward a Stable Regulatory Framework to Promote a Low Carbon Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297 Instruments for an Integrated Approach to a ‘‘Low Carbon Economy’’ . . . . . . . . . . . 300 Non-technological Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302 Technological Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313 Wei-Yin Chen, John Seiner, Toshio Suzuki & Maximilian Lackner (eds.), Handbook of Climate Change Mitigation, DOI 10.1007/978-1-4419-7991-9_9, # Springer Science+Business Media, LLC 2012

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Abstract: Since climate change has become an international concern, most of the developed countries have attempted to adopt energy policies to mitigate global warming and its side effects in the last years. The current energy model, based on fossil fuels and nuclear energy, has been the basis for the functioning and development of modern industrial society. Nevertheless, the threats of this model (environmental problems, exhaustion of fossil sources, possible inflation process and loss of competitiveness, dependency toward energy export countries, etc.) have forced a change in the EU’s traditional energy strategy (which was focused on the security of supply). The present energy model of the European Union, which supports its economic growth and prosperity, is 80% dependent on fossils fuels [1] and it is increasingly dependent on energy imported from Non-EU member countries, creating economic, social, political, and other risks for the Union. From the 1990s, the key objectives of the EU have been security of supply, competitiveness, and environmental protection, making renewable energy sources and energy efficiency the basis for its new energy strategy in the EU. However the lack of a common energy framework seems to have been an obstacle to reach those objectives. Therefore, the European Union has recently adopted new directives and instruments to create a unique energy framework in order to reach the mentioned targets but also to become the world leader in the impulse of renewable energy sources and in the employment of energy efficiency technologies. In this work the main problems of the conventional energy model (CEM) are explained. The basis, obstacles, and challenges for implementing a more sustainable energy model are also analyzed. Likewise, due to the strategic importance of the European Union leadership in developing and implementing new instruments and policies to mitigate climate change, this work is focused in its energy strategy. Thus, the recent energy directives and other measures adopted by the EU are discussed.

Introduction As climate change has become an international concern, a track pursued by the European Union (EU) is the development of low carbon technologies, essential both to the achievement of the goals of reducing greenhouse gas (GHG) emissions and increasing the use of renewable energy, but also as a means to ensuring Europe’s competitiveness. The mitigation of climate change must be based on a new energy model relying on renewable, low carbon, and more efficient energy technologies. Renewable energies, which are derived from natural processes and are replenished constantly, can play an important role in achieving a higher degree of independence as well as developing a more sustainable and secure supply in the foreseeable future. Low carbon and renewable energy technologies, emerging in the European energy market, confront many market and regulatory failures and present structural weaknesses, such as long lead times for these new technologies to mass market, locked-in infrastructure investments, diverse market incentives, and network connection challenges. Furthermore, the market take-up of the new energy technologies is additionally hampered by the nature of the technologies themselves, because they are generally more expensive at the earlier stages than the technologies they replace.

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In short, imperfections and distortions in the market coupled with unfavorable financial, institutional, and regulatory environments imply that governmental intervention is not only desirable but also necessary to promote these new energy technologies [2]. The role of governments includes generic actions such as considering externalities and removing barriers, setting up research and development infrastructure, improving human and institutional capacity, creating an enabling environment for investment, and providing information and mechanisms to promote renewable, low carbon, and more efficient energy technologies. These topics will be deeply analyzed in this chapter, which is organized in three sections, as follows: The first part of the chapter (> section on ‘‘Energy Model and Sustainability’’) gives a short historical description of the current or conventional energy model (CEM), including its main threats. Later, the basis for the development of a more sustainable energy model is established, that is, a model based on the use of renewable energy sources (RES), and EE (energy efficiency) technologies. However, as there is still a long way to the consecution of a sustainable energy model, the second part of the chapter (> section on ‘‘Reasons for the Promotion and Support of Renewable Energy Sources’’) describes the most relevant problems, barriers, and obstacles that use of RES and EE have to face, and also the most important instruments to promote them. The third part of the chapter (> section on ‘‘European Union Policy for a Low Carbon Economy’’) analyzes the current EU’s energy strategy for a low carbon economy, and also describes its main instruments and legislation. Finally, the main conclusions of the chapter and references are included.

Energy Model and Sustainability The conventional energy model, which has contributed to the development and wealth of humankind (mainly in industrialized countries), is considered not to be compatible with sustainable development any longer. This conventional model has encouraged overconsumption of energy from nonrenewable sources through cheaper prices that did not include external costs, such as environmental impacts, depletion, exhaustion of energy sources, etc. Additionally, this energy model has contributed to climate change owing to a massive use of fossil sources (coal, oil, gas) to produce energy. Due to these problems and others that will be treated in next sections, a new model based on renewable energy technologies and energy efficiency is emerging in the EU in order to achieve a sustainable development and, at the same time, to achieve world leadership in the renewable energy sector [3].

Conventional Energy Model: Features and Threats At the end of the eighteenth century, with the Industrial Revolution, starts the development of the current or conventional energy model (CEM). This centralized model is based on a massive use of conventional sources of energy, the fossil resources, starting by coal, later oil (end of nineteenth century), and finally gas and nuclear (twentieth century).

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As explained in Patterson, the ‘‘universal system’’ in the electricity sector (which uses alternating current and direct current converters and transformers) was introduced in 1893, setting the stage for the technical model of centralized thermal power plants. This model was to become the worldwide standard. This central-station electricity system has been a common technical model with many institutional variations as legislation, political processes (with a distinctive and intimate relationship with the relevant government), financial arrangements . . . At the beginning of the twentieth century, all electricity systems were operated under government supervision, called ‘‘regulation.’’ Sometimes, these systems were publicly owned, while others were privately owned. With its different variations, the systems were operated as local or regional monopolies authorized by governments (local, regional, or national), while electricity users were considered ‘‘captive customers.’’ This author also affirms that since electricity has been a fundamental element for the operation and development of the OECD countries, a flow of revenue to the system has been guaranteed, including all building, maintenance and operation costs, whatever timescale might be appropriate. This is why planners and producers could work in decades, because even if they did it wrong someone else would pay the bill. Moreover, electricity has been traditionally considered a ‘‘public service,’’ so anyone wanting a connection to the system had to accept its terms and pay the corresponding tariff [4]. It must be remembered that the questions related to the electricity and energy tariffs and their generation cost are very unclear. According to Patterson [4], in Europe the process of setting tariffs has tended to be opaque, and has involved governments and interested parties in negotiation. Although in the USA this process has been more transparent and accessible, it has also been more legalistic and often adversarial [4]. Regarding energy production cost, two relevant factors make it difficult to estimate. On one hand, there is the problem of calculating the ‘‘external costs,’’ that is, the related environmental costs (see > section on ‘‘Uses and Complexity of External Cost Estimation and Main Critics’’). On the other hand, it is very difficult to take into account both public aid, and the funding or subvention for research given to the CEM through history. In this regard, the European Commission published in 2002 a report of the public aid given to the different energy sources from the 1990s [5]. According to it, the promotion by different European governments of their national energy sources has been very common. The aid for the production of solid fuels deserves special mention, with 5.993 million Euro accounted for 1997 for Germany, France, Spain, and UK. Moreover, the EU itself has supported the research and innovation of conventional sources by different programs, as is described in Martı´nez de Alegrı´a et al. [6]; for example, Thermie (1994–1998) or Energie (1998–2002), received around 30 million Euro for the promotion of research on solid fuels since 1999 to 2001. Also, there is a large amount of funding given by the EU for the research and development in the area of nuclear energy including nuclear fusion, where the great importance of the ITER (International Thermonuclear Experimental Reactor) project must be highlighted [6]. In short, to understand the real success of the CEM, not only must be taken into account the support provided by private investors and companies, but also the continuous support (not only political but also economic and financial) provided by different public

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administrations for its development, which has also contributed to the distortion of energy market prices. According to Patterson, as it was the case in other industries, the ‘‘liberalization process,’’ which started in the mid-1980s, also affected the energy and especially the electricity sector. In the first place, the government of Chile, followed later by the UK, started the privatization process of their electricity systems. In 1986, the European Single Act was adopted to include the objective of the creation of the Internal Market, which became a key element of the European Policy. From then on, the so-called liberalization of European national energy markets has been on the agenda. ‘‘By the early 1990s other governments were ‘liberalizing’ their electricity systems (. . .). Sweden and Finland in the North, Australia and New Zealand in the South, and a lengthening roster of other countries in between, all embarked on various permutations of privatization, restructuring, and introduction of competition’’ [4]. The ‘‘liberalization process’’ means new challenges: – The important element in the process of liberalization is not the privatization, but the introduction of real competition. So, it is fundamental to ensure that public monopolies are not simply replaced by private monopolies or oligopolies. – The liberalized markets ‘‘might not provide sufficient capacity margins to guarantee the reliability of energy systems. Waiting for the inevitable corrections of the market is likely to result in costly disruptions and extreme cost swings as occurred in the deregulation of the electricity market in California. Because reliable electricity is a vital public good, public oversight is needed’’ [7]. – ‘‘Electricity liberalization, by reallocating risk away from users to shareholders and bankers, has altered investment priorities. Traditional generation, based on large-scale and long-term investments, such as major dams, coal-fired and nuclear power generation and long high-voltage transmission lines, becomes very risky in a market context, and all face increasingly severe financial and environmental problems’’ [4]. In fact, the development of the gas-turbine generation is starting a trend toward more and smaller generators closer to users, changing electricity systems away from the traditional centralized configuration to a more decentralized one, where other smallerscale generating technologies, that is, new renewable energy sources, will become increasingly important [4, 7]. There is no doubt that the CEM, and the electricity generation based on central-station generation, has been a real success in providing ‘‘energy services’’ (e.g., electric light, electromotive power, and electronics, but also energy for heating, transport, etc., that can be obtained thanks to the electricity or not), which are a key element of modern industrial society. Moreover, this energy model has been developed under the assumption that a near proportional relationship exists between prosperity or wealth and the increase in energy consumption. Since the oil crisis in the 1970s, the necessity of improving energy efficiency (EE) and the decoupling of the proportionality between energy consumption and gross domestic product (GDP) were especially outlined. Currently, the relation between prosperity and the increase in energy consumption is under challenge [8, 9, 10]. Indeed, with

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a long-term perspective, the CEM could also mean poverty. The CEM is considered not to be compatible with sustainable development in any of its three constituent parts (environmental, social, and economical perspective); this is why more than ever the threats of the CEM have to be taken into account. These threats can be summarized in terms of the following: – Dual energy crisis: while in modern industrial countries there are problems with inefficiency and overconsumption of energy, traditional electricity has failed to reach one-third of humanity. Moreover, 2,400 million people depend on conventional biomass for cooking and heating [7]. – There is a great debate as to whether or not the prospect of exhausting fossil fuel supplies is an immediate concern. However, with a long-term perspective, the increasing reduction of the fossil fuel reserves due to growing energy demand, and the lengthening of the ‘‘energy chain’’ (which includes production or extraction, conversion, transmission, and consumption of energy), will lead to an increase in conventional energy fuel cost, rising problems with the security of supply, inflation, and economic crisis [6, 11, 12]. This problem was specially put in evidence after the ‘‘oil crisis’’ (1973–1974). – The CEM is causing important environmental damage [13, 14], what is threatening human health and quality of life, and is affecting the ecological balance and biodiversity. The negative local, regional, and global impacts such as those caused by oil slicks, nuclear accidents, methane leaks, and, of course, CO2 emissions cannot be forgotten. According to the Intergovernmental Panel on Climate Change (IPCC), there is now clear scientific evidence that emissions from economic activity, particularly the burning of fossil fuels for energy, are causing changes to the Earth’s climate [14]. Presently, about 88% of the global energy mix comes from depleting fuels and, with the exception of nuclear energy (6%), are all carbon-rich fossil fuels such as oil (35%), natural gas (21%), and coal (26%) [15]. – Although energy supply security has been considered adequate for the past 20 years in industrialized countries, more and more risks appear linked to the safety of the energy chain. Taking into account that oil and natural gas are concentrated in ‘‘sensitive or vulnerable areas,’’ potential for geopolitical conflict, sabotage, disruption of trade, and reduction in strategic reserves is high. It is considered that some large-scale energy installations are also considered to be potential targets for acts of terrorism [7].

Basis for a More Sustainable Energy Model Current threats linked to the CEM are clear signs of its exhaustion. Therefore a new and more sustainable energy model is needed. In search of a more sustainable ‘‘economic system,’’ more and more authors refer to ‘‘the low carbon economy’’ or ‘‘the solar economy’’ ([1, 12, 16, 18]), which, regarding the energy sector, may be summarized as: (a) A low energy intensity model: low energy consumption by each unit of GDP generated. Energy intensity gives an indication of the effectiveness with which energy is being

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(b) (c) (d)

(e)

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used to produce added value. It is defined as the ratio of Gross Inland Consumption of Energy to GDP [19]. A low carbon intensity model: low level of CO2 emissions by each unit of GDP generated. A low environmental impact model. That is, a model based on RES (renewable energy sources) and energy efficiency (EE). A socially sustainable model, so it should be designed also for the development of rural and isolated areas and poor nations. Thus RES have been considered as one of the strong contenders to improve the plight of two billion people, mostly in rural areas, without access to modern forms of energy [2, 20]. An economically sustainable, EE is the most economical way to improve competitiveness [21], and RES technologies create more jobs per unit of energy generated [22], however, even if RES technologies are reducing notably their costs, actually there are still important market barriers that difficult a major penetration of these technologies in the market (see next chapter: Reasons for the promotion and Support of RES and EE).

To ensure a lower carbon economy and a sustainable development, some key factors should be taken into account: On one hand, this model should be developed in a decentralized way, where the supply is close to the demand, so reducing the ‘‘energy chain’’ and avoiding as much as possible the energy transport and distribution losses. According to Directive 2009/28/EC [23], on the promotion of the use of energy from RES, the move toward decentralized energy production has many benefits, including the utilization of local energy sources, increased security of energy supply, shorter transport distances, and reduced energy transmission losses. Such decentralization also fosters community development and cohesion by providing income sources and creating jobs locally. Many of the renewable technologies are well-suited for distributed uses. Moreover, the production of energy from renewable sources often depends on local or regional small and medium-sized enterprises (SMEs). Consequently, when favoring the development of the market for renewable energy sources, new regional and local development opportunities are encouraged, and also export prospects, social cohesion, and employment opportunities, in particular as concerns SMEs and independent energy producers. This is why it is so important to support the demonstration and commercialization phase of decentralized renewable energy technologies [23]. However, to obtain major benefits from this model, technological progress and economies of scale must be reached [18]. On the other hand, it should be a model with a lower environmental impact. It is considered that environmental damages caused by energy produced from RES are much lower comparing with those caused by energy produced by fossil sources. ‘‘The need for improving energy efficiency and reducing CO2 emissions and other pollutants, as well as the restructuring of energy markets have favoured the increase of distributed energy sources. The co-ordinated control of these sources comprising RES and distributed generators characterised by higher efficiencies and lower emissions compared to central thermal generation, when based on coal or oil, provide several environmental benefits’’ [24].

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However, it must be remembered that the environmental damage provoked by RET can also be worrying, especially under the following circumstances: (a) If they are not well managed. As an example, the United Nations suggests that problems associated with bio-energy and use of the land (particularly of virgin land, including deforestation, biodiversity loss, soil erosion, and nutrient leaching) will remain the most vexing problem, and will deserve the most attention [25]. According to United Nations and Directive 2009/28/EC on the promotion of RES, more research and evaluations are needed to determine which crops and management practices can best minimize impacts and maximize benefits [23, 25]. Thus, the Brussels European Council, reports that ‘‘it is important to ensure the sustainability of biofuels policies’’ [26]. In this regard, Directive 2009/28/EC includes some ‘‘sustainability criteria’’ for biofuels and bioliquids (art 17; [23]). (b) When they are programmed for large-scale generation and do not take into account the local necessities and impacts. An example is ‘‘The Three Gorges Dam,’’ developed in China, which is the world’s largest hydropower project and most notorious dam. In 2003, a total of six 700 MW units were installed and put into operation, setting a new world record for yearly installation of large-size turbine generators. This large-scale project sets records for the number of people displaced (more than 1.2 million), number of cities and towns flooded (13 cities, 140 towns, and 1,350 villages), and length of reservoir (more than 600 km). The environmental and social impacts of this project have increased Chinese scientists’ and government officials’ concern about local consequences [27]. Traditionally, it has been considered that nonconventional RES (renewable energy sources based on technologies most recently used and developed, such as wind, photovoltaics, etc.), have a scale of production and environmental impact much lower than conventional RES (those renewable energy sources that have been used for long, e.g., hydropower and traditional biomass). However, the scale of production seems not to be clear any more. There exist already wind power and solar thermal plants with a capacity of production of several hundreds of megawatts. As an example, the aim of the ‘‘Desertec’’ project is to pave the way for large-scale production of electricity from sun and wind in the desert, with a long-term goal of satisfying a substantial part of the energy needs of the Middle East and North Africa (MENA) countries and to meet about 15% of Europe’s electricity demand by 2050 (Desertec joint venture [28]). This project is shown as an example of how to solve problems related to climate change, or trends in population growth [29]. Nevertheless, it also could be an example of the ‘‘desire of many governments and big energy companies to continue the maintaining of the classical model of centralised production’’ [16]. Gains in renewable energy have been dramatic over the past few years [30], and there is still a vast potential for obtaining energy from the sun [9, 12], but this potential is also limited. In fact, a sustainable energy model is not compatible with a model of eternally increasing energy and material consumption. In short, the massive use of RES and improvements in EE are not by themselves a guarantee of the sustainability of the model, so changes of current

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consumption patterns are also fundamental. For a real reduction in the energy consumption patterns in the EU, efforts should be specially focused on [31]: (a) The building sector, where the active solar energy (using photovoltaics, solar thermal energy, etc.) and passive solar energy and bioclimatic architecture (i.e., well-orientated or well-located buildings, better wall insulation, etc.) should become key elements. (b) The transport sector, taking into account land planning to improve accessibility, promoting public transport, etc. [1, 21, 31, 32]. Finally, it is important to highlight that the reduction of energy consumption does not necessarily mean a deterioration of the quality of life. On the contrary, better wall insulations and reorientation of buildings, better public transport, etc., could clearly improve it. In this sense, good public management plans linked to innovation seem to be crucial for obtaining best synergies between EE, energy savings, and use of RES while also improving the quality of life.

Reasons for the Promotion and Support of Renewable Energy Sources (RES) and Energy efficiency (EE): The European Union (EU) Case There are different reasons that could explain why the use of RES must receive not only public funding for improving research and innovation, but also public aid for their development: (a) Most of the conventional energy sources are finite and cannot supply the highly increasing demand of energy all over the world. Besides, these traditional energy sources provoke substantial damages on the environment, and consequently on human health, ecosystems, etc., that are not included in market prices and that are known as ‘‘externalities’’ (see > section on ‘‘Externalities’’). So if measures are not taken promptly, by adopting RES and increasing EE, the welfare and development of humankind could be in danger in a near future. The EU, concerned as it is for the promotion of RES and climate change mitigation, has developed aid, programs, and a legislative framework to this aim. However, it is important to clarify that state aid in the EU framework must fulfil certain criteria and be authorized by the European Commission. This institution issues guidelines and frameworks to help Member States (MS) by announcing in advance which measures it will consider compatible with the common market, thus speeding up their authorization. According to the cited guidelines ‘‘environmental protection is a fundamental objective for the EU so, taking into account that, on the one hand, the level of environmental protection is not sufficiently high, and on the other, companies do not fully account for the costs of pollution for societies, the Commission considers that there is a need to do more. In order to address this market failure and promote a higher level of environmental protection, different governments can use regulation to ensure that companies pay for their pollution (e.g., through taxes or emission trading systems) or meet certain environmental standards; give private firms an incentive to invest more in

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environmental protection or to relieve certain firms from a certainly high financial burden in order to enforce a stricter environmental policy’’ [33]. However, these guidelines serve also as a safeguard that it will not be possible to grant badly targeted or excessive state aid which not only distorts competition but also can frustrate the objective of meeting environmental targets [33]. (b) There are social, political, administrative, and economic barriers that impede a wider penetration in the market of the new renewable energy technologies, which means that if RES technologies do not get financial and social support, they will not be able to compete with conventional energy technologies. Moreover, as has been explained before, conventional sources have received important political, economic, and financial support from different governments for a long time, and still receive them. This support has permitted the development of a distorted market based on fossil fuels and nuclear, while it has also allowed the achievement of economies of scale that renewable sources have not achieved yet, and that are still far from this goal. According to the United Nations, large subsidies to conventional energy represent a substantial market distortion, discourage new entrants into the market, and undermine the pursuit of energy efficiency [7]. Although traditional technologies used to have an overwhelming cost advantage over renewable energies a decade ago, things seem to be changing. In > Table 9.1, the estimated generation cost of different electricity generation technologies in 2005 and 2010 are shown. A discount rate of 5% has been considered for all technologies, which allows an objective comparison between them. According to the data, while coal doubles its price for most countries in 2010 compared to 2005, the price is almost triple for the Czech Republic and the Slovak Republic. Cost of nuclear power rises notably, with the exception of Japan. Cost of solar photovoltaic (PV) increases except for the Czech Republic. Regarding onshore wind, its cost rises for most of the countries (with the exception of Netherlands where it has been reduced), but this increase is lower in each country, in relative terms, if they are compared with traditional technologies (coal, gas, nuclear, and hydro). It is also clear that onshore wind becomes the cheapest energy source in 2010 in absolute terms, with US $32.19/MWh in South Africa and US $48.39/MWh in the USA, which suggests that the more is the investment in RES and the more they are deployed, the cheaper the price of renewable energy sources will become. In fact, while traditional energies estimated costs reach the highest relative increase (coal 136.19% and hydro 111.82%) from 2005 to 2010, renewable energies have got the lowest relative increase (48.74% onshore wind), being even negative in the case of solar energy (
44.18%). (c) There is another reason to promote RES and EE in the specific case of EU: Europe wastes at least 20% its energy due to inefficiency, with an estimated direct cost of 100 billion Euro annually by 2020, so realizing the savings potential has been considered the most effective way to improve security of supply, reduce carbon emissions, and foster competitiveness [21]. Consequently, it is important for the EU to encourage research to reach higher levels of EE. In addition in the EU, most traditional energy sources must be imported and there is a trend toward a higher external

79.03 136.19%

72.49 32.19 88.08

73.29 120

49

79.26

53.43

46.7 40.8 52.1 43.6

49.7 60.4 55.9 40

46.4 49.7

2005

Gas

82.32 84.64

2010

Own elaboration (data from [34, 35]). USD/MWh *Data for Switzerland is for small hydro **It is calculated with respect to average cost in 2005

33.46

Average estim. cost % increase**

47.8 31.1

Italy The Netherlands Slovak Republic Canada

27.1 15.7 49.5

29.4 31.9 35.2

Belgium Czech Republic Denmark Germany

United States South Africa Japan Switzerland*

2005

Year discount rate 5 %

Coal

31.45

48 28.8

105.1 94.04 88.75 66.05%

30.1

35.8 31.3 26

28.6

23

2005

76.56

86.85 80.40

85.23

89.71 91.92

2010

Nuclear

. Table 9.1 Estimated generation cost of electricity from different energy sources

60.35 91.89%

49.71 78.24

48.73

62.76 62.59

49.97

61.06 69.74

2010

68.81

31.1

76 94.3

53.4 92.3 50.5 84.1

2005

102.35 48.74%

162.9

48.39 32.19

99.42

145.5 85.52

105.8

95.65 145.8

2010

Onshore wind

603.32

120.6

1520 484.8 287.8

2005

Solar PV

336.78
44.18%

215.4

227.4

410.4 469.9

304.7

392.9

2010

78.05

142.9

39.7

83.2

46.4

2005

Hydro

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energy dependency. It should be emphasized that dependency rates have already negative impacts on the European balance of payments. If unforeseen changes in availability (e.g., because of political instability) and prices of energy sources (e.g., increase of oil prices in 2006–2009) occur, there will be worrying impacts on economic growth. Therefore, the EU has emphasized the importance of energy security and import independence (see > sections on ‘‘European Union Policy for a Low Carbon Economy’’ and > ‘‘Towards a Stable Regulatory Framework to Promote a Low Carbon Economy’’).

Externalities Human activities can cause damages on human beings, ecosystems, and materials. In the 1920s, Pigou had already identified the negative consequences of the economic activity as external costs or externalities. An externality arises ‘‘when the social or economic activities of one group of persons have an impact on another group and when that impact is not fully accounted or compensated for, by the first group’’ [36]. An example of the ‘‘negative externalities’’ regarding the energy sector is the environmental impact (including climate change) caused by the CEM which is not fully accounted for in the energy or electricity tariff. It has to be noted that there could also be positive externalities linked to the energy sector, for example, the development of a mini-hydraulic system to provide electricity to an isolated area could also help to create local employment without a hard negative environmental impact. According to traditional economic theory, externalities are market failures which produce inefficiency. Therefore, the existence of externalities means that market price only reflects private marginal costs (raw materials, labour, etc.) and not the external and social marginal costs. As a consequence, ‘‘including all social, environmental and other costs in energy prices would provide consumers and producers with the appropriate information to decide about energy mix, new investments or research and development’’ [37]. Thus, external costs should be internalized by using the most suitable instruments [36]. However, it cannot be forgotten that conventional energy sources have become a real success also because they have received important support from different governments (not only political but also economic and financial), and that a correct formation of prices is not possible if there is not a cost transparency, which means that fully private marginal costs are not reflected into the consumers tariff, creating a distorted energy market. In short, it may be concluded that current state aid and support to the use of RES and EE is not only justified by the existence of ‘‘externalities,’’ that is, for environmental reasons, but also because the existence of a distorted energy market.

Estimation of External Costs of Energy: Objectives and Instruments The internalization of external costs is intended as a strategy to rebalance the social and environmental dimension with the purely economic one, accordingly leading to greater environmental sustainability. On the whole, the objectives of estimating the

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external costs of energy are to measure the social damages, which are not paid by the energy sector, and transform these damages into a monetary value. Therefore, converting external effects into monetary units would be useful to compare between the different technologies of producing energy. Experts have traditionally used a cost-benefit analysis to estimate these social damages. In such an analysis, the costs to establish measures to reduce a certain environmental burden are compared with the benefits (e.g., the avoided damage due to this reduction). It consists of assessing a decision taking into account its consequences (e.g., economic cost vs. environmental/social benefits). According to Pon et al. [38], environmental impact studies can follow two different paths: bottom-up or top-down. A bottom-up approach tries to establish environmental impacts through a life cycle analysis (LCA) or a ‘‘cradle to grave’’ approach. Top-down studies employ input–output tables in order to value the impact of activities from a macroeconomic perspective [38]. The bottom-up approach is more adequate for microeconomic studies, such as to compare two different technologies or different location options for a single technology, etc. The top-down approach could be used, for example, to calculate CO2 emissions of different regions. LCA has its beginnings in the 1960s, concerning over the limitations of raw materials and energy resources [39]. Currently, the life cycle assessment or analysis is mainly employed to compare the full range of costs, including environmental and social damages of different technologies or products. The LCA is an objective process to evaluate the environmental burden of a product, process, or activity, because, according to Rabl and Spadaro [36], not only there are ‘‘external costs occurring during operation, but also during construction, provision of energy carriers and materials, waste disposal, dismantling, etc.’’ LCA is a ‘‘cradle to grave’’ approach to assess industrial systems. This ‘‘cradle to grave’’ approach ‘‘begins with the gathering of raw materials from the earth to create the product and ends when materials are returned to the earth. LCA enables the estimation of cumulative environmental impacts resulting from all stages in the product’s life cycle, often including impacts not considered in more traditional analyses (e.g., raw material extraction, ultimate product disposal, atmospheric emissions, etc.). By including the impact throughout the product life cycle, LCA provides a comprehensive view of the environmental aspects of the product or process and a more accurate picture of the actual environmental trade-offs in product and process selection’’ [39]. Once research studies have all the information about the inputs and outputs of an activity, they can proceed to an economic assessment of the whole cost of the product or process. Nevertheless, results are usually different from one study to another in this regard, which is mainly due to the complexity involved in the estimation of environmental costs of energy (see > section on ‘‘Uses and Complexity of External Cost Estimation and Main Critics’’). Nevertheless, over the past 20 years, there has been much progress in the analysis of environmental damage costs, particularly through the ‘‘ExternE’’ (External costs of Energy) European Research Network. Since 1991, the ExternE project has involved more than 50 research teams in over 20 countries. The effects of energy conversion are physically, environmentally, and socially complex and difficult to estimate, and involve

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very large, sometimes ultimately irresolvable uncertainties, unforeseen events, and differences of opinion. Despite these difficulties, ExternE has become a well-recognized source for method and results in externalities estimation. To compare technologies or assess policies, it has to be determined whether one composition of impacts and costs is better or worse than another composition. This is not straightforward, as different impacts have different units, so they cannot be added directly. Therefore, before being able to add them, it is necessary to transform them into a common unit. The ExternE methodology provides a framework for doing this [40].

Uses and Complexity of External Cost Estimation and Main Critics Estimation of environmental impacts and other externalities derived from energy production and consumption is not only necessary but also useful. Thus, calculating external costs can have several uses: (a) For investment, consumption, or supporting decisions. Since external costs allow for the consideration of environmental impacts, they should be added to private costs, getting the total cost of kWh production. In this way, organizations and users could make appropriate decisions on what energy technologies to invest in or use. Society and governments should also consider external costs in the decision process about which kind of energy should be promoted. (b) For health and environmental impacts valuation. (c) For choosing the measures to reduce environmental impacts and health risks. (d) For an adequate interpretation of damage. It is generally more useful to have a monetary value; otherwise people could have problems interpreting data that does not have a monetary value. By way of an example: most people do not know whether one gram of CO2 is as harmful as one gram of SO2. However, everybody would understand ‘‘one gram of SO2 costs 5 Euro and one CO2 gram costs 3 Euro.’’ This has the advantage of making it possible to compare costs with benefits, and monetary units are defined independently of the assessment process [36]. Although estimation of the external costs becomes a useful instrument to measure environmental damage and make better decisions regarding energy technologies, it is also quite complex for several reasons. First, because environmental impacts caused by the energy sector do not have a market where a trading price for them can be established. As a consequence, experts are looking for another way to give those impacts a price. For climate change, two approaches are followed: (a) The quantifiable damage is estimated. Because of large uncertainties and possible gaps, an avoidance cost approach is used [36]. (b) At present, the EU emissions’ trading scheme is an attempt to create a market where CO2 emissions have received a price. This market provides economic incentives for achieving reductions in the emissions.

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Second, unanimity cannot be achieved since there is a high level of subjectivity when deciding the variables to consider. These are the principal reasons why researchers show so variable results in their studies about the external cost of different types of energy technologies. And third, because there are many uncertainties calculating external costs. However, ‘‘where there are threats of serious or irreversible damage lack of full scientific certainty should not be used as a reason for postponing such measures’’ [41]. In spite of the difficulties, the external costs estimation is a very useful instrument to determine the weaknesses and strengths of a technology. The results of the different researches are in consequence guidelines, because they are neither completely true nor false [42]. Nevertheless, identifying and assessing energy technologies external costs are necessary for a sustainable development despite the uncertainties.

Main Barriers for RES and EE Technologies and Instruments to Remove Them Main Barriers for RES and EE Regarding EE and RES, two different barriers can be distinguished. On the one hand there are ‘‘artificial barriers,’’ such as the administrative and legislative barriers, or market failures and distortions. On the other hand there are ‘‘natural barriers.’’ These barriers are common to those that the majority of new technologies have to face when penetrating an existing market, as, for example, lack of financing and lack of scale economies. > Table 9.2 presents a brief description of the main barriers and disadvantages of RES. The European Commission [31] describes the main barriers to achieve EE as crosssectorial barriers due to incomplete implementation of EU energy efficiency legislation, insufficient access to financing, and low awareness of the benefits of energy saving. In fact, there are insufficient infrastructures to facilitate EE in transport and a lack of commitment from the sector’s improvement needs. Likewise, a low awareness of the potential benefits and high up-front cost represent clear obstacles for the industry, whereas the current state of financial markets does not help either to improve access to financing in the short term [31]. Policy approaches to achieve the techno-economic potential can either remove the barriers or create conditions where the market is forced to ignore these barriers. The former normally works at the micro level addressing the barriers directly, while the latter acts mostly at macro level to address the barriers indirectly [2]. For example, setting up information centers and establishing codes and standards, address the barriers directly, whereas increasing energy prices through pollution taxation addresses the barriers indirectly.

Instruments to Promote RES and EE There is a vast literature about the instruments that promote RES and EE. There is also a large variety of classifications of these instruments, depending on the perspective

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. Table 9.2 Main types of barriers to RES 1. Market failures and distortions

2. Financial

3. Technological and technical

4. Administrative and legislative

5. Social, cultural, behavioral, and economical

6. Geographical and environmental limits

From own elaboration

! Externalities are not included ! Existence of natural monopolies (electricity logistics) ! Power of great companies linked to conventional energy model: lack of interest for RET and EET (energy efficiency technology) from the firms ! A highly regulated sector ! Aids and subsidies to conventional energy sources and technologies ! High initial investment ! High level of risk (derived from the lack of knowledge and experience of new technologies for users and firms) ! Costs of transaction for existing firms (not only have they to make new investments in RET but they have to recuperate their investments in conventional technologies too) ! Low level of technological development in some RET ! Lack of scale economies ! Lack of professionals facilitate penetration of RET into final markets ! Lack of skills to improve and create new technologies ! Lack of materials (ex. silicon for photovoltaic) ! Lack or difficult access to the electricity grid for some RES ! Different legislatives (energy dumping) ! Lack of an adequate and standard legislation ! Bad application of current legislation ! Lack of juridical stability for projects or technologies ! Excessive bureaucracy and long time periods to obtain permissions for projects ! Lack of coordination between administrations ! Lack/low level of awareness and education of population ! Inadequate information on energy service/process ! Lack of adequate agencies to promote RET and EET ! ‘‘Not in my back yard’’ culture ! Higher prices for users ! Costs of transactions for users (need to adapt or buy new appliances or modify existing facilities, wiring. . .), what implies an even higher price than conventional energy ! Scarcity of specific renewable sources in the geographic area (solar, wind. . .) ! Impact on environment and ecosystems (especially in large-scale energy structures)

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adopted; for example, they can be classified on international, national, and local, or simply by considering if they are conventional or new (nonconventional) instruments, which is the classification followed in this part of the work. Most important traditional instruments to promote RES and EE include: – Financial instruments as subsidies and special tariffs. Tariffs can be used to encourage the adoption of renewable energy sources. It typically includes three main ideas: guaranteed grid access, long-term contracts for the electricity produced, and purchase prices based on the cost of renewable energy generation. Feed-in tariff policies to stimulate renewable technologies have been enacted in 63 jurisdictions [30], such as Australia, Austria, Brazil, Canada, China, Germany, Greece, Hungary, Iran, Israel, Italy, Lithuania, Luxembourg, Portugal, Singapore, South Africa, Spain, Switzerland, and in some states in the USA. – Regulation (see > section on ‘‘Non-technological Instruments’’) – Taxes(see > Table 9.3) – Promotion of information, education, and public awareness . Table 9.3 Traditional instruments to promote renewable energies and energy efficiency Instruments

Description

Advantages

Regulatory approaches Development of regulations
Define the objectives and the instruments to achieve them which establish the way to
Present few uncertainties in relation act in environmental with the objectives efficiency and the subjects or quantitative instruments proposed limits to emissions
They can motivate firms to come up with innovative, productivityimproving responses Financial measures Taxes

Financial incentives

Tariffs

From own elaboration


Incentive to foster energy savings Establish a tax over fossil
Tax over the energy or over the energies, greenhouse gas emissions emissions, and/or electricity
They do not mean a pay out from generation public funds They consist of fostering the development of renewable energies, through lower interest rate, credits, primes, subsidies, etc. To establish a higher price, for the renewable energy producers


They attempt to encourage investments in new technologies that can benefit the environment
They can promote research in new and cleaner projects
They make up for the high costs of renewable electricity
They offer incentives for innovation

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Although these traditional instruments are useful to promote RES and EE, they seem to be not enough by themselves to reach the EU goals on this topic. To this respect, it has to be noted that during the 1990s, the European Commission proposed the adoption of a carbon tax for the EU; however, the proposal failed because of the concern of the European industries about their competitiveness, and the necessity of unanimity between MS for its adoption [6, 43]. > Table 9.4 shows some of the newer instruments created with the objective of promoting sustainability in the energy sector, including their main advantages and disadvantages. They are hybrid approaches, as they try to combine interventionist approaches with the economic efficiency and flexibility of competitive markets. The emission trading system (ETS) is one of the three flexible mechanisms established by the Kyoto Protocol to help developed countries to accomplish their commitments. The other two flexible mechanisms are the clean development mechanisms (CDM) and the joint implementation (JI). A key factor of these last flexible mechanisms is to find the way to evaluate the most interesting projects in order to accomplish the objectives of greenhouse gas (GHG) emission reductions and sustainability. The EU Emission Trading System (EU-ETS) is a cap-and-trade scheme. It started in January 2005 with the adoption of Directive 2003/87/CE [44]. According to the most recent directive on emission trading adopted in 2009 (Directive 2009/29/EC, which amends the previous Directive 2003/87/EC), an auctioning system will be applied to the electricity sector from 2013, while there is a transition period for the rest of the sectors affected by the Directive. This recent directive improves and extends the GHG emission allowance trading scheme of the community and will regulate the emission allowances traded from 1st January 2013. The regime established on this Directive encloses several important novelties with regard to the previous Directive 2003/87/EC. First of all it establishes an objective of a 21% reduction of GHG below 2005 for the affected industries. From 2013, the Commission will establish the overall emission volume to allocate among all Member States, which means that a community view is established opposite to the national approach set by the former directive. Second, it establishes auctions as the allocation method for all the participant sectors (apart from exceptions and transitional provisions). It means that for each tonne of CO2 issued, the issuing entity should present the necessary allowances that have been previously acquired through auction [45]. Auction method established by Directive 2009/29/EC will have two important advantages compared to the previous free allocation method [46]. On one hand, the new directive will remove to a great extent speculative profit introducing a minimal starting price. On the other hand, it treats in an equitable and correct way all companies, giving them the opportunity to purchase emission allowances in a clear way. Therefore, auctions avoid the need to take difficult and politically delicate decisions about the allowances quotas that each country must allocate to each company that is interested in the Emissions Trade System. This mechanism would guarantee equity to new companies that would like to participate in the GHG trading system, because they would have the same opportunities as existing companies to purchase emission permits (except for the permits bought from 2005 to 2012).

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. Table 9.4 Newly created instruments to promote renewable energies and energy efficiency Instruments

Description

Advantages


They encourage the reduction of GHG.
They offer flexibility to achieve the objectives proposed.
They control the total amount of GHG pollution generated by the industry.
They provoke changes in the operating costs as well as in the future production structure.
Users can buy CO2 emission rights improving environment (it can also be a disadvantage for some companies).
Trading platforms are considered to reduce transaction cost and risk of their customers giving fluidity to markets.
They encourage the reduction of ETS: baseline and The ETS based on baseline and CO2. credit credit involve the establishment of (e.g., CDM) a ‘‘baseline level of emissions’’
They offer flexibility to achieve the (usually defined as the business as objectives proposed. usual scenario) for a sector or
Lower level of emissions a project or company. Under this comparing with those emitted by scheme no overall emissions cap is conventional energy-generation set; however actors are encourage projects based on fossil fuels. to reduce their emissions below this
Development of projects in baseline to generate emission renewable technologies. credits that can be traded’’ [43]. An
They are compatible with all the example is the Clean Development instruments to struggle against Mechanism (CDM), which makes emissions. part of the Kyoto Flexible mechanisms. It offers emission credits for an effective emissions reduction thanks to a previous project that looks for a reduction of greenhouse gas emissions. Emission Trade Schemes (ETS): cap-and-trade (e.g., EU-ETS system)

Under the ETS based on ‘‘cap and trade’’ ‘‘the government defines a new set of property rights to use atmosphere based on an emission limit or cap, that is, it establishes the overall level of emissions allowed’’ [43]. Within that limit, participants in the system are allowed to buy or sell allowances as they require. It involves the trading of one metric tonne of CO2 or any other greenhouse gas. An example is the current EU Emission Trading Scheme (EU-ETS).

Green certificates


They encourage the use of This certificate proves the renewable technologies. renewable origin of the energy and
They reduce the burdens that its price will supplement the price governments must withstand. received for the kWh in the market.

Carbon capture and storage

Integrated process in which CO2
Reduction of released CO2 emissions are captured and stocked emissions. in a permanent way.

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. Table 9.4 (Continued) Instruments

Description

Voluntary measures

Taken measures by the supply or the
They involve not only energy companies and industry, but also demand with a volunteer character electricity users. (e.g., Energy Star™). Development of a mechanism that
They can offset the weakness of combines two or more instruments the above mentioned formerly mentioned. instruments.

Combination of techniques

Advantages

From own elaboration

Several countries use green certificates as a mean to support green electricity generation instead of feed-in tariffs. Thus, Poland, Sweden, the UK, Italy, Belgium, and some US states have developed green-certificate markets; however, green certificates cannot be exchanged/ traded between countries unless they accept it. In this sense, Directive 2009/28/EC on the promotion of the use of RES establishes the rules for the certificate of origin of an energy source, reducing administrative and regulatory barriers that impede the growing of RES. The lack of transparent rules and coordination between the different authorization bodies has been shown to hinder the deployment of energy from renewable sources [23]. This is a flexible mechanism that enables statistical transference of this guarantee of origin between MS making it possible to reach their objectives of developing RES out from their territory. To summarize, the previously mentioned flexible mechanisms put a price on carbon emissions in the covered sectors. Thus, a market incentive for higher penetration of low carbon technologies is provided. Consequently, these kind of mechanisms have the objective of internalizing the negative ‘‘externalities’’ of carbon emissions by monetizing them. Other instruments, in particular carbon taxes or, in some cases, standards, can be applied in sectors that are not in the EU-ETS (e.g., in households, transport, and services) (see > section on ‘‘Non-technological Instruments’’) to create similar cost-efficient incentives. The ETS as well as energy or carbon taxes are market instruments. Their intention is to create the incentives to introduce the cheapest and most efficient abatement technologies first, that is, the technologies with lowest costs. In terms of technology development, this is equivalent to the technologies closest to the market. Thus, market-based policy instruments create a powerful stimulus for the introduction of these technologies. At the same time, these instruments also create incentives and accelerate the market uptake of more immature technologies by improving the expected long-term rate of return of new technologies.

European Union Policy for a Low Carbon Economy The present energy model of the European Union, which supports its economic growth and prosperity, is 80% dependent on fossils fuels [1], and it is increasingly dependent on energy imported from Non-EU member countries, creating economic, social, political, and other risks for the Union. As is shown in > Table 9.5, this dependency has been and is still increasing.

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. Table 9.5 Energy dependency for EU-27 [47] EU-27 (%) Energy dependency

2003 49.0

2004 50.3

2005 52.6

2006 53.8

2007 53.1

2008 54.8

Indeed, the security of supply has been the basis of the EU’s energy strategy from its creation, and it must be borne in mind that the EU started from the European Coal and Steel Community (ECSC) in 1951. This is why it seems a paradox that until the Lisbon Treaty [48] ‘‘the previous Treaties did not include any legal basis related to a Common Energy Policy, so actions related to promote RES and EE should be developed under different policies (external relations, internal market, environment, etc.)’’ [6]. Therefore, in the following paragraphs, the strategy of the EU to cope with this target will be analyzed.

Toward a Stable Regulatory Framework to Promote a Low Carbon Economy Energy and transport play a large part in climate change, as they are the two biggest emission sources [19], and energy policy is particularly important in the European Union’s strategy toward sustainability and climate change mitigation. Energy-related emissions represented approximately 80% of total emissions in 2007. The largest emitting source was the energy industry (40% of energy-related emissions), followed by transport (further 24% of energy-related emissions) [19]. The EU also attempts to improve its competitiveness and reduce its energy dependence by improving the security of supply not only by promoting other energy sources but specially by cutting the demand for energy. The necessity of promoting EE was already present in the European energy programs adopted during the 1980s; and in the 1990s, the environmental aspects of energy gained importance. Since 1995, the following three key objectives are pursued by the European Energy Strategy: security of supply, environmental protection, and improvement of competitiveness. In 1997, the European Commission (from now on Commission) published a White Paper on renewable energy [49], which announced a target to double the European Union’s renewable energy share to 12% by 2010. The White Paper also announced a renewable energy strategy and action plan, highlighting the need to develop all renewable energy resources, create stable policy frameworks, and improve planning regimes and electricity grid access for renewable energy. A key element of the action plan was the establishment of European legislation to provide a stable policy framework and clarify the expected development of renewable energy in each Member State (MS). In this regard, Directive 2001/77/EC [50] and Directive 2003/30/EC [51] set indicative targets for 2010 for all MS and require actions to improve the growth, development, and access of renewable energy. A Biomass Action Plan (BAP) was also adopted in 2005 paying attention to the specific need for MS to develop Europe’s biomass resources [52].

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In response to a request formulated by the 2005 Autumn European Council, the Commission worked on the following important tasks: The establishment of the basis for a common energy policy. Their conclusion was that future energy policy should be based on the following ‘‘three pillars’’: sustainable development, increase of competitiveness, and security of supply [53]. They are directly related to RES and EE. Sustainable development has an obvious relation, EE is the basis for competitiveness, and RES are also a key factor because of the great importance that they could gain in the internal energy market. Finally, RES and EE seem to be the only way to reduce increasing energy dependency. The elaboration of the ‘‘European Strategic Plan for Energy Technology’’ or SET-Plan, the objective of which is the consecution of the cited ‘‘three pillars.’’ The final objective was the restructuring of the European full energy system, starting with competitiveness and passing through to technological processes. The Commission also highlighted that to reach this objective, and compared with the current situation, a higher quantity of resources (human and financial) will be needed [21]. In 2007 the reports and the Renewable Energy Roadmap [54, 55] highlighted the slow progress achieved by MS and the likelihood that the EU as a whole would fail to reach its target of reaching a 12% share of RES by 2010. Some possible reasons for this could be the lack of a coherent and effective policy framework throughout the EU with a stable longterm vision, the increase in energy consumption, and the uncertain investment environment provided by the existing legal framework: Action Plan for Energy Efficiency 2000– 2006 [21]. In the Brussels European Council of 8 and 9 March 2007, after debating the Commission work on common energy policy and the SET-Plan, the commonly named ‘‘20/20/20’’ mandate was established, with the following ambitious targets for 2020 [56]: Reduction in GHG emissions by 20% compared to 1990 levels and by 30% when a new global climate change agreement is reached (providing that other developed countries commit themselves to comparable emission reductions and economically more advanced developing countries contribute adequately according to their responsibilities and respective capabilities). Saving 20% of energy consumption compared to projections for 2020. Increasing the level of renewable energy in the EU’s overall mix to 20% (with a minimum target for biofuels of 10% in transport consumption for each MS in the EU). This European Council position was a clear sign of their concern about energy management and climate change; indeed, the first of these targets was a clear sign of engagement and the ‘‘ethic leadership’’ face to the Kyoto Protocol commitment, while the following two were internal objectives and constitute the best complement to reach the first one. The objective of the EU is to change the increasing dependency on fossil fuels and energy import through the promotion of EE and RES. For example, over the 1997–2006 period, annual final energy use has increased by 11%, which represents one-third of all crude oil imports into the EU-27 in 2006 [31]. Nevertheless, the energy intensity ratio

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. Table 9.6 Gross Inland Energy and RES consumption for EU-27 EU-27 (Mtoe/year)

2003

2004

Gross Inland (GI) energy consumption

1802.9 1824.6 1825.3 1825.8 1807.8 1799.3

Annual variation rate (%) GI RES consumption Annual variation rate (%) % of GI RES consumption in GI energy consumption

– 107.8 – 5.98

1.20 116.2 7.81 6.37

2005 0.04 120.1 3.38 6.58

2006 0.03 129.1 7.49 7.07

2007
0.98 143.1 10.82 7.92

2008
0.47 151 5.55 8.39

From own elaboration from [47]

(Gross Inland Consumption (toe)/GDP (M€)) of the EU-27 has decreased, passing from around 215 in 1990 to 177 in 2006 [57], which is a positive sign. In addition, the EU Gross Inland energy consumption has increased very slowly from 1985 until 2001 in EU-15, passing from 1,245 to 1,486.2 Mtoe [58], while a small reduction of consumption has occurred between 2007 and 2008 in EU-27 (see > Table 9.6). However, it has to be noted that in the years when gross energy consumption has decreased (2007 and 2008), RES consumption has increased. However energy dependency of the EU-27 has not decreased (see > Table 9.5). According to the Commission, if the saving objective of 20% is reached, the EU would not only use about 400 Mtoe less primary energy, but it would also avoid the construction of about 1,000 coal power units or half a million wind turbines. CO2 emissions reduction would be around 860 Mt [31]. Biomass is the largest single renewable energy source in absolute terms and is expected to contribute to around two-thirds of the expected renewable energy share in 2020 [59]. Moreover, it is important to note that biomass can be used in the production of heating and electricity as well as in the form of ‘‘biofuels,’’ e.g., the use of biomass in transport. This is why the EU produced the Biomass Action Plan (BAP) in 2005 which highlighted the need for coordination of policy and estimated that biomass could contribute between 130 and 150 Mtoe of EU energy needs by 2010. In 2005, biomass contributed 81 Mtoe to EU-27 energy consumption [60], and 102 Mtoe in 2008 [60] which represents a 25.65% increase from 2005. According to EU Biomass Action Plan [52] this achievement is still a long way from reaching the EU’s biomass potential. It is clear for the EU that the technology and the efficient use of resources lie at the heart of the 20/20/20 Challenge [1]. Indeed the EU aspires to gain world leadership in the RES sector [3]. In fact, as it can be seen in > Table 9.7, several MS of the EU are among the top positions in the world in renewable energies. These top positions are not the fruit of chance, but are the result of efforts and investments in research and development of new technologies focused on an increasing improvement of the efficiency in RES. However, increases in the energy consumption are still the main obstacle to the accomplishment of the EU’s objectives.

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. Table 9.7 Top five countries in renewable energies (Adapted from REN21, 2009) Annual amounts for 2008 1

2

3

4

5

New capacity investment United States Spain

China

Germany

Brazil

Wind power added Solar photovoltaic added (grid-connected)

United States China Spain Germany

Germany

Spain

Solar hot water/heat added

China

India United States South Korea Japan Italy Germany

Brazil

France

Ethanol production Biodiesel production

United States Brazil Germany United States

China France

France Canada Argentina Brazil

Turkey

The European Strategic Energy Technology Plan (SET-Plan) considers that the key factor to reach the mentioned leadership is to accelerate the availability of energy technologies into the market and, at the same time, to engage industry in the process. In other words, these targets are achievable if adequate technological strides are taken, but it is also necessary that these technologies are well introduced into the market. This is why the Council gave to the Commission two new mandates [61]: on the one hand, the elaboration of an ‘‘Energy/Climate-Change package’’ of proposals linking the two areas. On the other hand, to elaborate a specific proposal for the development and execution of the SET-Plan. According to the Commission, ‘‘the achievement of the goals of the European energy and climate change policy necessitates the development and deployment of a diverse portfolio of low carbon energy technologies (. . .) However (. . .) the EU will continue to rely on conventional energy technologies unless there is a radical change in our attitude and investment priorities for the energy system. In response, the EU has endorsed the European Strategic Energy Technology Plan (SET-Plan) as a vehicle to accelerate the development and large scale deployment of low carbon technologies’’ [1]. In the following section, more recent and relevant initiatives adopted by the EU toward the ‘‘low carbon economy’’ are analyzed.

Instruments for an Integrated Approach to a ‘‘Low Carbon Economy’’ Programs (which provide financing) and directives (which establish obligatory mandates for the Member States) are the main instruments managed by the EU to promote RES and EE, in order to face the challenge of a sustainable and ‘‘low carbon economy.’’ These instruments can be classified into two different groups:

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– Non-technological instruments: which are political and legislative tools, such as programs and directives that try to conduct the behavior of citizenry, firms, institutions, etc., of MS – Technological instruments: which are referred to as means to achieve new and/or more efficient technologies, innovative products, etc. Of course, the potential of each kind of instrument differs. For instance, a directive transformed in law in a Member State can be a really worthwhile tool if there are the technological resources to carry out the principles of that legislative norm. Therefore, political and legislative instruments (i.e., programs and directives) are necessary but not enough to solve energy problems in the EU and vice versa, since technological instruments (based on new energy technologies to carry out RES and EE) need to be effective and establish the aid of a legislative framework. In the next sections, both types of instruments will be analyzed more deeply. The SET-Plan can be considered as the fundamental instrument to facilitate the link between technology development and its public acceptance and penetration in the market. The European Commission in collaboration with many other private and public institutions has drawn up the fundamental Technology Roadmap necessary to ‘‘turn Europe into a lowcarbon economy.’’ This indicative Roadmap ‘‘prioritises the different needs of different technologies, depending upon their state of development and maturity, balancing the short term needs against the long term innovation potential’’ [1]. It also analyzes the cost and the potential of various technologies to reduce carbon emissions, or to cover a certain share in electricity or energy consumption. To evaluate this potential, not only technological aspects are considered, but also other socioeconomic and cultural aspects; that is, the time and the challenge for the implementation of each technology. In this approach, EE is by far the cheapest and simplest way to secure CO2 reductions (especially regarding EE in buildings and transport). Later, the cogeneration and wind power technologies are the best placed technologies. Hydrogen cars and fusion technologies are placed last, while other technologies are placed in between [1]. It has to be noted that ‘‘although the presentation of the roadmaps has been harmonized as far as possible, each low carbon technology faces its own challenges, market dynamics, maturity and deployment horizon. Hence, in each case, the activities are tailored to the specific innovation needs, reflecting also non-technological barriers. Similarly, the anticipated impact of the Initiatives varies both in volume, intensity and timing’’ [1]. The implementation of the SET-Plan is based on the European Industrial Initiatives (EII), the Energy Efficiency-Smart Cities Initiative and the European Energy Research Alliance (EERA). Next, the different initiatives of the SET-Plan are described, with their estimated public and private investment needs to make the low carbon technologies affordable and competitive. (It has to be noted that ‘‘there is no directly quantifiable link between research expenditures and the value of the results obtained from research. However, as a pre-requisite for any cost competitive deployment of technologies, each roadmap presents the technology objectives that are critical for making each low carbon technology fully cost-competitive, more efficient and proven at the right scale for market roll-out’’ [1]). In any case, ‘‘this estimated budget includes the cost of research,

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technological development, demonstration and early market take-up, but the cost of deployment and market based incentives are excluded, such as feed-in tariffs’’ [62]. Also, their potential for job creation is offered [62]: (1) the European wind initiative with €6 billion and more than 250,000 skilled jobs; (2) the Solar Europe Initiative, with €16 billion and more than 200,000 skilled jobs; (3) the European electricity grid initiative with €2 billion; (4) the sustainable bio-energy Europe initiative with €9 billion, and more than 200,000 local jobs created; (5) the European CO2 capture, transport, and storage initiative with €13 billion; (6) the sustainable nuclear fission initiative with €7 billion; and (7) the fuel cells and hydrogen initiative with €5 billion for the period 2013–2020. Additionally, as EE in buildings and transport is considered the cheapest and simplest way to secure CO2 reductions, the SET-Plan includes the Energy Efficiency-Smart Cities Initiative, with an estimated budget of €11 billion and the potential of 40% reduction of GHG emissions by 2020 on participant cities and regions. As previously mentioned, the SET-Plan also proposes the European Energy Research Alliance, with the objective of ‘‘elevating cooperation between national research institutes to a new level (from ad-hoc participation in uncoordinated joint projects to collectively devising and implementing joint programmes) (...) taking ideas out of the laboratory and developing them to the point that they can be taken up by industry is a step that needs to be shortened considerably. The involvement of universities in the Alliance through the platform created by the European University Association will help to ensure that the best brains can be mobilised’’ [62].

Non-technological Instruments The European Union, according to Kyoto Protocol, is committed to reducing its GHG emissions, as a whole, by 8% compared to 1990 emissions [63]. However, as it has been mentioned, the European Council of March 2007 made the firm commitment to reduce the overall GHG emissions of the Community by at least 20% below 1990 levels by 2020 [56]. This was not the sole objective of the Council, as it committed to two other objectives: 20% of RES by 2020 and a 20% reduction of energy consumption. These last objectives, however, will make it possible to achieve the 20% reduction of GHG objective, which means that the three targets are closely linked. > Figure 9.1 shows that the EU-25 has obtained a 6% reduction of GHG from 1990 to 2005. Considering the objective of 20% reduction compared to 1990 emissions level by 2020, the EU has to reduce the GHG 14% from 2005 to 2020 [64]. In 2007, EU-27 had already reduced its emissions 9.32%, while the EU-25 had got a reduction of 7.87% compared to the 1990 level [65]. As it is set by Decision 406/2009, each MS must achieve a different objective of emissions reduction ‘‘based on the principle of solidarity between MS and the need for sustainable economic growth across the Community, taking into account the relative per capita GDP of MS.’’ As a consequence, each country has its own reduction objective to 2020 compared to 2005 [66]. The limits between Member States vary from
20% and +20% (e.g.,
20% for Luxembourg, +20% for Bulgaria, and
10% for Spain [66]

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GREEN HOUSE GAS (GHG) EMISSION TARGET –20% below 1990 GHG emission level

–14% below 2005

EU ETS sectors –21% below 2005 Directive 2009/29/EC

EU non ETS Sectors (Transport, buildings, heating...) –10% below 2005 Decision 406/2009/EC

TARGET FOR 27 EU MEMBER STATES from –20% to +20% Source: EU, 2008a.

. Fig. 9.1 Greenhouse gas emission target for European Union in 2010 [64]

(see > Fig. 9.1). It must be pointed out ‘‘The sharing of GHG reduction efforts between MS is determined solely for sectors not covered by the EU ETS’’ [64]. MS are responsible for the fulfilment of this objective through the implementation of national measures, that is, through the promotion of RES and EE. As it is shown in the > Fig. 9.1, in order to perform the 20/20/20 mandate, the EU has established a gradual and foreseeable trajectory of GHG emissions reduction. Directive 2003/87/EC [44] establishes that all sectors of the economy should contribute to emission reductions in order to achieve the objective of a 20% reduction of GHG by 2020 compared to 1990 levels. According to other EU documents [64], the total effort for GHG reduction needs to be divided between the EU-ETS and non-ETS sectors. EU-ETS sectors are the industrial installations included in the European Union Emission Trade System; that is, the sectors included in Directive 2003/87/EC and following directives (for more details about these directives see > section on ‘‘Main Barriers for RES and EE Technologies and Instruments to Remove Them’’), which must reduce their emissions by 21% compared to 2005 [45]. There are few sectors that take part in the EU-ETS (energy activities such as combustion installations, refineries, production and processing of ferrous metals, mineral industry, industrial plants for the production of paper, air transport, etc.), but all together these sectors represented approximately 42.9% of the EU-27 overall emissions in 2007 and 42.68% in EU-25 [65].

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On the other hand, there are the non-ETS sectors or ‘‘diffuse sectors.’’ The ‘‘diffuse sectors’’ are a wide range of sectors that are made up of many small-scale GHG emitters such as transport (cars and trucks), buildings (especially heat consumption), services, small industrial facilities, agriculture, and waste, that together represent large amounts of emissions (57.1% of the EU-27overall emissions and 57.32% in EU-25 in 2007 [65]). Non–EU-ETS sectors should reduce their emissions around 10% compared to 2005 by 2020. Regarding the ‘‘diffuse sectors,’’ it must be taken into account that, while access to energy is not only an important but also a strategic factor to local and/or regional economic development, participation in the decision process regarding buildings and transport and services sectors of local and regional agents (municipalities, citizens, firms, etc.) is necessary for a sustainable progress. Indeed, the EU ambitious objectives to mitigate climate change and become a world leader in renewable energy will only be possible if local and regional authorities take actions to implement locally the national regulations, and if they consider how their actions influence the implicated parts [23]. It must be remembered that the most profitable way for both the EU-ETS sectors and non–EU-ETS sectors to perform their GHG reduction objectives (21% and 10%, respectively) is basically through the promotion of EE and RES [21, 23, 31], indeed, the EU-ETS is considered only as an additional measure applicable to the EU-ETS sectors, that is, the EU-ETS sectors should reach most of their CO2 emissions reductions through improvements in EE and the development of RES, and should purchase as few CO2 permits as possible. > Figure 9.2 (which is not exhaustive) shows the most important legislation for the consecution of EU targets regarding climate change and energy. On the left side all legislation and tools that affects the EU-ETS sectors is shown. The right side of the figure represents all instruments that affects the ‘‘diffuse sectors.’’ Notice that many of the legislations focused on the promotion of RES and EE affect simultaneously the ‘‘diffuse sectors’’ and ‘‘nondiffuse sectors.’’ Those elements with an asterisk constitute the legislation and tools adopted by the EU for the achievement of the ‘‘20/20/20’’ mandate, and comprise part of the ‘‘Energy/ Climate-Change’’ package [53, 61]. The rest of the elements conform to the legislation which existed previously to the cited package, but which is also fundamental for the accomplishment of the established targets. In the following lines, some relevant legislation forming part of the ‘‘Energy/Climate package’’ is described (for more details of some of these directives see > section on ‘‘Main Barriers for RES and EE Technologies and Instruments to Remove Them’’): Directive 2009/29/EC, which amends previous legislation on the matter, is the most recent legislation adopted on the emission trading into the EU. > Figure 9.2 shows that it was through Directive 2003/87/EC [44] and Directive 2004/101/EC [67] that the link between the EU-ETS and the other two ‘‘Kyoto Flexible Mechanisms’’, that is, the CDM and the JI, was established. The EU adopted in 2009 the Directive 2009/28/EC on the promotion of the use of energy from RES [23]. ‘‘Energy from renewable sources means energy from renewable non-fossil sources, namely wind, solar, aero-thermal, geothermal, hydrothermal and ocean energy, hydropower, landfill gas, sewage treatment plant gas, biogases, and biomass.

Promotion of Renewables and Energy Efficiency by Politics

*RENEWABLE ENERGY DIRECTIVE 2009/28/EC

*RENEWABLE ENERGY DIRECTIVE 2009/28/EC ACTION PLAN FOR EE + MS EFFORTS COM/2008/772/final ELECTRICITY FROM RES DIRECTIVE 2001/77/EC CO-GENERATION DIRECTIVE 2004/8/EC ENERGY SERVICES DIRECTIVE 2006/32/EC

9

ACTION PLAN FOR EE + MS EFFORTS COM/2008/772/final

*EMMISIONS TRADING SISTEM DIRECTIVE EU/ETS

DIFUSSE SECTOR: BUILDINGS AND TERTIARY SECTOR

2009/29/EC Reduction target for affected sectors for 2020: –21%

ECOLOGICAL DESIGN DIRECTIVE 2005/32/EC

*CO2 CAPTURE & STORAGE DIRECTIVE 2009/31/EC CONNECTIONS WITH KYOTO PROTOCOL FLEXIBILITY MECHANISMS

EMMISSIONS ALLOCATION PLAN

ENERGY SERVICES DIRECTIVE 2006/32/EC

EE OF BUILDINGS DIRECTIVE 2002/91/EC and *Recast 2010/31/EU *STATE AID IP/08/80

Reduction target for 2020: –10%

*RENEWABLE ENERGY DIRECTIVE 2009/28/EC *NEW PASSENGER CARS REGULATION 443/2009 *FUEL QUALITY DIRECTIVE 2009/30/EC

2003/87/EC EU/ETS 2004/101/EC FLEXIBILITY MECHANISMS

CO-GENERATION DIRECTVE 2004/8/EC

ECOLOGICAL DESIGN DIRECTIVE 2005/32/EC *MEMBER STATES EFFORT DECISSION 406/2009

*STATE AID IP/08/80

ELECTRICITY FROM RES DIRECTIVE 2001/77/EC

*EFFICIENT VECHICLES DIRECTIVE 2009/33/EC

DIFUSSE SECTOR: TRANSPORT

BIOFUELS DIRECTIVE 2003/30/EC ACTION PLAN FOR EE + 2020 OBJECTIVE COM/2008/772/final ENERGY SERVICES DIRECTIVE 2006/32/EC ECOLOGICAL DESIGN DIRECTIVE 2005/32/EC

Source [68]. *STATE AID IP/08/80

. Fig. 9.2 Climate and energy package: interaction with other regulations [68]

Biomass means the biodegradable fraction on products waste and residues (. . .) as well as the biodegradable fraction of industrial and municipal waste’’ [23]. This directive does not distinguish between conventional and nonconventional RES. A novelty of this directive compared to previous directives on the matter is that it establishes different nationally binding objectives for the MS (from 8.5% to 20%), with an overall target of increasing the level of renewable energy in the EU’s energy overall mix to 20% (with a minimum target for biofuels of 10% for all MS). According to the Directive, all MS had to notify the Commission by June 2010 their national renewable energy action plans. These plans must include not only the share of RES, but also the information on what policy measures (including public aid) they will take to fulfil their

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national objectives. The directive also includes some sustainability criteria for biofuels and bioliquids. This is an example of legislation affecting the EU-ETS sectors, and also non–EU-ETS or diffuse sectors simultaneously. According to this directive, the increased use of energy from renewable sources, together with energy savings and increased energy efficiency, constitute important parts to comply with the Kyoto Protocol, promoting at the same time the security of energy supply and the technological development, and providing opportunities for employment and regional development, especially in rural and isolated areas [23]. In > Fig. 9.3 are shown two columns (same color) for the EU-27 and for each Member State, respectively. First column shows the share of electricity generated from renewable sources in 2007. The second column represents the target for 2010, which is unlikely to be achieved considering last years’ trends ([19], p. 76). In 2007, only a few MS (Germany, Hungary, and Denmark) had already achieved their target for 2010, while most of the other countries remaining far away from their targets [19]. Biomass is the predominant renewable energy source across all Member States. In fact, biomass had the fastest growing share and it delivered nearly 70% of the total renewable energy in 2007 [19]. Measures in the Transport Sector

Alongside GHG benefits, security of supply has been a principal reason for adopting the EU targets for renewable energy used in transport.

Austr

ia

80

Swe

den

70

Latvia

60

enia

gdom

Slov

akia Finla nd

d Kin Unite

nd Pola

Lithu

ania Luxe mbo urg Hung ary Malta Neth erlan ds

Italy Cypr

us

Irela nd nia Esto

Slov

ania Rom

Spain ce

ce Gree

any Germ

ublic h Rep

Fran

Denm

0(21 aria Bulg

Czec

10

Belg

ium

20

EU2

30

7201

6%)

%)

40

ark

Portu

gal

50

EU2 7200 7(15 ,

306

0 Source: Own elaboration from EUROSTAT, 2010c [69].

. Fig. 9.3 Electricity generated from renewable sources 2007 and 2010 target (% of gross electricity consumption) [60]

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Directive 2009/28/EC on RES establishes that ‘‘increasing technological improvements, incentives for the use and expansion of public transport, the use of energy efficiency technologies and the use of energy from renewable sources in transport are some of the most effective tools by which the Community can reduce its dependence on imported oil in the transport sector, in which the security of energy supply problem is most acute’’ [23]. In fact, the transport sector grew rapidly between 1995 and 2005 in the EU (goods and passenger transport grew by 31.3% and 17.7%, respectively), and this growth was predicted to continue [70]. Measures to improve fuel quality and a binding target of 10% share of renewable energy sources in transport by 2020 are part of the Climate and Energy package. The Fuel Quality Directive 2009/30/EC was amended to introduce a mandatory target for reducing the GHG intensity of fuel used in road transport, considering that road transportation dominates with 94% of total transport GHG emissions in 2007 [19]. Promotion of biofuels by MS has mainly relied on tax relief and obligations to blend, with important developments having taken place over the last years. These measures have encouraged the supply and demand of biofuels in transport. In 2007, according to MS’ reports, biofuels represented 2.6% of the total fuel consumed in transport in the EU and they accounted for 75% of renewable fuels in transport, of which 26% was imported [71]. From an economic point of view, the increasing use of biofuel has contributed to security of supply by decreasing fossil fuel and diversifying fuel consumption in the EU. Biofuel sectors have also contributed to the EU economy by generating additional jobs [72]. In addition to biofuels policies, important measures have been adopted for the transportation sector by the EU in recent years and some more will be developed in the coming years. More precisely, in 2008, the ‘‘Greening Transport’’ package was launched [73], which was accompanied by a strategy for the internalization of external costs of transport and a proposal on the charging of heavy goods vehicles for infrastructure use. This strategy should encourage the use of cleaner vehicles and improved logistics. In April 2009, Directive 2009/33/EC on the promotion of clean and energy-efficient road transport vehicles was launched to stimulate the development of a market for these vehicles. This directive is addressed to influence the market for standardized vehicles produced in large quantities such as passenger cars, buses, coaches, and trucks. Considering that clean and energy-efficient vehicles initially have a higher price than conventional ones, this directive attempts to create sufficient demand for such vehicles to ensure that economies of scale lead to cost reductions [74]. It also highlights that ensuring a sufficiently substantial level of demand for clean and energy-efficient road transport will encourage manufacturers to invest in and further develop vehicles with low energy consumption, CO2 emissions, and pollutant emissions [74]. Regulation (EC) No 443/2009 was also adopted in April 2009 with the objective to set emission performance standards in order to reduce CO2 emissions from light-duty vehicles while ensuring the adequate functioning of the internal market. It also provides an integrated legislative framework to the Community Strategy, adopted by the Commission in 1995, for reducing CO2 emissions from cars. This strategy was based on three pillars: voluntary commitments from the car industry to cut emissions, improvements in

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consumer information, and the promotion of fuel-efficient cars by means of fiscal measures. In 1998, the European Automobile Manufacturers’ Association (ACEA) adopted a commitment to reduce average emissions from new cars sold to 140 g CO2/km by 2008 and, one year later the Japanese Automobile Manufacturers’ Association (JAMA) and the Korean Automobile Manufacturers’ Association (KAMA) adopted the same commitment to be reached by 2009 [75]. In 2007, two parallel communications were adopted by the Commission, underlining that progress had been made toward the target of 140 g CO2/km by 2008/2009, but that the Community objective of 120 g CO2/km would not be met by 2012 in the absence of additional measures [75]. Therefore, this regulation, consistent with the approach under the voluntary commitments adopted by manufacturers, is aimed to achieve the Community objective by focusing on mandatory reductions of emissions of CO2 to reach an objective of 130 g CO2/km for the average new car fleet by means of improvements in vehicle motor technology. It also establishes fines for those manufacturers whose average specific emissions of CO2 exceed its specific emissions target from 2012 onward [75]. Increasing the share of renewable energy use in transport and the energy efficiency of engine and vehicle technologies will remain key EU priorities to reduce the high oil dependence in the transport sector. Measures aimed at reducing the consumption of the whole stock of cars, such as by increasing car occupancy rates and improving traffic infrastructures, also have a large potential in terms of GHG emission and fuel saving. Nevertheless, these measures require a coordinated effort at local, regional, and central government levels in terms of policies, support, and communication. ‘‘While progress is needed most rapidly in the road transport sector (due to its size and rapid growth rate) developments in other modes, notably aviation, are also important’’ [3]. Renewable Energy Used in Heating and Cooling (Residential Sector)

A complete assessment of the development of renewable energy in Europe requires the evaluation of the heating and cooling sector. According to the Environment Energy Agency [76] heating and cooling is the most significant component of household energy demand, and can vary substantially from year to year depending on climatic variations. Approximately 50% of all final energy consumption and 60% of all renewable final energy consumption is due to the heating and cooling sector [3]. Despite this relatively high share of renewable energy used by this sector, it is far from achieving its potential, partly as a result of the absence of a clear legislative framework and incentives, as well as the existence of nonmarket barriers, such as the lack of information, education, and training of the different agents implicated [3]. The heating and cooling sector depends on different renewable energy sources (biomass, solar and geothermal energy,) but is dominated by the use of biomass [3]. The main legislative instrument dealing with the energy efficiency of buildings is Directive 2002/91/EC, which came into force on 4 January 2003. As buildings are responsible for 40% of energy consumption and 36% of EU CO2 emissions, they are a key factor in the achievement to climate change and energy objectives [77]. Under this

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Directive, ‘‘the MS must apply minimum requirements as regards the energy performance of new and existing buildings, ensure the certification of their energy performance and require the regular inspection of boilers and air conditioning systems in buildings’’ [77]. On 19 May 2010, a recast of this directive on energy performance of buildings was adopted (Directive 2010/31EU) in order to strengthen the energy performance requirements and to clarify and streamline some of its provisions [78]. There is no doubt that the EU legislation and programs related to RES have provided a major boost to the development of these technologies. As stated earlier, EE is considered the cheapest and simplest way to reduce GHG emissions, reduce energy dependency, and increase competitiveness. The five pillars of the EE policy are [31]: 1. The general policy framework and actions under the European Energy Efficiency Action Plan 2. The National Energy efficiency Action Plans based on the Framework Directive on Energy Services 3. The legal framework for the most important consumption sector (buildings) and energy consuming products 4. Flanking policy instruments such as targeted financing, provision of information, and networks like the Covenant of Mayors and Sustainable Energy Europe 5. International collaboration on energy efficiency A large part of the EE legislation is oriented to establish minimum EE requirements or design standards and labeling systems to promote a more efficient consumption, especially in the residential and building sectors. But there are also other legislation measures, such as the Energy Services Directive, or the Ecodesign Directive (see > Table 9.7). According to the Commission, on current implementation trends by MS, it is clear that the 20% saving objective is in danger of not being meet, and even if it is too early to assess the full impacts, the first-hand information on the evolvement and the implementation as well as other indicators suggest that the energy saving potential is not being reached. With the existing EE measures ‘‘should achieve energy savings about 13% by 2010 if properly implemented by MS. Even if this represents a major achievement, this falls far short of what is needed’’ [31]. This is why the Commission proposes an EE package consisting of: ‘‘a proposal for a recast of the Energy Performance of buildings Directive; a proposal for a revision of the Energy Labelling Directive; a proposal for a new Directive containing a labelling scheme for tires; a Commission decision establishing guidelines clarifying the calculation of the amount of electricity from cogeneration; a communication on cogeneration’’ [31]. This new legislation being proposed follows the path of previous legislations and reinforces the existing energy labeling instruments. However, as the Commission explains, a wider application of the measures is proposed, and also some restriction for public purchases taking into account EE levels (e.g., a revised energy labeling directive is foreseen (Directive 92/75/EEC) which will identify which products will not be procured by or receive incentives for public authorities [31], which could be an effective measure. A synthesis of non-technological instruments, to achieve a low carbon economy in EU, is shown in > Table 9.8 (which is not exhaustive). Remember, though that, for the fulfilment

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. Table 9.8 Main non-technological instruments (political and legislative instruments) to promote RES and EE in the European Union Non-technological instruments Promotion of the use of energy from renewable sources Directive 2009/28/EC

Regarding renewable energy sources

It fixes a target of 20% share of energy from renewable sources in the EU gross final consumption of energy in 2020. It also fixes mandatory national targets, establishing rules for a sustainable regime for biofuels and the ‘‘guarantees’’ of origin. It demands improvement for access of RES to the grids and in the access of information and training regarding RES. Intelligent Energy-Europe Intelligent Energy-Europe is the EU’s tool for funding action to IEE (European Parliament and move us toward a more intelligent energy system in Europe, Council 2006) [79] focusing on saving energy and reducing CO2 emissions, and promoting renewable energy sources through the removal of non-technological barriers in the market. Regarding Energy Efficiency It focuses on creating a common framework to promote the Energy performance of improvement of the energy performance of buildings. The Buildings directive requires MS to: (a) apply a methodology of Directive 2002/91/EC; calculation of the energy performance of buildings; (b) Recast: 2010/31/EU establish minimum requirements on the energy performance of new buildings and large existing buildings for renovation; (c) emit an energy performance certificate when buildings are constructed, sold, or rented out; and (d) carry out regular inspection of boilers and of air-conditioning systems in buildings. It attempts to provide a framework for the promotion of this Promotion of cogeneration efficient technique in order to overcome still existing barriers, electricity to advance its penetration in the liberalized energy markets Directive 2004/8/EC and to help mobilizing unused potentials. The main objectives are: (a) the establishment of a harmonized method for calculation of electricity from cogeneration and necessary guidelines for its implementation and (b) to guarantee the origin of electricity produced from high-efficiency cogeneration. Framework for the setting of It establishes that information concerning the product’s ecodesign requirements for environmental performance and EE must be visible, if possible, on the product itself, thus allowing consumers to energy-using products compare before purchasing. Other objectives are to ensure/ Directive 2005/32/EC [80] facilitate the free movement of those products within the internal market. Closely related to this directive are: 2002/40/EC on energy labelling of household electric ovens and 2003/66/EC on energy labelling of household electric refrigerators and freezers.

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. Table 9.8 (Continued) Energy end-use efficiency and To promote the supply side of energy services and create stronger incentives for the demand side. Its purpose is to energy services enhance the cost-effective improvement of energy end-use Directive 2006/32/EC [81] efficiency by means of: (a) providing the necessary indicative targets and mechanisms to remove existing market barriers and imperfections that impede the efficient end use of energy and (b) creating the conditions for the development of a market for energy services and for the delivery of other EE improvement measures to final consumers. Action plan for energy Its purpose is to mobilize society and to transform the internal efficiency energy market in a way that provides EU citizens with the COM (2006) [21] 545 final most energy-efficient infrastructure (including buildings), products (including appliances and cars), and energy systems in the world. It focuses on taking action and controlling consumption and supply in order to save 20% of annual consumption of primary energy by 2020, which corresponds to achieving approximately a 1.5% saving per year up to 2020. Integrating instruments Investing in the development of low carbon technologies (SET-Plan) COM (2009a) [1] 519 final

Renewable energy sources and energy efficiency The SET-Plan is the pillar to turn Europe into a low carbon economy, through the development and deployment of a diverse portfolio of low carbon energy technologies. The SET-Plan is based on the European Industrial Initiatives (EII) including EE-Smart Cities Initiatives and the European Energy research Alliance (EERA). The SET-Plan has analyzed the cost, but also the potential of various technologies in order to reduce carbon emissions, or to cover a certain share in the electricity or energy consumption. To evaluate this potential, not only technological aspects are considered, but also others socioeconomic and cultural aspects; that is, the time and the challenge for the implementation of each technology are considered. Thus, the SET-Plan attempts integrating the technological and non-technological issues and instruments of the EU energy policy.

From own elaboration

of the established objectives, the EU offers specific funding designed to promote education, training, diffusion of information, etc. Actually the Competitiveness and Innovation Framework Programme is in force for the period 2007–2013, with an estimated overall budget of 3,621 million euro. This Framework Programme will be implemented by the following specific programs: (1) Entrepreneurship and Innovation Programme, with 60% of the overall budget; (2) Information and Communications Technologies (ICT) Policy Support Programme, with 20% of the overall budget; and (3) Intelligent Energy-Europe

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Programme (IEE), with 20% of the overall budget. This is the specific program destined to support energy-related actions, especially those that promote RET and EE [79]. The EII program is the most important tool destined to remove the non-technological barriers that RES and EE have to face. This is why it supports projects related to diffusion of information and awareness, improvement of education, etc.

Technological Instruments The Energy Challenge must be based on new renewable and efficient technologies since technology can play an important role in reducing the energy intensity of an economy [82]. Both, energy technology and the innovation processes, have structural weaknesses, such as long lead times for new technologies to penetrate in mass into the market, locked-in infrastructure investments, diverse market incentives, and network connection challenges. Programs supporting ‘‘clean technology’’ development and diffusion are a traditional focus of energy and environmental policies because energy innovations face barriers all along the energy-supply chain, from research and development (R&D), to demonstration projects, to widespread deployment. It is vital that further investments in R&D are made, and direct government support to hasten deployment of new technologies, due to a lack of industry investment and motivation, is often necessary ([83], p. 307). Furthermore, the market take-up of new energy technologies is additionally hampered by the nature of the technologies themselves, because they are generally more expensive than the technologies they replace. There is therefore a need to create a long-term EU framework for energy technology development, and for economic and environmental impacts. In this respect, the European Strategic Energy Technology Plan (SET-Plan) is the technology pillar of the EU energy and climate policy. Similarly, MS are also unlikely on their own to be willing or able to accelerate technology development over a sufficiently broad portfolio of technologies. The European Strategic Energy Technology Plan 2 is the EU’s response to the challenge of accelerating the development of low carbon technologies, leading to their widespread market take-up. It sets out a vision of a Europe with world leadership in a diverse portfolio of clean, efficient, and low carbon energy technologies as a motor for prosperity and a key contributor to growth and jobs. It proposes joint strategic planning and more effective implementation of programs. It now needs to be taken forward to implementation. There are different possible pathways to a low carbon economy. Clearly, no single measure or technology will suffice, and the precise mix in each country will depend on the particular combination of political choices, market forces, resource availability, and public acceptance. The Research and Technological Development (RTD) Framework Programmes are multi-annual programs where the EU scientific objectives and research priorities are established for the following years. These programs also include the specific action lines to be developed and their financial allocation. All actions financed by RTD Framework Programmes have to be focused on the development of new technologies, in precompetitiveness phase. The interest of the EU in promoting the RES and energy clean

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technologies was already highlighted in previous RTD Framework Programmes, as, for example, the VI Framework Programme for the period 2002–2006 was adopted, with a total budget of €16,270 million. The VII RTD Framework Programme was adopted for the period 2007–2013 with a maximum budget of €50,521 million, where €2,751 million are assigned for research on nuclear power (e.g., ITER fusion project) apart from the Euratom Specific Program for nuclear power. ‘‘Energy’’ (included as a thematic area in the ‘‘Co-operation Programme’’) is one of the main areas to be promoted with a budget of €2,350 million. The objective in this area is to adapt the current energy system into a more sustainable one by developing: hydrogen and fuel cells; renewable electricity generation, renewable fuel production, and renewable for heating and cooling; CO2 capture and storage technologies for zero emission power generation; clean coal technologies; smart energy networks; EE and savings; and knowledge for energy policy making. It has to be noted that the mentioned ‘‘Co-operation Programme’’ also includes the ‘‘Environment’’ (including Climate Change) and ‘‘Transport’’ issues, which could be taken into account for financing topics related to the RES and EE [6].

Conclusions The current energy model, based on fossil fuels and nuclear energy, has been the basis for the functioning and development of modern industrial society. The threats of this model (environmental problems, exhaustion of fossil sources, possible inflation process and loss of competitiveness, dependency toward energy export countries, etc.) have forced a change in the EU’s traditional energy strategy (which was focused on the security of supply). From the 1990s, the key objectives are security of supply, competitiveness, and environmental protection, making RES and EE the basis for this strategy. The European Council of March 2007 established the 20/20/20 unilateral mandate, which calls for a reduction of GHG by 20% compared to 1990 levels, increasing the level of renewable energy in the EU’s overall mix to 20% and saving 20% of the energy consumption compared to projections for 2020. In order to achieve the mandate objectives, the ‘‘Energy/Climate-Change Package’’ was adopted in 2009. This package, complementing the previous existing legislation on climate change and RES and EE, constitutes the necessary set of tools for achieving the mandate. In relation with the promotion of RES, an important novelty of Directive 2009/28/EC from previous legislation is the establishment of different nationally binding targets, with an overall target of 20% in the EU’s energy overall mix by 2020. However, the Member States have the responsibility to elaborate their national renewable energy action plans. Currently, biomass is the single largest renewable energy source in absolute terms, and it is expected to contribute to around two-thirds of the estimated renewable energy share in 2020. However, good management of this resource is fundamental. In this sense, LCA evaluation approaches should be taken into account to prevent serious environmental problems. The EE is considered the cheapest and the simplest way to reduce GHG, to reduce energy dependency, and to increase competitiveness. However, bearing in mind current

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implementation trends by Member States, it seems that the 20% saving objective is in danger of not being met. Even if it is too early to assess the full impact of current legislation, the energy saving hoped for is not being reached. With the existing EE measures, 13% of EE could be met, which is still not enough to reach the 20% goal. The Commission has proposed a new EE package. Nevertheless, the proposed new legislation follows the path of previous legislation, reinforcing the existing energy labelling instruments. It can be affirmed that current EU’s low carbon energy strategy is coherent and well developed, combining funding measures with legislation and allowing Member States to offer public aid for RES and EE measures, industries, and products. The EU aspires to gain leadership in the low carbon economy. That is why the EU has established the basis to accelerate a massive penetration of RES in the market. However there are still natural barriers (e.g., technology), and artificial barriers (e.g., market distortion, administrative barriers, etc.) which make the process difficult and delay this penetration. zThese barriers, together with the energy dependency of the EU, make it easy to understand why the EU research funds are focusing on RES and EE technologies, but they also take into account some technologies linked to traditional energy sources (as the CO2 capture and storage technologies, clean coal technologies, smart grids, and research on new nuclear technologies). Regarding energy saving and energy efficiency, structural changes are still needed to be able to change current energy consumption patterns. However, the adoption of a carbon tax for the EU has not been possible to date. Even if some advances have been reached on EE, the EU must still push additional strong measures. Although a certain decrease of energy consumption has been reached in 2007 and 2008, part of these reductions may have their origin in the economic crisis. If the reduction of 20% of energy consumption is not achieved for 2020, reaching the other two objectives (20% of RES and 20% of GHG reduction) will face certain additional difficulties. More efforts and structural changes in favor of energy saving and energy efficiency seem to be still necessary.

Acknowledgments This work has been possible thanks to the collaboration of the Energy Working Group, which belongs to the Chair of International Relations (Social Sciences Faculty) of the University of the Basque Country (UPV-EHU). Special thanks to Gonzalo Molina Igartua and Angela Marı´a Mestizo for their inestimable help and collaboration.

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10 Implications of Climate Change for the Petrochemical Industry: Mitigation Measures and Feedstock Transitions Simon J. Bennett Imperial Centre for Energy Policy and Technology, Imperial College, London, UK Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321 The Chemical Industry Value Chain: From Feedstocks to Final Users . . . . . . . . . . . . . . 323 Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326 Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 Biomass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 Twin Concerns: Climate Impact and Resource Sustainability . . . . . . . . . . . . . . . . . . . . . . . 333 Climate Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333 Primary Sources of Greenhouse Gases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334 Geographical Variations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336 Future Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336 Resource Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339 Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339 Waste Management and Recycling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342 Wei-Yin Chen, John Seiner, Toshio Suzuki & Maximilian Lackner (eds.), Handbook of Climate Change Mitigation, DOI 10.1007/978-1-4419-7991-9_10, # Springer Science+Business Media, LLC 2012

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Future Directions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343 Combined Heat and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344 Carbon Dioxide Capture and Storage (CCS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346 Biorefineries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354

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Abstract: For the past 50 or more years, society has been increasingly reliant on the products of the organic chemical industry to supply the clothes we wear, the food we eat, our health, housing, transportation, security, and other commodities. Approximately 92% of organic chemical products are produced from petroleum, that is, fossil, or mineral, oil, and gas. In addition, these same resources are generally used to provide the large quantities of process heat and power needed by the industry. In the modern petrochemical industry, oil and gas inputs for both raw material and process energy compose around 50% of the operating costs. The result is that not only is the chemical industry (including petrochemicals) the industrial sector with the highest emissions worldwide, it is also very vulnerable to variations in fossil fuel prices and carbon prices. Thus, efficiency has long been a major factor in determining competitiveness in petrochemicals, and the sector has a high success rate in reducing its energy intensity. Despite this, over the past decade, while total use of oil has grown globally at a rate of 1.4% per year over, the use of oil for chemical feedstocks has grown at about 4.0% per year. Reducing greenhouse gas (GHG) emissions in an industry that is so dependent on fossil fuels presents a significant challenge that has begun to receive serious attention from researchers and businesses alike. This chapter introduces the history of the modern chemical industry and the establishment of its close relationship with the oil industry – a relationship that has recently come under strain. It goes on to describe some of the major chemical processes, their GHG emissions, and their geographical variations. The main focus of the chapter is a discussion of the benefits and challenges of three main technological mitigation options: efficiency gains, CO2 capture and storage, and feedstock switching. The interaction of these options with the main climate policy instruments in Europe, and worldwide, is considered. The concept of ‘‘biorefining’’ for bio-based chemicals is given particular prominence for its potential to deliver renewability, low CO2, and energy/feedstock security in the long term. However, establishing new production routes based on biomass in Europe is shown to face considerable social, technical, and economic obstacles to reaching a scale that can contribute valuable emissions reductions.

Introduction Many of the chapters in this book focus on the potential for low-carbon technologies to reduce the rate of emissions of greenhouse gases (GHG) from energy production and use. Combustion of fossil fuels for energy is the major source of GHG worldwide, and, along with energy efficiency and land use, is a primary target for climate change mitigation efforts. Low-carbon energy technologies can be applied in all the key energy-using sectors, including power production, transport, residential applications, and industry. Several of these technologies have the potential to be applied in multiple applications and create linkages between the sectors. This could lead to a new, integrated and sustainable energy landscape in the place of the current fossil fuel-based system. An example of increased integration is the further electrification of transport and the necessary changes to the

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power grid to deliver the ‘‘fuel’’ from both centralized renewable electricity from offshore wind farms and decentralized supply and demand management from the residential sector. This chapter takes a look at climate mitigation from the perspective of an industrial sector that has already for many decades been highly integrated with the prevailing energy system. Because it derives both its energy requirements and raw material from petroleum, the organic chemical industry is both a heavy emitter of GHG and also highly dependent on fossil fuels. In the modern petrochemical industry, oil and gas inputs for both raw material and process energy compose around 50% of the operating costs. For the past 50 or more years, society has been increasingly reliant on the products of the organic chemical industry to supply the clothes we wear, the food we eat, our health, housing, transportation, security, and other commodities [1]. The global organic chemical industry is highly diverse. Derivative products from petrochemical feedstocks are pervasive throughout the economy. They are transferred between firms within the value chain for further processing, such that the industry consumes over one fourth of its own production. Products can be bulk or speciality. Bulk organic chemicals are generally commodity products that compete on price and are produced in large volumes. They include the major platform chemicals such as ethylene, propylene, and benzene, and their immediate derivatives. Methanol, ethanol, commodity polymers, fabrics, and plastics are also included. Speciality chemicals cater to custom markets and generally compete on technological expertise that provides a greater added-value to their products. End products include speciality plastics, fabrics, paints, pigments, and cosmetics. Approximately 92% of chemical products are produced from petroleum, including natural gas. Coal delivers 1.3% of chemical feedstock globally, by energy content [2]. The total use of oil has grown globally at a rate of 1.4% per year over the past decade and the use of oil for chemical feedstocks has grown at about 4.0% per year (> Fig. 10.1). De Vries et al. [3] have highlighted that so far, unlike other materials consumption trends, demand for chemical products such as plastics tends to continually rise with GDP and has not yet reached a saturation point at which consumption stabilizes in the face of increasing wealth. In the USA, approximately 3.4% of a barrel of oil is incorporated into chemical products, while nearly 20 times as much (70.6%) goes to fuel uses [4]. In Europe, the corresponding figure is 9% for chemical feedstocks, as oil (naphtha) dominates natural gas for bulk chemical production [2]. The overall values of the industries are similar, however, with US petrochemicals (excluding pharmaceuticals) returning a pre-tax profit of $375 billion and oil-derived fuels having pre-tax profits of $385 billion [4]. The organic chemical industry is being pressed to revise its energy use for the future, for at least three reasons. Concerns about volatile feedstock costs and potential oil supply constraints have instigated a debate about the sustainability of petroleum-based products [5, 6]. High oil prices at the beginning of the twenty-first century have accelerated the eastward migration of the industry toward low-cost liquefied petroleum gas (LPG) feedstocks. LPG is an associated by-product of oil refining and is thus a cheap resource in the Middle East where oil production costs are low, in comparison to naphtha feedstocks in Europe, or natural gas in the USA, which more closely follow global oil

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10

4

3

2

1 1971

1976

1981

1986

1991

1996

2001

Oil use for chemical feedstock (1 = 60 million tonnes) Oil use for fuel (1 = 2240 million tonnes)

. Fig. 10.1 Global growth in oil use for chemical feedstocks and energy, in % per year [2]

and gas price trends. Thus, energy efficiency and alternative feedstocks have serious economic drivers as well as drivers relating to climate change and security of supply, especially in Europe and North America. This chapter introduces the history of the modern chemical industry and the establishment of its close relationship with the oil industry – a relationship that has recently come under strain. It goes on to describe some of the major chemical processes, their GHG emissions, and their geographical variations. The main focus of the chapter is a discussion of the benefits and challenges of three main technological mitigation options: efficiency gains, CO2 capture and storage, and feedstock switching. The interaction of these options with the main climate policy instruments in Europe, and worldwide, is considered. The concept of ‘‘biorefining’’ for bio-based chemicals is given particular prominence for its potential to deliver renewability, low CO2, and energy/feedstock security in the long term. However, establishing new production routes based on biomass in Europe is shown to face considerable social, technical, and economic obstacles to reaching a scale that can contribute valuable emissions reductions.

The Chemical Industry Value Chain: From Feedstocks to Final Users Organic chemicals are those that contain a structure based on carbon, usually in combination with hydrogen. Although there is no official definition, organic chemicals are widely understood to be the carbon-containing compounds associated with life, such as

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. Table 10.1 Formulae and structures of the main hydrocarbons used in fuel and chemical production (With the exception of methane, only carbon–carbon bonds are shown as lines. Hydrogen atoms are omitted) Group

Example hydrocarbons

Formulae

Natural gas

Methane

CH4

Structures H

H

H H

Olefins

Ethylene, propylene, butadiene

C2H2, C3H6, C4H6

LPG

Ethane, propane, butane

C2H4, C3H8, C4H10

BTX

Benzene, toluene, xylenes C6H6, C7H8, C8H10

Gasoline Octane, plus a variety of saturated and unsaturated hydrocarbons Diesel Cetane, plus a variety of saturated and unsaturated hydrocarbons Coal 60–90% carbon

C8H18, other C4 to C12

C16H18, other C8 to C21

Approximately C135H96O9NS

OH

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sugars, proteins, or the hydrocarbons present in fossil fuels. Coal, oil, and gas contain largely pure hydrocarbons with a carbon backbone and without a high prevalence of heteroatoms such as oxygen, nitrogen, or metals. > Table 10.1 shows some relevant molecular structures. The complex value chain for chemical production from fossil fuels is exemplified by the production of acrylonitrile butadiene styrene (ABS) rubber (> Fig. 10.2). The fundamental building block for this material is butadiene, which is used to make polybutadiene. Hydrocarbon feedstock, such as LPG or naphtha, is first cracked to provide the unsaturated platform chemicals (olefins) ethylene, propylene, and butadiene. These primary bulk chemicals are normally produced at an integrated petrochemical and refining site. Crude butadiene is then separated using solvent extraction and the crude butadiene can be shipped or piped to an extraction unit, although most extraction units are located close to an olefin cracker because butadiene is gaseous and energy is required for its liquefaction and transport. Butadiene monomer is polymerized to polybutadiene, which is subsequently copolymerized with styrene and acrylonitrile to make ABS resin. ABS resin is sold to manufacturers who wish to use the light, rigid, insulating, recyclable thermoplastic in car parts, pipes, and electronics products for sale to end users. ABS is even used in some tattoo inks. The important aspects of this supply chain are, firstly, that downstream users of butadiene, polybutadiene, and ABS are usually very different firms to the major petrochemical companies that produce the primary bulk chemicals [7]. Secondly, styrene and acrylonitrile are also both produced from olefins: styrene from ethylene and acrylonitrile from propylene. This demonstrates the high levels of integration of each step in the value chain and the inherent complexities in influencing changes in any of these steps, which each use large amounts of process energy usually derived from petroleum. One kilogram of ABS requires approximately 2 kg of petroleum in feedstock and energy.

+

Crude oil (distillation products)

CN

Steam cracking

Energy

Energy

Energy n

x CN

. Fig. 10.2 Synthesis of ABS

y

z

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Oil In 2006, 267 million tons (Mt) of oil products were used for chemical feedstock worldwide, representing approximately 7% of all crude oil consumed [8]. A similar amount was used by the petrochemical industry as process energy, although exact figures are unavailable, partly due to the problem of allocating energy balances between the various processes of a refinery and petrochemical site. Crude oil is first distilled to separate the major components, which are further processed to deliver the liquid fuels required to power our transport infrastructure. In terms of tonnage, the primary energy products are diesel (31%), gasoline (25%), jet fuel (6%), plus residual fuel oil used in power generation (15%). The proportions of the different products are determined by the nature of the oil – whether it contains mostly short- or long-chain molecules – but refinery operators have some flexibility to manipulate these values to meet demand. This is evident from a brief consideration of the history of oil demand and supply. In 1850 when Scotsman James ‘‘Paraffin’’ Young first patented oil distillation, it was the illuminating properties of the kerosene product that ensured his technology a bright future [9]. Throughout the supremacy of Standard Oil in the early US oil-refining business it was liquid kerosene lamp fuel that determined how refineries were designed. Kerosene was the only valuable product of otherwise dirty and unpleasant crude. The development of the internal combustion engine had demonstrated a use for one of the other distillates, but when motoring really took off in the 1920s and 1930s there was not enough petrol by-product to meet demand [10]. The story of the oil refinery is one of adjustment to new technologies that maximize output of products for the most attractive markets. Thermal cracking increased the petrol yield and its replacement with catalytic cracking opened the way for selling higher purity coproducts to the chemical and electricity industries, among others [11]. The use of oil for chemical production began in the USA with the manufacture of ethylene derivatives for solvents and, especially, ethylene glycol and tetraethyl lead, whose manufacture for antifreeze and antiknocking went hand in hand with the manufacture of gasoline for the huge expansion in automobile ownership in the 1920s. The feedstock was primarily refinery off-gases, which were in plentiful supply adjacent to oil refineries on the Gulf Coast of the USA [12]. Consequently, the history of petrochemicals is one of close interaction with the oil refining industry. At each turn, innovative chemists found ways of tailoring fuel products to the needs of new engine technologies, such as high octane fuel for military aircraft in the 1930s [13], and found new outlets for unused distillation fractions as chemical products. The early ethylene-based products built on acetylene lighting technology and targeted existing product families like solvents, surfactants, and lubricants. These product families were expanded to integrate other olefin raw materials, for example, isopropyl alcohol from olefinic propylene was Standard Oil’s first petroleum-based product in 1920 [14]. They were predominantly based on small reactive molecular entities. A major revolution in organic chemical production occurred in the mid-1930s with breakthroughs in the field of polymer science. The theory developed by Hermann Staudinger revealed that small reactive chemicals could be joined together purposefully

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to synthesize products with known properties. He suggested that it ‘‘is not improbable, that sooner or later a way will be discovered to prepare artificial fibers from synthetic highmolecular products’’ [15:99]. Confirmation of the theory was delivered by the synthesis of nylon by DuPont shortly afterward. Nylon and polyethylene played highly significant roles in pushing petrochemicals into markets where they could displace natural products such as rubber, wood, and metal. The effectiveness of these materials during World War II opened up the prospect of almost limitless demand for olefins, altering the economics of refining and ensuring that petrochemical complexes would be built alongside refineries in the USA from the 1940s onward. The experience in Europe was markedly different and European petrochemicals production did not catch up with the USA until the 1950s. Before North Sea oil and gas was discovered in the 1960s, Europe did not produce oil to fuel its vehicles. Gasoline was imported from North America and Russia and so a ready supply of olefin by-products was not available. Furthermore, the two major energy using European nations, Germany and the UK, were reluctant to exchange their leadership in coal-based technologies to become reliant on imported fuel and feedstocks [16]. Decisions to support coal-to-oil conversion, alcohol motor fuel, and overseas oil exploration were influenced heavily by governmental attempts to steer technological change toward policy priorities including securing energy supplies, supporting troubled industries, and addressing unemployment. This process was accompanied by the attempts of industrialists to steer policy priorities toward maintaining or developing their preferred technologies [17]. In the UK, ICI’s Chairman Alfred Mond expressed his belief in 1927 that ‘‘not only oil, but the whole field of organic products will be based upon coal as a raw material in the near future’’ [18:84]. Consequently, when ICI decided to invest in petrochemicals after the War, they did so not in collaboration with BP – the major British oil company that was simultaneously moving some refining operations from Iran to Scotland – but as a stand-alone chemicals plant near their existing coal-based operations. As a result, ICI chose to import naphtha for cracking to olefins. Naphtha is a liquid by-product of oil refining that can be transported by ship. This was a novel approach, and reflected the value that ICI and the British government placed on maintaining independent industrial enterprises. The UK continued to lead Europe in petrochemicals, especially as Germany remained committed to its indigenous coal reserves as it rebuilt its economy after the War. The current configuration of European crackers to operate on naphtha is a reflection of this history. In the Middle East, especially Saudi Arabia, exploitation of abundant sources of LPG has been a relatively recent development. This is because petrochemicals production requires heavy investment in local infrastructure; this involves a more complex industrial strategy compared to the rapid returns delivered by investment in oil production and export. The lack of local demand for high-value chemical products also played a part in the delay in investment. However, European naphtha crackers are now relegated to being the marginal suppliers of ethylene and propylene and as oil prices are projected to rise over coming decades, the predominance of LPG is likely to become further entrenched [19]. In summary, the current utilization of petroleum as the major organic chemical feedstock and the options for greater sustainability must be understood in the context

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of the close development of petrochemicals with oil refining for fuels production. The integration of these two industries determines the technologies, product mixes, and economics of organic chemicals production. It has resulted in highly efficient manufacturing complexes that have different designs, often resulting from 5 decades of technical evolution.

Gas Although 5.5% of all natural gas is currently used for chemical feedstock, the strength of the carbon–hydrogen covalent bond in methane is among the strongest in all hydrocarbons, and thus its use as an organic chemical building block is limited [8]. However, natural gas is the primary source of hydrogen worldwide, through a process of steam reforming of methane to hydrogen and carbon dioxide. Hydrogen produced via this method is widely used in the chemical industry, in particular for production of ammonia by the Haber process. Of the 38 Mt of hydrogen produced each year, approximately half is used for ammonia, 80% of which is processed to fertilizers [20, 21]. Because of the production of carbon dioxide as a by-product of steam reforming, and the energy intensity of the Haber process, ammonia production in Europe emits approximately 1.3 t of CO2 per ton of ammonia [22]. Where it is readily available, natural gas is an attractive source of carbon for organic chemical feedstocks. Its use would be likely to be associated with lower CO2 emissions than LPG or naphtha feedstocks and would not be reliant on the markets for other petroleum refinery products. Thus, the economic conversion of methane to useful hydrocarbon building blocks, such as olefins, is an ongoing area of research [23]. Aside from use as a feedstock, natural gas is commonly used to provide the process heat and electricity that powers petrochemical facilities (> Table 10.2). Heat is used in all . Table 10.2 Fossil fuel consumption figures for the OECD in 2007 [52] Energy used by chemical industry (including Total consumption petrochemicals) (million TJ) (million TJ) Oil and oil products Natural gas Coal

95.2

11.2

Used as organic chemical feedstock (million TJ) 10.0

Percentage of total consumption used by chemical industry (including petrochemicals) 11.8

Percentage of total consumption used as organic chemical feedstock 10.5

59.4

3.28

1.59

5.52

2.67

132.9

0.978

0.0328

0.736

0.0247

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10

petrochemical processes and considerable attention has been paid to heat integration in recent years. However, because petrochemical plants and refineries are typically fueled by crude oil, or by waste petroleum products from the conversion processes, the greater efficiency of natural gas combustion is often used to reduce process costs. Petroleum fuel products can be recycled for feedstock or higher-quality energy products. The petrochemical industry is particularly well suited to this ‘‘fuel switch’’ due to its consistent demand for both heat and power for processes requiring a higher energy service quality, such as pumps, instruments, and motors. Heat and power can be provided by cogeneration (or combined heat and power, CHP) plants [24]. Through heat integration, CHP can be 50% more efficient than supplying steam and electricity separately. As a consequence of ever more stringent environmental legislation and higher fuel costs, CHP is being increasingly incorporated on petrochemical sites. Indeed, Europe’s largest CHP plant is a 730 MW facility that provides steam and power to the petrochemical and refining processes at Immingham in the UK. The use of natural gas has been traditionally associated with local availability. As a feedstock and energy source, natural gas (and associated LPG) has been used by the organic chemical industry on the US Gulf Coast, Europe’s North Sea, and, more recently, Saudi Arabia and Brazil among others. The processing of natural gas to higher-value chemical products for export is an economically attractive alternative to gas flaring or investments in pipeline networks for feeding gas to power stations. This has especially been the case in remote locations with abundant gas but little local demand for energy. Following the discovery of natural gas in New Zealand, two plants were established in the early 1980s to convert methane to methanol. The process used steam reforming of methane to carbon monoxide and hydrogen as a first step. Up to 6,700 t per day of crude methanol were produced. These were partly upgraded to gasoline via the Mobil process and partly exported as chemical grade methanol for further processing in the main petrochemical facilities abroad [25, 26]. At the time, this represented the world’s largest methanol production capacity. These days, natural gas in remote locations can be transported to major international ports to feed continental pipelines as liquefied natural gas (LNG). Nevertheless, there remains considerable interest in conversion of natural gas to methanol, dimethyl ether (DME), and, especially, gasoline, for export. Perhaps the most notorious case is that of Qatar, where methanol production is proceeding alongside LNG and gasoline production from natural gas.

Coal Coal was the original feedstock and energy source for the organic chemical industry when it evolved from the early British coal tar pigment industry in the late nineteenth century. It has been remarked that the synthetic dye industry became the ‘‘synthetic-everything-else-industry’’ [27:136]. In addition to the aromatic chromophores (naphthalene, anthracene, and benzene derivatives) that could be obtained from

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coal tar, coal was gasified to yield acetylene and synthesis gas (syngas) that could be upgraded to produce some basic synthetic chemicals. By the end of the 1930s, coal-based chemistry in Germany and the USA had developed to a stage where liquid fuel, rubber, plastics, solvents, lubricants, and many other chemical products were commercially manufactured from coal. Coal-based chemistry laid the foundations for the modern petrochemical industry. In 1938, DuPont claimed that ‘‘in the field of carbon monoxide chemistry’’ they had ‘‘an answer to anything the oil companies can do from hydrocarbon gases’’ [18:321]. By this time, however, coal had already been replaced by petroleum as the primary organic chemical feedstock in the USA, and was about to be overtaken in the UK. > Figure 10.3 shows this transition from coal- to oil-based chemicals in the UK. It mirrors the substitution of coal by oil and gas in primary energy use, but, although starting later, it shows a much more rapid overturn of the raw material base, reaching 50% penetration 20 years earlier. The displacement of coal by oil was completed in the 1960s when technologies for producing aromatic chemicals, such as benzene, from petroleum were commercialized. Aromatics had until then remained the preserve of the coal-based chemical industry. Non-fossil feedstocks are excluded from > Fig. 10.3 due to a lack of reliable data. They are thought to account for a shrinking proportion from a high of up to 15% in the 1930s to less than 3% today.

100 90 80 70 % (GWh basis)

330

60 50 40 30 20 10 0 1924 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 Year Other primary energy sources (nuclear, hydro etc.) Primary energy from coal Chemical feedstocks from coal Primary energy from oil & gas Chemical feedstocks from petroleum and natural gas

. Fig. 10.3 Transitions from coal to oil and gas in UK primary energy (grey) and chemical feedstocks (black) 1924–2005 (5-year rolling averages from UK official energy statistics)

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10

Since 1940, coal-based chemistry has thrived only under severe resource pressures because it has not been competitive with petroleum-based processes. Without access to reliable oil supplies German chemists during World War II focused their energies on products from syngas, especially gasoline but also synthetic rubber. This technology was applied subsequently by the South African oil and chemicals giant Sasol who had access to large coal deposits but restricted access to international oil markets. By 1974, Sasol was operating its first integrated fuel and chemicals plant based on coal gasification. By 1982, before a significant drop in the global oil price, it was producing 80 different chemicals for about 700 clients and sales of chemicals represented 16% of total sales [28]. Most of these were produced from olefins generated by cracking the naphtha that is a fraction of the so-called Fischer–Tropsch liquid fuel manufactured from syngas. Today, Sasol produces about 2 Mt of olefins from coal per year for the South African chemical industry. Of all the sources of chemical feedstock and process energy, coal gives rise to the largest CO2 emissions. This has been estimated to be 8–11 t of CO2 per ton of high-value chemical produced, in comparison with approximately 4 t for conventional oil-based routes and 4–5 t for those based on natural gas [23]. For natural gas, this result is due to the additional energy requirements of syngas production from methane. Despite these high CO2 emissions and the stringent greenhouse gas regulations introduced in many parts of the world, coal-based chemistry is favored in certain locations. These notably include China where indigenous coal is far more abundant than other fossil fuels. In 2007, about 50% of coal in China was used for production of chemicals, largely using traditional ‘‘low-tech’’ processes such as coking, processing of coke and coal tar, and carbide chemistry. The main growth areas for the future are likely to be coal-to-liquids, coal-tomethanol, and C1 chemistry, that is, based on syngas, as used by Sasol [59]. One such project, a US$7-billion plant to be developed by Sasol and China’s Shenhua Group was given a green light in 2008 and will process 3.2 Mt of coal per year upon completion. Other integrated facilities using coal or coke gasification have been proposed and have gained commercial interest in countries including the USA due to rises and volatility in the prices of oil and gas [29]. These include ammonia plants for fertilizer production based on syngas from coal, which is forecast to be competitive with syngas from methane in the coming years.

Biomass It has been estimated that about 5% of global chemical sales are products from biomass feedstocks. Biomass refers to vegetation or other plant material that can be converted industrially into useful energy, fuel, or materials. Most of the biomass that enters the chemical industry’s value chain is either in traditional bulk processes that have never been fully displaced by petrochemicals or in speciality products that utilize specific natural properties in smaller quantities. The former category includes products such as cellophane, which is produced from cellulose from wood, vegetable oils in soaps, pine

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rosins in paints, and castor oil as a constituent of polyurethane. The latter category includes cosmetics, food additives, dyes, and medical products, for example, those that biodegrade in the body. Croda, a UK-based company founded in 1925 to manufacture lanolin from sheep’s wool, is today a large speciality chemicals firm that obtains 70–80% of its raw materials from ‘‘natural and sustainable sources’’ [30]. The firm focuses on personal care plus crop care, polymers, and coatings, and had a turnover of 0.9 billion GBP in 2007. In many ways, the history of the petrochemicals industry is one of replacement of biomass by synthetic products. Wood, for example, has been replaced in a wide variety of furniture applications by plastic. Cotton has been superseded in certain fabric products by synthetic fibers such as nylon. But, in addition to these ‘‘natural’’ polymers and products there is another class of bio-based chemicals that has a more complex relationship with fossil-based chemicals: synthetic materials from bio-based chemical feedstocks. In Europe and America between World War I and World War II, there was a great deal of interest in industrial use of fermentation ethanol. Support schemes operated in Germany, France, Italy, the UK, and the USA, among others [31]. There were various reasons for these policies, but they mainly related to: the troubled distilling industry under prohibition and temperance; concerns about the security of supply of oil for motor cars; farm support during and after the depression; and, in Europe, a lack of convincing evidence that petrochemistry was truly superior or cheaper. In the UK, the added incentive of adding value to the molasses obtained from sugar plantations in the British Empire led to a significant tax relief for industrial alcohol production (known as the Inconvenience Allowance) [18]. As a result of the Inconvenience Allowance, and the partly related lack of UK refineries, British chemical companies deployed the ethylene-based chemistry that was being developed in the USA by first dehydrating ethanol produced by ex-whisky producers such as the Distiller’s company [32]. The feedstock for the first polyethylene plant in 1938 was, therefore, ethanol. In the USA, a movement based around the Farm ‘‘Chemurgic’’ Council advocated harnessing agricultural production for soybean plastics, corn-based rubber, and agrol (gasoline–ethanol blends) to relieve farm poverty and dependence on powerful oil companies [33, 34]. In 1941, Henry Ford unveiled a car that ran on Agrol and had a soybean plastic body. The notion of separating plastics production from the oil industry was revisited following the oil shocks in the 1970s when ICI began development of Biopol, a polymer made from fermented glucose [35]. As oil prices dropped, the prospect of commercial Biopol production receded, but the development work undertaken by ICI has provided foundations for a new generation of bio-based chemicals. Climate change is one of the concerns that have generated renewed interest in using biomass as a chemical feedstock. Biomass is a renewable resource that sequesters CO2 from the atmosphere as it grows. If the biomass is then used as a chemical feedstock then atmospheric CO2 is incorporated into products. Depending on the end-of-life disposal of the product, the carbon is either locked up indefinitely and kept out of the atmosphere or returned to the atmosphere upon degradation or incineration thereby creating lower net

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emissions than the equivalent fossil-based product. A lower carbon footprint has been calculated for a number of synthetic materials from bio-based feedstocks, most notably polylactic acid (PLA) and Mater-Bi plastics and fibers made from corn starch by NatureWorks in Nebraska, USA and by Novamont in Terni, Italy, respectively [36–38]. At present, the small number of bio-based plastics are more expensive than their petrochemical counterparts, and so are only commercially produced for specific applications where their raw material or biodegradability is able to command a premium. Biomass can be used to meet feedstock and/or energy requirements in organic chemical manufacture in order to provide environmental benefits. A full lifecycle analysis (LCA) of these benefits should account for fossil resource depletion, water use, gaseous emissions, and other pollutants, in addition to CO2 emissions. This type of analysis is useful if, as is the case with renewable raw materials (RRM), the alternative technologies cannot be universally applied due to resource constraints. Because biomass is presently a more limited resource than oil, gas, and coal, in future it may be necessary to allocate it wisely to the applications with the most environmental benefits. This issue is discussed further below.

Twin Concerns: Climate Impact and Resource Sustainability As has been indicated by the previous sections, the heavy dependence of the petrochemical industry on fossil fuels raises two major sustainability concerns: the impact of chemical processes on the climate and the finite and depleting nature of fossil fuel reserves. Through emissions regulations and through real and expected rises in the prices of oil and gas, both of these concerns are impacting on corporate decisions. In the chemical industry, truly sustainable solutions will address both of these problems. However, implementing change requires an appreciation of the entrenched integration in the industry. This integration, as described above, relates to the physical integration of refining and petrochemical infrastructure, the interdependence of the industries on the by-product relationship between oil refining and olefin cracking, and the economic and commercial integration of the main firms involved in the chemical value chain. Technological change in the organic chemical industry is capital-intense and so introducing new lower-carbon processes into such a highly integrated environment presents a significant challenge. The following sections describe the two main concerns and evaluate some mitigation options with regard to their potential for approaching technological change and long-term sustainability.

Climate Impact The chemical and petrochemical industry accounts for more than 30% of the total industrial energy use worldwide. This gives rise to very large levels of CO2 emissions. However, in comparison to other industries the emissions intensity is not high as much of

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the energy is used as feedstock which becomes locked up in products until the end of their lifetime, and in many cases for a long time after disposal. Data on global energy efficiency and GHG emissions from the petrochemical industry are not fully available, due to antitrust issues, limitations to the recorded statistics and difficulties with allocating energy between heavily integrated processes on sites. The International Energy Agency (IEA) has estimated total global CO2 emissions from the chemical and petrochemical industry to be 1141.8 Mt per year [39]. It should be noted that this includes both inorganic and organic chemicals production, and concerns only direct CO2 emissions and excludes emissions from power generation and emissions in energy recovery from petrochemical products during disposal. Discussions of GHG emissions from the production of organic chemical products are more complex than those for other industries. This relates to the nature of the industry as a ‘‘store’’ of fossil carbon in chemical products – carbon that would otherwise have been emitted to the atmosphere. It is estimated that carbon storage in plastics worldwide is 477.3 Mt of CO2 equivalent per year [39]. In comparison, only 30 Mt of plastics are incinerated at the end of their lifetime putting the carbon into the atmosphere as CO2. Furthermore, as is often highlighted by representatives of the chemical industry, a lifecycle approach to calculating climate impact should take into account both end-of-life disposal of carbon-containing products and their contribution to efficiency gains during their lifetime. Many polymers and plastics are used to provide insulation, thus saving considerably more carbon dioxide during their use than was generated during their production [40]. Ultimately, however, such accounting problems could be overcome by applying a price to carbon dioxide emissions throughout the economy.

Primary Sources of Greenhouse Gases The main source of GHGs in the chemical industry is in energy use to power energy intense production processes. Steam cracking to produce olefins is the major energyconsuming process worldwide due to its energy intensity and extensive use. More than 39% of the chemical and petrochemical industry’s final energy use is used for steam cracking. The energy used in steam cracking depends on the technology used and also on the choice of feedstock. Lighter feedstocks such as ethane are cracked at lower temperatures and the ethylene yield decreases as feedstock molecular weight increases. To produce 1 t of ethylene requires 1.25 t of ethane, 2.2 t of propane, or 3.2 t of naphtha (> Table 10.3). To address the problem of lack of data on energy usage in the chemical industry, the IEA has proposed an aggregate product indicator composed of 49 products that represent more than 95% of all energy used in the chemical and petrochemical industry [41]. Of these, the five most energy intense processes are for acetic acid (34 GJ/t), benzene produced by steam cracking (27 GJ/t), xylene by steam cracking (26 GJ/t), toluene by steam cracking (24 GJ/t), and toluene diisocyanate (22 GJ/t). Accounting for production volumes, the three largest energy uses are for the processes that produce ethylene (1.3 million GJ), propylene (0.7 million GJ), and benzene (0.6 million GJ). While there is

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. Table 10.3 Energy requirements for steam cracking for three different feedstocks [39] Feedstock

GJ/t ethylene

Ethane

15–25

Naphtha Gas oil

25–40 40–50

potential for efficiency savings throughout the industry, savings in these processes could yield the greatest climate change mitigation benefits. Carbon dioxide from energy generation is not the only GHG emitted by the organic chemical industry but is the most important by a long way. Mitigation activities should be undertaken to avoid emissions of methane, nitrous oxide, and chlorofluorocarbons (CFCs) wherever they are used. To put the difference in context, however, the EU chemical industry in 2007 reported emissions of 32,307 kt of CO2 but only 118 kt of CO2 equivalents of N2O, 29 kt of CO2 equivalents of NOx, and 21 kt of CO2 equivalents of methane [42]. Emissions also occur in the transport of chemical products for sale or further processing. Often raw materials are processed to final products on one site due to the difficulties of transporting intermediate products (gaseous, unstable, etc.); however, this is not always the case. As with other industries, the greater the proximity of raw material production, manufacture, and sale, the lower the GHG emissions from transport will be. Greater distribution of petrochemical sites to fit raw material and consumption patterns needs to be balanced against significant economies of scale that are gained from large-scale petrochemical sites. On the ‘‘demand side’’ of organic chemicals production, two aspects make important contributions to GHG emissions. Firstly, the scale of demand for chemical products is immense and has been increasing in close connection with GDP for the past 60 years. Reducing consumption is one of the most effective measures to mitigate GHG emissions from the chemical industry. Secondly, it should be recalled that many organic chemical products are used to replace existing materials. Replacing the metal body of a car with a lightweight plastic can reduce fuel consumption and thus reduce GHG emissions from transport. A strong synthetic lightweight polymer such as this could also enable electricpowered vehicles to become commercial as this could help offset the weight of the battery. Carbon fiber in high-performance vehicles is a good example of the weight savings, and therefore emissions reductions, that could be achieved through greater use of organic chemicals. The conclusion is clear: Calculations of the impact on the climate of organic chemicals should be undertaken with an understanding of the lifecycle impact of a particular product or application. There is no space in this chapter to look in depth at particular products. Instead, the sections below on climate change mitigation options consider the potential for improvement of the most polluting petrochemical processes. Production of these basic products

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is likely to continue on a large scale in the next couple of decades even if, as one would hope, serious thought is given to whether demand for the final products should be partly reduced.

Geographical Variations The main petrochemical producing regions are Europe, the Middle East, and the USA. Because these regions rely to a large extent on different raw materials, their GHG emissions vary. > Figure 10.4 shows the percentages of ethylene production capacity in different regions that are based on the six main feedstocks. This demonstrates that ethane dominates in the Middle East and naphtha and heavier fractions dominate in Europe. The USA is mainly reliant on LPG and some naphtha. While the capacities vary between regions, the core technology designs are similar and are based on the steam cracking process developed in the USA in the early 1940s. The biggest plants are currently in the USA and the Middle East. The distribution of CO2 emissions in > Table 10.4 reflects these regional differences and also the emissions intensities of the processes. Thus, the top countries in the table are those with high energy costs and therefore incentives to operate highly efficient, integrated plants, and those that use lighter ‘‘cleaner’’ feedstocks.

Future Trends The main influences on GHG emissions from the organic chemicals industry are feedstock costs and climate change regulation.

100%

80%

60% Others Gas-oil

40%

Naphtha Butane

20%

Propane 0%

Ethane Africa

Asia & Pacific

Europe West

Europe East

. Fig. 10.4 Ethylene plants by feedstock and region [39]

Latin America

North America

Middle East

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. Table 10.4 Total CO2 emissions from national chemical industries, in reverse order of their estimated emissions intensity as an indication of room for improvement [39] Country Netherlands Saudi Arabia Japan United Kingdom France India Germany Italy United States Brazil China Chinese Taipei

Million tons of CO2 per year (Mt CO2/year) 22.7 53.1 120.1 19.4 24.3 51.0 46.8 10.1 275.0 13.6 51.0 13.4

The high oil prices experienced in 2007–2008 gave an indication of how the industry could develop if investment decisions are made in the belief that oil supplies will be tight in the next decades. Middle East producers of olefins from ethane were the most advantaged under these conditions due to the low cost of both feedstock and manufacture from this feedstock. European naphtha-based crackers became the marginal producers and were able to continue operation due to continued integration with local refineries. However, prices of both naphtha feedstock and process energy increased sharply for these producers and caused a delayed downturn in demand. In the event, of course, greater damage was done to demand for petrochemicals by the credit crunch and ensuing global recession. Long-term increases in oil prices would be likely to cause a marked shift in basic petrochemical production to locations where light crude oil is plentiful, especially Saudi Arabia and the Middle East. Although the use of LPG as a basic feedstock is accompanied by lower CO2 emissions, these countries have less-stringent CO2 emission regulations. Nevertheless the nature of the industry is such that minimizing energy costs (for feedstock, heat, steam, and power) is a major factor in plant design worldwide. Under these conditions, European and US companies may find it necessary to return to a level of vertical integration that allows them to absorb price volatility in the value chain. Large plants and multinational companies have always been the status quo in the petrochemical industry and this is not foreseen to change. Another outcome of the oil price spike in 2007–2008 was the growth in interest in coal and biomass feedstocks. The close relationship between oil and gas prices and other geopolitical issues relating to the security of gas supply mean that natural gas has not been considered to be a long-term alternative to oil. However, the impact of unconventional gas has yet to be fully explored. Coal has most interest in China, the USA, Australia,

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and South Africa for reasons of indigenous supplies and technological expertise. Increased use of coal as a feedstock for ammonia and methanol production would lead to higher CO2 emissions. Use of biomass can lead to lower CO2 emissions where it is also used for providing process energy. The concept of a ‘‘biorefinery’’ is discussed further below as a long-term option. An eastward shift in chemical production appears to be an inescapable trend for the near future. Aside from raw materials costs, this relates to lower capital and operating costs in China, India, and Brazil, less costly regulatory environments, and the higher rates of demand growth in these regions. In the developed world, the main markets for bulk chemical products are largely saturated. Investment in new capacity in Europe and America is likely to continue to focus on speciality products and infrastructure considered to be of strategic importance. Chemical plants in regions subject to GHG emissions regulations have a very strong incentive to implement mitigation technologies. Although the timetable is unclear, there is a broad expectation that GHG emissions will be costly for chemical producers in most regions of the world in coming decades. Investments today will therefore consider extensive heat integration and CHP as competitive advantages, as well as the use of biomass to provide a proportion of the heat and power requirements of a chemical site, perhaps through co-firing. Another macroeconomic trend with possible impacts on the petrochemical industry’s emissions intensity is changes to refinery output. Modern refineries are capable of adjusting output to meet demand by cracking and upgrading the different distillation fractions to meet fuel requirements. For example, heavier fractions can be cracked and reformed to produce more high-octane gasoline for instance. Because of the high levels of integration between the fuels and chemicals industries, changes in the – much larger by volume – fuels industry could impact on the fractions of crude oil available for chemical feedstocks. In the near- to medium-term, most of these changes to the current balance of products would most probably lead to a larger amount of processing to supply the existing infrastructure. More processing indicates more CO2. Plausible changes in refinery configurations could result from, among other things, a global trend toward diesel-powered cars; the emergence of a highly competitive market for LPG fuel; a substantial increase in the proportion of electric, hybrid, and biofuel powered cars worldwide; and a trend toward ‘‘heavier’’ crude oils. This last change appears unavoidable. Oil sands, coal to liquids, and other unconventional and difficult-to-access sources of liquid fuels will be needed to replace the depleted supplies of conventional light crude oil. It should be borne in mind, however, that complex industries that have evolved together over many decades will only reorient their supply chains to radically new technologies on the scale of decades; the inertia in the infrastructure is very great. It is worth considering these future trends as they could all impact negatively on the ease with which the organic chemical industry can mitigate its impact on the climate. In the section on mitigation options, the main focus will be on long-term options that offer serious emission cuts. Incremental efficiency improvements may be insufficient to offset trends that lead to higher emissions intensities.

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Resource Sustainability Oil Because of the reliance of the organic chemical industry on fossil fuels, especially oil, for both feedstock and energy, the sustainability of oil supply is of utmost importance. The precise amount of oil left in the ground is a key concern for the petrochemical industry not just because it cannot presently be entirely replaced by alternatives but also because of the link between resource availability and cost. Shortages of oil and gas will lead to high prices as it is not easy to substitute these key economic inputs at low cost. High prices could trigger either lower demand for petrochemicals or feedstock/fuel switching; both of which would have consequences for GHG emissions. It is therefore necessary to say something briefly about ‘‘peak oil.’’ The two men most associated with the ideas behind peak oil concerns are William Stanley Jevons and M. King Hubbert. Both looked at a finite fossil fuel resource and noted that the production rate of that resource, which had risen exponentially initially, would reach a maximum point long before the resource became exhausted. Jevons correctly predicted that UK coal supply would be unable to keep up with demand in the early twentieth century. Hubbert correctly predicted a peak in US oil production in the mid-twentieth century. For both resources, the growth rate of supply was checked at approximately half of the total reserve. Although British coal and American oil could subsequently be replaced by alternative fossil energy sources, mainly through imports, what was recognized by these theorists was that if there is no alternative supply source that can be used as a substitute at similar cost, then the inevitable decline in production will cause intense competition between consumers with entrenched expectations of continuously increasing their demand. Peak oil is therefore a prediction that, in the absence of acceptable and available substitutes, the key date is the extraction of half the ‘‘conventional’’ oil on the planet and not the date of total exhaustion. After the peak (or plateau), very sharp price rises and very dramatic declines in production rates would mean an end to decades of economic growth based on cheap access to oil. In fact, studies suggest that most of the world’s major fields have peaked at between 30% and 40% of their total resource [43]. Conventional oil refers to crude oil, condensate, and natural gas liquids, which are usually relatively easily extracted from subsurface oil fields and require relatively little upgrading to liquid fuels. By contrast, nonconventional oil refers to oil sands, shale oil, and extra-heavy oil, which are not found in a usable form and require more treatment to yield liquid fuels. To nonconventional oil can be added other nonconventional liquids such as coal to liquids, gas to liquids, and biofuels. To date, nonconventional liquids have been more expensive to produce, and have generally only been used in times of scarcity of conventional oil. The date and severity of peak oil is much debated and remains unresolved. It is difficult to draw clear conclusions due to a lack of data. However, the key variables are: the total remaining conventional oil resource, the cost (both economic and environmental) of

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extraction of the remaining conventional oil, the cost and availability of alternatives, the production rate, and the elasticity of oil demand. The first of these is uncertain because of uncertainties associated with national statistics and because the globe has not yet been fully explored. It is also subject to adjustment on the basis of technological improvements or price changes that make previously uneconomic reserves commercially viable. Nevertheless, it is possible to look at the reported annual discoveries of crude oil and equate this with the known depletion rate of oil fields in production. While one must account for possible technological improvements and for economic and political trends that affect the exploration efforts of oil companies, it is reasonable to expect that before the peak cumulative discoveries (plus ‘‘reserve growth’’ of known fields) should significantly outpace production growth. For most parts of the globe, where most social and economic activities are reliant on oil-based transport, diesel for heating or power, or petroleum chemical feedstocks, the elasticity – the responsiveness of the quantity demanded to a change in the oil price – is low. People will therefore find a way to bear the cost of price rises rather than give up or substitute the use of oil. > Figures 10.5 and > 10.6 show the global trends in oil reserves and production. In a review of the evidence for a peak in conventional oil by 2030 by Sorrell et al. [44], it is noted that although there are around 70,000 oil fields in the world, 100 fields account for half of production and up to 500 fields account for two thirds of cumulative discoveries. Most of these giant fields are well past their peak of production or will begin to decline in the next decade. Their analysis indicates that just to maintain production at current levels, 3 million barrels per day of new capacity must be added each year – equivalent to a new Saudi Arabia coming on stream every 3 years. This means that in order to prevent

1,400 Global proved reserves (Gb)

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1,200 1,000 800 600 400 200 0 1975

1980

1985

1990

1995

2000

2005

2010

Year

. Fig. 10.5 Global trends in proved conventional oil reserves [44] (This does not include ‘‘probable’’ or ‘‘possible’’ reserves. Proved reserves are those that are considered to have a 90% chance of economic recovery and are thus subject to changes in technology and oil price)

Implications of Climate Change for the Petrochemical Industry 35

1,200

30

1,000

25 800 20 600 15 400 10 200

5 0 1840

Cumulative production (Gb)

Annual production (Gb)

10

1860

1880

1900

1920

1940

1960

1980

2000

0 2020

Year Annual production

Cumulative annual production

. Fig. 10.6 Global trends in oil production [44] (1 giga barrel=approximately 150 Mt. 2008 production was 82.3 million barrels per day, excluding biofuels)

production from falling, more than two thirds of current crude oil production capacity may need to be replaced by 2030. Yet there is almost no chance that new giant fields will be discovered and discoveries of new smaller fields are not currently at the levels needed. Sorrell et al. [44] conclude that there is a ‘‘significant risk of a peak in conventional oil production before 2020. Given the potentially serious consequences of supply constraints and the lead times to develop alternatives, this risk should be given urgent consideration.’’ Meanwhile, the IEA’s World Energy Outlook 2009 expects a slight increase in conventional oil production by 2030, and a total liquids production of well over 100 million barrels per day. Given that increasing the global ultimately recoverable reserves of conventional oil by 1 billion barrels would delay the date of peak production by only a few days, there is clearly a narrow window to develop substitute fuels and feedstocks. For comparison, the cumulative production from the UK, to date, is approximately 24 billion barrels. Aside from the potentially devastating effect that high oil prices could have on certain petrochemical producers, this message has other important implications for the chemical industry. The substitute fuels are generally considered to be oil sands, shale oil, biofuels, coal to liquids, gas to liquids, and other heavy oils. Each of these is itself a limited resource of differing proportions and none is anticipated to offer a sole solution. Unlike for crude oil, production of liquid fuels from these resources does not produce by-products – such as LPG or naphtha – that are highly suitable for replacing current petrochemical feedstocks. Olefins, aromatics, or syngas can all be produced from nonconventional liquids but they would be competing for the raw material with the fuel users, who may be willing to bid

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high prices if the available resource is constrained. Integrating nonconventional feedstocks into the petrochemical industry could require major changes to the upstream infrastructure and could be very costly. This section has not yet touched upon the climate impact of peak oil. The impact is, however, potentially very significant. Nonconventional feedstocks (with the possible exception of biomass) require energy intense processing methods such as gasification, hydroconversion, or steam injection. If future organic chemical production is going to be sustainable then not only should CO2 emissions be consistently reduced, but the industry must take into account the possibility that it may need to start integrating nonconventional feedstocks in the coming decades. Reconciling these two issues will be extremely challenging. Two ideas are discussed in the sections on climate change mitigation options: CO2 capture and storage, and biorefining.

Waste Management and Recycling Another aspect of resource sustainability that must be considered is that of waste management and recycling. Waste management is important for managing the environmental impact of organic chemical products at the end of their life, including the GHG emissions. As a solution to the waste management problem, recycling also has major benefits in terms of reducing the need for fossil raw materials. Taking plastics as an example, today, only 10 Mt of plastic waste are recycled which is less than 10% of the overall waste generated. In the USA, Japan, and Europe, the proportion is much higher than this. About 30 Mt of plastic waste are incinerated, equating to up to 750,000 GJ of energy, which is 3% of the energy used in plastics production [39]. There is a trend toward less land fill or incineration without energy recovery and more recycling and energy recovery. Most plastics have a relatively high energy content, which is comparable to other hydrocarbon energy sources. Polypropylene, for example, contains 46 MJ per kg, which is equivalent to that of kerosene. Household mixed plastics waste contains approximately 32 MJ per kg, which is favorable compared to coal (approximately 25 MJ per kg). Hence, energy recovery from plastics can substitute fossil fuels in heat or power production. For developed societies, this is a sizable, secure, and competitive energy source. Total plastics consumption worldwide equates to some 235 Mt per year. If one third of this was to be used for energy recovery then it would equate to 2.5 million GJ, five times the global production of renewable energy in 2007. With landfill taxes being employed in many countries for reasons of space constraints and waste management, this resource is increasingly attractive. The climate story of energy recovery is slightly different. As mentioned earlier, the use of fossil fuels as plastics feedstocks effectively locks up the carbon, which breaks down only very slowly in landfills. (It should be noted that where it does break down it is likely to yield methane, a much more potent GHG. However, this can be partially dealt with by landfill gas collection for energy use.) Use of plastics as an energy source creates CO2

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emissions that can be considered as deriving from fossil carbon. If this displaces coal combustion then the climate benefit would be small but useful. If it replaces natural gas combustion then the climate impact would be unfavorable. Therefore, while energy recovery is attractive in terms of conservation of fossil fuels, it is unlikely to be attractive for reduction of GHG emissions. Recycling, on the other hand, offers both energy security and climate benefits. Reducing the amount of fossil (or bio-based) feedstock necessary for chemical production can have a positive effect on the available energy supplies. Perhaps more importantly, recycling can reduce the energy demand, and therefore the GHG emissions, of plastics manufacture by about 0.6 t of CO2(eq) per ton of plastic recycled – compared to landfilling [45]. Maximizing recycling is therefore a vital tool in the pursuit of sustainability in the chemical industry from economic, social, and environmental perspectives. To conclude this short overview of recycling it is necessary to briefly distinguish between thermoplastic recycling and so-called feedstock recycling. Most recycling today is thermoplastic recycling. Thermosplastics are polymers that become liquid when heated and can be reset as plastics when cooled and put to a new use. Feedstock recycling generally refers to the use of plastic waste as a raw material for thermochemical conversion to new feedstocks. This can either be achieved by pyrolysis to liquid fuel, or, as is more usually promoted, by gasification to syngas and then use in similar chemical processes to those fed by natural gas or coal; this could be, for instance, ammonia production, liquid fuel production, methanol, Fischer–Tropsch olefin production, or dimethyl ether. Because feedstock recycling to chemicals requires energy intense conversion of the plastic waste to syngas, it offers a solution primarily to the problem of resource sustainability. It is only likely to yield GHG emissions reductions when compared to coal gasification processes. One main advantage of feedstock recycling is the hydrogen-rich syngas produced in comparison to that from coal. This could be advantageous in a future in which syngas is widely used for production of hydrogen, fuel, or chemicals, suggesting a possible role for ‘‘co-gasification’’ of plastic, coal, and biomass.

Future Directions This section looks at three climate change mitigation options that have the potential to increase the sustainability of the chemical industry from both a resource sustainability and climate perspective. These technologies address the impact of the organic chemical industry that will evolve in the coming decades. It is assumed that the products of this industry will continue to be produced on a massive scale worldwide in order to meet the material demands of a modern society with a growing population. Nevertheless, it should be stressed that alongside these three technologies, thermoplastic recycling and the reduction of consumption should be pursued to the greatest extent practicable. The three following sections focus on combined heat and power, carbon capture and storage, and biorefining.

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Combined Heat and Power This section should perhaps refer to all available efficiency gains that could be achieved in modern organic chemical processes. However, the expansion of cogeneration, or combined heat and power (CHP), represents a unique and expansive opportunity for the chemical industry due to its high demand for heat. Because heat is a low-grade energy product, its production from fossil fuels can be considered to be a low-value use of precious resources unless it can be combined efficiently with the production of electricity or even chemicals. High efficiency is a natural pursuit of any business that is highly exposed to the cost of energy. Consequently, many of the key industrial processes in the chemical industry have been improving their performance year after year. Notable impetuses that gave momentum to this focus on efficiency were the oil price shocks of the 1970s. Early naphtha crackers consumed approximately 38 GJ per ton of ethylene produced, but in the 1970s an extensive redesign lowered the energy requirements by 40–50% [46]. Today, 18–25 GJ is the norm for the furnace and product separation at new plants. The change has been most apparent in Europe, where the energy efficiency of steam crackers improved by 10% between 1999 and 2003, while in North America the improvement was 3%. Among other things, this indicates the impact of using imported naphtha in Europe in comparison to regions with local LPG resources, which require less furnace and separation energy in cracking. In future, the battle for efficiency is likely to be due to the cost of GHG emissions as well as energy costs. There remain improvements that could be made to crackers in developed and developing countries alike. Higher-temperature furnaces, gas–turbine integration, advanced distillation columns, and combined refrigeration plants are possibilities that have been identified as potentially leading to savings of 3 GJ per ton of ethylene. Other options, such as fluidized catalytic crackers (FCC) and new deep catalytic cracking processes, have milder temperature and separation requirements, but are limited either by feedstock availability – FFC generally uses refinery gases – or by the impact on other integrated processes. Deep catalytic cracking yields are at the expense of gasoline yields, for instance. Efficiency improvements of all types are key to the future competitive edge of the major petrochemical firms and will lead to GHG savings. It has been estimated that there is an energy efficiency improvement potential of 30–40% for polyethylene and polypropylene production in total, and 10% for PVC [39]. The message is that such savings will be realized for almost any chemical processes wherever they are profitable, and where there is a shift to lower-cost regions of production the savings may be realized faster than the expected 30-year infrastructure replacement cycle. After all, many of the plants built in the Middle East and Asia are made to cutting-edge European and American designs, for example, the new methyl methacrylate plant commissioned in 2008 by British firm Lucite in Singapore. Lucite was subsequently subject to acquisition by Mitsubishi of Japan. Improvements to the environmental performance of existing processes are encapsulated by the 12 principles of Green Chemistry (> Table 10.5). Green chemistry is an approach to chemical production that stresses the environmental impacts of all process

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. Table 10.5 The 12 principles of green chemistry [53] 1 2

Prevent waste Design safer chemicals and products

3 4 5 6 7

Design less-hazardous chemical syntheses Use renewable feedstocks Use catalysts, not stoichiometric reagents Avoid chemical derivatives Maximize atom economy

8 9 10 11

Use safer solvents and reaction conditions Increase energy efficiency Design chemicals and products to degrade after use Analyze in real time to prevent pollution

12

Minimize the potential for accidents

steps. It encourages industrial producers to use processes that meet as many of the 12 aims as possible. ‘‘Increase energy efficiency’’ is principle 9. The Presidential Green Chemistry Challenge Awards have been awarded annually since 1996 by the American Chemical Society supported by the US Environmental Protection Agency (EPA). In 2009, the Greener Synthetic Pathways Award was won by Eastman Chemical Company for a novel route to the production of esters. The old process used strong acid catalysts at high temperatures; using enzymes eliminates the need for harsh conditions and thus significantly reduces energy use. It reduces the overall requirements for feedstock and solvents. It is also a cheaper process, which was made possible by taking a holistic approach to the industrial process. This section now turns to the energy efficiency technology after which it is named: combined heat and power (CHP). By making use of the ‘‘waste’’ heat produced as steam in electricity production, CHP increases the overall efficiency of a power plant. However, one criticism of CHP use in power plants is that the efficiency of electricity generation is reduced in order to deliver useful heat, and, since heat is a lower-quality energy product than electricity, this does not necessarily constitute a better use of fossil fuel resources. Domestic heating should, it could be argued, be provided by solar heating panels, heat pumps, or even ‘‘micro-CHP’’ instead. A petrochemical facility, on the other hand, has a high demand for both power and high-temperature steam, for processes such as steam cracking. Combining heat and power production is therefore a ‘‘no-brainer’’ – a truth that has not been lost on the industry. The chemical and petrochemical industry is already one of the largest users of CHP. In the USA, 24 GW or 34% of the CHP capacity was in the chemical industry in 2004. ExxonMobil alone has a worldwide installed CHP capacity of 3.7 GW in its facilities in 2006, considered to be equivalent to a reduction of 9 Mt of CO2 per year [39]. Additional

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technical potential in the industry in the USA is estimated to be more than 7.8 GW of power, much of which is at smaller plants as the larger facilities have already made the switch. Between 1999 and 2003, although the average number of CHP units used for powering each steam cracker did not increase, the average number went up by a third. At 730 MW (due to be expanded to 1,180 MW), Europe’s largest CHP plant at Immingham in the UK supplies a refinery and chemicals site and is approximately 70% thermally efficient. CHP is a technology that could be applied at nearly all chemical sites worldwide and could realize considerable GHG emissions savings. It has the advantage of being possible to retrofit without redesigning and investing in new process infrastructure, unlike the huge theoretical energy savings that are actually distributed among many different process improvements. GHG emissions can be reduced still further by using sustainably produced biomass fuel. Two challenges face the expansion of CHP for the organic chemical industry, however. Firstly, the technology needs to become more economically viable at smaller scales than at present (e.g., below 50 MW). Secondly, policies for supporting renewable energy need to be aligned with those for CHP to incentivize the use of biomass with CHP. In the UK, until recently, renewably fuelled CHP plants did not qualify for electricity subsidies. Consequently, the 30 MW biomass power station opened in 2007 at the Wilton chemical site on Teesside site was built without CHP. > Table 10.6 shows the IEA’s estimates of energy savings potential in the chemical industry.

Carbon Dioxide Capture and Storage (CCS) It may have seemed little more than a pipe dream just 10 years ago, but CCS is now widely accepted as a powerful tool in the fight against climate change. Other chapters in this book deal thoroughly with the technical details and the policy context of CCS, especially for the power industry, so only a brief review is necessary here. The main purpose of this section is to describe the applicability of CCS to the chemical industry. The big picture tells us that fossil fuel use continues to grow worldwide, notably in emerging economies such as China. Even in Europe, North America, and Australia, the . Table 10.6 Energy efficiency potential in the chemical and petrochemical industry [39] Estimated savings in EJ (thousand million GJ) Heat Electricity Recycling and energy recovery

4 1 2–4

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challenge of decarbonizing an electricity production system that is so hooked on coal and gas puts even the proudest of achievements in the renewable sector into fairly stark perspective: there is still a long way to go. CCS technologies appear to cut to the heart of these issues. By capturing and permanently storing the CO2 contained in the flue gases of power stations and industrial facilities, emerging economies can continue to nourish themselves on the coal and gas that fattened the Western world. Plus, by retrofitting the technology to existing European facilities, emissions cuts can be achieved much more rapidly than by relying on new renewables or the enigmatic goal of consumer energy efficiency. CCS is really a collection of technologies rather than a single procedure. At each stage of the process there are several technical options, such as the choice of separating the CO2 either before or after combustion of the fuel. Perfecting post-combustion capture would make it possible to retrofit existing power stations, whereas pre-combustion capture could increase the efficiency of the overall process. Similarly, the captured CO2 could be stored on land near the combustion site if a suitable aquifer or depleted hydrocarbon reservoir is nearby, or it could be piped to an offshore platform for injection. Capture could even be improved by using a high oxygen oxyfuel combustion method that reduces the challenges of separation – or the CO2 could be transported by ship rather than pipe. In reality, each of these stages is challenging and is receiving research and industrial attention. If the CO2 is used for enhanced oil or gas recovery (EOR/EGR), then depleting reservoirs are also suitable sites, as long as the CO2 is permanently stored. The extra oil revenues can even help make CCS profitable. It is, however, perhaps debatable whether enhancing the production of oil is consistent with the climate goals that CCS has been conceived to address. In the power sector, CCS is being prioritized by a number of governments as a crucial technology to be enabled in the next 10 years. Utilities and equipment supplier firms have rapidly moved from research to pilot projects and now to demonstration scale projects. Commercial-scale demonstration of the full CCS value chain has been identified as the next major step. If the experience from the first 20 or so plants can be gathered by 2020, then competitive deployment of the technology is anticipated shortly afterward, providing the option of low-carbon fossil fuel use and its attendant climate and energy security benefits. Although CO2 capture has been used by the chemical industry for many years, although CO2 has been transported over many hundreds of kilometers by the American oil industry for enhanced oil recovery (EOR), and although a million tons of CO2 per year has been stored at Sleipner in the North Sea by Norwegian firm Statoil since 1996, the full chain of CCS has never been integrated on a commercial scale. The reason is cost. The inescapable truth is that, in contrast to renewable energy technologies such as photovoltaics, it will never be cheaper to use fossil fuels with CCS than to use fossil fuels without CCS, regardless of the price of coal or oil. As a result, CCS will always be dependent on there being a cost to emitting greenhouse gases, the so-called carbon price that is currently provided to a limited extent by the EU emissions trading scheme (ETS). Furthermore, the cost of a demonstration plant can be up to €1.5 billion, a risk that

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no company is currently willing to take on its own in the absence of a high carbon price and a robust regulatory system for managing the liability issues around CO2 storage. As a result, in 2009, the EU provided €1 billion to assist six demonstration projects to be operational by 2015; it has also earmarked a further €4.5 billion (N.B. This value is heavily dependent on the eventual price of 300 million ETS allowances reserved in the 2009 revision of the EU ETS Directive for CCS and innovative renewables projects) and has established a CCS Project Network to help first-mover projects to share their experiences and advance from pilot to demonstration to deployment. In Canada, the federal and Albertan governments are committing approximately CAN$3 billion to 3–4 CCS demonstration projects, Australia has put $2 billion AUD in the federal budget for demonstration projects and the USA pledged almost US$3 billion to CCS demonstration projects in its American Recovery and Reinvestment Act in 2009, a billion of which could go toward the restarted FutureGen project (a US Government initiative to build a 200 MW coal-fired oxyfuel combustion plant with CO2 storage by the middle of this decade). Aside from the opportunity to sell the solvents that will be used to scrub the CO2 from flue gases, there are a number of reasons why the chemical industry would be well advised to pay close attention to CCS. These include the development of CO2 infrastructure clusters and the integration of CO2 and syngas chemistry through gasification technologies. To transport CO2 from the capture plant to the storage site is generally considered to require pipeline networks. For the first demonstration projects, this is likely to involve a single pipe linking a power station with an onshore or offshore storage site. A couple of these projects are set to be in areas that have a number of heavy emitters in a particular region. In Europe, the new power stations in Rotterdam and Humberside that aim to fit CCS are good examples. These areas have recognized that the next, much larger, tranche of CCS plants are likely to be power plants in these areas that can plug into already existing pipeline networks and utilize the same storage sites. This will greatly reduce costs. In Rotterdam, the discussion has evolved a step further to include chemical producers. Coal power plants have a much lower tolerance to the cost of carbon as electricity is ultimately a low-cost product and competes with other sources of power on the grid. As the cost of carbon rises, CCS could become an option with commercial value for other energy intense industries, such as cement, steel, or chemical production. Rotterdam has a high density of power production, refining, and petrochemicals. The Rotterdam Climate Initiative aims to bring these sources one by one into a linked CO2 network. The common infrastructure, it is proposed, would lower the cost of CCS for each plant and encourage them to be early movers in CO2 capture. In view of rising carbon prices in many parts of the world – despite the continuing absence of an international carbon trading system – petrochemical plants in the West could one day find that CCS is a vital way for them to remain in business. It will be advantageous for them to be located close to pipeline networks and ensure that the networks being developed today are of a sufficient scale to accommodate the facilities that will need to capture their CO2 emissions in 10 or 15 years from now. The Port of Rotterdam intends to capture and store some 20 Mt of CO2 per year from local sources by 2025 to achieve a 50% reduction of emissions compared to 1990 levels. Currently, over 50% of emissions in Rotterdam are from process industry sources.

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In contrast to other energy intensive industries like iron, steel, and cement, CCS could be particularly appropriate for the future petrochemical industry because of the importance of gasification technologies. In pre-combustion CO2 capture, coal is gasified to syngas, whereupon the hydrogen component is separated from the carbon monoxide and dioxide, which is cleaned and pressurized for storage. This is the principle behind IGCC coal power plants. The aforementioned proposed plant at Hatfield, near Humberside, is an example of such a plant. If multifuel turbines can be successfully demonstrated, the hydrogen could be used as a fuel in a gas turbine such that the electricity generation could, in principle, be from natural gas, hydrogen from coal gasification, or syngas. Syngas is already widely used in the chemical industry, primarily for hydrogen production. As was highlighted earlier in this chapter, there is a possibility that marginal organic chemical feedstocks like coal, heavy oil, and natural gas could become sources of petrochemicals via gasification to syngas. Syngas can be used as a starting point for Fischer–Tropsch synthesis of olefins and polymers, but only with higher CO2 emissions than today’s processes. Integration of CCS with industrial syngas ‘‘hubs’’ could enable these alternative feedstocks to be utilized in a manner that is compatible with a low carbon economy. With a strong carbon price, the syngas, the hydrogen and the CO2 could all be tradable commodities between firms (see > Fig. 10.7). Again, realizing such a scheme so that the integration can be optimized requires governments and companies to develop shared visions of how the future chemical industry might look in a carbon-constrained world. The IEA, in its 2010 Technology Roadmap for CCS, charted a course to deployment of CCS to achieve the kinds of capacity that would be required by their scenarios for tackling

Fossil fuels & Biomass Geological CO2 storage

CO2

CO / CO2 Petrochemical, bio-based, oxygenated, nitrogenous reagents etc.

Gasification

CO2

Uncaptured GHGs

CO / CO2 H2

H2 C1 chemical factory, methanol plant, FT-olefin synthesis etc.

Organic chemical value chain

Power & Heat

Power generation

Electricity grid

. Fig. 10.7 Schematic representation of a gasification-based chemical complex with CCS

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climate change. This roadmap shows a requirement for nearly 100 additional commercialscale CCS demonstration projects by 2020. Among these, it is expected that the chemical industry is well placed to make an early contribution to advancing the technology. The IEA considers that 18.5 Mt per year of CO2, or 11% of all captured CO2, could be from the chemical industry in 2020, with projects capturing CO2 from sources such as ammonia and fertilizer production offering near-term, low-cost opportunities. 18.5 Mt equates to approximately 20–40 projects that would need to raise investment funding in the next 5 years. This figure is then projected to fall to 9% of all captured CO2 in 2050, although in real terms it would have risen to a huge 411.3 Mt per year for the chemical industry. The IEA’s analysis is based upon the achievement of a 50% reduction of CO2 emissions levels by 2050, consistent with the aim of stabilizing CO2 levels at 450 ppm. One key point made in this report is that without CCS, the overall costs to halve CO2 emissions levels by 2050 increase by 70%. By 2050, CCS can deliver one fifth of the lowest-cost GHG reduction solution in 2050. This chapter has mentioned numerous technologies that can partly address the fossil fuel dependency and climate impact of the global organic chemical industry. CCS on its own can do very little about the former, but could be a very potent weapon against the latter. The current trends are unmistakable. Although the increasing exploitation of LPG as a chemical feedstock in affluent oil-producing nations means that the carbon intensity of olefin production has decreased, this is more than offset by the rise in production and the use of heavier feedstocks elsewhere in the industry. > Figure 10.8 charts the increase in global chemical feedstock consumption since 1971 and shows that it has largely mirrored the growth in per capita GDP. Without political intervention to reserve the most suitable fractions of conventional oil resources for organic chemical feedstocks, the depletion of these resources will, in the course of the next few decades, increase the energy intensity of chemical manufacture from fossil fuels. If this energy – and this is very likely in the major chemical-producing regions – is itself derived from fossil fuels, then CCS is the only option for substantially reducing CO2 emissions. Efficiency improvements may not even be able to help the industry to stand still in terms of its GHG emissions rate. In its favor, CCS is particularly suited to the chemical industry. GHG emissions from petrochemical manufacture tend to be concentrated upstream in coastal areas of heavy industry, refining, and oil and gas production. These factors offer a strong potential for linking emissions sources together and accessing suitable offshore, or onshore, storage sites.

Biorefineries As was described earlier in this chapter, the ‘‘coevolutionary’’ history of the organic chemical industry and the petroleum fuels industry has led to a highly integrated modern production system. This integration influences the pattern of raw materials use, technological choices, and the institutional organization of the major firms, industry associations, and government departments. Thus, the profitable use of certain fractions

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1 1976

1981

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. Fig. 10.8 Increase of global chemical feedstock consumption and per capita GDP [51, 52]

of each barrel of oil for making chemicals such as plastics contributes to the economic advantage of oil in the energy mix. There are only about 700 oil refineries worldwide, but their products underpin almost every aspect of modern society. The synergies of this ‘‘by-product relationship’’ make it more difficult for each sector – fuels and chemicals – to make the switch to alternative, cleaner resources. One such alternative is to increase the contribution of biomass as a fuel and feedstock. The section introduces the concept of biorefining as a way of maximizing raw material utilization and therefore using integration as a means of improving the competitive position of an alternative to fossil fuels. Peck et al. [47] have noted that there is not yet an agreed definition of a biorefinery, but cite the following: ‘‘The economic conversion, fractionation, or extraction of a spectrum of biomass sources through integrated physical, biological and chemical processing for the production of various commodities and specialities’’ [48]. This is a broad definition, but it indicates the idea of a processing plant that can take in multiple biomass raw materials and produce a range of salable products. These salable products are generally considered to be added-value chemicals, nutraceuticals, and proteins that can improve the economics of large-scale biofuels production by increasing the revenue per ton of biomass converted. By utilizing renewable biomass energy to power its chemical and biochemical processes, a biorefinery can reduce the overall consumption of fossil fuels and GHG emissions in the production of organic chemicals.

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Two strategies toward biomass feedstock substitution are being explored by sections of the industry. Many large chemical firms have taken an interest in the production of platform chemicals. Platform petrochemicals are olefins and BTX (benzene, toluene, xylenes), which form the basic building blocks for most derivative products in all organic chemical market segments. Platform biochemicals could be the same entities, for example ethylene produced from bioethanol, or new entities produced because they are easily accessible from biomass, for example, 1,3-propanediol. The Brazilian firm Braskem is pursuing ethylene from cheap Brazilian cane sugar-based ethanol [49] and DuPont commercially manufactures 1,3-PDO from corn [50]. Other novel platform chemicals could include hydroxymethyl furfural, lactic acid, succinic acid, or phenol. All of these could be produced from sugars with a lower carbon footprint. However, generating new product lines for their derivatives may ultimately be more challenging that finding routes to existing platform chemicals. One reason for this is simply that bio-derived chemicals tend to be more oxygenated and require more processing to yield materials of equal performance to petrochemicals. In contrast, an example of a new route to an existing value chain is the gasification of wood to syngas, followed by chemical or biochemical conversion to fuels and feedstocks. The second strategy to feedstock substitution is to target new products that can easily be accessed from biomass, such as polymers and speciality chemicals. This strategy is more suitable for smaller chemical firms that see an advantage in avoiding existing value chains and marketing their products directly as having novel ‘‘green’’ properties. Biodegradable polymers, such as polylactic acid (PLA), are an example of this. Although PLA is currently manufactured from energy-intense US corn, and only in small quantities, it has been shown to have a lower carbon footprint than the petrochemical alternatives. The challenge for PLA, which has only been produced since 2002, is to develop a broad product slate in areas such as packaging without compromising the biodegradability of the product. After all, one of the things that people find most convenient about plastics is that they do not degrade during the time that people are actively using them. Because of these different strategies, it is clear that unlike the relative homogeneity of oil refineries, individual biorefineries are likely to be very different entities depending on the availability of raw materials and the markets for the different products. Raw materials could include lignocellulosic materials such as wood, oils such as rapeseed, or sugars from cane or beet. Conversion technologies could be thermal (e.g., gasification), chemical catalytic (e.g., Fischer–Tropsch synthesis or dehydration), or biochemical (e.g., fermentation). Of these, it is very likely that biotechnology is going to play a major role in determining the success of biorefining. Enzymatic reactions are often well suited to renewable raw materials and have high specificity and high energy efficiency. Uncertainty prevails over where to find reliable markets for biorefinery products, and this is a hindrance to the raising of capital. Biofuels are currently produced through maximizing the fuel yields for which there are guaranteed outlets. Introducing renewable raw materials into the nonfuels markets will require what have been termed ‘‘lead markets.’’ The European Commission has launched a search for lead markets for biobased products, a process that is already well under way in several sectors, for example, the

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development of niche markets for plant-based cosmetics and biolubricants. Biolubricants could be especially attractive to manufacturers of biofuels as the fuel industry traditionally also sells oil-based lubricants. There is no space here to describe in full the various designs and concepts that have been proposed for biorefineries. As is logical, they differ on the basis of the resources that are geographically available and the product markets that are most attractive to the proponents. Subsidies for biofuels have, for instance, led to most advanced biomass processing facilities in Europe and North America being driven by provision of liquid fuels. Policies that promote bio-based chemicals could encourage firms to seriously consider production of bulk chemicals from biomass. Policies that promote properties, like biodegradability, that can be more easily delivered by using renewable feedstocks could also contribute to this result. For the reduction of GHG emissions, bulk chemicals would be more important targets simply because of the volume of petrochemicals that could be replaced. As a general caveat to this section, it must be borne in mind that biorefineries are currently only at the beginning of a development process. Three critical aspects give reason for caution when advocating biomass as a low carbon raw material for displacing both liquid fuels and organic chemicals. The first is that the biomass resource is more limited than the rate at which mankind has been able to produce petroleum during the last 50 years. Unless yields can be improved dramatically, for example, by intense algae cultivation, then biomass for biorefineries will compete with other uses of agricultural land and forestry. The high food prices in 2007 gave the world a taste the human impact of undersupply of staple foods. If crops are to be produced for industrial products in a world of 9 billion people and water shortages, then it may be difficult for some in developing countries to afford basic foods. Therefore, biorefinery raw material production must be based on policies that ensure that non-food crops are used that do not compete with food production. Aligning the needs of chemical producers with the timescales of agricultural innovation will thus be important. The second critical aspect is the scale at which biorefining can be sustainable. The modern chemical industry operates at vast scales to produce materials that are affordable in many thousands of applications. The biomass resource is relatively diffuse and would need to be transported large distances to feed a very large-scale plant all year round. Biomass generally has a high water content and is more energy intense to transport than petroleum with an equivalent hydrocarbon content. Ultimately, the climate benefits of biorefining will depend on innovations in industrial arrangements. These could range from large-scale ‘‘co-firing’’ of biomass and fossil fuels in gasification processes to localized processing of biomass before shipping the lighter, more valuable components for further processing. Thirdly, and finally, biorefining is a different prospect to oil refining. Oil refineries are based on a fixed set of principles and a relatively fixed set of hydrocarbon distillation products. Biorefineries, because of the diversity of designs, raw materials, products, and scales will not be able to benefit from ‘‘by-product’’ relationships to the same extent. Thus, it may take a lot longer to approach the kind of standardized biorefinery designs that can

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be licensed and propagated worldwide. Given the outlook for GHG emissions and fossil fuel supplies, it appears prudent to consider the biorefinery concept as a long-term objective for addressing looming troubles in the organic chemical industry. This can be helped by recalling the general principles of oil refining rather than the specific processes involved. The best biorefineries will convert all of the raw material to valuable products, and will be highly integrated with the downstream uses of their outputs.

Concluding Remarks This chapter has sought to introduce the organic chemical industry as a highly energy dependent sector of the economy. Presently, the industry is dominated by petrochemicals and a manufacturing system that is almost entirely reliant on fossil fuels, especially oil, for both raw materials and large amounts of process energy. This situation can be understood as the consequence of almost 80 years of ‘‘coevolution’’ of organic chemicals production with liquid fuels production, based around the oil refinery and the platform chemicals that are produced in the refining process. This process of close integration was especially pronounced during the periods of very rapid expansion during the 1950s and 1960s in Europe and North America. It has bequeathed a network of petrochemical clusters that feed the world’s manufacture of plastics, synthetic fibers, solvents, lubricants, medical products, and cosmetics. The efficiency of large-scale, integrated production continues to drive growth and innovation among the small number of multinational firms. As a result, this pattern of fossil fuel use, and thus GHG emissions, can be perceived to be ‘‘locked in,’’ making it very difficult for new low-carbon technologies to break into the chemical value chain. The chemical industry is responsible for 30% of industrial energy use and about 5% of global CO2 emissions. This chapter proposes that to seriously address climate change, GHG emissions from the chemical industry need to be severely reduced and that to do so will require a thorough understanding of the integration between the oil and chemical industries, and the ambiguous nature of fossil carbon storage in chemical products. Truly sustainable solutions will therefore need to address the future trends in petroleum resource availability, and overcome the barriers to market entry raised by the economics of the by-product relationship of olefins production and oil refining. Three options have been introduced that could have the potential to either ‘‘green’’ the existing production paradigm or disrupt it through radical innovation based on biotechnology. These three technology areas – efficiency savings through CHP, carbon capture and storage, and biorefining – could furthermore be combined to enable long-term organic chemical production that is compatible with deep GHG emission cuts. In addition, recycling, demand reduction, and green chemistry are clearly identified as vital complements to the introduction of new technologies. However, as the industry moves closer to a world in which its use of carbon is tightly regulated, new tools that are able to account for the full lifecycle impacts of organic chemicals will need to be developed and established as international standards. For instance, there can be environmental

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benefits to locking up carbon in nondegradable plastics but only if they are not subsequently burned for energy recovery without CCS. Likewise, if biomass resources are limited then they should be directed to where they can have the greatest impact on GHG emissions reductions. This calls for a major role for lifecycle assessment that is accounted for by carbon prices throughout the world economy. The challenge is an immense one that requires committed and enduring action from industry and governments, a fact that has been clearly identified for the two key areas of CCS demonstration and lead markets for bio-based products.

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39. IEA (2007) Tracking industrial energy efficiency and CO2 emissions. In support of the G8 plan of action. International Energy Agency, OECD, Paris 40. Cefic (2006) The chemical industry helps to protect the climate. The European Chemical Industry Council, Brussels 41. Tam C, Gielen DJ (2006) Petrochemical indicators. In: IEA/CEFIC Workshop: feedstock substitutes, energy efficient technology and CO2 reduction for petrochemical products. December 12–13, 2006. Paris, France 42. EC (2009) European community annex I party GHG inventory submission for 2007. UNFCCC, Bonn, DE 43. Ho¨o¨k M, So¨derbergh B, Jakobsson K, Aleklett K (2009) The evolution of giant oil field production behavior. Natural Resources Research 18(1): 39–56 44. Sorrell S, Speirs J, Bentley R, Brandt A, Miller R (2009) Global oil depletion. An assessment of the evidence for a near-term peak in global oil production. UK Energy Research Centre, London 45. Wrap (2006) Environmental benefits of recycling. An international review of lifecycle comparisons for key materials in the UK recycling sector. Wrap, London 46. Gielen D, Bennaceur K, Tam C (2006) IEA petrochemical scenarios for 2030–2050: energy technology perspectives. International Energy Agency, Paris 47. Peck P, Bennett SJ, Lenhart J, Bissett-Amess R, Mozaffarian H (2009) Understanding, acceptance, and support for the biorefinery concept among policy-makers. Biofuels, Bioprod Bioref 3(3):361–383 48. Koutinas AA, Arifeen N, Wang R, Webb C (2007) Cereal-based biorefinery development: Integrated enzyme production for cereal flour hydrolysis. Biotechnol Bioeng 97(1):61–72 49. Braskem (2007) Braskem has the first certified green polyethylene in the world. Press release. http://www.braskem.com.br/site/portal_braskem/ en/sala_de_imprensa/sala_de_imprensa_detalhes_ 6062.aspx, Accessed 27 September 2007 50. DuPont (2006) DuPont tate & lyle bio products begin bio-pdo™ production in tennessee. DuPont News. Accessed 27 September 2007 51. Maddison A (2009) The world economy: historical statistics. OECD, Paris

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11 Venture Capital Investment and Trend in Clean Technologies John C. P. Huang Focus Capital Group, Cupertino, CA, USA Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361 Venture Capital Investment Trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362 Venture Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362 Venture Capitalist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363 Venture Capital and Cleantech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363 Venture Capital Investment in Cleantech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 Cleantech Venture Investment in 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 Cleantech Venture Investment in 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 The Scope of Cleantech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366 Renewable Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366 Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367 Green Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368 Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368 Smart Power, Green Grid, and Energy Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369 Air, Water, and Waste . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370 Cleantech Technology Trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371 Solar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373 Smart Grid and EV Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377 Green Buildings, Lighting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381 Biofuels and Biochemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382 Batteries, Fuel Cells, Energy Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384 Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 Other Energy: Wind, Nuclear, Cleaner Coal, Geothermal . . . . . . . . . . . . . . . . . . . . . . . . . 389 Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393 Green Information Technology (IT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393

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Cleantech Geographic Trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394 Cleantech in the USA and California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394 Cleantech in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 Cleantech in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 Cleantech in Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 Solar Energy in Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398 Concluding Remark: Globalization and Deployment of Cleantech . . . . . . . . . . . . . . . . . 399 Globalization of Cleantech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399 Deployment of Cleantech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 Venture Capital Firms in USA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 Venture Capital Firms in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403 Venture Capital Firms in India, China, Japan, and Israel . . . . . . . . . . . . . . . . . . . . . . . . . . 405 How to Secure Venture Capital Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405 How is a Business Plan Evaluated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406

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Abstract: ‘‘Cleantech’’ is being widely used to replace ‘‘Green Technology.’’ It describes a group of emerging technologies and industries, based on principles of physics, chemistry, biology, and resource efficiency, new paradigms in energy, and water conservation. The scope of this field includes large-scale infrastructure projects as well as innovative technologies. The term Cleantech is also often associated with venture capital (VC) investment. The goal of this chapter is to provide readers with an overview of the scope and trends in venture-capital-funded innovation in Cleantech, how to seek VC funding, and Cleantech implications on world climate change. This chapter addresses the basics of venture capital and the dynamic field of Cleantech. Major topics covered include: (1) VC Investment Trend based on the volume of funds invested and the number of projects funded chronologically; (2) The scope of Cleantech encompassing renewable energy, energy efficiency, green building, transportation, smart power, smart grid and energy storage, air, water, and waste; (3) Cleantech Technology Trend through a discussion of the top VC-funded Cleantech start-ups and selected high-profile projects, a total of 61 companies in nine technology categories; (4) Geographic Trend addressing the status in western nations as well as in emerging countries and highlighting the status of Silicon Valley in California, now the heart of Cleantech innovation; (5) Concluding Remark discusses globalization of Cleantech as an infrastructure project and the key to the deployment of Cleantech innovations. The appendix provides a brief introduction of how to apply for VC funding and lists of major venture capital companies in key nations.

Introduction In recent years, the term ‘‘Cleantech’’ is being widely used to replace ‘‘Clean Technologies’’ and ‘‘Green Technology.’’ It describes a group of emerging technologies and industries, based on principles of physics, chemistry, biology, and resource efficiency, new paradigms in energy, and water conservation. The scope of this field includes large-scale infrastructure projects as well as innovative technologies. The term Cleantech is also often associated with venture capital investment. In 2001, the total Cleantech investment in North America, Europe, Israel, China, and India was US $500 million. By 2010, Cleantech investment increased to $7.8 billion, a 15-fold increase in a decade. This private investment is in addition to the very large dollar amounts invested and granted by various government agencies. This chapter addresses the dynamic field of Cleantech in the following five sections: 1. Venture Capital Investment Trend addresses the basics of venture capital and provides an analysis of the historical venture capital investment trend in terms of funds invested and the number of projects funded. 2. The Scope of Cleantech lists the scope of Cleantech that encompasses renewable energy, energy efficiency, green building, transportation, smart power, smart grid and energy storage, air, water, and waste.

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3. Cleantech Technology Trend provides an overview of the key technologies that received venture capital investment. This is accomplished through a discussion of the top 50 VC-funded Cleantech start-ups plus selected eleven high-profile projects. These 61 projects include: renewable energy such as solar thermal systems, solar photovoltaic, wind turbine designs, fuel cells, and biofuels; energy efficiency systems focusing on new conception of battery technology, lighting, and green building; innovative resource management based on software and hardware, such as wireless smart meters and smart grids. 4. Cleantech Geographic Trend provides an overview of nations that allocate funding or establish legislation to support Cleantech, such as China, India, Germany, Australia, and USA. This section will also evaluate the status of Silicon Valley in California (the center of the US venture capital industry), now the heart of Cleantech innovation. 5. Concluding Remark discusses globalization of Cleantech as an infrastructure project and the key to the deployment of Cleantech innovations. The goal of this chapter is to provide readers with an overview of the scope and trends in venture-capital-funded innovation in Cleantech and its implications on world climate change.

Venture Capital Investment Trend Venture Capital Venture capital (also known as VC or Venture) [1] is provided as seed funding to earlystage, high-potential, growth companies and more often after the seed funding round as growth funding round (also referred as series A round) in the interest of generating a return through an eventual realization event such as an IPO (Initial Public Offering) or trade sale of the company. To put it simply, an investment firm will give money to a start-up and growing company. The growing company will then use this money to do research, build infrastructure, develop products, advertise, etc. The investment firm is called a venture capital firm or company, and the money that it gives is called venture capital. The venture capital firm makes money by owning a stake in the firm it invests in. The start-up company that a venture capital firm will invest in usually has a novel technology or creates a business model. Venture capital investments are generally made in cash in exchange for shares in the invested company. It is typical for venture capital investors to identify and back companies in high technology industries such as biotechnology, IT (Information Technology), now Cleantech. The source of funding of Venture capital typically comes from institutional investors, endowment funds, and high net worth individuals and is pooled together by dedicated investment firms. Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training, financial management, or deep industry experience.

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A core skill within VC is the ability to identify novel technologies or business models that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital (thereby differentiating VC from buyout private equity that typically invest in companies with proven revenue), and thereby potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one’s investment in a given start-up company. As a consequence, most venture capital investments are done in a pool format where several investors combine their investments into one large fund that invests in many different start-up companies. By investing in the pool format, the investors are spreading out their risk to many different investments versus taking the chance of putting all of their money in one start up firm.

Venture Capitalist A venture capitalist (also known as a VC) [1] is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers to a pooled investment vehicle, often an LP (Limited Partner) or LLC (Limited Liability Corporation) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or government small business loan. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company’s ownership. Young companies wishing to raise venture capital require a combination of extremely rare yet sought after qualities, such as innovative technology, potential for rapid growth, a well-developed business model, and an impressive management team. VCs typically reject 90–98% of opportunities presented to them, reflecting the rarity of this combination. The general rule of thumb for the success rate of VC-invested start-up is: about 60% start-up failed; 30% existed for 5 or more years with little or no profit; only about 10% start-ups go to IPO or are acquired by larger corporations as a separation business unit or merge into an existing operation of a larger corporation.

Venture Capital and Cleantech Traditionally, the venture capital (VC) industry has been focused on information technology, Internet, wireless and broadband communications, and biotechnology. All projects related to innovation of energy generation, energy saving, waste management, and

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environmental impact were grouped into a general industry category and the investment funds were relatively small. In recent years, however, Cleantech investment has become a separate category and played a major role in the VC portfolio.

Venture Capital Investment in Cleantech The following table lists venture capital investment in Cleantech for 2002 to 2010. Cleantech investment in 2010 is the second highest in 2010, but the volume of deals remained strong (North America, Europe, China, Israel, and India. Source: Cleantech Group [2]). Year

Investment (Billions US $)

Deals

2002

$0.9

164

2003

$1.3

301

2004

$1.3

333

2005

$2.0

381

2006

$4.5

409

2007

$6.1

488

2008

$8.5

567

2009

$5.6

557

2010

$7.8

715

Cleantech Venture Investment in 2009 In 2009, 128 venture funds in the USA collected $13.7 billion, down from 205 funds that collected $29.3 billion in 2008, and 204 funds that collected $40 billion in 2007, according to data tracker VentureSource. About US $5.6 billion in venture capital investment went to Cleantech firms in 2009 [3] – including solar, wind, energy efficiency, transportation, and biofuel. The investment flow underscores that: (a) Cleantech became a dominate force. In 2004, the sector accounted for about 3% of venture capital investment. That share expanded to about 25% in 2009. The Cleantech sector in 2009, for the first time, received more private venture capital than any other sector, including software. (b) Energy efficiency and transportation sector became important. The top Cleantech recipient in 2009 was solar, which received 21% of it. However, solar investment declined 64% from the previous year, while the transportation and energy efficiency sectors had record years. The investment decline for solar stems from several factors, including the large investment required to commercialize technologies. Meanwhile, energy efficiency

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firms – those concentrating on a diverse range of technologies ranging from lighting to green building materials – often require less money to bring products or services to market, may rely on more proven technologies, and, consequently, may pose less risk to investors. In 2009, venture capital for transportation – for items such as electric cars and new battery technology – rose 47% to $1.1 billion. Investment in energy efficiency rose 39% to $1 billion. (c) The raise of global interest. Northern America was still dominant for Cleantech venture capital, but its share is declining. In 2009, North America received 62% of Cleantech venture capital dollars, down from 72% in 2008. Europe and Israel received 29% of 2009 dollars, an increase of 22% from 2008. The increased share of venture capital funding in Europe and Israel may reflect the desire for investors to pursue less risky deals in markets where Cleantech is already more widely deployed. Concurrent with the apparent decline in share of Cleantech venture capital in North America, the US Government has invested around $16 billion a year and plans to increase investment to $50 billion annually by 2020. Part of the funding, about $15 billion, will come from tax credits and other fiscal measures. The rest will be derived from rate-payer increases for electricity and other energy. This spending should lead to very large investments in wind, solar, and carbon capture. In addition, the bill would bring into existence the first nationwide system of building codes, which would be further tightened every year through 2030. These codes will lead to considerable demand for green building technologies.

Cleantech Venture Investment in 2010 Cleantech had a second record year in drawing in venture capital in 2010, with $7.8 billion invested globally. The first half of 2010 had an increase in venture capital investing while the second half of 2010 saw two consecutive quarters of declines. Overall, global investing totals saw a 28 percent increase compared to 2009, making it the highest year for investment after 2008 ($8.5 billion). The drawback in the last half of 2010 seems to reflect some skepticism among venture capitalists on capital-intensive investments that are risky and can take years to bear fruit. Instead, investors are looking more towards capital investments like energy efficiency which is less costly to invest. BrightSource Energy is one of the capital-intensive investments and success stories of 2010 received funding sources beyond venture capital. The company behind a massive 392-megawatt Ivanpah solar thermal plant in California’s Mojave Desert received $1.4 billion Department of Energy loan guarantee and was preparing an initial public offering (IPO) in 2011 in a public stock market. Overall, venture capital in North America totaled nearly 70 percent of all the venture capital invested globally in 2010, with dollars invested surging 45 percent to a total $5.28 billion. Big deals included: solar manufacturer Solyndra’s $175 million raised in IPO,

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$350 million raised by electric vehicle infrastructure startup Better Place, $150 million raised by BrightSource Energy, $110 million raised by Abound Solar and $165 million raised by Switzerland’s smart meter company Landis + Gyr. IPOs had a record year as well, with eight of the 10 top IPOs in China worth a combined $10 billion. The country is emerging as a huge energy market with lots of opportunity for Cleantech companies. It has pledged over $7 billion to smart grid alone and continues to subsidize solar panel manufacturers that have undercut global competition in price. The top IPO of the year was the $3.6 billion offering in Madrid by the renewable energy unit of Italian utility Enel Green Power, the renewable energy unit of Italian utility Enel. The most active Cleantech venture capital investors of 2010 were: Chrysalix Energy Venture (16 rounds), Draper Fisher Jurvetson (16 rounds), Carbon Trust Investment Partners (12 rounds), Element Partners (12 rounds), Kleiner Perkins Caufield & Byers (12 rounds). In addition to venture capital funded projects, governments of major nations all invested heavily. According to Bloomberg New Energy Finance (BNEF), global investment in Cleantech reached $243billion in 2010. BNEF indicated that the sector is halfway to achieving the $500 billion a-year investment target that experts believe is required to ensure greenhouse gas emissions peak by 2020. BNEF found that 2010 investment levels surpassed the $186.5 billion spent in 2009, significantly buoyed by an increase in spending in China where BNEF said Cleantech investment in China had expanded 30 per cent year-on-year to US$51.1 billion. The study covered investment in renewable energy, energy efficiency, smart-grid equipment, biofuels, and carbon capture and storage. We can see venture capital investment in Cleantech is only a small portion of the total investments by government, but these VC supported projects are often the most creative and full of scientific innovations.

The Scope of Cleantech The scope of Cleantech encompasses a broad range of technology categories, including renewable energy, energy efficiency, green building, transportation, smart power, smart grid and energy storage, and air, water, and waste. The following lists [4] provide examples of technologies within each of the major categories.

Renewable Energy The Renewable Energy category includes innovations that use, enable, and accelerate the migration to renewable energy. Renewable energy encompasses technologies that use waste streams to directly produce energy.

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Examples include low-emission power sources, such as solar, biofuel, wind, wave and tidal energy, and hydropower. Example technologies include: ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

Solar for energy production CIGS Thin-film solar manufacture Concentrating solar PV Coatings for solar panels Polysilicon supply and manufacture Residential scale solar deployment Ethanol Bio-based fuels Tidal energy Wave energy capture Landfill gas to energy systems Agricultural waste to energy systems Hydropower Turbine blade design Advanced fluid flow designs Wind power aerodynamics Wind power conversion efficiency

Energy Efficiency The Energy Efficiency category comprises technology that can significantly reduce wasted energy (including natural gas), driving toward the common goal of saving the equivalent of ‘‘a power plant a year.’’ Examples include advanced light sources and controls, smart/user-friendly energy management systems, energy-efficient water heaters and other appliances, high-efficiency industrial process systems, motors, pumps, and advanced space heating and cooling systems. Example technologies include: ● ● ● ● ● ● ● ● ● ● ●

Pumps for water/material Industrial process improvements Natural gas monitoring and control (industrial or residential) LED lighting Advanced lighting controls Water heating HVAC solutions Heat pumps Waste heat management Efficient heat transfer Utility-scale natural gas controls

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Display systems for energy management Materials used in microelectronics manufacturing Deposition and sputtering processes Alternatives to heat-intensive processes Cooling solutions Glass materials production Pure manufacture techniques for fuel cells

Green Building The Green Building category focuses on reducing the environmental impact of building construction or operation through improved design or construction practices, new or innovative use of building materials, or new hardware or software applications. Technologies are applied directly to the built environment. (Building energy efficiency submissions will be considered in the Energy Efficiency category). Examples include improved site planning, water management systems, reduction of hazardous materials in building construction or operation, use of new environmentally friendly or recycled materials, systems to improve indoor environmental quality, and systems for improved waste reduction or disposal. Example technologies include: ● ● ● ● ● ● ● ● ● ● ● ● ● ●

Insulation materials Cement alternatives Cement production techniques Building integrated PV (BIPV) Indoor air filtration systems Modular housing Disaster relief housing Architectural designs for thermal management Office environment Low VOC carpeting and flooring Water saving toilets, showers, plumbing Residential heat pumps Recycled materials for use in building material Design improvements to commercial environment

Transportation The Transportation category encompasses transportation and mobile technology applications that improve fuel efficiency, reduce air pollution, reduce oil consumption, or reduce vehicle travel (not limited to automobiles). Technologies are applied directly to transportation systems or vehicles. Examples include new vehicles and new types of

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transport services and infrastructure, efficient batteries, fuel cells, bio-based transportation fuels, and use of information technologies. Example technologies include: ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

Fleet management hardware and software systems Routing and data solutions for public transportation operators Logistics management Carpooling solutions Hybrid motor systems Storage of energy specifically applied to vehicles Plug-in hybrid vehicles All electric vehicles Fuel cell vehicles Biodiesel applications Intermodal tracking and monitoring NOX/SOX reductions for ocean going vessels Cold-ironing systems Diesel particulate matter filters for locomotives Combustion designs Fuel blends Flex fuel engines and applications Drivetrain conversion kits Route management via GPS networks Exploiting GPS and location information Monitoring and control of driver behavior

Smart Power, Green Grid, and Energy Storage The Smart Power, Green Grid, and Energy Storage category promotes links between information technologies and electricity delivery that give industrial, commercial, and residential consumers greater control over when and how their energy is delivered and used. It includes improvements in all forms of energy storage, from battery technology for consumer-scale products to large chemical, metal, biological, or other approaches to storage of utility-scale energy, as well as methods for controlling or increasing the efficiency of energy storage or energy transmission. Examples include wireless metering and use of real-time pricing information, intelligent sensors, batteries, fuel cells, flywheels, and advanced materials or systems for energy transmission, such as hardware and software controls. Example technologies include: ● ● ● ●

Advanced metering Network architecture for power management Cloud computing, applied to grid Batteries

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Novel battery chemistry Nickel-metal hydride improvements Hydrogen storage Li-ion cells Form factor improvements Improved cycle life for batteries Depth of discharge for batteries Solid oxide fuel cells Novel catalysts in batteries, fuel cells Advanced fuel cell membranes Methanol fuel cells PEM fuel cells Flywheels Grid scale hardware and infrastructure Power storage for intermittent, renewable resources Monitoring and deploying power generated from renewables Transmission efficiency Electrical engineering and controls for power distribution Novel metals and alloys for power transmission Superconducting power transmission Real-time power monitoring

Air, Water, and Waste Entries in the Air, Water, and Waste category focus on improving resource availability, conservation, and pollution control. With respect to waste, the category focuses on cradleto-cradle approaches to reduction, reuse, and recycling technologies, as well as innovative business models and approaches to materials usage. Air examples include services, instruments, and equipment related to emission control, treatment, or reduction technologies. Also included are creative approaches to greenhouse gas reduction, including carbon conversion and sequestration. Water examples include treatment, storage and monitoring, recycling and conservation technologies. Waste examples include waste management equipment; sorting; resource recovery processes; pollution prevention, control, and treatment technology; as well as waste reduction through innovative recycling processes and new recyclable materials, such as bio-based plastics. Example technologies include: ● ● ● ● ●

Water monitoring – on-site in-situ real-time water monitoring for pathogens Cooling solution On-site wastewater recycling – industrial and commercial applications Advanced water metering Storm-water and flood control, rainwater harvesting

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● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

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Smart irrigation On-site water disinfection Membranes for water treatment Advanced filtration without membranes Produced water (from oil exploration and drilling) Energy-efficient water pumping Reverse osmosis Advanced filters and filtration (air or water) Emissions controls Scrubber technology Carbon and GHG monitoring and control Carbon sequestration Carbon capture and storage Technology enablers for carbon markets Reduction and remediation of VOCs Waste cleanup and remediation DI water supply Agricultural waste treatment Recycling Microbial water treatment Bio-based packaging solutions Methane capture and storage Soil technology Natural pesticides Clean coal

The scope of Cleantech is extremely broad and involves many scientific and academic disciplines. It is a good field for today’s science and engineering students to pursue as a career for the next decade.

Cleantech Technology Trend Technology Trend provides an overview of the key technologies that received the majority of the venture capital investment. These include: renewable energy such as solar thermal systems, solar photovoltaic, wind turbine designs, fuel cells, and biofuels; energy efficiency systems focus on new conception of battery technology, lighting, and green building; innovative resource management is based on software and hardware, such as wireless smart meters and smart grids. Venture capital firms have invested almost $20 billion into hundreds of Cleantech start-ups since 2005. All of these firms are looking to launch a disruptive force into their target markets, scale rapidly, and grow quickly. Some of these firms will actually make it. Greentech Media [5] announced on March 8, 2010, the top 50 US VC start-ups in

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Greentech (Cleantech) that Greentech Media rated as having a chance of succeeding and making an impact on the energy-intensive lives. The selection criteria are: ● ● ● ● ● ● ● ●

Technological edge Potential to severely disrupt the market Great management team Massive market opportunity Substantial war chest (financial resources) Feasible exit strategy Sheer hype power Only venture-backed private firms

In addition, this section added eleven selected high-profile companies with () added in the following list. These companies generated publicity and general interests; they are either sponsored by VC, or by major corporations. The following information is compiled from sources of green-media.com, linkedin.com, the Web sites of respective companies, Google search, and news stories from Wall Street Journal and Business Week. Most of the companies have employees ranging from 50 to 300 and were founded between 2004 and 2008. These companies received VC funding ranging from $20 million to $100 million; some of them also received additional government agency funding; few have already gone public and their stocks are likely traded in NASDAQ exchange. The combined list of 61 promising companies is grouped in the following nine technologies: 1. Solar – 15 companies: Brightsource Energy, Chromasun, Enphase Energy, eSolar, Innovalight, Nanosolar, Petra Solar, SolarCity, Solyndra, Suniva, SunRun, Ausra, Enel , SolFocus, Stion 2. Smart Grid and EV Infrastructure – 13 companies: Arcadian Networks, Better Place,  CPower, Coulomb Technologies, EcoLogic Analytics, eMeter, OPOWER , Proximetry, Silver Spring Networks, SmartSynch, Tendril Networks, Trilliant 3. Green Buildings, Lighting – seven companies: Adura Technologies, Bridgelux, Optimum Energy, Recurve, Redwood Systems, Serious Materials, Turbine Air Systems 4. Biofuels and Biochemicals – six companies: Amyris, LS9, Sapphire Energy, Solazyme, Synthetic Genomics, Renewable Energy Group 5. Batteries, Fuel Cells, Energy Storage – six companies: Bloom Energy, Deeya Energy, EEStor, General Compression, A123 Systems, Axion Power International  6. Transportation – three companies: Coda Automotive, Fisker Automotive, Tesla Motors 7. Other Energy – Wind, Nuclear, Cleaner Coal, Geothermal – seven companies: Laurus Energy, Nuscale, Nordic Wind Power, Potter Drilling, Ze-Gen, Accio Energy, Carbon Trust  8. Water – three companies: Oasys, Miox, Purfresh 9. Green Information Technology – two companies: Hara, Sandforce

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The following is an undated description of each company. When information is available, each company’s headquarter location is added to illustrate the geographical distribution of Cleantech ventures; the founding year is also included to show the longevity of the company.

Solar Brightsource Energy (BE): located in Oakland, California, and founded in 2006. The original (BE) technology was based on solar thermal parabolic trough technology, which focused sunlight on pipes carrying synthetic oil. In recent years, BE has advanced solar thermal technology by developing new flat mirror reflectors that increase solar-to-thermal conversion efficiency from about 36% (for the older parabolic trough technology) to above 40%. At the same time, the new design significantly reduces overall equipment and project costs. The company is developing more than 4 GW of solar power projects in southwestern USA, enough to power 1.4 million homes. BE now has more than 2.6 GW of power under contract, including the two largest solar power agreements ever – 1,300 MW with Southern California Edison and 1,310 MW with Pacific Gas & Electric Company. The company’s Solar Energy Development Center in Israel’s Negev Desert is now fully operational and demonstrating the effectiveness of its Power Tower technology. Now the challenge is getting past further environmental objections to its first 396-MW power plant in California’s Mojave Desert. Chromasun: located in San Jose, California, developed Micro-Concentrator (MCT) as next-generation high-performance solar collector that uses the same technology as utilityscale solar systems, except now in a much smaller package. It has been designed specifically for rooftop integration. The MCT is low profile, lightweight, and has no external moving parts, so it is simple to mount and easy to maintain. Using a 25 Fresnel reflector optic, the MCT generates temperatures up to 220 C (428 F), something an ordinary flat panel solar collector cannot achieve. Air conditioning accounts for 50% of the demand for power during peak periods in California. Chromasun uses solar thermal collectors to gather solar heat to run a double effect chiller that curbs peak power, broadens the market for solar thermal technology, and fits well within the practices of the building trades. Danish investor VKR Holding led the $3 million investment, along with GoGreen Capital and two unnamed individuals in the USA. Enphase Energy: located in Petaluma, California, and founded in 2006, has new design of solar photovoltaic microinverter, a device that converts direct current (DC) from a single solar module (panel) to alternating current (AC). The contract manufacturing model is working and the company continues to grow. There are a number of microinverter start-ups but Enphase is the only one to reach credibility and volume shipments in

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a high-growth $2 billion market. This well-funded microinverter innovator has shipped more than 120,000 units for residential and commercial deployments. eSolar: founded in 2007 and based in Pasadena, California, engages in the design, development, construction, and deployment of modular and scalable concentrating solar power (CSP) plants for utilities in the USA. Its power plants utilize small mirrors that track the sun with high precision and reflect the sunlight to a tower-mounted receiver, which boils water to create stream that powers a turbine and generator to produce solar electricity. It sought funds to build solar thermal power plants; then switched strategies and decided to license its technology and sell equipment, leaving the actual building of the power plants to others. Since 2009, it has signed deals that will lead to gigawatts worth of its solar technology planted in China, India, Africa, and the Middle East. A 5 MW demo plant went up in 2009 and construction on the first 92 MW begins 2010. ESolar has software that helps improving the efficiency of the overall plant. Google, India’s Acme Group, Oak Investment Partners, and NRG Energy funded the company. Innovalight: based in Sunnyvale, California, and founded in 2002, is dedicated to helping world-class crystalline silicon cell manufacturers improve the performance of their solar cells. Innovalight has developed a portfolio of patented technologies and materials that allow current cell manufacturing companies to cost-effectively produce solar cells with higher conversion efficiencies. Representing over 90% of the solar photovoltaic (PV) market, crystalline silicon solar is the dominant PV technology. Manufacturers of crystalline silicon solar cells have reached the limits in the conversion efficiency of solar cells using current designs. Innovalight’s Cougar™ Platform is a new low-cost cell design enabled by Innovalight Silicon Ink that allows silicon wafer manufacturers to boost their cell efficiency by up to 2% with a low capital outlay. Nanosolar: located in San Jose, California, and founded in 2001, with a facility in the Berlin capital region as its European site. Its solar cell is to deposit a thin film of a semiconductor using a printing process – far faster than conventional high-vacuum deposition – and to create an efficient, durable solar cell. Nanosolar can now apply equipment from the printing industry to produce solar-electric foil at very high speeds, bringing the economics of printing to the world of semiconductor manufacturing. The thin-film pioneer got started in 2002, making it one of the earliest thin-film companies supported by Silicon Valley. Since then, Nanosolar has used every avenue of funding to fund their potentially disruptive solar firm, now at about $500 million in funding to date. Nanosolar is shipping product in the 10–12% efficiency range and has panels in the lab topping 16% efficiency. Nanosolar faces the same challenge as every other solar panel manufacturer – keeping up with silicon and cadmium telluride prices and efficiency. Petra Solar: located in South Plainfield, New Jersey, and founded in 2006. The core technology is a system, which operates as individual power generation stations, combines solar power, smart grid, and power management technologies to enable utilities to

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improve power quality and grid management. Petra Solar’s systems operate on streetlight and utility poles, connecting directly to the grid’s secondary voltage lines at the pole. Petra Solar is also a market channel player; its more than $50 million in VC funds are exploiting an untapped sales channel – solar panels on utility and power poles. Petra has a large contract with Public Service Electric and Gas, New Jersey’s biggest power utility, to install solar panels on streetlights and power poles across the distribution network. PSE&G looks to install 200,000 panels in 2010, according to PSE&G. Petra Solar has potential for high growth in a new application. SolarCity: headquartered in Foster City, California and founded in 2006, is a full-service solar provider for homeowners, businesses and government organizations – the first company to provide solar power system design, financing, installation and monitoring services from a single source. Fast growing SolarCity has emerged as one of the largest residential solar installers in California and has moved into other solar-friendly states. The start-up has innovated in the installation field as well as in the financial field by offering leasing options for homes and small businesses. US Bancorp has set up a $100 million fund to finance SolarCity’s residential and commercial installations. Solyndra: founded in 2005 and headquartered in Fremont, California, with almost a billion dollars in venture capital and half a billion in US Department of Energy loan guarantees, Solyndra is the clear winner in money raising. It designs and manufactures photovoltaic systems, comprised of panels and mounting hardware, for the commercial rooftop market. Using a proprietary cylindrical modules and thin-film technology, Solyndra systems are designed to be able to provide the lowest system installation costs on a per watt basis for the commercial rooftop market. Solyndra operates a state-of-theart 300,000 ft2 highly automated manufacturing complex. When this handbook is about to go to press, the once a star in Cleantech - Solyndra filed for bankruptcy protection on September, 2011. Solyndra’s photovoltaic panels were, as the name implies, a cylindrical design, like a florescent light tube. They were more efficient, as they caught light from not only above, but also reflecting off the roof. But Solyndra’s process technology is more complex and more expensive to produce. Silicon is the primary material used in photovoltaic systems. In 2008, silicon price was $475 per kilogram; by mid 2011 silicon price dropped to $51 per kilogram. Solyndra’s technology needs only a fraction of (one estimate was around 1 to 2%) silicon material in comparison with conventional photovoltaic; as a result, Solyndra lost its competitive advantage. Solyndra’s 1100 employee at Fremont, California lost their jobs. It is possible another Cleantech firm could modify the design, infuse it with cash, and attempt to make a go in the future. Suniva: located in Norcross, Georgia, USA is a well-funded company that produces crystalline silicon solar cells. Investors NEA, Goldman Sachs and Warburg Pincus have invested more than $125 million. Solar cells that Suniva manufactures are made of Polysilicon which is created by refining sand or quartz, one of the most abundant

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materials on earth. After being refined and ‘‘grown’’ into extremely pure monocrystalline ingots, the ingots are carefully sliced into very thin wafers. The monocrystalline wafers then undergo processing steps which apply an electric field to them, a metal grid or pattern of electrodes is affixed, and both an aluminum backing and a surface antireflective layer are applied. Suniva utilizes a number of patents and proprietary knowledge and technologies in these processing steps which yield very high cell efficiency at low cost and when combined with the ability to use thinner wafers results in industry leading cost per watt levels. These Suniva monocrystalline silicon cells are marketed as ARTisun® series which generate more power with fewer panels, resulting in lower costs. SunRun: located in San Francisco, California and founded in 2006, offers residential solar system with Solar power purchase agreements (PPA) – home solar as a monthly service. The company has seen eight to ten times growth in 2009. SunRun has received venture funding from Foundation Capital and Accel Partners, as well as a $105 million tax equity commitment from an affiliate of US Bancorp. Residential PPAs from SunRun might be the disruptive piece that allows solar to better penetrate the residential roof market. Ausra Inc. located in Mountain View, California, provides solar thermal power, steam and energy systems for industrial processes and utility-scale electricity generation. (For detail see ‘‘> Globalization of Cleantech’’). Enel: is located in Viale Regina Margherita, Rome, Italy. The Italian energy company on July 14, 2010, inaugurated an innovative solar thermal plant that stores heat from the sun in molten salts. The Archimede plant of Enel, near Syracuse in southeastern Sicily, is the first to use molten salts as a heat transfer fluid. The 5-MW Archimede plant uses molten salt, rather than an oil called therminol, to transfer heat collected by parabolic mirrors to the boilers for making steam. The plant also sports molten salt storage tanks and a combined cycle gas facility so it can produce power on cloudy days or during the evening. While solar thermal developers have used tanks of molten salt to store excess heat, they have not used molten salt as the transfer fluid that runs in the pipes that sit above the mirrors where heat from the sun is collected. By deploying salt as the heat transfer mechanism inside the pipes of parabolic solar thermal parks as well as a storage medium, the efficiency of solar thermal power plants could inch up incrementally, because molten salt retains heat longer than therminol. Thus, more heat could be ultimately exploited from the mirrors. This approach may potentially help parabolic solar technology, the reigning but aging standard in solar thermal; better compete against heliostats and some of the other new solar thermal architectures. The system involves some 320,000 ft2 of mirrors that concentrate solar rays onto 17,700 ft of pipes containing the molten salts. The plant has a capacity of about 5 MW and is expected to save some 2,100 t of oil equivalent per year and reduce carbon dioxide emissions by about 3,250 t. Italy is Europe’s second largest producer of solar power after Germany.

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SolFocus: founded in 2005 and located in Mountain View, California with European operations in Madrid, Spain, and manufacturing in Mesa, Arizona as well as with manufacturing partners in India and China. SolFocus has developed leading concentrator photovoltaic (CPV) technology which combines high-efficiency solar cells (approaching 40%) and advanced optics to provide solar energy solutions which are scalable, dependable and capable of delivering on the promise of clean, low-cost, renewable energy. Its high-efficiency solar cells with advanced concentrating optics to provide high energy yield using just 1/1,000 the amount of photovoltaic material used in traditional photovoltaic systems. SolFocus, the most heavily funded concentrating solar start-up around, received $70 million in 2009 to a total of $150 million funding. Stion: located in San Jose, California founded in 2006, is a manufacturer of high-efficiency thin-film solar panels. On June 2010, it has raised $50 million from a VC belonging to Taiwanese Semiconductor Manufacturing Company (TSMC) which will take a 21% stake in Stion. The funding brought the total Stion VC investment since 2006 up to $114.6 million. The two companies have reached a series of agreements covering technology licensing, supply, and joint development. Existing investors Khosla Ventures, Braemar Energy Ventures, Lightspeed Venture Partners, and General Catalyst Partners also invested, this latest, series D round, VC investment will be used to expand its current San Jose facility to produce 100 MW worth of solar panels per year, up from the current pace of 10 MWs. TSMC has licensed Stion technology to build a large Copper indium gallium selenide (CIGS) thin-film factory in Taiwan. CIGS is mainly used in photovoltaic cells (CIGS cells); in the form of polycrystalline thin films.

Smart Grid and EV Infrastructure The smart grid of the future is a utility-managed system that orchestrates smart meters, solar panels, batteries, demand response systems and plug-in vehicle chargers to serve as ‘‘virtual power plants’’ scattered throughout a utility service territory. Arcadian Networks: founded in 2006 and headquartered in Valhalla, New York, designs and delivers wireless communication networks to utilities based on the private (licensed), secured 700 MHz spectrum. The 700 MHz appears to be a better choice (than 900 MHz) is rural areas, since the signal can travel farther without relays and can penetrate physical obstacles (such as crops and hilly terrain) that higher frequencies may struggle with. The other major advantage of the 700 MHz spectrum is that because it is licensed there is not any interference from other sources. While 900 MHz mesh networking solutions have dominated the market due in part to their lower costs, as interference continues to create problems for utilities, and as ‘‘intelligent provisioning’’ becomes more common, expect Arcadian Networks to compliment 900 MHz networks in situations where interference is just not acceptable.

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In 2010, Arcadian announced the release of their second generation router/gateway adding the ability to link with WiMax. While this router can also connect to all other major communication networks (3G/4G, 900 MHz, Ethernet, etc.) clearly, Arcadian is doubling down on licensed networks for smart grid. Better Place: founded 2007 and headquartered in Palo Alto, California, is a global company delivering the electric vehicle (EV) networks and services that make an electric car affordable to buy, easy to use, and amazing to own. BetterPlace builds and operates the infrastructure and systems to optimize energy access and use. A $350 million dollar funding round in January 2010 ranks as one of the largest Cleantech deals in history with a pre-money valuation of $900 million. Pre-money means the value of a company before the next VC investment. Commercial launch is targeted for 2011 for the bold electric-vehicle/charging-station/battery-swap/electricityselling start-up with an initial focus on Israel and Denmark. Investors include HSBC, Morgan Stanley Investment Management, Lazard Asset Management, VantagePoint Venture Partners, et al. Better Place is looking to install between 15,000 and 20,000 charging stations in both Israel and Denmark in the near-term. This firm could be a Google or Netscape-type market disruptor. But even a dominant role as an urban vehicle, as a fleet vehicle, as a delivery vehicle, Better Place could win big in a niche market. CPower : founded in 2000 and based in New York, turns commercial buildings into electricity generators by getting its 1,500 commercial customers to cut back on energy during peak periods and selling the saved kilowatts to utilities when the grid is under stress. Cash is the lure for clients: Almost all the money CPower earns goes right back to them. Owners of a 50-story Manhattan tower, for instance, can save up to $30,000 per year. In Texas, customers are getting checks for 15–20% of the totals spent on electricity. With paybacks like that, it is not hard to understand why CPower is booming. In 2010, the company has gone nationwide with some 800 MW of demand response under curtailment management and is no. 3 in the demand response arena behind public companies EnerNOC and Comverge. CPower is looking to quickly move into other energy services, including reserves and frequency regulation, renewable energy credits, and energy efficiency for consumers. The firm, founded in 2000 as ConsumerPowerline and rebranded in 2008 as CPower, has raised $35 million from Mayfield Fund, Expansion Capital, Bessemer Ventures, Schneider Electric Ventures, New York City Investment Fund and Intel Capital. Coulomb Technologies: founded in 2007 and headquartered in Campbell, California, builds a vital piece of the EV infrastructure – charging stations connected to the grid with power and data. Coulomb was founded on two premises – that every charge station should be networked and that Coulomb needed to be a self-sustaining business model – they win revenue from the sale of the charge station and from fee-based charge services. Investors include Voyager Capital, Rho Ventures, Siemens Venture Capital and Hartford Ventures.

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EcoLogic Analytics: founded in 2000 and headquartered in Bloomington, Minnesota, provides meter data management (MDM) software solutions and decision management technologies for utilities. They offer a suite of software solutions that include gateway engines, meter data warehouse, meter read manager, meter reading analytic, navigator graphical user interface, automated validation engine, network performance monitor and reporting engine, real-time outage validation engine, data synchronization engine, calculation engine and residential rate analysis. Their MDM solutions also integrate with other billing systems to business users in the enterprise. EcoLogic Analytics was chosen as the vendor to provide MDM for PG&E, the biggest deployment in North America. In 2009, the company landed its second major contract with Texas utility Oncor and served as the MDM provider for more than three million electric meters. eMeter: founded in 1999 and headquartered in San Mateo, California, makes software that manages the enormous volume of data coming from smart meters, providing both MDM and AMI (Advanced Metering Infrastructure) integration for utility information systems. eMeter’s solutions also allow for demand response and real-time monitoring of resource usage, yielding greater energy efficiency and more reliable service, while minimizing the costs of AMI deployment, data management, and operations. The company competes with AMI companies that can provide their own software AMI and MDM software such as Itron and Sensus, as well as other software companies such as Oracle. In early 2009, eMeter announced a deal with CenterPoint Energy to support the Texas utility’s plan to install two million smart meters in its territory. That follows deals with Alliant Energy, Jacksonville Electric Authority, the Canadian province of Ontario, and European energy company, Vattenfall. The company claims to have more than 24 million meters under contract. eMeter has transitioned from just providing MDM solutions for utilities into consumer services. OPOWER: founded in 2007 and headquartered in Arlington, VA., is an energy efficiency and Smart Grid software company that helps utilities meet their efficiency goals through effective customer engagement. Using cutting edge behavioral science and patent-pending data analytics, the OPOWER platform enables utilities to connect with their customers in a highly targeted fashion, motivating reductions in energy use, increased program participation and overall customer satisfaction. Six of the ten largest utilities in the United States use OPOWER to significantly improve the effectiveness of their energy efficiency portfolios. For utilities with Advanced Metering Infrastructure (AMI), the OPOWER platform represents a cost-effective way to convert hourly data into measureable peak and overall savings, delivering the value of the Smart Grid directly to their customers. In late 2010, OPOWER raised $50 million in a round led by Accel and Kleiner Perkins. Proximetry : founded in 2005 and headquartered in San Diego, California, provides network and performance management solutions for wireless networks to enable network operators to visualize, provision, and actively manage their networks, especially to support mission-critical communications. The company’s software solution, AirSync,

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enables real-time, network-wide visualization, management, and active network control from a single system and location for multivendor, multifrequency, multiprotocol wireless networks. This so-called ‘‘intelligent provisioning’’ which provides ‘‘dynamic bandwidth’’ matching network resource priorities to user and device needs seems like a logical extension of smart-grid networking, and we expect this to be a major new trend going forward. Proximetry is working with San Diego Gas & Electric, widely considered to be one of the most innovative utilities in North America. Silver Spring Networks: founded in 2001 and headquartered in Redwood City, California, has developed standard-based networking for smart meters for close to a decade – building routers and hubs that connect via a wireless mesh protocol. The firm has made announcements of utility contracts with Oklahoma Gas & Electric, Sacramento Municipal Utility District, AEP, and Florida Power & Light and closed a $100 million investment from blue-chip VCs including Kleiner Perkins and Foundation Capital, bringing its VC total to $250 million. Revenues are estimated in the $100 million range a year. It is one of the leading VC-funded smart-grid start-up. SmartSynch: founded in 1999 and headquartered in Jackson, Mississippi, its GridRouter is a modular, standards-based, upgradeable networking device that can handle almost any communications protocol that a utility uses. Four networking card slots allow a single box to handle ZigBee, WiFi, WiMax, or other proprietary communications standards simultaneously. The cards can be removed so utilities can swap out and/or upgrade their networks without replacing the basic piece of installed equipment. It provides communication to any device on the grid over any wireless network. Potentially, that could eliminate some of the fear and uncertainty surrounding smart-grid deployments. The Tennessee Valley Authority selected SmartSynch to serve as the communications backbone in its renewable program. Tendril Networks: founded in 2004 and headquartered in Boulder, Colorado, makes a varied suite of hardware and software solutions for applications such as demand response, energy monitoring, energy management, and load control. It offers an energy management system for consumers and utilities, smart devices (such as smart thermostats, smart plugs, and in-home displays), as well as Web-based and iPhone-enabled displays and energy controls. The company also develops applications for utilities such as network management, direct load control, customer load control. The start-up has deals in place with more than 30 utilities and had a large commercial roll out in 2009, along with a number of field trials. In 2009, the company raised a $30 million third round, bringing its total to more than $50 million and making it one of the better funded private companies competing in the Home Area Network space. General Electric’s Consumer and Industrial division has teamed up with Tendril to develop algorithms and other technology that will allow utilities employing Tendril’s TREE platform to turn GE dryers, refrigerators, washing machines, and other energy-gobbling appliances off or on to curb power consumption. Trilliant: founded in 1985 and headquartered in Redwood City, California, provides utilities with wireless equipment and management software for smart-grid communication

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networks. In 2009, Trilliant acquired SkyPilot Networks, a manufacturer of long-range, high-capacity wireless mesh networks. The acquisition allows them to offer complementary networks, both the neighborhood network and the wide-area network. Trilliant’s largest deployment is a 1.4 million device network spread over 640,000 km2 for Hydro One in Ontario, Canada.

Green Buildings, Lighting Adura Technologies: founded in 2005 and headquartered in San Francisco, California, is an energy management company that provides best in class solutions for existing buildings; a clean energy technology venture applying low-power wireless mesh networking to the lighting controls market. Approximately 85% of commercial office buildings in the USA are illuminated inside with fluorescent tube lights. In the vast majority of cases, these bulbs cannot be dimmed or turned off remotely. Only around 1% of lights in California office buildings are networked. Adura has created a wireless mesh system that effectively flips the lights off when no one is around and dims them when the sun is out. In a recent test conducted by PG&E, Adura managed to cut the power delivered to lights by 72%. Next, the company plans to connect its software to other devices in buildings. VantagePoint is a lead investor. Bridgelux: founded in 2002 and headquartered in Livermore, California, is focused on lowering the cost of LED-based solid-state lighting to a penny per lumen – a disruptive price achieved through clever packaging and innovating in the expitaxial processes of building the phosphor-coated film. Early in 2010, it announced a $50 million funding to finance a new fab, bringing its substantial fund-raising totals to over $150 million from investors including DCM, El Dorado Ventures, VantagePoint Venture Partners, Chrysalix Energy, and Harris & Harris Group. The firm is generating significant revenue. The big question is whether Bridgelux can outrun the big companies like Philips and Osram. Optimum Energy: founded in 2005 and headquartered in Seattle, Washington, addresses the commercial building market’s growing need for more energy-efficient heating, ventilating, and air-conditioning (HVAC) systems. Optimum Energy is the first company to take an enterprise application approach to commercial HVAC systems, and as a result, is changing the way these systems are operated and managed. Optimum makes software that dynamically controls the chillers – the enormous machines that cool water for airconditioning systems in skyscrapers. According to the company, there are more than 150,000 buildings that can use their product and if the software was used in each one, 75 GW could be taken off the grid. Adobe has installed it. Recurve: founded in 2004 and headquartered in San Francisco, California, provides home performance services that help homeowners and contractors create healthy, energyefficient homes through home energy audits and green energy remodeling. It is assembling a dynamic software package that will allow contractors large and small around the world to cut down the time, cost, and errors in conducting retrofits. A lot of the employees

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come from Google that does not happen at other construction companies. A number of large contractors are testing the software. Recurve’s next policy initiative: funding retrofits by getting them classified as carbon credits. Redwood Systems: founded in 2000 and headquartered in Redwood City, California, invented an entirely new, centralized power system capable of individually powering up to 64 LED light fixtures via low voltage network cable. Redwood replaces lighting wires and regular light bulbs with Ethernet cables and LEDs. A building will have a network in your ceiling that every light, smoke detector, and other device can link into, a very creative idea. Serious Materials: founded in 2002 and operating in California and Colorado, received $60 million VC funding in 2009. Their products include: Serious Windows high-performance insulated windows and glass, which can reduce heating and cooling energy costs and emissions by up to 40%. Windows are a $20 billion dollar market in the USA. Serious has won the Empire State Building retrofit project for their thermal windows. The retrofit project will receive the tax credit from the US Government. Turbine Air Systems: founded in 1999 and located in Houston, Texas, received $47 million VC investment in 2009. TAS is a recognized leader in designing, manufacturing, and servicing high-efficiency cooling, heating, and power systems for industry. It claims the industry’s most efficient chilled water and heating systems. TAS helps facility owners and managers reduce energy consumption and operating cost and reduce their facility’s carbon footprint to improve efficiencies by up to 50%, as compared to well-maintained air-cooled systems.

Biofuels and Biochemicals Amyris: founded in 2003 and located in Emeryville, California, has 220 employees, makes second generation biofuel from synthetic microorganisms. This synthetic biology start-up spun out of University of California at Berkeley with more than $200 million in VC funding. Amyris develops microbes that feed on sugars and secrete custom hydrocarbons for conversion into jet fuel, industrial chemicals, or biodiesel. Amyris claims to eventually produce biodiesel that can wholesale for $2 a gallon. In late 2009, the firm paid $82 million to Brazil’s Sa˜o Martinho Group for a 40% stake in an ethanol mill project and entered into agreements with three other Brazilian companies to produce ethanol and high-value chemicals. LS9: founded in 2005 and located in San Carlos, California. LS9 has developed a new means of efficiently converting fatty acid intermediates into petroleum replacement products via fermentation of renewable sugars. LS9 has also discovered and engineered a new class of enzymes and their associated genes to efficiently convert fatty acids into hydrocarbons. LS9 believes this pathway is the most cost, resource, and energy-efficient way to produce petroleum-replacement products and industrial chemicals. This translates

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into efficient land and feedstock use and directly addresses tensions between food versus fuel and chemical production. It plans to reuse a microbe instead of cultivating a new generation that cuts time and costs. Another added bonus: the company is working with Procter & Gamble on green chemicals and with Chevron on fuel. Sapphire Energy: founded in 2006 and headquartered in San Diego, California, plans to produce hydrocarbons from genetically modified algae grown in open ponds. Conceivably, it could be the cheapest and fastest technique for producing algae fuel. But it is also fraught with complications. Growing algae in open ponds for fuel oil at the moment is expensive and complex, and keeping genetically modified organism strains from being outcompeted by natural strains in the open is even more difficult. The company has raised $100 million plus from top-flight VCs, including the firm that invests on behalf of Bill Gates. Solazyme: founded in 2003 and headquartered in South San Francisco, California, is one of the oldest algae companies and the one that is also the furthest along. Solazyme avoids growing algae in ponds or bioreactors through photosynthesis. Instead, it puts algae in beer-brewing kettles, feeds them sugar, and grows them that way. The sugar adds to the raw material costs, but Solazyme makes up that cost because it does not have to extract the algae from water, one of the most vexing problems facing most algae companies. Solazyme says it will be able to show that its processes can be exploited to produce competitively priced fuel from algae in about 2 years. It has produced thousands of gallons already and has a contract to produce 20,000 gallons of fuel for the Navy. The company is already selling algae for revenue to the food industry. Chevron is an investor. Synthetic Genomics: founded in 2005 and located in La Jolla, California, plans to do research and develop next-generation biofuels using photosynthetic algae. Synthetic Genomics’ dynamic founder is J. Craig Venter, a well-known scientist; his vision is to use algae to produce hydrocarbons. In addition to a large funding of $300 million from Exxon, Synthetic Genomics has received funding from Draper Fisher Juvetson, Meteor Group, Biotechonomy, and BP. Renewable Energy Group: located in Ralston, Iowa, has produced and sold biodiesel for more than 10 years through its predecessor companies. It is leading the biodiesel industry by marketing more biodiesel than anyone in the USA. REG is the only fullservice biodiesel company offering plant management, risk management, raw material procurement, plant construction, biodiesel production, and biodiesel sales and marketing services. All planned facilities will utilize patented continuous-flow biodiesel production technology featuring water recycling and methanol recovery. REG serves hundreds of customers including on-highway fleets, original equipment manufacturers, maritime, military, home heating, and agriculture industries. In 2010, it has successful completion of $100 million private financing, one of the largest investments in biodiesel.

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Batteries, Fuel Cells, Energy Storage Bloom Energy: founded in 2001 and headquartered in Sunnyvale, California, after 10 years and close to $400 million VC investment, the fuel cell maker Bloom Energy showed its products on February 24, 2010. The Bloom Energy Server is a solid oxide fuel cell (SOFC) technology that converts air and nearly any fuel source – ranging from natural gas to a wide range of biogases – into electricity via a clean electrochemical process, rather than dirty combustion. Even running on a fossil fuel, the systems are approximately 67% cleaner than a typical coal-fired power plant. When powered by a renewable fuel, they can be 100% cleaner. Each Energy Server consists of thousands of Bloom’s fuel cells – flat, solid ceramic squares made from a common sand-like ‘‘powder.’’ Because of the media publicity and a large amount of VC investment, Bloom Energy technology deserves more discussions. A solid oxide fuel cell (SOFC) is an electrochemical conversion device that produces electricity directly from oxidizing a fuel. Fuel cells are characterized by their electrolyte material; the SOFC has a solid oxide or ceramic, electrolyte. Advantages of this class of fuel cells include high efficiency, long-term stability, fuel flexibility, low emissions, and relatively low cost. The largest disadvantage is the high operating temperature that results in longer start-up times and mechanical and chemical compatibility issues (> Fig. 11.1). A solid oxide fuel cell is made up of four layers (refer to Wikipedia for detail), three of which are ceramics (hence the name). A single cell consisting of these four layers stacked together is typically only a few millimeters thick. Hundreds of these cells are then connected in series to form what most people refer to as an ‘‘SOFC stack.’’

Electric current

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. Fig. 11.1 Solid oxide fuel cell – Diagram from Wikipedia

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. Fig. 11.2 Bloom energy servers fuel cell boxes, photo taken from BloomEnergy.com

The ceramics used in SOFCs do not become electrically and ironically active until they reach a very high temperature and as a consequence the stacks have to run at temperatures ranging from 500 C to 1,000 C. Reduction of oxygen into oxygen ions occurs at the cathode. These ions can then diffuse through the solid oxide electrolyte to the anode where they can electrochemically oxidize the fuel. In this reaction, a water byproduct is given off as well as two electrons. These electrons then flow through an external circuit where they can do work. The cycle then repeats as those electrons enter the cathode material again. Bloom’s fuel cell technology is claimed to differ from others in four primary ways: it uses lower cost materials, provides high efficiency in converting fuel to electricity, has the ability to run on a wide range of renewable or traditional fuels, and is more easily deployed and maintained. Unlike traditional renewable energy technologies, like solar and wind, which are intermittent, Bloom’s technology can provide renewable power 24/7 (> Fig. 11.2). Each Bloom Energy Server provides 100 kW of power in roughly the footprint of a parking space. Each system generates enough power to meet the needs of approximately 100 average US homes or a small office building. For more power, customers simply deploy multiple Energy Servers side by side. Customers who purchase Bloom’s systems can expect 3–5 years of payback on their capital investment from the energy cost savings. Depending on whether they are using a fossil or renewable fuel, they can also achieve a 40–100% reduction in their carbon footprint as compared with the US grid. Fuel cells have been under development by many companies for decades. Any consumer electronics company from Samsung to Sharp, or auto maker, from Hyundai to Toyota, has researchers developing fuel cell technology. The problem is that fuel cells have remained too expensive. We need to see if Bloom can get those costs down. Bloom Energy Compares with Solar and Wind: The Bloom server will produce power for 9–10 cents/kWh after incentives. This price includes service, maintenance, gas, and all of the other costs associated with running it. Commercial solar installations, when incentives and external costs are added, generate power for around 10 cents/kWh. Residential solar generates power for around 19 cents/kWh and utility-scale solar costs around 11 cents/kWh. Cutting-edge wind turbines can generate power for 5 cents/kWh after incentives. On average wind is a little less costly than solar. One of the big hurdles that Bloom will have to leap is the reliability of the ceramic/ zirconium plates inside the fuel cell. These plates, which convert gas to electricity, must

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operate in an 800 C environment without becoming distorted or corrupted. User data will be heavily scrutinized. These plates may have a lifetime of 5 years: replacement at this pace is contemplated at nine to 10 cents/kWh price. If replacement occurs at a faster rate, it will increase cost. For a more detailed discussion, refer to [6]: www.wired.com/epicenter/ 2010/02/bloom-vs-solar-which-one-is-best/ The Bloom’s biggest selling point is availability. The box can produce power 24 hours a day in a completely predictable fashion. Solar panels only produce during the day and wind turbines are only active about 30% of the time. Worse, wind turbines in many areas generate most of their power at night. Fuel cells are by their very nature electricity-storage devices. Power does not get made until gas gets released into the fuel cell stack. General Electric and others are trying to build sodium or lithium battery packs to store power at wind and solar fields but these are in the experimental stage. Deeya Energy: founded in 2006 and headquartered in Fremont, California, develops and manufactures electrical energy storage systems. Deeya Energy’s innovation, the L-Cell, is based on a novel battery technology originally developed by NASA in the early 1970s as a potential energy storage method for long-term space flights. A few years ago, flow batteries were exotic, barely understood pieces of equipment. It has created a battery in which electrolyte flows in and out of the battery so it always stays charged. Utilities and cell phone carriers that need remote power will be the primary customers. In 2009, the company started shipping its first commercial products. The products cost around $4,000 a kW (or about half of what Bloom currently sells its products for). The company hopes to bring the price down to $1,000. EEStor: founded in 2001 and headquartered in Cedar Park, Texas, claims its energy storage technology as a ‘‘multilayered barium titanate ceramic capacitor,’’ and its units are based on ‘‘ultra capacitor architecture.’’ EEStor expects its technology to provide ten times the energy of lead-acid batteries at one tenth the weight and half the price. The firm is attempting to make material advances in ceramic powders used in high energy ultracapacitors. It is a novel idea, but needs more work. General Compression: founded in 2006 and headquartered in Newton, Massachusetts, is developing a system to store large quantities of energy from wind farms and make it available on demand. The cheapest form of energy storage remains compressed air, according to Electric Power Research Institute. To date, however, compressed air has relied upon finding geological formations where one can stuff thousands of cubic meters of air. General Compression, along with SustainX and Isentropic Energy, want to change that with mechanical systems. Both General (which recently raised $17 million) and Isentropic employ pressure and temperature differentials to store and generate heat. Duke Energy is building a 2-MW trial facility for General. A123 Systems: founded in 2001 and located in Waltham, Massachusetts, is a lithium-ion battery maker; plans to develop a nanoscale electrode technology, Nanophosphate™, which is built on a new nanoscale materials initially developed at the Massachusetts Institute of Technology. A123 Systems is now one of the world’s leading suppliers of

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high-power lithium-ion batteries designed to deliver a new combination of power, safety, and life. The company mass produces a variety of battery cells being used in DeWalt power tools, aircraft engine starters, hybrid vehicles, and electric vehicles. In December 2006, the US Advanced Battery Consortium (USABC) in collaboration with the US Department of Energy (DOE) awarded the company a $15 million development contract to optimize A123 Systems’ proprietary doped Nanophosphate battery technology for hybrid electric vehicle applications with a focus on power, abuse tolerance, durability, and cost. USABC is an organization composed of Daimler Chrysler Corporation, Ford Motor Company, and General Motors Corporation. After a series of private and corporate funding, the company on September 23, 2009, raised $380 million going public stock exchange. Axion Power International: founded in 2003 and located in New Castle, Pennsylvania, just outside of Pittsburgh, is developing advanced batteries and an energy storage product based on its patented lead carbon battery PbC Technology™. Conventional lead-acid batteries use negative electrodes made of sponge lead pasted onto a lead grid current collector. In comparison, its technology uses negative electrodes made of microporousactivated carbon with very high surface area. The result is a battery-supercapacitor hybrid that uses less lead. Axion received two grants total $1.1 million from Pennsylvania government agencies in 2010, after $26 million common stock offering in late 2009.

Transportation Coda Automotive: founded in 2009 and located in Santa Monica, California, designs, manufactures, and sells electric vehicles (EV) as well as lithium-ion (iron phosphate) battery systems built for transportation and utility applications. By the end of 2010, Coda will attempt to market an all-electric, mid-priced sedan to American drivers. Car start-ups like Tesla and Fisker have initially aimed at the top end of the market, where price and volume are less important factors. The entire auto market will be watching closely about Coda and BYD. BYD also will represent China’s first major EVentry into the US auto market. Coda’s car is based around a Chinese gas-burning car that has been retrofitted by US engineers – will be assembled in China and will come with a battery made through a joint venture between Coda and Lishen. A Chinese bank has agreed to lend $450 million to the battery venture. Fisker Automotive: founded in 2007 and headquartered in Irvine, California, plans to produce a luxury EV, but unlike the Tesla, the Fisker Karma is a plug-in hybrid, combining a battery and an internal combustion engine. On July 19, 2010, Fisker announced that it has finalized its purchase of a former GM factory where it will build plug-in hybrid electric vehicles that use some composites. Fisker is now in full possession of the 3.2 millionsquare feet/300,000 m2 Wilmington Assembly plant in Wilmington, Del., for which it paid Motors Liquidation Co. (MLC) $20 million. MLC is the holding company formed by General Motors Corp.’s bankruptcy.

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The purchase is supported by a $528.7 million Department of Energy loan for the development of two lines of plug-in hybrids. The Wilmington plant will be home to Project NINA, Fisker’s second line of plug-in hybrid electric vehicles, and where Fisker expects to ultimately create more than 2,000 factory jobs. This firm is another Kleiner Perkins portfolio company and uses batteries from A123. A123 was also an investor in their most recent $115 million funding round. The car sells for $87,900 and already has more than 1,400 people on the waiting list. Hendrik Fisker is a noted car designer who has worked with, among others, Aston Martin. Tesla Motors: founded in 2003 and headquartered in Palo Alto, California, engages in the design, manufacture, and sale of electric vehicles (EV) and electric vehicle power train components. The Tesla Roadster, the company’s first vehicle, is the first production automobile to use lithium-ion battery cells and the first production EV with a range greater than 200 miles (320 km) per charge. The base model accelerates 0–60 mph (97 km/h) in 3.9 seconds and claims twice as energy-efficient as the Toyota Prius. The company had produced its 1,000th Roadster as of January 2010 and has delivered Roadsters in at least 25 countries as of May 2010 (> Fig. 11.3). In May 2010, Tesla had bought the recently closed Toyota Nummi assembly plant in Fremont, California, where it intends to make its Model S luxury electric sedan and other future models. Also Toyota Motor and Tesla Motors will begin developing an electric version of Toyota’s RAV4. The electric vehicle (EV) prototypes will be made using the Toyota RAV4 model with a Tesla electric power train, with the intention of marketing the EV in the USA in 2012. The first prototype has already been built and is currently undergoing testing. Tesla plans to deliver a fleet of prototypes to Toyota for evaluation before the end of 2010. Both

. Fig. 11.3 This Tesla Roadster photo is a file from the Wikimedia Commons. (Commons is a freely licensed media file repository)

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companies will benefit from the mutual arrangement. Tesla wishes to learn and benefit from Toyota’s engineering, manufacturing, and production expertise. Toyota desires to learn more from Tesla’s EV technology. Tesla was founded in 2003 with initial VC investment of $7.5 million, by January 2009; Tesla had raised US $187 million and delivered 147 cars. In June 2009, Tesla was approved to receive US $465 million in interest-bearing loans from the US Department of Energy. The funding, part of an US $8 billion program for advanced vehicle technologies (Advanced Technology Vehicles Manufacturing Loan Program). Tesla went IPO on June 28, 2010.

Other Energy: Wind, Nuclear, Cleaner Coal, Geothermal Laurus Energy: founded in 2007 and located in Houston, Texas, extracts energy from coal in the form of syngas while it is still in the ground using a process known as UCG – underground coal gasification. Laurus then fractionalizes the syngas: carbon dioxide is separated and sent via a pipe to oil fields, where it is injected into other wells to help pull crude out of the ground. The rest of the gases – a combination of hydrogen, methane, and hydrocarbons – are then burnt in a gas-fueled power plant. Power from coal is not going away, so any disruptive technology that lowers the carbon footprint of coal and eliminates mountain top removal can be a new untapped piece of the energy mix. It is currently working with a Native American tribe in Alaska to build a UCG vein with a power plant. The process converts deep, un-mineable coal ‘‘in-situ’’ into multiple gas streams that can be used for low carbon energy production and as feedstocks for chemicals and other products. UCG technology unlocks previously un-mineable coal resources. By some estimates UCG could increase worldwide economically recoverable coal reserves by 600 billion tons, and increase the US reserves alone by up to 300%. Laurus Energy currently controls the rights to 13 billion tons of coal, the third largest coal holding in North America. Nuscale: founded in 2007 and headquartered in Corvallis, Oregon, is formed to construct and sell dedicated design of relatively small (160 MW thermal, 45 MW electric, hence 28% efficient) nuclear reactors, which will be modular, inexpensive, inherently safe, and proliferation-resistant. These reactors could be used for heat generation, production of electricity, and desalinization. NuScale’s modular nuclear reactor design could disruptively shift development away from the large-scale, over-budget, 10-year nuclear power plant projects. Small modular reactors are the ‘‘game-changer’’ in energy technology. NuScale can manufacture modular reactors on a factory assembly line – and cut the time to develop a nuclear plant in half. Nordic Wind Power: founded in 2005 and headquartered in Berkeley, California, is a merger of Swedish, US, and UK teams with decades of success in wind and other renewables. After 20 years of R&D and 10 years of very successful turbine operation in Sweden, Nordic Windpower was formed to commercialize the groundbreaking Nordic

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technology for wind turbines. All of the team members have a longstanding commitment to the renewables industry. With funding from Khosla Ventures, NEA, and Novus Energy Partners, Nordic Wind Power is the only wind turbine company in the USA to get a DOE loan guarantee – $16 million under the innovative renewable energy program. Nordic also received ‘‘significant’’ funding from Goldman Sachs in 2007. Their groundbreaking 1-MW two-blade turbine design challenges the traditional wind turbine design paradigm (> Figs. 11.4–11.6). In 2009, Nordic Windpower was awarded contracts for 19 of its N1000 1-MW wind turbines for public- and private-sector community wind projects in North and South America. The 70 m high N1000 turbine, with blades 59 m in diameter, will provide clean and renewable wind energy for schools, wind farms, a military base, a municipal utility, and a sustainable residential development. The projects span four states in the USA – Arizona, Indiana, Iowa, and Minnesota, and Uruguay in South America. Nordic Wind power will provide a combined total of 19 turbines as follows: 12 MW for community wind projects in Minnesota including a LEED Gold Certified housing development project that is the first of its kind in the USA; 3 MW for a wind turbine installer to add capacity to an existing wind farm in Uruguay; 2 MW for a construction, energy efficiency, and management company, for schools in Indiana; 1 MW for a municipal power company located in Iowa; and, 1 MW to power the grid at a military base in Arizona. Potter Drilling: founded in 2004 and headquartered in Redwood City, California, is focused on developing innovative drilling technology to enable clean energy solutions. It is based on a process known as hydrothermal spallation that has the potential to lower the cost and expand the range of deep hard-rock drilling. Geothermal provided 4.5% of California’s power in 2007 and advocates say that more power could be extracted from underneath the ground, even in non-geothermal hot spots.

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. Fig. 11.4 Wind turbine design – photo credit: NordicWindpower.com

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. Fig. 11.5 Wind turbine farm – photo credit: NordicWindpower.com

The problem has been getting to it economically and safely. Potter, founded by oil industry alums, has come up with a way to drill that is five times as fast and far less costly. Google. org is one of its investors. Ze-Gen: founded in 2004 and headquartered in Boston, is integrating advanced gasification technology to efficiently convert ordinary solid waste streams into synthesis gas and then into different forms of renewable energy. Ze-Gen dips organic landfill waste into molten iron and turns it into biogas. The architecture of the system eliminates many of the inefficiencies associated with biomass. It has a pilot plant and raised $20 million in 2009. The big challenge is in getting a production plant off the ground. The technology detail is described in Wikipedia.org. According to Ze-Gen, a typical 500 t per day waste-to-energy facility would cost about $150 million to build and would generate 13 MW of electricity and 170 t per day of ash waste. A similar size Ze-Gen facility would cost about $40 million to build and would generate 30 MWof electricity and minimal waste. Therefore, the installed cost per kilowatt hour of a Ze-Gen facility should be in the $1,300–$1,400 range, significantly lower than existing waste-to-energy facilities. Accio Energy: founded in 2008 and located in Ann Arbor, Michigan, was funded by private venture and received $250,000 federal contract with the US Defense Advanced

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. Fig. 11.6 The two-bladed design of Nordic‘s wind turbine allows it to be assembled on the ground and lifted in one piece. Most large wind turbines require the turbine housing, or nacelle, to be installed on the tower separately – photo credit: NordicWindpower.com

Research Projects Agency to continue the design and creation of its prototype device. It is developing a stationary ‘‘aerovoltaic’’ device that would be installed on rooftops, harvest wind, and turn it into electricity – without the moving parts associated with wind turbines. It would resemble a wind version of a solar panel. Aerovoltaic technology is an approach to wind energy that does not rely on electromagnetic effects to produce electricity from the wind’s kinetic energy, just as photovoltaic cells exploit photoelectric effects rather than electromagnetic principles. Aerovoltaic technology harvests energy by using the wind to move electrically charged particles against a voltage gradient. The electricity generated is fed directly to the grid or stored locally to provide energy on demand. Aerovoltaic technology plans to have its first external demonstrations in late 2010. Carbon Trust: founded in 2001 and headquartered in London, created a consortium of British businesses to pioneer the development of a world-class, commercially viable process to turn municipal and wood waste into transport biofuel. The consortium will work on the enhancement of a process called pyrolysis to process waste biomass to produce a greener and cheaper alternative to existing biofuels at mass scale, and to blend with fossil fuels. A key advantage of developing a process that will use existing organic waste, rather than plant crops is that it overcomes many of the issues associated with some current biofuels, and can lead to even greater carbon savings by avoiding methane emissions from

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landfill. The carbon footprint of this new pyrolysis biofuel could potentially achieve a carbon saving of 95% when compared to fossil fuels. This is a significantly higher carbon saving than some existing biofuels, which do not currently factor in the impacts of land use change when calculating the carbon saving. The consortium aims to produce its first biofuel from a pilot plant in 2014 and there is potential, using UK biomass alone to scale production to over two million tons per year. This will generate a saving of seven million tons of carbon, which is the equivalent to the annual emissions of three million cars.

Water Oasys: founded in 1999 and headquartered in Bellingham, Washington, is a water start-up to build around research from Yale University with $10 million in venture funds to see if its novel desalination technique, which exploits fundamental chemistry and waste heat, can go commercial. The process is a low-cost, low-energy desalination and purification technology for seawater, wastewater, and industrial waste streams. The company claims its ‘‘forward osmosis’’ process can desalinate water for about half the cost of standard reverse osmosis desalination. Miox: founded in 1994 and headquartered in Albuquerque, New Mexico, has a business plan to distribute water purification instead of the current centralized model. The company makes on-site water purification systems for gray water remediation and water recycling. Distributed water purification could potentially open up a flood of investment into water. Miox’s technology is in making the process cost-effective. The company’s system can purify a given amount of liquid with a volume of salt that is one fourth the amount of liquid chlorine that would be required. Investors include Sierra Venutres, DCM, and Flywheel Ventures. Miox already has some installations in the USA and around the world. Purfresh: founded in 1996 and headquartered in Fremont, California, offers a range of clean technology solutions that purify, protect, and preserve food and water. Purfresh’s innovative crop applications, food wash systems, and cold chain technologies effectively safeguard fresh produce before and after harvest. Its water technologies purify and disinfect bottled, pharmaceutical, and consumer products. The company, backed by Foundation Capital, kills microbes with ozinated water. Growers use it to keep food fresh on the way to store shelves and bottlers use it to sterilize plastic. Orders go up every time an E. coli outbreak occurs. Like Serious Materials, Purfresh is expanding from its base to become a full-service water and food company.

Green Information Technology (IT) Hara: founded in 2008 and headquartered in Redwood city, California, provides ondemand environmental and energy management software solutions that enable

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organizations to grow and profit while optimizing their resource consumed including energy, water, waste, carbon, and other natural resources. Hara enables organizations to comprehensively and securely manage their environmental record and leverage best practices in order to improve efficiency and manage risk. Large enterprise companies are actively looking for software solutions that provide actionable information, metrics, recommendations, and reporting regarding their carbon footprints. Hara has amassed an impressive list of customers, including Coca Cola, News Corp., Akamai, Intuit, Brocade, and Safeway. Sandforce: founded in 2006 and headquartered in Saratoga, California, has created a chip that makes it possible for search companies, banks, and other companies with large datacenters to swap out storage systems made out of hard drives in favor of drives made of flash memory, which only use about 5% of the power. In real terms, it means dropping the power budget for storage systems from $50,000 for 5 years to $250. Storage giant EMC has invested in Sandforce.

Cleantech Geographic Trend Geographic Trend provides an overview of nations that allocate funding or establish legislation to support Cleantech, such as: China, India, Germany, Australia, and USA. This review will also evaluate the status of Silicon Valley in California (the center of the US venture capital industry), now the heart of Cleantech innovation.

Cleantech in the USA and California The USA has been a leader in venture capital financing for Cleantech and has been particularly vibrant in California where strong Cleantech investment continues. Silicon Valley earned its name and first great fortune as the cradle of the computer age. Then it built a launching pad for the Internet age. Now the valley has assumed a leading role in the global competition to develop renewable energy and other clean, green technologies. Cleantech is poised to be the valley’s third great wave of innovation [7] – not just the next big thing, but perhaps the biggest thing ever. Confronting the peril of greenhouse gases and climate change happens to be a multi-trillion-dollar business opportunity. Consider that the sum of America’s yearly utility bills, one component of the nation’s overall energy costs, exceeds $1 trillion – or nearly triple the annual global revenues of the semiconductor industry. The solar and wind energy markets, which totaled about $80 billion in 2008, are projected to nearly triple in size in 10 years, employing 2.6 million people worldwide. Leading venture capitalist suggests that Silicon Valley may someday be called Solar Valley, given that dozens of solar companies have sprung up in recent years. But solar represents just one aspect of the Cleantech revolution. Around the valley, some former ecommerce and software mavens are now busy trying to electrify the automobile industry

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while other technologists are developing energy-efficient glass, drywall, and cement. Still others are introducing cutting-edge information technology to the twentieth-century electricity grid, working on biofuels and fuel cells, and pioneering new methods to recycle waste, protect air and water quality, and enhance agriculture and aquaculture. Most of Silicon Valley start-ups are innovating in new ideas right now, trying new devices. Most of the start-ups will phase out; a few will flourish. Some might come to dominate the energy system and become billion-dollar corporations. Cleantech may seem like a radical departure from Silicon Valley’s semiconductor roots. But solar photovoltaic cells are a simple form of semiconductor, and smart-grid innovators are essentially integrating the twenty-first-century software efficiencies into a wasteful twentieth-century electrical infrastructure. The valley’s expertise in biotechnology is vital to biofuels and its work in nanotechnology is critical to new materials that might find their way into nuclear reactors or a suburban home. However, Silicon Valley does not have a natural advantage in talent – like chemical engineers, fermentation experts, engine designers, and physicists. But Silicon Valley does have a support culture for entrepreneurship and a culture of risk-taking and risk-funding. Google has invested $45 million in a handful of Cleantech firms and other projects concentrating on such things as solar, wind, geothermal, and electric vehicles. Google also recently launched PowerMeter, its online tool to enable consumers to watch their home energy use. Other big-name Silicon Valley firms are also making moves in energy. Cisco Systems unveiled its goal to provide the underlying technology for smart grids – which aim to move electricity more efficiently than do today’s grids – just as Cisco started providing the plumbing for the Internet years ago. A big chunk of what Cisco estimates could be a $20 billion annual smart-grid market within 5 years. Silicon Valley is also home to some of the top companies working on the infrastructure needed to keep electric cars charged up and on the road, including Better Place of Palo Alto and Coulomb Technologies in Campbell, which have established early leads in creating battery-swapping stations and public charging networks. Other companies here are quietly working on creating more powerful batteries for the cars. One is Amprius, a Menlo Park start-up still in ‘‘stealth’’ mode that is developing advanced lithium-ion batteries. Venture capitalists have become willing to enter the transport space, beginning with vehicles and now transitioning into components, batteries, and energy management systems. Silicon Valley has the potential to be a center of the industry. Cypress Semiconductor Corp. declared in July 2010 that Cypress’s headquarters campus in San Jose, California, will be independent from the public utility grid by the year 2015. The announcement was made as the company dedicated three new Bloom Energy fuel cell systems at the site. The Bloom Energy Servers, combined with existing rooftop solar panel installations, supply approximately 75% of Cypress’s electric needs in 2010. In addition to California, many Cleantech start-ups have sprung up in Texas, Massachusetts Colorado, Michigan, New York, New Jersey, Washington, Oregon, Pennsylvania, etc. Private companies, innovative sprits, and venture capital investments are everywhere. It is likely that USA will continue to play a pivotal role in Cleantech arena.

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Cleantech in China China’s Cleantech has primarily been a project of government initiative and funding. The Pew Environment Group has released a report that shows that China’s investments in clean energy have overcome the US figures. According to Pew, China now leads the way with $34.6 billion invested in 2009 across all investment types – nearly double the US figure of $18.6 billion [8]. Top 10 in Clean Energy Investment in 2009 (Source: the Pew Charitable Trusts Research, March 25, 2010). China

$34.6 billion

USA

$18.6 billion

UK

$11.2 billion

Spain

$10.4 billion

Brazil

$7.4 billion

Germany

$4.3 billion

Canada

$3.3 billion

Italy

$2.6 billion

India

$2.3 billion

Rest of EU – 27

$10.8 billion

China is already the largest producer of solar panels and expected to become the world’s biggest producer of wind energy by 2013. One reason China can move so fast is that once its central government decides on a policy, it can execute it quickly through the nation’s handful of state-owned utilities. In the USA, there are thousands of electric utilities and a barrage of regulatory and environmental hurdles to starting new projects. In China, nothing is too fast. They have got the land, the need, and fast decisionmaking. Applied Material is the biggest maker of equipment to make solar panels; in 2010, it opened the world’s largest solar research facility in China. China plans to have ‘‘clean energy’’ account for 15% of its total consumption under a 10-year renewable energy promotion program. The plan would accelerate efforts already under way to help ease reliance on expensive oil imports and heavily polluting coal, which fuels about three quarters of China’s electricity generation. It also is in line with Beijing’s pledges to rein in output of greenhouse gases by reducing China’s carbon intensity – its use of fossil fuels per unit of economic output – by 40–45% by 2020. Renewable energy accounted for 9.9% of China’s total energy consumption in 2009, up from 8.5% the year before. Under the plan, by 2020, the government intends to raise that to 15%. In 2010, Chinese companies raised US $30 million in five disclosed rounds. The largest deal was for Prudent Energy, a developer of flow batteries, which raised $10 million from JAFCO Investment Asia, Mitsui Ventures, and CEL Partners. The largest global Cleantech IPO recorded in 2010 was Origin Water, a China-based developer of membrane filtration systems for municipal and industrial sewage treatment and recycling, which raised

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$370 million from an offering on the Shenzhen Stock Exchange. The company’s share price more than doubled during the first day of trading, valuing the company at about $3.3 billion. Chinese carmakers, such as BYD, are pushing ahead faster than established Japanese and American rivals to mass produce electric vehicles. Its carbon captures technology and high-efficiency ‘‘ultrasupercritical’’ coal plants are close to the global cutting edge. China will be one of the dominant forces in Cleantech investment worldwide in the near future.

Cleantech in India India’s Cleantech industry tends to focus on domestic application and may be more applicable to developing countries. On the outskirts of Bangalore in an industrial area [9], Kotak Solar is churning out solar-powered products of many kinds – to light up streets and gardens with LEDs, heat swimming pools, and provide drinking water. To prove a point that solar can work for every day practical uses, Kotak Solar recently electrified a village in India with solar power. Now 120 families in this remote location pay just five cents per day to get light and drinking water, plus juice for a community-shared mobile phone, plasma TV, and Internet connection. The next step is to take this pilot project to more villages in India, where 80,000 villages or 45% of the total are still not on the grid. It attracted $6 million plus from the US VCs, Kleiner Perkins, and Sherpalo Ventures in 2008. In Delhi, D.Light Energy produces and sells solar-powered LED lanterns to replace kerosene lights in the emerging market villages. In 2 years’ time, the company sold 100,000 lanterns to villagers in India, east Africa, and Latin America. The lights help moms work on handicrafts at night-time to earn some income and get kids to study after sun fall. The potential is huge; about 1.6 billion people worldwide live off the grid. D.Light aims to reach five million people, has funding from US VCs Draper Fisher Jurvetson and Garage Technology Ventures, as well as two social investor groups, and is aiming to generate revenues of $25 million this year.

Cleantech in Germany Germany is positioning itself as the world’s first major renewable energy economy. It is already a Cleantech powerhouse with more than 300,000 people employed in Cleantech industries and is the top exporting country with a 16% share in global Cleantech trade [10]. Let us take a look at the drivers of Cleantech in Germany. Strong government support: As a result of the policy framework, the renewable energy sector in Germany has been characterized by steady growth rates over the past decades, with a significant increase in capital investment across various clean technologies. Germany has saved 57 million tons of carbon dioxide directly through implementation of its Renewable Energy Sources Act of 2000. Sunny Germany: The country has the world’s largest solar power market, despite having extremely cloudy weather. Germany is by far the European leader for photovoltaic

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capacity with a capacity of 8,000 MW, and has the world’s largest solar cell producer, Q-Cells. Cluster of Cleantech companies: Cleantech clusters in Munich and Berlin have a concentration of companies, research institutes, venture capitalists, and infrastructure, and account for a significant amount of employment and research activity in the sector. Stuttgart, in southern Germany, is home to leading automotive companies such as Daimler, Porsche, and Bosch. These companies are seeking advancements in vehicle design and performance, such as new drivetrains and power supplies for hybrid and electric vehicles. German Cleantech exits: Large German multinational corporations such as Siemens and Bosch are creating exit opportunities as they have begun to acquire growing Cleantech companies. In 2009, there were more than $1 billion in Cleantech merger and acquisition transactions in Germany. The German stock exchange has seen many Cleantech initial public offerings and should continue to provide opportunities for future investment exits. Strength in engineering and science: The German word, ‘‘Tu¨ftler,’’ describes the German engineering mentality of a person who tinkers with things. This cultural affinity and Germany’s traditional strengths in machinery, instruments, automobiles, and precision-engineered products are valuable assets for development of its Cleantech economy. Germany boasts some of the world’s leading research institutes, including FraunhoferGesellschaft, Max Planck Society, and the Leibniz Association. An example of the concentration of research institutes is in Berlin. There are more than 30 Cleantech research institutes in Berlin alone, and this has helped develop the Cleantech cluster in the city. German companies have historically been financed by German banks and have had little access to equity capital. Relatively new Cleantech venture capital firms have been formed to focus on the German market, such as Mountain Cleantech, Zouk Ventures, Munich Venture Partners, and Pinvoa Capital. These firms understand the German market and the needs and cultural sensitivities of German owners and managers.

Solar Energy in Australia Australia plans to build the world’s largest solar power station with an output of 1,000 MW in an AU $1.4 billion (US $1.05 billion) investment [11]. The plant would have three times the generating capacity of the current biggest solar-powered electricity plant, which is in California. The project was aimed at exploiting the country’s ample sunshine, which is Australia’s biggest natural resource. The project should eventually lead to a network of solar-powered stations across the country, with locations chosen to fit in with the existing electricity grid and ensure good access to sunshine. The AU $1.4 billion dedicated to this project was part of a wider AU $4.65 clean energy initiative by the government. The innovative spirit of Silicon Valley in California, the master plan of Chinese government in Cleantech, the down to earth of Indian entrepreneurs, the success factors

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of Germany, and the commitment of the Australian government are indicators for other countries to pattern after. Many European, Asian nations, Canada, etc., are also allocating their resource to develop Cleantech.

Concluding Remark: Globalization and Deployment of Cleantech Globalization of Cleantech To be a real successful Cleantech innovation, a project will evolve from: (a) (b) (c) (d)

An academic and concept development A prototype development A small-scale infrastructural project A larger-scale infrastructural implementation

These sequence involved many individual partners, venture capital investments, and multinational corporations. The following is an example to illustrate a real successful Cleantech project. Ausra Inc. is a Silicon Valley company that provides solar thermal power, steam, and energy systems for industrial processes and utility-scale electricity generation. Ausra’s core technology, the Compact Linear Fresnel Reflector (CLFR) solar collector was originally developed by an Australian scientist, Dr. David Mills. Instead of the parabolic troughs or mirrors used in other solar thermal systems, CLFR uses flat reflectors moving on a single axis plus Fresnel lens to concentrate the solar thermal energy in collectors. Flat mirrors are much cheaper to produce than parabolic ones. Another advantage of CLFR is that it allows for a greater density of reflectors in the array. David Mills originally conceived of the approach in the early 1990s while at Sydney University. Mills is known internationally for his academic advancements in non-imaging optics, solar thermal energy, and concentrator systems. Mills is not the only Aussie on the Ausra starting team – a group of solar power scientists, power project developers, and financiers, who want to make reliable, large-scale solar thermal power a reality. Graham Morrison worked with Mills between 1995 and 2001. Morrison ran Australia’s premier solar test facility and is an expert at both solar collector and solar radiation modeling. In 2002, Mills and Morrison founded Solar Heat and Power Pty Ltd. (SHP) in partnership with Ausra CEO Peter Le Lie`vre, and SHP built a successful trial 1 MW system in 2004 for Macquarie Generation in New South Wales. After some nominal sponsorship by several Australian government agencies, in October 2006, the above partnership connected to two Silicon Valley VCs: Khosla Ventures and KPCB. In 2007, the resulting combined entity Ausra moved to Silicon Valley; David Mills became Ausra Chairman. In 2008, Ausra began building large-scale systems and sold projects to a Californian utility company. One solar thermal electric power plant, the 354 MW Solar Energy Generating Systems, which covers 1,000 acres in the Mojave Desert in Southern

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California, produces 90% of the world’s commercially produced solar power. However, a large-scale project like this needed different engineering skills and large infrastructure building experience. Early in 2009, Ausra abandoned plans to build its own solar projects to focus on supplying solar equipment to other developers. In early 2010, Ausra was acquired by French engineering and nuclear giant Areva for around US $400–$500 million (unconfirmed), now renamed Areva Solar [12]. Ausra’s core technology, the Compact Linear Fresnel Reflector (CLFR) solar collector and steam generation system, uses modular flat reflectors to focus the sun’s heat onto elevated receivers, which consist of a system of tubes through which water flows. The concentrated sunlight boils the water in the tubes, generating high-pressure steam for direct use in power generation and industrial steam applications without the need for costly heat exchangers (> Fig. 11.7). Unlike photovoltaic energy resources that immediately shut down during periods of transient cloud coverage, Ausra’s solar steam generators retain heat, allowing for a more seamless integration with the electric grid. For standalone power plants, Ausra can also include a natural gas boiler backup design. These solar-natural gas hybrid plants can provide firm capacity for customers – around the clock. While older solar setups depend on expensive photovoltaic panels, Ausra’s installations boast mass-produced mirror clusters that focus the sun’s rays onto water-filled tubes. When the water begins to boil, it produces enough steam to turn an array of turbines. It is estimated that electricity generated this way will cost 10–12 cents/kWh – on par with power from polluting sources such as coal, and 50% less than photovoltaic power. Photovoltaic is constrained because it uses high-grade silicon; Ausra uses just steel, glass, and water. Paris, France, based AREVA with 75,000 employees, is also a world leader in electricity transmission and distribution, and offers greater grid stability and energy efficiency.

nl ig ht

Water as the working fluid

Su

Receiver pipes

Reflectors

. Fig. 11.7 Figure taken from Ausra website: www.ausra.com/technology/

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Combining Ausra’s proven technology and AREVA’s world leading Engineering, Procurement and Construction skills could build the most cost-effective solar thermal plants for utilities, independent power producers and industrial customers around the world. The market for concentrated solar power plants is expected to grow substantially in the next decade with an average annual growth rate of 20% and should reach an estimated installed capacity of over 20 GW by 2020. The evolution of Ausra illustrates a good globalization of a Cleantech project. From innovation of Australia scientists, added Silicon Valley VC’s funding for a large scale prototype, to the acquisition by a France giant AREVA for large infrastructure enterprise for global implementation.

Deployment of Cleantech Modern society is counting on Cleantech to meet growing energy and other resource demands, while reducing environmental impacts and generating new opportunities for the economy. However, it is important to remember that ultimate success will depend on the coordination of technology development and technology deployment, two separate endeavors, each with requisite incubation characteristics and catalysts. Deployment often depends on the scalability and price parity of new technologies, which often takes years beyond the time of the initial innovation for it to reach the mainstream. New technologies have the potential to continue to improve the world, but also require planning and long-term commitment to its application – indeed, a different skill set than the work of innovation itself. Therefore, it is important that individuals, engineering and science graduates, participating in Cleantech maintain a balanced perspective, based on creativity on one hand and pragmatism on the other, while focusing on the goal of advancement. Through this chapter, readers should gain an overview of the trends in venture-capital-funded innovation in Cleantech, the broad scope of the basic science and technology, and Cleantech implications that affect world climate change.

Appendix Venture Capital Firms in USA USA has more than 1,000 VC firms. The best way for an entrepreneur to seek VC funding is to first look at the local or regional VC firms to begin with. However, in the USA, only 50–100 VC firms could provide larger funding. The following is a list of 50 larger and most popular VC firms in the USA. It is ranked by Web site traffic (based average monthly viewed) in the fourth quarter of 2009. The following are the top 50. The list is prepared by Larry Cheng and Dave Gordon of Volition Capital published on February 2, 2010 on Volition Web site; the original study listed 150 firms [13].

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11 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Venture Capital Investment and Trend in Clean Technologies

First Round Capital (31,632) Sequoia Capital (22,441) Bessemer Venture Partners (14,825) Highland Capital Partners (12,704) Garage Technology Ventures (12,375) Draper Fisher Jurvetson (11,823) New Enterprise Associates (11,762) Kleiner Perkins Caufield Byers (10,924) Polaris Venture Partners (10,217) Benchmark Capital (10,162) Battery Ventures (10,034) Founders Fund (9,654) Accel Partners (9,604) Greylock Partners (9,445) Centennial Ventures (9,224) General Catalyst Partners (9,086) Summit Partners (8,270) Norwest Venture Partners (8,198) Founder Collective (8,189) Spark Capital (7,834) Foundry Group (7,787) Technology Crossover Ventures (7,503) Matrix Partners (7,309) Lightspeed Venture Partners (6,475) Union Square Ventures (6,333) OpenView Venture Partners (6,319) Charles River Ventures (6,316) TA Associates (6,245) Austin Ventures (6,037) Canaan Partners (5,763) Mayfield Fund (5,643) True Ventures (5,627) Atlas Venture (5,462) Alsop Louie Partners (5,346) Maveron (5,164) Mohr Davidow Ventures (5,139) Rustic Canyon Partners (5,006) Redpoint Ventures (4,950) Warburg Pincus (4,863) Highway 12 Ventures (4,821) Shasta Ventures (4,664) Khosla Ventures (4,624) Split Rock Partners (4,613)

Venture Capital Investment and Trend in Clean Technologies

44. 45. 46. 47. 48. 49. 50.

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Trinity Ventures (4,603) Madrone Venture Group (4,593) August Capital (4,521) Venrock (4,298) VantagePoint Venture Partners (4,274) Edison Venture Fund (4,004) US Venture Partners (3,992)

Venture Capital Firms in Europe Europe historically did not have many VC firms. In recent years, the VC industry has flourished. Here is a directory as provide by [14]: 3i – Investment focus: European and Southeast Asian start-ups. Add Partners Limited – Focus: early to late-stage European start-ups in information technology. AltAssets – Focus: news service for global venture capital and private equity professionals. Ariadne Capital – Focus: part of a new European model, helping manage investor exits, drive consolidation, and leverage entrepreneurialism. Athena – Focus: international, for-profit, high technology, business incubator. Baring Communications Equity – Focus: media and communications focused fund for Central and Eastern Europe and the CIS. Business Angels Connect – Focus: global services packaged to young entrepreneurs. CGS Management – Focus: medium-sized technology-based European companies with an emphasis on Switzerland. Cobblestone Private Equity – Focus: venture-oriented direct investments in emerging European technology companies seeking expansion and US market penetration. Copan – Focus: leading European technology executives and investors. Delta Partners – Focus: venture capital and private equity early-stage funding to high technology companies in Europe and Ireland. DeMinds – A pan-European investment group focused on the global Internet market. European Equity Partners – Investment focus: Euro one half to three million initially and up to 5–8 million euros based on meeting key milestones and criteria. Financier Natexis Banques Populaires – Focus: private equity investment holding company active in all segments of the business including venture capital. Hunter Lovec – Focus: consultants helping Central European companies solve their financial problems and achieve their financial goals. IDEA Network – Focus: network of international experts and consultants working under donor-funded projects. Innova Capital – Focus: advises private equity funds with more than 300 million euros for investments into profitable companies in the EU-accession countries of Central Europe.

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Internet Ventures Scandinavia – Focus: adds capital and partner experience to unique Internet ventures. INVEST MEZZANIN – Investment focus: later-stage private equity investing in companies in Austria, Switzerland, and Germany. Investindustrial Holdings Limited – Specializes in medium-sized companies, principally in Italy and Spain. Kildare European Leader Teoranta – Focus: rural development company for County Kildare, Ireland, with funding to distribute to innovative rural projects. Mericom – Focus: venture capital financing and investment services for telecommunication projects, start-up companies, and new businesses in the telecom industry. Michelsen-Partners – Focus: European cross-border mergers and acquisitions advisory services, structured finance advice, and international fund management. Net Partners – Investment focus: European start-up and early-stage initiatives related to the Internet. Northzone Ventures – Offers early-stage venture capital investments and focusing on technology companies. ORAH Investments – Swiss-based venture capital holding financing businesses in Southeast Europe. Permira – Investment focus: formerly known as Schroder Ventures Europe, a leading private equity group and advising funds. Pino Venture Partners – Investment focus: Italian company for operations in information technology, communications, and media. PrivateEquityOnline.com – Focus: tracks private equity activity across Europe, delivering daily news on funds, deals, and exits. PROPHETES – Focus: providing and investing venture capital into innovative companies and projects and providing support to investors who invest capital in the countries of southeastern Europe. Seven Summits Capital – Focus: active in the international private equity market participating in buyouts as an investor, initiator, or catalyst. Startup Avenue – Paris-based B2B incubator funding Internet start-ups that focus on Europe. Stratos Ventures – Investment focus: wireless information and communications technology companies with substantial global growth potential. Triago – Focus: private equity fund raising, limited partnerships, and joint ventures. TustCapital Partners – Focus: Belgian venture capital investment fund. VCG.dk – Focus: lists all Danish venture companies and a profile on them. Venture Capital in Europe – Discussion of the state of venture capital in Europe and its trends. Venture Consulting – Focus: professional business consultancy and services based on extensive international experience. ViewPoint Capital Partners – Specializes in software technology companies in early, expansion, and late-stage situations; offices in Frankfurt, Amsterdam, and Zurich.

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West Private Equity – Focus: provides capital for management buyouts, buy-ins, and the expansion or refinancing of companies headquartered in Western Europe.

Venture Capital Firms in India, China, Japan, and Israel India’s venture capital industry has about 25 VC firms. Wikipedia.com has a listing. China’s venture capital industry has more than 150 VC firms, which altogether manage over US $100 billion in venture capital and private equity funds. China Venture Capital Association (CVCA) provides details of its VC services at www.cvca.com.cn [15]. Japan’s venture capital industry has about 100 active funds. A list could be found at www.irasia.com/venture/jp [16]. Israel’s venture capital industry has about 70 active venture capital funds, of which 14 international VCs are with Israeli offices. For more information, refer to www. investinisrael.gov.il [17]. Australia’s venture capital industry has very limited VC firms. It is mainly supported by the government. For detail see www.avcal.com.au [18].

How to Secure Venture Capital Money Venture capitalists invest money in start-ups in exchange for an equity ownership in the company. VCs receive hundreds of business plans from entrepreneurs each year. There are more than 1,000 venture capital funds around the world. Here are few tips to gain the attention of VC: Step 1 Prepare a comprehensive business plan. VCs will expect you to clearly define the purpose of your business, disclose pertinent financial information (including revenue streams and projections), and provide information on your executive management team. Step 2 Do research on venture funds to find the appropriate fit for your company. Look in Pratt’s Guide to Venture Capital Sources, available in many bookstores and libraries, to see what fields each firm is likely to fund. Some focus on retail and service companies, while others look specifically for technology start-ups. Step 3 Get an introduction to the venture capital firm. You will have a much better chance if you have been personally introduced to the VC rather than blindly sending your business plan. These introductions can be made by executives of companies already being funded by the VC or by lawyers and accountants who work with the firm. Try to contact four to five VCs. Step 4 Arrange a meeting with the VC. Consider bringing key members of the management team to the meeting. Step 5 Follow up your visit with a thank-you note and additional information. Step 6 be persistent and polite; wait for VC evaluations.

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How is a Business Plan Evaluated? When a business plan (BP) arrives at VC office, venture capitalists tend to give a quick review. If they decide a BP deserves a further study, the entrepreneur is invited to VC office for a power point presentation. In the process, one venture capitalist categorized BP into four types [19]: a Home-run, a Struggle, a Joy-ride, or a Time-waster. A Joy-ride project will get many media publicity, but investors would not make much return. The objective of VC is to sponsor a real winner – a Home-run, a project that is not too obvious or too easy to implement, otherwise others will launch the identical or similar one. When great minds think alike, most of them do not make much money. So a good BP needs: – – – –

High market potential – customers will buy it Technology novelty – nonobvious innovation An entrance barrier – a valid patent protection A cohesive and complementary team – technology skill plus management professional – A complementary business alliance – Reasonable funding requirement – Reasonable timing to realize a high return

References 1. Wikipedia, Venture capital & venture capitalist. www.wikipedia.org, 2010 2. Cleantech Group, Clean technology venture investment totaled $5.6 billion in 2009 and Record Number of Clean Technology Venture Investment Deals in 2010. www.cleantech.com 3. Climate Progress, Clean tech gets big piece of venture-capital funding. www.climateprogress.org/ 2010/01/07/clean-energy-and-global-warmingscience-epa-strict-new-health-standards-for-smogclean-tech-funding-vc-sectors-software/. Accessed 7 Jan 2010 4. Cleantech Open, Clean tech open defines clean technology. www.cleantechopen.com/app. cgi/content/competition/category_description, 2010 5. Greentech Media, Top 50 VC-Funded Greentech Startups. www.greentechmedia.com/articles/read/ Top-50-VC-Funded-Greentech-Startups/. Accessed 2 Feb 2010 6. Michael Kanellos, Bloom vs. solar: which one is best? Wired. February 24, 2010

7. Harris SD, Cleantech: silicon Valley’s next great wave of innovation. www.MercuryNews.com. Accessed 11 May 2010 8. Berger E, China’s clean energy investments surpass the United States. www.blogs.chron.com/ sciguy/archives/2010/03/. Accessed 25 Mar 2010 9. Rebecca Fannin, Cleantech startups heat up in India. Forbes. February 21, 2010 10. Lesser S, Enz A, 2010’s top 10 major highlights of Cleantech in Germany. www.cleantech.com/ news/5741. Accessed 30 Mar 2010 11. News Article from Sydney, Australia to build world’s largest solar energy plant: PM. Reuters. May 17, 2009 12. Ausra.com, AREVA completes acquisition of U.S. Solar Company Ausra. www.ausra.com/ technology/ 13. Cheng L, Gordon D, Venture Capital (VC) Firm directory – ranked by Website Traffic. www. ask.volitioncapital.com/ask/venture-capital-vcfirm-directory-ranked-by-website-traffic-q409/. Accessed 2 Feb 2010

Venture Capital Investment and Trend in Clean Technologies 14. Directory Investment, Venture Capital in Europe. www.directoryinvestment.com/Venture-Capital/ Europe.html, 2010 15. China Venture Capital Assoc., China venture capital industry. www.cvca.com.cn, 2010 16. Japan venture capital industry, www.irasia.com/ venture/jp, 2010

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17. Israel venture capital industry, www. investinisrael.gov.il, 2010 18. VC Journal, Australian private equity & venture capital guide 2010. www.vcjournal.com.au, 2010 19. Gaebler.com, How to evaluate a business idea. www.gaebler.com/How-VCs-Look-At-Startups. htm. Accessed 7 Aug 2010

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Section 2

Impact of Climate Change

12 Carbon Liability Yoshihiro Fujii Graduate School of Global Environmental Studies, Sophia University, Tokyo, Japan Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412 Carbon Liability as a Concept in Accounting and in Ecology . . . . . . . . . . . . . . . . . . . . . . . 412 Carbon Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412 Similarities and Differences Between the Concepts of Carbon Liability and Environmental Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 414 Cows’ Belches Can Be Tradable Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415 Different Legal Treatments of Carbon Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415 Invisible to Visible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416 Impact of Potential Carbon Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416 Quantifying Carbon Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416 Global Carbon Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417 Excess Cost of Carbon Imbalance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418 Avoiding Carbon Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419 The Carbon Break-Even Point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420 Measuring the Valuation Materiality of Corporate Carbon . . . . . . . . . . . . . . . . . . . . . . . . . 421 SEC Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421 Regulation Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422 Physical and Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422 Quantitative Carbon Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 The Movement for Quantitative Carbon Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424 Putting a Price on Carbon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425 Difficulties in Monetizing a Price for Carbon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425 The IFRIC3 Dispute over Accounting Standards for Government Grants of Carbon Allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427 Calculating Physical Risk to Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429 Applying ARO Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429 Converting a Market Risk to an Opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430

Wei-Yin Chen, John Seiner, Toshio Suzuki & Maximilian Lackner (eds.), Handbook of Climate Change Mitigation, DOI 10.1007/978-1-4419-7991-9_12, # Springer Science+Business Media, LLC 2012

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Abstract: By the term ‘carbon liability’, we mean a calculation of value approximating to the economic externalities of carbon emissions in the global economy, in relation to the totality of global economic activity. As a consequence of over two centuries of industrialization, the global carbon budget and its associated global balance sheet of carbon have clearly diverged from a state of natural equilibrium. Three material identifiable, types of carbon risk have emerged; related to regulation, to physical processes and to market-related risk. ‘Cap-andtrade’ schemes are an important economic mechanism aiding both the rectification of these imbalances and the restoration of a natural carbon cycle disrupted by emissions of anthropogenic greenhouse gas (GHG) in both developed and emerging economies. Such schemes establish an economic value to carbon through open market trading. They serve to quantify and to reduce carbon risk, in accordance with appropriate and efficient economic regulation. Monetizing carbon liability through these market mechanisms is a means to place boundaries on, and thus to mitigate, the uncertainties of carbon liability. This process of monetization may also transform market risk into an opportunity for economic exploitation.

Introduction The Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC 2007: ARA4 [1]) concluded that ‘‘warming of the climate system is unequivocal,’’ and that ‘‘most of the observed increase in global average temperatures since the mid-twentieth century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations.’’ Although the force of these decisive phrases may have been somewhat diminished by the so-called ‘‘climate-gate scandal,’’ which emerged in late 2009 around the intergovernmental negotiations over the post-Kyoto framework, nevertheless the primary meaning of the ARA4’s conclusions remains robust. The famous words of Galileo Galilei, Italian physicist, mathematician, astronomer and philosopher, are apposite to the current condition of our planet: ‘‘And yet it warms’’.

Carbon Liability as a Concept in Accounting and in Ecology Carbon Liability This chapter focuses on the importance of these findings, in relation to the concept of ‘‘carbon liability’’ and its implications. By this term we refer to a calculation of values related to the economic externalities of carbon emissions in the global economy, and the process of apportioning those values, both in macroeconomic terms within the global economy and microeconomically, to achieve a more true economic value for each individual emitting entity. This process can be referred to as ‘‘carbon management.’’ What is a ‘‘carbon liability?’’ Liability is a concept familiar from accounting and from law. It means an obligation enforceable under contract, whether that contract be explicit

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and operating between individuals, or implicit between individuals and wider agents within society, such as the state. The obligation on a citizen to pay tax is an example of a unilateral liability imposed by a government. From an accounting point of view, a liability means a present obligation arising from past events. Its settlement is expected to result in an outflow of resources. The International Accounting Standards Board (IASB) is currently in the process of changing this definition has proposed a new draft of International Accounting Standards (IAS) 37, defining liabilities to the public. This chapter discusses the current definition. Carbon liability has its roots in this environment of civil obligation. In recent years, governments have introduced regulations to restrict quantified volumes of GHG (greenhouse gas) emissions by incorporated entities, a measure directed toward the public goods of controlling the unequivocal danger – an economic ‘‘bads’’ which includes global warming. Thus ‘‘carbon liability’’ arises from an established tradition of state-initiated regulation. Entities addressed by governments are required to meet the costs of their obligations using their own resources in order to comply with the demands of regulation. Liability in relation to carbon emissions differs in kind, however, from other forms of liability, in that it includes a lot of messy uncertainties about its causality and its composition. The IASB’s International Financial Reporting Standards (IFRS) categorize such instances as a ‘‘contingent liability,’’ in the IFRS’ words, ‘‘a possible obligation depending on whether some uncertain future event occurs’’ and ‘‘a present obligation whose payment is not probable or the amount cannot be measured reliably.’’ These characteristics correspond to the nature of carbon liability, which encompasses the past, present, and future responsibilities for GHG emissions. Carbon liability belongs in addition to a broader definition of Environmental Liability. This field has already been defined legally and in accounting terms in both the USA and the European Union. The US Environmental Protection Agency (EPA) has defined ‘‘environmental liability’’ as an obligation in environmental law to make a future expenditure to remedy the past or ongoing manufacture, use, release, or threatened release of a particular substance, or other activities that adversely affect the environment [2]. This regulatory stance arose from a succession of environmental disasters in the USA during the 1970s and 1980s, which resulted in asbestos exposure and soil contamination and damage to people, property, and the natural environment. To prevent and remedy such damages, US legislators enacted the Comprehensive Environmental Responses, Compensation and Liability Act (CERCLA), otherwise known as the ‘‘Superfund Act.’’ It was enacted in 1980, then was amended as Superfund Amendment and Reauthorization Act (SARA) in 1986, Small Business Liability Relief and Brownfields revitalization Act in 2002, respectively. Drawing on this American legislation, the European Union constructed its own legal framework for the prevention and remediation of damages to the human and natural environment. In 2004, the EU Commission published its Directive on Environmental Liability (ELD), which came into effect in all EU states in 2008. These legal frameworks on either sides of the Atlantic share common characteristics.

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Drawing on these models, the US Federal Accounting Standards Board (FASB) and the IASB have developed an accounting framework on environmental liability. The FASB issued EITF93-5, ‘‘Accounting for Environmental Liabilities,’’ in 1993; in 1996, it was included in the Statement of Position (SOP96-1: Environmental Remediation Liabilities) in the American Institute of Certified Public Accountants (AICPA). As noted earlier, the IASB has referred to environmental liabilities in its IAS 37 standard. What definitions of ‘‘the environment’’ are used in these legal and accounting frameworks? The concept in those frameworks is very broad. For example, the Lugano Convention (Convention on Civil Liability for Damage Resulting from Activities Dangerous to the Environment, June 1993) that laid down fundamental concepts of strict liability for environmental damages caused in EU territories, considers ‘‘the environment’’ to be the realm of all natural resources, both abiotic and biotic, such as air, water, soil, fauna and flora, and the interaction between the same factors. In combination, these properties form part of the cultural heritage and the characteristic aspects of our planet.

Similarities and Differences Between the Concepts of Carbon Liability and Environmental Liability It is clear that any concept of ‘‘carbon liability’’ should be considered in the context of an established corpus of environmental liabilities. Carbon emitted by corporations shares characteristics with other forms of environmental damage including, as already noted, cost of damages attributable to past or present commercial activities, including production of GHGs, and/or their release into the atmosphere. To discharge these obligations, entities must meet the necessary expenses of remediation or reparation from their own resources. In other words, this discharge of legal responsibilities under regulation entails for corporate entities an internalization of a type of cost control of carbon emissions. This has been was previously considered as an economic externality. The similarities in these definitions demonstrate are that they can be constructed in the same kind of legal and accounting framework for carbon liabilities in order to manage resulting marginal costs to the environment and to society as a whole. Similarities notwithstanding, the concept of carbon liability also has several differences from general environmental liability. Most importantly, GHGs are not in themselves toxic. This contrasts directly with the toxic or noxious characteristics of most general pollutants specified or implicated in legislation on environmental liability, such as asbestos, sulphur dioxide, heavy metals, etc. Directly and indirectly, the latter harm human health and the ecosystem. Carbon dioxide, the most common GHG and a primary factor in most cases of carbon liability, is not toxic in itself. It is merely one component in the atmosphere, a natural chemical byproduct of all plant and animal life. (Of course carbon monoxide (CO), which is chemically related to CO2, is clearly toxic. In theory, CO2 itself can be poisonous in high volumes; such a danger is, however, never likely in naturally occurring concentrations. In this context, concentrations of CO2, even in the most dangerous scenario simulated in the IPCC’s ARA4 toward the end of this century, will cause only indirect loss and

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damages, as part of the indirect consequences resulting from climate change. This indirect attenuated chain of causality presents serious difficulties in the calculation of carbon liability in society.

Cows’ Belches Can Be Tradable Commodities The planet is populated with very many agents of GHG emissions, whether animal, corporate, or human. Corporations contribute GHGs by their activities in resource consumption, in production and distribution, and in demand stimulation. Nature’s emission processes include deforestation, volcanic eruptions, swamps and wetlands. Even ruminant livestock in agriculture add to the emissions of animals: the human population, now on the cusp of 6.9 billion, is of course the most highly polluting species of fauna. A belch from a cow or other ruminant emits methane, a GHG with 21 times the warming power of CO2. The Worldwatch Institution, an independent research organization, has estimated that GHG emissions from ruminants contribute between 10% and 15% of the planet’s annual GHG total from all sources. The legal implication is clear: the belch of a cow might be regarded as a carbon liability for its owner. A rancher might compensate by participating in carbon trading, offsetting the wider economic cost of methane from his livestock. If he can find a way to reduce methane from his cows, he can trade a carbon credit on the free market linked to his animals, thereby earning additional income besides selling milk or meat. Idemitsu Kosan, a Japanese petroleum company working in co-operation with Hokkaido University has developed a new food for cattle to reduce output of methane gas bovine eructation in 2007. Besides biology, GHGs are emitted through innumerable economic and industrial processes in manufacturing, power generation, farming, logging, transportation, and so on. These are in addition to the emissions of individual humans. Consequently, it is very difficult to restrict GHG emissions from all sources. This near-universal emission by billions of agents and processes, of gases often essential to life itself, presents a completely different, universally pervasive causality which is more complex than with other recognized pollutants. This difference presents a major obstacle in forming policies to reduce emissions and to manage carbon, both in macroeconomic policy and in the carbon management strategies of individual corporations.

Different Legal Treatments of Carbon Liability As noted above, the concept of carbon liability can be seen as an obligation like others in environmental law. Its treatment and remedies differ from jurisdiction to jurisdiction, however. Developed countries who ratified the Kyoto Protocol recognize a duty to reduce their GHG emissions from 1990 levels. On the other hand, developing countries including even major emitters such as China, India, and Brazil face only a voluntary, non-binding commitment to reduce their own emissions. Some additional differences remain between developed countries. Targets in GHG reductions to be achieved before 2012 under the Kyoto Protocol range from 6% for Japan,

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7% for the EU, and 8% for the USA. After promising quantified reductions, the USA failed to ratify the agreement and left for domestic political reasons. As a result, even in developed countries, there have been different types of legal measures for reducing GHG emissions. These have affected the respective impact of carbon liabilities under different jurisdictions, both in terms of global macroeconomic policy, as well as in relation to the responses and obligations of individual corporations. In consequence, discussions on the post-Kyoto framework have focused as much on the differences between the commitment and stances of developing countries, as on the importance of emerging economies such as China, India, and Brazil.

Invisible to Visible Impact of Potential Carbon Cost What consequences do carbon liabilities carry for carbon-emitting corporations? A recent study by Trucost, a UK-based environmental consulting firm, published under the auspices of the UN’s Principles for Responsible Investment and the United Nations Environment Programme (UNEP), reveals some interesting answers. It calculates that the full cost to the world’s biggest companies of GHG emissions, pollution, and other environmental damage was almost $6.6 trillion in 2008. This figure is 20% larger than the $5.4 trillion decline in the value of pension funds in developed countries caused by the global financial crisis in 2007/ 2008, and equivalent to 11% of world Gross Domestic Product (GDP) [3]. On such analysis as Trucost’s, it is clear that very heavy cost liabilities arising from companies’ impacts on the environment remain to be recognized and accounted for in their market valuations. Almost 70% of the Trucost figure of $6.6 trillion is estimated as being the companies’ own carbon-related obligations to the environment and to civil society. Once properly accounted for, these enormous obligations linked to climate impacts will hugely reduce not only those companies’ market capitalizations, but will also lower their reputations in global public opinion. In calculating carbon impacts over the entire global economy, it must be considered the tasks both of quantifying carbon impacts on the planet’s ecosystem and secondly, of monetizing these carbon liabilities. The first task, an impact assessment of GHG volumes, can be focused on.

Quantifying Carbon Impacts The fast-developing science of climate change obliges all countries on this planet to cut very quickly the GHG concentrations in the atmosphere back toward sustainable levels. Based on the IPCC’s AR4, although it has been already well known in the world that the concentrations of CO2 in the planet’s atmosphere were approximately 380 ppm in 2005, an increase of about 100 ppm – or 36% – from levels before the Industrial Revolution began in Europe in the late eighteenth century. Over the past two centuries, the growth in

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GHG concentrations has averaged 1.9 ppm per year. The long-term rise in GHGs is calculated to have pushed up average global temperatures by 0.74ºC each year, and to have caused sea levels to rise almost 17 cm across all oceans, according to the IPCC’s AR4. Assuming an unchanged global dependency on fossil fuels, the IPCC AR4’s worst-case scenario predicts a 6.4 C rise in average temperatures by 2100, resulting in a 17 cm rise in sea levels. Such a worst-case scenario is anticipated to result in near-cataclysmic damage, affecting all life on the planet. In order to avoid such cataclysm, and to discharge the intergenerational liability to children and to themselves, action is imperative to decrease concentrations of GHGs in the planet’s atmosphere.

Global Carbon Budget The concentrations of GHGs that have built up through human economic activities, due primarily to more than two centuries’ use of fossil fuels, have clearly harmed the earth’s natural ability to sustain life. In non-scientific terms, ‘‘Mother Nature’’ has for billions of years supported plant, animal, and human life through her generosity and tolerance. But now emissions of carbon dioxide have combined with other GHGs and sources of manmade pollution, waste, and other detritus of post-industrial economies. The effect is to exceed the planet’s inherent capacity to absorb the shocks imposed on it by humanity’s weight of life, as much as by its way of life. The IPCC’s ARA4 calculates the planet’s capacity to absorb carbon into its total biosphere of land, air, and oceans as being 3.1 Gt per year (1 carbon tonne = 44/12 equivalent to the CO2). This calculation is based on latest scientific knowledge and on annual averages for the 5 years ending in 2005. Against this sum, current GHG emissions from human activity have reached 7.2 Gt of carbon per year (> Fig. 12.1). This is more than twice the capacity of the ‘‘Pachamama,’’ the mythical ‘‘Mother Earth’’ revered by Bolivia’s native people. The country hosted ‘‘the World People’s Conference on Climate Change and the Rights of Mother Earth’’ in April 2010 at Cochabamba. President Evo Morales advocated concerted Prediction in 2030 445~535ppm

590~710ppm

Current(380 ppm) Natural CO2 concentration(280 ppm)

Natural absorption by the earth(3.1bn carbon tonnes)

. Fig. 12.1 Global carbon budget (Source: AR4)

Accumulation to the earth(4.1bn carbon tonnes) anthropogenic GHG concentrations (7.2 bn carbon tonnes)

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action in defense of the earth of ecosystems. President Morales said ‘‘Human beings cannot survive without Mother Earth, but Mother Earth can survive without us. We have direct accountability to her.’’ He is usually demonized as Bolivia’s anti-USA and antiEuropean dictator. But his words should be heard by western politicians. Excess GHG emissions continue to accumulate in the atmosphere. The resultant rises in global temperatures will not only continue, but will accelerate, following the wellestablished principle of positive and exponential feedback in complex natural systems. In other words, the absorptive, or uptake functions of ‘‘Mother Earth’’ have fallen into environmental near-bankruptcy in terms of their capability to compensate for the changes which humanity has made to the makeup of the atmosphere. The components and causes in this bankrupting of the planet’s ecosystem are obvious. Prime among them stands human activity, especially the overuse of fossil fuels as main sources of energy, in industrial production and in maintaining human life. Annually around 7.2 Gt of carbon are emitted from fossil fuels and cement. The impact of cement production accounts for only 3% of the total. In addition, changes in global land usage over the past two decades have also pushed up GHGs. Among other sources the ARA4 attributes 2.2 Gt of carbon as being due to deforestation in the 1990s and industrialized agriculture brought onto previously virgin woodland. Before the Industrial Revolution, man-made concentrations of GHGs could be contained safely within the earth’s natural capacity to absorb them. This historical fact clearly compels human beings to recover as quickly as they can the earlier successful balance of consumption and of nurture in which humans must coexist with the planet. In economic terms, people must respect the planet’s natural ‘‘uptake capacity.’’ More broadly, they must restore the relationship between the earth and human activities. This means that they have to mitigate and decrease unabsorbed GHG concentrations. (See the right hand part of box in > Fig. 12.1). This number represents only a ‘‘per year’’ imbalance in emissions, of course. It might be referred to as a global ‘‘income statement of emissions,’’ or as a ‘‘profit and loss statement,’’ for anthropogenic GHGs. Any year’s excess of GHG adds to a huge GHG accumulation in the atmosphere, built up over two centuries’ use of fossil fuels. The IPCC’s ARA4 shows these increases in atmospheric CO2 as the contemporary ‘‘carbon budget.’’ Estimates of atmospheric CO2 have shot upwards in successive IPCC reports. In the 1990s, the equivalent of its third report TAR put a figure of 3.2 Gt of carbon on accumulated atmospheric carbon. Less than a decade later over the period from 2000 to 2005, ARA4’s calculation of atmospheric CO2 had risen by 28%, producing a new estimate of 4.1 Gt of carbon.

Excess Cost of Carbon Imbalance How can monetary values be assigned to these quantities of emissions? First, the unit of carbon volume must be reconciled to CO2-equivalent metric tonne. This is because carbon credits are traded in units of ‘‘tonne of CO2-equivalent unit.’’ The molecular weight of CO2 is 44. Therefore, it can be multiplied weights by this factor to calculate gigatons of carbon.

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Thus the figure for CO2-equivalent tons can be derived. Applying this formula to the figures in the previous section, totals can be calculated for annual anthropogenic emissions of 26.4 Gt CO2 equivalent, and 15.0 Gt CO2-equivalent tons for accumulated atmospheric CO2. Next, a monetary value can be derived for these quantities by referring to market prices for carbon in the EU’s Emission Trading Scheme (EU-ETS), the world’s first mandatory GHG emission trading market. As of June 2010, prices in the scheme were running at almost 15 Euro per tonnes. Thus, the total global carbon deficit would monetize to 225.0 billion Euro annually. The annual buildup of CO2 in the atmosphere represents the net increase of carbon liabilities across the planet – or rather, it represents the liabilities of the human race. Huge though these carbon deficits are, they show only one side of the picture. As already mentioned, these trends in accumulation have continued for more than 200 years, since the start of the Industrial Revolution in the eighteenth century. What are the continuing impacts on the earth of those early and long-lasting carbon burdens? They can be considered not only as yearly increments, but also on a fully amortized, ‘‘total cost of ownership’’ basis, as might be used in calculating a ‘‘global carbon balance sheet’’ of the planet. Sadly, these calculations are not easy, due not least to major gaps in current knowledge and in available data sets. For example, the total assets and liabilities of the earth cannot be reconciled in both a monetary sense and in a non-monetary one. It is very difficult to calculate the remaining periods of atmospheric carbon in the earth. Much recent debate in economics has focused on this topic and estimates vary from 15 years to as much as 200 years. Using 15 years as the hypothesis for the remaining period of atmospheric carbon, it must be increased by 15 times AR4’s ‘‘per year’’ assessment of excess liability, and monetized to Euro 3.375 trillion as a total price of carbon liabilities. On any basis of calculation, this number will be huge. In accounting terms, it has to be concluded that, if the mother planet was an enterprise, she should be filing for Chapter 11 insolvency, owing to her children’s persistent ecological trashing of the family home, sustained over a score of decades. Recent studies in the economics of climate change have attempted to set fair value (market value) on centuries of human ecological vandalism. Among the varying estimates produced, the safest conclusion is that the differences between the balance sheets of manmade carbon production of the earth would be huge even in comparison to the previously mentioned annual income statements of carbon. This much is true, not least because account has to be taken of 200 years of anthropogenic CO2 accumulation. Huge liabilities remain, in the form of excess, unabsorbed carbon. That is the reason why it is not sufficient merely to stabilize human consumption of fossil fuels at current levels. Humanity should be aggressively cutting consumption, if we are to stand any chance of achieving 80% cuts in GHG emissions by 2050.

Avoiding Carbon Insolvency Continuing the ‘‘balance sheet’’ analogy, it must be concluded that after two centuries of mass industrialization, human being remain terrible managers of carbon factors of

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production, of carbon assets, and of carbon liabilities. Judged on such universally accepted principles of accounting as ‘‘true and honest valuation’’ and ‘‘prudence,’’ the history of economic activity amounts to a disaster tantamount to ‘‘carbon insolvency’’ or, at the very best, a staggering profligacy with nonrenewable carbon assets. ARA4 presents a simple benchmark for assessing the short- and long-term effects of CO2 increase. This is the ‘‘airborne fraction’’ – in other words, the increase in CO2 concentrations in the atmosphere, as a share of all fossil fuel emissions. From 1959 to the latest, with remarkably little variation, the airborne fraction has averaged 0.55. That means the absorptive capacity of the earth’s biosphere has consistently removed the remaining 45% of fossil-derived CO2 from the atmosphere. So the recent accelerating rate of increase in atmospheric CO2 reflects an increased level of emissions from burning fossil fuels.

The Carbon Break-Even Point Correcting and rewriting the global balance sheet of carbon places us in a series of double binds, in multiple tensions between growth and ecology, between developing and developed countries, between uncertainty and certainty, and between present and future. Reconciling these opposite is far from easy, but it has to be done. The labor of finding balancing points on each continuum depends on how resources distribution can be improved. In short, a range of optimum levels of resource allocation should be identified, appropriate both to achieving cuts in carbon emissions and to securing economic growth. Any honest or prudent management of the planet’s carbon balance sheet would oblige people to allocate to responsible agents Euro 225.0 billion worth of costs of GHG reductions. Given an adequate rise in the market price of carbon – to the level of Euro 30 per tonnes, as reached by the EU-ETS in mid-2008 – the planet’s total carbon liabilities would rise in value to Euro 450.0 billion. That number should be familiar. It is virtually identical to the estimate produced by Sir Nicholas Stern in his 2006 book, ‘‘The Economics of Climate Change (2006).’’ At that time Stern wrote that: "

If a wider range of risks and impacts [of climate change] is taken into account, the estimates of damage could rise to 20% of GDP or more. In contrast, the costs of action can be limited to around 1% of global GDP each year [4].

On the International Monetary Fund (IMF) estimates, world GDP in 2008 amounted to $ 58 trillion. Under this analysis, estimates of damage due to climate change could vary from as high as $11.6 trillion and as low as $0.58 trillion. Comparing Stern’s figures to the carbon balance sheet above, Euro 450.0 billion of excess carbon liabilities is almost the same value as the minimum expenditure estimated by Stern. So it can be safely concluded that securing this value of resources for measures to cut carbon would represent the break-even point. In other words, such a resource base would constitute a ‘‘sweet spot,’’ a point of balance favoring continued economic growth while at the same time preventing further global warming. Besides monetizing and valuing carbon emissions into carbon liabilities, it also has to be accounted for the effects of feedbacks and positive reinforcement in the climate-carbon

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cycle. These feedback effects mean that global warming tends to slow down the absorption of carbon dioxide by the planet’s landmasses and oceans, thus increasing the fraction of emissions remaining in the atmosphere. According to one estimate, the phenomenon of positive feedback will be responsible by itself for a rise in corresponding global average warming of more than 1 C by 2100. This assumption suggests humanity might reach a sustainable point of equilibrium, merely by establishing break-even points of GHG emissions. But this action would be only one step. Governments and supragovernmental agencies need to move very far and very quickly, if we are to achieve meaningful reductions in emissions and stabilize the climate by the middle of this century.

Measuring the Valuation Materiality of Corporate Carbon SEC Guidance The next task is clear. Calculable amounts of values must be allocated and mobilized in the urgent task of reducing global GHG emissions. The most cost-effective way of achieving this allocation would be by considering both macroeconomic and microeconomic issues. The COP 15 in Copenhagen of December 2009 considered macroeconomic issues, as will COP 16 in November 2010, and subsequent Conferences of the Parties. It might be hoped and believed that COP delegates could at last have been able to reach agreement on the post-Kyoto framework. The issues could not affect more closely the future of humanity and that of the earth. Nobody can escape the implications of climate change. The microeconomic agenda, including new obligations of carbon accounting and disclosure for corporations has emerged to apportion sufficient resources to cover climate-related carbon liabilities. The US Securities and Exchange Commission (SEC) published in February 2010 new guidance to companies facing responsibilities to disclose to investors the materiality of their carbon-related activities (‘‘Commission Guidance Regarding Disclosure related to Climate Change’’). The SEC issued its guidance in answer to requests from members of the United States Climate Action Partnership (USCAP) and from the corporate evaluation community. An urgent need is being felt for a policy framework on climate change, in order to make coherent disclosures of material-relevant carbon-related liabilities, for the purposes of valuing companies. The SEC guidelines stress the necessity of carbon disclosure to investors, as defined in new regulations from the US Environmental Protection Agency (EPA), especially as the new rules on GHG data affect reporting by the large emitter entities, as well as the disclosure regulations contained in the EU-ETS. It is estimated that the EPA’s reporting requirements will affect as much 85% of the USA’s GHG generation, emitted by approximately 10,000 plants and facilities. In addition, despite the USA never ratifying the Kyoto Protocol, many registrant companies have operations outside the USA that are subject to SEC standards.

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Regulation Risk The SEC’s guidance examines the materiality of carbon-emitting activities under three categories: 1. Regulatory risk 2. Physical risk 3. Market risk This scheme has been recognized generally by businesses as acceptable and workable. The SEC document begins by explaining the impact of regulatory risk on three types of companies. For some, the regulatory, legislative, and other developments could have a significant effect on operating and financial decisions, chiefly decisions involving capital expenditure needed to reduce GHG emissions. Secondly, for companies subject to ‘‘cap and trade’’ legislation (not yet introduced in Japan or the USA, but promised for implementation soon), the SEC’s guidance sets out the expenses permissible to purchase emissions allowances, where reduction targets cannot be met. Thirdly, the SEC describes how firms not directly affected by emissions regulation, could still be affected indirectly, through higher prices, charged by directly affected companies who need to pass on their own increased costs of compliance. One consequence is that even in jurisdictions still without a mandatory ‘‘cap and trade’’ regime, companies may yet face some regulatory risk, as a consequence of international trade or cross-border procurement and supply chains. These new regulations on emissions reduction may also present new opportunities for investment. This has been the lesson from the EU-ETS and its associated carbon markets. Companies with more allowances than they need, or who are eager to earn offset credits, can raise capital by selling these instruments on the markets. Companies must thus manage both sides of their own carbon balance sheets to balance their carbon assets and liabilities. Just as important in assessing regulatory risk associated with carbon liabilities, is the necessity for companies to understand cycles of trading and regulation. Even in the EUETS, which is based on the current Kyoto Protocol, trading is limited to a defined period. The EU will extend the present trading period to the end of 2020 under the third phase of the ETS. Beyond 2020, no clear commitment exists; as a result companies face uncertainty. The SEC’s guidelines are equally unclear on this point.

Physical and Market Risk Climate change presents corporations with increased physical risk. Extreme weather events such as fiercer storms, hurricanes, more frequent flooding, deeper erosion of coastlines, melting of permafrost and higher temperatures will all affect enterprises’ facilities and operations. Changes in the availability or quality of water and other factors of production are among innumerable physical challenges about to confront to businesses.

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Physical changes associated with climate change may depress consumer demand for products or services. Warmer winters may cut demand for heating fuels, servicing, and equipment. These effects could affect companies’ operations and the value of their assets. Market risk due to climate change may be defined as companies confronting the risk of reductions or eliminations in business opportunities, consequent upon changes in consumer demands and in society’s needs. If companies have not reacted astutely in response to regulatory and physical risks, they could lose the confidence of consumers and investors. This risk is reputational, and can be considered a type of market risk. The SEC’s guidance advises that, depending on a registrant company’s business and its reputation with the public, it may need to consider whether public perception of its published data on GHG emissions could expose it to potential adverse consequences to its business operations or financial condition. The SEC emphasizes the importance of disclosing risk factors linked to climate change in companies’ financial reports, even where the data’s materiality may be hard to assess. The SEC notes fail to give methods for evaluating such data, neither do they provide any criteria to measure the materiality of non-financial factors. The sole quantified threshold shown is the SEC’s explanation on Instruction 5 to Item 103 of Regulation S-K. This recommends citing any current or outstanding environmental litigation related to governmental regulation. Notwithstanding the SEC’s guidance on climate change, familiar questions remain. How can corporations and other carbon-emitting organizations calculate the materiality of their own carbon liability? How should this be measured?

Quantitative Carbon Disclosure Companies are left to their own devices in deciding how to measure the materiality of their carbon exposure and to disclose this in financial reports. With this realization the next problem, namely, measuring a corporation’s carbon liability, must be focused. Research in corporate reporting reveals several different approaches to climate-related risk. Examples include the disclosure of a company’s carbon budget, as described above, and its philosophy for carbon management. Firms in such carbon-intensive sectors as oil exploration, electricity, chemicals, steel and cement have been quick to adopt such approaches. This is because they have hitherto faced the three types of carbon risk already mentioned. Firms can no longer tuck such data away in financial reports. In its latest corporate citizenship report, ExxonMobil explains that it emitted 128 million tonnes of direct GHG in 2009, down by 2.3% on the year before. The US oil giant publishes detailed information on its gas flaring and on its co-generation capacity, two factors with major impacts on carbon liabilities in its sector. Exxon’s peers Shell, Chevron and BP also disclose their quantified data of carbon emissions. BP has faced another hugely expensive environmental liability, stemming from

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the huge Deepwater Horizon oil spill in the Gulf of Mexico in April 2010. In its disclosures of quantified carbon emissions, BP is more precise than Exxon. BP itemizes its direct CO2 emissions of 60.4 million tonnes, direct methane emissions of 0.22 million tonnes, and customer emissions of 554 million tonnes, respectively, in 2009 (> Table 12.1). A huge volume of environmental liabilities, as well as carbon ones, can be expected in BP’s next report, as it meets claims arising from the Gulf Coast accident, which is now rated as America’s worst-ever oil disaster. Japanese companies are strongly competitive in environmental matters. RICOH, a global leader in office automation equipment and very eager to disclose its own environmental data, publishes figures for its CO2 emissions. It quotes its commitment to achieve 30% reductions in 2020 and 87.5% from 2,000 levels (> Table 12.2).

The Movement for Quantitative Carbon Disclosure Years of pressure by environmental movements have given strength to regulators seeking quantitative disclosure of CO2 emissions by companies. Prominent among them are the UK’s Carbon Disclosure Project (CDP) and the Climate Disclosure Standards

. Table 12.1 Quantities of carbon emissions associated with BP’s activities Year 2006

2007

2008

2009

Direct CO2 (Million tonnes) Indirect CO2 (Mt) Direct Methane (Mt)

59.3 10.1 0.24

59.2 10.7 0.20

57.0 9.2 0.21

60.4 9.6 0.22

Direct GHG (Mt) Customer CO2 (Mt) Environmental expenditure ($ million)

64.4 539 4,026

63.5 521 3,293

61.4 530 2,520

65.0 554 2,483

Note: BP sustainability review 2009

. Table 12.2 Quantitative carbon emission in RICOH (ten thousand CO2 tonnes) 2008

2009

2010 (target)

CO2 (in Japan) Accumulated CO2 reduction

17.65 1.15

16.83 1.83

15.58 2.4

CO2 (global other than Japan)

8.97

9.16

7.61

Note: RICOH sustainability report (Environment) 2009

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Board (CDSB). The CDP is a voluntary, non-profit organization which, through force of argument and through a tailored questionnaire, works to persuade global companies to measure and disclose CO2 emissions and strategies in relation to climate change. The CDP co-ordinates research on behalf of 534 institutional investors, with combined holdings worth in the region of $ 64 trillion. CDP reports include statistics on carbon emissions from its respondent companies, plus other analysis. Open to public scrutiny, this information yields important trends and developments in corporate management of carbon emissions. The Climate Disclosure Standards Board is composed of a pro-environment consortium of global companies, accountancy firms and accounting organizations, and nonprofit lobby groups. CDSB’s mission is to develop a global framework for corporate reporting on GHG emissions, with the aim of supporting, strengthening, and harmonizing existing initiatives in climate-related reporting. The board seeks to enhance best practice in the form of a single consistent global framework. Even though both the CDP and the CDSB claim their activities continue to raise standards of corporate accountability toward the environment, neither would claim their work is complete. Information in companies’ financial reports may be useful for investors seeking to select environment-friendly companies for ESG (Environment, Social, Governance). But quantified information in financial reports does not necessarily reflect the precise cash values associated with liabilities in relation to carbon emissions, nor the resources which companies must dedicate to meet them. Quantified disclosure of climate- and carbon-related liabilities is gradually becoming an obligation under company law. Participating companies in the EU-ETS are obliged to provide their emission data on a site-by-site basis to EU national governments. Since 2005, enterprises in Japan consuming 1,500 kl per year in fossil fuels must submit emissions data; the relevant legislation stipulates reporting of all six main greenhouse gases. The Japanese government has made public the names of companies exceeding prescribed levels of quantified CO2 emissions when it recalculates corporates’ declared emissions data on a per-site basis. Companies who fail to quantify and disclose emissions data, face fines. The US EPA has decided to introduce a Japanese-style scheme for compulsory GHG reporting.

Putting a Price on Carbon Difficulties in Monetizing a Price for Carbon Methods are evolving quickly to collect quantified data on carbon emissions from various types and sizes of corporations under various jurisdictions around the world. What are the next steps? Measuring a corporation’s carbon liability means putting a price on it – in other words, monetization. How should this be done? Carbon markets already provide an important tool to measure current prices for carbon in a free market. Emissions trading

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schemes like the EU’s exist to link sellers with buyers, in the process setting a marketclearing price. Two types of environmental trading systems exist, ‘‘cap and trade’’ and ‘‘baseline and credit.’’ In the EU’s cap and trade system, carbon emission credits such as the European Union Allowance (EUA) have been traded. A closing price for this security is reported after every day’s trading. The process is identical to that for trading currencies, stocks commodities, or any other form of financial instrument. As the biggest trading mechanism for corporate carbon credits, the EU-ETS is highly influential in setting a global price for carbon. In consequence, the prices of Certified Emission Reduction (CER) that were issued by Clean Development Mechanism (CDM) projects in developing countries admitted as one of the emission reduction tools in the Kyoto Protocol have settled on arbitrage trading with EUA markets (see > Fig. 12.2). The effect of such price-setting markets has been that, in general, the more emissions a company causes through its activities, the more it must pay to cover its carbon liabilities. Complete understanding of techniques to value carbon liabilities will be lacking, however, if they are considered merely as a mean to the end of trading of carbon credits in the market. Three types of carbon risk exist, each presenting its own valuation issues, namely, regulatory risk, physical risk, and market risk. Regrettably, a market mechanism such as trading cannot monetize all three types of risks. Let’s consider why. Firstly, regulation risks are not shared equally between all types of carbon emitters. Proof of this emerges, when the composition of the current EU-ETS is examined. Now in its second phase of operations, the EU-ETS admits only firms from heavy-emitting industries and eligible sectors including power utilities, energy generation, iron smelting, cement and oil refining. The EU-ETS will expand its targeted eligible sectors gradually.

18 16 14 12 10 8 6 4

2010EUA 2010CER

10/05

10/04

10/03

10/02

10/01

09/12

09/11

09/10

09/09

09/08

0

09/07

2 09/06

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2011EUA 2011CER

. Fig. 12.2 Price differences between EUA and CER (=Euro) (Drawing by the Daiwa Institute of Research based on the data of European climate exchange, June 2010)

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For its third phase running from 2013 to 2020, it will admit firms in chemicals, aluminum, and aviation, but still not expand to include all of CO2-emitting sectors. In a sector-led approach to industrial carbon reduction, national governments thus decide which industries are prioritized. Under the United Nations’ Framework Convention on Climate Change (UNFCCC) and its enforceable Protocol, the job of setting reduction targets is decided at country level. So the UNFCC allows huge political compromises to be made, invariably to the detriment of emissions reduction. If the government of a developing company, for example, judges that a heavy emitter of CO2 – its iron industry, say – is critical to national development and job creation, then the politicians may well exempt that sector from regulation. No penalties follow for the country in terms of its compliance with the treaty, so long as it achieves its overall promised goal for emissions reduction. Methods of limiting national output by sector have been enacted in some trading systems. The RGGI is a mandatory cap and trading system of carbon rights, covering 10 northeastern and Atlantic states in the USA. It targets only the power generation sector, against a goal to cut emissions by 10% by 2018.

The IFRIC3 Dispute over Accounting Standards for Government Grants of Carbon Allowances Any system of public trading of corporate carbon rights will produce a market price at the end of every trading-day. To allocate costs within a company for the resultant carbon price, it is necessary that the company has to include such prices on both the balance sheet and the income statement of companies, in accordance with the prevailing principles of accounting. This necessity is at once very important and very difficult for companies. Regrettably, there is no avoiding it. The International Financial Reporting Interpretations Committee (IFRIC) is the interpretative body of the IASB (International Accounting Standards Board). In December 2004, just as the EU launched its ETS, the IFRIC committee issued IFRIC3, its formal accounting interpretation on Emission Rights, or carbon credits. At that time it was decided that EU-ETS should come into effect from 1 March 2005. In practice the IFRIC3 thus became the new accounting tool of choice for the EU-ETS. But it was withdrawn after only a month, the victim of wrangles between accounting regulators and business leaders. The allowances granted by national governments to the companies participating in the ETS were at issue. According to the IASB, IFRIC 3 specified the following [5]: 1. Rights (allowances) are intangible assets that should be recognized in the financial statements in accordance with IAS 38. 2. When allowances are issued to a participant by government (or government agency) for less than their fair values, the difference between the amount paid (if any) and their fair value is a government grant that is accounted for in accordance with IAS 20.

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3. As a participant produces emissions, it recognizes a provision for its obligation to deliver allowances in accordance with IAS 37. This provision is normally measured at the market value of the allowances needed to settle it. The issue was how to treat such an allowance on the balance sheet. A consensus among businesses held that an allowance is an asset, because it is acquired at a cost, in the same way as any other factors of production such as raw materials and equipments. IFRIC agreed; however, not all business leaders did so. As the IFRC is an interpretative body of the IASB, it is bound by the IASB Framework on the Preparation and Presentation of Financial Statements (‘‘Framework’’). This framework does not assess an asset from the cost evaluation viewpoint. It defines an asset as a ‘‘resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity’’ [6]. As the EU-ETS began trading, the IFRIC standard recognized as an asset the allocation by EU governments of allowances to companies in their own territory. However, IASs set by IASB require assets to be measured at fair value at each reporting date. In consequence, the IFRIC interpreted allowances in an undifferentiated manner, failing to discriminate between allowances purchased from the market or granted by governments. In contrast at that time, the IASB had a long-standing proposal to amend recognition of governmentallocated granting of rights in the IAS 20 (Accounting for Government Grants and Disclosure of Government Assistance) this stipulated that any grant from a government could no longer be considered as income. The dispute’s implication was that any free emission allowances granted by governments would have to be recognized immediately as income. Business leaders protested that it was impractical for them to recognize fair value at the outset of trading. The IASB withdrew IFRIC3. Further accounting disputes have followed, concerning the structures of the emission trading schemes, and in particular how to establish a scale of values for initial allowances and allocate them among the scheme’s members. At question have been competing methods of rights allocation such as the so-called ‘‘grandfathering approach’’ as used in the first phase of the EU-ETS; alternative methods also considered have included benchmarking approaches, and allocation based on auctions of emissions rights. IFRIC3’s failure was a direct consequence of the ‘‘grandfathering’’ approach favored by the EU. In a statement, the Board of the IASB justified its withdrawal of IFRIC3 claiming that ‘‘the Board decided to take the time to conduct a broader assessment of the nature of the various volatilities resulting from the application of IFRIC 3 to a cap and trade scheme and to consider whether and how it might be appropriate to amend existing standards to reduce or eliminate some of those volatilities.’’ The decision was taken by an overwhelmingly vote of 12 in favor, 1 against, and 1 abstention. After several years, the IASB restarted the debate on limiting free issues in emissions trading schemes. But it chose not to address the controversy surrounding accounting standards for all government grants at December 2007. To date, joint discussions have continued with its US counterpart, the FASB. A new exposure draft proposal will be expected in late 2011 no new version of the IFRIC guideline is anticipated before late 2012.

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Calculating Physical Risk to Price Despite long-standing discussions on setting up comprehensive and intelligible rules in carbon accounting, markets seem to provide the simplest method for setting a carbon price. Companies trading under mandatory emission trading schemes like the EU-ETS can compare carbon prices in the market with their own carbon management on issues such as raw materials purchase, investment in production equipment, identifying a development site, or in deciding about the production of a new product or service. As described above, accounting standards for reporting carbon values have not been decided, and none will be accepted until the new draft of ‘‘IFRICa’’ emerges. Carbon pricing in free markets serves well as one measurement of carbon liability. It is limited, however, in relation to regulatory risk. As described above, the concept of carbon liability comes not only from regulation but also from physical and market risk types. Physical risk may increase carbon damage to the asset side of a company’s balance sheet, as opposed to its liabilities. Some simple examples illustrate the point. Rising sea levels may halt or impede operation of an enterprise’s factories and facilities located along coastlines. Companies face operational interruption or damage, due to fiercer storms, heavier rain, more frequent typhoons, or land erosion caused by drought. Firms will be well advised to introduce climate contingent Business Continuity Plans (BCPs) to prevent deterioration of their fixed assets and operational interruptions caused by climate change. Introducing climate contingent BCPs could serve as a form of environmental insurance against carbon impacts.

Applying ARO Method As companies struggle to calculate climate-related physical risks to their asset base, both now and in future, they have available to them a useful accounting technique. This is the accounting rule for asset retirement obligations (AROs). AROs are legal obligations associated with the retirement of a tangible long-term asset. Such obligations result from the acquisition, construction, development, or normal operation of a long-term tangible asset, as defined in the FAS 143 standard issued in 2002 by the FASB. This accounting rule applies a ‘‘fair value’’ measure of fixed assets, which includes environmental damage or other future obligations. For example, the owner of an asset that is subject to environmental laws such as CERCLA is required to recognize their liability as an ARO on their balance sheet in the period in which it is incurred, based on a reasonable estimate of its fair value. Even if it is not possible to estimate with precision, the liability must be recognized whenever a reasonable estimate of fair value can be made. An ARO is not quite the same as a carbon liability associated with any fixed asset. But it can be said that the nature of the uncertainty surrounding any carbon liability might be

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quite similar to the processing of evaluating an ARO. Companies have to estimate the fair value of a carbon obligation, against the uncertainty of future regulation against the possibility of physical risk. FIN47 is the FASB’s interpretation of FAS 143 issued in March 2005. The US-based environmental accounting consultant C Gregory Rogers [7] specifies that the fair value of an ARO may be determined based on any of the following methods. 1. The amount of the obligation embedded in the acquisition price of the asset 2. A market quote in an active market for transfer of the obligation 3. Application of an expected present value technique to estimate fair value (if neither of the above two situations apply)

Converting a Market Risk to an Opportunity Setting a price on carbon liabilities associated with market risk can be very difficult, not least because this type of risk may be influenced by customers’ changes in taste or in buying behavior. One solution may be to apply marketing methods such as Customer Related Marketing (CRM). If companies use such carbon marketing techniques, they may persuade their customers that their products are differentiated by virtue of low impact on the environment. Perceptions can be altered by careful market positioning. It is not yet clear how many customers will value, or will react to, perceptions of low carbon positioning, rather than to traditional lower prices and higher quality. But more easily than with the other carbon risk types, market risk can be turned from a liability into an asset and a source of competitive advantage. Several global competitors are already attempting to pursue carbon value as a marketable asset. The German chemical giant BASF published its corporate carbon footprint in 2008. The company uses the lifecycle principle to calculate GHG emissions not just at its own controlled facilities, but also at external points in the value chain such as procurement, manufacturing, transport and disposal. BASF emphasize their sound carbon budgeting, based on comparison of emissions and savings. Emissions from procurement, manufacture, transport and disposal come to roughly 90 million tonnes of CO2 equivalent. Almost 30% – or 28 million tonnes – comes from in-house production. By comparison, the use of BASF products saves 287 million tons of CO2, resulting in a ratio of 3:1. Dr. Ulrich von Deessen, BASF’s Climate Protection Officer and head of the Competence Center for Environment, Health & Safety, said in the report that ‘‘Corporate carbon footprints highlight the opportunities and threats that companies face as a result of climate change. This is important both for the company itself, as well as for stakeholders such as investors, customers and employees.’’ Carbon management entails the full realization and declaration of all costs and liabilities arising from man-made carbon, and allocating these costs to appropriate activities both in their production, and to the final retail value of a product. In discharging this management obligation more efficiently, corporations must establish a well-planned

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architecture of mandatory carbon trading which minimizes regulatory risk. Equally desirable and necessary is an agreement on more accurate accounting methods, capable of producing coherent and usable valuations of carbon liabilities, as they materially effect a company’s base of fixed assets and related liabilities. In addition, companies should apply across all its key audiences – customers, investors, and other stakeholders – a comprehensive, appropriately designed strategy of carbon marketing. The goals should be to request and to achieve collective changes in patterns of consumption as well production in order to safeguard the interests of future generations.

References 1. 2.

3. 4.

The Fourth Assessment Report of the Intergovernmental Panel on Climate Change, 2007 US Environmental Protection Agency (1996) Valuing potential environmental liabilities for managerial decision-making :a review of available techniques UNEP FI & PRI’ Universal Ownership’ October 2010, contributed by Trucost Stern N (2007) The economics of climate change. Cambridge University Press, Cambridge

5. 6.

7.

International Accounting Standards Board (2010) Explanation on emission trading schemes Cook A (2009) Accounting for emissions: from costless activity to market operations. In: Freestone D, Streck C (eds) Legal aspects of carbon trading. Oxford University Press, Oxford Gregory Rogers C (2006) Financial reporting of Environmental liabilities and risks after SarbanesOxley. Wiley, Hoboken

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13 Impacts of Climatic Changes on Biogeochemical Cycling in Terrestrial Ecosystems Dafeng Hui1 . Hanqin Tian2 . Yiqi Luo3 Department of Biological Sciences, Tennessee State University, Nashville, TN, USA 2 International Center for Climate and Global Change Research, School of Forestry and Wildlife Sciences, Auburn University, Auburn, AL, USA 3 Department of Botany and Microbiology, University of Oklahoma, Norman, OK, USA

1

Introduction: Global Climate Change and Terrestrial Ecosystems . . . . . . . . . . . . . . . . . 435 Approaches to Evaluate the Impacts of Climate Change on Terrestrial Ecosystems: Observation, Experiment, Model, and Meta-analysis . . . . . . . . . . . . . . . . . . 437 Observation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 438 Experiment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442 Terrestrial Ecosystem (TECO) Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442 Dynamic Land Ecosystem Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444 Model Parameterization and Inverse Modeling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445 Meta-analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446 Impacts of Elevated Atmospheric CO2 Concentration on Carbon Cycling in Terrestrial Ecosystems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 Experimental Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 Photosynthesis, Respiration, and Stomatal Conductance . . . . . . . . . . . . . . . . . . . . . . 448 Plant Growth, Biomass, Ecosystem Productivity, and Carbon Storage . . . . . . . . 448 Modeling Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449 Meta-analysis Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453 Photosynthesis, Respiration, and Stomatal Conductance . . . . . . . . . . . . . . . . . . . . . . 453 Plant Growth, Biomass, Ecosystem, Productivity, and Carbon Storage . . . . . . . 454

Wei-Yin Chen, John Seiner, Toshio Suzuki & Maximilian Lackner (eds.), Handbook of Climate Change Mitigation, DOI 10.1007/978-1-4419-7991-9_13, # Springer Science+Business Media, LLC 2012

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Impacts of Global Warming on Carbon Cycling in Terrestrial Ecosystems . . . . . . . . . . 455 Experimental Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455 Photosynthesis, Respiration, and Soil Respiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455 Plant Growth, Biomass, Ecosystem Productivity, and Carbon Storage . . . . . . . . 456 Modeling Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457 Meta-analysis Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458 Impacts of Precipitation, Ozone, and Multiple Climatic Factors on Carbon Cycling in Terrestrial Ecosystems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460 Experimental Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460 Plant Photosynthesis, Respiration, and Soil Respiration . . . . . . . . . . . . . . . . . . . . . . . 460 Modeling Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462 Meta-analysis Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463 Future Directions: New Experiments, New Models, and New Approaches . . . . . . . . . . 464 Closing Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465

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Abstract: Global climate change has profound effects on biogeochemical cycling in terrestrial ecosystems. This chapter summarizes the existing state of knowledge on how climate change affects biogeochemical cycling, specifically carbon cycling, as the carbon cycling has long been recognized as important for understanding climate change. The review draws largely on knowledge gained from manipulated experiments, modeling, and meta-analysis studies. This chapter starts with a brief description of current changes in several climate factors such as atmospheric carbon dioxide (CO2) concentration, temperature, precipitation, and ozone (O3) and their effects on terrestrial ecosystems. Then approaches commonly applied in global change research such as natural observation, experiment, ecosystem modeling, and meta-analysis are described. The advantages and disadvantages of these approaches and general procedures are also summarized. The impacts of global change such as elevated CO2, global warming, and changes in precipitation and O3 on carbon cycling in different terrestrial ecosystems are further synthesized. In addition, issues related to global climate change such as single factor versus multiple factor studies, graduate versus step increase experiments, and inverse modeling are briefly discussed. At the end of the chapter, some recommendations for future global change research in terrestrial ecosystems are provided.

Introduction: Global Climate Change and Terrestrial Ecosystems The atmospheric carbon dioxide (CO2) concentration has gradually increased from 280 ppm in preindustrial times to 379 ppm in 2005 and is expected to exceed 700 ppm in 2100 [1], mostly due to land use change and fossil fuel combustion. As a consequence of rising CO2 and other greenhouse gases, the Earth’s surface temperature has increased by 0.74 C in the twentieth century and is expected to increase by another 1.8–4.0 C by the end of this century [1]. Precipitation is also anticipated to increase by about 0.5–1% per decade over most of the middle- and high-latitude land areas in the northern hemisphere in this century [1]. The tropospheric ozone (O3) level has been increasing at local, national, continental, and even global scales. Future projections indicate that the trends in greenhouse gases, temperature, and precipitation will continue, resulting in a warmer, wetter, yet drier world in the twenty-first century [1, 2]. Changes in atmospheric CO2 concentration, O3, and other climatic factors have the potential to trigger complex influences on terrestrial ecosystems with feedbacks to climate change [3–5]. Carbon dioxide, for example, is not only one of the main greenhouse gases, but also a substrate of plant photosynthesis. Rising atmospheric CO2 concentration can directly affect photosynthetic rates, plant growth, and ecosystem productivity. Temperature influences all physical, chemical, and biological processes. Global warming can affect ecosystem structure and function, such as ecosystem carbon cycling. Precipitation, O3 concentration, and nitrogen fertilization also regulate plant growth and ecosystem carbon cycling in terrestrial ecosystems [6–9]. The amount of carbon stored in terrestrial ecosystems will feedback and influence future atmospheric CO2 concentrations. Thus, it is very

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Impacts of Climatic Changes on Biogeochemical Cycling in Terrestrial Ecosystems

important to assess the impacts of global climate change on ecosystem carbon cycling and processes [10]. Ecosystem carbon cycling and fluxes between the atmosphere and terrestrial ecosystems are controlled by the processes of photosynthesis, plant autotrophic respiration, and soil heterotrophic respiration (> Fig. 13.1). The total of plant photosynthesis in terrestrial ecosystems is gross primary productivity (GPP). Soil respiration includes root respiration and heterotrophic respiration (i.e., soil microbial respiration). Ecosystem respiration includes both soil respiration and aboveground autotrophic respiration. The difference between plant photosynthesis and respiration is defined as net primary production (NPP). The difference between NPP and soil heterotrophic respiration, defined as net ecosystem production (NEP), represents the net carbon flux from the atmosphere to ecosystems. Ecosystem carbon processes and productivity are also influenced by plant phenology, nitrogen conditions, land use changes, and disturbances such as fire, drought, and insect outbreaks. Among many factors affecting these processes, the most obvious are elevated CO2 concentration and climate change, which directly and indirectly influence and interact to control the carbon fluxes from ecological and physiological processes [5, 11, 12]. Climate and atmospheric CO2 concentration are key regulators of most terrestrial biogeochemical processes and have the potential to markedly modify the carbon cycling in terrestrial ecosystems [10]. Responses of terrestrial ecosystems to elevated CO2 concentration and global climate change are complex and thus, require different approaches, such as observation, manipulated experiment, ecosystem biogeochemical modeling, and meta-analysis [2]. Long-term observations over large spatial areas provide invaluable insights and background information on ecosystem response to climate changes. Manipulated experiments allow us to seek the different effects and mechanisms of climate change on terrestrial ecosystems. Ecosystem modeling is a very powerful tool to synthesize

Atmospheric CO2

Global warming

Precipitation

O3 and other factors

Soil moisture

Photosynthesis

Plant respiration

Plant growth and productivity

Soil heterotrophic respiration

Soil carbon storage

Net ecosystem carbon storage

. Fig. 13.1 Impacts of climate change on terrestrial ecosystem carbon processes and feedback

Impacts of Climatic Changes on Biogeochemical Cycling in Terrestrial Ecosystems

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experimental results and assist extrapolation of leaf, plant, and ecosystem-level research results to project changes in ecological processes at regional and global scales [10–12]. Meta-analysis provides a quantitative synthesis and generates a general conclusion of many individual and often inconclusive studies [3, 14, 15]. Many studies have been conducted on the responses of terrestrial ecosystems to elevated CO2 and global climate change during the past several decades using these different approaches. Results from these studies have greatly improved our understanding of the responses of terrestrial ecosystems and the feedback to future climate change. This chapter reviews global climate change studies on the impacts of biogeochemical cycling, specifically carbon cycling, in terrestrial ecosystems, and attempts to provide a comprehensive and up-to-date overview in the field. The complexity of responses is often confounded by other concurrent human-induced global changes such as nitrogen and sulfur deposition, invasive species, and land use changes, but these are not covered in this review. This chapter starts with a description and comparison of different approaches commonly applied in global change studies. Then the impacts of elevated CO2, global warming, precipitation, and other climate change factors on ecosystem carbon cycling are reviewed. Issues related to global climate change such as single factor versus multiple factor studies, graduate versus step increase experiments, and inverse modeling are also briefly discussed. Finally, some recommendations for future global change research in terrestrial ecosystems are provided.

Approaches to Evaluate the Impacts of Climate Change on Terrestrial Ecosystems: Observation, Experiment, Model, and Meta-analysis Several approaches have been used to evaluate the impacts of rising atmospheric CO2 concentrations and climate change on terrestrial ecosystems in the past several decades at different spatial scales. Generally, these approaches can be classified into four categories: observation, experiment, model, and meta-analysis. Among these approaches, experimental study is a powerful tool to evaluate the responses of climate changes on terrestrial ecosystems and to understand the mechanisms underlying these responses. It will continue to be a major tool and has been extensively used, in global change studies. With the advancement of sensor technology, automatic recording, and satellite images, more and more observations and measurements on terrestrial ecosystems under natural conditions can be made over long term and at large spatial scales. Ecosystem modeling becomes more and more important, especially at scaling up from plot-level experiments to large spatial scales and forecasting future responses. As more and more data accumulates, metaanalytic techniques provide another means to quantitatively integrate the individual studies and generate a grand conclusion on a common topic. Recently, Rustad [2] summarized some of these approaches (> Table 13.1), particularly on experimental studies (see also Fig. 1 and Table 1 in [2]). In this section, the four approaches are briefly discussed, with a focus on terrestrial ecosystem carbon cycling.

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Impacts of Climatic Changes on Biogeochemical Cycling in Terrestrial Ecosystems

. Table 13.1 Advantages and disadvantages of different approaches to evaluating global change impacts on terrestrial ecosystems [2] Approach

Advanta