Policy & Finance

For a long time, the dominanting has been that taking action against climate change is a risky business for a country and its industry, an idea underpinned by some economic thinking saying that unilateral action is at best useless and that policy measures must be strictly targeted. One problem requires one measure only, otherwise, measures will be diluted and even counterproductive. Nowadays, both politicians and their advisors have a different tune. Actions may not be as costly, early actions may give an advantage and policies may be mutually supportive. Could it be the Stern Review that has turned into a Stern Tsunami?

President Barroso announced an interesting shift in the Chinese attitude to the post-Kyoto agreement when visiting Beijing last week. The Chinese premier Wen Jiabao is said to have indicated that China could participate fully in an international agreement provided that the old industrialised nations promised to reduce their emission until 2020 and a financial mechanism for technology transfer is established.

If the Chinese really will be a full and acting participant in a future international solution with mutual binding targets, it is hard to imagine that the other giant, India, will stay out. The concerns are the same, not to be left with a commitment that no one else honours, and awareness about needs and actions is high.

It will then just leave us with the U.S., but the deck of cards will soon shift.

Not only climate

The EU-delegation, however, also discussed other issues, including the topical ones about the Olympics, Tibet and Human Rights. It is said that it is important for Chinese not to lose face and, if one can trust the press release, it seems as if President Barroso and the team of commissioners have managed quite well in showing both respect and profound will.

A matter of growing concern is the Chinese presence in Africa and an EU-China-Africa partnership in development cooperation was initiated. Such co-operation might be interesting since the reports of Chinese activities are a bit disturbing. Will the new co-operation mean that there will be less arms trade and less exploitation of raw materials in vulnerable African states?

In just two months time (July 7-9) there will be a G8-summit in Hokkaido under the Japanese chairmanship. A month earlier there will be a preparatory meeting on energy. The chairing country have made their homework thoroughly and it looks all set for a decisive step in preparation for the post-Kyoto agreement. But still it could be more productive to hesitate and even to postpone the decisions!

The reason is the (not so) United States

President Bush addressed the climate issues only last week in a statement that was a master-piece of empty rhetoric and were the only informative part was that the US should slow down emissions to a peak at 2025! When most other industrialised countries have at least plans for a substantial reduction by 2020. Small wonder that the German minister for environment called it a “Neanderthal speech”. He even went on and said that the US attitude is that of a "losership" not a leadership! If this US attitude should direct the decisions made in the Hokkaido summit there is not much hope for real actions.

Mr Bush in his speech referred to his French counterpart Sarkozy as "his friend". That might be the case, but also president Sarkozy has in a laconic statement dismissed the US move and asked that they should take on real targets of reduction.

But then of course we still do not know what the next US administration think and we can hardly find out before November. John McCain does not seem to have much in the bag either. On the contrary, his motion to have a summer rebate on petrol in the US does not seem to reveal that he know or care about what is at stake for the climate.

On the other political side in the US the Clinton-Obama race is on. True that they have both shown much more consideration for climate and global issues, but how much of that will hold in a fierce campaign when (quite naturally) most debate will focus on individual “wallet-issues”?Basically the US is not so united but which route it will take after the elections is just not known. Would it not be better for the G8-summit to gamble for a more favourable political climate (!) six months later and play for a temporary deal in July?

We are now so used to talking about climate change in terms of policy, of technicalities, such as GHG-concentration in PPMs and of technologies/fuels, that we tend to lose sight of the object itself – the physical impact on everyday life. The latest IPCC-report is, however, of great help to understanding this. What will climate change do to me?

Smart has for some time been the buzz-word in energy circles. We should act energy-smart, we should have smart meters and smart grids. In the US we now hear several of the candidates for presidency claim that they want to support building of smart grids. In Europe the Commission has issued programmes for research on smart grids. But how smart can a grid really be and how will the grid show its’ smartness?

There seem to be at least three different perspectives of smartness that you want the grid to apply:
·         Economic Use of resources
·         Service improvement for utilities
·         Technical upgrading of functions

No doubt new technology and technology in development can make networks (grids) work better than only lining up electrons in order to be delivered through the wires. But can all the wishes be fulfilled or will some have priority over the others?

Something strange has happened with the EU Climate and Energy package. On Monday January 21, when it was previewed in a presentation by none other than Commissioner Barroso at a conference in London, he said that the goal was 20-20-20 by 2020. Reduction in GHG by 20%, the share of renewable fuels in energy mix should be 20% and Energy Efficiency should be improved by 20%.

On Wednesday, January 23, the Commissioner for Energy signed a memo where the target is reiterated, but as the text goes on, the energy efficiency part disappears (!) and the text is a long advocacy for the blessings of renewable fuels. Good, but is it good enough?

Then, at last, the package was presented to the world by Commissioner Barroso on the same Wednesday, and look what has happened. The energy efficiency part has been dropped entirely! Now the goal has been shifted to 20-20 by 2020.

The most valuable part of the package, which can be estimated to roughly 200 Billion Euro savings Europewide yearly, was dropped. The part that saves you money was dropped in favour of parts that cost money. Though commendable, renewable fuel costs where energy efficiency saves.

The EU package on renewable fuels and climate is advertised for Wednesday January 23rd. The winning Number 20 seems to be secured for energy efficiency improvements, the fraction from renewables and the reductions of GHG. All should be 20% and achieved by the year 2020, but what about Number 10? 10% has been suggested as a target for biofuels in transport, but has been heavily criticised by one of the EU research institutes JRC only recently, as reported in The Financial Times. The critique is broad and deals with price, GHG-emissions, cost over benefit , energy security and employment. All factors said to have either too small positive effects to be significant or, flat out, large negative effects.

Different but expected views

As can be expected, these views are not shared by all. The division in responses largely follows expected lines. Producers of biofuels are sceptical over the criticism while several environmental NGOs find the critique justified.

Investment in renewable fuels is booming. Last year, solar and wind are reported to have broken through the 100 BUSD wall and reached 117 BUSD, a growth over 3 years that averages more than 40% per year. Reportedly, there is no slow-down in sight - on the contrary! Growth 2007 was 20 BUSD above predicted values.

The road to sustainability is not straight. It may even hold diversions and impasses that we have to travel and travel back. This is annoying in itself and even more so when we have to do it at some speed. In the debate some of the dilemmas have been highlighted, dilemmas where our hearts and emotions may say one thing but where our brains and acts may say another. Do we have to choose between Food or Biofuel, Local Production or Global Trade, Consume or Save? Can the instruments we use to analyse and create sustainable systems help us solve, or at least navigate among, these dilemmas?

The message from Bali that climate negotiations will continue with the aim OF a new agreement at COP 15 in Copenhagen early December 2009 is certainly encouraging in spite of all the fine-print that the negotiators have put into the text. In the meantime, we have to “think big, start small, act now!”

Anticipating leadership

The road up to COP 15 will be travelled without one of the important co-drivers, the US President. He is, in this matter, not even a lame duck, as is the term used for outgoing presidents whose proposals can be ignored since they can not be around for their implementation anyway.  He looks more like the dead parrot in the Monty Python sketch.

Many European newspapers have commented upon the U.S. behaviour in the Bali negotiations. Not the least the fact that their negotiators were booed at the meeting and asked to “get out of the way” if they did not want to help. A very un-diplomatic and rare behaviour, but which clearly shows that the U.S. has lost all confidence on the climate arena.

The major U.S. newspapers, however, have not even commented on the end of the meeting in their editorials. It looks to be a rather clear signal that the U.S. does not expect anything from its present administration, but is just waiting for the next, which in turn means that half of the time until COP 15 will be spent in anticipation of a new leader in Washington. Who will it be and what will that person say about climate issues?

Democrates

·         Hillary Clinton is a known card with clear statements on the issues

·         Barack Obama has also expressed himself in very favourable terms on climate action 

·         John Edwards, like his competitors among the democrats, has made rather bold statements

Republicans

·         Mitt Romney does not mention climate change but only energy dependency 

·         Rudy Guiliani does not mention climate nor energy at all among his 12 important issues

·         Mike Huckabee does not express himself in terms of climate change but energy security. He is however reported   to be in favour of global actions and U.S. participation based on a theological statement that the earth belongs to God and we have no right to destroy it.

Think big, start small, act now!

In all we do not know the pitch of the U.S. voice in this crucial matter till November 2008! We just have to anticipate that there will be a change and that it probably will be towards the better even if the emphasis might be rather on the concern for the U.S. car-industry and farmers than on the common future.
We do know however that there are lots of actions in the states in the U.S. from east to west and back. We may have to think as Thomas Freidman suggest in New York Times after the Bali weeks “Think big, start small, act now!” This could be a useful mantra. As for the U.S. leadership, we will have to wait until later.

Most of the Clean Development Mechanism, CDM, Projects are geared towards renewable energy supply in spite of the fact that energy efficiency improvements would have been cheaper and delivered more GHG-reductions. These single-sided operations tend to worsen the situation if the new supply only feeds into wasteful in-efficient demand. The good money is lost because the waste remains. Or in other words, the ship is still leaking even if high quality pumps are pumping water out of the hull.

In a new report from the World Bank it is argued, and shown how, energy efficiency project can be a major part of the CDM instead of a minor as it is today

Two strands of criticism

The present CDM regime has recently been constructively criticised from two perspectives. Both of them seem to miss the issue that energy efficiency and renewable fuels have to be combined to make a system sustainable.

Recently the IEA has issued its World Energy Outlook 2007 (WEO) and IPCC its 4^th Assessment report. Comparing the two shows that:
·         Present and planned policies and measures are not sufficient to halt global warming (WEO)
·         The technologies, policies and measures needed are known. They just need to be applied (IPCC)

The conclusion is obvious. We need a radical break in policies. The WEO even has an interesting note on that, called “What is stopping governments from implementing new policies?” (page 98). The answer is simply that stakeholder interests are blocking them, but now it is time to release the brakes!

The EU Strategy – out of pace.

With this need in mind, the EU communication on a strategic energy technology plan sounds thrilling, but the result is disappointing.

While the world is struggling with climate issues and as IPCC has issued its final report, underlining the severity and the need to act, there is a solution close at hand.

It is claimed, by some, that the problem is so-called "urban heat islands" - paint the cities white and shazaam the problem is solved! It is also far cheaper than all other measures.

Does it sound too good to be true? Yes, it certainly does, and when you see that the suggestion comes from Björn Lomborg, who is a well-known “sceptic” (to put it diplomatically,) you may want to take the advice with a pinch of salt.

Urban heat Islands do exist

Indeed they do, and partly due to the effect of heat absorption by dark surfaces, but that is only one explanation for the phenomenon. Heat islands have been studied for a long time, and dealing with them is part of the package to combat climate change.

Using light colours, green roofs, evaporation, shading etc. are all ways to reduce the need and energy use for cooling. The local effect on the temperature and living conditions in urban areas are important. Therefore, these measures are already included in the suggestions to mitigate the GHG.

BUT it is not THE solution, only one part of it.  So, if there was ever one thing in the Lomborg articles that was misleading, it is the comparison of cost end effect for dealing with urban heat islands and the total Kyoto package.

Contrarians, deniers and sceptics

There is a long catalogue of different attitudes to the warnings about the decline of environment and climate, and they have been given names as contrarians, deniers and sceptics, depending on what interests they act upon. Scepticism is healthy, no doubt, but there should be a limit where established facts should take over and help us to focus on the right measures rather than continuing the discussion whether or not the earth is flat.

Lomborg has a reputation of bouncing back into the debate with a technique that he has developed to perfection. That is to use selective arguments and create confusion. It would be nice if there were an easy solution to all this, but burying our heads in the sand is not a good starting point. Lomborg just offers another sand pit.

It will certainly be some time before we see a global carbon market, but there are a few interesting proposals which show that thinking might be converging.

Firstly, the European Trading System will tighten. It has already been previously flagged up that the quotas will be distributed and decided centrally by the EU in Brussels, a view that is further emphasised in a new study for the European Parliament. This report also advocates that targets should be narrowed between countries and that the trading could (or should?) also be extended to other industries such as the aviation business. However, the most important issue may be that they say the allocation of emission rights should be done largely by auctioning.

The Hillary-type of US energy policy

And this view of allocation is also embraced by Hillary Clinton, who recently revealed her plans for an energy policy in the US if she takes the office in the White House.

Almost one third of the global population does not have access to electricity. It is predicted that this rate will reduce in the years to come, but also that the nominal amount will remain roughly the same - i.e. 1.5 - 2 billion people, the majority of them living in Africa and on the Indian peninsula.

The most pressing need for these people would be to get access to electricity for lighting. This would enable important activities in many families both for studying, for the household and for their trade. It would also improve their welfare since the alternative in a majority of cases is to use kerosene lamps that provide inferior light, are more expensive and emit far more carbon dioxide than most electrical alternatives. Poor people are kept in poverty because of their poor lighting!

Off grid electricity – a laboratory

The solution for many of these people is, however, not to be connected to a national grid, at least not for a long time. They must be offered off-grid solutions of which there are many and that can be designed for different size and circumstances. Unfortunately, the recommendations from many of the organisations that deal with energy, aid and assistance are obsessed with the regulatory frameworks of large-scale grid development and energy markets rather than practical solutions that are affordable to local people.

However, there are exceptions. One is the “Lighting Africa” project launched by IFC. It also has the formidable strength to illustrate the basic principle that low-intensity end-use (energy efficiency) has to be twinned with renewable (locally available) resources to make the “biggest bang for the buck”.

This IFC approach, where PV and WLED-lighting is focused, has targeted Kenya and Ghana as the “niche markets”. A success in the project “per se” would however also have a wider implication and would be beneficial also to PV and WLED for industrialised countries, since it inevitably also has to address the issue of product quality and will result in a volume growth for high-quality products. Such volume growth that also has an impact on costs (via the market learning). So, if there was ever a case of “multiple wins”, this is it.

Off-grid is a manyfold thing – complex to grasp

But even if lighting is the most pressing issue, there are many other human needs that can be better satisfied with electrification. Water and irrigation, cooling and preservation, communication and security - to mention a few. There are also many more ways to make use of local, mostly renewable resources to make it happen. The key to making it really useful is, however, the combination of energy efficiency end-use and local resources, since that squeezes the most out of the available fuel. The G8 studied this in their “strategic pathway analysis” and checked it against some cases at the beginning of this century, but otherwise there is surprisingly little work done on the systems aspect of this problem.

Typically, studies focus on the availability of renewable resources and sometimes these also hint at the opportunities to harvest them. Another very typical feature of studies available is the recommendations for countries with low electrification to deal with regulatory matters and to adapt energy prices to world market making maximum use of the market mechanisms.

If these recommendations were correct it is hard understand why the electrification in the market economy India is lower than in centrally planned China. And if dictatorship and/or central decision-making is a key to success then it is hard to understand that electrification is lower in Zimbabwe than in Botswana. The truth might be that the development must take the abilities of those deprived from the good into account.

One study, however, made by people affiliated to the World Bank, views the full scope of the problem. It far from comprehensive, but it does map out the complexity and the possibilities. Who will take on this challenge?

The Chinese leadership confirms, in the recent party-congress, its intention to change the economy for the better, not only in terms of volume, but also in terms of environmental quality. The question is, however, whether it will work, or if they have already passed some critical crossroads from which there is no turning back.

The energy situation is bad, but water pollution might be worse.

The Magazine 'Foreign Affairs' has a broad survey in their latest edition that shows the state in several sectors and aspects, including water supply, deforestation, urbanization, air quality etc. The survey covers more aspects than we normally see in the reporting on China. It is still not comprehensive, but rather a gathering of snapshots. As such, it still gives more facets to the overall understanding on both why the leadership is so concerned and where the present development could lead.

A necessary, but insufficient, condition is that the findings of the researchers can be transferred to common knowledge. One of the main problems in policy design is that the general perception of how markets and economy work is built on simplifications that we all know are wrong, but still prefer to think of as real and true. Some of them are:

• That information is perfect for all actors, whereas in reality it is asymmetric. Some know more than others and in some cases we prefer to hide our knowledge or to keep our true valuation of an offer secret in the hope of getting a better deal
• Another is that we act as if every problem were new to us, whereas in reality we act with a memory of earlier or similar experiences. We learn and draw conclusions from our learning.
• A third is that we are rational and indifferent between options with similar economic outcome. If we earn by hazard 100€ and lose 100€ on the same day, we just shrug it off as if nothing has happened. We are back on zero. Whereas, in reality, we value gains and losses with different scales. Losses give us more grief than the joy we get from our gains.

There are more everyday problems that most economic reasoning and rhetoric tend to forget, but let us stay with these. The Nobel Prize in economics has in the last decade honoured several findings in the areas mentioned, and that may have a great impact on how we handle economics and policy design related to sustainability issues.

The Nobel Prize is awarded for past achievements, but is mostly more interesting in the perspective of these achievements' applicability for the future. This is certainly true for all the categories, but, in a more general sense, is more valid for this years' award to the IPCC and Al Gore. Congratulations to both of them!

It is very appropriate that the Peace Prize is awarded to these individuals, since global warming may have a destabilising consequence. At the extreme, the impact on habitats and living conditions may even feed terrorism, as pointed out by a group of U.S. militaries! If the committee today (October 15th) also awarded Sir Nicholas Stern the prize for Economy, it would be a grand slam, but that would be too much to hope for.

The IPCC in the shadow

Most of the focus in the media has been on Al Gore, probably because the media in general is more focused on people than topics, but the achievements of the IPCC need more highlighting. The IPCC has been somewhat overshadowed in the media.