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Central banking and the energy transition

Continuous renewable energy deployment may be less certain than previously thought. If interest rates rise, the cost of renewable energy is disproportionately affected compared to fossil fuel alternatives. Thermostatic policies can help ensuring renewable energy deployment in such environments.

Image above: Continuous deployment of wind farms may be less certain than previously thought. Aerial take from a wind farm. Photo by Thomas Richter on Unsplash

Unfortunately, no rooftop bar in Singapore and no conference dinner in the foothills of Tuscany mark the beginning of this research project. Instead, the development of this paper demonstrates the gradual nature of research. Over the last two years, we spent an awful lot of time discussing the role of finance in the energy transition as part of the EU Horizon 2020 research project INNOPATHS. We met with investors to try to understand their behaviour, we interviewed policymakers to figure out what their intentions and constraints were in designing policy and we collaborated with academics to find out what exactly we already know about the enabling role of finance in energy transitions.

In this process, we discovered the pivotal role of experience in the financial sector, which led to a paper in Nature Energy (free read-only) demonstrating that decreasing financing costs contributed a large share to making renewable energy cost competitive with fossil fuel alternatives. In fact we discovered not only the importance of experience, but even more so the decisive role that general interest rates play in determining the competitiveness of renewable energy. Our analysis showed that lower general interest rates decreased the levelised cost of electricity (LCOE) by 4% to 20% for utility-scale German solar photovoltaics and onshore wind respectively between the period of 2000-2005 and 2017. Soon we asked ourselves; to what extent does large-scale renewable energy deployment depend on extremely expansive monetary policy as we have seen it in the aftermath of the 2008/09 financial crisis?

So we set off to find out. In a new paper in Nature Sustainability (free read-only), we looked at the same two technologies, onshore wind and solar PV, in Germany and developed three scenarios. A flat scenario, where interest rates stay at the current record-low levels. A moderate scenario, where interest rates recover with the same speed as they declined after the financial crisis. And an extreme scenario, where interest rates rise to pre-crisis levels at twice the speed they declined before. In the extreme scenario, LCOEs for the two technologies increase by 11% (solar photovoltaics) and 25% (onshore wind) over just five years (2018 to 2023). Even in the moderate scenario, the higher financing costs outweigh the expected decreases of hardware cost for onshore wind (LCOE +9%) and almost entirely eat up these technology cost reductions due to learning (LCOE -2%) for solar photovoltaics. As a result, we show that adding new renewable energy capacity becomes economically unviable compared to hard coal power plants takes a severe hit if interest rates rise again.

In light of the recent EU decision to scrap binding renewable energy deployment targets for member states these results may announce difficult times for renewable electricity deployment and hence climate targets. However, one may ask, are these scenarios realistic? The temptation is to respond with a sounding no. Just this month, the European Central Bank confirmed record-low interest rates, its president Mario Draghi openly speaks of evaluating new ideas, such as venturing more into fiscal domains using the Modern Monetary Theory, and there is an ongoing debate about expanding the toolkit of central banks to provide cheap liquidity. In the United States, the central bank acted differently: it steadily increased interest rates since December 2015, until it changed course in August 2019 and lowered the interest rate twice. Some commentators see more structural factors (e.g., aging population, low immigration, few investment opportunities) behind the ongoing struggle to unleash economic growth and judge expansionary monetary policy as the wrong remedy for the curse. Proponents of the secular stagnation, like Larry Summers, would favour rising interest rates in combination with rising government spending in education and infrastructure and potentially more liberal immigration laws.

Image 2: The decision hub for European monetary policy – and renewable energy policy too? Night shot of the European Central Bank’s headquarters in Frankfurt. Photo by Paul Fiedler on Unsplash

In sum, the discussions around appropriate monetary policy and hence future interest rate levels are far from being resolved. While interest rates currently remain low in the European context, it is far from certain that this will be the case in the future too. Consequently, climate policy and renewable energy policy in particular need to keep an eye on interest rate developments. Ideally, thermostatic policies would be in place that automatically adjust given the current interest rate environment. In the short run, renewable energy auctions fulfil this criteria and counter potential cost hits on renewables due to interest rate increases. In the longer run however, a transition away from renewable specific support policies seems likely. In such a case, existing emission trading schemes, such as the EU or the Californian ETS, could be equipped with a price floor to ensure renewable energy deployment even in high interest rates environments.

Unfortunately, even countries such as Germany, which used to be known for progressive renewable energy policies, remain rather far from this ideal. For example, to reach its Paris target, Germany would need to install about 5 new wind turbines a day, but only connected 35 to the grid so far this year. A natural next step for research would hence be to investigate, how significant interest groups can be formed to support thermostatic policies and how these policies can be designed in order to survive government changes after elections. Comparing the results of our paper with reality, we circle back to the start and find the next exciting research question… Perhaps we should have a kick-off meeting at a fancy place this time!

Originally published on the Nature Sustainability Research Community page, Wednesday 25th September 2019.

Unheard voices across the lifecycle of digital technologies and low-carbon transitions

Lived experiences of cobalt miners in the DRC and e-waste workers in Ghana

We are living in a society that relies heavily on digital technology, and these technologies have become so engrained in our everyday lives that we rarely question where they come from, whose labour contributes to their existence and what happens after we dispose of it. Some technologies, such as electric vehicles, solar panels, and heat pumps, also rely on both degrees of digitization and many of the same metals, minerals, and components as digital technologies.

How many of us have thought about purchasing an electric vehicle, or installing solar panels on our home? Or, perhaps more commonly, how many of us have found ourselves automatically agreeing to an “upgrade” with our phone network provider after our smartphone stopped working shortly after the end of a two-year contract?  

A transition to a more sustainable economy will require joint efforts from corporations and governments to work towards a circular economy, to decrease the impact of products on our planet across their lifecycle, starting from what raw materials we use to how waste is handled. But how will this impact people working at different stages of the product’s lifecycle—especially the front end (mining and extractive industries) and back end (recycling and waste management)— in parts of the world with weak governance structures and lack of policy enforcement and accountability?

A set of two recent twin studies have looked at cobalt mining in the Democratic Republic of Congo, and toxic electronic waste  (e-waste) processing in Ghana. These two studies set out to humanise the challenges of both these sectors by revealing the lived experiences of cobalt miners and e-waste workers.

Cobalt miners and scrapyard workers in the DRC and Ghana, 2019

The photo on the left shows an artisanal cobalt mining team near Kolwezi, mining on the Kasulu concession in the Democratic Republic of the Congo. Note the young age of most of the miners, the use of manual tools as well as the lack of any women present. The photo on the right shows a scrapyard worker at Agbogbloshie, near Accra, Ghana, using fire to melt down electronic and digital appliances so that copper can be extracted. Note the lack of any protective equipment as well as the thick black smoke.

Giving a voice to people whose experiences are rarely considered in decision-making processes put the impact of our addiction to digital technologies into stark light.

The Democratic Republic of Congo produces roughly 60% of the global supply of cobalt, which is used in our phones and computers, as well as other technologies such as electric vehicles, wind turbines and solar panels. Despite having vast natural resources, 63% of Congolese citizens live below the national poverty line of less than $1 per day.

In the DRC, corporate firms and mining associations operate with perhaps as much power as government actors, with miners finding themselves at the bottom of the hierarchy of interests. Many of these miners work in conditions that harms their health and even endangers their life. In many cases they have no protective equipment or tools to work with, so they have to dig by hand. There are no trade unions to protect their interests or cooperatives that could fight for improved conditions.

The situation is similar with toxic e-waste workers in Ghana. Negative health impacts among scrapyard residents and workers, child labour and environmental pollution are ubiquitous.

Unheard voices can also help highlight the other side of the story. People trapped in poverty in areas with almost no opportunities for formal employment have lower expectations when it comes to working conditions. Cobalt mining in the DRG and work on the scrapyard in Agbogbloshie, Accra have provided a route out of poverty for the community. When you are offered two and a half times above the average income of informal economic workers in the country and you have a family to feed, you don’t think about the health impacts.

Many workers we spoke as part of our research showed pride in their work, which has become a key part of their cultural identity. One of our expert interviewees in Ghana explained

“We call it e-waste, but people on the ground do not call it that … Scrap dealers do not identify as waste managers, they instead see themselves as harvesting commodities as part of a lively value chain. They are community stewards”.

Discontinuing cobalt mining or e-waste processing in these countries without thinking about the people who will be impacted on the ground will have disastrous consequences. We don’t have to look too far to see, how, phasing out certain industries without thinking about providing alternative employment opportunities can destroy a community.  

A thoughtful response to a challenging situation is needed. Our research explores what policy makers can do at a global as well as national level to tackle the challenges arising. One thing is key: when thinking about a sustainable future, we need to remember the unheard voices, lives sacrificed at the altar of consumerism. Solutions need to consider their future and how we can shift away from harmful practices while also offering alternative pathways out of poverty in a way that preserves the community’s pride and identity.

Finally, you might ask, what we can do as consumers. We can remember that our phones and EVs don’t come from nowhere and don’t just go away. The “away” is a very real, living, breathing, suffering “place”). But also, it is a place with pride.

The research summarized here is published in the following two studies, both peer-reviewed academic journals, and both a part of the INNOPATHS project:

Sovacool, BK. “The precarious political economy of cobalt: Balancing prosperity, poverty, and brutality in artisanal and industrial mining in the Democratic Republic of the Congo,” Extractive Industries & Society 6(3) (July, 2019), pp. 915-939.  Available at https://authors.elsevier.com/a/1ZjZH_,52Irqxfa

Sovacool, BK. “Toxic transitions in the lifecycle externalities of a digital society: The complex afterlives of electronic waste in Ghana,” Resources Policy 64 (December, 2019), 101459, pp-1-21.  Available at https://authors.elsevier.com/a/1ZrGM14YFwvkMb

Climate policies and skill-biased employment dynamics: Evidence from EU countries

The political acceptability of climate policies is undermined by job-killing arguments, especially for the least-skilled workers. However, evidence of the distributional impacts for different workers remains scant. We examine the associations between climate policies, proxied by energy prices, and workforce skills for 14 European countries and 15 industrial sectors over the period 1995–2011. Using a shift-share instrumental variable estimator and controlling for the influence of automation and globalization, we find that climate policies have been skill biased against manual workers and have favoured technicians. The long-term change in energy prices accounted for between 9.2% and 17.5% (resp. 4.2% and 8.0%) of the increase (resp. decrease) in the share of technicians (resp. manual workers).

Written by Giovanni Marin and Francesco Vona

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INNOPATHS holds a workshop for European policymakers

How might Europe achieve deep decarbonisation? The INNOPATHS project is using a process of stakeholder engagement and co-design to develop decarbonisation pathways for Europe to 2050 – each of which explores a different route to deep decarbonisation. On Tuesday 9th July the project brought together policymakers from across Europe to think through how decarbonisation

Will incumbent industries and infrastructures (like gas networks) play a big role in shaping technology choices, or will upstart newcomers disrupt and reshape the business landscape for energy? Will populist movements cause some countries to fall behind, while others press ahead towards net-zero, leading to a Europe with “two speeds” of decarbonisation? How might a “circular” or “sharing” economy change patterns of energy demand?  These are important issues for long-term energy strategy, and are explored through the narrative scenarios being developed within the INNOPATHS project. Each narrative highlights knowledge gaps, where more research might help, and each one highlights challenges for policymakers.

The workshop discussions helped the INNOPATHS team to further develop the narrative scenarios. The key aspects of these narratives will then be quantified using the project’s suite of integrated assessment and energy modelling tools, and then made available to explore via an interactive decarbonisation simulator. The final narratives—and associated modelling—will be completed in March 2020. Watch this space!

Halving energy demand from buildings: The impact of low consumption practices

Limiting global warming below 1.5 °C requires rapid decarbonization of energy systems. Reductions of energy demand have an important role to play in a sustainable energy transition. Here we explore the extent to which the emergence of low energy consuming practices, encompassing new behaviors and the adoption of more efficient technologies, could contribute to lowering energy demand and thereby to reducing CO2 emissions.

To this end, we design three detailed energy consumption profiles which could be adopted by individuals in current and future wealthy regions. To what extent does the setting of air conditioners to higher temperatures or the widespread use of efficient showerheads reduce the aggregate energy demand? We investigate the potential of new practices at the global level for 2050 and 2100.

The adoption of new, energy saving practices could reduce global energy demand from buildings by up to 47% in 2050 and 61% in 2100 compared to a scenario following current trends. This strong reduction is primarily accounted for by changes in hot water usage, insulation of buildings and consumer choices in air conditioners and heat pumps. New behaviors and efficient technologies could make a significant long-term contribution to reducing buildings’ energy demand, and thus facilitate the achieval of stringent climate change mitigation targets while limiting the adverse sustainability impacts from the energy supply system.

Written by Antoine Levesque, Robert C. Pietzcker and Gunnar Luderer

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No simple answer to carbon complexity

“These are the times that try men’s soul” wrote Thomas Paine in his famous pamphlet American Crisis in the heat of the American Revolution. These words well describe the present time too – in their broadest meaning. The political systems in the western world are under unprecedented pressure not witnessed since the dark times of the 1930’s.

But we also see the raise of a quite new kind of awareness among people and businesses on climate change. The public discourse on emissions has jumped to another level compared to just a few years ago. Our leaders are being challenged to move from just talking about the issue, to undertaking stronger measures to cut carbon emissions quickly.

At the same time, bottom-up popular movements are entering the political arena reflecting our political systems’ inability to adequately reflect on timely issues. However, they also reflect the failure of our politicians to equip the people with the tools and skills required to handle with wicked problems such as climate change.

The climate change movement is obviously getting stronger in several member states of the EU, and also resonated in the recent European Parliament elections. It may, however, still be too early to claim a coming leapfrog in climate policies due to the shifting political landscape in Europe, though all scientific evidence univocally speaks for its urgency.

But let’s make a ‘gedankenexperiment’ by assuming that in spite of all the uncertainties, Europe would soon make a shift towards a stricter climate policy. Instruments for emission cuts are in place (e.g. the price of emission allowances in ETS could be better regulated, among others). Scenario tools such as those used in the Horizon 2020 INNOPATHS project can help to construct least-cost technology trajectories to reach a zero-carbon energy sector in Europe. From a techno-economic point-of-view, we could well find a feasible deep decarbonization solution for Europe.

But would society be prepared for such a quick energy transition?  Deep decarbonization equates in practice to a huge technology disruption similar to the industrial revolution. It goes beyond the techno-economic realm. It involves profound social issues. It is essentially a social-technical transition in which institutions and business models supporting present technologies need to be changed to enable adoption of new clean technologies and practices.

Consumers also need to adapt and engage in new ways. How to deal with distributional effects? A change involves winners and losers. For example, a high carbon tax may sound like a perfect tool for cutting emissions as it forces those who pollute to pay and it could motivate the polluters to change their behaviours. But from a justice point of view, it could also legitimize those who can afford to pay to pollute (even more) and not to change their lifestyles, whereas those who cannot pay or afford non-polluting solutions, could face large challenges in their everyday lives. A just climate legislation would therefore strive for measures which treat each of us equally in relation to our capabilities.

There are multiple ways to frame the energy and climate problem1. Importantly, the way we frame it would also prioritize the values and factors against which we make our decisions, which in turn will shape the solutions. Personally, I would prefer to see the more fundamental factors being prioritized in any type of climate framing, namely the Science (laws of nature), the Planet (planetary boundaries), and the Ethics (universal values).

Though a lot of research has already been done on policy and social dimensions, also within the INNOPATHS project, the complexity of the issues involved is so profound that this would call for much stronger efforts for this area of research in the coming Horizon Europe R&D programme.

Thomas Paine ended his pamphlet with the words “…the harder the conflict, the more glorious the triumph”. For me his inspirational words sound in today’s terms more like where there’s a will, there’s a way – also in the quest of solving the carbon question.

1 Sun-Jin Yun, John Byrne, Lucy Baker, Patrick Bond, Goetz Kaufmann, Hans-Jochen Luhmann, Peter Lund, Joan Martinez-Alier, and Fuqiang Yang. 2018. Energy and Climate Change. In: Rethinking Environmentalism: Linking Justice, Sustainability, and Diversity, ed. S. Lele, E. S. Brondizio, J. Byrne, G. M. Mace, and J. Martinez-Alier. Strüngmann Forum Reports, vol. 23, J. Lupp, series editor. Cambridge, MA: MIT Press, 2018 ISBN 9780262038966.

Assessing the impacts of setting CO2 emission targets on truck manufacturers: A model implementation and application for the EU

The European Commission introduced in 2018, for the first time, CO2emission standards for truck manufacturers, to incite additional reduction in the road transport CO2 emissions; trucks represent the second major contributor to CO2 emissions in the EU road transport. This paper presents a model based analysis which simulates the implementation of such targets in an energy economic framework and assesses the impacts of such standards using the PRIMES-TREMOVE model. We implement the CO2 emission standards on truck manufacturers as CO2 emission constraints on the new vehicle choice module. The proposed method is formulated as a mixed complementarity problem. The analysis reveals a reduction in road transport CO2 emissions and diesel consumption as a result of an uptake of more efficient truck technologies. In particular, LNG trucks are favored because of the lower emission factor of natural gas relative to that of diesel. Implementing progressively ambitious CO2 standards renders diesel trucks more expensive as their energy efficiency potential reaches its technical limit.

Written by Pelopidas and Yannis Moysoglou

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Modelling the EU’s Long-Term Strategy towards a carbon-neutral energy system

The COP21 UNFCCC conference in Paris in December 2015 flagged a new era for energy and climate policy. Climate change mitigation turned from being the wish of a few, to the reality of almost all nations around the globe. The signed agreement has invited all parties to submit, by 2020, mid-century low-emission strategies compatible with the goal of limiting the rise in average global temperatures to well below 2oC above pre-industrial levels and pursuing efforts to limit it to 1.5oC.

The aim of a low carbon economy has been on the EU policy agenda since the release of its “Low carbon economy roadmap” in 2011 that introduced an 80% GHG emission reduction target for the year 2050 relative to 1990 levels. However, pursuing the 1.5oC temperature increase limit requires boosting even more the ambitious climate target and aiming at a carbon-neutral economy by mid-century. Given the new climate policy regime, the discussions around low, zero, or even negative carbon policy options have been intensified in the years following the Paris milestone; new quantitative analysis, in the form of detailed policy scenarios, strategies and quantitative pathways, is necessary to assist EU policy makers in assessing the available options from both a technological and economic perspective, while also considering societal and governance issues. Many research discussions, debates and synergies in the modelling communities, have been triggered after the COP21 conference, as new innovative concepts need to be introduced and enrich existing modelling frameworks, in order for the latter to be able to perform the appropriate deep decarbonisation scenarios and provide sound input to impact assessment studies.

Certain key policy elements and technologies are considered pillars of the low-carbon transition and are treated as “no-regret” options in all recent EU climate and energy policy discussions. Such policy options are the strong electrification of final energy demand sectors, accelerated energy efficiency mainly via the renovation of the existing buildings’ stock, advanced appliances, heat recovery in the industrial sector and intelligent transportation, and the strong push of variable renewable energy sources (RES) in the power system. From a modelling point of view, their assessment is well established in the literature, and does not pose any considerable, unpresented difficulties. However, the modelling of disruptive technologies and policy instruments that could be proven essential for the transition towards a carbon-neutral EU economy (a case that requires GHG emission reductions beyond the 80% target) is far from being considered as mature in the existing literature or academic research. Modelling a power sector with renewables above 80% is a challenge as it requires representing variability in some detail along with the various balancing resources including cross-border trade. Modelling strong energy efficiency in buildings implies representing the decision of individuals about renovating the buildings deeply; this is also a challenging modelling task give the large variety of building cases and idiosyncrasies of the individuals in decision making. Electrifying heat and mobility in market segments where this is cost-efficient is among the no-regrets option. Modelling the pace of transition and the role of policy drivers from internal combustion engines to electric cars and from boilers to heat pumps are also challenging tasks due to the large heterogeneity of circumstances that the modelling will have to capture. So, the amplitude of the three main no-regrets options is challenging the modelling despite the significant experience accumulated so far. 

The carbon-neutrality target poses considerable additional challenges for the modelling. The no-regrets options are not sufficient to deliver carbon-neutrality by mid-century. Mobility, heating, high-temperature industrial uses and the industrial processes would emit significant amounts of CO2 by 2050 if conventional wisdom policies and measures only apply. To abate the remaining emissions in these sectors, disruptive changes are necessary, regarding the origin of primary energy and the way energy is used and distributed. The disruptive options are surrounded by high uncertainty due to the low technology readiness levels of the technologies involved. The disruptive options are antagonistic to each other because they require large funding resources to achieve industrial maturity and economies of scale of the yet immature technologies. Such concentration of resources requires long-term visibility for the investors and infrastructure investment, which both require clear strategic choices among the disruptive options.

We consider the “disruptive” options grouped in stylised categories, as shown below. The modelling has to include assumptions regarding the future evolution of costs and performance of a plethora of technologies and options for alternative sets of disruptive changes had to represent. Each stylized category of disruptive changes has its own challenges in terms of modelling considerations, as presented below:

  1. Extreme Efficiency and Circularity: The aim of the options included in this category is to push energy efficiency savings close to its maximum potential, introducing circularity aspects and further improving material efficiency in the EU economy, increasing the intelligence of the transport system, sharing of vehicles, achieving near-zero energy building stock, etc. Even though these concepts are present in the literature, introducing them in a large-scale applied modelling framework poses significant difficulties as, for instance, estimating the maximum industrial output reductions that can be realised at a sectoral level. It also required estimating the upper boundaries of the impact of behavioural and restructuring changes in the transport sector in reducing transport activity. Similarly, modelling a near-zero energy building stock involves great difficulties regarding the driving policies and the idiosyncratic behaviours of individuals. Almost all options included in this category are associated with non-linearly increasing costs, beyond a certain level of deployment that needs to be captured in the quantitative assessment. Some of the options might also create so-called “disutility” to the consumers, as they alter their behaviour to an eventually less “comfortable” patterns. Not capturing such effects, would underestimate the difficulty in the introduction of such policy options.
  1. Extreme Electrification: Strong electrification is a “no-regret” option, but extreme electrification is a relative newly established concept. This category adopts electricity as the single energy vector in all sectors in the long-term, with bioenergy complementing electricity only in sectors where full electrification is not technically feasible with currently known technologies, such as aviation and maritime. From a modelling perspective, deep electrification requires to studying the technoeconomic of innovative technological options such as full-electric long-distance road freight vehicles, electric aircrafts for short-haul flights and high temperature heat pumps. Using electricity as the only vector for the heating of buildings will broaden the seasonal demand gap between the summer and winter seasons for many regions, requiring either significant investments in power storage solutions or in power capacity that will have low utilisation. Capturing this in the modelling requires establishing electricity load patterns that differ by scenario at an appropriate time resolution.
  1. Hydrogen as a carrier: This category assumes that hydrogen production and distribution infrastructure will develop allowing hydrogen to become a universal energy commodity, covering all end-uses including transport and high-temperature industrial uses. Hydrogen can also provide a versatile electricity storage service with daily up to seasonal storage cycles. Hydrogen is assumed to replace distributed gas after an extensive overhaul of the pipeline system and gas storage facilities. From a modelling perspective it requires identifying the industrial processes that can be decarbonised using hydrogen-based solutions (and the relative boundary conditions), assessing the techno-economics of a variety of carbon-free hydrogen production facilities (for both blue and green hydrogen) and the costs associated with the upgrade of the gas distribution and storage system. All the above, should be established in a modelling framework that is available to co-optimise the operation of the power system and the hydrogen production facilities, enhancing in this way energy storage and coupling various sectors of the energy system and the economy.
  1. GHG-neutral hydrocarbons (liquid and gaseous): In this case, the paradigm of using and distributing energy commodities, along with the respective infrastructure, is maintained. The nature and origin of the hydrocarbon molecules is modified in order to ensure carbon neutrality from a lifecycle emissions perspective, using synthetic molecules rather than fossil ones. The production of synthetic methane and liquid fuels requires carbon-free hydrogen production and an appropriate carbon dioxide (CO2) feedstock source. The last element hints at the emergence of CO2 as a commodity, therefore it is important that energy-economy models are modified in order to treat CO2 not only as a by-product of fossil fuel combustion, as it was done till recently, but as a product that can be used for different purposes (e.g. apart from producing GHG-neutral fuels, creating carbon sinks and inducing net negative emissions via embodying it in materials or storing it underground). The origin of CO2 can either “from air” via using Direct Air Capture (DAC) technologies or by biogenic sources; both of them have uncertainties related to its learning potential and maximum availability potential, respectively. For the production of hydrogen, similar modelling considerations as in the previous case apply. A model able to represent effectively this strategy should have a rich technology database that explicitly includes the major pathways for the production of synthetic fuels; in turn populating such a database is a difficult and time-consuming exercise given the uncertainty regarding the learning potential of the various technologies. Ideally, a model should be in a position to optimise of the location of clean-fuel production facilities in Europe or elsewhere, as it is more likely that such commodities will be traded extensively.

The analytical assessment, which has provided input to the “Clean Planet for All” strategy by the European Commission in November 2018, has confirmed that a carbon-neutral EU economy by mid-century (2050) is viable both from a technological but also an economic perspective, should a number of key technologies evolve as anticipated. The analysis should be perceived as the first step of a complex assessment procedure to bolster the decision-making process regarding the definition of the EU’s long term energy and climate strategy.

Next steps should focus on the assessment of several uncertainties associated with the various pathways studied. For instance, emphasis should be given to identifying the appropriate policy instruments that could be used to materialise the emergence of technologies and energy carriers as long-term visibility of future markets is crucial for their deployment. The characteristics and costs of several disruptive technologies are also worthy of further research with emphasis on the potential of learning and economies of scale. The modelling and data improvements to be realised in INNOPATHS will enhance the model representation of disruptive options and sectoral transformation, and will enable further improvement of the design of deep decarbonisation pathways.

For more information on the analytical work behind the “Clean Planet for All” communications, please click here.

Ratcheting up policy stringency through sequencing

While in the EU the past decade can be characterized mostly by getting climate policies into place and refining them, the challenge ahead for the next decade is to substantially increase their stringency. In the first decade of this century, many of the policies considered to become the backbone for achieving these targets were developed and implemented. First of all the EU’s Emission Trading Scheme became operational in 2005, although with very weak reduction targets and primarily to achieve the Kyoto protocol obligations. In 2008 the EU adopted the 2020 climate & energy package, which entailed relatively modest targets for GHG emission reductions, renewable energy use, and energy efficiency. Around ten years later the ETS is expected to have overcome its long lasting “prices crisis” (in the wake of the 2018 reform), CO2 emission standards for cars and trucks are being tightened, and a new governance mechanisms for renewable support with complementary EU mechanisms has been agreed upon as part of the “Clean Energy for All Europeans” package.

Yet the targets of the next decades are considerably more ambitious and require even more stringent policies. For the EU Long Term Strategy, a number of scenarios were developed that project the achievement of the 2030 targets as agreed in June 2018, and aim at long-term emission reductions of at least 85% by 2050 (from 1990 levels). While these scenarios are underpinned by a range of assumed policies, it is by no means clear that these policies can be implemented and ratcheted up as needed. For instance, the current price in the EU ETS – even though it has quadrupled in the last two years – still seems to be far away from driving decarbonization in the power and industry sectors at the rate required. A core question is thus: how must policies be designed in order to allow for such ‘ratcheting’?

Climate policies as sequences that can overcome barriers to higher ambition
In recent work (Pahle et al) we examined how climate policy today may be effectively designed to lay the groundwork for more stringent climate policy in the future—what we call policy ‘sequencing’. Such advance thinking is essential, because as the Roman emperor and philosopher Marcus Aurelius put it: “the impediment to action advances action. What stands in the way becomes the way.”

The core mechanism is illustrated in the figure below: the effects of policies implemented at an initial stage (t1) remove or relax stringency barriers over time so that policymakers can ratchet up stringency at the subsequent stage (t2).

In this work we also identify at least four categories of barriers: costs (both due to the cost of new forms of decarbonization technology, and due to the economic costs of more or less efficient policy choices); distributional effects (the winners and losers of any specific climate policy choice); institutions and governance (where capacity limits and veto points might prevent the enactment of more stringent policy) and free-riding concerns (where some jurisdictions may not adopt climate policies in the hope of free-riding off of the climate policy achievements of other jurisdictions). After exploring ways in which those barriers might be reduced or eliminated, we finally draw on the cases of Germany and California to provide specific examples of how sequencing works.

Applying sequencing to strengthen the EU ETS.
The concept of sequencing is not only a useful approach for explaining what has enabled ratcheting in the past – it can also be used strategically to design current and future policies. In the following we apply the sequencing framework to the EU ETS to illustrate the concept and discuss implications for policy choices. A first aspect is that strong myopia of market participants could lead to persistently lower ETS price, which eventually might rise sharply towards the end of the next trading period (“hockey stick”). Such a sharp rise would face strong political opposition, possibly jeopardizing the ratcheting up of the policy. A remedy could be a minimum carbon price, which would balance prices over time as described for example by Flachsland et al.

Overcoming the waterbed effect
In a similar vein, the EU ETS has long been challenged by the problem of overlapping policies on the national level, which reduce demand for certificates, thus depressing ETS prices, and thereby inducing the ‘waterbed effect’ that other countries emit more. Again, a minimum carbon price could alleviate this problem, an EU-wide minimum price seems to be politically infeasible at least in the near future. Suitable policy sequencing could over time reduce this barrier. For example, recent work (Osorio et al) with a focus on the German coal phase out, examined how a coalition of ambitious countries could implement such a price floor to reduce the short-term waterbed effect. In order to prevent leakage to future trading periods, they would have to cancel allowances equivalent to the level of additional mitigation the price floor would induce – an option that was made more prominent in the last reform of the ETS,. Such a coalition could grow over time and eventually create a majority to also implement a carbon price floor in the full EU ETS.

Professor Benjamin K. Sovacool authors Visions of Energy Futures: Imagining and Innovating Low-Carbon Transitions

INNOPATHS consortium member, Professor Benjamin K. Sovacool has authored a recent book entitled, Visions of Energy Futures: Imagining and Innovating Low-Carbon Transitions, that uses INNOPATHS initial work and findings.

This book examines the visions, fantasies, frames, discourses, imaginaries, and expectations associated with six state-of-the-art energy systems—nuclear power, hydrogen fuel cells, shale gas, clean coal, smart meters, and electric vehicles—playing a key role in current deliberations about low-carbon energy supply and use.

Visions of Energy Futures: Imagining and Innovating Low-Carbon Transitions unveils what the future of energy systems could look like, and how their meanings are produced, often alongside moments of contestation.

Read more about it here.