Britain looks beyond Kyoto deal

Under the Kyoto climate change agreement, greenhouse gas emissions don't have to be reduced until 2008, but the effects for industry could be immediate. James Dark assesses work in progress and the measures that will be required.

Targets for greenhouse gas reductions set at the Kyoto climate change conference fall well short of the action proposed by environmental campaigners, the EU and developing nations. But for British industry the 8% reduction in gases agreed at the conference is likely to have have little relevance to the target it will have to work towards. DETR has repeatedly confirmed that the manifesto pledge to reduce CO2 by 20% remains Government policy and a consultation paper to be issued this summer will focus on moving beyond the legally binding 8% target.

Seeboard’s 668MW Medway power station – it’s gas turbines helped the electricity industry stabilise Britain’s greenhouse gas emissions at 1990 levels

Kyoto deal

The agreement thrashed out in Kyoto sets greenhouse gas emission limits for specified countries based on reductions from 1990 levels, with the option of using 1995 levels as the benchmark for hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride.

Assuming Kyoto targets are adopted, for the five years from 2008 to 2012 emissions must be reduced by a 5.2% aggregate in the industrialised world. The deal worked out will affect some countries more than others. Large polluters like the EU will have to reduce emissions by 8%, the US by 7% and countries such as Japan and Canada by 6%. Another group which includes Russia and New Zealand must stabilise emissions while a further group of countries such as Norway (1%) and Australia (8%) is permitted to increase emissions.

In the EU, the Electricity Association estimates this will amount to a 10.5% reduction in CO2 methane and nitrous oxide to compensate for rises in the other three gases.

The unit used to measure reductions will be the CO2 equivalent of the six gases.

To achieve the cuts, power companies will have to supply more energy generated from renewable energy sources and industry will have to install more energy efficient technology. Under the terms of the deal, emissions can be offset against CO2 ‘sinks’, for example forests, and credit will be given for helping developing countries to reduce their emissions – in many cases, the price of refitting a polluting, inefficient power station in developing nations will be less than cutting emissions by the same quantity in developed countries.

Immediate effect

Although it is not until 2008 that the Kyoto agreement comes into force, its effects are already being felt. The DTI wants 10% of Britain’s energy to be generated from renewable sources by 2010. To put that target into perspective, last year 2% of energy came from renewables, which would have been 3% if shortage of rainfall had not adversely affected hydro capacity.

Investment in renewable sources will have to be stepped up which an Electricity Association spokesperson says will inevitably mean costs being passed on to the electricity suppliers and on to consumers.

However, the Association points out that since 1990 moves towards gas power stations, nuclear power and renewables has had the dramatic effect of taking Britain’s greenhouse gas emissions back to 1990 levels without contributions being required from any other sector, domestic, transport or industrial. Not only that, electricity prices for industrial users have actually fallen by 21-27% during that time. The suppliers’ obligation to use renewables need not mean price rises, but industry will not be able to rely on further large cuts.

What industry should be investigating now is energy efficiency because even if the relatively small targets agreed at Kyoto are adopted, in the longer term economic instruments are likely to be used to dampen demand if other action is not sufficient to cut emissions.

Government action

The Government is holding a review of renewable energy which is expected to report in the second half of this year. At the moment renewable energy development is being supported through non fossil fuel obligations (NFFO) which enable the Government to require electricity suppliers to secure certain amounts of energy from non-fossil sources.

DTI figures show that last September NFFOs were producing 486MW capacity from 217 projects and much higher capacity will be contracted through NFFO 5.

Under present and future NFFO contracts, the Government estimates renewables will contribute 5% of the nation’s electricity requirements by 2003. The review will investigate whether renewables can be brought up to 10% by 2010 and whether future NFFOs may be extended to include technology not currently covered. Solar energy is being discussed in the review, but currently the costs are very high. Photovoltaic electricity is five to 10 times the cost of electricity from conventional sources which is why it hasn’t been included in NFFOs which are based on a technology’s market potential.

However, although development of new sources of renewable energy is needed to reach the 10% target, the DTI is confident that capacity from existing renewables is far from reaching its limit.

“Existing techniques are becoming more economical,” a member of the DTI’s renewable energy section explained.

“All NFFO technologies are steadily coming down in price, the exception being small scale hydro which went up between NFFO 3 and NFFO 4.

“These technologies can be competitive in their own right and you can see that clearly in the case of wind which produced electricity at 11p per unit in NFFO 1 in 1990 and 3.5p per unit for NFFO 4 early last year.”

Perhaps the most successful source of renewable energy has been landfill gas projects which are now being developed without having to rely on NFFO premium rates. For example, Shanks & McEwan plans to open a landfill gas electricity plant outside of NFFO.

In addition to investigating new ways to produce competitive renewable energy, the Government is committed to investigating all sources whether or not they are likely to contribute large amounts of energy.

Fifty-eight thousand pounds has been invested in a survey by the consultancy ECOTEC into the market potential of photovoltaic (solar panel) technology even though John Butson, who is conducting the research, believes the technology only has a minor contribution to make towards Government targets.

“By 2010 we will be looking at the majority of renewable energy coming from waste, landfill gas and possibly active solar, but not PV,” he commented.

“For a technology like PV to become effective by 2010 its performance would have to improve, its cost would have to fall and additional measures such as carbon taxes would be needed to increase its competitiveness.”

A further limiting factor on PV panels is that while they have the potential to run small industry plants and offices, they cannot produce the power to operate large processes.

Currently the only likely use for PV is for companies such as supermarket chains which find it profitable to promote a green image.

Yet the importance being placed on developing every source is evident in the Government’s encouragement to ECOTEC to make their results widely known and ECOTEC has made a submission to present a paper at the Chartered Institute of Building Engineers Conference in the autumn.

Industry action

Jenny Barker, a policy advisor at the CBI, does not believe even a 20% target for reductions in CO2 will necessarily make industry less competitive, pointing to a range of measures that will mean greater energy efficiency and cheaper electricity to offset the effect or possibly the need for any carbon tax.

“Energy market liberalisation will give firms the most efficient choice of energy, industry sectors are entering voluntary agreements to cut energy and the public as well as industry can be encouraged to play their part. The Government has said it won’t do anything to make industry uncompetitive and this target is achievable,” she commented.

Barker believes industry must view rationalising energy use as an ongoing process starting now and continuing over the next five to 10 years.

In some respects this message has been taken on board, particularly in the Chemical Industries Associations’s voluntary agreement with the Government to cut energy consumption by 20% from 1990 levels by 2005.

Recent ETSU research into CO2 emissions suggests such targets may be achievable if industry were to adopt all cost effective measures, but lack of capital for investment and insufficient management resources to investigate possibilities such as building a combined heat and power plant to service several companies in an area may be significant barriers. However, there is room for manoeuvre in the future. The ETSU model estimates that if all technically possible measures were adopted, CO2 emissions could be reduced by nearly 50%.

Regulation will also play a part in cutting emissions. The phasing in of IPPC after October 1999 will oblige existing installations to adopt efficient techniques as new factories are already having to do under IPC.

Plans submitted under IPC for a new Blue Circle cement manufacturing plant in Holborough, suggest that fuel savings of 25% and a consequent reduction in CO2 emissions of approximately 12% will be made compared with emissions from the Northfleet works it will replace.

However, some recent research suggests that falling electricity prices mean industry may not give energy efficiency as high a priority as is needed. If this attitude prevails, in the long term a carbon tax will be necessary to increase efficiency, forcing energy bills up.

ACBE’s working group on climate change which is expected to influence this summer’s consultation on emissions reductions suggests that a scenario is for individual sectors to develop voluntary agreements to cut emissions before 1999. Within the next five years, legislation to enforce agreements would come into force. And as targets become legally binding a carbon tax would provide the final decisive incentive for inductry to reach emissions targets. But ACBE’s report indicates that such a tax need not be financially painful for industry if set employers’ National Insurance contributions were reduced by way of compensation.

Trading pollution

Under the Kyoto agreement, industrialised countries will have to monitor pollution levels. If they expect to exceed their targets they will be able to take action to buy unused pollution permits from countries which have met targets. It is probable that industry rather than governments will be given responsibility to buy and sell permits.

Tim Denne, formerly head of climate change policy at the New Zealand Environment Ministry, now a consultant with ERM, suggests a system based on fuel sales is the simplest way to monitor emission levels. From fuel sales it is possible to calculate emissions of CO2 directly because all carbon burnt is emitted as CO2.

Based on this information, the responsibility for holding permits would most simply be given to fuel wholesalers. If targets are exceeded, wholesalers could either buy permits or face financial penalties for selling too much fuel. The price of the permits would be set by the market and would be expected to equal the cost of the cheapest available emission reductions. The wholesalers would pass this price on to the power stations who would pass it on to consumers. If demand for permits outstripped supply, the permit price and fossil fuel price would rise until demand was reduced.

The system would work like a carbon tax. Denne believes the greatest impact would be on coal price and the least on heavily-taxed petrol.

Other systems

An alternative system to ‘taxing’ wholesalers would be to require permits to be held by final users, and require them to meet targets and trade in emissions. This could apply to all users from power stations to cars. The Government would have to decide where best to draw the line.

Most complicated would be a system which allowed cuts in all greenhouse gases to count towards a country’s target. CO2 apart, these gases can’t be measured on a carbon-in carbon-out basis as emissions depend on, for example, combustion temperatures. It would be far easier for Governments to police fuel sales than to monitor all greenhouse gas emissions which could include methane produced by livestock.

Under the terms of the Kyoto agreement emissions cuts don’t have to start being achieved until 2008, but already a futures market has begun in permit trading.

Uncertain position

The critical question for industrial competitiveness is whether measures such as energy efficiency, development of renewables, voluntary agreements between industry and Government, regulation and market liberalisation can reduce CO2 emissions sufficiently to make a carbon tax, in whatever form, unnecessary.

As yet it is impossible to predict how great a role the various elements in the emissions reduction strategy may play.

The target to extend combined heat and power production to 10,000MW from its current level of 2-3,000MW is seen in many quarters as a more realistic proposition than a the 10% target for renewable energy. It is even unclear what that 10% target relates to. A DTI spokesperson commented that as the current review of renewables is based on finding out whether 10% is possible, it should not be regarded as a definitive figure that is required to achieve any set emissions target.

And at present the CIA is unable to quantify how great a reduction in emissions its agreement with the Government will produce. Whatever industry does to reduce emissions, though, its influence overall on reductions is limited. Industry only accounts for 20% of the country’s CO2 emissions. Much will depend on reducing other sources, particularly emissions from cars and encouraging public efficiency. While industry is the greatest single emitter of CO2 in the UK, domestic emissions account for 27% and road transport for around 22%.

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