Energy Technology Breakthroughs for Climate Change Mitigation

We Need Energy Technology Breakthroughs to Effectively Stem Climate Change Mike Toman Research Department, World Bank iSEE Congress, University of Illinois September 13, 2016 Responsibility for the content of this presentation is mine alone and the views expressed should not be attributed to the World Bank or any member countries.

Key conclusions Reducing global greenhouse gases enough to significantly mitigate climate change risks will require complete global energy transformation, starting soon There are important limits to economically feasible mitigation actions at present given costs of energy system emissions reductions Additional international cooperation to develop more affordable low-carbon energy options is crucial to avoid dangerous warming 2

Key conclusions (2) Putting more emphasis on sectoral and technology-focused measures for emissions reduction may be effective for building international cooperation Lower-income countries still striving to meet basic needs should not be expected to bear significant cost burdens for GHG mitigation 3

Climate change and other environmental risks 4

Without additional mitigation, global mean surface temperature is projected to increase by 3.7 to 4.8 C over the 21st century causing significant risks for the environment and human well-being. Based on WGII AR5 Figure 19.4 Source: [2] 5

Other environmental risks matter too [3] 6

Energy priorities for most developing countries Improved access to affordable, clean energy Basic access for cooking, heating, lighting Expanded access to electricity for growth Improved reliability of electricity availability Mitigate productivity as well as direct welfare losses Increase investment in modern growth sectors Financial sustainability of sector Subsidy, other governance reforms Improved energy efficiency that lowers costs 7

Possibilities for and Potential Costs of GHG mitigation 8

Regional patterns of GHG emissions are shifting along with changes in the world economy. Based on Figure 1.6 Source: [2] 9

GHG emissions rise with growth in GDP and population; long-standing trend of decarbonisation of energy reversed. Based on Figure 1.7 Source: [2] 10

GHG emissions rise with growth in GDP and population; long-standing trend of decarbonisation of energy reversed. Based on Figure 1.7 Source: [2] 11

Decomposition formula for growth in CO2 emissions C=emissions, E=energy, Y=income, P=population ? ? + % (? % ? = % ? + % ?) In words, the % increase in total GHG emissions is the sum of the growth rate of income, the % change in energy intensity of economic activity, and the % change in carbon intensity of energy used The action is in reducing energy intensity and decarbonizing energy system 12

An Example: Suppose population growth is 1% per year, and per capita income growth is 3% -- so total income growth is 4% Very modest income growth relative to what is needed to reduce global poverty Sustained energy efficiency improvement of 2% per year is ambitious With that, still need 2% per year reduction in carbon intensity of energy to hold total GHG emissions constant; But . 13

Even with fairly strong renewables growth, fossil energy dominates the mix absent major change Growth in total primary energy demand 1987-2011 Gas 2011-2035 Coal Renewables Oil Nuclear Source: [5] 500 1 000 1 500 2 000 2 500 3 000 IEA projection Mtoe While primary energy demand roughly doubles from 2011-2035, fossil energy only shrinks from 82% to about 75% absent much more aggressive GHG emissions mitigation

There is far more carbon in the ground than emitted in any baseline scenario; fuel scarcity not a major emissions constraint Based on SRREN Figure 1.7 Source: [2] 15

More ambitious GHG mitigation involves more substantial scaling up of low-carbon energy. Source: [2] 16

More ambitious GHG mitigation involves more substantial scaling up of low-carbon energy. Based on Figure 7.16 Source: [2] 17

Global costs rise with the ambition of the mitigation goal. Based on Table SPM.2 Source: [2] 18

How to evaluate these costs? While the % deviations from baseline are small, in absolute terms even a few % of (growing) future global consumption is a large amount Such cost estimates typically assume cost-effective measures for international mitigation (i.e. globally efficient carbon pricing) costs will be significantly larger without them Assumption of profound increases in energy efficiency (e.g. ~ 40% of total wedge ) Costs will be significantly larger than shown if all low- carbon technologies are not available even those that are pre-commercial and controversial 19

Availability of technology can greatly influence mitigation costs. Based on Figure 6.24 Source: [2] 20

Further technical progress is needed to reduce costs of low-carbon options Land use and environmental concerns with biofuels; second generation options still in future Fuel cells need significant advances to be economic Wind and solar have inherent challenges to scale up (intermittency/grid stability, storage, land use) Solar thermal still in intermediate stage of commercial maturation Nuclear remains costly, public concerns Carbon capture and storage (CCS) seems technically feasible but essentially untested at a commercial scale, with unknown performance and permanence 21

International cooperation for global GHG mitigation 22

Criteria for evaluating agreements Environmental effectiveness Aggregate economic performance impacts Distributional and social impacts Institutional feasibility (participation, compliance) 23

Standard prescription Countries agree on individual emissions reductions targets Countries implement policies to achieve their targets: Use of price-based policies, like a tax on carbon emissions or energy taxes based on the carbon content of the energy source, will lower the cost of achieving the targets Such policies also motivate technical innovation to lower the cost of emissions mitigation But . 24

International free riding on emissions reductions agreements Deep and costly cuts in global emissions also increase incentives to shirk Broader participation becomes feasible only with more modest objectives and thus lower environmental effectiveness Search for commonly held, implementable principle of equitable burden sharing elusive 25

Disruptive energy technology transformation 26

Need to lower the cost of completely restructuring global energy system Lower cost means decarbonization consistent with individual countries self-interests Incentive-oriented policies for GHG limits definitely can and do induce needed low- carbon innovation, lowering compliance cost But given current costs of and barriers to greatly scaling-up low-carbon energy resources, a more incremental path to energy system transformation risks being too slow 27

Resource requirements for engendering disruptive technology transformation Cost of transformation is very uncertain, but likely well above recent OECD energy RD&D spending of ~$15B/yr. Energy R&D recently has been ~ 5% of total R&D half what it was in 1980 IEA estimates ~$45 trillion needed by 2050 to limit dangerous global temperature rise, on top of the resources required to meet growing global energy demands Calls for 5x increase in RD&D spending 28

Energy RD&D has slipped in priority OECD R&D spending Defence 50% Health and environment General university funds Non-oriented research Space programmes Energy 40% 30% 20% 10% 0% 1981 1985 1990 1995 2000 2005 2010 Source: [6]

Major RD&D funding increases will require major intergovernmental cooperation Sums this large ( ~0.2% global GDP) will have to be raised by governments beyond the means and incentives of private sector to finance Need assurance that knowledge will be shared but not poached Needed basic knowledge advances will not be patentable spillovers unavoidable Countries may want to specialize in major investments in certain activities, and need a range of these to find best opportunities So need assurance that there will be shared contributions to global effort 30

The beginnings of an international technology cooperation initiative are there November 2015 20-country agreement to double clean energy R&D Breakthrough Energy Coalition Global Apollo Programme proposal in UK (0.02% GDP versus 0.2%) Support at Paris climate meetings 31

Focus on sector-specific and technology- based cooperation for emissions mitigation also can reinforce RD&D cooperation Many developing countries need to improve their energy and transport systems anyway Focus in financing on trade in new capital goods, expanded use of affordable lower-C options Sector-based, technology-focused approaches do not preclude shift toward broader economy-wide price instruments 32

What about rebound effects? Reducing the cost of low-carbon energy will limit the rebound from technology policies to improve energy efficiency The threat of lower alternative energy costs is not likely to accelerate fossil energy depletion that much Could be some speed-up in depletion of marginal oil resources 33

Uses of international financial resources for GHG mitigation need to reflect developing country priorities Carbon finance will have limited effect without stronger commitments from developed and major developing countries to curb emissions Need to emphasize development benefits Local environmental co-benefits shouldn t developing countries pursue improved air quality anyway? 34

Thank you I look forward to comments and questions. mtoman@worldbank.org 35

Sources for individual slides [1] WGIIAR5-Slides-June 12 2014; downloaded at http://ipcc-wg2.gov/AR5/report/ [2] IPCC_WGIII_AR5_Presentation; downloaded at www.mitigation2014.org/report [3] OECD 2012 Environmental Outlook figures downloaded at http://www.oecd.org/env/indicators-modelling- outlooks/oecdenvironmentaloutlookto2050theconsequencesofinaction.htm [4] IPCC AR5 WGIII Summary for Policy Makers Figure SPM.2; downloaded at http://mitigation2014.org/report/figures/summary-for-policymakers-figures [5] Presentation by Fatih Birol on IEA World Energy Outlook 2013 for OECD Parliamentary Days, Paris, 5 February 2014. Downloaded at http://www.oecd.org/about/membersandpartners/publicaffairs/parliamentarydays201 4slides.htm [6] IEA Energy technology Perspectives 2012 slide deck; downloaded at http://www.iea.org/etp/etp2012/ [7] Global Commission On The Economy And Climate, The New Climate Economy Report (Global Report): Figures 1.6 (McKinsey curve), 5.2 (subsidies) [8] IEA, Redrawing the Energy-Climate Map, Figure 3.16. 36

GHG mitigation and developing countries 37

Who should go first? Controlling climate change is and for some time should be an issue primarily for high- emitting upper and middle income countries Consistent with UNFCCC Lower income countries especially those not able to meet basic energy needs should not be carrying out costly decarbonization Important implications for international project financing 38

Several policies can reduce help reduce GHG emissions at relatively low cost, risk Energy efficiency performance standards Reduced deforestation Reform of trade policies that restrict diffusion of lower-carbon technologies Energy subsidy reforms But political economy difficulties provide a cautionary lesson 39

[3] 40

Putting a price on carbon remains crucial Increased cost-effectiveness Economic instruments motivate cost-reducing innovation in low-carbon technologies Important complement to public investment in new knowledge for lowering mitigation costs 41

42

Substantial reductions in emissions would require large changes in investment patterns and appropriate policies. Based on Figure 16.3 Source: [2] 43

McKinsey MAC curve shows lots of win-win Source: [7] 44

Difficulties with this narrative MAC curve has several flaws Evaluation of individual mitigation opportunity costs Interactions among mitigation components A large body of analysis indicates that to make deep GHG cuts we will have to make intensive use of the ostensibly more expensive options Counting co-benefits: Often are cheaper options for pursuing co-benefits than GHG mitigation If many co-benefit measures should be pursued already, why aren t they? 45

Reform of energy consumption subsidies offers significant win-win opportunities if political barriers can be overcome Source: [7] 46

Stabilization of atmospheric concentrations requires moving away from the baseline regardless of the mitigation goal. Based on Figure 6.7 Source: [2] 47

Stabilization of atmospheric concentrations requires moving away from the baseline regardless of the mitigation goal. ~3 C Based on Figure 6.7 Source: [2] 48