/Climate_Investment_Framework_augusti_2010 by Global Utmaning

a climate investment framework for the eu:

Turning failure in Copenhagen to progress in Cancún Allan Larsson, Niclas Ihrén & Måns Lönnroth published may 2010, updated in august 2010

Contents Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1. Climate negotiations: How to turn a failure in Copenhagen to progress in Cancún? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2. Preparing the ground for Cancún and beyond: why action is urgent. . . 6 3. Preparing the ground for Cancún and beyond: technologies and time frames. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4. A Climate Investment Framework for a low carbon economy. . . . . . . . . 11 5. The road to Cancún: broadening the agenda and building a Climate Investment Community . . . . . . . . . . . . . . . . . . . . . . . . . 17

special thanks A special thanks to our sponsors, in particular PricewaterhouseCoopers and Vattenfall. This report would not have been possible without the contributions of our panel of experts on energy and climate policy. The authors thank you all, but in particular Andreas Barkman, Jan Cedergren, Karl Hallding, Håkan Jonsson, Inger Jägerhorn, Peter Kleen, Thomas Koch, Staffan Laestadius, Lars-Erik Liljelund, Arne Mogren and Anders Wijkman.

global utmaning (global challenge) is an independent swedish think-tank. We are a qualified network from business, politics and academia focusing on the challenges posed by a new world order regarding economics, environment and democracy. Authors: Allan Larsson, Niclas Ihrén and Måns Lönnroth Published by Global Utmaning Stockholm, August 2010 Birger Jarlsgatan 27 111 45 Stockholm Sweden +46-8-787 21 50

www.globalutmaning.se

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A Climate Investment Framework for the EU

Turning failure in Copenhagen to progress in Cancún executive summary This report takes the Copenhagen Accord as a starting point and suggests a European agenda for global progress regarding climate change. A new path is needed in the preparations of the Climate Summit in Cancún in December 2010 and beyond.

1. Restarting the UNFCCC process and a parallel process towards a Climate Investment Framework The UNFCCC process remains the main avenue for global climate negotiations, in spite of the outcome of the COP 15 in Copenhagen. Today, there is a broad understanding that a legally binding global agreement is a complex process that will take time, probably many years. There are no indications whatsoever that the deep resistance encountered in Copenhagen against a legally binding global climate agreement can be overcome in time for COP 16 in Cancún. However, there is an urgent need to give clear signals to business that the world has to enter into a new era of climate responsibility. So far, the EU has assumed that the legally binding global treaty would be both necessary and sufficient to stimulating investments. However, since the treaty now looks a long way off, the EU must reverse the logic and focus on a Climate Investment Community, that can grow stepwise and add new members as the see fit. The core of the Community is a Climate Investment Framework – a set of rules and incentives that stimulate investment in climate efficient technologies.

2. Turn the climate strategy into an agenda for growth and leadership in cleantech In the preparations for the Cancún Summit, the EU should identify the climate strategy as one of the key driving forces for the transformation and modernisation of our economies, for improved productivity and more sustainable growth – not as a burden. The focus should be on new technologies and investments, a strategy that will bring many benefits, as outlined in “A European Eco-Efficient Economy”1 and in “Roadmap 2050”2:

1 A European Eco-Efficient Economy, SEI, 2009 2 Roadmap 2050, report from European Climate Foundation, 2020 http://www. roadmap2050.eu/

• Investments in the energy sector will have to double over the next 15 years • Compared to a business as usual scenario, total energy costs will be lowered by 20–30% through increased energy efficiency and through less price sensitive low-carbon energy sources. • Several hundred thousand jobs in Europe and corresponding export revenues can be created during the next decade. • Significantly improved security of supply will be achieved in the energy system • Sustainable energy and lower emissions is essential for coming generations. Turning the climate strategy into an investment strategy offers the EU a golden opportunity to assume leadership in one of the most strategic areas of technology, low-carbon technologies. The first step is to reverse the order between a legally binding climate agreement and a climate investment framework. By doing this and by focusing on investment and technology, the parallel UNFCCC-negotiations on a global climate agreement will be facilitated.

3. Make a Climate Investment Framework a top EU priority We suggest that the EU makes a Climate Investment Framework a top priority first internally in the EU and then externally in consultations and negotiations with other countries. The external aim should be a political agreement, not a legally binding document. The Climate Investment Framework needs to give guidance to policy makers and investors to make the right choices in building future sustainable energy systems. The framework should be simple and focused on a few strategic issues.

4. Establish a technology neutral CO2 price as an investment driver The centrepiece of a Climate Investment Framework is the establishment of a technology neutral CO 2 price. Today, the CO 2 price in the EU emissions trading system is €13–15 per ton, which could be compared to a price of €40 per ton, which is needed to allow for low-carbon technologies to compete long term on a level playing field with fossil technologies. Thus, fossil energy is today “subsidised” by around €25–27 per ton CO 2 emissions. This “subsidy” will have to

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be paid by future generations in the form of increasing costs for climate change impacts and adaptation. This perverse situation has to be corrected by internalizing climate impact in the CO 2 price. In this report we present a CO 2 price trajectory to 2020 and beyond, which better creates a level playing field free from fossil fuel “subsidies”.

and measures that the WTO rules allow scope for, such as public procurement, green subsidies, product standards and requirements as well as energy and carbon taxes. The Climate Investment Framework has the aim of inspiring other countries and regions to follow and benefit from a pro-active investment policy.

5. Use emission trading and CO2 taxation to maintain a technology neutral price floor

8. Strengthen and re-emphasize commitments to technology transfer

The basic idea behind our proposal for a technology neutral CO 2 price is to give clear signals to businesses and consumers that fossil based technologies will become unprofitable, while low carbon technologies will be profitable. To create and maintain a floor for such a technology neutral CO 2 price, the reformed EU Emission Trading Scheme (ETS) should be used as much as possible. To stabilize the price along a predetermined price trajectory, it will be required to adjust the availability of emission rights at a higher frequency than today, centrally in the ETS. In addition, Member States will have to use complementary CO 2 taxation to the degree necessary for sectors not covered by ETS. The financial resources in the system from a higher pricing should be returned to and used by Member States to fulfill national priorities, particularly in transformative investments in energy systems and energy intensive infrastructure.

Technology transfer to developing countries should be emphasized. The commitments made by developed countries in the Copenhagen Accord to provide initial investments of USD 30 billion for the period 2010–2012 and USD 100 billion dollars a year by 2020 in new and additional resources, for mitigation and adaptation should be supported by a Climate Investment Framework.

6. Strengthen the directives on energy efficiency to match EU climate commitments Roughly half of the required emission reductions can be achieved through improved efficiency. This is also the area where CO 2 abatement has the highest profitability. The EU standards on energy efficiency could consequently be modernised to further strengthen the Climate Investment Framework, and also to reinforce the EU commitments on 20% emission reduction for 2020 and beyond. With existing technologies for energy efficiency, a yearly reduction of 2% of energy consumption in Europe is feasible through energy efficiency initiatives, according to Roadmap 2050. Energy efficiency is further an area where pro-active local initiatives in different countries will continue to play an important role, and they should be encouraged. Time has come to review the energy efficiency directives in the light of the EU commitment to emissions reduction 2020. One important purpose is to make a concerted effort to overcome lack of interest from business and resistance from different interest groups.

7. Make trade and climate commitments mutually supportive The impact that a higher CO2 price will have on European competitiveness globally needs to be monitored and managed. Trade and climate policy should be mutually supportive. EU and its members should fully use the domestic policy instruments

9. Build a Climate Investment Community to make impact today on investments for tomorrow Investments are based on expectations. The aim of the EU commitment for a Climate Investment Framework is to create strong financial incentives for low-carbon technologies. The EU should see itself as the founding member of a Climate Investment Community and invite other nation states to join the Community. This would have an immediate effect on business and on financial institutions when planning new investments. The stronger the political support, the more impact on business and consumer investments worldwide. The core element of a Climate Investment Framework is a technology neutral CO 2 price trajectory. The policy mix for the implementation of such a price – in the form of market mechanisms, taxes or legislation – may be different in different countries. Intensive co-operation and discussions should be initiated with governments that have shown a clear commitment to tackle climate issues – both in developed and developing countries countries – and to focus on technology and investment.

10. The long term goal – a legally binding treaty on climate change The EU should aim for a legally binding treaty within the UNFCCC process and with the Copenhagen Accord giving political guidance. Countries with major historical emissions as well as countries with estimated major future emissions need to be part of this treaty. The G20 and the MEF fora could be used for additional negotiations. These are likely to take several years, but chances of success increase as practical experiences of climate mitigation and adaptation build up. It is possible, but by no means certain, that the existing Kyoto Protocol can be integrated into this wider treaty. The Cancún Summit, and possibly the summit after Cancún, should be devoted partly to dispassionately examine the future role of the Kyoto Protocol.

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1. Climate negotiations: how to turn a failure in Copenhagen to progress in Cancún? The aim of this report is to give a contribution to the further development of the EU strategy for climate negotiations, by discussing how the EU can turn a failure in Copenhagen to progress in Cancún. We present the arguments for a Climate Investment Framework and suggest a coordinated strategy for the transformation of the European energy systems and for the modernisation of our economies.

1.1 The EU Copenhagen strategy: High and unrealistic expectations COP 15 in Copenhagen was seen as a failure due to the high expectations created and nurtured by the EU, some developing countries and many NGOs. Instead of a legally binding Copenhagen Agreement a political Copenhagen Accord was reached but never formally adopted by the COP 15. The Copenhagen Accord includes a commitment to prevent global warming above 2 degrees Celsius and a request for national commitments to reduce emissions. It furthermore stresses the need to use market mechanisms to enhance cost effectiveness and speed of implementation. To this end, it also states the need for developed countries to provide initial investments of USD 30 billion for the period 2010–2012, and USD 100 billion dollars a year by 2020 in new and additional resources, for mitigation and adaptation. The most important accomplishment at COP 15 is the fact that the Copenhagen Accord is supported by some120 out of 194 UN member nations including all top greenhouse gas emitters representing more than 80 per cent of CO 2 emissions. This is a clear development, since the Kyoto protocol only targeted emission reduction from countries with great emissions in the past (industrialized countries). Nevertheless, it is necessary to realize that the outcome of the Copenhagen Summit has had – and will have – a severe effect on decisions taken today on long term investment in our energy systems, products and processes. The failure to sign a legally binding agreement in Copenhagen has left “much of the business community confused about exactly how to interpret the meeting’s wider economic implications”3. That means a loss of momentum in the investment process that is needed for the transformation of the old economy to a new economy based on low carbon technologies.

1.2 The EU Cancún strategy: More realistic expectations and an open door The big challenge for Governments and the UN system is to replace the confusion created in Copenhagen in the

business community, by a clear understanding that fossil based technologies will become unprofitable, while lowcarbon technologies will give return on investment. At the EU Spring Summit in March 2010 leaders of the 27 Member States made a review of the climate negotiations and agreed to adopt a more flexible strategy for the forthcoming climate negotiations. The aim is “to bring a new dynamic to the international negotiations process”. They proposed to follow a stepwise approach, building on the Copenhagen Accord, which should be swiftly implemented: a) As a first step, the coming meetings in Bonn in May and June 2010 should set the roadmap for taking the negotiations forward. b) The COP 16 in Cancún in December 2010 should at least provide concrete decisions anchoring the Copenhagen Accord to the UN negotiating process and addressing remaining gaps, including as regards adaptation, forestry, technology and monitoring, reporting and verification. The Heads of State and Government repeated that they remain firmly committed to the UNFCCC process and a global and comprehensive legal agreement, supporting ongoing efforts to make the process more effective. However, “given the short time available before Cancún, this process could usefully be complemented and supported by discussions in other settings and on specific issues”. Thus, the EU expectations on COP 16 in Cancún in December are more realistic than on the COP 15 in Copenhagen. Many others engaged in the negotiations share these expectations. When the climate negotiations process restarted in Bonn in the middle of April, also Yvo de Boer, Executive Secretary of UNFCCC, was ready to reduce expectation on Cancún: “I think that Cancún can agree an operational architecture but turning that into a treaty, if that is the decision, will take more time beyond Mexico,” he said. “I think that we will have many more rounds of climate change negotiations before the ultimate solution is arrived at4.” In the background document to the European Council, the EU Commission highlighted the need for “a strong focus on policies to accelerate innovation and early deployment of new technologies and infrastructure, creating a competitive edge for European companies in key sectors of the future (including energy efficiency, green cars, smart grids, carbon capture and storage (CCS), renewable energy).” The European Council replied to this by opening a door to work “in other settings and on other specific issues”, particularly on technology and investment. This is a prerequisite to build a new “Road Map” in Cancún, particularly in the fields of technology and investment. 3 Jeremy Oppenheim, McKinseyQuarterly, February 2010. 4 Yvo de Boer, Reuters News Agency, April 11, 2010.

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2. Preparing the ground for Cancún and beyond: why action is urgent It is urgent to take action to transform our energy systems, because of climate change, but also because of security of supply. There is no time to wait until global consensus has been reached on an agreement, legally binding for all nations. Changes are already happening across industries, but these processes need to be accelerated significantly. The proposed bottom-up approach needs to be supported through policy-decisions nationally and internationally.

2.1 Climate warming: changes go faster than estimated The IPCC’s Fourth Assessment Report (AR4) shows that climate change is already having strong effects on ecosystems, water resources and coastal zones across the world. It is affecting people in various ways, including higher mortality during heat waves, water scarcity, and changes in the spreading of diseases carried by vectors such as ticks and mosquitoes. The Stern Review projects that, in the long term, climate change could cut global gross domestic product each year by between 5% and as much as 20% or more if it is not brought under control by cutting greenhouse gas emissions (GHGs). Taking global action to combat climate change is thus the pro-growth strategy for the longer term. The earlier we act, the less costly action will be. The latest reports from scientists in the field repeatedly indicate that climate change is happening much faster than projected, due to feedback-loops in the Earth system and also due to the more rapid growth of emissions compared to earlier projections. The Climate Change Science Compendium 20095 looked at 400 scientific reports released through peer-reviewed literature. It concludes that all major variables, including sea-level rise, temperature rise, sea acidification, glacier melting, are changing more rapidly than estimated in the earlier IPCC reports.

ing closer and that shortage of oil will have a fundamental impact on our economies and our societies. Oil in particular is the most convenient and multi-purposed of fossil fuels. Oil currently accounts for about 43% of the world’s total energy consumption, and 95% of fuels used globally for transportation. Oil and gas are feedstocks for plastics, paints, fabrics, pharmaceuticals, fertilizers, electronic components, tyres and much more. Oil is so important that the peak will have vast implications across the realms of war and geopolitics, medicine, culture, transport and trade, economic stability and food production. The Hirsch Report6, commissioned by the US Department of Energy and published in 2005 warns that “as peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking.” The predictions for peak oil are constantly disputed, but different organizations are slowly converging in their predictions. IEA officially predicts a peak in production to occur around 20207, although whistleblowers in the organizations claim that most data indicate an earlier peak8. Others are of the opinion that the peak is more immediate. The International Association for the Study of Peak Oil and Gas, ASPO, predicts the peak to come already 20109. UK Industry Taskforce on Peak Oil and Energy Security (ITPOES) predicts that the peak will occur 2013.10 In April 2010, US military announced a warning that all oil surplus production may be gone 2012 and potential massive shortage of oil may result 2015.11 Regardless of which estimate is right, oil production is rapidly moving towards a plateau or a peak. With limited time to adjust the energy system, this development is likely to produce significant price increase and price volatility.12 6 http://en.wikipedia.org/wiki/Hirsch_report

2.2 The insecurity of energy supply: the peak is coming closer

7 http://bigthink.com/series/30?selected=%2019155#player

Insecurity in the sustainable supply of fossil resources has been on the agenda for a long time. During the last few years, the science and debate regarding peak oil has made great progress, as the awareness has risen that the peak is com-

9 http://www.aspo-ireland.org/contentFiles/newsletterPDFs/newsletter100_200904.pdf

5 UNEP (2009), ”The Climate Change Science Compendium”, http://www.unep. org/COMPENDIUM2009/

12 http://www.energypolicyblog.com/2010/03/12/oil-price-volatility-causesand-recommendations-to-the-eu/

8 http://rawstory.com/2009/2009/11/we-entered-peak-oil-iea-source-reportedly-claims/

10 UK Industry Taskforce on Peak Oil and Energy Security. “The Oil Crunch: Securing the UK’s energy future” 11 The US Army report, http://www.jfcom.mil/newslink/storyarchive/2010/ JOE_2010_o.pdf and a commentary in the Guardian http://www.guardian.co.uk/ business/2010/apr/11/peak-oil-production-supply

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figure 1 Illustration of already passed oil peaks (2007).13 Mexico 2004 Denmark 2004 NGL, USA 2002

Forecast

Yemen 2001 Norway 2001

Oman 2001

- 3% p.a.

Australia 2000 UK 1999 Ecuador 1999

Vietnam Thailand Eq. Guinea Sudan, Chad Neutral Zone Brazil Angola

Colombia 1999

Mb per day

Venezuela 1998/1968 Argentina 1998

Malaysia 1997 Gabon 1997 Syria 1995 India 1995 Egypt 1993 Alaska 1989 Indonesia 1977

20 15

China

Romania 1976

10 5

Canada (conv.) 1974 Lower 48, USA 1971 Texas, USA 1971 Germany 1967 Austria 1955

1920

1930

1940

Gulf of Mexico

1950

1960

1970

1980

1990

2000

2010

The diminishing oil resources push the industry and governments towards the exploration of oil resources that are in environmentally sensitive areas and consequently increasingly difficult to explore, expensive, and with higher negative impact and risks regarding environment. The currently leaking oilrig in the Mexican gulf is a dramatic example of this development. The ban on offshore drilling along the American coast that has now been lifted by president Obama is another, and the exploration of huge areas of tar sand in Alberta, Canada is a third. These developments risk leading to severe environmental impacts, higher costs and dramatically changing public opinion. People will react to these large-scale impacts in unforeseeable ways, but we know that these reactions can impact policymaking and business very rapidly if the reaction is strong enough.

hard to secure energy investments in many regions, including Africa, Central Asia and Venezuela.14 Chinese oil companies have increased their investments in Africa dramatically over the last years. Increasing political tension is not confined to Chinese interests. Russia lays “special claim” on energy resources among its neighbours of Former Soviet Republics. In the Central Asian Republics many interests in fossil fuel resources intersect, including EU, US, Russia, China and Islamic countries.15 The same pattern can be seen in all parts of the world. Energy security is becoming a major risk factor for most countries, and is therefore receiving rapidly increasing attention.

2.3 The politics of energy supply: a major risk factor for most countries

Our proposal to the EU to focus on a Climate Investment Framework is motivated both by climate change and by security of supply. It is urgent to act now by giving a clear signal to business to invest in low carbon technologies.

The situation regarding energy supply is further complicated by political initiatives from oil consuming countries to secure their own supply of fossil fuels through political means. Lacking their own energy reserves, China is working 13 This curve was developed by ASPO in 2004, and been further developed by the consultancy Ludwig Bölkow System-technik GmbH, 2007. http://www.worldfinancialblog.com/commodities/the-creeping-oil-crisis/

2.4 Our conclusions: change is urgent both because of climate change and security of supply

14 “Africa’s Increasing Importance in Worldwide Energy Security Affairs”, http:// www.opednews.com/articles/Africa-s-Increasing-Import-by-OilGuy-091214-889. html 15 “Russia, China and the Energy Security Politics of the Caspian Sea Region after the Cold War” http://www.allacademic.com/meta/p_mla_apa_research_citation/2/5/3/9/0/p253903_index.html

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3. Preparing the ground for Cancún and beyond: technologies and time frames The EU should identify the climate strategy as one of the key driving forces for the transformation and modernisation of our economies, for improved productivity and for more sustainable growth – not as a burden. The focus should be on new technologies and investments, a strategy that will bring many benefits, as outlined in “A European Eco-Efficient Economy” and in “Roadmap 2050”.

Demand side changes: • Improving energy efficiency industrially and domestically • Transforming the transport sector to low-carbon technologies • Switching to non-fossil sources in the heating and cooling of buildings Supply side changes:

• Investments in the energy sector will have to double over the next 15 years. • Compared to a business as usual scenario, total energy costs will be lower by 20–30% through increased energy efficiency and through less price sensitive low-carbon energy sources. • The creation of several hundred thousand jobs in Europe and corresponding export revenues during the next decade. • Significantly improved security of supply in the energy system. • Sustainable energy and lower emissions for coming generations. There is a golden opportunity for the EU in turning the climate strategy into an investment strategy and to assume leadership in one of the most strategic areas of technology, low-carbon technologies. As a first step, the order between a legally binding climate agreement and a climate investment framework has to be reversed. By doing this and by focusing on investment and technology, the parallel UNFCCC-negotiations on a global climate agreement will be facilitated. “Roadmap 2050”, a recent report from the European Climate Foundation16, shows that a transformation to a lowcarbon society until 2050 is possible with existing technologies, and that it would generate total energy costs during the period that are lower than for a business as usual scenario, by estimated 20–30%. This means that it also makes good financial sense. A complete transformation of the energy system is required to meet the challenge in the short time frame available. This means that we need to work with the supply side, the demand side and the link between supply and demand, i.e the power transmission system.

16 http://www.roadmap2050.eu/

• Reducing emissions from existing fossil fuel power plants through Carbon Capture and Storage, CCS • Investing in new power generation from wind, solar, hydro power and nuclear Power transmission system: • Since the future energy system will be dependent on electricity to a higher degree than today, we need to invest in a more robust and resilient power transmission system. A broad portfolio of technologies will be needed since each technology only has the theoretical capacity of covering part of the necessary CO 2 abatement. It is also needed in order to continue to develop all technologies and to build a system that is more resilient to delivery risks. Furthermore, the suitable mix of technologies will be different in different regions. Investing to meet Electrical Transmission Requirements is not primarily needed as a CO 2 abatement technology per se, but it is making the energy system more efficient and thereby reducing the overall capacity need. It is also needed in order to create an energy system that will be more dependent on electricity, with a 40% expansion until 2050, and yet more resilient than the current system.

3.1 Demand side changes 3.1.1 industrial and domestic energy efficiency According to a report by McKinsey17, the most cost efficient greenhouse gas abatement investments short-term are to be found in a further improvement in energy efficiency in different sectors, cf. illustration. In the report, it is shown that a majority of investments in this area are already profitable. This indicates that with predictable prices for CO 2 and for fossil fuels, this area is where large impacts on CO 2 emissions would be achieved. However, appropriate policy incentives through technical norms and standards have to 17 http://www.mckinsey.com/clientservice/ccsi/pathways_low_carbon_economy. asp

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figure 2 This figure from McKinsey (2007) shows the abatement costs for different technologies. To the left are technologies and opportunities with negative costs, i.e., opportunities that are profitable already, to the right are those technologies that are not yet profitable. CCS technologies can be found to the right in the diagram, with costs of between €40–50/ton CO2, when the technology is commercially mature. This defines a technology neutral CO2 price.

Abatement cost € per tCO2e 60 50 40 30 20 10

Gas plant CCS retrofit Coal CCS retrofit Iron and steel CCS new build Coal CCS new build Power plant biomass co-firing Reduced intensive agriculture conversion High penetration wind Solar PV Solar CSP

Low penetration wind Cars plug-in hybrid

Residential electronics

Degraded forest reforestation Nuclear Pastureland afforestation

Residential appliances Retrofit residential HVAC Tillage and residue mgmt Insulation retrofit (residential) Cars full hybrid

Degraded land restoration 2ndgeneration biofuels Building efficiency new build

Waste recycling

0 -10

-20 -30 -40 -50 -60 -70 -80 -90 -100

1520

Organic soil restoration Geothermal Grassland management Reduced pastureland conversion Reduced slash and burn agriculture conversion

Abatement potential GtCO2e per year

Small hydro 1st generation biofuels Rice management Efficiency improvements other industry Electricity from landfill gas Clinker substitution by fly ash Cropland nutrient management Motor systems efficiency Insulation retrofit (commercial) Lighting –switch incandescent to LED (residential)

be strengthened and implemented in parallel. In several areas the market signals don’t work because of broken value chains (e.g. one organization making the investment, another receiving the savings). This indicates that new technical standards driving the development are necessary. In Roadmap 2050 mentioned above, it is estimated that a yearly energy efficiency improvement of up to 2% is achieved.

3.1.2 de-carbonising the transport sector and the building sector During the coming decades, fossil fuels will also have to be completely replaced in buildings and in the transportation sector by use of low-carbon alternatives, including bio fuels and electricity. Alternatives including fuel cells, heat pumps, district heating and geothermal energy will also continue to be developed and implemented. This area provides huge opportunities already. In e.g. Sweden, the reliance on heat-

Note: The curve presents an estimate of the maximum potential of all technical GHG abatement measures below €60 per tCO2e if each lever was pursued aggressively. It is not a forecast of what role different abatement measures and technologies will play. Source: Global GHG Abatement Cost Curve v2.0

ing to the building sector from district heating is about 50% compared to 6% as an EU average.18

3.2 Supply side changes 3.2.1 carbon capture and storage (CSS) Technologies related to carbon capture and storage will offer an important potential to reduce emissions while using available and already implemented energy sources. Carbon capture and geological storage is a technique for trapping carbon dioxide as it is emitted from large point sources, compressing it, and transporting it to a suitable storage site where it is injected into the ground. To find safe storage under ground when the technology is scaled up remains as an uncertainty. CCS can be seen as a “bridging technology” between the present energy systems/sources and a low carbon economy based mainly on renewables. The CCS technology 18 http://www.handelskammaren.com/fileadmin/user_upload/Analys_rapporter/ Rapport_4_09_final.pdf

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is from a CO 2 abatement perspective more expensive than many energy efficiency measures, and also compared to many technologies for renewable energy. However, to address the enormous base of fossil fuel usage already implemented, CCS is the only alternative. A CO 2 price of at least €40/ton is estimated to make CCS competitive long-term. When this price level is used as a baseline, it will also make a large number of technologies for renewable energy and for energy efficiency competitive too, based on long-term cost estimates. Initially, the CCS technology has much higher costs that have to be managed through additional means.

...all essential technologies are already available and prices are falling rapidly as implementation scale increases.

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capacity and resilience. Grid investment requirements are around 10% of generation investments. • Intermittent renewable energy sources, e.g. wind and solar require some backup electric capacity to balance their intermittent nature. However, the report shows that the backup capacity needed in an EU perspective is only around 12–14%. It is crucial that the EU start to formulate a framework for the expansion and investments in the transmission network. This is going to be central in order to secure energy efficiency and resilience in the entire region – it cannot be left to member states to manage independently. Important research is done in this field, such as the proposed SuperSmart Grid by the European Climate Forum and the Potsdam Institute for Climate Impact Research.20 The SuperSmartGrid would connect the EU with North Africa, the Middle East and Turkey through a comprehensive network based primarily on renewable resources, including DESERTEC.21 20 http://en.wikipedia.org/wiki/SuperSmart_Grid 21 http://en.wikipedia.org/wiki/Desertec

3.2.2 low-carbon energy generation deployment Low-carbon energy sources will have to be implemented replacing fossil fuel sources. Long-term, they will become the dominating sources of energy, but the transformation has already started and it needs to accelerate. In a recent report by PriceWaterhouseCoopers19, it is concluded that all essential technologies are already available and that prices are falling rapidly as implementation scale increases. This process can be accelerated if the present subsidies to emission technologies are replaced by a fair pricing of emissions. In addition, different governments can choose to stimulate more rapid commercialization of new technologies through e.g. feed-in tariffs, as in the case of Germany. This can have a dramatic impact on the commercial availability of new technologies, and thereby creating an even more level playing field for technologies at different stages of commercialization.

3.3 Power Transmission System A European energy system undergoing rapid transformation from fossil fuels to low carbon technologies will require substantial changes also in the electricity transmission grid. In the Roadmap 2050 report, a number of conclusions are of importance: • An EU regional perspective is required to balance local differences. Investments are needed with a regional perspective in mind, higher capacity in inter-regional transmission is needed. This will be a cost efficient way of increasing 19 http://www.ukmediacentre.pwc.com/News-Releases/Come-sun-rain-or-highwind-Europe-could-create-a-100-renewable-electricity-supply-by-2050-e5e.aspx

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4. A Climate Investment Framework for a low carbon economy 4.1 What is it and how to do it? An investment framework is a means of establishing stable conditions, including less volatile and a more level playing field for investments in projects for CO 2 abatement. Currently, fossil based projects without cleaning technologies are heavily “subsidized”, since they do not have to pay for the effects they cause in terms of climate change22. An investment framework could contribute to adjusting this by removing the “subsidies” by implementing a stable, higher and more justified price on CO 2 . The price is set to make low-carbon technologies competitive long-term. Thereby, different means of abatement will become commercially attractive. So far, the framework for the investment process has been assumed to follow from a legally binding global climate agreement – thus, a process starting with a commitment of keeping the increase in global temperature below 2 degrees Celsius, followed by commitments on emission reductions, followed by emission trading, leading to a global CO 2 -price, giving incentives to investment in low carbon technologies, transforming energy systems worldwide. This process can be described as a top down global agreement, aiming at a market based investment framework. There are, however, no indications that the deep resistance encountered in Copenhagen to such an agreement can be overcome in time for Cancún 2010 or even in South Africa 2011. By giving all attention to the political negotiations on a top down, global, legally binding agreement, the more immediate task of creating guidance and incentives for the investment process has been neglected. • Therefore, we suggest that the EU, as a first step in the preparations for Cancún reverses the order between the investment framework and the global legally bind-

22 A level playing field is created by letting all energy sources cover their full costs, i.e. including environmental costs which are currently externalized in the economic models. The true costs of climate change are very difficult to calculate, but they risk becoming very high. Another approach is to look at the investment needed to make the fossil fuel based technologies ”carbon neutral”, through the use of CCS technology. With this logic, the subsidy of fossil fuels can be seen as the investment cost of internalizing climate impact through the investment in CCS technology. McKinsey and others have estimated the investment to be 40-50 €/ton CO2 long-term. In the short-term the cost will be several times higher.

ing agreement, giving the investment framework a new, more distinct political form. • A second step is to put a climate investment framework on the agenda and to make it a top priority in the coming negotiations. In our view, a successful Climate Investment Framework will facilitate negotiations on a legally binding agreement23 . We suggest making it a political agreement, not a legally binding document. A Climate Investment Framework could be simple and designed to serve as guidance for investors today to make the right choices for the future. The following basic elements are required: • The transformation of our energy systems should be identified as a driving force for the modernisation of our economies, for improved productivity and economic growth. • The centrepiece of a Climate Investment Framework is the establishment of a technology neutral CO 2-price. In this report we present a CO 2 price trajectory to 2020 (and beyond) to create a level playing field free from fossil fuel subsides. • To create a floor for a technology neutral CO 2 price, the EU Emission Trading Scheme, should be used as much as possible, while Member States can use complementary CO 2 taxation as much as required in sectors not included in the ETS. • Many new technologies need support to overcome high initial costs before they are fully commercialized. National initiatives to stimulate development and investments in new technologies with such “threshold costs” should be encouraged. • To further strengthen the Climate Investment Framework, the EU could update and align EU standards on energy efficiency with the EU commitments on emission reduction for 2020 and beyond.

23 It should be borne in mind that this is not unique. The first agreement under the Vienna Convention for the protection of the ozone layer was similarly regarded as woefully inadequate. The same held for the first protocols under the Geneva Convention for the protection against air pollution. Subsequent protocols, developed as the parties grew more confident about what could be achieved, narrowed the gap between agreements and the necessary. These experiences indicate that the role of the first agreement is not to solve all problems once and for all but to start the learning process that will take years if not decades to mature.

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figure 3 This figure shows a suggested CO 2 price trajectory with a ramp up to €40 accomplished in two years. €40 per ton is a “working target” and should be reached as quickly as possible, but no later than 2020 (The EU IMPACT study 2007). The perspective for the post 2020 period has to be kept open until we have better knowledge about what will be needed in the long term. Suggested long-term projections include a modest increase to €85–90 per ton (EU IMPACT and UK DEFRA 2007) and a fast increase to €200 per ton CO 2 (France Commission Quinet).

CO2e price development (historic and suggested) [€/ton CO2e] 60 50 40 30

Historic price development has been volatile 2005-2008

Other slopes may apply

Development after 2020 is rising but uncertain

0 2008

2009

2010

Investments are based on expectations. The basic idea behind our proposal is to establish a technology neutral CO 2 price to tell business and consumers that fossil based technologies will become unprofitable, while low carbon technologies will give return on investment. A strong EU commitment for such an economic incentive will have an immediate effect on businesses and on financial institutions. The stronger the political support the stronger the impact will be on business and consumer investment worldwide. The new UK Government is committed to the idea of a CO 2 -price floor. EU can build on the UK initiative and and in parallel convince other regions to follow suit.

4.2 Make a technology neutral CO2 price the lever to transform our energy system The EU should establish a technology neutral CO 2 price to transform our energy systems. This price should transcend all sectors, including those included in the ETS. The EU ETS is a market-based system, however quite different from many traditional markets. While traditional market based systems reach equilibrium between supply and demand through prices, the purpose of the ETS is to help EU reach emission targets cost-efficiently and stimulate investments for the reduction of CO 2 emissions where these investments are most cost effective. The system gradually reduces the supply of emissions permits to increase the price in balance with investments in increasingly costly reduction initiatives. However, the ETS has not been working very well during the last few years. We suggest that ETS is complemented and strengthened by the establishment of a politically agreed trajectory for a technology neutral CO 2

2011

2012

2013...

...2020

price. Such a price trajectory can guide consumers and investors in an analogue way as Central bank’s interest rate trajectories give guidance to savers and investors. In sectors not included in the ETS system, the price trajectory is accomplished through additional CO 2 taxes, regulated on a country level. Today the CO 2 price in the ETS is €13–15 per ton, which has to be compared to the €40 per ton, which is the lowest price needed to allow low-fossil technologies to compete on a level playing field with fossil technologies, including Carbon Capture and Storage, as well as renewable energy generation. Thus, fossil energy is “subsidized” by around €25–27 per ton. This “subsidy” will have to be paid by future generations in the form of increasing climate adaptation costs. To reverse this perverse situation and to guide public policies and business investors, a Climate Investment Framework should include a CO 2 -price trajectory to 2020 and beyond to create such a level playing field. A CO 2 price of at least €40/ton could be set as a ”working target” to be achieved as soon as possible, but no later than 2020. That price level will create conditions not only for most alternative fuels to be competitive with coal, longterm but also create the necessary incentives for CCS technologies to be competitive long-term. In the very long-term the CO 2 price will probably have to be even higher. The reason being that the technology opportunities below the €40/ton CO 2 then will be exhausted, and further development can only be achieved by using remaining and new technology opportunities that are more costly. It is hard to estimate exactly when the CO 2 price should start to further increase, as well as to estimate the required speed of further price increase. The current assumption is that

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it will happen 2020 or later. Different studies give varying indications on how rapidly the price will have to increase thereafter.24 To sum up: CCS will be needed as a bridging technology between the present fossil economy and a low carbon economy in the future. It must therefore pay to develop and invest in CCS technologies. As an important side effect it will also create an enormous potential for alternative energy solutions. Thus, by making CCS economically viable, “clean coal” will be economically attractive, but it will also create attractive market conditions for competing energy forms. The policy conclusion is to focus on the costs for CCS and let that set the long-term minimum (floor) price. The establishment of a technology neutral price is a fundamental element in a Climate Investment Framework. Now, the question is: how to reach and maintain a CO 2 -price that works as a strong incentive for investments in cleaning and clean technologies?

4.3 Combine the EU Emission Trading Scheme and national CO2-taxes to create a price floor To create and maintain a floor for a technology neutral CO 2 price we suggest the EU Emission Trading Scheme, ETS, is used as much as possible and that Member States are using CO 2 taxation as much as necessary.

4.3.1 make full use of a reformed eu emissions trading scheme The EU ETS has been in operation since January 2005 and is the main pillar of the EU climate strategy. While representing two thirds of the world carbon market, and thus a success story, the ETS has been seriously called to question. The reason is a high volatility in the prices of CO 2 and over-allocations of permits by national governments, which led to a fall in the price from €20–28 per ton in the beginning of 2008 to €10–15 per ton at the end of 2009 and beginning of 2010. Thus, the EU ETS has not managed to determine a CO 2 price that is sufficiently high and stable to give clear incentives for energy investments. It should be brought to mind, that the ETS was not constructed to maximize investments in low-carbon technologies, but only to lower emissions in the most cost effective way. The allocation of emission rights does not take into account economic business cycles – only the emission targets. This means that in the economic downturn and its aftermath, the carbon market has in reality been subject to over-allocation of emission rights. The ETS is now subject to reform and will be strengthened through the “climate and energy package” which came into force in July 2009. • The cap on emission allowances for the sectors covered 24 ”The Shadow Price of Carbon”, French Commission, http://www.strategie.gouv. fr/IMG/pdf/EN-Analyse101.pdf

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by the system – power generation, energy-intensive manufacturing industry and, from 2012, aviation – will be cut in a linear fashion every year from 2013. • The scope of the system will also be extended to include further big industrial emitters, such as the chemicals and aluminium sectors. • The current system of fixing 27 national caps on emissions from the ETS sectors will be replaced from 2013 by a single EU-wide cap. • Instead of receiving emission allowances for free, businesses covered by the system will have to buy a progressively higher share at auction. From 2013 around 50% of total allowances will be auctioned and the goal is to reach full auctioning by 2027. To establish sufficiently high and stable prices the EU should make full use of a reformed EU Emissions Trading Scheme. The effect of these reforms will mainly be seen after the second phase of ETS, starting 2013. The efficiency of the new scheme should be measured and judged in the light of its capacity to reduce emissions. However, it is our firm belief that we should also evaluate the ETS capacity to maintain a technology neutral CO 2 price, which is following the suggested price trajectory with limited volatility, since this will be a prerequisite for long-term investments in low-carbon technologies. To stabilize the price along a predetermined price trajectory, it may be required to adjust the availability of emission rights at a higher frequency than today, possibly through a central buying/selling of emission rights in the ETS.

4.3.2 support a sufficiently high co 2 -price through member states’ co 2 taxation A revision of energy taxation is urgent, addressing both the CO 2 price signal and energy efficiency. Taxing CO 2 in sectors not covered by the EU emission trading system would be a cost effective way to meet the EU’s commitments under the climate change package and to transform to a low carbon economy. The new EU tax Commissioner has put this issue high on the EU agenda, with the aim to finalise the ongoing work on the revision of the Energy Taxation Directive. The revision would provide for an adapted and modernised framework of rules for the Single market: 1) it would introduce framework rules for CO 2 taxation for emitters not included in the EU emission trading system and 2) it would streamline remaining energy taxation to make it neutral and eliminate distortions. It will be the responsibility of the Member States to use a new Energy Taxation Directive to make the necessary decisions to complement the EU ETS with an effective CO 2 taxation. One conclusion from Member States, having implemented such taxes, is that it is preferable to include a CO 2 tax in a more general modernisation of national tax systems to manage distributional effects. It is also preferable to establish a long-term agenda, including successive

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figure 4: share of 2006 greenhouse gas emissions in the eu-27, by main activity 25 This diagram shows the breakdown of emissions by sector, and consequently the potential for emission savings through increased energy efficiency in different sectors.

Public electricity and heat production 27.1%

Road transportation 18%

Households (fossil fuel consumption) 9.4% Other activities 22.9% Cement production (process emissions only) 2% Petroleum refining 2.6% Enteric fermentation 2.8%

reforms and moving tax burden from jobs and employment to energy, i.e. a greening of the tax systems.

4.4 Make full use the Internal Market mecha nisms to strengthen energy standards In order to speed up the modernisation process, to increase energy efficiency and to reduce fossil fuel consumption we suggest that the EU make full use of the Internal Market by aligning the EU product legislation and standard setting with the EU commitments to emission reduction and to a technology neutral CO 2 -price. Europe has the strength of being the most successful standard-setting and rule-setting political force in the world. This has been achieved by building the largest homogeneous internal market and by being swift and smart implementer of internal market rules, in a way that others follow. The Economist has noted that Europe is undermining “America’s role as a source of global standards”. Europe’s strength in this standard-setting process can now be used to set more ambitious performance targets for the implementation of the EU climate strategy in Europe and for achieving an impact in the rest of the world. Some sectors are of particular interest with respect to new smart regulations to promote energy efficiency, resource efficiency and the development of services in the green sector. Energy efficiency is the quickest and most cost effective way of achieving emission reductions. The potential to reduce CO 2 emissions through efficiency improvements represents half the abatement potential, roughly. Many

Agricultural soils 4.6% Iron and steel production (process + fuel combustion) 4.2% Tertiary sector (fossil fuel combustion) 3.6% Waste management 2.9%

opportunities in this field are already profitable, but are not fully leveraged due to conservative practices, lack of information, non-functioning markets etc. The positive effects of increased energy efficiency can easily disappear through rebound effects (the so called Jevons paradox). When the efficiency increases, it lowers energy use, which leads to a lower price, which leads to higher consumption. The increase in efficiency also creates financial returns, which gives room for new investments or consumption, which leads to higher energy use. In order to avoid Jevons paradox, it is vital that central directives on energy efficiency on EU level and for all member states are put in place. The stable CO 2 price trajectory is also a means of reducing the rebound effect, since it balances a potentially falling energy price. With existing technologies for energy efficiency, we can achieve an increased efficiency by 2% yearly according to “Roadmap 2050”. Through innovation in new technologies, materials and practices, this can be increased significantly. Although a number of EU policies exist related to energy efficiency, it is also addressed differently in different member states. Each country has a National Energy Efficiency Action Plan, NEEAP, describing the national strategy for reaching EU wide targets for Energy Efficiency. These strategies contain a multitude of initiatives and policies that stimulate energy efficiency in different countries in different ways. The EU wide target is to reduce energy consumption by 25 EEA(2008) Greenhouse gas emissions and trend projections in Europe 2008. Copenhagen, European Environment Agency.

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20% by 2020, with an indicative target of 9% reduction per country set to be achieved by 2016. Implementation of instruments for energy efficiency is partly working well, partly inefficiently. The implementation of the National Energy Efficiency Action Plans from 2006, where transposition of Community law into national legislation is slow and financial encouragement is not yet practised widely enough. The action plans cover voluntary and information-based approaches, as well as market-based mechanisms, but need to be further worked on to become more efficient. In some cases, the directives are fairly new, like the new legislation on CO 2 from passenger cars with a phasing in from 2012. In other cases the directives were prepared and decided upon several years ago. In most cases they were prepared under resistance from different stakeholders, leading to compromises and a watering down of the original intentions. Time has come to review the energy efficiency directives in the light of the EU commitment to emissions reduction 2020. One important purpose is to make a concerted effort to overcome resistance from business and other interest groups, and to include in the Climate Investment Framework a commitment to strengthen the tools for energy efficiency. EU has a number of initiatives that could be renewed in the light of required changes, and coordinated with a new climate investment framework. Initiatives promote energy efficiency in buildings, combined heat and power generation (CHP), transport, end-use efficiency, employing labelling and taxation techniques, as well as others.26 The already operational directives include: the Energy Performance of Buildings Directive, the Eco-Design Directive, the Directive on Energy End-Use Efficiency and Energy Services. EU can also take the lead on forming sector agreements, with key parties in different industrial sectors, that stimulate emission reductions in different industries, while promoting investments that will make these industries more competitive long-term.

4.5 Stimulate development and investments in new technologies with “threshold costs” through local and regional initiatives A technology-neutral CO 2 -price will create a level playing field for mature technologies on the market. However, it is important to also stimulate the introduction of new technologies. New technologies typically have much higher costs before they have become more widely commercialized. There are different ways of stimulating the introduction of new technologies through e.g. funding of pilot installations, or through feed-in tariffs, as is the case in Germany. Different strategies may apply in different countries, depending on the technologies and industries in focus. 26 Stockholm Environment Institute (2009), A European Eco-Efficient Economy. Report for the 2009 Swedish Presidency of the Council of the European Union.

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table 1: global market value for low-carbon and environmental goods and services in billion € 28 Air Pollution

31.77

Environmental Consultancy

26.54

Environmental Monitoring

4.90

Marine Pollution Control

3.95

Noise & Vibration Control

7.16

Contaminated Land

30.44

Waste Management

158.96

Water and Waste Water Treatment

267.19

Recovery and Recycling

210.82

Hydro Wave & Tidal

14.43 2.25

Biomass

157.84

Wind

395.72

Geothermal

311.16

Renewable Consulting

16.91

Photovoltaic

160.09

Alternative Fuels for Vehicles

383.31

Alternative Fuels

635.85

Additional Energy Sources

40.59

Carbon Capture & Storage

14.99

Carbon Finance

36.08

Energy Management

82.30

Building Technologies

439.68

Total all sub-sectors

3,432.94

The table illustrates the huge financial opportunity that lies in the development of the low-carbon sector as an export industry. This is based on a recent UK study which estimates that the global market for low-carbon products and services is already more than €3,000 billion, and growing steadily. Roughly one third of this (€1,000) is in the renewable energy sector. Another report to the European Commission estimates the current turnover in eco-industries in Europe to be €270 billion, or about 1.4% of EU GDP. The industry directly employs 2.3 million people in Europe.29

28 Innovas (2009). Low Carbon and Envitonmental Goods and Services: an Industry Analysis, London, BERR. 29 Stockholm Environment Institute (2009), ”A European Eco-Efficient Economy”

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4.6 Make free trade and climate commitments mutually supportive A Climate Investment Framework should include a commitment to making trade policies and climate policies mutually supportive. To this end, EU and its member states can fully use the domestic policy instruments and measures for which there is scope in the rules of the WTO – such as public procurement, green subsidies, product standards and requirements as well as energy and carbon taxes.

A ten year delay of investments will cause the investment need to be

three times as high as today’s level. Trade conflicts with other countries should be avoided. It is only when the EU forces the energy-intensive sectors (steel, paper etc.) to pay the full price for acquiring the emission rights in the ETS that border carbon measures (BCAs) might be considered to level the playing field. However, even then, such measures should only be contemplated when there are no other domestic adjusting measures available and when the possibilities of concluding international (global or sectoral) agreements have been exhausted.

4.7 The bottom line: modernization, improved productivity and sustainable growth Reducing greenhouse gas emissions is an absolute must in order to maintain a planet that is friendly to humanity. The 2-degree target requires immediate action and that emissions start to decrease on a global level this decade. In “Roadmap 2050” from the European Climate Foundation, it is very clearly illustrated with detailed calculations, that the economic benefits are great from investing immediately to curb GHG on a European level. It is shown, that although the electricity cost will increase over the period from now until 2050, the overall energy costs are significantly lower by 20–30% compared to a business as usual scenario. There are several additional reasons why a massive and rapid transformation of the energy system makes a lot of sense: • Through the investments, some several hundred thousand jobs will be created in Europe from 2010 – 2050. • This industrial expansion is also likely to generate very significant export revenues for Europe during the next decade.

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• Energy security of supply is to be improved rapidly through a transformation strategy. This will be increasingly important in a future marked by higher competition for natural resources. • Sustainable energy and lower emissions is of fundamental importance for coming generations. It is furthermore concluded that the investments needed are manageable. The investments in the energy sector will have to double over the next 15 years, but this investment is justified by lower energy costs over the period compared to the business as usual scenario. However, it is required that the investments start very soon, during the next 5 years. A ten-year delay of investments will cause the investment need to be three times as high as today’s level.27 The strategic objective is to curb GHG emissions, while at the same time stimulating growth in industrial sectors of great importance for the future. Industrial sectors of relevance to curb emissions will benefit from markets developing faster in Europe. This will build a competitive advantage as the same demands mature in other markets around the world. In the table on page 15 the market opportunities related to low-carbon products and services today are listed. This market is growing rapidly.

27 A basis for the scenario is a price of CO2 of at least €20-30/ton. This is somewhat conservative compared to what is needed, as shown in this report.

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5. The road to Cancún: broadening the agenda and building a Climate Investment Community

5.1 The UNFCCC process: still the main avenue The EU is committed to work for the adoption of a global binding agreement within the framework of UNFCCC. Thus, this process will continue to be the main avenue in the efforts to reach a legally binding agreement. There are similar commitments from the other main actors, including the BASIC countries. However, there are no expectations that this process will lead to an agreement in Cancún. Or, as stated by the European Council: “Given the short time available before Cancún, this process could usefully be complemented and supported by discussions in other settings and on specific issues” That means that the EU without compromising the UNFCCC process can take new initiatives, both regarding the content of negotiations and the form of negotiations.

5.2 EU: Taking the lead by building a climate investment community for investment and growth The EU can vitalize the UNFCCC process by giving a clear signal that that the time has come to reverse the order between a legally binding global climate agreement and a climate investment framework. The EU should start a process together with the EU Member States in order to prepare a Climate Investment Framework and at the same time invite other countries or regions to take part or work on similar concepts. The common aim shall be to establish a technology neutral CO 2 price that can drive the modernisation process as described in this report.

5.3 The MEF and the G20 processes: new platforms for formal and informal negotiations leading up to a legally binding new treaty. Leaders of the G20 agreed at the Pittsburgh Summit in 2009 to make the G20 “the premier forum for international economic cooperation”. G20 will have several high level meetings in the next few months followed by a G20 Summit in Toronto, Canada, at the end of June and a new Summit in mid November in Seoul. These meetings are opportunities to make sure that heads of state are involved in the climate negotiations and committed – not only the ministers of environment. These meetings are a platform for heads of state

and government to meet formally and informally to take the negotiations forward. The endorsement by world leaders of an alternative and complementary strategy of the kind that we have proposed here will in itself be an important incentive to markets to start the necessary process of change. The Major Economies Forum on Energy and Climate, MEF is an informal constellation of 17 leading economies meeting with some regularity with the support of UN. MEF is a complementing structure to G20, and has assembled heads of state in L’Aquila in 2009 and recently assembled representatives in Washington DC. All major political forums are important platforms to work through in order to build coalitions for the way forward regarding an investment framework. The aim of these informal and formal negotiations should be to integrate the Copenhagen Accord into the UNFCCC process and thus lay the groundwork for a legally binding treaty within the UNFCCC process. The participants need to include the countries with major historical emissions – by and large responsible for the existing increased levels of greenhouse gases in relation to pre-industrial levels – as well as countries with projected major emissions and therefore contributors to future climate change. All the members of the G20 will have to be included in this negotiating process. We expect the aim of a legally binding treaty to be highly controversial – at first. We also expect, however, that the resistance to such a treaty should diminish as practical experiences of climate mitigations and adaptations build up. Nevertheless, the negotiations are likely to take years. That is also why it is fundamentally important to reverse the order between a legally binding treaty and a Climate Investment Framework. The EU negotiating position has been built upon the assumption that investments will follow once the treaty is in place; the reality is however, that the reverse is more likely to be true. Countries are more likely to accept a legally binding treaty once they have experiences that investments actually are productive both from an environmental and an economic perspective. This is why the Climate Investment Framework now is a pre-condition for a legally binding treaty later. It is possible, but by no means certain, that the existing Kyoto Protocol can be integrated into this wider treaty. The Cancún Summit, and possibly the summit after Cancún, should be devoted partly to dispassionately examine the future role of the Kyoto Protocol.

A new approach to tackle climate change is needed. There is broad understanding today that a global, legally binding climate agreement will take years to negotiate. Several parallel strategies should therefore be pursued for the Climate Summit in Cancún in December 2010 and beyond. This report argues that the EU should identify a Climate Investment Framework (CIF) as one of the key driving forces for the transformation and modernisation of our economies, for improved productivity and more sustainable growth. The centrepiece of a Climate Investment Framework is the establishment of a technology neutral CO2 price, free from fossil-fuel subsidies. Such a price can be achieved through the EU Emissions Trading Scheme and nationally based CO2 taxation. A stable price, following a predetermined price trajectory, will provide clear incentives for companies to invest in low-carbon technologies, across industries. This will accelerate the required transformation and strengthen European competitive advantage. The CIF is a bottom-up approach to address climate change. The EU should seek allies for the strategy – “a coalition of the willing” – to increase the impact on business and consumer investments worldwide. The Climate Investment Framework has also the opportunity to complement and revitalize the UNFCCC negotiating process. Allan Larsson is former Minister of Finance of Sweden and Director-General at the EU Commission. Niclas Ihrén is lic. eng. in sustainable energy systems, former CEO of Globe Forum, and advisor on sustainability innovation and transformation. Måns Lönnroth is former State Secretary at the Ministry of Environment and former Head of the Swedish research foundation Mistra.

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