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EFN 2015 Retreat Notes

Achieving a Low-Carbon Economy

Notes from Lord Turner’s keynote speech to EFN members on 3 February, 2015

Adair Turner  web2014 was a year of increasing certainty about some aspects of the climate change debate. Some aspects of those were good and one was bad and we need to figure out what to do about it. Increasing certainty was good – it’s increasingly clear that the world is warming and it’s manmade. It’s significant and concerning. It’s increasingly easy to win the debate in a way that was getting a bit more difficult against some of the sceptics a couple of years ago. Last year was the warmest on record. Shouldn’t matter in terms of winning the debate. For purposes of winning the debate — not against the deniers, but the people in the middle – the fact that for 10 years there was a pause in the increase in land surface temperature was problematic. The fact that all the hottest years on record have been in last ten years has made it much clearer. This is producing the predictable impact of a less predictable climate. One of the most concerning things about the climate changing is the less predictable nature of it, particularly because of role of the hydrological cycle.

We have an increasing certainty. There will still be debates about sensitivity of climate to carbon concentrations and the pace of change, but the latest IPCC report sets out a clear point of view that this is concerning and we have to do something about it.

There is also greater certainty at the global political level – an increasing focus on the two degree target. There is no way we can now have a set of policies that make it certain we will restrict warming to below 2 degrees. On the UK Climate Change Committee, they attached even more importance to the avoidance of REALLY serious global warming and designing policies so that we have a less than 1% chance of warming above 4 degrees. But at the global level there is a belief that we have to move towards dramatic cuts by 2050 and essentially a carbon zero system by the end of the century.

China and the US
We are also seeing a significant step forward, both in China and in the US. The switch we’ve seen in the US recently has been a willingness of Obama to simply say, “I can’t get stuff through Congress but there’s a surprising amount I can do through executive action.” That was shown in the preliminary agreement with China, in the action on car emissions, in the EPA treating carbon as a pollutant.

We are also seeing China taking the issue very seriously. It’s essential that China moves out of the mode of treating itself as an emerging market country which wants everyone else to act. In last two years, Chinese emissions have become bigger than European emissions, both in absolute terms and on a per capital scale. That is beneficial for debates because they can no longer play the poor country card. It is also the case that the Chinese authorities are aware of the sensitivity of Chinese ecology to climate change – the reliance on Himalayan snowmelt for their rivers. Without that they’ll move into flood versus drought oscillation.

China will increasingly complicate the debate in Europe. In 10 years’ time it’s quite possible that Chinese emissions per capita will be twice UK emissions. At which point, total Chinese emissions will be 20 times those of the UK. That is bad for action at home – a certain group of people will say, “What difference does it make what we do?” So we need to keep up focus in Europe on our reduction in emissions even as we move into an environment where we’re a smaller part of the global problem.

Technological development
The best news in 2014, which is an accumulation of news which has been going on for the last five years, is the extraordinary pace of crucial technologies. PV electricity is now a quarter of the level it was at in 2008 and a tenth of its cost in 1990. There’s debate about how soon we will get to the stage where it’s the cheapest way of producing electricity even without subsidies, but it’s certain that we will reach that point within 10-15 years. That is a huge transformer – the sun each day produces and radiates onto the earth 5,000 as much solar energy as the entire human industrial/household use of our energy system – even if totally electrified. We need 1/5000th of sun’s radiation to meet all energy needs of the world.

There have been huge changes in batteries. The price for batteries that can power 1kWH of electricity is dropping dramatically. That means the vision of surface transport being electrical is clearly within reach.

There are multiple other aspects of technology which are important. We need technologies to deal with energy efficiency, we will need biofuels, we will need synthetic liquid hydrocarbon for air travel. (Can’t use solid batteries for that as they’re too heavy.) There are challenges in how we provide the intense heat which is required in some industrial processes, but overall it’s the case that even if we looked only at technologies already available, we have increasing certainty that we can run a low-carbon global economy of roughly the same quality as it would otherwise have been by 2050. If an alien arrived in the night and stole two thirds of all our fossil fuels, the standard of living of the world in 2050 would be so marginally different from what it would otherwise be that you wouldn’t even notice the difference.

Leaving Two-Thirds of Fossil Fuels in the Ground
We need to put carbon emissions on a strong downward path. What we need to do in the next 15 years is a bit more expensive, but still not so expensive as to mean an end to growth or prosperity. New Climate Economics report in Sept 2014 suggested that the cost of getting to where we need to be in 2030 is about 1-4% of global GDP in 2030.

Suppose it’s 2% of GDP. Then by 2030 you will have to wait till Dec for everyone to reach the standard of living that might otherwise have been reached by January. Or think in investment terms: in order to build a modern low-carbon economy, or even the bit we need to get to by 2030, the world needs to invest $14 trillion in new energy systems and energy efficiency. We would have spent some anyway on the old-fashioned high carbon system — $10 trillion. So the incremental cost is $4 trillion — $93 billion or $89 billion over 16 years. The problem is that this has a disproportionate effect on electricity bills: £100 on £1,000.

The real problem is the other certainty: we’ve got huge amounts of fossil fuels in the world. Some people got excited about peak oil, peak gas. I wish it was the case, but I don’t think it is at all. There are huge amounts of fossil fuels in the world. Standard conventional oil – liquid hydrocarbon will probably reach some sort of peak, but it’s relatively easy to liquidize hydrocarbons from oil or coal. Our problem is too much fossil fuels, not too little.

To prevent harmful climate change, we’ve got to leave two-thirds of all our fossil fuels in the ground. So our concern should not be that some alien will come in the night and steal all our fossil fuels, but that no such alien exists. We should pray for a thief in the night but we’re unlikely to get one.

The problem with fossil fuels is that periodically we’ll get very low fossil fuel prices. Even as we bring down the prices of other technologies, we will occasionally fight against those collapses in fossil fuel prices. The current oil price slump is partly because of the glut from the US, and also because of a major downturn in some aspects of Chinese economy. The scale of the Chinese boom is extraordinary. Between 2011 and 2013, China poured 6.6 gigatons of concrete. That’s the total amount that the US poured in the whole of the 20th Century. The decline in that boom is feeding through to major falls in commodity prices and oil prices that we’re seeing across the world.

So these periodic slumps will undermine the price falls in renewable energy. Secondly it can produce a significant rebound effect – the extraordinary tendency of human beings to take benefit of new technology and spend them on forms of consumption that it’s hard to connect to human benefit. The behavioural economics of the rebound effect are really important.

We have got to leave two-thirds of fossil fuels in the ground. That’s our biggest challenge. While some is very expensive to get out of the ground, some of it is not. A lot of the big open cast coal mines are very cheap to run.

So what do we do?
Clearly it is important that we have a high carbon price. One of the big tools used to drive behaviour and technological developments is a high carbon price. But it’s quite hard to get one. The European emissions trading scheme basically a disaster. Also, emissions trading schemes are not sufficient in themselves — they need to be underpinned by a carbon tax.

Affecting future prices of fossil fuels is not the most efficient way to produce a change in the energy system. It’s of the nature of renewable (and nuclear) energy that you spend an enormous amount upfront and very few costs after that. One of the most important ways to intervene in that sort of case is to affect the cost of capital. Public policy needs to make sure the cost of capital for low carbon energy is significantly reduced.

There is also a major role to be played here by the disinvestment movement which has sprung up. The intellectual idea is sound behind the carbon bubble. It’s not simple in terms of winning the argument with those companies and shareholders willing to take a selfish point of view. Because it’s quite possible for people not convinced by your argument to say, ‘We’ll never get an international agreement that caps the amount we can burn’. Or they’ll say, ‘Two-thirds can be left in ground, but not mine!’ You can’t win this argument just on logic. You can’t win it, either, on the idea that if all fossil fuel companies suffered an equity price reduction of 80% over next 5 years, we’d be in economic turmoil — there simply would not be a financial instability risk remotely comparable to the financial crisis caused by the downturn in property prices. Property is where 80% of all wealth in modern economies resides.

The tools that we have got to use are a mixed set which are about establishing an assumption about the way the world is going, and taking actions which derive from a mix of altruistic and profit maximizing objectives. There are many foundations in the world now who are committed to divestment – where frankly their motivation is a mix of ethical and financial. Those mixed motivations are very important to how we make progress in climate change. Conduct regulators should be expected to pressure fossil fuel companies increasingly to communicate the stranded asset risk to their shareholders.

Paris can create the impression that we are moving closer and closer to a global agreement. That will lead more and more people to disinvest, and more and more power companies will worry about their reliance on fossil fuels and we will make progress.

The nature of how we make progress in this climate change debate probably doesn’t have an absolute silver bullet. We have some extraordinarily beneficial things happening on the technology side. They make it increasingly clear that we can have a low-carbon economy by 2050 which is also attractive in many other ways, as well. The co-benefits in terms of local environmental quality are huge. A London of electric cars will be a far more pleasant place to live than a London of fossil fuel driven cars.

China — a case study
China is determined to build a low-carbon economy. They are already taking some steps that are quite remarkable. In their new electricity generation capacity, the renewable element is very large. They’re building much less coal, putting in huge amounts of wind and huge amounts of solar. They’re increasing their total energy use, though, so coal is still massive in relation to the world, but at least they’re shifting in percentage terms. The debate has shifted over the last two years from reduction in the energy intensity of carbon in GDP growth (i.e. slower growth but still growth) to more consensus that at some point Chinese absolute emissions will have to peak and start coming down.

Pollution in China is a massive problem. Rich people living in Beijing have high-tech air pollution filters in their apartments. What gets measured gets managed. For a long time, the Chinese wouldn’t release particulate counts in Beijing. But they couldn’t stop the American embassy putting up a sensor, working out the particulate count themselves and then putting out on the internet what the air quality was, which then spread round China. Eventually they gave up and started producing official statistics which were consistent with US Embassy data.

So the regime is committed to change. They have some enormous problems they have to figure out. One of the key reasons Beijing air is so terrible is not just factories and cars (until recently their emissions standards were tighter than in the US) (and Beijing is geographically sensitive to air pollution) is that heating in suburban areas is old-fashioned coal-burning stoves that produce hot water for district heating. They’re changing, but it’s taking a long time. Beijing is really cold in the winter and they need the heat.

China at one level is top down and at another is a chaos of competition between cities and provinces. The Chinese party incentive system has GDP targets. The fastest way to grow GDP is to attract steel and concrete factories. They are trying to change that. Shanghai is now saying it is not going to have GDP targets.

The concrete pouring figure above was driven by roads, convention centres, apartment block buildings, sports stadia – they’re realizing they can’t continue economic growth through that infrastructure growth.

China’s coal use went down last year, which is probably a sign of a turning point in their use.

Carbon capture and storage:
If electricity is cheap enough with renewables, then ambient heat – ability to have a house at the temp you want, is doable without CCS. But you probably need it for certain industrial processes that we rely upon, which are either chemically bound to produce CO2 or you need intense heat and it’s very difficult to get that heat without burning a fossil fuel, so you need CCS to capture it. So it really is only needed for industrial processes.

There are some quite complicated things in CCS – capture is complicated in terms of a chemical and engineering process, as is the storage part.

Nuclear likely to be 15-20% of our electricity mix in 2050. It’s at 20% today when it reaches demand. Not radically different by 2050, most likely. Doesn’t make sense to phase it out initially – an important intermediate technology while we address immediate urgency of climate change, but eventually, when we are at a very low carbon point, it would be good to phase out.

India v. China
We are now at about 7 tonnes per capita carbon emissions in the UK.
India is at 1.5 tonnes per capita
China is at 8 or 9 tonnes per capita
US is at 19 (was 25) tonnes per capita

China is already the biggest absolute emitter, given size of population. In 15 years could exceed US in per capita emissions.

India has not yet had an infrastructure boom – compare India’s motorways to China’s. And it doesn’t have a huge manufacturing sector. Internationally competitive sectors. It’s not as important that India acts, but it’s crucial that we persuade them that they can skip a generation of energy production. They could go straight to solar. Though given population density in some areas, that is some times an issue. They need help grasping the technologies that will help that jump. Likewise Africa. There’s enormous potential in Africa to build a new version of an electricity system that never has to have big central generators and grids to quite the same extent that we have because the distributed provision of solar energy to every farm and village in Africa is a very real possibility and within reach, though storage still a key issue.