22 January 2021
Welcome to Edition 7 of Low Carbon Pulse. This Edition is published within the two week cycle between the Editions 6 and 8 of Low Carbon Pulse to mark the likely change of course of the US as a result of the change in administration.
In this Edition 7 we focus on the implications for the US and the world of the anticipated re-accession of the US to the Paris Agreement, and other changes that have been flagged by the new US Administration, and possible policy settings that may be considered.
This Edition 7 of Low Carbon Pulse is shorter than the earlier Editions. This is because while we are keen to set the scene, we are acutely aware that the policy settings for progress towards net-zero emissions will be rolled out over time. As policy settings are rolled out, we will update this Edition 7 to keep track of those changes.
Background
As outlined in the first five Editions of Low Carbon Pulse, Q4 of 2020 saw considerable recognition of the need to commit, and to introduce policy settings, to ensure that by the middle of this century net-zero GHG emissions are achieved, and the rate of reduction by 2030 and 2040. The Peoples Republic of China (PRC), Japan and Korea committed to net-zero GHG emission outcomes by 2060, 2050 and 2050 respectively. In December 2020, the EU and the UK committed to accelerate materially the reduction in GHG emissions by 2030, with clear policy settings providing a pathway to achieving those accelerated reductions, and consistently renewable projects were completed and net-zero carbon initiatives were announced.
In contrast to the deepening of commitments in the week of the US elections, now former, President Trump delivered on a commitment to remove the US from the Paris Agreement. This commitment had been flagged by the Trump administration as part of its desire to support the fossil fuel industry in the US. At the same time as the policy on the Paris Agreement was moving in one direction, the significant percentage of major US corporations (including utility) were heading in the other direction, including by committing to net-zero carbon emissions by 2050 with a number committed to negative carbon emissions, some going back to the date of their incorporation (for example, Microsoft). Even with this non-alignment, it is fair to say that the US has made considerable progress towards net-zero emissions.
Fulfilling great potential
In a similar vein, while the Trump administration supported the fossil fuel industry, US businesses continued to develop renewable energy, with considerable success. As a result of the continued success of the renewable energy industry it is anticipated that nearly 85% of new US electrical energy capacity developed in 2021 will be carbon free. Renewable energy from solar will lead the way, with a new record of 15.4 GW of new utility scale solar capacity anticipated to be added to the grid during 2021. In relative terms, the US has great potential in roof-top solar. As such, there is a good deal about which to be positive – the potential exists, the only issue is the speed of realisation. Until this potential is realised, coal and nuclear power will continue to provide the majority of US electrical energy, at 30% and 56% respectively. This said, the falling cost of solar and wind energy is starting to provide its own momentum to change: the only way the cost of renewable energy is going is down, and the only place for coal and nuclear costs to go are up.
As we noted in Edition 5 of Low Carbon Pulse, in addition to the cautious optimism arising during Q4, the re-entry of the US into the Paris Agreement and the appointment of John Kerry as Climate Envoy provides a basis for real optimism globally, in particular as the US returns to global climate leadership shown under the Obama Administration.
Helen Mountford of the World Resources Institute describes optimistically the outlook of the Biden Administration:
"Science will once again guide America's policymaking and inauguration day will mark a new era for climate ambition in the US. [President Biden] will have a lot on his plate, there's no doubt that [President] Biden intends to make a full court press on climate change".
The important thing is that the Biden Administration appears to recognise that re-instating the Obama Administration policy settings will not be sufficient, the policy setting need to be bolder. Brian Dees, President Biden's nominee of director of the National Economic Council has noted:
"It's not sufficient [to pick up where we left off] for where the science says we need to be and it's not sufficient because we've lost critical time over the last [few] years".
During 2020 it was reported that the GHG emissions arising from the US fell by 10.7%. As explained in Edition 5 of Low Carbon Pulse, this fall will not reverse the increase in GHG in the atmosphere, but will slow slightly the rate of increase. The industries in which the falls were the greatest were transport (in particular air transport) and electrical energy generation. The fall in GHG in 2020 is greater than the fall in 2009 in the aftermath of the Global Financial Crisis.
See: Almost All New US Power Plants Built in 2021 Will Be Carbon-Free; Solar to be No. 1 in US for new 2021 electricity generating capacity and US emissions plummet to lowest levels in post-World War II era
Best estimate of current GHG emissions by country
Please click on the image to enlarge.
As will be apparent from the International Energy Agency (IEA) pie chart, it is estimated that the US gives rise to around 15% of CO2 GHG emissions annually, with the PRC contributing together, over 40% of global GHG emissions. Given the size and nature of the US economy, it is critical to have the US re-enter the Paris Agreement to allow the achievement of the Paris Agreement goals.
The US is the only country that is a top-five country both in terms of GHG emissions (second) and GHG emissions per capita (fourth): while the PRC and India are top five (first and third respectively) in terms of GHG emissions, they are outside the top ten on a per capita basis (thirteenth and twenty first respectively).
Irrespective of one's views on the relevance of facts and statistics, for net-zero GHG emissions to be achieved globally, the onus must rest on developed countries to do more than reduce their proportionate share of GHG emissions reductions so as to achieve net-zero emissions by 2050. More developed countries will need to accelerate the rate of reduction of GHG emissions arising from their economies. The EU and the UK have recognised this responsibility consistently, and each has doubled-down on this recognition in December 2020. In due course, the next step is to take the lead of major corporations such as Microsoft and move to introduce negative emission policy settings.
Biden Administration's head-line grabbing plans
Headlines
At the core of the Biden Administration's ambitions is to achieve net-zero emissions by 2050. This will require policy settings in place that will achieve net-zero emissions by 2050, and more importantly to achieve milestones every five years between now and then. Within this overall target is a proposed decarbonisation of the electrical energy industry by 2035. The achievability and cost of this needs to be stress-tested. What is clear is the US has the capacity to achieve this outcome, the challenge is doing so in a way that balances economic, environmental and social implications of doing so (Balanced Equation).
USD 2 trillion funding is contemplated for these purposes under the Biden Administration. We anticipate that this will be insufficient recognising the need for grid development.
It was reported on January 20, 2021 (Washington DC time) that one of the three executive orders signed on the afternoon of President Biden's inauguration, included one to effect the re-accession of the US to the Paris Agreement. It is expected that over the coming weeks, President Biden will sign executive orders in respect of environmental requirements and standards. The heavy lifting on policy settings, to implement the Paris Agreement, and to accelerate reductions in GHG, will require legislation.
Possible headlines
For some commentators, the US needs an Operation Warp Speed on Climate Change. Among the suggestions made are that the Federal Government should become the off-taker of electrical energy from renewable energy sources thereby providing an immediate boost to the market for the development of renewable energy. This would be radical in a US context, and to our knowledge is not part of the day one plans of the Biden Administration. Nevertheless this suggestion is worth consideration at least to allow the industry to achieve greater scale and in doing so reduce unit costs.
While the preference of all governments is to have the private market pull itself up by its bootstraps, the issue here is more about providing the initial impetus to allow the private sector to bootstrap, rather than the Federal Government continuing to have a role in the electrical energy market.
Similar arguments arise in respect of carbon capture, utilisation and storage (CCUS), although in the US (and in other countries) there is an argument for government stepping in to develop CCUS facility, and monetise the investment through use or sale. In many ways, the economic argument is stronger for CCUS than for renewable energy.
The issue is how and what, and as importantly, how quickly
Electrical energy cost control
The how and what will develop over time, but it is more likely than not that whatever is done, the costs to the customer must be kept at levels comparable to current levels. Critical to this is the cost of electrical energy, and the need to keep the cost of electrical energy at or below 6% of US GDP in relative terms, and at or about the same cost for businesses and households. These are the economic and social elements of the Balanced Equation.
East Coast and Sunbelt
It is apparent that along the East Coast of the US that there is an increasing acknowledgement that off-shore wind power is likely to provide a viable source of electrical energy without causing the concerns held by many folk around on-shore wind.
In addition, across the sunbelt of the southern States of the US it is clear that the private sector is already exploiting the world class renewable resources that exist, both solar and wind. Given some of the world scale projects that have been concluded in the Greater Gulf Region (see Edition 6 of Low Carbon Pulse for a summary of the up to 5GW by 2030 strategy), and replicate in the US Gulf Region, including the record low cost outcomes for the dispatched electrical energy.
The US has the solar (and wind resources) to achieve this level of renewable energy development as quickly as any country in the world, and in our view a clear pathway to achieving the lowest dispatched electrical energy outcomes. We refer to lowest dispatched electrical energy on the basis that this does not include transmission and distribution cost.
Also it is to be noted, on a Gulf to Gulf comparison, that the Mohammed bin Rashid Al Maktoum Solar Park is providing electrical energy to the Emirates Global Aluminium smelter. (While the electrical energy is off-taken for the gird, the use of electrical energy is matched to renewable energy, and tracked and traced using the International Renewable Energy Certification System.)
Fossil fuel grandparenting
In addition, each industry affected by progress to net-zero emissions may require some level of grandparenting: while overall the projections are that the renewable energy industry will give rise to more jobs overall, these jobs will not be located on a person by person basis in the areas in which industries in need of grandparenting are located. Again the economic and social elements of the Balanced Equation need to be considered.
Taking the electrical energy industry as the focal point, achieving net zero emissions by 2050 will require considerable additional investment by 2030 by increasing wind and solar capacity to between 600 GW and 1,000 GW (on the basis of anticipated electrical energy usage in 2050), increasing the capacity of the grid by between 60% and 80%, having 50 million BEVs and up to to 3 million re-charging stations, and doubling (for household heating) and tripling (for business and commercial heating) the use of heat pumps. The increase in the capacity of the grid is a key part of the equation, and it needs to be stress tested early to ensure that the grid developments and enhancements are undertaken ahead of the connection for new renewable energy.
Regulation of otherwise booming industries
From the late noughties to 2014 / 2015, the US led the world in shale development. One of the issues with extraction of hydrocarbons from shale and traditional sources of oil and gas is fugitive methane (CH4) emissions on extraction, transportation and on processing to produce hydrocarbon products. The Biden Administration is flagged the new regulation of CH4 emissions.
The IEA has released A Regulatory Roadmap and Toolkit – Driving Down Methane Leaks form the Oil and Gas Industry.
Hydrogen
Back in the late 1990s, and early 2000s, and in George W. Bush's first term hydrogen, was labelled the freedom fuel. David Yellen has called hydrogen the "Swiss Army knife" of the transition to clean energy. We embrace this analogy, in the same way that we embrace the concept of the Hydrogen Rainbow (on which more in the second article in The Shift to Hydrogen (S2H2): Elemental Change series).
The market for green hydrogen is developing, and it is to be expected that it will offer the US domestic and export benefits but to a level that may be regarded as dwarfing the perceived benefits of shale. In context, Bloomberg NEF estimates that US$ 11 trillion will need to be invested in production and storage globally by 2050 to ensure that green hydrogen can meet 25% of the project global energy needs by 2050 – being the level of demand that is not easily met by electrical energy, including the difficult to decarbonise industries.
To achieve this around 25,000 GW of new renewable energy will be required. This is in addition to the near doubling of electrical energy capacity to supply sufficient electrical energy by 2050. In short, there are three sources of demand for new renewable energy capacity, first, to displace use of fossil fuels as a source of energy, secondly, to anticipate and to match growth in demand for electrical energy attendant on population growth, and thirdly to allow the development of the green hydrogen and green ammonia industries.
As noted in the first article in The Shift to Hydrogen (S2H2): Elemental Change series, the US has world class renewable recourse that will allow it to become a superpower in the production of hydrogen, allowing it to decarbonise difficult to decarbonise industries with the US (including the cement, chemical, and steel sectors), and to decarbonise transport.
For further information, please contact:
Michael Harrison, Partner, Ashurst
michael.harrison@ashurst.com
