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The Economic And Institutional Foundations Of The Paris Agreement On Climate Change: The Political Economy Of Roadmaps To A Sustainable Electricity Future
Mark Cooper, January 2016 (Institute for Energy and the Environment, Vermont Law School)
Abstract
Three recent “roadmap” analyses outline routes to a low-carbon economy that model the decarbonization of the electricity sector and the pervasive electrification of the transportation and industrial sectors. Two of these also impose a pollution constraint on electricity resources that rejects the use of nuclear power and fossil fuels with carbon capture and storage. Using independent cost estimates and sequentially “relaxing” the constraints on resource selection, this paper compares the resource costs of the resulting portfolios of assets needed to meet the need for electricity. Reflecting the continuing decline of the cost of renewable resources, the paper supports the claim that the long run costs of the 100% renewable portfolios are not only less than business-as-usual portfolios, but that the “environmental merit order” of asset selection is quite close to the “economic merit order.” Neither fossil fuels with carbon capture and storage nor nuclear power enters the least-cost, low-carbon portfolio. As long as a rigorous least-cost constraint is imposed on decarbonization, the pollution constraint is superfluous. The paper evaluates the Paris Agreement on climate change in light of these findings. The Agreement is described as a progressive, mixed market economic model with a governance structure based on a polycentric, multi-stakeholder approach for management of a common pool resource. The paper argues that this approach reflects the underlying techno-economic conditions and the fact that national governments have authority over local energy policy. It also notes that the political economy of the Agreement is consistent with current academic analysis of policy responses to the challenges of climate change and management of a large, focal core resource system…
Charting The Route To A Decarbonized Electricity Sector
1-Refining The Route To Deep Decarbonization
Minimal Cost Saving from Relaxing Environmental Constraints
In the above analysis, when we indicate that there could be competition at the margin for the final spots in the resource portfolio if either of the environmental constraints are relaxed, that does not mean that the “environmental merit order” would be more costly than a business-asusual approach. Quite the opposite is the case because the cost of the resources that make up the first three-quarters to nine-tenths of the “environmental merit order” are so much lower. In every case, building the resource portfolio with the renewable building blocks – efficiency, wind, solar (overwhelmingly CSP) – would be less costly. The competition at the margin is only about how large the cost savings will be.
The outcome is uncertain because it depends on how much the low-cost resources could expand, if one or both of the constraints is lifted. At one extreme, it can be argued that the environmental and economic “merit orders” are so close and leave such a small amount of competition at the margin that one or more of the lower cost resources will expand to occupy the space left. Cost might go up, but not very much.
At the other extreme, one can argue that there would be no expansion, as shown in Figure V-1. In the Jacobson et al. analysis for the U.S., the marginal resource needed would be nuclear, which would increase the cost savings by 10% because of the extremely low assumed cost of nuclear and the relatively large role of offshore wind. At Vogtle costs, the marginal resource would be coal with carbon capture and the cost savings would be 5%. The result is similar with the higher costs of Hinkley or North Anna. If both the carbon and pollution constraints were relaxed, the marginal resource would be coal and the marginal savings would be about 11%.
In the global analysis, the relaxation of the pollution constraint would lower costs about 5%, again because of the unjustifiably low nuclear cost projected, while eliminating the carbon constraint would lower costs by 10%, because of the smaller role of offshore wind. At the Vogtle cost of nuclear, the marginal resource is coal with carbon capture and storage and the additional savings are even smaller. Thus, relaxing the constraint on other pollutants results in minimal cost savings.
Cost Savings from Increased Energy Efficiency
While we will not explore the space between the extremes of assuming that other resources would fill the gap of relaxing the constraints entirely, or not at all in detail, one area between the extremes that is compelling and worthy of comment is the amount of efficiency that is assumed. Given the way efficiency is treated in the larger Jacobson et al. analysis and the fact that only modest gains in end use efficiency are assumed, it seems reasonable to project a larger contribution from efficiency, not only in the analysis of the lifting of constraints, but even in the base renewable case. Combining the business-as-usual and the transformation scenario, the total improvement in end use efficiency is about 20%. The economic potential is larger than that today and the technical potential is much larger. Moreover, the active management of demand in the transformation of the system has a dividend in reduced demand in the range of 10% to 20%.
Therefore, it can be argued that higher end use efficiency savings should be assumed and priced into the overall analysis. Although assuming an additional 10% of efficiency and pricing it into the analysis is conservative, as shown in Figure V-1, it has a large impact on the cost of the portfolio of assets.
Figure V-1 compares estimates for the impact of assuming a relatively modest ten percentage point increase in efficiency from the base case. We find that it not only fills a large part of the gap created by removing the carbon or pollution constraints, it also more than offsets any cost increase associated with the constraint, compared to savings that would result from lifting the constraint. Of course, one can argue that policy could achieve efficiency independently of the constraints, so that the overall price would be even lower, but the difference is extremely small.
Thus, contrary to loud complaints that dealing with climate change will cause a disastrous increase in electricity costs, a rigorous, least-cost approach prevents such an outcome and may even result in a reduction in the total cost of energy services, taking into account the cost of more efficient capital equipment powered by electricity and the very large potential for passive approaches to energy services.
Other Factors And Considerations
Environmental and System Factors
Having reached this conclusion on the basis of the direct cost of the resources, we would be remiss in not mentioning other costs and factors that have economic implications. Jacobson et al. have quantified the large public health and environmental benefits of shifting to low-carbon, low-polluting resources. There have been quantitative and qualitative efforts to assess and rank the resources in terms of their environmental impacts and sustainability.
Figure V-2 combines qualitative and quantitative approaches to demonstrate the nature of these considerations. The upper graph shows two quantitative assessments. The lower graph correlates these with Jacobson et al.’s ranking of environmental impacts. The quantitative and qualitative ranks yield similar results that support a clear set of conclusions:
• The selection of resources on the basis of their environmental and sustainability characteristics would be almost identical to a selection based on their economic cost.
• Renewables have much smaller impacts.
• Nuclear and natural gas are quite close to one another.
Simply put, the environmental and economic “merit orders” fit hand in glove based on these considerations. In fact, the recent Australian cost study included a qualitative assessment of many of the factors considered by Jacobson et al.
One other impact of the transition to a low-carbon economy that deserves special attention is the energy-water nexus. Water is an essential need for human life, a critical input to agriculture and has been an important input for electricity generation. The electricity sector is a huge consumer of water.60 Electricity generating technologies have impacts on water from both the consumption and contamination points of view, which have been recognized in the broader environmental evaluations of resources.61 Climate change and the response to it are also likely to magnify the importance of the energy-water nexus.62 As shown in Figure V-3, the examination of water reinforces the earlier conclusions.
Bioenergy (represented in the upper graph of Figure V-3 as ethanol) and hydro power are very large consumers of water. This supports the Jacobson approach, which excludes biomass on environmental grounds and includes no increase in hydro generation. Comparing the remaining resources, we find that the renewable alternatives are clearly preferable.
The Timing and the Task
A final factor that must be taken into account is time. Indeed, the urgency expressed in the Paris Agreement suggests it should be the first factor. Although we have shown similar “merit order” results in the short- and long-term analyses, there is an urgent need to reduce carbon emissions and pollution as quickly as possible. All of these road maps require significant change in the technologies used to produce and consume energy, essentially a transition to intelligent energy services that includes active management and passive design to meet the much greater need for electricity required by the electrification of the industrial and transportation sectors. Given the current state of technological developments, some technologies can deliver much sooner than others in response to the urgency of the challenge.
As shown in Figure V-4, wind and solar, which will be the core technologies of the future global energy system, can deliver the needed power in large quantities more quickly. The capacity projections in Figure V-4 are adjusted for load factors, using current experience. The variable nature of wind and solar is reflected in an assumed 35% factor for wind, 25% factor for solar and 70% for CSP with thermal energy storage. Nuclear is assumed at 90% and fossil fuels at 85%. Over the course of the next decade and a half, the load factors for wind and solar are likely to go up as the technologies improve and they are combined with increasingly economic storage. Indeed, there are many deployments of these technologies that already exceed the load factor levels assumed above. This is all the more likely since, according to the economic “merit order” approach, much of the global deployment of renewable resources would be in virgin territories with rich resources. Since the Deep Decarbonization Project covers nations that emit three-quarters of global carbon, their projected resource mix, which includes nuclear and carbon capture, is scaled up in Figure V-4 to represent the decarbonization of 100% of the global electricity system.
The analysis of Deep Decarbonization without the environmental constraint ends up claiming a significant contribution from fossil fuels and nuclear. However, that contribution comes much later and results in electricity costs that are much higher. Though 2030, there is little contribution for new nuclear reactors and fossil fuels with carbon capture and storage. The Deep Decarbonization Pathways assume increasing contributions from nuclear and carbon capture in later years.
Both fossil fuel-based technologies and nuclear power, however, are much more costly and would require long research, development and deployment processes to get those costs down. Both would also have to solve significant environmental problems. The analysis of cost trends presented above suggests that an economic revolution in the traditional technologies is not likely in the near- or mid-term. The real world experience of nuclear reactor construction does not support a claim that it can be brought online quickly. Construction periods in the U.S. increased throughout the history of the industry and average a decade. Current nuclear construction is well behind schedule throughout the world. Globally, nuclear construction periods are not quite as long as the U.S., but they are far longer than other technologies. Globally and in the U.S., nuclear construction periods are six times as long as renewable construction periods. The extreme urgency of climate change means that nuclear will miss the critical period of the next decade, particularly if new nuclear technologies that are still on the drawing board are needed.
The comparison in Figure IV-4 also challenges the claim that technologies based on fossil-fuels with carbon capture or nuclear power are necessary to deal with climate change. The Greenpeace “revolution scenario” projects a level of low-carbon generation that equals the Deep Decarbonization Project projection with carbon capture but without nuclear. Both the Greenpeace “advanced scenario” and Jacobson et al. projects a level of carbon reduction that exceeds the Deep Decarbonization Projection without either fossil fuels or nuclear.
Conclusion
Resource Economics of a Low-Carbon Electricity Sector
This paper demonstrates that the “economic merit order” of resource acquisition is quite close to the “environmental merit order.” Applying least-cost criteria in the context of a carbon constraint achieves the goal of pollution reduction.
• In the long-term, the economic and environmental “merit orders” are almost identical. Because the cost of the low-carbon, low-pollution technologies has plummeted and their cost is expected to continue to decline, the shift away from baseload resources (fossil fuels and nuclear power) to reliance on flexible renewable resources – linked with active management of supply and demand – will lower the cost of electricity.
• Even in the mid-term, the “economic merit order” follows the “environmental merit order” to a large extent (75%-90%, depending on costs used). Because the deviation of the “environmental merit order” is so small and the economic benefit of pursuing a 100% renewable electricity sector is so large, it does not seem worthwhile to relax the carbon or the other pollutant constraints.
• In the short-term, the main resources of the 100% renewable approach are currently less costly and widely available. Therefore, there is no reason to hesitate in pursuing the low-carbon, low-pollution path. Given that this analysis assumes the massive electrification of the whole economy, the much smaller task of decarbonizing the electricity sector to meet the “traditional” need for electricity would be quite manageable. The technologies are in hand; we “merely” need to deploy them. The constraints are in the transportation and industrial sectors, where the necessary technologies are not as far along. The economic resource savings achieved by utilizing lower cost low-carbon, low-pollution resources largely “pays for” the transformation of the other sectors. The environmental and public health benefits of the transformation are surplus savings.
The Paris Agreement
This paper concludes that the political economy chosen for responding to climate change in the Paris Agreement fits the underlying techno-economic nature of the available resources. It is also consistent with the terrain of political authority and responsibility of the Parties to the underlying United Nations Framework Convention on Climate Change. The political economy of the Agreement reflects the combination of techno-economic conditions and environmental goals.
• The progressive, mixed market economic model is driven by the need for a rapid, least-cost decarbonization that supports sustainable development of the global economy.
• It also recognizes vast differences in resource endowments and the dramatic differences in level of economic development between the Parties.
• The multi-stakeholder, commons approach to governance reflect the diversity of circumstances and the authority of nations over local energy policy.
The Final Word on Nuclear Power
At this moment, nuclear power demands attention as a subtheme of the analysis because its advocates claim it must be a part of the solution. Indeed, some go so far as to call for a 100% nuclear future. Because these claims are made in spite of nuclear power’s extremely high cost, abysmal and continuing record of cost overruns and construction delays, serious environmental and public health impacts, and fundamental incompatibility with renewable resources, it merits at most a footnote in the analysis, a footnote that merely explains why nuclear power should not be included as an asset in the long-term, low-carbon portfolio.
• To match the economic cost of renewables, nuclear power would need a technological revolution that has eluded it in its half century of commercial deployment.
• Such an improbable revolution is very unlikely to take place in the time frame deemed critical to the fight against climate change.
• Nuclear power is equally unlikely to overcome its other severe environmental problems.
Once the direction of a least-cost route to a decarbonized economy is set by the superiority of renewables, it becomes impossible for nuclear power to participate in the ultimate portfolio. The idea of pursuing an “all-of-the-above” scenario runs afoul of the fundamental differences between the 20th century, baseload fossil fuelapproach and 21st century, renewable energy approach. The two technologies simply do not mix very well because nuclear is not flexible. The vigorous attack on the renewables launched by advocates of nuclear power in their effort to secure favorable treatment of aging reactors is testimony to the incompatibility between the two.63 Gas has also fought renewables over market share. Much the same can be said of fossil fuels with carbon capture.
The structure of the Paris Agreement gives individual nations the authority and responsibility to develop local decarbonization strategies within the parameters endorsed by the Parties. The Parties cannot be ordered not to pursue nuclear, but the goal of rapidly developing and deploying a least-cost, economically and environmentally sustainable decarbonized electricity sector argues strongly against nuclear power. To the extent that collaborative and coordinated actions are necessary and undertaken to accomplish the goals of the Agreement, they should be devoted to promoting progress along the 100% renewable route to a decbarbonized economy. The reference to renewables in the Agreement in the context of promoting access to affordable, sustainable electricity and building local capabilities, suggest that, here too, the Agreement got it right.
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