Recovery Strategies Towards Emissions Reduction and Affordable Access

Key Messages:

• The COVID-19 pandemic can serve as a catalyst for countries to accelerate Greenhouse Gas (GHG) emissions reduction and reach affordable energy access goals through recovery policies and stimulus packages.
• GHG emissions reduction mechanisms fall into three broad categories that encompass market-based signals, regulatory standards, and technology solutions. These include:
  • Placing a value on GHGs in the form of emissions trading systems, or taxation
  • Regulatory approaches e.g. emissions, fuel quality, and energy efficiency standards
  • Technology and innovation such as Carbon Capture Use and Storage or Hydrogen that provides an interface between Renewables and Hydrocarbon economies
• Technology solutions continue to advance access to affordable energy for all but still lack sufficient traction in contributing to emissions reduction goals as indicated, for instance, by the limited investment in Carbon Capture Use and Storage.
• Producer and consumer countries should carefully reflect on increasing tariff, taxes, duties, and royalties when considering how to fund stimulus and recovery measures.
• These reduce predictability and mute market incentives for investment, trade, and technology transfer in emission reduction and energy access solutions to recover.
• Every country has a different set of circumstances that needs to be considered. Different emissions reduction policies and affordable energy access mechanisms can lead to complementary solutions through greater international dialogue, market transparency, and collaboration.
• Maintaining a balance between recovery strategies and open, stable energy markets helps to mobilise trade and investment in a secure and sustainable energy future at scale and an acceptable cost to society.
• Upcoming events on the IEF platform to discuss these topics include but are not limited to:
  • The 7th IEF-IGU Ministerial Gas Forum hosted as a virtual event by Malaysia in Kuala Lumpur on 3 December 2020
  • The 17th IEF International Energy Ministerial and International Energy Business Forum hosted by the Saudi Arabia in 2021

Context:

Reducing emissions and advancing universal energy access remain high priorities for both OECD and non-OECD countries due to increasing global GHG emissions and population growth. As society has become more aware of the impacts of climate change and energy poverty, more steps have been taken by governments and industry to mitigate them through comprehensive policies. These include implementing policies to keep global temperatures from rising more than two degrees Celsius above pre-industrial levels under the 2015 Paris Agreement and achieving universal access to modern energy services as part of the Sustainable Development Agenda for 2030.

Consequently, policy actions to reduce GHG emissions and advance new energy technology solutions are accelerating around the world. The COVID-19 pandemic provides countries an opportunity to accelerate smart, orderly energy transitions by incorporating supportive measures notably for technology transfer, trade, and investment on emissions reductions and sustainable development goals in stimulus packages. This will allow producer and consumer countries to return to growth trajectories that are compliant with the Paris Agreement and achieve Sustainable Development Goals faster together.

Emissions Reduction Mechanisms

Emission reduction strategies fall into three broad categories that encompass market-based policies, technology and innovation, and regulatory approaches. Each element has its own unique emission reduction mechanisms that are adopted based on several factors and circumstances in regional, national, or subnational jurisdictions including major cities. A key concern for policymakers, while choosing among various mechanisms, is to understand the opportunities and limitations of each emissions reduction mechanism on economic performance, and social and environmental goals, including universal energy access and intergenerational equity.

Market-Based Mechanisms:

• Emissions Trading System – An ETS allows industry emitters to trade emission units to comply with their evolving GHG emissions targets. ETS participants can choose to implement internal measures to reduce emissions or purchase emission units in the "carbon" market. A market for GHG emissions is established by creating demand and supply for those emissions allowances that decline over time.
  • Cap-and-trade systems - have a fixed upper cap on GHG emissions and limited emissions permits that can either be distributed for free according to specific criteria or can be purchased and traded up to the amount equivalent to the GHG emissions cap.
  • Baseline-and-credit systems - have no fixed limit on GHG emissions, but baseline emissions intensity levels are established for individual entities under regulations. If regulated entities reduce their GHG emissions below the baseline, they are entitled to credits that can be sold to other polluters who exceed their baseline levels and need those credits to comply with regulations.
• Carbon Tax – A carbon tax imposes a direct cost on GHG emissions and requires industry and other consumers to pay for each unit of carbon dioxide (CO2), or equivalent GHG covered, released into the atmosphere. The system provides certainty and guarantees a maximum cost per unit of pollution in the sectors covered by the carbon tax. A constraint of this approach lies in balancing the "social cost" of carbon which is based on several uncertainties on which there is little consensus with the "social benefits" of carbon on that contributes to real-world economic growth and well aligned climate and energy policies. A carbon tax can disproportionately impact the low-income consumers as energy costs are a larger part of their overall budgets and energy products are already a subject to significant taxes and surcharges. The addition of a carbon tax risks widening social disparities in both developed and developing countries seeking to recover from the impacts of the pandemic and to grow their economy. To maintain social equity, governments may choose to implement compensation schemes for lower-income demographic by reducing the rate of other taxes, providing more assistance in the form of rebates, or combining both approaches while increasing investment in clean energy infrastructure.
• Carbon Border Adjustment Mechanism – is a planned import tax as part of the European Commission's proposed European Green Deal and serves as a resource for the Next Generation EU recovery plan. Importers of products with high GHG footprints would have to buy emission allowances and/or exporters to EU markets of such products would be subject to a surcharge at EU market entry. Trade with markets governed by equivalent GHG reduction policies would be exempted. The aim is to "level the playing field" in support of EU industries that are placed at a competitive disadvantage by cheaper imports from countries that apply less strict rules to reduce GHG, and "counter carbon leakage" by reducing the incentive for EU industries, jobs, and the GHG emissions they create to move to other jurisdictions.

Technology-based mechanisms:

• Carbon Capture Use and Storage Technologies – focus on redirecting CO2 that is emitted by hydrocarbon technologies to other economic uses or storage. These range from major oil and gas sector initiatives as well as land management practices that store CO2 in agricultural soils, wetlands, and forests. Others are at the pilot stage such as direct air capture technologies that capture CO2 directly from the atmosphere.
• Efficiency, Renewable Energy, and Innovation – New energy efficiency and renewable energy technologies have an important role to play in reaching climate and sustainable development goals. A drastic reduction in costs over time notably for solar photo voltaic panels and onshore wind technologies has increased the share of renewables in the global energy mix. Innovative solutions such as those that reduce gas flaring and improve fugitive gas detection technologies via satellite imaging and digital technologies will further contribute to emissions reduction and help increase efficiencies in the oil and gas sector.
• Whole System Solutions and the role of Hydrogen – Both renewable and hydrocarbon technologies are part of the solution towards climate mitigation and sustainable development goals. Holistic whole system solutions are required due to pathway dependencies and different social economic conditions across geographies. Circular Models such as those advanced by the European Union or the Circular Carbon Economy discussed in the G20 employ a technology-neutral approach to achieve energy market stability, responsible and inclusive economic growth, and sustainable development goals. Hydrogen technologies may well move to the centre of whole-system solutions. The interface they offer between advances in renewable and hydrocarbon technologies, carbon capture use and storage also help build on existing infrastructure to effectively manage GHG emissions for a secure, sustainable, and affordable energy future.

Regulatory-based mechanisms:

• Emissions Standards – Emission standards set quantitative limits on the permissible amount of specific GHG and air pollutants that may be released from specific sources over specific timeframes.
  • Restrictions on Venting and Flaring – Flaring is a process used primarily in the production of crude oil in which excess natural and other gases produced with the oil is burned off. Venting is a controlled release of gases into the atmosphere during production and refining. Several OECD and non-OECD countries and jurisdictions enact policies to regulate flaring and venting to reduce emissions.
  • Fuel Quality Standards
    • IMO 2020 – the UN's International Maritime Organization (IMO) 2020 Regulation, which limits the amount of sulphur content in marine fuel to 0.5 percent from 3.5 percent, came into effect on January 1, 2020. Excessive amounts of sulphur in the atmosphere can lead to acid rain, harm biodiversity, and contribute to the acidification of oceans that negatively impacts sea life.
    • CORSIA – The Carbon Offsetting and Reduction Scheme for International Aviation was adopted in 2016 by the International Civil Aviation Organization to address annual increases in total CO2 emissions from international civil aviation above 2020 levels. Under CORSIA, airlines are required to buy carbon offsets to compensate for their growth in CO2 emissions.
• Energy Sector Reform – Another method to regulate emissions is through policy support for innovative clean technologies that will spur investment, create jobs and lead to economies of scale that reduce costs and improve competitive and technological prowess. Such approaches can be combined with energy market reforms, for example by phasing out inefficient subsidies that cause wasteful consumption and redirect support to clean energy initiatives.
  • Government
    • European Green Deal (EU) – The deal aims to reach net-zero carbon emissions by 2050, and a 50%-55% cut in emissions by 2030. It also aims to boost the efficient use of resources by moving to a clean, circular economy and restore biodiversity and cut pollution. This will be done through investing in environmentally-friendly technologies, supporting industry to innovate, rolling out cleaner, cheaper and healthier forms of private and public transport, decarbonising the energy sector, ensuring buildings are more energy efficient, and working with international partners to improve global environmental standards.
    • Subsidy Reform (Sub-Saharan Africa) – According to the IMF, lower fuel taxes and higher fuel subsidies are associated with higher CO2 emissions in Sub Saharan Africa. Subsidy reform presents an opportunity for governments to provide welfare benefits by raising financing for modern energy services. For example, a series of electricity sector reforms by Kenya has led to increased tariffs and greater uptake of renewable electricity options. Additionally, a low overall subsidy for kerosene as an important feature of the existing policy framework has enabled distributed clean energy enterprises to expand in Kenya.
    • Middle East – Middle East countries are steadily moving towards greater energy efficiency and the integration of alternative sources of energy. Several new visions have been proposed in recent years emphasising concerns and commitment to achieve sustainable development goals and realign energy priorities. For example, Saudi Arabia's National Renewable Energy Program as part of Vision 2030 aims to reform the electricity sector and establish a renewable energy industry and works to fulfill the Kingdom's commitments to reducing CO2 emissions. This includes targets to install 60 GW of renewable energy by 2030 and produce 650 tons of green hydrogen per day to advance clean energy and the Circular Carbon Economy strategy.
  • Industry
    • Oil Gas Climate Initiative – The Oil and Gas Climate Initiative is a CEO-led initiative consisting of several NOCs and IOCs that are committed to accelerating smart and orderly energy transitions to meet Paris Agreement and Sustainable Development ambitions. Initiatives include reducing methane intensity, decarbonising industrial hubs by incorporating CCUS, increasing clean investments over a ten-year period, and supporting Zero Routine Flaring by 2030.

Analysis:

Ultimately, the mechanism adopted towards emission reduction and affordable energy access for recovery and sustainable development is dependent upon a country or region's resource wealth and economic reality.

Producers may tilt more towards technology-based mechanisms and approaches that incorporate clean technology and greater efficiency measures to benefit from their sovereign energy resources. Consumer interest is focused on maintaining energy security by diversifying energy supply and sources without reliance on only a few markets and options. As a result, consumers may face less opportunity cost which makes it easier to adopt a combination of mechanisms to curtail emissions.

On carbon pricing specifically, policymakers must consider the societal impacts of taxes placed on carbon either at source or through import levies on their respective populations. Disproportionate impacts of taxes on certain groups in addition to already high fuel costs will have societal implications which may be dealt with alternative compensatory programs for the most vulnerable.

No two producer or consumer countries are alike or have the same challenges or balance of motivations when it comes to emissions reduction and affordable access to modern energy services. Ultimately global GHG emissions reductions and universal energy access to modern and affordable energy services are the metrics that matter to keep global temperatures within acceptable thresholds and grow in a sustainable manner.

Recommendations:

• Enhance dialogue on recovery strategies towards emissions reduction and affordable energy access and their impact on global energy market trade and investment.

  As countries continue to draft and implement stimulus and recovery packages in efforts to deal with the economic fallout of COVID-19, dialogue and collaboration on emission reduction mechanisms and energy access goals through a mix of market-, technology-, and regulatory-based approaches is important to enable investment, trade, and technology transfer to move forward.

• Improve global energy data transparency on emissions reduction and energy access through the Joint Organisations Data Initiative (JODI).

  To meet globally shared climate and energy access goals, energy data requirements will demand greater transparency to deepen market insight across countries, market segments, and organisations. Greater data transparency on investment in CCUS, Hydrogen, and other technology solutions including on CO2 and Hydrogen production, consumption, trade, and storage volumes as well as data on emissions reduction and energy access in collaboration with JODI Partners improves energy market data visibility and transparency including by building on existing datasets.