16 for ’16: climate and energy issues to track this year

by Inline Policy on 07 Jan 2016

2015 was a significant year for climate and energy policy and markets: from the momentous Paris agreement to Obama’s continuing push on the Clean Power Plan; from the new British Government’s fresh (and controversial) energy approach to, at last, some stability for the EU Emissions Trading System (ETS), which may have real implications for the longer-term.

But it’s now a question of New Year, new challenges. Here are 16 climate and energy issues - at UK, EU and global level - that we believe are worth tracking during 2016.

UK

1) Brexit. The most important decision by the British people since World War II will be taken by referendum, probably this year. A vote to leave would have massive implications for the UK’s energy markets and climate change policies, as it would have in other areas.

2) Fifth Carbon Budget. The Government has to table legislation, in accordance with the Climate Change Act, by June this year. The Firth Carbon Budget will cover the UK’s emissions reductions targets for 2028-2032. More than any other indicator, the Government’s decision on whether to keep the UK on its cost-effective path to the 2050 legislated commitment to reduce UK emissions by 80% on 1990 levels (in line with Climate Change Committee advice), will show whether this government (David Cameron and George Osborne in particular) is serious about UK climate ambition and leadership.

3) Tight Energy Supply. National Grid has warned that the UK’s electricity supply is at its tightest for a decade. Any more emergency NISMs (“Notification of Inadequate System Margin”) over the winter like the one the Grid issued in November, and - against the background of the phase-out of coal power, and continuing worries about whether the Hinckley Point nuclear plant will be delivered on time - the questions about security of supply may continue to grow.

4) Gas/Fracking. Secretary of State Amber Rudd, strongly backed by the Chancellor, signalled in her “re-set” speech a “UK dash for gas 2.0”. Putting aside questions about how quickly new gas can come online over the next few years (which might yet presage changes to the capacity market), fracking remains a key part of the Government’s energy strategy. But the public seems unpersuaded about the benefits of shale gas and the NGOs fiercely resistant. In an attempt to avoid decisions by local government to reject fracking applications (as has happened to Cuadrilla in Lancashire) the Government (lead dept. DCLG) has decided to consider such applications at national level. A 10-day public hearing on Cuadrilla’s proposed drilling will begin on 9 February. The Government will hope this change of approach will finally clear the logjam.

5) Energy Efficiency. One area where the re-set speech shed little light. Amber Rudd said that the Energy Company Obligation (ECO) will be reformed so that it is “concentrated on those in greatest need”. But there remains a yawning gap on energy efficiency policy following the demise of the Green Deal. Perhaps the consultation on business carbon taxes will bring forward some proposals; but this remains a neglected area which the Government needs to address urgently, given the role that energy efficiency measures can play in reducing GHG emissions.

Europe

6) 2030 Targets. Following the COP, Climate and Energy Commissioner Cañete ruled out re-consideration of the EU’s 2030 emissions reduction target, saying that Europe had more urgent issues to attend to. But there is no getting away from the fact that the EU’s 10-year cycle is now out of step with the five-year review periods agreed in Paris. The Commission and Council have been invited to address the results of COP21 - especially the 2030 framework - by March 2016. This space will be worth watching.

7) Energy Union. One of European Commission President Juncker’s ten signature initiatives, and one where the EU needs to start delivering, following the adoption of the strategy in 2015. Progress on key infrastructure will need to be demonstrated; legislative proposals are due in 2016 on electricity market design and on retail; a renewables package is due, including a new Directive for 2030. It will be a big year if the Energy Union is going to have the meaningful impact its sponsors intend that it will.

8) Transport. A number of measures are included in the Energy Union Roadmap on transport. But this is an area worth singling out; a sector where Cañete acknowledges policy on decarbonisation has lagged behind, compared for example with the power sector. The VW emissions scandal might also be a relevant factor here. Several proposals should come forward in 2016, the most important of which is probably the review of regulations which set emissions performance standards to establish post-2020 targets for cars and vans.

9) EU ETS. The passage of the Market Stability Reserve last year may have brought some much-needed stability to the ETS. Prices are very gradually heading up the curve, although a €10 EUA price still looks a substantial way off. In the shorter-term, attention has now turned to the Phase IV Directive, which the Commission tabled last summer. The European Parliament Rapporteur, Ian Duncan MEP, has promised to come forward with his views on the package by Easter. The new Dutch Presidency say the package will be a priority. The ongoing debate about carbon leakage will merit particular monitoring, especially in the aftermath of the Paris COP, i.e. its positive language on carbon pricing, and as carbon markets continue to develop in other parts of the world (US, China, Canada).

International

10) COP21 Ratification. There will be a 12-month window for ratification at the UN in New York from 22 April. The bar looks fairly straightforward: at least 55 nations accounting for at least 55% of global GHG emissions will need to give their domestic assent to the Paris Agreement for it to be officially ratified. The worry has always been that President Obama would encounter opposition from Congress. Given the way the agreement (not treaty) has been drafted, that looks highly unlikely. But it will still be a relief when the bar is reached: implementation of the agreement will be vital to maintaining the momentum from Paris.

11) The Oil Price. What will continue to be the rippling effects of the low oil price? Some commentators argue that it will have a negative effect on clean energy and emissions, as exemplified by the 2.4% increase in US gasoline consumption in 2015. Others maintain that it will keep the pressure on the oil and gas industry to justify their projections for growth, and keep the stranded assets issue firmly in the spotlight.

12) Coal. The coal sector was on the back foot at the Paris COP. Western Europe seems to be turning its back on coal power. The potential effect of the US Clean Power Plan has been well-documented. But the reports of coal’s demise are premature. In a report issued on 18 December (which was rather overlooked in the post-COP euphoria), the International Energy Agency (IEA) noted Asian coal demand outside China “modestly increasing through 2020” as the structural decline in Europe and the United States is more than offset by growth in India and Southeast Asia (Indonesia, Vietnam, Malaysia, Philippines). But if the sharp fall in Chinese demand continues, the pressure on the coal sector overall will be maintained; even more so if countries accelerate the decarbonisation plans (ie the NDCs) codified in the Paris Agreement.

13) Obama’s Legacy. The President has kicked off 2016 signalling that his legacy on climate change will be one of the top priorities for his last year in office. But even post-Paris, 2016 still won’t provide a comfortable ride for him and his team. Congressional and judicial challenges to the Clean Power Plan will continue. The Environmental Protection Agency has also tabled proposed rules that require shale gas drillers to use new technologies to track and block accidental and purposeful leaks of methane. Obama will want to push this strong methane rule through, but faces a fight from an industry who claim they are implementing their own voluntary measures. The President’s State of the Union address on 12 January may reveal more about his climate intentions. And then there is the rather important decision about who will replace Obama…

14) Clean Energy Finance. One of the indicators of the “Paris effect” will be whether it prompts a step-change in clean energy finance and investment. Copenhagen infamously sent the negative signal in 2009 to the banks and to institutional investors that international action on climate change was, at the very least, on hold. The Paris Agreement and the accompanying NDCs) ought to be the confirmation to the financial sector that the transition to the low-carbon economy is underway; so watch out for signs that clean energy financing is becoming “mainstream”.

15) Climate Risk and Disclosure. A striking moment at COP21 was the appearance of the Governor of the Bank of England (the first time the head of a central bank has ever attended a COP?), in his capacity as Chair of the Financial Stability Board, to announce the formation of the Climate Disclosure Task Force (CDTF), with Michael Bloomberg as its Chair. The CDTF, which is industry-led, will make recommendations within 12 months on information and disclosures to help financial market participants to better understand and manage their climate-related risks. The CDTF’s work will have a major bearing on the debates around stranded assets and the carbon bubble; and its findings may have a potentially significant influence on investors considering (see above) whether it’s time they took climate risk and decarbonisation opportunities seriously.

16) Aviation. Aviation emissions, like the maritime sector, weren’t covered in the Paris Agreement. The problems of incorporating aviation emissions in the EU ETS have underlined what a thorny issue this is. However, the sector’s governing body, the International Civil Aviation Organisation (ICAO), will meet for its triennial general assembly from 27 September - 7 October this year and is meant at this meeting to discuss and decide whether to introduce a global market-based scheme to mitigate aviation emissions. ICAO has a track record of disappointing progress on this issue; it remains to be seen whether recent developments (COP 21, but national polices as well) finally achieve a breakthrough. The aviation sector has the fastest emissions growth.

We lied! Here’s (an additional) issue No 17, of major importance to the functioning of the UK energy market. A question of last but definitely not least.

17) UK CMA Report. The Competition and Markets Authority (CMA) began its investigation into the UK energy market in 2014. Last year, it extended the deadline for its report to June 2016, although it says that it is now planning to publish its provisional decision on “remedies” this month with a view to reaching its final decision by the end of April 2016. The Government recognises that the CMA report - the most comprehensive investigation since the privatisation of the energy market in the 80s and 90s - could have major consequences for customers, for suppliers large and small, and for other players such as the intemediaries. Many found the CMA’s provisional findings published last year rather underwhelming for their lack of radicalism. The fundamental question at hand here will be whether the CMA concludes that much more needs to be done to reduce the dominance of the Big 6, or whether there are enough measures already in place to support “steady as she goes”. Ultimately, of course, it will be up to the Government to decide what to do with the report once it is published.

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Photo via Flickr (CC BY-SA 2.0)

Topics: European Union, Energy and environment, Issues, UK politics, 2016, International politics, Economy

Inline Policy

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