As the international community looks to the period beyond the UN Copenhagen agreements on climate change, attention is focusing on the finance for implementing global emissions reductions on the ground. The requirement for significantly scaled-up investment into the solutions to climate change is a central issue, often characterized as investment flows into 'low carbon technologies'.

This paper draws on five years of insights from mainstream financiers leading the exponential growth in renewable energy investment, and key issues for policy-makers seeking to foster conditions for even greater investment are identified.

The eruption of another Icelandic volcano this week, ejecting ash plume into the atmosphere, reminds us afresh of Europe's vulnerability to 'low probability, high impact' events. Will Europe respond better this time? A forthcoming Chatham House Report shows that in such crises our governments and global businesses are in a better place to cope for a week - but no longer. This is because the full consequences of worst case scenarios are rarely factored in.

The ash cloud in 2010 is estimated to have cost the EU around $ 5-10 billion - the airlines bore about $ 1.7 billion in lost revenues and the tourism industry was hit hard. The greatest impact felt by many organisations was in human resources - the absence of stranded employees and dislocated management structures - but some companies fared better than others having learnt lessons from 9/11, SARS and other shocks to aviation. Businesses responding to a Chatham House survey on the impact of the ash cloud said that if the ash event last year had persisted just a few more days there would have been far more serious consequences.

This is not surprising given our dependence on long supply chains and the just-in-time business model. Since the earthquake and tsunami in March, for example, Japanese national infrastructure has been struggling to cope with fraying supply-chains and significantly slowed production. Carmakers and mobile phone manufacturers across the world were forced to halt or slow production as inventories of essential products - electronic components, car parts and fine chemicals - were quickly run down. Major cities for production, trade and travel are often badly affected by any international shocks, irrespective of the source, rendering the apparent resilience of having multiple suppliers meaningless.

A major scenario planning exercise conducted by Eurocontrol, five weeks ago suggests that the EU might be better prepared for an ash cloud disruption than a year ago. A key test for Europe now lies in whether member states will succeed in working together better in coordinating responses to ash threat and building public confidence in science-based risk management and planning.

Policy-makers face again the challenge of communicating a complex problem to a frustrated public. The ash cloud last year demonstrated the complication of crisis management in the media-saturated world, where opinion can be swayed by the most audible, the most active or the most politically powerful voices rather than the best informed or the most legitimate. There are important lessons here on the advantages and potential pitfalls of engaging stakeholders and the public via social and online media.

Our forthcoming report also shows a bias in the traditional media towards industry voices rather than those of the scientific community and policy-makers. During the crisis last year, there was scant public defence of the precautionary principles or safety, merely airlines duelling through the airwaves to step up pressure to remove the flight ban. First off the gate, Ryanair had already started its public relations battle last night. This time around, let's hope that traditional media will give greater airplay to voices beyond industry commentators, including scientists and experts. In-depth explanations of the science and technology involved in an event can help people assess the levels of uncertainty and risk involved in a situation, and what it means for them.

In the aftermath of the recent Rio+20 conference, James Bacchus will discuss the potential for establishing new trade, investment and other international rules and arrangements to promote sustainable growth. In particular, he will explore the interconnections and the international arrangements relating to food, energy, water, climate and other issues affecting global sustainable development.

Attendance is strictly by invitation only. To enable as open a debate as possible, this event will be held under the Chatham House Rule.

About Director's Breakfast Briefings.

Lord Tu'ivakano, will deliver a keynote address on the development of the Tonga Energy Road Map (TERM), which plans for 50% of the country's energy to come from renewable energy sources by 2020. 

The Kingdom of Tonga is highly susceptible to both climate change as well as changes in global energy prices due to its high dependency on imported oil. The TERM has required both ground-breaking whole-of-sector institutional changes in Tonga as well as innovative coordination across a range of development partners, including the World Bank, ADB and the UN. Key players in the international community have closely watched the development and implementation of the TERM as it presents a complete change in the aid paradigm that is not just specific to Tonga, or the energy sector. 

Registration for this event has now closed.

The European Union has reached agreement on its 2030 climate and energy package in preparation for the next major international climate summit in Paris in December 2015. In the agreement member states have signed up to reducing greenhouse gas (GHG) emissions by at least 40% by 2030 – compared to 1990 levels. Currently emissions are approximately 20% below 1990 levels and so the 2030 target represents a continuation of current decarbonization trends, but it is below the rate of reductions required to meet the longer term objective of cutting emission by 80-95% by 2050.

However, the overall 40% reduction will still drive structural changes in Europe’s economy and the energy sector. This could and should be seen as an opportunity for the EU to become a world leader in the innovation of both the new technologies and systems, such as electricity storage, dynamic demand responses and the deployment of electric vehicles, all of which are experiencing a rapid increase in the size of their global markets.

But there are some concerns. The climate and energy package has put forward a collective target to double the current level of renewables so that it will provide at least 27% of energy by 2030. However, the target is binding on the EU as a whole but not on individual member states, which creates uncertainty and is further complicated by a lack of clarity on the enforcement mechanism, which remains vague. To avoid loss of investor and industrial confidence a transparent process needs to be rapidly developed that ensures compliance. 

The EU has also failed to give energy efficiency the priority it deserves, downgrading it to an indicative target (i.e. one that is aspirational only) of a 27% reduction in energy use from business as usual. However, this is equivalent to, at most, a 19% reduction from Europe's pre-recession trajectory. The weaker energy efficiency and renewable energy elements of the package reflects the resistance of a relatively small number of countries to further EU-wide legal commitments, either because they prefer market inducement or due to their reluctance to reform their energy sectors. The package also makes clear that the a reformed Emissions Trading Scheme will be the main instrument to achieve the GHG reduction target and proposes to accelerate the reduction of the cap on maximum permitted emissions. However, this would only kick in after 2021, meaning the scheme will remain relatively ineffective for at least another five years. 

The crisis in Ukraine and the potential implications for security of supply once again highlights the importance of both domestic energy production and common European approaches to energy suppliers. Every 1% of energy saved across the EU reduces gas imports by 2.6%, and a stronger target would do more to reduce dependence on Russian gas imports. The EU’s failure to adopt a more far reaching and binding target on energy efficiency is a missed opportunity given that it is one  of the only approaches that delivers on the three pillars on energy policy, namely environmental protection, competitiveness and security of supply, simultaneously.

It is important to note the progress that the EU has made in both meeting its climate targets over the last decade and the impact that this has had on its other energy policy objectives. Currently, the EU’s 2020 target for reducing GHG emissions by 20% has or is very close to being met, in part due to the economic downturn, but also due to efficiency, renewable energy and changing industrial patterns and technologies. Furthermore, the use of renewable energy is now estimated to save around €30 billion per year in imported energy, improving balance of payments and improving security of supply. Likewise improvements in energy efficiency have been shown since the turn of the century to have contributed to a 1% annual reduction in energy consumption in the EU.

But the EU is not alone in preparing national carbon reduction targets for the UNFCCC conference in Paris 2015. Both China and the US, the world’s first and second largest emitters, are preparing their own emission reduction plans. China announced in September that it would put forward a new target for the peaking of its carbon dioxide emissions as early as possible. It is suggested that this might be as early as in 2025, with the potential for peak coal use coming even earlier in 2020. The US has proposed to set limits on the emissions from new coal-fired power stations and a 30% reduction in US power sector emissions by 2030 (relative to their 2005 baseline), and President Obama is expected to go further with new climate measures next year.

In the year ahead all countries that are party to the UNFCCC are expected to put on the table their national carbon abatement plans for 2030.  Some will be conditional upon further international assistance and commitments. The package agreed by Europe has scope to respond to increased efforts by other countries. This could include increasing the EU’s own domestic target (currently framed as ‘at least 40%’) or through international offsets and climate finance. How the EU responds to other countries efforts will be a test of its global leadership on climate issues.

To comment on this article, please contact Chatham House Feedback 

It has long been argued that if we are to limit the effects of climate change, some fossil fuel reserves must stay in the ground. But how much of each fuel; and which locations must remain untapped? A new study, recently published in Nature finds that a third of oil reserves, half of gas reserves and over 80 per cent of current coal reserves globally should remain in the ground and not be used before 2050 if global warming is to stay below the 2°C threshold. The speaker will discuss the methods used to generate these estimates, the key findings of the paper, and the implications that they may have in this milestone year for addressing climate change. 

Attendance at this event is by invitation only.

African countries will be amongst the worst affected by climate change. High levels of poverty and underdevelopment combined with insufficient infrastructure exacerbate the already severe impact of global warming on resources, development and human security. In order to adapt to and mitigate the effects of climate change, Africa’s leaders need to implement more robust environmental policies, increase local human capacity and encourage renewable energy entrepreneurship. Within international fora, they must better coordinate their position as some of the smallest contributors to global warming.

Ahead of the upcoming UN conference on climate change in Paris, this discussion will examine the prospects for African countries to present a stronger collective voice within the international efforts against climate change, as well as the role that the international community and public and private partners can play in supporting local capacity and lower carbon economic growth.

Summary

• Plans for an EU-wide Energy Union are taking shape, following the European Commission’s adoption in February 2015 of a ‘Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy’. The strategy underlines the EU’s ambition to attain ‘secure, sustainable, competitive, affordable energy for every European’.
• The initiative seeks to transform energy markets and energy/climate policy across the EU. Its goals include cross-border coordination and integration in energy security, supply, market operations, regulation, energy efficiency, low-carbon development, and research and innovation.
• There is an important foreign policy aspect to the Energy Union, given the imperative of managing security and supply risks in Europe’s neighbourhood and further afield. By addressing structural divisions between member states, the Energy Union could have a marked beneficial effect on the EU’s capacity to conduct a unified and effective foreign policy.
• Development of the Energy Union presents abundant challenges, however. Policy and legislative changes will need to be coordinated across 28 countries. Variations in EU member states’ attitudes to security and energy policy may lead to differences in, or clashes between, priorities. The wider context is also complicated. Interrelated challenges rooted in broader policy issues include the partial transition to low-carbon energy, and concerns over competitiveness relative to other major economies.
• The current EU approach to energy security and infrastructure focuses on natural gas. This ‘gas first’ approach risks crowding out other responses to the energy security challenge. It could result in the creation of ‘stranded assets’, if the future gas demand on which investments are predicated does not match projections. A narrow focus on new gas infrastructure could also impede development of other dimensions of the Energy Union.
• The markets for coal, oil, gas and renewables are changing significantly. The shale oil and gas ‘revolution’ in the United States has altered the economics of hydrocarbon fuels, and the plunge in oil prices since mid-2014 is causing energy businesses in the EU to reassess investment plans.
• The EU is rapidly expanding the use of renewable energy. Dramatically falling prices for renewables will challenge traditional energy utility business models. How the Energy Union enables market access for new business models will be key to determining future energy trajectories.

Summary

• Over the last 30 years the EU has played a central role in addressing the competitiveness, security and climate dimensions of energy policy among its member states. The UK has been critical in driving forward integration of the European energy market, and has been a strong advocate of liberalized energy markets and some climate change mitigation policies.
• If, at the June 2016 referendum, the UK does vote to leave the EU, energy and climate policy will be part of the overall package of issues to be negotiated, as it is unlikely that each sector will be treated separately. The model of relations for energy and climate may well be determined by political and public sentiment on higher-profile issues such as freedom of movement, rather than by what is best for the UK in these policy areas.
• The UK is increasingly reliant on imports, including from and through continental Europe, and its energy market is deeply integrated with that of its European neighbours. As a growing share of the UK’s electricity is exchanged with EU partners, it would be neither possible nor desirable to ‘unplug’ the UK from Europe’s energy networks. A degree of continued adherence to EU market, environmental and governance rules would be inevitable.
• This paper reviews the risks and trade-offs associated with five possible options for a post-exit relationship. Of these, the Norway or the Energy Community models would be the least disruptive, enabling continuity in energy market access, regulatory frameworks and investment; however, both would come at the cost of accepting the vast majority of legislation while relinquishing any say in its creation. The UK would thus have less, rather than more, sovereignty over energy policy.
• The Switzerland, the Canada and the WTO models offer the possibility of greater sovereignty in a number of areas, such as buildings and infrastructure standards as well as state aid. None the less, each would entail higher risks, with greater uncertainty over market access, investment and electricity prices. These models would reduce or even eliminate the UK’s contribution to the EU budget, but would also limit or cut off access to EU funding mechanisms.
• All five Brexit models would undermine the UK’s influence in international energy and climate diplomacy. The UK would no longer play any direct role in shaping the climate and energy policies of its EU neighbours, at a time when the EU’s proposed Energy Union initiatives offer the prospect of a more integrated and effective European energy sector. A decision to leave the EU would make it easier for a future UK government to change direction on climate policy, since only a change in domestic legislation would be required.
• ‘Brexit’ could affect the balance of energy policy among the remaining member states. In its absence, the centre of gravity for EU energy policy might shift away from market mechanisms and result in weaker collective action on greenhouse gas reduction targets.
• In the field of energy and climate change policy, remaining in the EU offers the best balance of policy options for Britain’s national interests: the UK would continue to benefit from the integrated energy market, while maintaining influence over its direction and minimizing uncertainty for crucial investment.

In May 2016, Chatham House published a research paper that assessed the options for the UK’s climate and energy policy in the event of a British vote to leave the EU. It determined that:

• The UK’s energy market is deeply integrated with that of its European neighbours and that it would be neither possible nor desirable to ‘unplug’ the UK from Europe’s energy networks. A degree of continued adherence to EU market regulations, energy efficiency standards of appliances, environmental and governance rules would be inevitable. 
• The EU’s collective negotiation on international climate issues has given the UK greater political weight than any member state has alone.
• The EU’s coordinated approach in engaging with major fossil fuel producers such as Russia and countries in the Middle East has helped support price stability and security of supply, including through infrastructure investment to make existing pipeline systems more efficient and improve storage and capacity.   

In light of the decision to leave, Chatham House is hosting a roundtable to reassess the options for a future UK-EU energy and climate change partnership. The meeting will bring together those experienced on UK and EU policy in both climate change and energy and explore the short and medium-term climate and energy policy considerations. 

Attendance at this event is by invitation only.

Over the next two decades, a combination of ‘circular economy’ approaches and distributed manufacturing methods such as 3D printing raise the prospect of fundamental changes to the nature of production, the reconfiguration of supply chains and changes to patterns of resource consumption – with profound implications for sustainability. This roundtable will bring together expert participants from companies, government, civil society and academia to discuss the state of innovation in the ‘circular economy,’ with a particular focus on the approaches and activities of entrepreneurs and investors, what is needed to scale up and accelerate innovation, how to track and measure progress, and how to ensure that innovation in the ‘circular economy’ makes a significant contribution to the meeting of short and medium term climate and sustainability goals.

Attendance at this event is by invitation only. 

The US Department of Defense regards climate change as an ‘accelerant of instability and conflict’. A former head of the US Pacific Command described it as the most significant long-term security threat in his region. US federal agencies have recently been mandated to fully consider the impacts of climate change in the development of national security policy. This step-change in the US approach reflects the Pentagon’s conclusion that climate impacts are a ‘threat multiplier’ for security concerns – not just for the future – but which pose ‘an immediate risk to national security’.

A new documentary from the US, The Age of Consequences, explores the links between climate change and security, including in current events in Syria, Egypt, the Sahel and Bangladesh. Our high-level panel will reflect on key sections from the documentary, which will be screened during the event, and explore whether security strategists, militaries and policy-makers in nations other than the US are fully cognisant of the risks posed by a changing climate, and whether they are ready to anticipate and respond to its potentially destabilizing effects.

The panel discussion will be followed by a Q&A.

THIS EVENT IS NOW FULL AND REGISTRATION HAS CLOSED.

Summary

• The use of wood for electricity generation and heat in modern (non-traditional) technologies has grown rapidly in recent years, and has the potential to continue to do so.
• The EU has been, and remains, the main global source of demand, as a result of its targets for renewable energy. This demand is largely met by its own forest resources and supplemented by imports from the US, Canada and Russia.
• Countries outside the EU, including the US, China, Japan and South Korea, have the potential to increase the use of biomass (including agricultural residues as well as wood), but so far this has not taken place at scale, partly because of the falling costs of competing renewables such as solar PV and wind. However, the role of biomass as a system balancer, and its supposed ability, in combination with carbon capture and storage technology, to generate negative emissions, seem likely to keep it in contention in the future.
• Although most renewable energy policy frameworks treat biomass as though it is carbon-neutral at the point of combustion, in reality this cannot be assumed, as biomass emits more carbon per unit of energy than most fossil fuels. Only residues that would otherwise have been burnt as waste or would have been left in the forest and decayed rapidly can be considered to be carbon-neutral over the short to medium term.
• One reason for the perception of biomass as carbon-neutral is the fact that, under IPCC greenhouse gas accounting rules, its associated emissions are recorded in the land use rather than the energy sector. However, the different ways in which land use emissions are accounted for means that a proportion of the emissions from biomass may never be accounted for.
• In principle, sustainability criteria can ensure that only biomass with the lowest impact on the climate are used; the current criteria in use in some EU member states and under development in the EU, however, do not achieve this as they do not account for changes in forest carbon stock.

Also see Woody Biomass for Power and Heat: Impacts on the Global Climate, which assesses the impact of the use of biomass for energy on greenhouse gas emissions, how these are accounted for under international climate accounting rules, and analyses the sustainability criteria currently in use and under development to minimise negative impacts.

Chatham House’s recent paper, Woody Biomass for Power and Heat: Impacts on the Global Climate, highlights how the use of wood for electricity generation and heat in modern (non-traditional) technologies has grown rapidly in recent years, and has the potential to continue to do so. EU member states’ national targets for renewable energy generation agreed in 2009 have helped ensure that the EU is now the world’s largest producer and consumer of wood for energy. And although other member states use wood more extensively for heat, the UK is the EU’s largest user for electricity generation, mostly sourced from the US and Canada.

Wood for energy often has a positive image: a natural product of growing forests. The biomass energy industry, which has grown rapidly on the back of government subsidies, likes to contrast it with dirty coal or oil. They point to the government’s sustainability criteria, which notionally guarantee a reduction of at least 60 per cent in greenhouse gas emissions compared to the fossil fuels the biomass replaces.

The problem with this happy picture, however, is that in fact biomass, when burnt, emits more carbon per unit of energy than most fossil fuels. The exact amount varies with the type of biomass and the type and age of the power plant, but figures from the Drax power station, Europe’s largest consumer of wood pellets, show that in 2013 it emitted about 13 per cent more carbon dioxide per unit of energy generated from biomass than from coal.

How is this consistent with meeting the government’s requirement for a 60 per cent reduction in emissions? Only by completely ignoring the carbon emitted when the wood is burnt; the sustainability criteria measure only supply-chain emissions from harvesting, processing and transporting the wood. (Direct land-use change – for example, clearance of the forest for agriculture or urban development – also falls outside the criteria, but biomass for energy generally originates from existing forests.)

This treatment of combustion emissions as zero – and thus, the awarding to wood the same kind of financial and regulatory support as other renewables such as solar PV and wind – is justified on the basis that the carbon contained in woody biomass is part of the natural forest cycle. The carbon released during combustion was absorbed by forest growth in the past and will be reabsorbed by forest growth in the future; in contrast, fossil fuels originate outside this cycle and their combustion adds carbon to the atmosphere.

But this argument rests on a basic fallacy. Carbon is carbon, wherever it comes from, and if you burn wood for energy, you increase carbon dioxide concentrations in the atmosphere (by more than if you had used fossil fuels), and thereby contribute to climate change. The fact that the carbon emitted was absorbed by growing trees in the past is simply irrelevant. After all, when it’s harvested you don’t have to burn it; you could use it for construction or furniture or window frames or a host of other uses, fixing the carbon in wood products rather than emitting it to the atmosphere.

Climate impacts

It is true that continued forest growth will absorb carbon in the future, but the process is a long one, taking decades or even centuries if whole trees are harvested and burnt. Replacing large mature trees, with plentiful leaf cover absorbing large volumes of carbon dioxide, with small young ones mean that the rate of carbon uptake will be far lower for years. On top of that, the impact of harvesting itself releases soil carbon into the atmosphere, further accelerating climate change.

The impact on the climate of using sawmill or forest residues for energy rather than whole trees is undoubtedly lower, since these tend to be wastes from other industries which harvest trees for their own purposes, and do not imply any additional harvesting. Sawmill wastes which, if left to themselves, would rot and release their stored carbon into the atmosphere in a matter of months or years, are in many ways the ideal feedstock; it makes sense to use them for energy rather than leave them to decay. However, mill residues are already intensively used and there seems little room for expansion; a survey in the US in 2011 found that over 99 per cent of mill residues were already used, mainly for energy and wood products such as particleboard.

Forest residues are the parts of harvested trees that are left in the forest after log products have been removed, including stumps, tops and small branches, and pieces too short or defective to be used; these can amount to as much as 40–60 per cent of the total tree volume. Their impact on the climate if used for energy varies significantly. While the smallest pieces tend to rot and release their stored carbon into the atmosphere quite quickly, if left in the forest, they are generally not suitable for use for energy, as they contain too much dirt and ash to be burnt cleanly. Larger pieces are more suitable but take much longer to decay; burning them for energy instead of leaving them in the forest thereby increases carbon concentrations in the atmosphere for years or decades. And on top of that, a portion of the carbon and other substances contained in the residues is transferred to the soil as they decay; their removal from the forest for energy may reduce both soil carbon and the levels of the nutrients trees need to grow, again with negative impacts on the climate.

The biomass industry generally likes to claim that it uses mainly mill and forest residues, though on closer inspection the categories they report often contain whole trees, perhaps classified as ‘unmerchantable’ or similar. (This is not helped by the fact the categories used by Ofgem, for example, to whom UK biomass users have to report, are confusing and potentially overlapping.) Several independent studies, however, have concluded that the use of mill and forest residues is in reality substantially lower; pellet plants in the US – the UK’s main source of supply – in fact source about 75 per cent whole trees.

Setting aside these arguments about feedstock, however, can it be safely assumed that future forest growth allows us to treat biomass as carbon-neutral? If the trees would have grown anyway, even in the absence of the biomass energy industry, it cannot be assumed that their future absorption of carbon cancels out the carbon emitted when wood is burnt. If the rate of carbon absorption in forests remains the same whether or not some of the harvested wood is burnt, then clearly, the best outcome for the climate in the short and probably medium term is not to burn it, but to use it for wood products or leave it to decay slowly in the forest. This is not an academic argument: the current global rate of emissions of greenhouse gases is incompatible with the aims of the Paris Agreement and may risk triggering irreversible tipping points in the Earth’s climate system. We need to reduce carbon emissions now, not in several decades’ or centuries’ time.

The biomass industry likes to point to the expansion of US forests in recent decades to show that forests overall have been absorbing more carbon even while increasing volumes are burnt for energy – sometimes implying that this forest growth has been encouraged by the demand for energy. But in fact US forest expansion started in the 1950s, decades before European subsidies stimulated the expansion of the modern biomass industry. And there is little evidence of recent overall forest growth in the US southeast, the location of almost all the pellet plants supplying European demand. In any case, the point is not whether US (or European) forests are expanding, but whether they would have grown at a different rate if part of their wood had not been burnt for energy. If they would have grown at the same rate, or faster, in the absence of biomass energy use then it cannot be assumed that using wood for biomass is good for forests, or the climate.

Redirecting public money

There is no question that renewable energy policy and forest policy both have a critical role to play in the mitigation of climate change. But governments have limited resources to deploy in their support, which is why the Chatham House paper questions whether it is really a good use of public money to subsidise activities which release stored forest carbon into the atmosphere, thereby increasing carbon emissions and accelerating climate change.

I argue instead that support should be limited to those feedstocks which genuinely reduce carbon emissions over the short term – i.e. mill residues and post-consumer wood waste. This would not only have a positive direct impact on the climate but would also release more resources for genuine zero-carbon technologies, such as solar, wind or tidal – and perhaps also for programmes encouraging afforestation and the more extensive use of wood in buildings and products. Use it, don’t burn it.

To comment on this article, please contact Chatham House Feedback