Tuesday, June 24, 2008

Shaping Carbon Budgets


Practical application of an approach based on the notion of time critical pathways

This note was prepared in January 2008 by Mike Parker, John Rhys and Gordon Mackerron
on behalf of the BIEE Climate Change Policy Group . Its purpose was to stimulate ideas on how to use a "time criticality" approach to work from an overall and long term (2050)cumulative target for CO2 reductions to a set of sectoral policy requirements.

1. We strongly welcomed the lead given by government in the Climate Change Bill, with the creation of a new institutional framework to back a system of “carbon budgets” which will set legal limits on UK CO2 emissions within rolling five year periods.

2. However we are concerned that the carbon budgeting system, with its associated accountability and monitoring arrangements, cannot be effective without public scrutiny of the whole corpus of policies and measures concerned with the low-carbon issue, since these arrangements will need to highlight not only recent performance of carbon emissions against budget, but also those steps being taken to increase the momentum of carbon savings in the short-run[1], and to create the conditions for transition to longer term technological and system changes.

3. Moreover these procedures need to address directly the issue of urgency in the conduct of UK climate change policy. Given the long lead times involved in removing the sources of inertia and “barriers”, introducing low carbon technologies, and making the associated changes to infrastructure and institutions, the successful implementation of any 60% path to CO2 reduction is already on a very tight schedule. For an 80% reduction path the schedule would be even more demanding. Procedures therefore need to place great emphasis on lead-times and time criticality.

4. Accordingly we believe that the carbon budgeting system should incorporate detailed descriptions, endorsed by Government, on how and at what rate the emission reduction targets are to be achieved. We call these descriptions “time critical pathways” (TCPs). Our purpose here is to indicate our preliminary views as to how this approach would work, and how these ideas can be developed further.



5. Policy analysis in the White Paper and elsewhere has been based on disaggregation into sectors, given the very wide range of detailed issues involved in terms of technologies, market structures and policy instruments. We recognise there is an element of overlap in certain cases – for example micro-generation and other decentralised electricity on energy use in residential and other buildings, and the use of electricity in transport. The core sectors in our view are electricity, transport, and heating of buildings (residential, commercial and service sectors). All three depend to a very significant degree on UK-specific factors, potentially demanding UK specific strategies and policies.

6. Industrial process heat, though a significantly smaller contributor to total emissions than the above, is still substantial. The adaptation of UK industry and its competitiveness will be a large and important issue, albeit one that needs to be viewed primarily in the wider international context of the EU ETS. Two other very significant sectors – aviation and shipping - also need to be included in a comprehensive strategy and in emission targets, as we have argued in earlier papers.


7. We envisage TCPs for each of the main sectors being drawn up by the relevant Government departments (with coordination on overlaps). These would be consistent with the achievement of the aggregate target of CO2 reduction by 2050, with the minimisation of emissions in years to 2050 and associated targets for cumulative emissions, and would clearly set out the order and timing of the key developments, decisions and commitments involved. This process would clearly need to recognise uncertainties, to retain elements of flexibility, and to provide reasonable certainty of achieving targets and objectives. TCPs would be subject to periodic revision. Subject to these constraints and objectives the process would also seek to minimise the overall costs of the measures required.

8. These TCPs should also be capable of phasing into the first three carbon budget periods (2008-12, 2013-17, and 2018-22) and more broadly thereafter by decades to 2050. Moreover not only would the TCP set out what has to be done and when, but also what actors/agents would be involved and when.

9. For each sector the drawing up of TCPs would necessarily involve covering the following ground:

(a) assessment of CO2 savings available from short term measures to reduce demand, increase efficiency and achieve fuel switching for existing assets and systems, including measures already identified up to the recent White Paper, and the timing of these savings.

(b) identification of the likely portfolio of options for key technology and system changes [over and above those in (a)] which could contribute to the sector’s transition to a nil or very low carbon future by 2050, and an assessment of the speed at which they might be introduced in the light of :
  • Current state of technical development

  • Lead-times to widespread adoption

  • Age and turnover of existing capital stock including infrastructure

  • Nature of factors creating inertia and barriers to progress, including fiscal, regulatory and institutional factors, and the potential speed of their removal

10. For any given sector, technology pathway evolution is inherently uncertain, and also path-dependent. Within a portfolio of options, some are less certain than others and some options may conflict with others; this means that more than one pathway may need to be described, to provide an element of flexibility. This applies particularly to the electricity sector, where it will be essential to consider the relative time criticality issues arising from potentially different pathways for nuclear, CCS and renewables (centralised or decentralised). It might be thought that the use of alternative scenarios might weaken the essential urgency of policy, but this need not be the case. Indeed in such a circumstance the use of alternative TCPs would be a powerful tool in exploring the implications of such unavoidable uncertainties in terms of conflicts or synergies between policy options, particularly in the first two carbon budget periods (2008-2017). Indeed the use of alternative scenarios for the electricity sector, to decide what should be done in the next ten years, is in any case a matter of great urgency.


11. Our position is that the whole question of the balance of instruments should be addressed pragmatically relative to efficacy in reducing CO2 emissions at a rate compatible with urgency, whether or not the result is an increase in Government involvement. The use of TCPs which set out not only what has to be done and when, but also who is involved and when, would be a powerful tool in determining the most effective balance of instruments, including the role of “government” and “markets”. We are not advocating a detailed long term plan determined and controlled solely by Government, but rather a framework to create the conditions for large scale investment and system change to deliver a very low carbon economy in the UK, at a rate compatible with the urgency of the task and in ways that safeguard security of supply and minimise long-run resource costs.


12. TCPs as described in this note could be a vital and distinctive means of injecting urgency into UK climate policy because they:

(i) incorporate time criticality and lead times as essential building blocks in policy formulation

(ii) enable the phased timing of necessary measures to meet CO2 reduction targets to be clearly identified, in a way which can be related to the proposed carbon budget system. Comprehensive and coherent timetabling will be a necessary feature of any urgent conduct of CO2 reduction policy.

(iii) help to resolve potential conflicts between alternative technologies

(iv) provide a way to improve the rationale and coherence of the “balance of instruments” in a way compatible with the necessary speed and progress

(v) above all, allow much greater focus on what has to be done in the first two budget periods (2008-2016), irrespective of whether the resulting CO2 savings occur in these budget periods or later, in terms of
· major investments to be committed, started and completed,
· research and development to advance new options,
· fiscal regulatory and institutional measures to remove barriers to urgent progress


13. In this illustrative example the idea of time criticality is used in different ways and at different stages to show how a broadly defined strategy, with a loose collection of plans, policies and forecasts, could be developed and articulated in a coherent way using the notion of TCP, and how TCP would assist in some of the ways described in the first section of this paper.

14. As this is intended only as an illustration of TCP, it ducks some of the questions we have talked about earlier, in terms of where the strategy sits in the spectrum between centralised planning and a pure market approach. The distinction may be more illusory than real, if it is clear that even a market-based approach demands that particular engineering, regulatory and financial events inevitably happen in a well defined sequence. However a TCP may well indicate very quickly when either plans or markets are failing to deliver on their part of the strategy.

15. The example deliberately uses a very stylised and simplified approach, in order to avoid, as far as possible, a misleading impression of a level of precision and consistency that could be expected only after incorporation of more detailed analysis, which would have to be a feature of a real “live” application of TCP. As a first step this illustration uses a simple spreadsheet and some assumed annual percentage reductions to get a broad feel for the arithmetic of individual sector effects in relation to targets for cumulative emissions and 2050 annual emission targets. Even this very simple and approximating approach, however, quickly gives a feel for scale and orders of magnitude. Material derived from more elaborate energy sector models such as Markal, and numerous additional assumptions within a chosen strategic framework, inclusion of additional sectors and subsectors, and more precision about targets[2], could be used to convert this illustration into a more solid and reliable exercise with real UK data.

16. The example describes a fictitious world in which there are only three sectors to consider: electricity generation, heating of buildings, and (road) transport. Aviation, shipping, and process heat for industry[3] are excluded, as is the possibility of purchasing international[4] credits. Annual emissions total an annual 10000 “GHG equivalence” emission units in 2007, and the relative shares of the three sectors are of the same order as the 2005 shares for CO2 quoted in the White Paper. The relevant targets to be considered are 60% or 80% reductions by 2050, with associated cumulative emission targets based on constant percentage reductions.


17. A particular strategy has been chosen here to illustrate the TCP approach; it includes a strong supply side approach, including centralised electricity decarbonisation as a core component. In this sense it broadly resembles the recently published IPPR strategy except in that it does not rule out nuclear. It can be characterised as follows:

  • Reliance on White Paper measures in early years. Reductions to 2020 are largely limited to what can achieved through fuel switching in existing assets, including the impact of ETS, plus the impact of White Paper measures which include energy efficiency.

  • Decarbonising the electricity sector is a central theme for the strategy as a whole. It becomes a priority in effecting reductions for the period after 2020, whether through nuclear, CCS, large scale renewables, or a combination. A critically important issue in TCP terms is the rate at which CO2-free capacity can be substituted into the power sector.

  • Electricity for heating buildings; strategy on buildings can include a raft of demand side measures, some of which (such as heat pumps) depend on electricity, but one feature of this strategy in relation to buildings might be that CO2-free electricity becomes a default option for decarbonising the heating sector at some time after 2020 (notably if there is a risk of other measures proving insufficient). The timings for emission reduction in this sector might then become dependent on the pace at which sufficient electrical capacity can be added, as well as the speed and nature of decentralised, energy saving and non-electric alternatives.

  • Transport and innovation. The transport sector is the most obviously dependent on radical technological innovation, as well as possibly major systemic and infrastructure changes. There is a presumption that by 2040 at the latest we should be able to start moving to a hydrogen or electric transport economy. As with heating, both depend on electricity generating capacity.

  • Non-exclusive; a raft of other policies can co-exist with this basic structure, including more emphasis on feeding through of carbon pricing, second generation[5] biofuels, more renewables, regulatory controls, and planning and life style measures (“joined-up government”) aimed at reducing demand; all of these are potentially helpful in terms of time criticality and/or as stopgap measures,[eg biofuels pending more radical technology and innovation]. Some of them will affect forecasts and hence the quantum of what will be required; more detailed analysis will determine whether they impact in a major way on current required actions.
18. This illustration is not intended to be normative. For illustrative purposes it arguably has the advantage that its strong “supply side” element has a more containable number of technical parameters and assumptions, and in consequence some of the TCP issues are more easily and sharply defined.


19. Alternative approaches to strategy can be set out and subjected to a preliminary evaluation of what they will be required to deliver in relation to the arithmetic of targets.

20. Stage I. Making sure the strategy is consistent with the targets. In this illustration we concentrate first on the softer 60% target, reducing annual emissions from 10000 pa to 4000 pa but insist that we also meet an associated cumulative emissions target of 289000 over all years 2007-2050 inclusive. [80% would imply 220,000 cumulative.]

We input savings to 2020 based on the White Paper estimates, taking a “low reductions case” based on the White Paper, and assuming a constant annual percentage decline in this period. This is roughly speaking a 17 % decline in power sector emissions by 2020 (mainly due to coal to gas switching), a 33% reduction in heating related emissions (mainly residential), and no overall change in transport emissions by that year.

It is quickly apparent, as one would expect intuitively, that meeting targets under this strategy depends primarily on the pace at which the power sector can be decarbonised. We can experiment with different rates of progress, but the most ambitious limit so far contemplated is one in which emissions are halved between 2020 and 2030. This may seem like an excessive rate of turnover of capital stock, but would be wholly consistent, for example, with French experience in the 1980s and 1990s, or with recent proposals for UK offshore wind. However it is very hard to see how this strategy could deliver even on the 60 % target without such a rapid rate of progress in the power sector.

The next step is to consider what rate of progress is required in the heating and transport sectors after 2020. This is a bit more hypothetical and open-ended, primarily because there is a much wider raft of possible policies and technologies, but is still worth examination. However if we assumed no further reductions in these sectors between 2020 and 2030, perhaps because the White Paper measures had by then run their course and exhausted their potential, or because of insufficient electricity, then even for a 60% target, when expressed as a cumulative target, we would require 4% annual reductions in both sectors after 2030 in order to get back within the cumulative emissions limit. Given the nature and slow turnover of the building stock, and current perceptions of the intractability of the transport sector, 4% pa reductions represent a substantial challenge.

Moving to an 80% target, together with its equivalent cumulative target, is even more demanding, and implies larger and earlier contributions from heating and/or transport sectors. A possible corollary is the earlier need for demand side measures in these sectors.

Lessons from stage I.

22. Although this is no more than simple arithmetic, it is helpful in demonstrating that the strategy can deliver, in identifying key elements of time criticality, and in alerting policy makers to the adverse consequences of falling behind “planned” rates of progress.
  • Significance of taking cumulative targets as compared to end year annual rates; low rates of reduction to 2020 make the achievement of cumulative targets much tougher than a “per annum by the year 2050” target

  • Identification of significance and benefit of early achievement of power sector decarbonisation, by whatever route.

  • Necessity of substantial and relatively early progress in the building sector after 2020, with continuing reductions in heating beyond what has been achieved by White Paper measures to 2020.

  • First impressions of rates of change that will need to be achieved in transport sector: at least 1% pa after 2020, and significantly more if there is any growth to that point or if other sectors do not deliver.

  • Sensitivities; how falling behind any part of plan will impact on pace of change required later and/or in other sectors to “catch up”.

In particular, any failure to deliver on the expected savings from the White Paper measures by 2020 has a very adverse effect in requiring difficult “catch up” later.
An 80% target increases the pressures for early action to constrain near term growth or to cut emissions in heating and transport.


23. Stage 2. Drill down into the individual sectors. This process requires much more detailed consideration of alternative and complementary options in each sector. The aim is to identify explicit objectives, actions and timetables, both positive and precautionary. Above all it is vital to bring out the extent to which a strong momentum of CO2 reduction after 2020 depends on identified urgent actions being taken over the next ten years.

24. White Paper measures, 2007-2020

Objective: to ensure that the White Paper measures deliver both volume and to timetable.

Time criticality: monitoring of progress in detail, and dealing with observed shortfalls[6], if necessary seeking to strengthen existing measures or find additional savings.

Actors and agents: energy companies, government, ETS players and energy markets, regulatory bodies.

25. Power sector

Objective: to enable major carbon substitution beyond what can be achieved through the White Paper measures, with first carbon-free capacity starting 2020-22.

Time criticality: this is based around activities and preconditions associated with the alternative generation options, namely clear timetables for action on:

  • CCS; steps to demonstration project, identifying storage facilities with appropriate capacity, testing security of storage, mechanisms for moving from demonstration to large scale, decisions on extent of retrofitting, infrastructure provision specifically in relation to CO2 gas gathering and liquefaction/pumping;

  • Nuclear: licensing, technology choice and tendering, construction, planning constraints, infrastructure provision;

  • Large scale renewables – offshore wind or tidal power; resolve technical issues and uncertainties, planning constraints, infrastructure provision.
In each of the above cases, it is also necessary to determine whether the market will currently support the investment and on what terms. If the answer is negative then an immediate analysis/decision is required either on a viable alternative strategy, or on taking measures to make this strategy commercially viable eg by dealing with factors that predispose to market failure[7]. Similar questions need to be asked if only one, or only two, of the three main options can be considered commercially viable.

Actors and agents: energy companies; project promoters and finance providers, national grid, government on infrastructure issues, energy markets

26 Heating after 2020.

Objective; ensure ability to effect continuing rapid rate of emission reduction after 2020.

Time criticality; closely linked to the multiplicity of individual measures affecting this sector, but may include preparation of legislative and regulatory frameworks; part of strategy dependent on power sector capacity, but also need to examine in more detail policies and timing for zero carbon new housing, and need to have additional options available.

Actors and agents: government, builders, local authorities, architects, regulatory bodies, housing markets

27. Transport.

Objectives; develop sufficient number of options to ensure capability to meet sustained rates of reduction as soon as feasible; to be consistent with target arithmetic this should be no later than 2030.

Time criticality; The time dimension will be based partly around international research and development directions for the several, not mutually exclusive, options that include hydrogen, electric (batteries), and “type 3” biofuels. However the first two of these also rely on electricity, and on significant infrastructure changes (hydrogen production and distribution, and battery charging) which will tend to bring forward decision dates. Even if biofuels are supply limited they may still have a significant stopgap role.

If the overall arithmetic requires more from the transport sector, especially in the context of an 80% target, then demand side options need greater prominence. Two significant options for short to medium term reductions might be the enforcement of lower speed limits, and move to universal congestion (road) pricing, the second of these having very substantial technology, infrastructure and political/legislative dimensions.

Actors and agents: research bodies, car manufacturers, other manufacturers, energy companies, public transport bodies, government and local authorities.


28. The TCP approach provides a means of incorporating estimates, ideas and logical connections within a strategic framework. It differs from but may be complementary to more familiar approaches to forecasting, scenarios and optimisation models.

The BIEE group will therefore be continuing to develop the concept by examining particular projections, scenarios and sectoral policies from a TCP perspective. The objective will be to construct or identify strategies that deal explicitly with urgency and time criticality, and to do so in a form that will be useful for the carbon budgeting process, particularly for the first two periods.

Annex 1. Hypothetical 3-sector example. Indicative charts showing required rates of change over a 43 year period to 2050 in order to meet a 60% target (interpreted as a cumulative equivalent).

Chart of total emissions with sectoral breakdown. (above)

Chart of emissions for each sector

Horizontal axis is years 2007 to 2050. White Paper reductions assumed to 2020.

Chart of emission levels consistent with 60% target interpreted as an equivalent cumulative target. This profile requires a 63.5% reduction in annual emissions by 2050.

Annex 2. Same hypothetical 3-sector example. Indicative charts showing required rates of change over a 43 year period to 2050 to meet an 80% target (interpreted as a cumulative equivalent).

Chart of total emissions with sectoral breakdown. (above)

Chart of emissions for each sector

Horizontal axis is years 2007 to 2050. Emission levels consistent with 80% reduction when interpreted as an equivalent cumulative target. Almost impossible to achieve without increasing assumed White Paper savings [applied to electricity in this example] and also assuming very dramatic transport reductions from 2020. This profile requires a 90% reduction in annual emissions by 2050 to meet the cumulative target!


[1] The short run in this context is defined to mean the immediate future within which no major changes to existing assets are feasible.
[2] eg on GHG as opposed to CO2 equivalence and the associated technical parameters required for a GHG calculation.
[3] If we did compare this stylized example with UK actual data, then inclusion of these sectors would tend to make the targets harder. Even though the excluded sectors are smaller, industry presents a problem because the WP measures assume little change by 2020, and aviation and shipping are fast growing.
[4] In contrast with the exclusion of the smaller sectors, allowing international credits tends to soften the impact of the targets.
[5] Sometimes referred to as “ligno-cellulose”, these biofuels are typically derived from marginal land without alternative uses for food production. Lower CO2 emissions are involved in their cultivation, and their net contribution to carbon reduction is consequently higher.
[6] Particular concerns attach to the EU ETS and its ability to deliver the amount of coal to gas switching postulated in the White Paper.
[7] This might include consideration of guarantees, floor prices or other measures.