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Moving the world energy paradigm

Moving world energy paradigm towards CO2 free systems

INTRODUCTION

Withe the new US administration questioning the value and importance of climate maintenance it is perhaps worth exploring ways in which we can continue to meet the COP21 Paris agreement and  preserve the engine of the world economy – fossil fuel – as a major provider.

Methods for moving world energy production towards CO2 non-emitting systems such as solar, wind and tide are well known, well researched and to a growing extent “proven”, albeit only in certain scenarios.
Energy per-se is the most important component of the world economy and so the main problem we face is how to persuade/encourage the world at large to embrace these alternative energy production techniques in increasingly difficult circumstances when unabated energy production from fossil fuel is economically advantageous and flexibly deployable. So,

We don’t need to invent new methods to create energy, nor do we need new methods to  in order to limit CO2 emissions. From a technical perspective, these can already be done. What we do need is:

Both of these can be done in a direct and progressive way, such that conventional economic activity can then readily kick in to balance the books.
Rationing of this sort would be based upon carbon content of the fossil fuel. The total ration made available for “free burn”, license purposes, each year, would exactly mirror the COP21 agreement in Paris in 2014, so that we would automatically and directly solve the world’s CO2 problem.

To completely solve the world’s problem, we would need a world-wide rationing regime for “free burn” fossil fuel. Instantaneously setting a worldwide regime with worldwide a target is probably unrealistic. However:
Each national scheme would be based on “National Permits” to produce, sell and purchase fossil fuel for “free burn” use within each participating country. The “National Permits” would be sold at “National Permit” auctions. The National Permits available for sale in any participating nation at these auctions would be dated and for any given year an annual limit would apply, equal, in carbon equivalent terms, to that agreed at COP21. Thereafter, “free burn” energy production may only be carried out within the national boundaries, during any year against such “National Permits”[1].

Gradually, “Permitted” fossil fuel use dwindles, in line with the COP21 agreement. Likewise, the energy resulting from this source dwindles and possibly during the early stages of the process, the market price of energy overall inflates Meanwhile, what happens to the receipts from the Permit auction sales?

One answer is obvious. This income stream could be set up as a national energy fund (NEF) which could be used at the discretion on the national government for such purposes as subsidizing the early inflationary phase of the new style energy market (on a non-discriminatory basis), or simply as a national investment fund (such as Norway).

 

 

 

 

 

 

DISCUSSION:

Avoiding global warming caused by unabated “free burn” fossil fuel for energy production is not a technical problem for the world to solve, it is a commercial one.

Technically there are many ways in which energy can be created in a whole plethora of circumstances, each serving different needs. In each case the amount of energy produced, the cost of production and delivery and the portability of production varies according to the circumstance.

 

Since the beginning of the industrial revolution c.1750 AD:

 

 

the most cost effective method of energy production and delivery at an industrial scale, has been the burning fossil fuel with the attendant release into the atmosphere of copious quantities  of carbon dioxide (CO2) “free burn”

 

 

Whilst cost effective and therefore economically the favoured, this method of energy production and delivery, it is increasingly regarded as environmentally unacceptable.

So, we have a conflict between the economic answer and the environmentally acceptable answer.

We live in a competitive world with freedom of choice applying at every stage. But human behavior individually and collectively has almost always been driven by personal self-interest (PSI).  Rarely has anything changed collective human behavior other than PSI.  This dictates that without a massive effort in favour of an alternative, the economic answer prevails.

For all life forms including the vast majority if human kind, PSI is defined within a very short time horizon.  In human society it is predominately measured in “well-being” terms which, beyond the personal poverty horizon, simply boils down to an economic/financial/+political measurement.

Ergo this philosophical proposition facing the “carbon crisis” is that unless any putative solution delivers PSI in the shape of economic/financial/+political gain for those making the decision, it will always be rejected and the proposition will fail. So, the test that we will have to apply henceforth to any putative solution to the carbon crisis will be that the proposed solution MUST deliver PSI for the decision makers. In general, this PSI will always be based on economic/financial/+political gain. (“Political gain” here is just a special and generally longer term form of economic/financial gain).

This rule applies whether the decision makers are individuals, companies, governments or agglomerations of some or all of these.

So, if humanity is to survive the present carbon crisis, the above philosophical proposition needs to be explored and modified sufficiently to ensure that the environmental argument has supremacy over the crude economic argument in an AGREED and clear way whilst all other aspects of the resulting method remain and operate in their normal fashion.

The AGREED outcome based on harnessing PSI, can then evolve into a practical and universally acceptable PLAN which will deliver a practical resolution of the carbon crisis.

Whilst Fossil Fuel (absent special taxes and subsidies) retains its position across the world as the most readily available, transportable and flexible deliverer of the most economically successful and therefore dominant source of energy this cannot happen. So the necessary solution to the carbon crisis depends upon the delivery of an acceptable, “PSI resilient” way of reducing the natural and innate competitive position of fossil fuel, without damaging the functionality of the world economy including the fossil fuel industry in its widest sense.

This is inevitably the acid test for a viable solution to the carbon crisis but is it conceivably possible?

 

An alternative mechanism to implement COP 21

 

The key to achieving success is to change from supply side management to demand side management by progressively limiting the sale of fossil fuel destined for free burn. This policy albeit for different strategic goals is what OPEC and other major producers of fossil fuel have been operating since the first oil shock in 1973, albeit for different strategic reasons.

If the world as a whole took over this role it could revolutionise and regain control the fossil fuel market and hence the energy market on behalf of the world population and its climate.

 

This can be achieved through the issue/observation, of carbon content Permits.

This only requires a few simple steps:

  1. Set limits for the total annual free burn fossil fuel CARBON CONTENT permits to be sold. This limit would be the amount equivalent in carbon content to that specified under COP21.
  2. This in turn, automatically limits CO2 release from fossil fuel free burn into the atmosphere to the pre-defined acceptable levels set out at COP21.
  3. It could be operated and administered by individual nations, by economic collaborators or by the world at large.

 

To achieve this aim it would only need the recognition of two distinct classes of fossil fuel delineated by end use.

1: PERMITTED FOSSIL FUEL PRODUCTION – FOSSIL FUEL PRODUCED under a PERMIT

2: ACCREDITED FOSSIL FUEL – FOSSIL FUEL PRODUCED for sale only to an accredited user

Each sale of fossil fuel can only be sold and subsequently used for its intended class of use

The essential differences between the two classes of fossil fuel are:

1: PERMIT CONTROLLED PRODUCTION

2: ACCREDITED USE – CONTROLLED PRODUCTION

 

Fossil fuel which is intended for free burn requires a permit

CEV Permit ownership is restricted to licenced traders.

Licenced traders are appointed and may initially include:

  • fossil fuel producers,
  • energy producers and
  • bone-fide traders
  • + other classes of major user

 

Permits are denominated in terms of; carbon-equivalent-value (CEV)

Permits are valid for 12 months commencing from the date on the face of the permit but can be forward purchased [x] years ahead.

During the currency of a permit, its owner may:

Purchase fossil fuel up to the CEV of the permit.

Engage in free burn (or otherwise) of the fossil fuel without restriction.

Sell the permit to another registered trader.

 

Ownership of Permits (for Free Burn)

  • Open bidding for the initial ownership of CEV permits, is carried out periodically at CEV
  • At CEV auctions, licenced traders (subject to their repute and financial standing) can bid for for and obtain annually dated tradable permits of any designated CEV allowing “free burn” of the stated amount of fossil fuel.
  • monitoring of Permitted sales
  • During the currency of each permit, the licenced permit owner must:
    1. make monthly returns of its CEV1 utilisation, itemising the OWNER’s purchase and usage of fossil fuel and
    2. declare any remaining ullage.
  • When a permit is exhausted it must be returned to be struck off.
  • When the permit expiry date is reached, it is automatically struck2 off irrespective of any remaining ullage

 

  • TOTAL Permitted sale – ANNUAL limits
  • The combined CEV of all of the permits made available to be sold at auction for any year, is capped so as to be no greater than the COP21 target carbon trajectory, for that year (by country, economic block or world wide).
  • Auctions (and second sales) can deal in permits for the current year or for a forward dated year up to [x] years forward. (by country, block or word wide)
  • 2: ACCREDITED USE – CONTROLLED PRODUCTION
  • Accredited fossil fuel market
  • Fossil fuel Accredited sales may occur only in facilities where the products of any resulting combustion are rendered harmless by being captured or otherwise converted into benign products SUCH AS CaCO3. ALL Such facilities must be formally accredited as such.
  • Sales can only be classed as Accredited where the sale is to an accredited end customer for accredited
  • Accredited customers
  • Accredited sales are unaffected by the permit constrained market — and
  • Permit constrained sales are unaffected by the accredited market.
    • For Accredited purchases, potential end customers must apply to become Accredited customers and be approved as such.
    • Accredited end customers may initially include, those engaged in industries which carry out benign conversion of CO2 (e.g. to CaCO3) or CO2 re-sequestration.
  • uniquely important Accredited customers
  • Accredited customers may, from time to time, also include end customers in industries that are recognised as uniquely important, either economically, commercially or strategically including those who’s product is, at that time, irreplaceable
  • Uniquely important accredited customers might include:
    • Airlines,
    • Military requirements
    • Humanitarian supporting purposes
    • …..plus other transitory inclusions during the start-up years
  • accreditation of customers

The Accreditation process for customers is handled on a commercial basis by existing certification agencies.

  • MARKET CAPACITY
  • Overall market capacity

Over 30-50 years, the capacity of the permitted market (for free burn fossil fuel), will become progressively more constrained by its adherence to COP21 agreements.

  • Incentive to invest – confidence to proceed
  • Incentive to invest and confidence to proceed
    Detailed aspects:

Throughout its history the fossil fuel E&P industry has been technically strong and financially robust.

BY Embracing a market driven mechanism such as this, without arbitrary taxes and subsidies, the fossil fuel E&P industry has a real incentive to invest in Accredited fossil fuelled energy. It can thereby, continue to grow its overall MARKET share within a predictable and understood future energy market.

  • FREE markets – Competition for ENERGY & fossil fuel

With this mechanism,  EACH type of energy creation PROCES IS TREATED EQUALY – no discriminatory1 subsidy or taxation CAN EXIST NOR IS ONE NECESSARY.

Markets for fossil fuel and for energy are both FREE markets.

Thus, no individual energy TYPE  is able to gain arbitrary competitive benefit over any other energy TYPE. nor will any energy TYPE confront any arbitrary obstacle.

  • FREE markets – pricing fossil fuel

Fossil fuel producers (Oil & gas companies and coal producers) can sell both to the permitted fossil fuel energy market and to the accredited fossil fuel energy market.

 

Success in selling to either permitted or the accredited fossil fuel markets depends on THE CHOSEN MARKET:

  1. In the permitted market: The price offered by (the diminishing numbers) of permitted customers (those who have already bought and paid for permits).  As against:
  2. In the accredited market: The price offered by a small but growing and totally unrestricted number of accredited customers who have already invested in the additional plant necessary to qualify as

(BUT TO REMAIN COMPETITIVE OVERALL, they will have to take this

into  account, in their offer price.)

  • If the price of a permit is low enough and energy companies believe the price of a permit will remain low, they will postpone accreditation investment in their own facilities, continue to purchase permits and purchase permitted fossil fuel.
  • BUT the price of permits will inevitably rise as availability of permits in the market steadily reduces (in accordance with COP21).
  • If the price of a permit is low enough and energy companies believe the price of a permit will remain low, they will postpone accreditation investment in their own facilities, continue to purchase permits and purchase permitted fossil fuel.
  • BUT the price of permits will inevitably rise as availability of permits in the market steadily reduces (in accordance with COP21).

At, this “turning point” or in anticipation of it, energy companies must either:

  1. Switch away from fossil fuel, to renewable energy or:
  2. Invest in or sponsor, accredited fossil fuel energy

The day-to-day outcome will be market driven.

A positive choice exists for the fossil fuel industry:

  1. Increase demand by investing in accredited fossil fuel energy or
  2. In order to maintain fossil fuel price, reduce the supply being offered to that demanded only by the permitted market in line with the controlled shrinking market demand.

 

SUMMARY & OUTCOME:

This is a market driven implementation programme to achieve COP21. It conceives two parallel free markets for fossil fuel energy, both of which compete freely with all other forms of energy production:

In each set of circumstances, the most cost efficient form of energy production naturally comes to the fore and becomes the economic choice for:

  • Consumers
  • Fossil fuel producers
  • Energy companies
  • Investment providers
  • Tax payers (they no longer fund state subsidies to support uncompetitive energy production)

All consumers pay the competitive, free MARKET price, for the energy they consume.

Two approaches to the management and control of CO2 emissions have been compared;

  1. successfully and directly managing/controlling CO2 emissions
  2. successfully and directly managing/control fossil fuel production and sales,

The technical outcome from each is, identical as the item being controlled before, during and after is the same carbon atom.

This COP21 based plan offers a BALANCED overall outcome
END

 

[1] Note: This does not address the issue of importing finished or part-finished goods from territories not participating in the schemes but various methods are available for overcoming this issue. Also it might be possible to spawn an international trade in “permits”.

Starting a decarbonised electricity market

How do we start a market in decarbonised electricity?

Here’s my thoughts so far.

If the government (thinking of the UK, but equally applicable to any other government) is serious about hitting its “80 per cent CO2 reduction by 2050” target, and on the way, a 40 per cent by 2030 target, at some point there will be a market for decarbonised electricity, since someone has to supply the electricity which doesn’t involve carbon emissions.

How will this market work?

Right now, the market for decarbonised electricity – for renewals – works by the National Grid being forced to buy all the electricity which solar and wind generate at whatever rate they are currently paying for the cheapest form of electricity (coal with CO2 emissions). The market for the other sort of decarbonised electricity – coal + CCS – doesn’t work at all. This way we get whatever low targets the government is currently happy with.

But as the requirement to decarbonise electricity grows, the logic will change.

The government could achieve its target by explicitly requiring the National Grid to purchase decarbonised electricity. At this point, there will be a market for whoever can supply it the cheapest.

The government might also achieve its targets by forcing the phase out of free burn coal power. This would mean the National Grid buying its electricity from the next cheapest option – gas. But then the government will need to start phasing this out as well, if it wants to reach its targets.

This discussion is very interesting because at some point in the future, so long as targets are met, there wil be a market for decarbonised electricity. And the people who correctly predict it, and make their investments at the right time, will make a lot of money.

Interesting.

Why is CCS not investable?

Why is carbon capture and storage not investable in the UK right now?

The UK / EU have announced they want 20% reductions in CO2 by 2020, 30% by 2030 and 80% by 2050.

If these targets are to be achieved, this means that the amount of conventional coal power (without carbon capture) will soon be limited. This will create a market for decarbonised electricity to fill the gap.

In 2030 for example, electricity will need to be around 50% decarbonised to hit this 30% overall target (if we work on the basis that transport will take longer to decarbonise, since it needs both a supply of decarbonised electricity or hydrogen, and a conversion of vehicles to electric or fuel cell power).

If the National Grid (UK electricity body) must limit the amount of electricity supplied to the UK which can be carbonised as 50% of the total, then it will be shopping for decarbonised electricity. This comes at a price, but the price will be passed onto consumers who will presumably pay rather than go without their hot drinks and other things electricity provides.

This means there will be a real market for wind and coal + CCS – the sources of decarbonised electricity. They can both compete with each other. The market price will adjust until the 50% can be supplied – or until the electricity price rises to the point that consumer demand drops.

Basically there’s going to be a lot of demand for decarbonised electricity and a willingness to pay in 2030 – and a gradual increase up to that point.

If it takes at least 10 years to plan and commission a carbon capture plant, you might think that there’s a reasonably strong investment case in carbon capture right now – and this investment case will strengthen over the years.

There’s a collossal amount of capital in the world looking for reliable returns which don’t need to be particularly high. So if you take a slightly higher risk and invest in carbon capture now, perhaps you can sell your investment on to investment funds with a lower risk profile in a few years, at quite a high profit.

I’m not an investor – no-one is investing in this idea right now although it is fairly clear – but I can’t see the holes either. Unless people think there’s like a likelihood this carbon discussion will go away. Do we need some kind of government guarantees?

 

 

Start with ‘how’

“Start with why” is one of the most famous TED talks. The presenter explains that businesses typically market themselves by talking about ‘what’ they do (for example, a law firm will put lawyers to work on your case), and explain how their ‘what’ is better (we have better lawyers). But commercially successful companies often start marketing by saying ‘why’ they are doing something (for example, Apple says we want to revolutionise the way people work with devices, or something like this). In between ‘why’ and ‘what’ we have ‘how’ – how the business achieves what it sets out to achieve.

Here’s an idea. In the arena of climate, most people are still focussing on the ‘why’. Why should we reduce carbon emissions? Should we reduce carbon emissions? Why is Shell not getting the message about reducing carbon emissions and drilling in the Arctic” and so on.

How about we skip the ‘why’ discussion on the basis that everyone who will ever get the message has already got the message, and get on with the ‘how’ – how are we actually going to reduce emissions?

Let me start. The ‘how’ question is easy to answer at a basic level (more renewables + CCS, provide decarbonised electricity and phase out direct burning of fossil fuels. Less long distance car driving, convert cars and home heating to electric or hydrogen power, run industrial heating on electric).

At a deeper level we need investors to put more money into renewables and CCS, we need government to create a market for the decarbonised electricity they provide, we probably want the public to be more aware of the specific choices they will need to make.

To create a market for decarbonised electricity, we need carbonised electricity to be restricted, or investors to believe that it will be in 10+ years.

The UK government and European Union have variously announced 20% reductions in CO2 by 2020, 40% by 2030 and 80% by 2050, but that’s not enough to give investors confidence right now in carbon capture and storage.

It isn’t clear exactly why that is – but that looks like precisely the sort of question which ought to be answered, as part of our understanding of the ‘how’.

 

What if the government set a deadline on non CCS power?

What if the government were to set a decree today that all power generation must be 100% zero CO2 by 2045 (30 years from now).

Running carbon capture on a coal plant (capturing 100% of the CO2) adds (let’s say) 30% to the cost of generating electricity.

That means that electricity costs will rise 1% a year over the next 30 years.

Surely that’s politically achievable?

And by doing this, the entire carbon problem can be solved.

With decarbonised electricity we can go on to have decarbonised transport, heating and cooling; and decarbonise much of industry. We’ll have a problem with aviation (until hydrogen planes) but can probably remove 90% of CO2 emissions. Even long distance driving (beyond the range of electric cars) will be possible with fuel cell vehicles powered by hydrogen.

If all our vehicles were electric powered (or powered using hydrogen, also generated from coal + CCS power stations by gasifying coal), then we’d need more coal or gas power stations in 2045 than we have now. But that’s OK though isn’t it, if they all have carbon capture?

 

Using expertise to reduce emissions cont/d

US CO2 emissions (according to EPA) are 37% electricity, 31% transportation, 15% industry, 10% residential and commercial (I think that means buildings). 6 per cent from other sources.

How can expertise be used to reduce all of these?

ELECTRICITY: decarbonised electricity options widely exist (wind, solar, coal + CCS). They are all more expensive, but the high price is more of a political problem (how can politicians ask people to pay more for electricity) rather than a society problem (can people afford it). The problem is increased by lack of a market mechanism to make it investable – (there are many attempts but none really working). Also solar + wind have an intermittency problem, and electricity storage hasn’t been solved (although there are many ideas). So coal + CCS looks like a ‘low hanging fruit’.

TRANSPORTATION: is perhaps the toughest carbon problem to fix. The easiest way is if people stop travelling but that’s very hard for a politician to acheive and of course not something the public wants. Adding carbon fees to travel costs as a disincentive is a possibility but perhaps not a good one. Electric transportation is a possibility, but is only low carbon if there is decarbonised electricity (see above). Hydrogen power is another possibility, but the hydrogen needs to be created from gas or coal with carbon capture, so unlikely to happen until carbon capture happens. (Or it can be created from renewables).

INDUSTRY: The problem with industrial emissions is that most industry can easily move, and carbon regulations are unlikely to happen globally for a while, if at all.  So adding cost to industry in a rich country drives the industry to move and emissions stay the same. There is some wiggle room perhaps. Another possibility is if the buyers of goods are required to ‘pay’ for the carbon somehow (or at least, be more aware of it) – then it doesn’t matter which country the goods are actually made in.  If decarbonised electricity was available then that makes it much easier for industry to be decarbonised.

RESIDENTIAL AND COMMERCIAL BUILDINGS – technology largely exists to make buildings zero carbon, although there could be some penalty on comfort and cost – smaller windows, thicker walls, less airconditioning in summer or heating in winter. There are big advances in this technology happening all the time. Again, decarbonised electricity can be used for heating and cooling.

One conclusion here is that decarbonising electricity really is a massive step forward in reducing all CO2 emissions. We’re moving as fast as we can (arguably) in renewables. We’re not moving as fast as we can for coal + carbon capture.

 

How can experts reduce CO2 emissions?

Following our theory that perhaps the best route to reducing CO2 emissions is allowing people to develop and use expertise in different fields,

What kind of experts + fields would get there?

One of the most exciting areas, I think, is when a consumer facing company (such as Glaxo Smith Kline) sets itself goals to reduce its carbon footprint and understand it in depth. You have the drive, the capability, the funding, the power.

The continued drive to machinery efficiency is exciting, but limited in what it can achieve. We might make a car which is 10% more efficient in 10 years but not many people believe cars could be massively more efficient.

The realm of wind power has many experts – particularly in financial planning side of it – and in persuading the public to spend more money for wind power.

In the realm of policymaking, we have what sounds like regulation by stealth. My theory is that it is very hard for politicians to increase people’s fuel costs and stay elected, but they can (and do) make rules that new buildings must be more environmentally efficient.

Aviation is virtually impossible to solve. Airlines are in the business of persuading people to take more flights – which all means more CO2 emissions. Unless you curtain their business, which is very politically hard, airlines need to wait for hydrogen or (arguably) biofuel power to be low emission.

Transport emissions is a messy one. The biggest target for reducing CO2 emissions is long drives 15-40 miles – and it would be hard to persuade these drivers to get the train or bus, bearing in mind this usually means increased costs and lower flexibility. But many cities have successfully managed to reduce driving over shorter distances.

For the realm of industry, my best idea is to increase the labelling of where the carbon is. Perhaps one day everyone will calculate their own carbon footprint on an ongoing basis, and if you sell something to someone else, the embedded carbon emissions goes off your ledger onto theirs.

That’s the only way I can think of, of developing a sensible scheme for making it investable for manufacturers of (for example) chemicals, cement and steel to invest in carbon mitigation / carbon capture.

 

Investors are still saying “carbon capture – will that ever make money?”

I just did an interview about private equity opportunities in oil and gas with a director of an investment bank.

We got to carbon capture and he screwed his nose up and sort of said, there could be some business opportunity here but we have no idea what it is!

I’ve seen similar sentiment expressed by other investors this year.

How can we make carbon capture look more investable for people like this?

Perhaps 60% of the decision making for private equity is past performance – they won’t admit it because they can’t justify their fees that way but it is probably true! But that means that CCS will struggle to get PE investment,

But what about the other 40 percent – how do we make it worth investing in or convince them to invest in it?

My best answer is that CCS is investable when you consider it is the only way for EU countries to meet their future targets. But that is still a bit too vague for investors.

Can we come up with a better answer?

How about this way of looking at the carbon problem.

  • We need to have a way of allowing people to develop and use their expertise more in reducing carbon – there are so many ideas and schemes, some inclination, some of it will work better than others, and the pathway forward is to pick the right schemes and drop the weak ones. In this I include technology, business and policy schemes.

 

  • There needs to be a way of keeping score (a bit like money in the commercial world) and ETS is probably good for this, so long as the price of an emission credit is equivalent to the cost of avoiding carbon emissions (which it would be, if there was no surplus of allowances in the market and the ETS cost was a factor in people’s decision making). Many people believe that the money system is bad for society, they have a point, but we still stick with it, even if just as a means for keeping track of who is where! The same with ETS allowances.

 

  • Currently there is an emphasis on ETS as the driver – ETS isn’t really the driver though (like money isn’t the ‘driver’ of business). Eg people should be talking about schemes to cut carbon emissions at lower cost than the ETS price and how they can make a profit that way.

 

  • It all points to getting the ETS system working as the main way forward though, even if other commercial schemes (such as Red Hydrocarbon type scheme) can work in parallel with it (with convertible credits)!

Can we ignore the ‘trade’ part of ‘cap and trade’?

Mention ‘EU Emissions Trading Scheme’ to any carbon capture professional and you hear a big groan. The scheme made big promises of driving investment in carbon capture and other low carbon technology and failed to deliver. Meanwhile wind and solar managed to get their funding via other government routes and carbon capture didn’t.

Many people have explained why they think Emissions Trading can never work. The “trading” is a government allocated permission to permit – so you need a lot of trust in government’s ability to restrict the emissions to people who hold the certificates. The more successful the scheme is in driving low carbon emission, the less valuable the ‘trading certificates’ are, so the market is moving in the wrong direction (for a successful market, the price should surely rise the more popular the product being traded is).

These are fair points. But the Emissions Trading Scheme is about “cap” as well as “trade”. If we ignore the trading part of it, we have a cap on emissions – which, according to EU ETS Wikipedia page, will reduce by 1.74% a year from 2013 to 2020, and by 2.1% a year from 2020 to 2030, driving emissions from the ‘ETS sector’ (power generation and heavy industry, basically) by 43% by 2030.

Now we have something very different – a market for low carbon electricity.

How far can we quantify this market, in order to give security to a carbon capture investor?

If we assume that EU electricity consumption is constant until 2030, we can get a good idea of how much “low carbon electricity” will be required in Kwh.

If investors have a focus just on meeting this market demand at minimum cost, they can calculate that CCS can provide electricity at a lower cost per Kwh than other forms of low carbon – so CCS can earn revenue for electricity at the price of the next highest option (probably wind).

In other words, invest in a carbon capture power station now, for operation in (say) 2020, you can get as much revenue from your carbon capture plant as you could if you had to generate the power using wind turbines, but make much more profit since CCS is cheaper than wind.

There must be a flaw in this logic, since investors have looked at this in much greater detail but come to a different conclusion. Can anyone say what it is?

Or are investors too focused on the ‘trading’ part of ‘cap and trade (and disappointed at its results so far) to take anything associated with ETS seriously?

Our basic idea with Red Hydrocarbon is that the climate problem is best solved by the market – but based on a new market for ‘zero carbon energy’ (driven by regulatory caps) not with Emission Trading Scheme. This could be done by regulatory limiting of fossil fuel production – which would be a completely new scheme. But could it also be done with the EU ETS cap?