Navigant Research Blog

With New Energy Efficiency Directive, the EU Makes Sausage

— June 26, 2012

The remark often attributed to Bismarck, that the making of laws, like sausages, is not a pretty sight, seems particularly relevant to regulation in the European Union.  The EU’s 20-20-20 targets for 2020 are rightly considered to have established a world-leading benchmark for energy policy and the reduction in greenhouse gas emissions, but maintaining real commitment to that policy across 27 nations is a constant political struggle.

Of the three key targets set for 2020, the reduction in energy consumption has proven the hardest goal, with member states likely to achieve 9% efficiency gains by 2020 on current activities, instead of the targeted 20%.  This has led to renewed pressure for the EU to provide a tougher approach to ensuring that member states meet the required targets.  However, reaching agreement on how tough the new Energy Efficiency Directive should be has also proven far from easy.

Advocates of a stronger approach to energy savings had hoped that enforceable energy efficiency targets could be applied for each country, an approach that has been successful in driving forward renewable energy programs across the EU.  Government leaders, though, have resisted any significant move in that direction.  Instead, the new directive details measures that EU countries must adopt but does not provide specific targets for each country.  Those measures in turn have been the focus of difficult negotiations.

A number of countries have resisted important elements of the proposed new directive, including the United Kingdom and, more surprisingly, Germany.  Nevertheless, an agreement was finally reached earlier this month.  The result is a half-full or half-empty glass situation depending on your perspective.

The focal point of the new directive is the requirement for energy retailers to reduce energy consumption (in terms of their volume of sales) by 1.5% by 2020.  This proposal was watered down to allow about a quarter of that reduction to be achieved by other means, and so the actual reduction is closer to 1.1%.  In addition, the requirement that 3% of public building stock should be renovated annually to meet energy efficiency standards will now only apply to central government buildings.

These and other measures are estimated to provide a 17% saving in energy efficiency by 2020.  For some that’s enough to claim a victory, particularly as this is a minimum requirement and there will be a further review of progress in 2014 and 2016, with the possibility of introducing further measures as necessary.

The state of the European economy, of course, loomed over the discussions.  Critics of stronger measures claimed that it is the wrong time to put additional requirements on businesses, while others pointed to the overall net value of the measures to the European economy.   The Energy Efficiency Directive is estimated to cost €24 billion ($33 billion) a year until 2020, but it will save companies and consumers €44 billion ($61 billion).  The European Commission also estimates that the Directive will lead to an increased GDP in EU of €34 billion ($47 billion) in 2020, along with 400,000 new jobs.

As Europe’s countries struggle to resolve the financial and political issues around the eurozone crisis, the goal of achieving a low-carbon Europe is one of the few positive long term visions.  The struggle over the Energy Efficiency Directive, however, indicates that getting there will require a lot more sausage-making.


Microsoft Taxes Itself on Carbon Emission

— June 4, 2012

Fueled by environmental and regulatory requirements, supply chain mandates, brand image, shareholder pressures, and consumer purchase preferences for “green” products, companies from every sector have adopted sustainability strategies that typically have included ambitious carbon emission reduction goals.  But Microsoft’s recent announcement of levying an internal carbon tax on all its business units goes a step further than any other company in achieving lower carbon emissions.  It’s an unusually aggressive approach to achieving carbon neutrality.

Beginning on July 1, 2012 (the start of the company’s fiscal year 2013), Microsoft business units will be held financially responsible for the cost to offset the carbon (CO2) emissions that they produce.  In other words, each group will be charged a fee for every ton of carbon it generates, specifically from electricity consumption and company flights.  Administered by the corporate finance department, the money collected will be used to purchase renewable energy certificates (RECs) and carbon offsets to make it possible for Microsoft to become “carbon neutral.”  To this end, the company has developed an accountability model that quantifies each group’s carbon impact and price, based on the cost of buying offsets and investing in renewable energy.  According to a Microsoft spokesman, “… the internal cost for electricity includes not only the price we pay the utility for electricity, but also the price we pay to offset the carbon emissions associated with our electricity use.  For air travel, the cost includes not only the price we pay the airline for the ticket, but also the price we pay to offset the carbon emissions associated with the flight.”

Why such a drastic step?  Microsoft has already been effective in meeting its fiscal 2012 goal of reducing emissions by 30% per unit of revenue from 2007 levels through, for example, energy efficiency measures, a PC power management program, and installation of 2,288 solar panels at its Mountain View, California campus.  It has even been recognized, according to the company, by the U.S. Environmental Protection Agency for its commitment to renewable energy.  But these measures have apparently not been considered sufficient.

It would seem that besides aiming for carbon neutrality, Microsoft is also seeking to achieve behavioral change throughout its organization by setting a carbon price to help individuals internalize the environmental impact of their daily business activities.  While pricing carbon emissions is an effective way to raise awareness about energy use, it can also change behavior.  Perhaps another and more obvious reason is that by creating this type of accountability, Microsoft forces its business units to take ownership of the emissions they produce, thereby empowering them to take any necessary mitigating action.

And, let’s not underestimate the media and consumer attention that this announcement has created.  Because an internal carbon tax is a unique idea, it has attracted renewed interest in and curiosity about the company – perhaps much more so than any new product release could have generated by the company.  Microsoft stands out in the marketplace as an innovative environmental leader, providing a role model for other companies.  Though it’s unlikely to motivate U.S. government officials to re-consider their position on a national carbon tax, it could certainly inspire other corporations to adopt a similar approach to achieve carbon neutrality.


On Emissions Limits, California Goes its Own Way

— March 14, 2012

Earlier this year, the California Air Resources Board (CARB) completely revamped its passenger vehicle emissions control regulations. The new Advanced Clean Cars program, which covers model years 2017–2025, combines several regulatory schemes into the new program: the Low Emission Vehicle (LEV) program, which governs tailpipe regulations for light duty vehicles; the Clean Fuels Outlet regulation, a largely dormant effort to promote alternative fuel availability; and the most famous, or infamous, component, the ZEV mandate requiring automakers to produce vehicles with no tailpipe emissions.

California already has a reputation for marching to a different drummer, and this new program confirms that stereotype.

First, while it is now practically verboten to talk about carbon reduction at the national levels of U.S. government, California is openly embracing the idea.  Previously, the LEV and ZEV programs only addressed criteria pollutants.  The Advanced Clean Cars program expands the regulations to cover greenhouse gases (GHG) emissions.  By 2025, under the new regulations, passenger cars’ CO2 emissions will drop 34% from that of 2016 models.  The program is intended to help reduce GHG emissions in the state to 80% below 1990 levels by 2050.  In its scope and ambition, the new program resembles the carbon reduction goals and strategies being enacted in Europe more than anything happening elsewhere in the United States right now.

Second, the ZEV mandate remains a top-down, “technology forcing” regulation, contra a general preference for policies that simply allow new technologies to flourish.  While opponents of the ZEV mandate have painted it as an inflexible government “stick,” the Air Resources Board has always been open to modifying the mandate in response to changes in the technology landscape.  This flexibility helps explain the mandate’s remarkable resilience.  Consider that it was enacted in 1990, when the Soviet Union was intact, Tim Berners-Lee had just proposed something called the World Wide Web, and the Toyota Prius was just a gleam in an engineer’s eye.

The Air Resources Board has reconfigured the mandate to support the state’s 2050 GHG emissions target. CARB claims that the only way to meet the target is if ZEVs make up around 87% of the passenger vehicle fleet in California by 2050, as shown in the graphic below.

To get there, sales of ZEVs must ramp up dramatically from 2018 to 2025.  The mandate essentially requires that 500,000 ZEVs be produced cumulatively as of 2025, reaching 15.4% of new car sales as of 2025.  CARB’s scenario for the ramp-up projects that around 70,000 plug-in vehicles will be sold in California as of 2018.  This figure is close to Pike’s own forecasts for California.  We projected annual PEV sales to reach over 300,000 in the U.S. by 2017, and California will constitute almost 25% of those sales, as projected in last year’s Electric Vehicle Geographic Forecasts report.

Finally, CARB is practically the lone holdout among U.S. policymaking bodies in continuing to support fuel cell technology.  The ruling keeps fuel cells cars on equal footing with battery cars for earning ZEV credits.  More importantly, the board has revamped the Clean Fuels Outlet (CFO) program to support hydrogen fuelling deployment.  The lack of hydrogen infrastructure, and lack of incentives to deploy it absent large numbers of FCVs on the roads, is one of the key barriers to the fuel cell car market.  CARB is using the CFO to address that problem.  The new rule mandates that major refiners or importers of gasoline provide hydrogen fuelling when just 10,000 fuel cell vehicles are on the roads in a particular air basin.  Not surprisingly, this rule is receiving major pushback from the oil companies.

The new program faces a number of challenges.  First, there is controversy over a provision that lets automakers reduce the number of ZEVs they make if they “over-comply” with the overall GHG fleet standard. Second, the ambitions of this new program may come into conflict with the realities of the California state budget.  Third, it’s impossible to predict how the technology mix will really look in 2050.  The California plan essentially requires most of the fleet to be battery- or fuel cell-powered, with all hybrids and conventional gas cars basically obsolete by 2050.  2050 is a long way off and there are all sorts of things that could derail such a prediction, not the least of which is the actual progress of fuel cell and battery technology. But give CARB credit for thinking big.


How Green is Your EV?

— February 24, 2012

The American Council for an Energy-Efficient Economy just released its annual guide to the greenest vehicles.  For the first time, an electric vehicle (the Mitsubishi i-MiEV) ranked highest.  This factoid stirred up for me an issue that is not discussed often enough, and is understood even less.  When driving an EV, where you charge the batteries will determine whether or not the vehicle is greener than driving a gasoline car.

An EV powered by the average U.S. grid works out to about 207 grams of CO2 per mile, while the average new light duty vehicle sold in 2012 in the US emits 263 grams, according to the EPA.  So on average, driving electric is greener than driving a 33 mpg car.

However, in states with generation mix that includes a lot of renewables (hydro, wind or solar) or nuclear power, the carbon footprint of driving electric is clearly cleaner than your average automobile.  In states where coal is still king, the carbon footprint of an EV can actually be worse.

To illustrate the carbon footprint by state, below is a comparison of the emissions of an i-MiEV when driven in five states that are greener than the average and five states where you’d be better off driving a car with a fuel-efficient internal combustion engine.

As an alternative, customers in many states can choose to purchase electricity from renewable sources, which is the greenest way to drive.  Or, you can install solar panels on your roof, and net out more clean energy produced than consumed.

This state by state breakdown is really the tip of the iceberg when it comes to understanding true EV emissions.  Significant differences in carbon density occur between utilities within a state (such as hydro-rich western Oregon versus the coal-dependent eastern part of the state).

Also, the time of day that you charge can have a great influence on the generation mix too, as some regional grids with substantial amounts of solar can be relatively green at mid-day.  Since most EV charging is expected to occur overnight, states with higher percentages of wind power at night would enable greener EV driving.

As I’ve explained before, our knowledge about how green the grid is at any moment in time is woefully inadequate today.  In general, though, you can be confident that going electric is better, from a carbon emissions standpoint, than driving your old gas-guzzler.


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