Navigant Research Blog

World’s Largest Cap and Trade Program in Development

— October 7, 2015

Chinese President Xi Jinping has announced an ambitious vision to implement a market-based cap and trade system to limit China’s emissions from its largest sectors. The announcement was made jointly with U.S. President Barack Obama as both countries prepare for the Global Climate Agreement in December. The cap and trade system will initially encourage emissions reductions in the following industries: power generation, iron and steel, chemicals, and building materials (such as cement, papermaking, and non-ferrous metals).

While specifics to China’s program have not been released, a typical cap and trade system operates as follows:

  • An annual nationwide limit is set for maximum allowable emissions. This is typically capped with the intent to reduce overall emissions from 5% to 15% compared to the previous year.
  • Individual emitters will be allowed an annual allowance of emissions totaling the nation’s cap.
  • Emitters are penalized if they exceed their allowances.
  • If an emitter has excess allowances at the end of the year, it can sell extra allowances to over polluters that want to avoid penalties.

Generally, the system allows companies to plan ahead for annual reduction targets. Companies are incentivized to sell excess allowances and are punished for excessive emissions. China also intends to generate 20% of its electricity from renewable sources by 2030. The carbon tax will help promote investment in renewable technologies and incentivize industries to help achieve this target.

Emissions Reduction Potential

China is currently the world’s largest emitter of CO2. In 2013, China emitted 10.3 billion tons of CO2, which accounted for 29% of global CO2 emissions. If China can reduce its annual CO2 emissions by 15%, the reduction would total more than the annual CO2 emissions from all of South and Central America.

Current Status of Global Emissions Trading Programs

The cap and trade system has been applied in many locations around the world with mixed results. The European Union implemented the first phase of its Emissions Trading Scheme (EU ETS) among 27 countries in 2005. The ultimate target of this program is a 20% reduction in emissions from 1990 levels by 2020 and 50% reduction by 2050. However, initial phases of the program did not achieve significant reductions and lacked control in distributing carbon allowances. Modifications for phase 2 and 3 aim to further reduce emissions and to manage auctioning of carbon allowances.

In the United States, emissions trading was utilized in the late 1980s to reduce impacts of acid rain. Emissions trading became law as part of the Clean Air Act of 1990. The Acid Rain Program has been effective in reducing the total amount of sulfur dioxide emissions to a 50% of 1980 levels by 2010. The current Regional Greenhouse Gas Initiative cap and trade program is effective in 10 states and allows some states to auction all of their emissions allowances. In the first 2 years with the auction program, six states raised $38.5 million and $106.5 million dollars. The states and electricity utilities intend to invest funds for energy efficiency and renewable energy technologies to further reduce fossil fuel-based emissions.

How China decides to structure its cap and distribute emissions allowances will be critical to achieve significant cuts in emissions and to promote investments in efficiency and renewable technologies. Regardless, China’s emissions trading system should be an important step toward reducing global carbon emissions and increasing investment in renewable technologies.


August Presents Prospects and Threats for Renewable Energy

— September 15, 2015

Rough_Seas_webOil prices experienced a tumultuous year in 2015. With an increase in North American shale oil supply and a lack of management of Organization of the Petroleum Exporting Countries (OPEC) production, an imbalance in the supply and demand of oil has led to wild spikes in oil prices. As oil prices have plummeted over 50% in the past year, renewable energy companies are understandably concerned.

Simple economics explains that when commodities prices are low, consumers will want to purchase and use more of the product. This is no different when it comes to energy prices. Dropping oil prices makes renewable energy sources appear comparatively more expensive, and thus consumers will return to oil.

However, simple economic models are too basic to describe why dropping oil prices aren’t always a harbinger of challenges for the renewable energy market. Volatility is one reason why oil prices won’t collapse renewable energy stocks. Investors understand that markets are erratic. Despite the current downswing, investors in oil should expect an eventual recovery. Lack of control in oil production leads to little price stability. By comparison, investors may view renewable energy technologies as a far more consistent opportunity. Additionally, the decline in the use of oil for electricity generation has limited the impact of oil prices on solar and wind generation sources.

Global Stock Market Crash

This August, China’s stock market suffered a significant fall. An initial 8.5% drop in the world’s second-largest economy had a significant impact globally. This market crash led to immediate further dips in oil prices, causing stock prices for renewable energies to continue to decline as well. One cause of the Chinese market crash was a decision by the Chinese government to devalue its currency in an attempt to reduce costs of exports. China is currently the largest manufacturer of solar panels, often exporting solar panels globally below the production costs of competing manufacturers. As a result of the country’s currency devaluation, there are concerns from competitors that Chinese solar panels will continue to decrease in cost.

A New Clean Power Policy

President Barack Obama rolled out a new clean power policy this month that will provide federal backing for clean energy technologies. The plan calls for $1 billion in additional loans to be made available for distributed energy projects that aggregate numerous distributed energy resources in new and cost-effective ways. Clean energy technology will also be more readily available for residential customers through improvements being made to the property-assessed clean energy (PACE) program. The plan will also allow for significant innovation in distributed energy projects.

Challenges and Potential

While decreased oil prices and a struggling global stock market have had an immediate negative impact on the renewable energy industry, significant policy changes will allow companies the opportunity to fund innovative distributed generation technologies moving forward.


Increased Safety at Ports through Smart Technologies

— September 1, 2015

Massive explosions killed at least 114 people and injured over 700 in early August at the Port of Tianjin in China. Tianjin is located close to Beijing and is one of China’s most important oil and gas terminals. It also serves as a key entry point for iron ore, vital to the enormous steel making industry in China. While the cause of the explosions are not yet clear, it is interesting to question whether this accident could have been prevented through the use of smart technologies. Technologies such as petrochemical air pollution sensors and wireless mesh networks could have potentially been helpful in detecting potential hazards such as early fires (which may have led to the explosions) or a gas leak.

Smart Technology Port Applications

Ports in China would be far from the first to adopt smart technologies for safety purposes. Wireless mesh networks are currently being used in marine and safety applications in North America at the NY Waterway. This network provides a security solution with a coverage area spanning nearly all the waterways that surround Manhattan. The NY Waterway uses the high-speed wireless network to improve communications, emergency response, and preparedness throughout all ports and ferries in the organization’s fleet. Hundreds of Interlogix IP and analog cameras are being used and are connected through Fluidmesh’s Multiprotocol Label Switching (MPLS)-based wireless mesh network.

Increased Safety through Energy Efficiency

Smart technologies can also make port operations safer by making them more energy efficient. The Port of Hamburg, which takes in roughly 10,000 ships per year, recently computerized its loading systems to synchronize offloading and reduce traffic jams that were causing very high concentrations of diesel emissions. Integrated Truck Guidance systems from companies such as Siemens can track and guide trucks that are close to the port (within 10-15 miles) to assigned spaces or allocate each truck to alternative spaces if the originally assigned space is not open. This system can reduce traffic congestion and unnecessary idling at ports by making parking and cargo pickup routes more efficient—thus reducing harmful air pollution.

While it’s impossible to know for sure whether a connected sensor network could have prevented the explosions at the Tianjin port, perhaps operators could have taken some preventative action if they were given a chance to respond to the events before it became an uncontrollable situation. The inherent security and operational issues regarding ports and ships make this industry a prime candidate for smart technologies.

For more information on the use of smart technologies in port operations, see Navigant Research’s report Energy-Efficient Port Operations, which analyzes the market for shore power technology and natural gas drayage trucks.


Market Players Split on Energy Efficiency Opt-Out Program Options

— August 31, 2015

Walmart and a group of large energy users within Florida have proposed an opt-out option to Florida’s Energy Efficiency and Conservation Act. The proposal would allow these large companies to opt out of paying the energy conservation charge. This action would separate these payments and the demand-side management programs, which are both part of the Energy Efficiency and Conservation Act. As the Orlando Sentinel reports, Kenneth Baker, a senior manager at Walmart, stated: “We tend to pay into the rebate program … much higher numbers than we get back in rebates. I think that some of the money that we’re now spending on rebates could go towards other energy-efficiency measures.” Walmart is arguing it would have a better impact on energy efficiency measures if it were allowed to take control of these programs—and not be confined by the Energy Efficiency and Conservation Act.

Opt-out options of similar programs have been implemented in other states, with an Opt-Out Eligibility put forth by the utility and approved by the utilities commission. In order to opt out of the program in North Carolina, for example, a company must implement alternative energy efficiency measures.

The states that do not offer self direct and opt-out programs include Alabama, Alaska, California, Connecticut, Delaware, Washington, D.C., Florida, Georgia, and Hawaii. In Texas, clients develop their own energy efficiency plans if desired and are responsible for the financial impact associated with them. While self direct and opt-out programs have been implemented in other states, there is little information on the successes and failures of such programs.


According to Energy Manager Today, Duke, Florida Power & Light (FPL), Tampa Electric, and Gulf Power all oppose the proposal. Their arguments against the proposal are increased costs to small businesses and residential customers. All businesses and residents have the potential to benefit from the programs via the lowering of utility rates, which would be limited if the proposal passed. According to the Tampa Bay Times, FPL argued, “The proposals are self-serving and discriminatory because the thresholds would benefit only select customers.” It would be a detriment to small businesses and residential customers to allow Walmart and other large companies to opt-out of energy efficiency programs. There are no regulations stopping large energy users from investing in additional energy efficiency programs on their own.

If the Public Service Commission in Florida agrees to allow Walmart and other large energy clients to opt out, it seems likely they would provide a self direct program as an alternative, which is common in many other states. While the self direct programs require these companies to provide their own energy efficiency programs, this still leaves the issue of higher costs to small businesses and residential clients who do not qualify to opt out.

The commission is waiting for staff recommendations before making its decision, which will most likely happen in September.


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