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% of 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.

Emission 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 to reducing global carbon emissions and increasing investment in renewable technologies.


All’s Quiet on the DR Front, but a Storm Is Brewing

— October 7, 2015

Another ho-hum summer for demand response (DR) has concluded as September comes to a close. The last two summers have been light in regards to the need to activate DR resources for most of North America. The East Coast had a second consecutive relatively mild season, with no true heat waves until September. Even Texas, which saw record heat this summer, did not require a large amount of DR to support its grid through peaks. The lone exception is drought-stricken California, which needs all the help it can get to meet its energy and water needs.

This reality lies in stark contrast to the summers of 2012 and 2013, when the weather was hot, new peak load records were hit, and DR was utilized multiple times in markets across the United States. The past couple of years have gained notoriety for needing DR in the winter due to the polar vortex of 2014 and for ever constraining natural gas pipelines as the amount of gas-fired generation grows. It appears that the expansion of energy efficiency programs and solar photovoltaic installations have permanently lowered peak load growth in many regions, diminishing the need for peak support but potentially raising new needs to firm up new load shapes.

This lull just may be the calm before the upcoming storm, however. There was no lack of activity in the court system regarding DR this summer as the actual DR resources sat idly by. One small issue that surprisingly arose was the U.S. Environmental Protection Agency’s (EPA) Reciprocating Internal Combustion Engine National Emission Standards for Hazardous Air Pollutants (known as RICE NESHAP). In 2013, the EPA issued a rule that allowed backup diesel generators to participate in emergency DR programs for up to 100 hours per year. Some states and generator groups appealed this ruling (for different reasons), and in May 2015, the U.S. Court of Appeals threw out the EPA’s rule and told the agency to go back to the drawing board. The EPA has been granted a stay, so its existing rule can remain in place until it comes up with a new one, but the situation has created uncertainty for the 20% or so of DR that utilizes diesel generation.

However, the real fireworks will come on October 14, when the U.S. Supreme Court hears arguments on the case regarding the Federal Energy Regulatory Commission’s (FERC) Order 745 on DR compensation. The two issues at stake are whether DR should get compensated the same as generators in the wholesale energy markets, and, more significantly, whether DR should be allowed to participate in wholesale markets at all. FERC, EnerNOC, and a plethora of state agencies and other DR providers will line up on one side of the aisle, while generators and hardcore economists line up on the other. This could be the heaviest hitting we see until Super Bowl 50 next year.

It’s not too often that someone covering something as esoteric as DR gets to go to the Supreme Court, so I can’t pass up the chance. I will be reporting and live tweeting from the hearing (@BfeldmanEnergy) as much as is allowed and access provides. It promises to be the most riveting courtroom drama since Tom Brady’s hearing against the NFL in the Deflategate saga. I promise not to draw any unflattering courtroom sketches of FERC chairman Norman Bay or anyone else involved.


Digital Strategies Help Bridge the Bike Infrastructure Gap

— October 5, 2015

The number of Americans switching from cars to bikes for their commute of choice is increasing at a rapid rate—up 62% between 2000–2013, according to U.S. Census data—and is challenging cities to develop solutions that can address the safety and convenience needs for this new set of commuters. Cyclists in San Francisco and the Netherlands have famously demonstrated the need for separate infrastructure and rules, causing large traffic jams as a form of protest. However, developing bike infrastructure can be prohibitively expensive for cities burdened by transportation department regulations, and as some cities have experienced, reducing lanes in order to allocate more space for bikers can be extremely unpopular among citizens.

In recent years, new, more cost-effective and data-based approaches to planning and managing bike infrastructure have emerged. Cities like New York and Chicago are proving that improved data collection has the ability to inform where and how cities can strategically develop bike lanes (based on the number and location of bikers at any given time during the day) and also better enable cyclists to pass through not so bike-friendly areas through better integration with public transportation.

Motivate, formerly Alta Bicycle Share, is a for-profit organization based out of New York City that manages bike-share systems in New York, Washington, D.C., and Chicago. The company has struggled financially in recent years, and in its (so far successful) attempt to turn itself around, Motivate has developed a technology-based approach to engaging with members. This involves pulling together information on road and air conditions, public transportation schedules to optimize internal operations and development, and trip planning for members that includes other forms of public transport.

In Portland, Oregon, Open Bike Initiative and Knock Software have also recognized the need for improving open access to data in order to support bike travel. Knock Software is currently developing two projects to support the city’s efforts to be more bike friendly. The first is a low-cost sensor network that monitors and analyzes bicycle traffic and car traffic trends to provide planning insights for the city. The second uses this same data, paired with other sources such as weather data and road conditions, to help bikers plan and optimize their travel via an app called Ride. Similar to Google’s Waze for drivers, Ride provides information on routes and weather and allows members to give feedback on their commute.

Technology-based approaches have the benefit of improving safety and convenience and can result in much more strategic—and less expensive—transportation planning for cities. While cities like Portland, San Francisco, and New York have been open and supportive of their cycling populations, other cities where bike commuting is still just emerging have not quite figured out how to support this demographic in a low-cost manner—and something as simple as a smart phone app could be an easy first step.


Volkswagen Scandal Deflates Clean Diesel Image

— October 5, 2015

We finally have a more important scandal to discuss than air pressure in footballs. On September 18, the U.S. Environmental Protection Agency (EPA) laid out a case for a notice of violation against Volkswagen. The issue? Computer software within Volkswagen clean diesel vehicles that allows the cars to sense an emissions test and activate emissions controls. The vehicles then could easily pass stringent U.S. Tier 2, Bin 5 emission standards. A Tier 2 vehicle must meet an average nitrogen oxide (NOx) emission limit of 0.07 grams per mile. However, when the programmed vehicles were not under emissions testing, emissions controls were disabled and Volkswagen vehicles spewed up to 40 times that level of NOx emissions.

Immediate Impacts

In a matter of days, Volkswagen lost $17 billion in shareholder value as the company’s stock plummeted over 30%. Volkswagen recently became the largest car seller in the world, selling nearly 10 million vehicles globally in 2014. The automaker will face up to $18 billion in fines from the U.S. government, and has also committed $7.3 billion toward recalling nearly 500,000 vehicles for the reprogramming necessary to comply with pollution standards. Volkswagen has also halted sales of affected 2015 models, and the EPA will not certify the company’s 2016 models.

While the U.S. market accounts for 6% of Volkswagen sales, the damage to the company’s environmentally responsible image is significant. Diesel vehicles account for over half of vehicle sales in Europe, and European government policies have made diesel fuels cheaper than gasoline. Emissions standards for diesels are also less strict in Europe compared to in the United States.

The U.S. Clean Diesel Market

Volkswagen TDIs represented nearly 30% of diesel sales in the U.S. market. Effective greenwashing campaigns by diesel automakers have created a reputation for diesel as a clean fuel source for our vehicles. Diesel has a higher energy density than fuel and diesel engines also operate more efficiently, so higher miles per gallon can be achieved. A clean image and a high fuel efficiency greatly increased the popularity of diesel models in the United States.

Whether arguing for or against diesel as a clean fuel source, it is important to discuss the emissions contents of diesel versus traditional fuel. Traditional fuel-burning vehicles give off higher yields of carbon monoxide and hydrocarbon emissions than diesel vehicles. These emissions are minimized by improved catalytic converter designs. Diesel vehicles emit more NOx, which in turn creates smog (ozone). The EPA is likely to take final action on stronger smog standards before the end of 2015. While diesel automakers utilize a variety of treatment systems to reduce NOx emissions, the Volkswagen scandal has significantly squashed the idea of diesel as a clean fuel source. How the public will respond to this breach of trust is yet to be seen.

Hybrid and Electric Vehicle Market growth

As the smog clears on the Volkswagen scandal, what opportunity is presented to hybrid and electric vehicles? As the image of clean diesel fades, the growing consumer base for fuel-efficient and environmentally friendly vehicles is expected to turn toward hybrid and electric vehicles. With the disgrace of the country’s most popular diesel model and growing interest in electrification, the auto industry may soon see a significant restructuring.


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