Energy Transition in a Global Context

Climate change is one of the most pressing global challenges of the 21st century. The world’s population is expected to grow to around ten billion by 2050. The consequence is an increasing demand for energy, after all people in developing and emerging countries also have a justified desire for better living conditions. 

Responses to climate change must therefore first and foremost be developed with the help of an international, global approach, rather than unilateral efforts and instruments.

The European Union‘s Emission Trading Scheme

In the European Union (EU), the EU Emission Trading Scheme (ETS) sets a mandatory emissions reduction path for all EU countries over the years for the sectors it covers (including the entire energy sector, i.e. all coal, gas and other power plants). The ETS is a quantity control instrument which, thanks to the limited number of emission allowances issued, ensures that the EU achieves its internationally agreed climate protection targets. In the defined area of the ETS, the relevant greenhouse gas emissions of the EU will be reduced by 43% by 2030 (compared to the reference year 2005). The ETS is the central European control instrument for climate protection and has impressively demonstrated its effectiveness through the planned reduction of emissions to date. Consideration should be given to extending the ETS, e.g. to the building and transport sectors. Such strengthening of the ETS – or the introduction of another form of CO2 pricing in the non-ETS sector – could lead to considerable efficiency gains if it was coupled with an open-technology approach and genuine competition between the best and cheapest emissions reduction technologies. Similar efforts to tackle climate change may also be observed in other regions of the world. 

New Zealand’s ETS and the Role of Geothermal Energy

With the introduction of an ETS, New Zealand put a price on greenhouse gas emissions. Thus, the country also opted for a market based-approach in order to meet domestic and international climate change targets. The trading system is set by supply and demand and leaves it up to the emitter to decide whether they wish to reduce their emissions or purchase units. Only after substantial reforms a cap on the number of units in the scheme was introduced in 2018 and is intended to be reduced over time. New Zealand’s ETS was initially designed to cover all sectors, however, currently emissions from agriculture must only be reported and not surrendered. As a consequence, only around 50% of New Zealand’s greenhouse gas emissions are covered by the trading scheme to date.

When it comes to renewables, New Zealand has a long history of geothermal electricity generation. The country lies within a geographical area of high volcanic and seismic activity known as the Ring of Fire. It covers boundaries between several tectonic plates and is characterised by active volcanoes and frequent earthquakes. 

According to the Energy Efficiency and Conservation Authority (EECA), geothermal energy provides for almost 20% of New Zealand’s electricity supply. Total geothermal electricity capacity in New Zealand stands at over 900 MW. It has been estimated that there is approximately another 1,000 MW of geothermal resources that could be used for generating electricity. Given the fact that there are no subsidies or grants in New Zealand, neither for large nor small renewable energy projects, only economically viable and market-proven energy projects are implemented. The example of New Zealand and other countries located alongside the Ring of Fire shows how critical it is to use renewable energy sources given that wind does not blow equally strong everywhere, the sun does not always shine and geothermal energy may be easier tapped in some regions than in others, depending on the geological conditions.

Australia’s Instruments for Reducing Greenhouse Gas Emissions

Australia, to give another example, is seeking the best way to fulfil its commitment to reduce emissions. After repealing its 2012 carbon tax in 2014, today the Emission Reductions Fund (ERF), introduced in 2015, is the key instrument of Australian climate protection policy. The Fund provides financial incentives to use new technologies and methods that reduce greenhouse gas emissions and improve energy efficiency. Under the ERF, Australian carbon credit units are issued on registered projects that have been proven to reduce CO2 emissions. The ERF covers projects in the agricultural, building, power generation, industry, transport and waste management sectors. 

Generally speaking, a market-based system such as a trading scheme is the means of choice because it is potentially internationally connectable. By linking emissions trading systems, larger and more liquid markets may be created, emission reduction targets may be achieved more cost-effectively and distortions of competition may be avoided through a uniform CO2 price. The aim must be to harmonise and link emissions trading systems in order to work towards the creation of a global carbon market and thus the establishment of a level playing field. 

The global challenge of climate change must also be met globally!

The German Instrument: Expanding Renewable Energies

Another way to facilitate the transition towards a more sustainable environment is the expansion of renewable energies. For many years, Germany was regarded as a showcase example for international energy transition and decarbonisation. The country advanced to be an innovation pioneer in photovoltaic and wind power plants (on- and offshore) and thus paid for the learning curve of the world in the field of energy system transformation. Although almost 40% of its electricity now comes from wind, sun, water or biomass, the energy revolution in Germany seems to have stalled: failure to meet the national climate protection target by 2020, overpromotion of renewable energies, a drastic rise of electricity prices, which private households and industry in particular have a hard time bearing, and an insufficient grid development for its expanded electricity generation based on renewable energies. 

The 2010 Energy Concept sets the goal of reducing primary energy consumption by 50% by 2050. It was also agreed to reduce greenhouse gas emissions by 80% to 95% by 2050, now even climate neutrality (as proposed by the EU’s new ‘European Green Deal’ of last December) should be striven for. These goals could easily have been achieved if we had adhered to the 2010 goals.

Let me explain this: In 2010, electricity was generated in Germany using around 10% renewable energies and 30% nuclear energy. This means that 40% of electricity generation was CO2-free. Without the abrupt phase-out of nuclear energy, we would have had 30% nuclear energy while the use of renewable energies would have grown to 40% by 2020. This would have meant that up to 70% of electricity generation would have been CO2-free by 2020. The issue, however, was that the meltdown of the core in Fukushima (as the result of a tsunami) was immediately followed by a ‘meltdown of the brain’ in Germany. Instead of replacing coal, which is rich in greenhouse gases, with nuclear power, renewables took the place of low-emission nuclear power in the energy supply.

Hence: A rethink is needed. The question is: How must the transformation of the energy system be structured so that climate protection may succeed while Germany and Europe remain equally attractive for companies? The balance may be found in the energy triangle, which defines security of supply, economic efficiency and environmental compatibility as equal goals. In order to successfully restructure the energy supply and achieve the 65% renewable target by 2030, it is also necessary to push ahead with climate protection measures at national and EU level, which must not counteract the European ETS as the key instrument of climate policy. Reason and understanding, not blind activism and ideology, are needed here. Increasing energy efficiency is the best way to achieve this goal, because not to consume energy is still the cheapest and cleanest option. For this reason, the competitive increase in energy efficiency in all sectors – buildings, industry and transport – must be promoted. 

Instead of coercion and prohibition, incentives and technology-open competition are needed. With its “climate protection package 2030”, which was adopted in the end of September 2019, the Federal Government is moving in the right direction, in particular with the introduction of a market-based pricing system for CO2 in the transport and building sectors. 

The further expansion of renewable energies makes sense and is being pursued by the Grand Coalition. However, in contrast to the current situation, the expansion must be even more competitive and innovation-oriented as well as synchronised with an accelerated grid development.

Taking National Conditions into Account

When taking a broader view, it becomes clear that a one-size-fits-all approach is not appropriate concerning the expansion of renewable energies. 

Given its geographical location between two tectonic plates, New Zealand has an abundant supply of geothermal energy. The country could exploit this strategic advantage to become a forerunner in the field. Similarly, Australia’s geography is almost unique in the world for the expansion of wind and solar power: High solar radiation due to proximity to the equator, partly very strong and stable winds and above all lots of space. The population density in Germany is 75 times higher, whereas in Australia large parts of the continent are virtually uninhabited.

The mere expansion of renewable energies is not an end in itself. The integration of more renewables must rather take into account local circumstances in order to be efficient and bear the brunt of a secure and affordable energy supply.

Strategic Perspectives for Energy Transformation and Decarbonisation

For years, Germany has been a forerunner in regards to the development of photovoltaic and wind power plants. This role of a pioneer has come, however, at a price. Germany embarked on the project when renewable energy prices were much higher than they are today. As the subsidies are fixed for 20 years, this approach has created a “backpack” of costs which the country still carries today. The annual subsidies for renewable energy support add up to over €26 billion. Meanwhile, renewables have become increasingly competitive. As a result, they must learn to stand on their own two feet more quickly, prove themselves in competition and ultimately manage without subsidies. As the examples of Australia and New Zealand indicate, it will be vital not only to build renewable energy plants but also to consider local circumstances in order to increase their efficiency and effectiveness. Last but not least, the aim must be to merge the existing parallel subsidy systems into a new market design in which all technologies are combined according to competitive criteria, renewable energies and conventional power plants as well as storage, flexibility and digitisation. Furthermore, energy efficiency and sector coupling must be promoted.

Such an approach towards renewable energy systems combined with a global carbon market would truly help to tackle climate change in the most effective way.


Biography

Dr Joachim Pfeiffer is the economic & energy policy spokesman for the CDU/CSU parliamentary group. He was born in Mutlangen (Germany) and studied business economics with a technical orientation at the University of Stuttgart. He held a scholarship from the Konrad Adenauer Foundation during his studies. His political career he began in 1990, whilst he was studying toward his doctorate. From 1992 to 1997 Dr. Pfeiffer was employed by the electric supply company Energie Versorgung Schwaben AG (EVS). Here he gained particular experience in mergers & acquisitions.

Soon after obtaining his doctorate in 1997 he was the head of economic and employment promotion activities for Stuttgart, provincial capital of Baden-Württemberg. Since 2002 Dr Pfeiffer is a member of the German Parliament. In 2009 Dr Pfeiffer became the economic & energy policy spokesman of the CDU/CSU parliamentary group, a role he holds until today. He is also a lecturer at the Institute of energy economics & the rational use of energy at the University of Stuttgart, works as a freelance consultant and is chair of the CDU for the county of Rems-Murr.

Introduction

Analysis

Statements

Conclusion