Renewables in the Post-COP21 Agenda

Transformation of the global energy system forms the backbone of climate action. Without significant movement towards decarbonisation, the chances of keeping global temperature rise below two degrees celsius are low if not impossible. For Energy Day at the UN climate change talks in Paris, IRENA brought together scientists, policy-makers, business leaders and civil society to explore the future of renewable energy.

Arthouros Zervos, Chair of REN21, confirms the upscale in renewable energy deployment around the world and most importantly in developing countries. This is not surprising given the rapid drop in the cost of solar and wind power. According to the latest study by Lazard, a leading financial advisory firm, the cost of solar and wind power have dropped by 82% and 61% in 6 years:

Fossil Fuel Subsidies

One obstacle remains the massive fossil fuel subsidies of some $500 billion (IEA). These figures increase to $5.3 trillion or 6.5% of global GDP if externalities like pollution are included (IMF WP/15/105). In some countries, energy prices are kept artificially low by policies that can cost up to 40% of total government spending. This is why Kuwaitis get to pay $0.22 per liter of gasoline (Feb. 29 2016) and that electricity costs as little as 1 cent per kilowatt-hour in Saudi Arabia.

Private sector and civil society leadership 

ikea-solar-panelFor Peter Agnefjäll, CEO of IKEA, it has become clear that we must grow within the limits of the planet. This positive impact on planet and people is behind IKEA’s decision to invest in renewables with the objective of becoming totally energy independent globally by 2020.

Civil society can help propel this transformation with initiatives for entire sectors of the economy. For Jules Kortenhorst from the Rocky Mountain Institute and the Carbon War Room,  is working on scaling up to reduce costs and accelerate the uptake of renewables  like sustainable jet fuels for the aviation industry, improving the efficiency of maritime shipping and also in buildings, thanks to IT solutions and big data.

Tapping onto geothermal  

Iceland provides a powerful business case for geothermal energy to heat and cool buildings in cities. For President of Iceland, Ólafur Ragnar Grímsson, such solutions have proven profitable without subsidies and provide a cost-effective path towards lower emissions. In 2010, 24 countries generated electricity thanks to geothermal power while some 70 use it for heating.

COP21 a turning point

AdnanZ-AminAdnan Z Amin, Director-General of IRENA, recognises that ParisClimat2015 represents a decisive moment for renewables. From now on, the connection between clean energy, the de-carbonization agenda and the safe climate imperative are inseparable.

Cooperation between civil society, the private sector and policy makers is key to accelerate this transition.

Other resources: UNECE Sustainable Energy

Building Retrofits for Economic Stability and Energy Security

The 25th edition of the Krynica Economic Forum (Poland), the “little Davos of CEE”, took place a few weeks ago. After the opening with the Polish, Croatian and Macedonian Presidents on building a Resilient Europe, I took part in a panel organized by “The European Alliance of Companies for Energy Efficiency in Buildings” (EuroACE) on the economics and energy security aspects of renovating European buildings. A most timely topic as most buildings are energy colanders, and hence account for 40% of energy used in the EU – where more then half the energy is imported at a cost of €400+ billion.

Adrian Joyce. Archives of the Economic Forum, Krynica, Poland.

EuroACE’s Adrian Joyce reminded us that over 75% of European buildings have a very low performance level, and are a major source of energy waste and economic instability given Europe’s reliance on foreign energy. Yamina Saheb, from the Joint Research Centre of the European Commission, pointed to the economic opportunity for growth, job creation and side benefits like better air quality, health and productivity, key elements for prosperity and wellbeing in a sector that contributes 7% of EU GDP and 12 million direct jobs, adding that an ambitious renovation programme could create another 5 million jobs by 2030.

Oyvind Aarvig, from the Norwegian Ministry of Local Government and Modernisation, stressed the need to renovate existing buildings given that 80% of the buildings in 2050 have already been built. He raised the challenge of urban sprawl and renovating is not enough; we must also increased building density intelligently to create sustainable communities where people want to live. Andre Delpont, from the Bordeaux-Euratlantique Public Planning Authority, concurred that energy efficiency coupled with densification in large-scale urban regeneration projects is key to attracting investors.

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Archives of the Economic Forum, Krynica, Poland.

The city of Krakow, one of Europe’s most polluted cities because of coal burning, is opting for large-scale energy retrofits aiming to improve efficiency by 50% and co-financing its €500 million program through European Structural Funds. For Witold Smialek, Advisor to the Mayor of Krakow, the biggest obstacle is inability of owners and tenants to contribute their small contribution to the project and that is slowing down progress but in the end, he feels this can be resolved. Over 80% of Polish buildings have more than 25 years and are in need of renovation according to Oliver Rapf, Executive Director of the BPIE, meaning that the economic and social potential in renovating the building stock in the country is enormous. He commended the ambitious works in Krakow as an exemplary project that other Polish cities should replicate.

I commented that appropriate building technologies, including insulation, windows and lighting, can significantly reduce energy requirements and thereby costs, while boosting energy security in Poland and Europe. Replacing the 6,500 windows in New York’s Empire State building with energy efficient windows was one of the key elements that helped reduce energy consumption by 43% and saved $4.4 million annually with a payback of 3 years. The potential for the renovation of buildings, both in Poland and in the world is enormous.

Energy Utility Resistance

Attila Nyikos, from the Hungarian Energy and Public Utility Regulatory Authority, warned that reduced energy consumption meant lower revenues for energy utilities, as they must amortize massive fixed costs on a lower sales volume leading to higher energy rates for consumers, adding that occupants suffer while buildings undergo renovation works. He gave examples where owners refused free renovations because they wanted to avoid the inconvenience.

Takeaways:

  • When renovating a district, densification is key to attracting investors
  • Selecting the right timing for an energy retrofit and implementing integrated solutions is crucial to improve ROI
  • Multiple benefits can be important drivers (air quality, etc.) an inspire ambitious projects
  • Mixing local and EU funds is an effective answer to lack of upfront financing
  • To release the significant potential tied up in the existing building stock in Poland (and in the EU!) t is time to act. We need to start the work now (with proper planning), without delay!

Another important consideration is the need to align the interests of all parties involved. It is obvious that energy utilities will not promote effective energy efficiency programs if their profits depend on their volume of sales. Similar dilemmas exist between owners of building and tenants – owners will invest in measures to reduce energy bills if they see a real benefit for themselves. Regulatory measures (decoupling) can overcome such problems and are increasingly being deployed in America where utilities share part of the savings they generate for their customers. This sounds like a good starting for policy makers.

The Illusion of Cheap Oil

oil-pricesThe media were all over the “dramatic” increase in oil prices that rocked the markets last week. But at $40 a barrel, even the biggest one-day increase in five years (10%) only is a meager $4. Not even a blip in the decline that has took crude prices from $146 in 2008 to the low forties (down $104 or 70%+). As expected by analysts, the downward pressure soon returned and oil finished the week only $2.66 or 6% up (image source: ValueWalk).

Cheap oil for car drivers?

With 60% of global oil consumption used for transport (70% in the USA), it makes sense to focus on what cheap oil mean for drivers. But a closer look shows that little of the crude oil fall has trickled down to the price at the pump. Only 20% in the UK, 18% in France and just slightly more in the USA, but still only 32%.

Taxes keep gasolines prices high

Taxes makeup the largest chunk of gasoline prices in most countries – 60% in the UK and France. Even in places with lower fuel taxes like the USA, Canada and Australia, the decline at the pump was only a fraction of the crude oil price drop (32% in the USA). Because of taxes, cheap oil only resulted in marginal savings for households and business.

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There are exceptions. Some countries keep fuel prices artificially low. Iran and Saudi Arabia spend up to 9% of their GDP to subsidize fuel and offer fuel at 7 cents/liter. But with their state budgets under pressure from falling oil revenues, these policies are being phased out in Gulf countries but also in Indonesia, India and Venezuela. Drivers should get ready for hefty price hikes in the near future.

Major incentive for fuel efficiency

High prices at the pump provide individuals and industry with compelling reasons to improve fuel efficiency. In Geneva, in just a few years, the number of hybrid taxis (mostly Toyota Prius) has grown from close to nothing to 400 (out of 1,400 taxis in total). Most of them run on multiple shifts so they are on the road 24 hours a day, seven days a week. They are reliable, typically reaching 300-350 thousand km with little maintenance. But the main reason behind this phenomenal explosion is economic. With a consumption of 5 l/100km, taxi drivers claim that fuel savings pay for the car.

Similarly, Amsterdam Airport bought 160 Teslas because the economics of electric cars are so compelling. Even in the US where fuel is cheap ($0.76/liter), taxi companies are opting for electric cars boasting patriotism as they lower America’s reliance on foreign oil.

Fuel Efficiency Standards and other Incentives

Mandatory fuel efficiency standards are speeding up the revolution. France gives FEE-BATEs on new car purchases (rebates for clean cars of up to €10,000 financed by fees on dirty vehicles). Such schemes are boosting fuel efficiency of new cars in Europe by about 3% per year.

In the USA, fuel efficiency also improves (more slowly) despite a lack of regulations:

EDI_CAFE_July-2015

Now federal legislation will speed this up. Under CAFE (Corporate Average Fuel Economy) corporations must double the miles/gallon of their fleets (car and trucks) within a decade:

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Private Sector Leadership

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Truck of the Future by Walmart (2014), Peterbilt

But the private sector did not wait for regulators. 10 years after committing to double the fuel efficiency of its 6,500 strong truck fleet, Walmart has achieved a spectacular 84% improvement in fuel efficiency over its 2005 baseline.

Transportation companies are also  innovating in ways that go well beyond cost reductions. Thanks to UPSgermanyits e-bike service, UPS increased the number of daily pickups and deliveries because they can ride on pedestrian streets, zip through traffic and find parking anywhere – avoiding many of the frustrations of city driving. In addition to the cost improvements and the leap in productivity, their staff have never been happier.

Even the military, guilty for 1.9% of US oil consumption, has joined the efficiency race committing to get completely of oil by 2040, and pushing Detroit to supply electric vehicles with no compromise in terms of price, safety, comfort and performance.

Carmakers are speeding ahead

Just a few years ago Detroit and most manufacturers were dismissing electric cars as a distant illusion. But the landscape has changed dramatically, largely thanks to the Tesla revolution. “Hybridization, plug-in hybrids, or pure electric vehicles – this is a must for everyone… and the car company not able to keep up will disappear” said Rupert Stadler, Chief Executive of Audi earlier this year.

The end of Oil?

“The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil” declared Sheikh Zaki Yamani, former Saudi Arabian oil minister three decades ago. Ali al-Naimi, the country’s current oil minister, said that his kingdom will eventually not need fossil fuels and planned to become a “global power in solar and wind energy” and export electricity instead of fossil fuels. With a glut in oil supply, fuel efficiency that will shrink demand and Mr Naimi’s belief that “solar will me even more economic than fossil fuels”, the end of The Oil Age may be closer then we think.

This is the first in a series of articles on Cheap Oil and its implications.

Turning Trash into Cash

When Dr. Somthai started his waste recycling business in 1974, with 1,000 Thai Baht (30 US Dollars) and an old pickup truck, no one took him seriously. He literally became the laughingstock of Phitsanulok, a city of 800,000 located 400km north of Bangkok. But look who is laughing now. Over the last four decades, Dr. Somthai built his recycling business into a global empire with over 700 branches in Thailand and around the world, including Laos, Cambodia, Malaysia, Japan and even the United States. Not only has his Wongpanit Group become a major global player, his vision and charismatic personality have made him a leading international figure in terms of environmental stewardship, as a social entrepreneur, and, as a savvy, uncompromising and innovative business leader.

Waste is Gold

IMG_0215Waste management is a growing challenge in Thailand. A problem that only becomes more daunting as population grows and becomes more affluent. When waste was only organic it was easy to manage. But today, plastics, metals and toxics accumulate in landfills, overwhelm expensive and polluting incinerators, and threaten to contaminate water resources. Dr. Somthai offers a solution that diverts waste from landfills, incinerators and the environment, creates local employment and provides valuable commodities to industry at prices that help improve their competitiveness. By turning waste into resource, he transforms a problem into an opportunity for the environment and for society.

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Gold & platinum rings from recycled electronics

“There is no waste on this planet, only misplaced resources”, he says. “When looking at landfills most people see trash. I see valuable assets waiting to be mined! Recovering metals, plastics and other assets from landfills is much more efficient then mining the Earth for ores or oil. Reusing aluminum from scrap saves 95% of the energy needed to mine aluminum in the first place. The leverage is extraordinary!”

In his flagship ISO 14001 certified (since 2001) Phitsanulok plant, Dr. Somthai employs 250 people and can process 500 tons of trash every day. He buys waste from industry, landfills and individuals through 50 collection points scattered across the city. The waste is weighed, the purchase price determined based on the going rates and the payment is made immediately in cash.

IMG_1312He even has a catalog with 220 categories of items with prices for many categories of trash to encourage recycling.

A Global Market for Commodities

IMG_1265The prices of metals, plastics and all other commodities depend on global markets that Dr. Somthai monitors continuously. He prominently displays the daily prices for key commodities at the entrance of the center.

His four decades in the trade have helped hone his instinct for where the prices are heading. Akin to a professional commodities trader in London or Geneva, he takes positions, stocking up when he expects prices to go up or liquidating his stocks when prices are heading south. The recent drop in the price of oil had a negative impact on most products. This is why diversification is so important. His ability to recycle various kinds of waste helps spread his risk across a wide range of commodities. By adjusting his purchase price when markets are down he can always offer competitive prices to his customers while maintaining sustainable margins, whatever the market conditions.

Highly Skilled Labor

This labor-intensive trade is particularly well suited for developing countries with high unemployment and low wages. In Thailand it represents a significant source of income for the poorest of the poor. It is estimated that in the urban areas of Asia and Latin America up to 2% of the population depends on waste picking for their livelihood.

08_wongpanich_front05It would be a mistake however to think that this labor force is unskilled. Waste pickers are highly competent at identifying wastes with potential for recovery. The added value comes from sorting, cleaning, processing and organizing the transport of the waste in volumes that will make them commercially attractive for the domestic or international markets.

Take plastic for example. There are hundreds of plastic types. Each category must be identified, segregated by kind and color. Any impurities must be removed before processing (sorting, cleaning and chopping into flakes) so that the end product can have value. Any label on bottles of caps of a different plastic must be removed. Plastics must also be sorted according to their density (high HD or low LD) and their color. Each worker specializes in a particular type of material. Any turnover is problematic because training takes a long time and is expensive. Clearly, this is no project for amateurs.

Product Design

IMG_1267Manufacturers of packaging also cause significant problems when they fail to properly design their products. Many fast moving consumer goods have labels that are glued – this makes them difficult (sometimes impossible) to remove. But responsible companies are taking notice. Pepsi-Cola in Thailand has partnered with Wongpanit and agreed to pay an extra Baht for each kilo of recycled plastic but also to design its bottles to make them easy to recycle. Many manufacturers, despite their eco-labels and thick CSR reports fail to do this, which hampers recycling efforts and leads to overflowing landfills and incinerators. Dr. Somthai encourages these companies to follow the lead of Pepsi-Cola and the authorities to establish standards.

A Social Enterprise that is Part of the Community

schoolbankIn addition to providing local jobs and protecting the environment, Dr. Somthai values the importance of being a constructive force in the local community. Believing that the current generation is largely lost, he concentrates his time on young people, the leaders of tomorrow. He provides training in schools and once a week buys waste from the students,  providing them with an income while teaching them the economic value that can be found in waste. Similarly, he works with local monasteries that donate waste that he processes and donates money to fund scholarships for young people to be able to attend University.

A Global Perspective

11Delegations from around the world constantly visit Wongpanit. On the morning of our Swiss delegation visit there was also group from Japan, where Wangpanit already has two franchises. They wanted to meet the visionary man who started this business two decades before the first Rio conference, at a time when few people took environmental matters seriously. But today still, many believe that environmental stewardship is expensive and uncompetitive. Dr. Somthai has been disproving this myth for the last 40 years. Showing that the linear consumption model of extract-consume-dispose is outdated and that more circular models of consumption are needed. By turning waste into gold, Dr. Somthai provides the economic and social rationale for the creation of  zero-waste economy. A message that has come of age.

The Geneva delegation for the Swiss visit to Wongpanit was organized by the Honorary Consul to Thailand, Mr. Armand Jost, founder and president of S3Bi, a Geneva-based enterprise focused on assisting professionals in their career transition and its directors, Mark Giannelli, who is writing a thesis on “Waste Management in Developing Countries” at the Universities of St-Gall and Business School Lausanne (BSL). His Excellency, Ambassador Chalermpol Thanchitt from the Royal Thai Embassy in Bern (Switzerland) accompanied the delegation, as well as Dr. Gilles Bernard, Founder and CEO of Charity Consulting in Jumpol, Thailand, who is planning to develop such a project to create employment in the North of the country. My heartfelt thanks to Armand Jost and S3Bi for making my participation possible  and to our hosts, Dr. Somthai Wongcharoen, Wimonrat Santadvatana and the entire team at Wongpanit for welcoming us so generously. 

 

Bridging Luxury and the Environment

by Margo Koniuszewski, author of the “Bridging luxury & the environment” project
AngelinaJolie

Angelina Jolie in the Louis Vuitton Campaign (Source credit)

English version of Article published in Forbes Poland

Ten years ago, while buying lipstick at the stand of a leading luxury cosmetics brand, I asked if I could bring back the empty packaging for reuse by the company. The surprised saleslady answered, “I am sorry Madam, we do not practice such things here”. Today, premium brands like Guerlain, encourage their customers to return product packaging (empty perfume bottle, etc.), which is then transferred to special centers for sorting, recycling and recovery.

Luxury and Sustainability

Before luxury brands began to be identified with large corporations – fashion houses that spend billions on marketing – they were associated with family values, cultural heritage, precise-craftsmanship and timelessness (jewelry and watches that are passed on from generation to generation). Today, we must add the ecological and social innovation necessary to ensure a sustainable future. Customers actively support this process by demanding more responsible behaviors from their favorite brands. The global emergence of social and environmental awareness represents the most important cultural transformation of the twenty-first century – to which the luxury sector must provide leadership if their brands are to retain their prestige – an essential element in the DNA of luxury brands.

A Luxury Sector with a French Flavor

Luxury Industry revenues reached €210 billion in 2013 with French brands accounting for 25% of sales. The LVMH Group continues to lead the sector with revenues of €29 billion in 2013. Given this scale, the behavior of the industry has a major impact and through its leadership it can become a catalyst for driving aspirations of more eco-conscious lifestyles.

In 2013, the LVMH Group (Louis Vuitton Moët Hennessy) invested €17.3 million in environmental protection – including waste management, water recycling, soil and noise pollution reduction, and projects to support biodiversity. Investments in efficient buildings, internal training and the sponsorship of environmental initiatives are budgeted separately.

Supply chain monitoring, eco-design, energy efficient lighting, certification of business processes, ecosystems protection, materials recovery and sustainability audits are all integrated in the various brand strategies that are specific to each business sector: Wine & Spirits, Perfume & Cosmetics, Fashion & Leather Goods, Watches & Jewelry and Selective Retailing.

Without Nature there is No Business

Luxury brands are now building their core image around caring for society and the environment. Wanting to preserve their beauty and appeal, they must (as many already do) provide a persuasive narrative for their contribution to alleviate social and environmental concerns. Global warming, deforestation, resource scarcity, pollution of air, water and soil, endangered species and environmental degradation disturb the favorable conditions that have allowed the industry to develop and thrive. As LVMH Group CEO Bernard Arnault says, “LVMH owes a lot to nature”. And the business case for sustainability is made even more compelling because “green solutions” benefits extend beyond image building, they can also improve the bottom line through efficiency and cost reductions.

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In the production of Belvedere vodka, a brand of Polish descent, distillery Polmos Zyrardów has converted its power generation from oil to natural gas and improved its energy efficiency through a heat recovery system. The energy generated is now used in the production re-heating process. With these solutions, carbon emissions were reduced by 36 percent or 2 thousand tons, the equivalent to the consumption of 850 thousand liters of gasoline, like removing 900 cars from Polish roads. In 2012, LVMH launched a program to optimize energy consumption using LEDs in its boutiques, using technology from Philips Lighting amongst others – reducing the Louis Vuitton Maison power consumption by 50% since 1995. In addition to lower power bills, the shops have better possibilities in terms of “play of light” to showcase products.

Companies also benefit from recycling. LVMH created its CEDRE platform (Centre Environnemental de Déconditionnement et Recyclage Ecologique) to optimize the recovery and processing of waste generated in the production, distribution and recycling of its product packaging but also the waste from various events (exhibits, fashion shows, etc.). In 2013, it recovered around 1,600 tons of glass, paper, wood, metal and plastic.

The Hennessy Maison has been modernizing its vehicle fleet – more then 20 percent of its cars are now green (electric and hybrids). Charging stations have been installed at the factories and employees received eco-driving lessons, which helped reduce fuel consumption, accidents and maintenance costs. At Sephora, a fleet of electric trucks serves distribution centers located in French city centers, reducing costs and urban pollution.

Eco-marketing

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Veuve Clicquot Champagne casing made of potato starch and paper

The best strategy in terms of image and brand building in the luxury sector remains environmentally and socially responsible marketing. It is difficult to conceive a more compelling example for the imagination of wealthy eco-consumers then the fully biodegradable isothermal Veuve Clicquot champagne casing that is entirely made of potato starch and paper. Meanwhile, emotions-based cosmetics Maison Guerlain, engaged its brand in the protection of bees – the essential pollinators that are critical to healthy ecosystems. Through its Orchidarium research platform, Guerlain also supports the restoration of tropical forests – the natural habitat where orchids grow – passing along essential know-how to organizations that are involved in the collection of these flowers. Hennessy is also engaged in the protection of woodlands. The timber used for the production of cognac barrels comes from sustainably managed forests that are certified by FSC (Forest Stewardship Council) and PEFC (Programme for the Endorsement of Forest Certification).

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Guerlain – Celebrating 160 years of Commitment to Bees

Promoting advances in science is also important for Belvedere. Since 2005, it has worked with Lodz University of Technology to develop research programs in biotechnology and to help attract the best graduates.

Luxury ethics

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Bvlgari: Certified Responsible Jewelry Council label

Human rights stewardship is also important. Especially given the growing awareness of the social costs associated with precious metal and stone mining in the Third World. Responsible jewelry manufacturers became particularly vigilant in this area for fear of being associated with “blood diamonds”. Since 2005, Bvlgari has obtained the Certified Responsible Jewelry Council (RJC) label, certifying the implementation of responsible ethical, social and environmental practices in its supply chain. Since 2012, Louis Vuitton is also RJC certified.

Louis Vuitton also developed stringent  environmental audits of its supply chain.  There is also the implementation of ISO14001 with environmental assessment for transporters and warehouses.

LVMH works to reduce environmental impacts by designing quality products that are long-lasting and easy to repair. The durability and longevity of luxury goods contrasts with the planned obsolescence that is incorporated in fast moving consumer products.

Given the development of modern science, technology, and an awakening global consciousness, we realize that we can (and must) avoid repeating the mistakes of the past. Luxury brands enjoy global recognition and prestige, and we aspire to be associated with them. Aspirations are a critical element. If we want a better life and for meaningful leadership to come from the luxury sector, we better pay attention to what we buy and invest ourselves in asking the right questions. This is best path towards setting a new standard of sustainability for the industry and beyond.

Mixed Message from Australia after G20

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As host of this G20, Australia reluctantly released a statement that had been agreed with other leaders at the summit. Interesting energy and climate related commitments  were made, including:

  • To improve energy efficiency emphasizing six sectors: buildings, transportation -especially heavy vehicles, industrial processes, electricity generation, the financing of energy efficiency, and efficiency of networked devices. The White House highlighted a focus on heavy trucks and large vehicles that represent half the vehicle emissions but only 10% of traffic. The USA is keen on promoting its leadership in this area.
  • To phase out fossil-fuel subsidies that encourage wasteful consumption. The USA, China and Germany will conduct a study with the support of the European Union.
  • Strong and effective actions to address climate change, including a successful outcome of the Paris climate conference in 2015. Domestic targets for emissions reductions should be announced as soon as possible, ideally by early 2015.
  • The importance of contributing to the Green Climate Fund was highlighted. The USA committed $3 billion.

Tony Abbot and the Coal Addiction

Image from The Guardian

Image from The Guardian

The Australian Prime Minister and his team were not pleased. Having tried to resist pressure from President Obama and the European Union for climate change to appear prominently in the statement, they reluctantly sent the communiqué but made sure to downplay its significance. They also announced major investments of $7.5 billion in coal infrastructure despite warnings that the project is not commercially viable. Major international financial institutions refused to provide  financing.

Australia is highly reliant on coal but has suffered major setbacks in this sector recently, including the recent ban by China on the lowest quality “dirty coal” to improve air quality  that will hurt Australian exports.

EU Brokered Russian “Winter-Gas Package” for Ukraine buys time for Europe

With winter at our doorstep and just hours before leaving office, outgoing European Commission President, José Manuel Barroso, announced a last minute deal to keep Ukraine and Europe warm this winter and give assurances to Gazprom that Ukraine will be able to pay its debts of $3.1 billion and make upfront payments for the 4 billion cubic meters of gas ($1.5 billion) to be supplied until March 2015. Ukraine now also feels comfortable that Russia will deliver on its commitments. Financing will come from the current IMF programs and other sources.

PutinGasThe gas supplies to Ukraine had been cut since June, following deteriorating relations between the two countries. Meanwhile the tension between Europe and Russia was increasing and fears that Russia would cut gas supplies like it did in 2006 and 2009 resurfaced. What aggravated Russia most was the re-export of Russian gas from Poland, Hungary and Slovakia to Ukraine. Retaliation through lower supplies to these highly dependent central-European states heightened the crisis.

Russia’s Eroding Negotiation Position

The deal implies a $378 per cubic meter rate price, far below the original Russian asking price of $485. Similarly, Poland managed to renegotiate its rates with Gazprom in 2012 with a 15% reduction on a price of around $550, the second highest in Europe at the time (after Macedonia).

The recent reduction in the price of oil may have played in favor of Ukraine and Europe. While Russia was counting on oil at $100 a barrel for its 2015-2017 budget, the recent drop to $80 and expectations that it may fall to $70 in the coming months has severe implications for Russian finances and economy. The deal with Ukraine and the EU provides much needed stability for the coming months.

A Golden Opportunity for Energy Security through Efficiency

Europe depends on Russia for 30% of its gas supplies. In Ukraine this dependence represents 40% of its entire energy consumption. But Ukraine is one of the least efficient countries in terms of its energy use and it is promoting energy waste through misguided fuel subsidies representing 7.5% of its GDP. With an energy intensity that is twice that of Russia and 10 times the OECD average, the IMF is correct in requiring a major energy reform to reduce energy waste as part of its bailout.

Similarly, the EU is looking at improving energy security by implementing energy efficiency policies that would result in 40% savings by 2030, with equivalent reductions in gas imports. These measures could save Europe up to €549 billion between 2011 and 2030 according to the Commission.