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Coal Market Update 13 November 2015 21st Conference of the Parties (COP21) The 21st Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCC) takes place in Paris in early December, and is designed to produce the first legally binding agreement on climate change since the 1992 Kyoto Protocol. The COP21 talks represent a chance for the UNFCCC and multilateral action to regain the initiative in the regulation of carbon dioxide emissions. More than 150 countries have submitted pledges to reduce emissions. They are representing 90% of energy-related greenhouse-gas (GHG) emissions, according to the IEA. The most common energy-related measures are those that target increased renewables deployment (40% of submissions) or improved energy efficiency (33% of sub-missions). Figure 1 - Climate pledges for COP21 are consistent with a temperature rise of 2.7 0C, with investment needs of $13.5 trillion in low-carbon technologies & efficiency to 2030.

Source: OECD/IEA 2015

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Figure 2 - National climate pledges submitted for COP21 and coverage in terms of energy-related CO2 emissions in 2013

Note: The bubbles represent total energy-related carbon dioxide (CO2) emissions. The share of these emissions covered by INDC (Intended Nationally Determined Contributions) (as of mid-October 2015) is shown in green and those that are not in grey. Source: IEA Figure 3 - For COP21 negotiations Parties have been grouped by development status.

For COP21 negotiations Parties have been grouped by development status. Green = Annex I and II Parties, Blue = Annex I Parties, Yellow = Non-annex Parties, Red = Observer states and organizations. Parties classified as Annex I include developed countries and economies in transition (EITs), Annex II countries are developed OECD members required to give finan-cial and technical support to EITs and developing countries, non-annex countries are devel-oping countries requiring support.

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An energy sector transition is underway in many parts of the world. Policies to support the transition are increasingly being adopted, the US Clean Power Plan and China’s newly an-nounced carbon trading scheme to take effect in 2017 being among the most recent. Suppor-tive policies led to the installation of a record high 130 GW of renewables capacity in the power sector in 2014; collectively, renewables secured their position as the second-largest source of electricity, behind coal. Energy efficiency improvements helped restrain the growth in final energy demand in 2014 to just 33% of the level it would otherwise have been. The coverage of energy efficiency regula-tions in industry, buildings and transport has nearly doubled, rising from 14% of the world’s energy consumption in 2005 to 27% in 2014. In the New Policies Scenario (the central scenario of WEO-2015), the cautious implementa-tion of new and announced policies, including the energy sector components of the climate pledges, supports the greater adoption of low-carbon technologies and improved energy effi-ciency. Energy demand grows at 1.0% per year to 2040, about half the average annual rate since 1990, thanks to increased energy efficiency in end-uses and structural changes to the economy. The power sector decarbonises more quickly than ever before: CO2 emissions from power generation grow at only one-fifth the rate at which power output rises to 2040, breaking a longstanding one-for-one relationship. Figure 4 World electricity generation and related CO2 emissions

Source: OECD/IEA 2015 The deployment of renewables, which totals 3 600 GW from 2015-2040, is greater than for all other types of power plant combined as non-hydro (mostly wind and solar) become in-creasingly competitive. Driven by continued policy support, renewable account for half of additional global genera-tion, overtaking coal around 2030 to become the largest power source Figure 5: Global Electricity Generation by Source

Source: OECD/IEA 2015

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The energy sector in all countries can do more to restrain and reduce their GHG emissions. The IEA highlighted how just five energy sector measures (relying only on proven technolo-gies and policies) could help achieve an early peak in total energy-related GHG emissions, at no net economic cost. These measures, which were presented as a “Bridge Strategy” and intended to be a bridge to further action, include: improving energy efficiency in the industry, buildings and transport sectors; phasing out the use of the least-efficient coal-fired power plants; further boosting investment in renewables-based power generation technologies (to $400 billion in 2030); gradually phasing out fossil fuel subsidies; and reducing methane emissions from oil and gas production. The most recent run of news in the global coal market has consisted of depressed demand, overcapacity, and financial distress at producers. But the outcome of looming climate talks could have a more far-reaching, if longer-term, effect upon industry dynamics. Preliminary analysis has already demonstrated that countries with targets under the Kyoto Protocol collectively exceeded their original ambitions by a large margin, according to UNFCCC. Those countries who took on targets under the treaty have reduced their emissions by over 20% – well in excess of the 5% target they aimed to meet. This is a powerful demonstration that climate change agreements not only work but can drive even higher ambition over time. The new, universal climate change agreement set to be adopted in Paris this year will build on the valuable experience that implementing Kyoto gives us. But global emissions are still on the rise, and the world is different now than it was in 1997 when the Protocol was agreed. The agreement slated for Paris at the end of the year will be applicable to all, and will feature contributions by all. The agreement will also be facilitative and enabling, not punitive. Importantly, it will be a long-term framework that will aim at lowering emissions over the next 50 or so years in order to restore the ecological balance between emissions and the natural absorptive capacity of the planet. UNFCCC is very confident that the Paris agreement will deliver what it needs to achieve, namely to put all nations on track towards a sustainable future. All countries, without exception, have said they want an agreement. The investment community, the insurance community, businesses large and small, cities, territories and states are all making commitments and taking action. The cost of solar energy has dropped by 80% since 2008, a trend anticipated to solar and wind power has not been linear but, rather, exponential over the last three years. More than 100 countries have emission reduction targets up to 2020, most of them formally anchored in laws or policies. All this creates space for greater ambition. Paris will confirm that pathway and give it a legal basis. The link between energy and economic development is very strong, but the current falling costs of renewables show energy can come from sources with much lower carbon-intensity. Last year, for the very first time, we saw a decoupling of global emissions and economic growth. The International Energy Agency reported that carbon dioxide emissions from fossil fuels stayed flat while the world economy grew 3.3%. This is a hugely positive development. One year does not guarantee a trend, but it does indicate that we may now be heading in the right direction, that a tipping point has or is about to be reached. This certainly also had to do with the slowing of the economy in some parts of the world, but it also shows that climate policies are gaining traction. The scale of effort is not yet enough, however, and effort will have to be ramped up progressively after Paris for the world to limit global temperature rise to the internationally agreed maximum of 2 degrees Celsius. If in Paris governments agree a new framework that accelerates delinking CO2 from economic growth and helps make this a trend, it is real progress. The power generation sector must play a constructive and proactive role ahead of the agreement – and in implementing it – by setting out a positive credible vision of its own future. Energy can and must radically transform and diversify to avoid the worst impacts of

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climate change while meeting the needs of a rapidly growing population with current and future energy needs. The Paris agreement will solidify and accelerate low-carbon policies. UNFCCC encourages fossil fuel industries to look at this as a net positive – as an opportunity to diversify and innovate – and forego lobbying for weaker policies that slow the inevitable and necessary transformation to sustainable business models and sustainable growth models. The Paris agreement will not include detail regarding how specific technologies are regulated. Those decisions will be made at the national or local levels. However, the agreement will encourage accelerated deployment of clean technologies all over the world, and it will provide a clear signal that we are headed towards a climate-neutral future. To stay below the 2 degree Celsius defence line governments have agreed, this means three things. First, we must rapid see peak global emissions in the next decade. Then, drive down emissions further by restoring the ecological balance between emissions and the natural absorptive capacity of the planet, also known as climate neutrality. Finally, we arrive at fully climate-neutral and sustainable growth in the second half of this century. To achieve these three objectives, coal-fired power plants will over time need to be phased out and replaced by clean technology, unless the coal industry can be part of the solution and quickly advance carbon capture, storage and use to effective and cost-effective maturity. An immediate large scale disinvestment in the context of coal and other fossil fuels is obviously impossible without unacceptable economic impacts according to UNFCCC. But what we must accomplish is an orderly divestment over time from fossil fuel financial assets to match the short, medium and long-term transformation towards a clean energy global economy that meets the 2 degrees Celsius goal. We cannot harm the planet for the sake of short-term profit when there are energy alternatives that align with a sustainable future. Investors increasingly recognize the risks of climate change and are responding by shifting capital into low-carbon assets – green bonds, clean energy and companies that have committed to green their operations. The coal industry needs to honestly assess the financial risks of business as usual and to anticipate incentives to transform the energy mix, growing finance restrictions and diminishing public acceptance. Going forward, this means for the coal industry that further capital expenditures should only be considered if they are compatible with long-term climate goals and that the coal industry itself will best serve the interests of its own shareholders and employees by a planned and strategic divestment from coal and reinvestment into renewable energy, a path that visionary power companies are already taking. Finance is a crucial component to meeting our climate and development goals. We know that around $90 trillion will be invested in energy infrastructure over the next 15 years. Public and private finance institutions determine how that money will be spent. If it goes towards clean and resilient infrastructure, this will determine whether we stay under the 2 Celsius limit or not. Governments have agreed to mobilise $100 billion annually for developing countries by 2020, a sum that will increase beyond. Analysis of the UNFCCC’s Standing Committee on Finance shows that annual public and private flows from developed to developing countries ranged from $40 billion to $175 billion in 2011-2012, from a variety of sources. This is only a beginning and is money that is leveraging far greater sums. When you look at all commitments, public and private, alongside the fact that almost all development banks and many private banks have put policies in place to direct energy investments towards sustainable energy, you see that much of the supportive financial framework is already in place or is rapidly emerging. Having the technical backing for a global goal on climate has, to date, proven insufficient to yield a workable agreement, according to Worldcoal. The reason is likely differing perspec-tives and competing objectives for negotiators, including avoiding infractions on national sovereignty, maintaining national economic growth, advancing poverty alleviation, financing low-emissions technologies, ensuring a fair playing field, and more.

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Still, there is hope that a growing number of national and regional governments and industry players believe reducing emissions is important, not just for the environment, but also to protect sustainable development. The collaborative R&D and international knowledge sharing being demonstrated by SaskPower and its first-of-a- kind Boundary Dam CCS project is just one example. There is a strong case for the importance of engagement with business and industry, which will provide technical solutions and financing and can contribute to an agreement at COP21 and the resulting emissions reductions. For example, much of the innovation in recent years in low-emissions technologies can be applied to the coal industry, such as high-efficiency, low-emissions (HELE) power plants, in-tegrated gasification combined cycle, and circulating fluidized bed combustion, just to name a few. The development of carbon capture, utilization, and storage saw a major advancement with the startup of the Boundary Dam project in 2014. With further development, even CO2 capture from air could play a role to counteract historical emissions. With numerous technologies in the development pipeline, it is critically important that negotiators and regulators do not attempt to choose technological winners and instead support a suite of technologies. There are about 1.3 billion people with no electricity today and coal and other energy sources will be needed to provide it to them. Many of these people live in developing Asia and other locations where there are considerable coal reserves. Thus, as developed countries continue to rely on coal and developing countries expand coal use, engagement on technology development is imperative for emissions reductions. COP21 provides a real opportunity to create a framework to accelerate technology development and deployment. The coal industry is engaged and is already pursuing a first step through increasing the application of HELE technologies. KEY CHALLENGES IN REACHING A DEAL There are three main challenges to finalizing an international deal at COP21: reaching agreement on emissions reductions, adaptation to the impacts of climate change (current and future), and the financing of actions, according to Nothing less than a binding compre-hensive global agreement in Paris will be sufficient, according to Nick Campbell, Chairman, European Fluorocarbon Technical Committee. Going into the final Ministerial negotiating sessions, the negotiating text must be high level if a final agreement is to be reached. Many of the details will be developed in separate decisions, or processes will be initiated to develop mo-dalities and procedures to allow future implementation (e.g., a process to develop rules for the use of market mechanisms to help compliance with emission reduction commitments). One essential aspect that must be tackled in any agreement text drafted in Paris is related to reviewing progress and ratcheting up ambitions as the commitments agreed to in Paris are unlikely to be enough to meet the emission reduction goals as outlined by the IPCC. The devil will be in the details. Extensive (and possibly extended) discussions on many top-ics will be necessary. A few of the most important topics and the key questions to be answered are listed in the following table.

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TABLE 1 Key questions that must be answered at COP21 to reach an agreement Topic Key Questions to be answered at COP21

Intended Nationally Determined Contribu-tions (INDCs)

What should be included (economy-wide or sectors of the economy)? What time period should they cover? Should they be annual or multi-year? How frequently should they be reviewed?

Adaptation Should there be a global target? Should the current institutions be augmented/changed? Should loss and damage be included within adaptation or as a separate topic within the new agreement?

Review/Timing When and how often should the agreement made in Paris be reviewed? Against what parameters and by whom should it be reviewed?

Monitoring, Reporting, and Verification (MRV) (considered a vital part of the new treaty)

What should be the frequency of reporting? What should be reported? How should the reported data be reviewed and by whom?

Means of Implementa-tion

Finance: How should action be funded (i.e., through public or private finance)? What is the role of markets? How should the $100-billion Green Climate Fund (which was agreed upon by Heads of State in Copenhagen in 2009) be mobilized to assist developing countries to take action and, more specifically, from where should the funding come? • Technology: How should low-emission technology processes be disseminated to aid emissions reductions and development? How should this be financed? How can intellectual property rights (IPR) be protected? • Capacity Building: How should capacity to take action and institutional structures be built in de-veloping countries? Should there be an overall institution managing capacity building?

THE ROLE OF BUSINESS Business has a vital role in the fight against climate change. Many companies are affected by climate change and have already taken adaptation actions. For example, some power generators have planned for changes in cooling-water supplies. Business will provide the technologies that will enable society to move toward a low-carbon economy. Business will also provide much of the financing to enable adoption of existing and new technologies. Business will continue to innovate and develop new products for the future as well as im-prove current process and operating procedures to reduce energy consumption and improve efficiency. For example, carbon capture and storage, including utilization (CCS and CCUS), will play a vital role in a low-carbon future, especially in the least-cost approach to climate change mitigation.1 Business is expected to have a major role in providing investment to finance the transforma-tion to a low-carbon economy through investment institutions and banks. How the use of markets for compliance will be permitted within the 2015 agreement will be instrumental in the provision of finance.

1 Intergovernmental Panel on Climate Change, Working Group III. (2014). Climate Change 2014: Mitigation of climate

change, www.ipcc.ch/report/ar5/wg1/

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The Clean Development Mechanism under the Kyoto Protocol provided a great incentive for business participation in developed and developing countries alike and generated thousands of emissions reduction projects. These projects involved both large and small companies and ranged from improved cook stoves to renewable facilities. Insurance companies will also play a major role in adaptation to climate change and risk assessments of future impacts. However, creating the drivers for business to take these actions is a very real challenge. Transition to a low-carbon economy will require considerable investment from companies; this investment is juxtaposed against the need to generate a profit/return for shareholders. A key question that must be answered in Paris is whether the benefits and opportunities in a low-carbon economy are worth that investment. The answer will vary vastly depending upon the sector(s) in which a company operates. Consider, for example, different sectors within the energy industry. Clear advantages can be observed for companies that are developing technologies for and manufacturing renewables. However, what are the benefits for companies, such as those in the coal industry, that produce an essential, but higher-CO2, energy source? There will be companies throughout the spectrum being advantaged or disadvantaged by a move to a low-carbon economy. Clearly governments need to take into account not only the environmental, but also the de-velopmental, social, economic, and employment impacts of their commitments. The recent Business & Climate Summit, held 20–21 May in Paris, generated a number of key messages that are being fed back into the international climate-negotiating process. This event gave a window into the business and industry perspective on climate negotiations as it was attended by 1500 mainly business delegates, including a large number of CEOs, across a broad range of sectors. The key takeaways from the Summit can be summarized as follows: 1. Leading businesses are already taking action to build a prosperous low-carbon economy of the future. 2. Many businesses are already setting their own internal emissions reduction targets, using internal carbon prices in their investment analyses, increasing energy efficiency, innovating new materials, products and services, aligning their procurement toward low-carbon electricity, and working with suppliers to reduce emissions within their supply chains. 3. Many recognized that more can be done. Those businesses present at the Summit also called for an ambitious global climate agreement with appropriate policies from national gov-ernments to include ambitious, measurable, and verifiable national commitments, a coopera-tive mechanism to increase ambition over time, and transparency and accountability mecha-nisms. There were calls for the use of carbon pricing as a tool to achieve the least-cost global net emissions reductions. Many companies called for a global carbon price but, in equal measure, it was stressed that such tools should be implemented by governments where appropriate and that careful design and implementation was needed to avoid market competitive distortions. There is no “one-sizefits-all” solution. The considerable discussion on funding stressed the need for strong support for innovation and deployment of new technologies, including the financing of clean energy research and development and the protection of intellectual property rights. The need for public and private funds to leverage private-sector finance and to de-risk in-vestment toward low-carbon assets, especially in developing countries, was seen as particu-larly vital. Finally, there was a call to integrate climate into the mainstream economy through using trade and investment rules to encourage climate action, to support education and training, particularly in developing countries, as well as opening consultative channels to enable deci-sion-makers to get the best possible information from those in the business community. Many business groups as well as many groups that claim to represent business have devel-oped and championed positions on the outcome of the Paris meeting. Depending upon

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the motivations and members of the groups, there are many nuances between these posi-tions, but also a number of key messages. These include: • Develop an ambitious, predictable, and comprehensive global agreement. • Protect economic growth and development. • Understand that many businesses support a carbon price as an important tool to drive the transition to a low-carbon economy. • Ensure there is no distortion of competitiveness in the global market. • Encourage innovation. The foundation of the agreement has already been laid: controls by all countries on their GHG emissions based on INDCs, actions on adaptation, and financing for actions. Still, the work has just begun. The implementation of the structures around basic agreements will take several years to put in place to be ready for the implemen-tation of the new agreement on 1 January 2020. The transformation of the global economy to a new low-carbon future—which has, in some areas, already started—will re-ceive a boost from the outcome of COP21. The Kyoto Protocol entered into force on 16 February 2005 and now has 192 Parties, but a number of key Parties were not fully committed and did not fully ratify it (e.g., U.S.) or did not join the second commitment period (e.g., Canada and Japan). From 2005 to 2012, the Par-ties to the Kyoto Protocol negotiated further commitments for Annex I Parties for the years 2012–2020. Two working groups aimed to develop a new agreement ahead of COP15 in Copenhagen, Denmark, in December 2009. However, in a meeting in which there was considerable mistrust between the Parties the Copenhagen Accord was only the “noting” of an agreement. While the goal of a new agreement was not achieved in 2010, much of the trust lost in Co-penhagen was rebuilt, thanks in large part to the dedication and tireless diplomacy of the Mexican Presidency. The 2010 COP in Cancun, Mexico, formally recognized the need for deep cuts in global emissions to limit the global average temperature rise to 2°C. Much groundwork on establishing institutions for the technology and financial mechanisms that would be necessary to implement any global agreement was also laid at the Cancun COP. The following year at COP17 in Durban, South Africa, there was an agreement to establish a second commitment period under the Kyoto Protocol, 2013–2020. Since COP17, much discussion and little action has taken place in the attempt to understand Parties’ relative posi-tions and the scope of what could be viable in the new climate agreement. For example, at COP18 in Doha, Qatar, in December 2012, an agreement was reached on the amendments to the Kyoto Protocol to establish its second commitment period. In Warsaw, Poland, at COP19, the Intended Nationally Determined Contributions (INDCs) were formed. Using the INDCs gives each Party the opportunity to develop their own strate-gies and goals for reducing emissions. That these emission reduction goals are being devel-oped by the Parties individually is a critical difference from the Kyoto Protocol. The INDC approach means that the new 2015 agreement will be based on a bottom-up na-tional pledge system, rather than negotiated top-down targets. On the finance side, the Warsaw International Mechanism on Loss and Damage and the Warsaw Framework for REDD+ were established to assist countries dealing with the impacts of climate change and support major initiatives to prevent deforestation, respectively. The most recent meeting, COP20, in Lima, Peru, focused on the preparation of the draft ne-gotiating text of the 2015 agreement, as well as what should be included in specific INDCs. The Lima Call for Climate Action, while pushing forward the process, did little to advance the substance within the negotiating text, except for creating two extra negotiating meetings in 2015 leading up to COP21. In Southeast Asia, coal consumption is projected to rise by 4.6% a year through to 2040, ac-cording to IEA.

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Table 2 Primary Energy demand in Southeast Asia (Mtoe)

Compound average annual growth rate. ** includes solar PV, wind, and geothermal With this forecast in place, it would be irresponsible for ministers at COP21 to ignore the role that cleaner coal technologies need to play in mitigating CO2 emissions. It is vital that funding and attention are turned toward cleaner coal technologies. High-efficiency, low-emissions (HELE) technologies and carbon capture, use, and storage (CCUS) have the potential to dramatically reduce emissions from coal-fired power generation, while still meeting the demand for coal. HELE technologies can increase the efficiency of coal-fired power plants to such an extent that some two gigatonnes (Gt) of CO2 emissions could be cut each year, according to World Coal Association. Such an emissions reduction could be achieved by increasing the current global average efficiency of the world’s coal fleet from 33% to 40% with off-the-shelf technol-ogy. To put that figure in some context, reducing CO2 emissions by 2 Gt is the equivalent of running the Kyoto Protocol three times over, or equal to India’s total annual CO2 emis-sions. Bringing this technology to all new coal-fired power plants would have a huge impact in re-ducing CO2 emissions around the world, while retaining the two characteristics that make coal such an attractive energy source: its affordability and its abundance. HELE technologies are the most logical way to target both energy access and the climate, treating those issues as integrated priorities. Therefore, HELE technologies should be recognized by climate nego-tiators in Paris as essential and requiring international support. CARBON CAPTURE, USE, AND STORAGE Carbon capture, use, and storage (CCUS) is another key technology that has much potential to reduce CO2 emissions while maintaining the affordability and availability of coal, other fossil fuels, and biomass and waste. In the process of CCS/ CCUS the CO2 can be stored or, alternatively, used in enhanced oil recovery (CO2-EOR), a process which has been in use for decades. CO2-EOR is important because it can provide a useful revenue stream to re-duce the cost of early large-scale CCUS demonstrations. The recent success of Sask-Power’s Boundary Dam Carbon Capture Project in Canada demonstrates that CCUS is both viable and affordable for electricity from coal. BOUNDARY DAM CARBON CAPTURE PROJECT Operational since 2014, Boundary Dam is the world’s first commercial-scale post-combustion coal-fired CCS project, and a benchmark of what can be achieved using this technology.

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Located near Estevan, Saskatchewan, Boundary Dam provides a reliable baseload of 110 MW of electricity a year, while also reducing annual greenhouse gas emissions by one million tonnes of CO2,4 equivalent to taking a quarter of a million cars off the province’s roads. Much of the captured CO2 at Boundary Dam is used in CO2-EOR at nearby oil fields, while some is stored as part of the Aquistore Project at a depth of 3.4 kilometers in a layer of brine-filled sandstone. Added to this, the process also captures 100% of the plant’s SOx emissions and 56% of its NOx emissions, again proving just how valuable a tool advanced technologies are in reducing the environ-mental impact from coal. The criticism leveled at fossil fuels has grown over recent years, particularly as the divest-ment campaign has gained momentum. In order to maximize the possibility of achieving the world’s two degree Celsius (2˚C) target, action must be taken immediately. Countries like India, Indonesia, and many more in the region will see the progress China has made over recent decades and be aware that coal-fired generation is, for them, a critical part of their path toward economic growth and development. It may seem simpler for the international community to wish away coal’s role in the energy mix, but that is not a realistic prospect. In-dian Power Minister Piyush Goyal has previously described coal as playing an “essential role” in his $250-billion plan to provide “Power for All” by 2019, and Obviously, India shows no sign of slowing down the rate of its coal consumption, which makes it clearer still that 21st century coal technologies are vital to any hopes of a global climate agreement. It would be foolish to expect a country such as India, with the world’s second largest popula-tion, to turn its back on coal, giving up its opportunity to develop in an affordable and reliable way. A similar story can be told for many other emerging and developing economies in Asia. COP21 in Paris is being heralded by some as the last chance to avoid irreversible climate change, but the task of generating a consensus among a group of countries at very different stages of their development will be monumental. Affordable and reliable sources of energy are critical to development and this makes coal the logical choice for many developing and emerging economies. Such countries will not support an agreement that hampers their ability to develop. However, advancements in technology provide a pathway to compromise. HELE technologies and CCUS offer the potential for energy needs to be met, while also making huge reductions in global CO2 emissions. It is only by treating climate and development objectives as integrated priorities that we will successfully overcome these global challenges. Despite goodwill among the parties, to reach 21 conferences and still find global emissions set to skyrocket from around 37 billion tonnes of CO2 per year today to 46 billion tonnes of CO2 per year by 2035 is telling, according to Robin Batterham, Kernot Professor of Engi-neering, University of Melbourne . Put simply, and without denying anthropogenic impact on climate is measurable, 21 conferences and a rise of 25% over the next couple decades suggests that current messages on climate risks and emissions reduction scenarios, particu-larly of the more extreme variety, are not having sufficient impact to overcome the headwinds facing a global agreement on climate. COP21 will occur with a sense of urgency, albeit in a cyclone of conflicting opinions, inter-ests, and rhetoric. At such an important moment, it is worthwhile to pause and consider some realities about the world’s energy system, the challenges it faces, and how these challenges might be overcome. In this way arguments about fault and responsibility (i.e., how, how much, by whom, who will pay, etc.) can be sidestepped and negotiations can start from common ground. COP21 is unlikely to be the last step for the world to reach a final agreement on its exact emissions goals. Strategies to minimize emissions have access to a growing base of low-emission technologies on which they can rely. EXPLORING THE POSSIBILITIES OF TECHNOLOGY DEVELOPMENT In the world of climate and energy, promissory notes and aspirations are abundant. The re-cent meeting of G7 leaders in Bavaria, for example, targeted zero emissions by 2100. Such

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an objective implies that negative emissions will be required because emissions are largely inevitable from some sectors or industries, such as cement and metal production. Negative emissions are possible. For example, power generation achieved by co-firing biomass and coal with carbon capture and storage (CCS, which includes CCUS for the purposes of this article) is one of the very few large-scale approaches to realizing negative emissions. Others have focused on achieving negative emissions by capturing CO2 directly from air; although the costs for this approach would likely be higher than CCS from power plants, it maybe be a worthwhile technology to have at our collective disposal. There are some basic truisms around technology and innovation that deserve consideration. First, the cost of delivering a product falls in real terms as a result of innovation. LOW-EMISSIONS TECHNOLOGY INNOVATION There are many examples where innovation and learning by doing have reduced the cost of environmental technologies. For example, the delivered costs of solar cells and offshore wind have already fallen and are projected to continue to do so for quite some time. As re-newables have become less expensive, their potential role in emission reductions has in-creased, but even so they make up only one tranche of the required emissions reductions. Alone, renewables are not enough,2 and the discussion at COP21 must reflect that fact. High-efficiency power plants, CCS, and other technologies for fossil fuels must be included in the discussion. There are also many historical examples of cost reductions in the coal-fired power plant sec-tor. One such example, which is often compared directly to CCS, is the development of wet desulfurization scrubbers for coal-fired power plants in the U.S. where capital costs de-creased by about half as the deployment of the technology grew.3 According to the Global CCS Institute, current cost estimates show that coal with CCS could be less expensive than other low-emissions options, such as electricity from biomass, wind offshore, solar PV, and solar thermal.4 This cost comparison did not factor in high reliability and any capacity to follow electricity demand. Perhaps with greater application and innovation, costs could be further reduced. Reducing the cost of emissions control is certainly not limited to the U.S. Emissions control technologies have been developed and applied more recently in China (see next table), where the costs of producing increasingly clean power using coal also continue to fall.

2 Intergovernmental Panel on Climate Change. (2014). Working Group III, Climate change 2014: Mitigation of climate

change, report.mitigation2014.org/drafts/final-draft-postplenary/ipcc_wg3_ar5_final-draft_postplenary_technical-summary.pdf 3 Rubin, E. (2014, 2 June). Reducing the cost of CCS through “learning by doing”, Presented at the Clearwater Coal

Conference, Clearwater, FL, U.S., www.cmu.edu/epp/iecm/rubin/PDF%20files/2014/Reducing%20the%20Cost%20of%20 CCS%20through%20Learning%20by%20Doing.pdf

4 Global CCS Institute. (2015, 27 July). The costs of CCS and other low-carbon technologies: 2015 update,

www.globalccsinstitute.com/p u b l i cat i o n s /co st s - c c s - a n d - o t h e r- l o w- ca r b o n -technologies-2015-update

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TABLE 3 . Performance of an ultra-low emissions coal-fired power station compared with China’s national standards for natural gas plants in key areas5 Power plant versus emission standard Particulate

matter mg/Nm3

SO2 mg/Nm3

NOx mg/Nm3

Guohua Zhoushan coal-fired power plant

2.46 2.76 19.8

China’s gas power unit emission standards 5 35 50

Various companies in China have been installing ultra-low emissions technologies to coal-fired power plants. These plants boast world-class technologies: ultra-supercritical boilers with CO2 emissions up to 30% lower (courtesy of the higher operating efficiency) as well as SOx, NOx, and particulate matter removal systems. These high-efficiency, low-emissions (HELE) plants are hugely important, although CCS and CCUS will be necessary for the deep cuts in emissions needed to support international climate goals. Some of the ultra-low emissions plants in China are quite large, up to 1000 MW per boiler, with the result that the economic penalty for this low emission performance is less than 0.35 US₵/kWh. On-grid costs in China from such plants, including the emissions controls, provide electricity at about half the cost of natural gas-fired electricity in the country. Considering the gains being made through the application of HELE technologies in China, the role of CCS takes on a new meaning. Despite the glamorous and oft-repeated tales of how a single invention went on to change the world, the majority of technological takeovers are the result of incorporating leading edge technologies, often in combination, to yield marked improvements. In addition to CCS, there are other potential ground-breaking technologies in the pipeline. The recent efforts to use both heating and cooling of turbine blades are a case in point. Such technology allows coal-fired power stations to spin up to meet demand at a rate similar to a gas-fired power station, thereby turning coal into a fast-change load-following energy source. The use of coal directly injected into diesel engines (DICE) also allows rapid start-up. Both technologies would allow for more renewables into a grid. DICE also delivers a higher effi-ciency than existing coal-fired plants and could be coupled with CCUS.6 PROGRESS DOES NOT ALWAYS MEAN NEW One is reminded that, in terms of timing, there are many projections of how existing fossil fuel and nuclear power plants must be phased out, because they have reached the end of their economic lives. Unless mandated, most plants can be renewed as brownfield sites meaning that their economic lives can be extended. In fact, brownfield economics are often more attractive than greenfield economics. For ex-ample, the total refurbishment of the Boundary Dam brown coal-fired power station in Sas-katchewan retrofitted with CCS shows that an old asset can be rejuvenated, that emissions can be reduced, even for brown coal, by 80%, that the first-of-a-kind risks have been over-come and, importantly, it is producing very real insight into the costs of CCS. It is quite reasonable to expect that CCS/CCUS costs will follow a downward trajectory simi-lar to other low-emissions energy technologies.

5 Ling, W. (2015). Shenhua’s evolution from coal producer to clean energy supplier. Cornerstone 3(1), 10–14, corner-

stonemag.net/shenhuas-evolution-from-coal-producer-to-clean-energy-supplier/

6 Brockway, D., & Wibberley, L. (2014). DICE power and Victorianbrown coal. Brown Coal Industry Australia R&D Roundta-

bleForum, 15 October.

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In fact, the first steps to reducing costs of CCS/ CCUS are ready to be realized. The owners and operators of SaskPower’s Boundary Dam project are already suggesting that the full-scale costs of the next plant will be 30% lower. LETTING INNOVATION RUN ITS COURSE It is technological innovation that will eventually drive emissions down. The Organisation for Economic Co-operation and Development (OECD) has done some interesting work in terms of what drives innovation in low-emissions power generation. Their working definition of “clean energy” includes solar, wind, small and large hydroelectric, geothermal, marine, bio-mass and waste-to-energy power plants, carbon capture and storage (CCS) technologies, and energy-efficient technologies such as smart grids and electric vehicles. According to their recent report: “Production and activities in the solar-PV and wind-energy sectors are increasingly reliant on imported intermediate inputs. Policies aimed at protecting domestic manufacturers may thus hinder the profitability of downstream activities, e.g. by raising the cost of inputs.” In essence, the most effective route for innovation is to encourage international competition. The OECD results and the language are clear: “Policies that promote open, competitive and demand-driven markets for clean energy will support the continued cost reductions needed for a cost-effective transition to a low-emissions energy system, reducing the amount of pub-lic incentives needed to scale up the deployment of clean technologies.”7 Recent and detailed modeling of the Australian electricity market out to 2050 suggests that, in the absence of a price on carbon or other forms of support for low-emissions technologies, deep abatements are still possible. It is only a case of how much the market is prepared to bear. Brear et al. suggest that for 80% reduction by 2050 compared to 2000 levels, CCS and nuclear are highly competitive in Australia.8 The lesson from history is that the route to low emissions is primarily about technology. To predict which technologies will evolve, which will emerge, and the rate and the costs is unlikely to be successful. Against this proposition we need to be generous in our thinking and allow a wide range of activities. CCS is just as likely to help deliver our 2050 targets even more economically than a whole-sale flight to renewables. Emissions reductions with reasonable economics and impact should be our collective target. This is all doable and should include all options, CCS being quite attractive on economic grounds. The discussion should be about how much we can afford to pay. Given the lack of global progress on emissions reduction to date, perhaps this is also what the wider popula-tion has already told us. Lately, China’s coal market has been weak and could be further affected by regulations and the country’s commitment on climate. China’s commitments for COP21 may not be surprising as they largely reflect the landmark joint announcement in November 2014 be-tween Presidents Obama and Xi Jinping, according to Wood Mackenzie. A key element of that announcement, and of China’s Intended Nationally Determined Contributions (INDCs), is

7 a i , I., Johnstone, N., Watson, F., & Kaminker, C. (2010, 15 December). Climate policy and technological innovation

and transfer: An overview of trends and recent empirical results, OECD Environment Working Papers, No. 30, dx.doi. org/10.1787/5km33bnggcd0-en 8 Brear, M.J., Jeppesen, M., Chattopadhyay, D., Manzie, C.G., Dargaville, R., & Alpcan, T. (2015). Least cost, utility scale

abatement from Australia’s National Electricity Market (NEM). Part 2: scenarios and policy implications, submitted to En-ergy.

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President Xi’s pledge that “carbon pollution will peak some time before 2030”. This commit-ment was followed up separately in June 2015 by a further set of pledges, namely: • Cut CO2 emissions per unit of GDP by 60 to 65% by 2030 from 2005 levels; • Increase non-fossil fuel in primary energy consumption to around 20% by 2030; • Achieve 200 GW of wind power capacity by 2020; • Achieve 100 GW of solar power capacity by 2020; • Increase the proportion of concentrated and highly efficient electricity generation from coal; • Lower coal consumption of electricity generation from newly built coal-fired power plants to around 300 grams coal equivalent per kWh; • Strengthen research and development (R&D) and commercial demonstration for low-carbon technologies, such as energy conservation, renewable energy, advanced nuclear power technologies and carbon capture, utilization, and storage, and to promote the tech-nologies utilizing CO2 to enhance oil recovery and coal-bed methane recovery; • Build on carbon emission trading pilots, steadily implementing a nationwide emission trad-ing system and gradually establishing the carbon emission trading mechanism so as to make the market play the decisive role in resource allocation. China’s thermal coal market appears to be at a turning point, according to Wood Mackenzie. After a decade-long period of untrammeled growth—supported by economic advancement, migration of workforce to coastal provinces, higher standards of wealth, and growth in im-ports of raw materials to serve China’s massive industrial complex—Chinese coal demand has softened. A complex set of reasons is at its heart: slowing GDP growth (to around 7%), transformative change in the drivers of growth, wildly shifting energy consumption patterns, increasing penetration of non-coal-fired capacity (hydro and renewables), implementation of strict envi-ronmental targets across coastal provinces, and a concerted effort to relocate energy-intensive industries to the interior. 2013 likely saw peak coastal thermal coal consumption of 1.2 billion tonnes. In 2014 nation-wide demand fell 2–3% y-o-y, depending on accounting methods. There are a combination of structural and cyclical factors at work in China’s complex, dynamic, and regionally frag-mented market. China’s economy—historically intertwined with the coal industry—is in a key phase of transi-tion. The services sector overtook industry to become the largest share of GDP in 2013, and the slow, gravitational shift from China’s east to west is well underway. In the short term, policy remains the key driver of economic growth as the government balances between supporting growth and implementing reforms. As investment growth slows, Wood Mackenzie expects services to continue to grow as a share of GDP as China rebalances its economy toward domestic consumption and encour-ages the development of higher value added activities such as R&D and financial services. This transition from industry toward services will have significant implications for China’s overall energy demand growth as well as regional demand patterns since most commodity demand—including that for power, coal, and diesel—is heavily dependent on industrial growth. China’s power market output in 2014 was approximately 5500 TWh, with 3.8% growth over 2013 levels. This gain represents slower growth based on economic restructuring and weaker heavy industrial output. For the first time ever, elasticity—the ratio of change in electricity generation over a period of time associated with a one unit change in GDP over the same period—fell to 0.5. This “decoupling” effect is complex. The growth in contribution of services at the expense of industry is crucial as is the state of overcapacity in the industrial sector. As that state of overcapacity remains while the share of heavy industry falls a degree of decoupling is tobe expected. Going forward, we expect elasticity will appreciate slightly at first but will remain at far lower levels than historic norms. Overall, we forecast total

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electricity to rise by an average y-o-y growth rate of 4.8% between now and 2030, reaching 11,600 TWh. Although this is a doubling of electricity generation, electricity usage would still reach just 8 MWh per capita from 4 MWh per capita today, which is on a par with the mod-ern-day, energy-efficient performance in Germany and Japan. This improvement is a tall or-der for a country 10–15 times more populous and at a much earlier stage of development. A more obvious comparison would be with the U.S., undergoing its own energy-efficiency revolution, but starting from a wildly inefficient 12.4 MWh per capita in 2015. Looking at the industrial and non-power sectors, there is still a large demand for thermal coal. The fuel is used to fire cement kilns, generate electricity at smaller industrial boilers for heavy industry and agriculture, and heat homes and commercial properties. There is also demand from coal-to-chemicals conversion projects in the interior of China. The non-power sector represented nearly 50% of total thermal coal demand in 2014, approximately 1.7 bil-lion tonnes. To put that in context, the entire U.S. power sector will represent only half that amount in 2015. However, one key focus area behind environmental policy has been to target the less effi-cient non-power sector where energy efficiency of industrial boilers is low and emissions register high. Controls over cement production in northern regions, strict penalties for mis-use, and shutdowns of underutilized, inefficient boilers in heavy urban and industrial areas will reduce thermal coal demand in the non-power sector. In China’s Energy Development Strategic Action Plan released last November, the country aimed to raise the share of cen-tralized coal power penetration in industry to over 60% from today’s 52%, by phasing out dispersed, small coal-fired facilities in commercial and industrial sectors. Also, although the coal-to-chemicals conversion pipeline is strong, the recent fall in oil prices reduces the economic viability of those projects. In addition, such projects have tended to cluster in arid areas and the known high water requirement for conversion projects will add to cost and uncertainty. The April announcement of a Water Pollution Prevention and Control Action Plan will largely target the non-power sector and especially the chemical conversion sector. In July, the NEA set new stricter standards for coal conversion projects too, permitting a maximum limit of tonnes of coal for each tonne of oil or gas produced, as well as encourag-ing a reduction in the use of lower quality, high-ash, high-sulfur coals elsewhere. Finally, the Ministry of Environmental Protection recently rejected a Xinjiang coal-to-gas (CTG) pro-ject based on concerns regarding wastewater treatment and emission controls. CTG growth could be much lower than expected and there is much scope for reduced non-power demand for thermal coal. While China’s contribution is a major milestone in climate negotiations, Wood Mackenzie believes there are major challenges related to peaking emissions by 2030. Doing so will re-quire some dynamic shifts and could lead to widespread disruption across multiple seg-ments. First, looking specifically at China’s COP21 pledge to reduce the coal intensity of electricity from newly built coal-fired power plants to around 300 grams coal equivalent per kWh (gce/kWh) is important. Wood Mackenzie assumes that the figure refers to “standard coal” having 7000 kcal/kg energy content, which is well above average coal kcal in China. Current norms for power plant energy intensity are around 320 gce/kWh on average and will improve in future, according to Wood Mackenzie. The country has already greatly improved the efficiency of its coal-fired power fleet, but more upgrades will be necessary to meet COP21 commitments. Improving efficiency to 300 gce/kWh would require ultrasuper-critical (USC) boilers as the norm, with water cooling instead of air cooling condensers (ACC) which typically result in a 4–5% energy penalty. However, coal-fired power units in provinces with limited freshwater (Shaanxi, Shanxi, Inner Mongolia, Xinjiang) are mandated to use ACC technology, which helps to save up to 80% of freshwater demand in power plants. Given that a typical ACC coal plant consumes 12–13 gce/kWh more fuel than units using conventional water cooling, a realistic new coal-fired plant in inland provinces (with

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ACC) would be around 315 gce/kWh. Elsewhere, integrated gasification combined-cycle (IGCC) is comparable to USC in efficiency terms, but is not a commercially-mature technol-ogy. Thus, while China has taken great strides in improving the efficiency of its coal-fired power plants, additional progress will be required to meet its goal of 300 gce/kWh as the norm. China’s INDCs covered the role of high-efficiency, low-emissions (HELE) technologies to re-duce the country’s carbon emissions. In addition to the carbon-focused pledges related to COP21, the country has also aimed to improve air quality by reducing criteria emissions. Re-alizing that the coal consumption reduction targets were very aggressive, government em-phasis has been directed toward emission control equipment for utility-scale units. Provincial governments have also been very active, getting a better grip on implementation of ultra-low emissions technologies through the use of local policies. The attention so far has been fo-cused in Bejing, Tianjin, and Hebei and the Yangtze and Pearl River deltas which are con-sidered to be the most critical regions with air quality issues. Guangdong, Zhejiang, Shanxi, and Jiangsu provinces have announced specific policies to ensure that all grid-dispatched coal-fired power plants (existing or new-builds) greater than 600 MW in unit size (300 MW for Shanxi) comply with ultra-low emission standards for par-ticulate matter (PM), SO2, and NOx. Hebei, Shanxi, and Jiangsu will fast-track compliance in the 2015–2017 timescale while the implementation timeline for other provinces varies from 2017 to 2020. The emission levels are very stringent; similar to or even lower than gas-fired power stations. In return, the plants will receive a combination of incentives to cover addi-tional CAPEX and OPEX requirements. Options proposed include preferential dispatch or tariff premiums for ultra-low emission units, direct subsidies on CAPEX, and dispatch award/penalty of 100–200 hours for compliance/non-performance. These steps should improve air quality in the affected regions. Deployment of non-coal sources of energy are an important part of China’s COP21 commit-ments. The goals of 200-GW wind and 100-GW solar capacity by 2020 are broadly appear to be achievable, according to Wood Mackenzie; but what matters is generation output. Yes, the power sector is clearly shifting to lower emission energy sources, which are responsible for contributing more than half of new capacity additions over the past five years. But in terms of generation output, given de-rates, these levels will still be quite small compared to those from coal and hydro. Hydro additions through dam hydro and pumped storage continue, with an on-average 20 GW of new capacity each year through to 2025. China has had great success commissioning large hydro projects commercially but guaranteeing repeated success given that the addi-tions are slightly less than the equivalent of a Three Gorges Dam every year for the next decade looks to be a stretch, especially when considering the social implications and technical feasibility of designing and deploying that size of capacity repeatedly. What hydro does provide, though, is a summer peaking supply, and this has already begun to dis-rupt coal demand in key coastal provinces in a weak market. Perhaps the greatest difficulty is around nuclear deployment. The lowering cost of building new wind and solar plants will, of course, be additive on a capacity basis, but to truly displace growth in baseload coal-fired generation, China will need to make good on its target of 200 GW of nuclear capacity by 2030, as outlined in its low-carbon roadmap in 2014. Following the Fukushima disaster in Japan, China tightened safety requirements for nuclear power. Approvals for new reactors in coastal regions were suspended and proposals for inland nu-clear plants deferred until 2016 at the earliest. Though coastal approvals resumed in March 2015, nuclear faces an array of challenges throughout the value chain including limited domestic uranium supplies, unproven third-generation technology, fluctuations in quality and production capacity for

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key reactor components, a significant lack of experienced reactor operators, and limited ca-pacity for spent fuel reprocessing and storage. In addition, the public debate on nuclear hasn’t started in earnest and the cost and social implications could be enormous. As of June 2015, 27 reactors were under construction and it is likely that nuclear capacity growth from 26 GW at the end of 2015 to 50 GW by 2019 can be achieved. But these limiting factors will constrain growth of nuclear power beyond that time. Wood Mackenzie tentatively forecasts that China will add an additional ~155 GW by 2030 (180 GW total), but that may be optimistic and will, in any case, need to be greater if China is to successfully peak its CO2 emissions no later than 2030. Carbon capture and storage is another key technology that could dramatically reduce CO2 emissions around the globe. Of all possible places in the world where CCS might be de-ployed on a significant scale, China seems most likely, given its policy-driven, rather than market-driven, approach to growth. Also, CCS is effectively labeled in one of the country’s COP21 pledges. However, the demonstration and deployment of the technology is currently occurring too slowly for it to play a major role in the near term. The considerable challenges that remain include high cost for post-combustion capture, lack of policy clarity in China, and attention increasingly diverted to other low-emission options. CCS is technically feasible, but it must quickly make major progress in order to make a real contribution to emission reductions. All in all, China’s commitments ahead of COP21 look immensely challenging. For China to cap its emissions by 2030, the country will require a slowdown in economic growth to roughly 4.5% annually, a level which would reduce power generation growth. At 4.5% growth, many sectors and domains would be disrupted. Alterna-tively, it would need even lower carbon intensity such as could be achieved with a dramatic structural change to its fuel mix. The path will not be simple. Pledges made in advance of COP21 promise to give new impetus to the move towards a lower-carbon and more efficient energy system, but do not alter the picture of rising global needs for energy. Energy use worldwide is set to grow by one-third to 2040 in our central scenario, driven primarily by India, China, Africa, the Middle East and Southeast Asia. Non-OECD countries account together for all the increase in global energy use, as demographic and structural economic trends, allied with greater efficiency, reduce collective consumption in OECD countries from the peak reached in 2007. Declines are led by the European Union (-15% over the period to 2040), Japan (-12%) and the United States (-3%). By 2040, India’s energy demand closes in on that of the US, even though demand per capital remains 40% below the world average. Figure 6 Change in energy demand in selected regions, 2014-2040

Source: OECD/IEA 2015

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India moving to the centre of the world energy stage New infrastructure, an expanding middle class & 600 million new electricity consumers mean a large rise in the energy required to fuel India’s development Figure 7 Change in demand for selected fuels, 2014-2040

Source: OECD/IEA 2015

In China, responsible for about half of global coal demand, use in the power sector fell more than 4 percent in the first three quarters and imports declined 31 percent, according to the report. Since the end of 2013, the country’s electricity consumption growth has largely been covered by new renewable energy plants.

The coal industry likes to point to China adding a new coal-fired power plant every week as evidence that coal demand will pick up in the future, but the reality on the ground is rather different. Capacity utilization of the plants has been plummeting. China is now adding one idle coal-fired power plant per week. The emissions are so great that its dramatic reductions will be expected by thermal efficiency raise. With horizontal expansion of Japan‘s best technologies to the US, China and India, a reduction of 1.523 billion tons is possible Table 4 Coal-fired Power Technology as a trump card in reducing CO 2 emissions ■ CO2 emission reduction effects of the introduction of Japan's best practices (million of tons, 2011) a+b+c= -1,523

Country Emissions Emissions after introduction

Reduction

Japan 259 232 -27

USA 1716 1357 -359 (a)

China 3919 3091 -828 (b)

India 837 501 -336 (c) Source: http://www.jcoal.or.jp/coaldb/shiryo/material/upload/2-11Session%20%E2%85%A3_Moderator_Kikkawa.pdf

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Zero-Emission Coal Power Generation

・USC (Ultra-Supercritical Coal-fired power generation) 2000/600 ℃/42% ⇒

A-USC (Advanced Ultra-Supercritical Coal-fired power generation) 2015/700 ℃/46% ⇒

IGCC (Integrated Gasification Combined Cycle power generation) mid 2020s/1700 ℃/50% ⇒ IGFC (Integrated Gasification Fuel Cell power generation) late 2020s/55% IEA CCC has examined the climate implications of coal to gas substitution in power generation. The study takes in account the GHG’s from CH4 upstream, CO2 upstream and CO2 smokestack. It indicates that the current leakage from the natural gas(NG) system (eg pipelines) is likely to be in the range of 2-4%. In the range of 2.9-3.6% leakage for new CCGT vs SC coal, the total emissions are the same Figure 8 Coal versus gas

Figure Fuel-cycle GHG emissions (kg) from 1 MWh of electricity produced (Busch and Gamon, 2014) Source: IEA CCC Report “Climate implications of coal –to-gas substitution in power generation” Apr 2015 http://www.jcoal.or.jp/coaldb/shiryo/material/upload/1-3Featured%20Speech%202_WCA.pdf

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China's 13th Five-Year Plan

In November last year, China announced its intention to peak CO2 emissions around 2030, and to strive to peak earlier. This year China’s policy makers will be finalising the details of the 13th Five-Year Plan for the period from 2016 to 2020, with the view of adopting the final text in March 2016. The new Five-Year-Plan will give a better under-standing of China’s energy and climate policy objectives with regards to the role of coal in energy supply and the role of cleaner coal technologies in mitigating greenhouse gas emissions.

China’s Five-Year Plans typically include a set of environmental and energy targets and guidelines. Media speculation about the new plan include a possible introduction of a cap on carbon emissions or coal consumption, the expansion of existing pilot emissions trading schemes or the introduction of carbon taxes. The new plan is also likely to in-clude a new target for the expansion of renewable energy technologies.

2015 will also see new regulations coming into force. On 1 January 2015 a new regula-tion restricting some coal qualities came into force. This regulation, called “Interim Measures on the Management of Commercial Coal Quality”, specifies the following qua l-ity standards for coal produced, sold and used in the Chinese market:

Lignite quality requirements: ash (<20%), sulphur (<1%)

Other types of coal quality requirements: ash (<30%), sulphur (<2%)

“San Coal” (coal used for small boilers, domestic heating and in some ho-tel/restaurants) used in Yangtze River Delta near Shanghai and the Pearl River Delta near Hong Kong: ash (<16%), sulphur (<1%).

China to cap coal use at 2.72 bln T of standard coal by 2020, according to China Coal Resource. China’s coal consumption should be controlled below 2.72 billion tonnes of standard coal equivalent, according to a report released in an international seminar for the 13th Five-Year Plan on November 4.

China’s energy consumption in 2014 totalled 4.26 billion tonnes of standard coal equiva-lent, accounting for 25% of the global volume, with coal consumption taking even more than 50% of the global total.

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Table 5 - 13th Five-Year Plan

2014 2015 2020 2030

China’s coal use in bln T of standard coal equivalent 2.72

China’s coal consumption in of global total in % More than 50%

China’s energy consumption in billion tonnes standard coal equivalent 4.26

China’s energy consumption in billion tonnes standard coal equivalent - % of global volume

25

Coal use for power sector in billion tonnes of standard coal equivalent 1.39

Coal use for power sector in billion tonnes of standard coal equivalent - % of the total

51

Coal use for manufacture sector in billion tonnes of standard coal equivalent

1.17

Coal use for manufacture sector in billion tonnes of standard coal equivalent - % of the total

40.2

Coal use for building sector in million tonnes of standard coal equiva-lent

240

Coal use for building sector in million tonnes of standard coal equiva-lent - % of the total

8.8

share of coal consumption in % of total energy consumption 66 57.4

share of gas consumption in % of total energy consumption 10

share of non-fossil energy consumption in % of total energy consump-tion

15.2

Peak Carbon Emission of China X

Coal use in billion tonnes 3.8 3.4

total energy consumption of China in billion tonnes of standard coal equivalent

4.74

number of coal mining and washing enterprises 6390 3000 or less

Lay-off workers from coal mining and washing industries 862000

Source: China Coal Resource

Source: China Coal Resource

Coal use for power sector will be controlled within 1.39 billion tonnes of standard coal equivalent or 51% of the total; that of manufacture and building sectors will be controlled below 1.17 billion tonnes and 240 million tonnes, accounting for 40.2% and 8.8%, sepa-rately.

This move may force over half of the nation’s coal producers to withdraw from the mar-ket within five years, industry insiders said.

The number of coal mining and washing enterprises across the country should be re-duced from 6,390 in 2015 to 3,000 or less during the “13th Five-Year Plan” period ended in 2020, resulting in 671,000 and 191,000 lay-off workers from coal mining and washing industries, respectively. To realize the coal consumption control goal, the share of coal consumption will drop 8.6 percentage points from a year ago to 57.4% in the total en-ergy consumption; while the share of natural gas use will be increased to 10%, and that of non-fossil energy use will up to 15.2%.

China has promised to the world to peak carbon emission in 2030, and vowed to control coal use below 3.8 billion and 3.4 billion tonnes by 2020 and 2030, respecively.

Additionally, the realization of coal consumption control should be based on a sound withdraw system for coal producers, especially the reemployment guarantee system for laid-off staffs in coal industry.

Meanwhile, total energy consumption of the country should be or no more than 4.74 bi llion tonnes of standard coal equivalent by 2020, according to the report.

China's production and consumption of energy have continually increased during the 12th Five-Year Plan (2011-15), especially the latter, which has experienced an annual average growth rate of about 4.7 percent, almost three times the global average growth, Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University.

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However, at the same time the efficiency of energy use has constantly been improved; by the end of last year the energy consumption per unit of GDP had declined by 12 percent since 2010.

And over the same period, China's energy structure has witnessed a series of benign changes, as in June nuclear power generated more than 22 gigawatts of electricity, almost doubled that of 2010, and wind capacity reached 104 Gw, nearly one-third of the world's total installed capacity of wind power. China also produced the world's biggest increases in the installed capacity of solar power (over 35 Gw) and hydroelectricity (300 Gw and counting).

In contrast, coal accounted for around 66 percent of China's primary energy consumption in 2014, a reduction of 3.7 percent since 2010.

China's GDP contributed to approximately 13 percent of the global economy in 2014, but at the expense of about 23 percent of the world's energy consumption. Its extensive develop-ment of green energy sources such as the wind power has also caused a considerable waste of natural resources.

Hence, in its next five-year plan, the government should resort to energy restriction, particu-larly of coal, in order to press ahead with the transformation of the economic structure. The abundance of reserves and relatively low cost have granted coal a central place in China's energy consumption, giving rise to severe environmental pollution. Reducing the use of coal would also meet the demand for tighter control of carbon dioxide emissions.

Yet for China, oil and natural gas are unlikely to fill the void should it reduce its dependence on coal. High consumption of oil would pose a challenge to China's energy security and Chi-nese people's well-being, so would an overly high dependence on gas imports, which can easily fall prey to the geopolitical unrest in the neighbourhood.

Likewise, nuclear power is not a feasible solution for the world's largest energy consumer either, because of the latent security risks. Therefore, in the longer run, China should put more efforts into developing renewable energy sources, for instance, wind and solar power, so as base its energy structure on clean energy resources.

True, most clean energy resources are being used to produce electricity, but in an unpredict-able and intermittent manner. However, the constant advances in battery-based storage technologies will, in all likelihood, enable China to optimize its energy consumption. The Powerwall for domestic use and the Powerpack for commercial use, which have been devel-oped by the Tesla Motors, signal a possible reform in the supply and use of energy, if such technology can be put into extensive commercialization.

China's economy as well as the environment will also benefit greatly from the promotion of green technologies, but only if the electricity they generate costs less than that produced by consuming fossil fuels. The cost gap between energy produced by wind, solar and thermal power is closing with fossil energy in some parts of China, indicating there will be a greater use of clean energy with the introduction of energy-storing technologies, like the aforemen-tioned technology of Tesla.

As the country is still undergoing fast urbanization which requires a lot of electricity, energy enterprises should take the opportunity to claim the technological high ground and reduce the cost of clean energy. Governments at all levels, for their part, also need to be fully aware of the significance of energy-storing technologies and give priority to developing them.

Leadership in Beijing is set to consolidate a new model of economic development for China that could curb energy use and emissions even earlier than expected, according to Foreign Policy. China’s road map for the next five years seems set to cement the coun-try’s remarkable shift from an energy-guzzling, heavily polluting economy toward a cleaner, greener model — a change with big implications for the environment and global energy mar-kets.

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Chinese leaders this week signed off on the broad contours of the 13th Five-Year Plan,

which seeks to map out the country’s economic and social development plans from 2016

through 2020. It’s the first such plan crafted under President Xi Jinping, and its fundamental

goal is to create a “moderately prosperous” society in time for the 100th anniversary of the

Chinese Communist Party.

While it won’t be formally adopted until early next year, the plan points toward a period of

more moderate economic growth, continued economic rebalancing away from heavy industry

and toward services, and a renewed commitment to environmental issues and clean energy.

Chinese officials have hinted that the final version of the new blueprint could even take dras-

tic steps, like caps on coal consumption and a ban on new coal-fired power plants, in addi-

tion to launching new nationwide programs to curb greenhouse gas emissions. In other

words, after almost four decades of breakneck growth at all costs, China’s leaders seem to

have officially enshrined a “new normal,” as researchers at the London School of Economics

have dubbed the country’s transformation.

What’s especially telling is that Chinese leaders have renewed their commitment to a cleaner

economy despite a year of economic headwinds and lower growth. China has struggled this

year to reach its targeted goal of 7 percent GDP growth, which would already be a huge de-

cline from the double-digit growth it posted each year since the beginning of the century.

That green commitment isn’t political window dressing but rather a way to usher the world’s

second-largest economy to a course that is more sustainable over the long run, according to

China’s own leaders.

“There are fundamental, powerful drivers to pursue the new course and pick up the pace [on

sustainable policies],” said Paul Joffe, a senior policy analyst at the World Resources Insti-

tute, a nonprofit devoted to sustainable energy and environmental policies.

The Chinese shift is especially important coming just a month before the big U.N. climate

summit in Paris, where countries are trying to muster the political will to curb greenhouse gas

emissions to limit future temperature rises. China, long considered the poster child of dirty

development and a barrier to global action on climate just six years ago at the Copenhagen

summit, is now widely seen as a catalyst for more environmentally friendly policies.

“We’re on the eve of Paris, and the credibility of China’s actions is a factor there, and it’s also

a factor in U.S. domestic debates,” Joffe said. That’s because Republican lawmakers have

for years pushed back against the Obama administration’s efforts to clean up the U.S. econ-

omy and curb emissions by pointing to China. “That’s getting to be a pretty lame argument,”

he said.

Of course, China’s new direction will be bad news for some: Coal miners in the United

States and Australia, who were banking on years of reliable demand, have seen their most

promising potential market evaporate in little more than a year. As with coal, so with oil: Re-

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duced growth in future Chinese demand for oil is weighing heavily on producers, especially in

the U.S. oil patch.

The full details of China’s new five-year plan will emerge early next year. But the party com-

muniqué released Thursday summarizing the four-day summit of about 200 top Communist

leaders lays out clearly just what direction Xi and the rest of the Politburo want China to take.

They agreed to “accelerate” new economic development, a reference to the “rebalancing”

away from dirty industry and toward leaner sectors such as services. They agreed to pro-

mote “green development,” “sustainable development,” “civilized development,” and an “envi-

ronmentally friendly society.” The party decided to promote a “low-carbon energy system,”

including the adoption of a national carbon-trading program, and pledged to boost “environ-

mental protections.”

If faithfully enacted in coming years, all that will likely translate into an economy that keeps

growing, even as energy use and greenhouse gas emissions stay stable. That doesn’t mean

that China will suddenly be able to slash its energy consumption or drastically reduce its

greenhouse gas emissions, as the United States has already done. But it does mean that it

could reach its own targets for stabilizing emissions and curbing its hunger for coal much

earlier than expected. China expected to keep increasing its emissions until about 2030, but

it could now peak years earlier. Coal consumption was expected to keep growing at least un-

til the next decade, but it may already be in terminal decline.

Indeed, over the past year, China has already shown signs that economic growth does not

have to go hand in hand with massive energy consumption and pollution. Consumption and

production of coal, the main energy source, fell last year, despite economic growth of 7.3

percent, and both have continued to slide this year. (Unfortunately, while coal use is now fal-

ling, new accounting measures in China show that the country had actually been using more

of the stuff during the heady years of growth.)

A top Chinese energy official said this week at a coal industry conference that the govern-

ment could put strict limits on overall coal production and consumption in the new five-year

plan. Another researcher close to the state economic planning commission said that the Chi-

nese government is mulling a total ban on new coal-fired power plants. That would be easier

to do now than just a few years ago because electricity consumption is flat and many coal-

fired power plants are running at just a fraction of their capacity, thanks to the economic

slowdown and the shift away from heavy industry.

Chinese leaders will have a delicate balancing act to pull off: figuring out how to turn modest

economic growth into a “prosperous” society in just five years, without causing massive dis-

locations at shuttered steel plants, inefficient coal mines, and closed-down factories. Many

economists believe that if China struggles to meet its scaled-down growth targets, it will

again resort to tried-and-true remedies, especially by injecting billions of dollars into the

economy to spur investment in construction, infrastructure, and new industry. That’s because

while protests from environmentally conscious middle-class Chinese fed up with air pollution

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can chip away at the regime’s stability, protests by millions of unemployed Chinese could di-

rectly threaten it.

Looking ahead, China may have finally managed to rein in its runaway energy use and un-

checked pollution. The next big challenge for Chinese leaders will be to figure out how to roll

them back.

“What do they do after they peak? Do they have strong enough policies to achieve a steep

decline in emissions? Those are the kinds of things to watch for,” Joffe said.

China should slow thermal plants construction in 13th Five-Year period, according to China

Resource Coal. China should slow down the construction of thermal power plants, mostly

coal-fired, during the 13th Five-Year Plan period, to optimize energy mix adjustment, officials

suggested at a recent government meeting.

China should slow or even stop construction of thermal power projects as soon as possible,

especially in the coming three years, said Zhou Dadi, one researcher with the Energy Re-

search Institute under the National Development and Reform Commission. "Even if no new

projects built in the next three years, there will be no problem at all," he said at the Fifth Ple-

nary Session of the 18th CPC Central Committee earlier this month.

New thermal power generating units should be strictly controlled, and even "1 KW new ca-

pacity would be a burden," proposed Zhou and other experts. Actually, thermal power con-

struction in China has far exceeded the demand growth, either in the scale or the speed of

construction.

Over January-June this year, China put 23.43 GW thermal power capacity into operation,

surging 55% on year and raising the country’s total installed thermal capacity to 935 GW. In

contrast, China’s power use in the first three quarters amounted to 4,130 TWh, growing 0.8%

year on year, slowing from an increase of 1.1% in the same period last year, showed data

from the China Electricity Council.

China once recorded an average growth of 10% plus in power demand over 2002-2008 amid

economic booms, but this year the country may see a negative growth as industrial activities

decelerate, said Zhou. "During 2016-2020 and even for a longer period, China’s energy de-

mand is likely to shift to a lower gear," Zhou said. To reduce pollution and better use clean

energy, China should control coal-fired power construction but speed up development of re-

newable energies like hydropower.

Glut of Coal-Fired Plants Casts Doubts on China’s Energy Priorities, according to Greenpeace. 155 planned coal plant projects received a permit this year alone, with total capacity equal to nearly 40 percent of operational coal power plants in the United States.

China’s economic slowdown and the government’s pledges to use more renewable and nuclear energy make some of the country’s existing plants and most or all of the 155

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new ones unnecessary, according to interviews with officials and scholars, a review of public statistics and a report released Wednesday about the “coal power bubble” by Greenpeace East Asia. There are already too many plants, as shown by a steady decline in the plants’ average operating hours since 2013.

Figure 9 – Coal Power Bubble

Source : Greenpeace China’s state-controlled economy creates strong incentives for provinces to manage their own energy sources to generate jobs and revenue. Coal plants have long been the easiest, fastest way for provinces to meet their own energy needs and stimulate local economic growth.

That system has created what appears to be a disconnect between the provincial building boom and the country’s overall energy requirements, making it harder for China to convert to a system that is not dominated by dirty fuel.

“China already has more coal capacity than it will ever need,” Zhang Boting, vice chairman of the China Society for Hydropower Engineering, said in an interview. “A few years down the road, we’ll see what a waste the plants are. We have seen this happen to the steel and ce-ment industries.” In the first nine months of this year, state-owned companies received pre-liminary or full approval to build the 155 coal power plants that have a total capacity of 123 gigawatts, the report said.

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Figure 10 New coal-fired power plants being permitted in January-September 2015

Source: Greenpeace

That capacity is equal to 15 percent of China’s coal-fired power capacity at the end of 2014.

The construction boom — with capital costs estimated by Greenpeace at $74 billion — is a clear sign that China remains entrenched in investment-driven growth, despite promises by leaders to transform the economic model to one based on consumer spending.

It also raises questions about whether China is weaning itself from coal as quickly as it can and whether officials are sufficiently supporting non-fossil fuel sources over coal, which is championed by some state-owned enterprises. China is the biggest emitter of greenhouse gases in the world and the main driver of climate change, and it has some of the worst air pollution.

Conflict within the system is rising. Renewable-energy interests — wind, solar and hydro-power — are pushing back against coal-fired power plants, which have 40-year life spans. They say the rising number of coal plants prevents other energy sources from selling electric-ity on the grid and attracting more investment. They want the government to move faster with its promised “green dispatch,” giving priority to low-carbon electricity sources.

“Why do we see so much discarded water, wind and solar resources everywhere?” Mr. Zhang said. “Because all those coal plants need market share. Local governments need to maintain stability and employment, and to do so they need to give all the coal plants just enough market share to survive.”

Utility contracts guarantee that coal-fired plants operate a minimum number of hours to sell power to the grid, while renewable sources have no such guarantee. Wind power capacity has been growing in China, but so has the amount of wasted wind power, called curtailment, according toNational Energy Administration statistics. In the first half of 2015, the rate of cur-tailment was 15 percent, almost twice that of the same period in 2014.

The State Grid Corporation of China, the country’s largest power distributor, did not respond to a request for comment. It is also one of China’s biggest owners of coal-fired power plants.

Qin Haiyan, secretary general of the Chinese Wind Energy Association, told the China Elec-tric Power News, an official industry newspaper, that if the country’s appetite for new coal plants was not curbed, “the conflict between coal and wind will become even more fierce in the next few years.”

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Mr. Zhang said the dominance of coal power had led to “a sharp decline in investments in renewable energy.”

Hydropower is generated by provincial or central state-owned enterprises. The China Elec-tricity Council, a power industry association, said in a report this year that investment in hy-dropower had dropped for three straight years and that the amount in the first quarter of 2015 was half that of the same period in 2012.

Nevertheless, China is building more renewable and nuclear energy capacity. The govern-ment has said that by 2020, 15 percent of energy consumption will be met by sources be-yond fossil fuel. The growth in renewables and nuclear power is expected to meet an esti-mated 3 to 4 percent annual growth in electricity demand in the coming years, which makes new coal-fired plants unnecessary, said Lauri Myllyvirta, a main author of the Greenpeace East Asia report.

Despite the construction boom, Mr. Myllyvirta and some scholars say there is little danger that China’s coal consumption will rise significantly, since a slower economy and flattening coal use appear to be the new norm. President Xi Jinping said China was aiming for 6.5 per-cent economic growth from 2016 to 2020. The construction boom means that China is not investing in alternative fuel sources as quickly as it could, critics say, and coal use may stay at or near the current high level for years.

“You’re wasting a massive amount of capital that could be spent on renewable energy to generate green power that is needed,” Mr. Myllyvirta said. “And there’s a longer-term ques-tion of whether you will keep investing in renewables when you have all these coal plants ly-ing around.”

Coal plants now operate well below full capacity, with the average number of operating hours on the decline, the Greenpeace report said. Last year, thermal power plants, mostly coal-fired, operated 4,706 hours on average, 314 hours less than in 2013, according to the Na-tional Energy Administration. “At any given moment, more than half of capacity is idle,” Mr. Myllyvirta said.

The report recommended that officials cancel many projects and that the central government “urgently institute a ban on issuing new permits for coal-fired power plants.”

Though the total amount of coal-fired power capacity has grown annually, China is shutting down some older and smaller plants, especially in more populated eastern regions. By 2020, the central government aims to have coal-fired power generated mainly in western provinces and transmitted to the east via ultra-high-voltage lines. But Greenpeace researchers found that eastern provinces were still handing out large numbers of permits to build new coal plants.

Jiangsu Province has issued permits for 17 plants this year, while Shandong Province has issued permits for 16 — the second and third most plant approvals in the country, behind Shanxi Province. That goes against central policy, since regulations require those provinces to curb coal use.

Mr. Myllyvirta said that even the western provinces did not need so many new coal-fired plants because the current overcapacity and planned expansion of renewable and nuclear energy sources could meet the expected rise in demand for transmitted electricity.

Greenpeace estimated that if the 155 plants operated at typical levels for new projects, they would emit 560 million metric tons of carbon dioxide annually, equal to Brazil’s total energy emissions. They would also spew huge amounts of toxic pollutants, and 60 percent would operate in arid areas or ones with chronic water shortages, exacerbating those problems.

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The increase in permit approvals followed the enactment of a policy in March that allows pro-vincial environmental officials rather than the central Ministry of Environmental Protection to approve projects, in the interest of streamlining bureaucracy.

Provinces have an economic interest in keeping coal-fired power generation close to home, despite concerns over air pollution. Provincial state-owned enterprises running the plants have a guaranteed source of revenue. Also, officials can tax coal power plants but not re-newable-energy projects. And plant construction improves economic growth, an important measure in evaluations of provincial officials.

Figure 11 Environmental Approvals for coal-fired power plants

The Beijing Jingneng Power Company, which is building the Zhuozhou plant here in Dongxianpo township, is owned by the Beijing government. This year, the company was forced to shut down a plant in Beijing because of an air pollution control regulation that calls for the elimination of all coal-fired plants in the city by 2017. But Jingneng had begun building the plant right across this border. The company declined an interview request.

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It takes a lot of time to switch the economic growth model from investment-driven to con-sumption-driven, according to Lin Boqiang, director of the China Center for Energy Econom-ics Research at Xiamen University. Now the only way to drive up economic growth is still to rely on investment.