Hello, welcome to visit Shanghai Forum
Michael Grubb Interviewer: Wu Libo
Professor, International Energy and Executive Director,
Climate Change Policy, Center for Energy and
Institute of Sustainable Resources, Strategies, Fudan University
University College London (UCL);
Editor-in-Chief, Climate Policy journal, UK
“one of my private hopes is that we get a global, structured agreement, and a couple of years later, we might see the Beijing Protocol. A bit like 15 years ago, we have the Berlin Mandate, which was an agreement that led to the Kyoto Protocol.”
Wu Libo: Hello Michael, you are the chief editor of Climate Policy, which is the most authoritative journal in the world. I feel that you are really a master in the area of climate change, especially the policy issues. So let's start from the hottest issues. Is it possible to get some agreement in the coming Paris? Could you give us your prospects on the coming commitment?
Michael Grubb: I don't think we can really tell yet. International, global negotiations are incredibly difficult. You have different countries, each has different thinking, state of development and policies, changing of governments. I'm more optimistic about the Paris conference than Copenhagen, because on the Copenhagen Conference, there was a clearly defining issue, which was about whether the Kyoto Protocol would continue. It's clear that they are fundamentally different. So it was like seeing a train coming off its track, not being able to do anything. Paris is a different situation. The world has changed a lot, I think everyone has recognized how much the world has changed, and sadly, the expectations are lower. So no one is really expecting a binding global deal concerning emissions worldwide, because that's clearly politically impossible.
Wu Libo: So there will be no absolute target for mitigation of global warming on the global level?
Michael Grubb: Not in the sense that we will have a legally binding structure, I mean emissions reduction from industrialized countries, and even that proved unacceptable for the US without global participation. I'm sure that in Paris, a number of countries will try to achieve their targets in emissions, but I don't think it will have the same kind of legal force behind it.
The other point is that there's a high chance of agreement in Paris. The major players now want an agreement. In Obama administration’s seventh year, it's great to seek an agreement. It is part of his legacy, and he will want something moderately strong, partly to make life a little bit more difficult for a successive US government. So I think the chance in the US is good, and the impression on China is also very good. China does want an agreement! It is concerned about climate change issue. Though the EU is in a weaker situation, it still wants to see an agreement. Those major players need to do something in fundamental politics to go through the complexities and find a way. One final comment on Paris. Usually in international negotiations, a global summit like this represents a major political breakthrough, and the countries will want some sign of convergence, with some details and signs that have to be deferred. And one of my private hopes is that we get a global, structured agreement, and a couple of years later, we might see the Beijing Protocol. A bit like 15 years ago, we have the Berlin Mandate, which was an agreement that led to the Kyoto Protocol. So maybe we'll have something similar in Beijing. I don't expect everything to happen in Paris.
Wu Libo: So Paris can be expected as a real milestone. I agree with you that situation in this region is hopeful for a general agreement in the post-Kyoto era. I myself am also involved in the government evaluation of IBCC AR5, and in recent days we also have an arrangement in which we comment on especially SPM of the working group three. During the evaluation process, we do feel that on the one hand, there is a lot of political pressure which is trying to interrupt the process of such kind of activities. On the other hand, we also feel that the political pressure is really imbalanced. From the Chinese point of view, as mentioned yesterday by Professor Pan Jiahua, lots of efforts done by the Chinese government has not been fully recognized by the international society, not only by the policymakers, but also by some scientists, they are also trying to omit some parts. This is partly because we don't have so many English publications. Even if articles were printed on the English journals regarding China's energy efficiency improvement, the local carbon transformation, even the ETS development, international society wouldn't treat them in an equal way. That somehow makes the Chinese scholars a little bit depressed.
Michael Grubb: That's a very interesting comment. I think there are two or more different things going on. One thing is how slow information diffuses. So there's a natural timeline both between scientific discoveries and policy progress in a certain region. And we will find other regions two or three years behind, despite all the efforts we make at the international conferences. So that's one factor.
And language is another barrier. And it's not language in the sense of English and Chinese, but the culture and issues with which people consider seriously. And we're living in a world dominated by the culture of Anglo- Saxon, North American world, and that also tends to slow down progress and the common understanding. But we can do things about both points. I think there's a third problem that's not so difficult to deal with, which is that climate change policies become quite politicized. Not everywhere, but in the United States, it's a highly political issue. There are very powerful groups that try to slow down US climate policy. Very powerful weapons have been disabled. Watch if US does anything if China is slow to do that. They actively suppress the progress that China's making, because it weakens the stance of the US. I'm talking about a small, but powerful group. Too much for China's doing, but they want to stop that action in the US. And the strongest argument is that what the point of US’s action is if China, with a billion people, doesn't act. So they kind of don't want to hear good news about progress elsewhere. I'm sorry that it's a slightly provocative thing to talk about, but I definitely observed that. But the scientific community can definitely help to overcome that sort of embarrassment, that's what international science is about.
Wu Libo: Yes, I think Shanghai Forum can also make some contribution to fill this gap.
Michael Grubb: Just from the personal perspective, there's still a bit of legacy in the west, about how China's is viewed, we observed those states, so far those images. I still found people quite surprised when I came back from my last trip to China, I had a great meeting with the Chinese academy of Social Sciences, which was a really interesting, engaging, frank, completely open meeting. People back home were surprised, they didn't quite realize that there is culture here in the western research communities. You just talk about issues and try to understand them, so there are a lot of historic and other barriers that can only be overcome over time. But we could accelerate it.
Wu Libo: And you published one very important book, we also mentioned your book yesterday. I myself read your book briefly, I looked at the 'three Peters' discussion', I do feel that it's very important for China, the emerging economy in the transformation stage. You know, before the open up and reform, China is a closed economy, moreover we are trying to deal with 'dual system'. On the one hand, we try to deregulate market, and absorb market mechanisms and experience from the western society. On the other hand, we try to keep some sectors. But now the government realizes that we need a complete reform, especially for the energy sector. Some people see that, ok, we introduce the market mechanism, to all the sectors, and let them work. But other people still worry about whether market mechanisms can work effectively in China. Your concept about sustainable development for energy climate, and such kind of management truly indicates that market is very important, but should not be the only instrument. Western experience is very important for an economy like China. So could you provide us some further discussion on this, especially how can we use such kind of three peters to reform our energy management system?
Michael Grubb: Well, I am first glad to hear that you think it's a useful book. I'm interested if Chinese scholars have a chance to look a bit more into that. I can't say how much this applies for China, because that's something for Chinese researchers to think about and decide. I wrote this book partly because from my many experiences working on climate change, I became unsatisfied with the traditional western explanation that all you need to do is to introduce competition, and put a price on environmental damages, and that is the efficient thing to do. My political experiences told me that dealing with it was much harder than many thought, but secondly it wasn't a complete solution anyway. There are a lot of other things in practice, frequently what the government is doing will be commented by scholars as inefficient. The situation is actually more complex. We have markets that are unable to all things. Markets and prices work for some part, and a very important part of the problem. But they also leave very important gaps. There are also other processes that just require completely different policy tools. And I think many people live in strict economies don't think that we have a coherent intellectual explanation about different bits and how they fit together. And that's really what I'm trying to do.
Wu Libo: I think for Chinese scholars and policymakers, we really need to figure out other kinds of systems regarding energy and resource management. So far, we are trying to break the old system. But when we are building the new system, we have to think about the whole process. The experience you provide in EU is very helpful, I think for China, also for other Asian economies.
I also have some questions for energy structure transformation. Actually UK is a very good sample. On the deregulations of the energy markets, UK is on the frontier, it is a pioneer on the electricity and the natural gas market, and all these experiences have been widely adopted in many countries. For China, also for other Asian economies, the energy structure is also an important thing. Most countries have high national subsidies on the petroleum products. How can we adjust our energy structure? On the one hand, we have to defy green taxation system, on the other hand, we have to remove some subsidies for the fossil fuels, so do you have some observations on UK or European experiences, how can we do this, adjust such kind of pricing system gradually and smoothly, secure our energy security, and improve structuring?
Michael Grubb: UK has some subsidies for its coal production. One irony effect that people forget now is that UK is a strange place to promote low-carbon economy. Only thirty years ago, we were described as an island of coal and a sea of oil and gas. But domestic coal production was relatively high-cost and polluting, and it had become inefficient. There was quite a dramatic transformation when Mrs. Thatcher came to power. She wanted to get UK less independent on coal. That was one factor that helps the transition process. And definitely some privatization did help to improve efficiencies, bringing down some costs, in terms of introducing internet system. It's always difficult to remove subsidies and introduce environmental pricing. It's not easy because you're asking consumers to pay more. So it's got to be a good story, compared to what they're getting in return. And part of that can be the environmental improvement, but also like energy efficiency that can make us less dependent on the consumption of energy. One has to accept that in many major transitions, some groups are either protected or cynically brought out, because blocking changes is always hard. It's part of a package that this is what we're trying to achieve, this is how we achieve it, and here's some help to manage the transition. Maybe we're a little lucky in Britain as well as we've got the North Sea gas coming in just at the time the new generation of gas plant steps in, actually helping to reduce the price at the same time.
Wu Libo: But now we see that natural gas from the North Sea is also declining, right? I noticed that UK is also trying to import natural gas from Russia and other countries. The big contract between China and Russia really encourages many people, but if we look at the long term planning of Chinese government, the Chinese government still put focus of fuel structure transformation on nuclear and natural gas. Look at the plan in 2020, 2030, nuclear, in addition to hydro, will be the third largest source of energy generation. But there is a concern in the massive society about security issues after the Fukushima. How about UK case and others?
Michael Grubb: In the UK circumstances, the debate between the government and the civil society in the last ten years stresses that we will need all three major sources of energy, nuclear, natural gas and renewable energy. That was sort of the government explanation, the carbon capture is still not witnessing progress as hoped. But in the British context, it's less necessary because we don't have so much coal production. The government has been committed to both nuclear and renewable principals, implementing that has required a substantial reform of the energy market, because both of them are capitalintensive solutions. In particular, nuclear requires a very long term to be financed. So the government has now negotiated a new nuclear power station, trying to improve concept. There is some sort of complications with the EU about that. It has to be solved sober, the energy prices ended up a lot higher than people expected five years ago, more than twice as high. Certainly, the so-called nuclear revival is going to be a lot slower in EU and UK. As to China, I cannot comment, these things are very much national choices. I think there's an observation that nuclear proved harder and more expensive than most people expected.
Wu Libo: So far, the operating nuclear units in China are not so expensive. Maybe it's because the central government provides subsidies and tax-reduction policies to the nuclear industry. If you look at the electricity prices, nuclear is even cheaper than gas, and that's the China situation. But people are really concerned about the security issue. The nuclear now in construction all use the third-generation units that are much more expensive than the operating units. Russia signs a contract with the Chinese central government, but on the business side. There are still some problems to solve. Otherwise, it's just a political signal.
Michael Grubb: It's useful to have that additional option in China, because gas is cleaner than coal, and nuclear is cleaner than gas.
Wu Libo: Regarding the low-carbon transformation, the carbon market is now piloting in some cities in China. EU-ETS has some experiences. Good or bad lessons we're trying to learn. Now the Chinese government has two thoughts: One is combining the energy conservation trading with carbon emission trading, as I know, UK also experiences that. You introduced the white certificate for energy conservation, and the green certificate for the renewable, but this experience does not seem so successful, as I learned from the journals. So do you have some stories about this?
Michael Grubb: Well yes, there are quite a lot of stories. UK and EU tried to make serious progress on energy efficiency through various mechanisms, efficiency standards. The UK has quite an interesting set of instruments including business sector on energy efficiency. There's growing support for renewable energies. The solution in Britain is more complex and probably more expensive than it needed to be, and is now being reformed. The center problem has been price or carbon with the EU carbon emissions trading scheme. It's a mixed success. It looks like it is working perfectly, although there were some initial difficulties, some scandals about false allowances. But I think why a system like this effective is that it is creating real value in reducing emissions, and once you created a system with real financial value, somebody tries to play games with it, corrupt it. So you need strong governments. And I think we've got that, it's a well regulated system now.
And the big problem now is that the people designing the European trading scheme, including its extension to 2020 simply didn't understand uncertainty. So they can't set a cap which they think is reasonably ambitious. And lots of things happened. One was the major economic recession, we also had successive renewable energy policies, we have progress in energy efficiencies, and we have success in clean development mechanisms generating emission credits. So the whole system's flooded with more supplies coming in, but the emission's reducing for several reasons, and the result is that there's not much left for the carbon market because the target’s going to be achieved anyway. So you have the question: Is it a success or a failure?
Wu Libo: Maybe we need some adjustment.
Michael Grubb: Well, I think the point is the world is more uncertain than you think. You should design a system to deal with that uncertainty, so make it more robust, you also have to be clear and honest about what the instrument is supposed to achieve. So the people devising the carbon market seems to have an assumption without thinking very carefully that it will deliver emission caps cheaply and create a carbon price that will help the low-carbon investment and all those things. And those two targets are contradictory. You know, driving a CDM for international support, it helps that the target is achieved, but it's been useless for investment, because the price has got so low. Some industry group says: What's the problem? We've achieved the target, but we could have cut it down to much deeper levels. So the low carbon investment is really important. And we should have developed the instrument to support low-carbon investment to give more confidence about the price. And that probably means we will need a price code or something. We will design a system such that you get more confidence about what the price would be. A bit actually thanks to California.
Wu Libo: California seems to be a successful case so far.
Michael Grubb: Yeah, it seems to be more successful. Partly, I think they learned from the European experience. The successful is always the latter. But I mean there is a serious attempt now to solve that problem, with what was called the market stability mechanism, which is an approach to withdraw allowances when the surplus becomes too large. That is a proposal been put officially on the table by the European Commission and I think we will see a lot of debate over the next year about how exactly it’s implemented.
Wu Libo: In China, some provinces are also testing that, the allowances are allocated to each firm. If you don’t trade, your remainder would expire by the compliance period, and you cannot trade it for the next year. They’re trying to make some adjustments. You mentioned the interaction of different policies and the net outcome is totally different from your policy goal. That is the Chinese experience.
Michael Grubb: I think one point to stress, as an empirical fact, in almost every cap and trade system that I know of in carbon or elsewhere. The initial politics is about’Oh this is going to be expensive and hard! Can we afford it? What will it do to industry? ‘And the problem has ended up being the exact opposite.’Oh the target is overachieved! The emissions are below the cap! This thing is too loose! We have got too much surplus!’ That is not always going to be true in the future. We don’t know, but the same is pretty true for the United States. The first scheme is the regional gas program. Of course we are always more aware of the possible costs. The feared cost of the system, very often when something is on the way. The industry works to deliver it much cheaply than they thought.
