Also by EU-China Energy Cooperation
Platform Project
2020
EU China Energy Magazine Spring Double Issue
EU-China Energy Magazine Summer Issue
中欧能源杂志夏季刊
EU-China Energy Magazine Autumn Issue
中欧能源杂志秋季刊
EU-China Energy Magazine 2020 Christmas Double Issue
中欧能源杂志2020圣诞节双期刊
2021
EU-China Energy Magazine 2021 Spring Double Issue
中欧能源杂志2021春季双期刊
EU-China Energy Magazine 2021 Summer Issue
中欧能源杂志2021夏季刊
EU China Energy Magazine 2021 Autumn Issue
中欧能源杂志2021秋季刊
EU China Energy Magazine 2021 Christmas Double Issue
中欧能源杂志2021圣诞节双刊
2022
EU China Energy Magazine 2022 February Issue
中欧能源杂志20222月刊
EU China Energy Magazine 2022 March Issue
中欧能源杂志20223月刊
EU China Energy Magazine 2022 April Issue
中欧能源杂志20224月刊
EU China Energy Magazine 2022 April Issue
Joint Statement Report Series
Electricity Markets and Systems in the EU and China: Towards Better
Integration of Clean Energy Sources
中欧能源系统整合间歇性可再生能源 - 政策考量
Supporting the Construction of Renewable Generation in EU and China:
Policy Considerations
中欧电力市场和电力系统 - 更好地整合清洁能源资源
支持中欧可再生能源发电建设: 政策考量
ENTSO-E Grid Planning Modelling Showcase for China
ENTSO-E 电网规划模型中国演示
Accelerating the Incubation and Commercialisation of Innovative Energy
Solutions in the EU and China
加速中欧创新能源解决方案的孵化及商业化
Comparative Study on Policies for Products’ Energy Efficiency in EU and
China
中欧产品能效政策比较研究
Integration of Variable Renewables in the Energy System of the EU and
China: Policy Considerations
Table of Contents
Letter from the Team Leader
1. Imagining futures: a methodology for innovation
2. Squeaky clean? ECECP puts the green credentials of heat pumps
under the spotlight
3. Can the EU and China align their carbon markets?
4. Greening steel industry: the way forward
5. Why sustainable Buildings are critical for a resilient, healthier
society?
6. Decarbonising Ammonia Manufacturing: Three Scenarios for 2050
7. News in Brief
8. Reports Recommendation
Letter from the Team Leader
Dear All,
Welcome to the May 2022 issue of the EU-China Energy Magazine.
On 24 and 25 May 2022, we teamed up with the EU Chamber of Commerce
China (EUCCC) and EnergyPost.eu to organise a two-day online
conference on innovation for a low carbon economy. Participants heard
from expert analysts about the latest trends and targets, as well as case
studies featuring top EU companies that are ready to start work, e.g. with
floating offshore wind turbines and sector coupling to use waste heat from
data centres. We will make the conference videos available on our website.
Alongside the online conference, our May issue looks at how innovation
can support the low-carbon transition: we start with a futurology
perspective on innovation, and then move on to discuss the green
credentials of heat pumps and the development of green steel, and ask
whether the EU and China can align their carbon markets.
Don’t forget to take a look at our round up of the latest energy news in
Europe and China, and our selection of recent energy reports and
publications.
We hope you enjoy the content of this issue and always welcome feedback!
Last but not least, I would like to say a big thank you to our long-suffering
editors, Daisy Chi and Helen Farrell, for once again delivering a very
informative issue.
Flora Kan
Team Leader
ECECP
1. Imagining futures: a methodology for
innovation
Climate change will fundamentally alter life on our planet. However, it is
difficult to predict exactly what the impact will be. Innovations have the
potential to slow climate change, mitigate its effects and help human life
adapt to the changes. To create innovation, we must work out how to
forecast what we will need to maintain a livable planet. But how can we
second guess what the future will look like? ECECP Junior Postgraduate
Fellow Helena Uhde met with Elliott Montgomery, design researcher,
strategist and educator, whose work centres on asking questions about
social, technological and environmental impact.
A devastating view of the future is painted by the 2022 Report of Working
Group 2 of the Intergovernmental Panel on Climate Change (IPCC) in its
overview of climate change impacts on ecosystems, biodiversity and human
systems: widespread degradation of ecosystem structure and function, food
insecurity, reduced water supply, the emergence of new human and animal
diseases, and human mortality caused by extreme heat events are just some
of the consequences predicted to have a high or very high probability.[1] The
report is based on risk projections covering the near future (2021-2040),
mid-term future (2041-2080) and long-term future (2081-2100), and does
not create much hope for a viable planet worth living in. It prompts the
question: is it even worth trying to stop climate change?
A spectrum of futures
In many places, the report reads like a dystopia - it seems almost impossible
to stop the severe consequences of climate change. And indeed, there are
quite a few films based on a climate dystopia narrative.[2] However, visions
of the future that oscillate between dystopia and utopia offer a very narrow
view of things and block our view of the full range of possibilities. Leah
Zaidi, an award winning futurist, advocates imagining the future as a
spectrum rather than a binary notion. She calls this a spectrum of
‘polytopias‘ and explains it as ‘stories that depict many people, many places,
at many times. They demonstrate the incremental steps required to shift a
system and how those systems interact with people along the way.
Polytopias aim to capture the complexity and nuances of change itself.’[3]
Thinking in a spectrum rather than binary space opens up new possibilities,
new facets and inspiration that we would otherwise fail to see. It offers a
number of possible futures. This concept is also at the core of the work of
Elliott Montgomery, assistant professor of strategic design and management
at Parsons School of Design, The New School and cofounder of The
Extrapolation Factory. In his work, Montgomery explores how the methods
and approaches used in futurology can be employed to train the human
imagination so that it begins to see more valuable and provocative scenarios.
Speculative Design as an approach for imagining
futures
The framework that Montgomery uses is called speculative design, and was
coined by Anthony Dunne and Fiona Raby, professors at London's Royal
College of Art, as a form of design that ‘thrives on imagination and aims to
open up new perspectives on what are sometimes called wicked problems, to
create spaces for discussion and debate about alternative ways of being, and
to inspire and encourage people’s imaginations to flow freely.’[4]
Montgomery created a map (see Figure 1) to classify speculative design. In
contrast to the more well-known term design thinking, speculative design is
more in the field of art, but also overlaps with strategy.
Figure 1: An Unresolved Mapping of Speculative Design. Source: Elliott Montgomery - EPMID.com.
One of Montgomery's clients is Sweden’s Innovation Office, Vinnova. In the
project 'Future Prototypes', a dialogue about possible futures is initiated by
creating objects.[5] The project developed a number of change scenarios that
Sweden might face in the coming years. ‘We did a huge amount of work
scanning for signals to better understand how changes are happening in the
present moment. And from those signals we arrived at a series of drivers and
finally at four scenarios’, describes Montgomery. The scenarios are based on
two key drivers of change: i) the level of disruption, or the magnitude of the
change caused by climate change; and ii) the source of change. ‘Will there
be an impact from the top, from our government agencies, from big tech,
from corporations? Or will the changes come as a result of work that's
happening at the grassroots? General shifts in public opinion and choices,
people doing different things and living their lives in different ways,
consuming energy differently, etc.?’asks Montgomery. Based on the
combination of polarities, four different futures were played out in the
project. ‘Each one of these stories feels believable. We can imagine a
scenario where the Greta Thunbergs of the world start to gather really
significant forces, and we all come together and start to make changes in our
day-to-day lives, rallying on the streets, reducing consumption, flying less,
etc. And things start to change in ways that have a dramatic impact on the
world. We can also imagine a world where that type of engagement is the
primary driver, and it's still not enough.’ The four scenarios thus help to
locate a spectrum of imaginable narratives of change. The aim is not to
favour certain scenarios over others, but to create a discourse and to think
about what measures could be taken.
“A good science fiction story should be able to predict not the automobile
but the traffic jam.”
– Frederik Pohl.
One aim of this thinking game is to think about possible problems that arise
from the visions of the future. ‘Often in this work we try to imagine the
problems that do not exist now because the conditions causing those
problems have not yet materialised. But if we can start imagining these
problems, then we can start thinking about what we need to do about these
problems,’ states Montgomery. Speculating about future problems in a
proactive way can thus help us to understand the ties or tensions we may
face in one of the futures.
There are many recent examples of how important it is to think about
problems that were previously beyond the imagination. Before the
pandemic, who would have thought of the extent of supply shortages? With
the increase in electric cars, who foresaw the lithium shortage? Who
predicted that an increase in renewable energies in the electricity market
would lead to negative electricity market prices? In hindsight, these
developments seem logical and clear - but they were not flagged up in
advance.
What-if? and social rule bending in the electricity
sector
In the field of energy, speculative design could create a wider discourse, that
reflects on the role that electricity plays and should play in our lives. For
most people, electricity is an abstract construct that comes out of a socket on
the wall. However, if we think of the availability of electricity in terms of
comfort levels, such as keeping our computers and cell phones charged, the
air conditioning running and the Internet working, electricity has a much
more emotional value for us. This also changes the possible business
models. In Germany, where customers can choose their electricity supplier,
many people opt for one that supplies them with renewable energy. Studies
have shown that while cost is the determining factor when purchasing
electricity, other factors such as green energy or local generation play a role
in the choice.[6] At this point it is worth asking the 'what if' question. What if
electricity had a completely different value, or consumers had different
preferences? What if electricity didn't cost anything? What if electricity
didn't need a grid for transmission? What if electricity were plentiful, or non-
existent?
What if? questions can lead to technical innovations, but also to
experimentation with social rule bending. ‘Social rule bending is really the
ease with which we could bend social rules if we all agreed to,‘ explains
Montgomery. An example is our sleeping habits. We all usually sleep at
night and sleep for one single stretch at the same time. Switching from a
polyphasic sleep phase to monophasic sleep is a social norm that has made
us into a productive workforce. By bending this social rule, perhaps more
people would not divide their time into day and night, but sleep and be
awake as they saw fit. ‘This could alleviate the problems of peak loads
during the day when everyone is awake. And so, this simple act of bending
social rules, agreeing that the social rule we're sticking to might not
necessarily be the best for some of the technological systems, could get us
out of one of the challenges we're facing. No new technology would have to
be invented for this,’ says Montgomery.
Energy pilots
In an effort to make low-carbon energy technologies cost-competitive,
Montgomery developed hypothetical business models by borrowing proven
techniques from other sectors.[7] ‘One of the key tensions that I was starting
to find as I spoke with experts was that there are potentially different ethical
expectations of businesses in the low carbon energy sector than there are in
other sectors. In the low carbon energy sector, we do have quite high ethical
expectations, while in other sectors, when a CEO does things that might not
be entirely socially acceptable, they oftentimes seem to be given permission
to behave in ways that are just not as admirable,’ says Montgomery,
describing the motivation behind the project. The hypothetical business
models that Montgomery developed for low-carbon energy resources include
a lottery that offers the chance to win a cash windfall each billing period, as
well as high-end tourism, almost like the Richard Branson space tourism
model, which would make electricity almost free for the masses.
Representative physical prototypes for the hypothetical business models
were shown in public spaces to prompt a discussion about the feasibility and
social impact of these hypothetical strategies.
Montgomery sees further opportunities for innovation in cooperation
between different sectors, e.g. between energy and electronic gaming: ‘What
would happen if a big company in the electronic gaming sector were to
collaborate with an energy company to create essentially the Pokémon Go of
peer to peer energy networks? It could become this global sensation and
you’d have millions of people playing the game. What would it mean for the
low carbon energy sector to have that type of enthusiasm and fanfare where
nobody can stop talking about it? How could that type of engagement be
introduced into the energy sector through collaboration connection to those
who are not necessarily already working in the energy sector, but could
leverage their capacity and hold on society as a way to bring more eyes to
the energy sector itself.’
Creating discourse
Speculative design is not necessarily about finding a solution to a specific
problem. Also, when ideas are developed, which possibility is preferred is up
for debate. Rather, it is about creating a discourse about the range of
possibilities and changing the perspective from one single future perspective
to a spectrum of futures. ‘We might not be able to see all of the possibilities,
and in fact we never can truly see all the possibilities, but we can see more
of those possibilities as we look across the vista. Once we have an idea of
where we do want to go or where we don't want to go, we can set a strategy,
and the strategy starts to provide some of these answers or so-called
solutions,’ concludes Montgomery.
By Helena Uhde
ECECP Junior Postgraduate Fellow
2. Squeaky clean? ECECP puts the green
credentials of heat pumps under the
spotlight
Even before gas prices started to rocket in 2021, heat pumps were being
touted as the solution that would solve the problem of CO2 emissions in the
heating sector. They are key not only to reducing dependence on fossil fuels
– and, in the case of Europe, on Russian gas – but also to decarbonising
buildings. The IEA calculates that EUR 60 billion currently spent on gas
imports could be saved if the bloc as a whole switched to heat pumps, and
forecasts that by 2050 heat pumps will meet the majority of the world's
heating needs.
Already, heat pump sales are at record levels. In Europe, they accounted for
25% of sales in the heating market in 2021[8]. In order to reduce greenhouse
gas emissions by at least 55% before 2030, building emissions must fall by
more than half relative to 2015 levels.
The EU has set ambitious targets for heat pump installation, aiming for 50
million heat pumps to be installed by 2030, with an annual growth of 16%.
That will be about one third of the 150 million boiler installations in the
bloc. To put the target in context, in 2017 83% of Europe’s heating
installations relied on fossil fuels.
Individual countries have set their own targets. In Germany, for example,
the government announced in December 2021 that from 2025 any
household heating system must run on renewable energy – which has been
understood as an implicit endorsement of heat pumps. In the UK, the aim is
for 600 000 heat pumps to be installed per year. Outside Europe, China
leads the world in its promotion of heat pump water heaters.
An additional advantage is that a reversible heat pump can be used not just
for heating, but also for cooling, according the authors of a recent RAP
report by industry experts[9]: as the climate heats up, demand for air
conditioning units is expected to double by 2030, and the RAP authors say
heat pumps have the potential to offer cooling at far greater efficiency than
traditional air conditioning units. Once a standard air to air heat pump has
been installed, it is a relatively simple process to subsequently change the
type of heat pump in a building.
There are hurdles to be overcome:
Affordability: homeowners are unimpressed by the sizeable upfront cost of
a heat pump installation. That cost can start at EUR 9 430 (CNY 67 000),
but can, depending on whether the existing insulation and radiators are
compatible, reach EUR 53 000 (CNY 376 000). That is in marked contrast
to the average cost of a gas boiler, which retails at around EUR 3 000 (CNY
21 300). As rapidly rising inflation eats away at take home pay, investing in
a heat pump is an investment that fewer homeowners will be happy to
make.
Nevertheless, the higher cost of gas means that the cost of installing and
running a heat pump is now reaching parity with a gas boiler. Investments
such as the new factory being built by Octopus Energy in Northern Ireland,
which is set to manufacture heat pumps at the same cost as a gas boiler, will
make heat pumps more competitive. Heat pump manufacturer Stiebel
Eltron in Lower Saxony, Germany, aims to double production capacity by
2026, investing EUR 120 million in its expansion and creating 400 new
jobs.
Peak load pressures? What is going to happen at times of peak demand,
once the projected 50 million heat pumps are connected to the electricity
grid? There are concerns that the system will need upgrading, particularly if
reliant on renewable, and therefore variable, energy. Electricity grid
companies play down these worries, but there is no doubt that careful
planning and infrastructure investment will be required to meet the
additional demand for electricity that will accompany a mass rollout of heat
pumps.
Public opinion: Aside from the cost, consumers may be deterred by the
different heat experience delivered by a heat pump. Rather than being able
to respond to varying temperatures or situations, heat pumps maintain a
constant temperature. This is very different to gas or oil fired boilers, which
can be adjusted to deliver sharp variations in heat as required by the
householder.
Additionally, householders may balk at the size of a heat pump, which
involves a large air-conditioner-style box on an outside wall, and by the
noise it makes: professional advice is to locate it on a wall far away from
the master bedroom. The heat pump also requires installation of a water
tank – something that householders have recently dispensed with following
the advent of gas-powered combi boilers which heat water on demand, and
an item for which they may be hard pressed to find space.
Meanwhile, plenty of housebuilders are simply unaware of heat pumps as
an alternative to fossil fuel installations. New build houses are routinely
entering the market with standard fossil fuel heating, simply because of that
lack of knowledge.
Skilled installers? In order for a heat pump to be installed, a specialist
survey is first required to assess the insulation of the property and its
existing radiators. Without adequate insulation, the heat pump will be less
efficient than a fossil fuel powered system. Small, older radiators will be
incompatible with a heat pump system.
The installation itself is also complex, with the electrical wiring of many
buildings unable to accommodate the extra electricity needed by heat
pumps, which run on 220/240 volts like window unit air conditioners do. If
a gas boiler breaks down, the easiest and cheapest solution for a homeowner
is to swap it with another gas boiler. Installing a totally different type of
system that may have implications for the building’s wiring is a big ask, and
unlikely without some major subsidies.[10] A recent UK study found that
80% of heat pumps were less efficient than fossil fuel boilers simply due to
poor installation.[11]
In Germany, the lack of skilled manpower is holding up installations. Hans
Schmidt, owner of a heat pump firm in Bavaria, told Politico that it was
near-impossible to find heating technicians in Germany. ‘We’re desperately
looking for people,’ he said. ‘Once I called the job centre and said I need
installers for heating systems. They started laughing.’[12]
The UK’s Heat Pump Association has launched a mass drive to train up
installers, raising the skills base from just 3 200 installers in 2021 to 50 000
in 2030. The plans include an expansion of its training facilities from 22 to
37, and introduction of a simplified syllabus. Meanwhile, the European
Heat Pump Association (EHPA) is playing down the lack of installers,
saying it is possible to upskill heating installers in just five days.
Green impact? Heat pumps use refrigerants called fluorinated gases. F-
gases were developed in the 1990s to replace the ozone-killing
chlorofluorocarbons (CFCs) and hydrochlorofluorocarbons (HCFCs).
However, like CO2, F-gases drive global warming and are stable, so will
remain in the atmosphere for a long time.
In 2015, the EU imposed annual production quotas for F-gases in order to
promote the use of alternatives. DG Clima, the European Commission’s
department responsible for F-gas regulation, is now mulling a steeper phase
down in quotas, starting with a potential 50% cut from 2024. The danger
now is that this could hold up the push for more heat pumps.
‘Any new measure in the revised F-Gas Regulation that would limit in a
foreseeable future the availability or the choice of refrigerants (bans, stricter
quotas) would necessarily slow down the speed at which heat-pump
equipment will be deployed,’ warned an industry coalition in March 2022,
made up of the manufacturers’ group, EPEE, the European contractors
association, AREA, and the EHPA.
Having a full range of F-gases available is necessary ‘to speed up the
massive deployment in a safe and highly efficient manner,’ the group said
in a letter to the European Commission.
But alarm bells may soon sound over widespread and growing use of gases
that contribute to global warming.
Looking for answers: the Regulatory Assistance
Project steps forward
Many of these issues are acknowledged by EU industry specialists. In its
recent report, the Regulatory Assistance Project (RAP) (a group of
buildings and heat decarbonisation experts), has taken a look at the hurdles
confronting the heat pump sector, and how EU policy could support a mass
roll-out of heat pumps at the level required. Its main aim is to offer
guidance on how to improve the EU’s Fit for 55 package to encourage
greater use of heat pumps.[13]
The paper demands a clear strategy and policy stability to drive long term
investment and decision making, as well as a mix of different policy
measures to ensure that the journey towards heat pumps is simple, provides
good consumer outcomes and develops good jobs and skills.
Policies should include pricing mechanisms to ensure that heat pumps cost
less than fossil fuel systems (including running costs); financial support to
cover the additional capital costs associated with first-time heat pump
installs, as well as the insulation and heating system upgrades that may be
needed to get the buildings heat pump ready; and appliance standards to
drive an eventual ban on fossil fuel heating.
The report acknowledges the different strategies for heating in Europe’s
Member States. In areas like the Nordic countries, where there is a greater
penetration of heat pumps, consumers rely on communal heating
infrastructure such as electricity grids, heat networks and gas grids, while in
warmer states customers make heating decisions for their own individual
properties, rather than as a community. Where consumers are looking to
heat their own properties, they are likely to view the promotion of new
technologies with caution. They are wise to look beyond the headlines. For
example, while government and media trumpet the benefits of air-to-air
heat pumps, the RAP report suggests cooler countries should consider
introducing higher manufacturing standards or promoting ground source
heat pumps.This is because in cooler countries, the COP ratio is likely to be
lower because of the lower ground or surface air temperatures.
In response to the concerns about the global warming potential of F-gases,
the report notes that newer heat pump models can use refrigerants with
lower global warming potential, which means they can operate at higher
temperatures, potentially reducing the need to replace existing radiators.
To reduce running costs, RAP advocates ‘smart’ tariffs or ‘time of use’
tariffs, which will maximise the use of lower-cost electricity. It also
proposes using under floor heating rather than radiators in order to achieve
greater efficiency.
As far as installation goes, the report’s authors are firmly in favour of fitting
heat pumps in new builds: the costs of installing at the time of construction
are lower and the process is more straightforward compared to retrofitting
heat pumps into older buildings. Policy moves to ban fossil fuel heating
systems in new builds will help accelerate the adoption of heat pumps, the
report suggests. The authors also note that heat pumps are particularly
appropriate for industrial use, as they can be deployed either at scale or in
small units.
Policy and regulatory reform form the mainstay of the RAP
recommendations. They advocate capital support to eliminate upfront costs,
pricing policies to support lower ongoing heat pump running costs,
regulations to drive purchasing behaviour, and a framework of skills
development and consumer protection to encourage take up of the
technology. They also propose an additional carbon tax on heating fuels to
push consumers towards carbon neutral alternatives. An additional move
would be to adjust the EU’s proposed revision to the Emissions Trading
System Directive, which proposes an emissions cap that would generate
income for a social climate fund to reduce fuel poverty. The report suggests
using that money to help fund heat pumps for low-income households and
improve the economics of fuel-switching, and warns that policy and
regulation are needed to support the ETS proposals.
The RAP authors single out the European Tax Directive for criticism,
arguing that its rates are not related to energy or carbon content. They want
to see tax rates that reflect the higher energy content and environmental
impact of fossil fuels and unsustainable biomass. Such moves would give a
boost to the electrification of the heating sector and therefore to heat pumps.
The Directive on Energy Efficiency is found wanting as it allows
maintaining and even expanding heat generation from natural gas, and does
not restrict the use of biomass in heating. The RAP report calls for an
improved definition of district heating that would limit the use of gas and
biomass.
Unsustainable biomass heating should be capped by a revised Renewable
Energy Directive, the report advises. Electricity generated from renewable
sources should count towards a mandatory renewable heat target; and if no
cap is introduced, then a multiplier should be introduced for non-biomass
renewable heat technologies, including heat pumps.
Regulation is another area in which revision is required, suggests the report.
It backs the proposed reform of the Energy Performance of Buildings
Directive (EPBD) to call for decarbonisation of buildings, not just energy
performance, and calls for more stringent minimum energy performance
standards.
The revised EBPD currently under discussion would require all new builds
to be zero emissions by 2030, with public buildings required to meet these
standards by 2027. The RAP report calls for this deadline to be brought
forward to 2025.
Taken together, the RAP recommendations offer a useful overview of the
proposed revisions to the Fit for 55 package, alongside their own
suggestions for how to improve those revisions. They offer a number of
proposals that the EU is likely to take into consideration, as the pressure to
reduce emissions intensifies. There is a danger, however, of a ‘one size fits
all’ approach to the introduction of heat pumps or low-carbon alternatives,
with a combination of penalties and fixed costs to push homeowners and
builders towards the technologies. The suggestions take little account of the
squeeze on household income caused by general inflation and the recent
massive spike in energy costs, and instead lean on the ETS scheme to
provide funds to offset the costs for low-income households. Nor do they
make allowances for the fact that, as governments reel from the costs of the
recent Covid-19 lockdowns and associated social support, funds are not so
freely available as they were in 2019. No figure is put on the cost of the
measures proposed.
Conclusion
In a crisis, it is always tempting to reach for simple, ‘off-the-shelf
solutions. Heat pumps are a clear example where a single solution is being
presented by governments and trade bodies as the answer to a complex
issue. Little account is taken of the efforts already taken to introduce
cleaner technology. For example, since 2005, all new gas boilers in the UK
have been required to be condensing boilers, which offer 90% efficiency.
Will householders be ready to invest again in a new technology?
There are other ways to heat a building without recourse to harmful gases or
unpredictable upfront costs. For example, orientation of a building in
relation to the sun will maximise its natural heating and cooling potential.
Installation of solar panels or wind power can generate clean electricity to
power standalone heaters. Thermal energy storage can tap into the constant
temperatures of the sub-soil aquifer[14]. Targeting support at new builds,
which have adequate insulation and radiator systems, will avoid some of the
excessive costs associated with retrofitting heat pumps into older buildings.
Take a look at one alternative approach, in the Orkney Islands in northern
Scotland. The windy climate means that the community generates an excess
of electricity from wind power. Instead of being curtailed, the electricity is
now being redirected to power smart quantum storage heaters in the
islanders’ homes. Each heater costs around EUR 820 (CNY 5 820).[15]
As the drive for heat pumps continues, governments are now confronted by
the need to introduce costly subsidies and incentives if they are to meet
their targets. Studies show that heat pumps are not as squeaky clean in
practice as they are on paper, due to poor installation and other issues
highlighted above. In current inflationary times, many will shy away from
the high upfront costs. The climate and average temperature vary in each
European Member State, and the chances are that the solutions for each
Member State – be it type of heat pump, or type of heating technology -
will also vary. Perhaps energy planners need to open their minds to the
alternatives.
By Helen Farrell
3. Can the EU and China align their
carbon markets?
Pushing for a global carbon market might seem like a good idea but would be risky and complicated
in practice. For now, collaboration is the way forward, writes James Norris
Illustration: Daniel Stolle / China Dialogue
The EU launched its emissions trading system (ETS) in 2005, and it now covers 11 000 emitters and
almost half of European emissions. It uses a market-based cap-and-trade system to reduce
greenhouse gas emissions from large power stations, industrial plants and flights within Europe.
Since then, several other national or sub-national carbon markets have either been fully launched or
partly developed – notably in Canada, Japan, New Zealand, South Korea, Switzerland and the United
States. But the EU has worked particularly hard to build a collaborative relationship with China – to
help develop the carbon market concept – because China’s size makes it the obvious market leader in
Asia.
China’s ETS began trading last year, and so far only covers the power generation sector, but ‘the 2
162 companies it includes produce an estimated 4.5 billion tonnes of CO2 emissions annually,’ writes
Renato Roldao in Energy Monitor. ‘That compares with an EU ETS emissions cap in 2021 of 1.6
billion tonnes of CO2.’
In 2014, the EU cooperated with China on designing and implementing China’s carbon market and
supporting a roll-out of seven regional pilot schemes across the country. Three years later, at the
COP23 UN climate conference in Bonn, that cooperation facilitated the creation of China’s national
ETS. Commissioner Arias Cañete said at the event that the ETS would, ‘undoubtedly send a strong
signal to the rest of the world in support of carbon markets. The EU is therefore pleased to engage in
even closer bilateral cooperation with our Chinese counterparts.’
The rationale underpinning this EU–China cooperation is that by sharing its experience with China,
the market with the greatest potential to reduce global emissions, the most established carbon trading
system, the EU, can expedite progress in the fight against global warming.
Barbara Pongratz, an associate analyst at the Mercator Institute for China Studies (Merics), told
China Dialogue: ‘The goal of EU–China dialogue on carbon markets is to combine knowledge and
enhance our common understanding of ETSs.’ Being the global ETS market leader, the EU was able
to share knowledge gained from its experience. However, as Pongratz says, ‘regular bilateral policy
dialogues between the EU and China are a mutual learning process and, given the sheer size and
complexity of the Chinese ETS, European stakeholders are learning a great deal from China’s
experience as well. ETS development is a procedure of constant exploration and enhancement.’
Differences in market design
China’s ETS, being at an earlier stage of development, differs from the EU ETS in a number of ways.
The main difference so far, Roldao says, is that China’s system has no absolute cap, and is based
instead on carbon intensity. Under this system, the emissions of individual companies are compared
against the average carbon intensity of the relevant sector. Each emitter is allocated emission
allowances free of charge, and if they can reduce the carbon intensity of their operations, they can
sell surplus allowances.
This system is designed not so much to phase out coal in favour of renewables but to phase out the
less efficient coal plants, so making the overall coal sector more efficient. As Roldao explains in his
article: ‘The same overall volume of electricity would be generated by coal as without the ETS, but
the increased efficiency would lead to lower emissions overall.’ In this way, the Chinese government
can work towards its global warming targets without compromising the country’s energy security.
China, like the EU, also makes use of scarcity as a policy tool to reduce emissions. Roldao writes:
‘Once the cost of carbon is fully reflected in the cost of energy, it will change power plant cost
structures, which is likely to accelerate reform of the Chinese power market, leverage green financing
and galvanise the uptake of emission reduction technologies.’
Linking up carbon markets
For policymakers, faced with a proliferation of carbon markets around the world, an obvious next
step is to gain synergies by linking up with other markets. The EU has for example linked up with
Switzerland. China, too, is working with its neighbours to develop a regional carbon market,
leveraging trade relations built over the years with the ASEAN bloc. Though regional ETS
harmonisation makes sense, analysts at the Green Finance & Development Center say this is difficult
to achieve in the short term, as the development of individual carbon markets in Vietnam, Indonesia,
Thailand and the Philippines is still at an early stage. For now, the analysts suggest, ‘the main focus
should be to assist Southeast Asian countries in completing the infrastructure construction of the
[regional] carbon market, improving the legislation of carbon market construction, building an
effective MRV (measure, report, verify) system, and exploring the development of the pilot carbon
market.’
Jessica Green, associate professor at Toronto University, writing in Nature magazine, says ‘linking
markets together should promote trading, smooth financial flows and lower the overall cost of
reducing emissions. A global price on carbon emissions would emerge without the need for long and
fractious diplomatic negotiations.’ However, she points out the reality is more complex: ‘Linked
carbon markets are difficult to manage when many regulatory authorities compete. Interactions with
other climate policies trigger unintended outcomes. Policymakers find it hard to keep prices at the
‘right’ level – neither so high that a carbon market becomes politically unacceptable, nor so low that
it fails to change behaviour.’
If a regional carbon market is challenging, a global one is even more so. Pongratz says: ‘The
introduction of a global carbon market is an ideal scenario that, however, seems unrealistic at present.
Several hurdles must first be overcome, as the different ETSs, especially those of China and the EU,
are at different stages of development and use different approaches and mechanisms that are
currently difficult to align.’
Alternatives to harmonising carbon markets
It will be some time before China can match the coverage and maturity of the EU ETS, Pongratz
says. The EU, as the ambitious climate policy leader, is keen to accelerate the process and has
exerted political pressure by proposing the Carbon Border Adjustment Mechanism (CBAM). This is
essentially a carbon tax on imports of certain products to protect climate action in Europe and to
prevent the ‘carbon leakage’ of European companies outsourcing their production to countries with
weaker emissions targets. She adds: ‘Using CBAM as a last resort, it wants other major emitters and
trading partners to step up their carbon pricing efforts. The more developed carbon pricing systems in
a specific country are, the less they will be affected by CBAM. CBAM should also serve as an
incentive to push forward global debates on carbon pricing, one type of which is emissions trading.’
Green believes that, within a global system, national carbon markets should limit their links to other
markets. She says China ‘made the wise decision to remain independent, providing leeway to fix the
problems that will inevitably arise. It should postpone any other linkages being considered. Similarly,
policymakers should reject offsets from other jurisdictions.’
Governments tend to avoid difficult political decisions. As a solution, Green favours the creation of a
central carbon bank to manage allowances and prices. She points to the EU’s Market Stability
Reserve for the EU ETS, which performs similar functions: ‘governed by detailed rules, it leaves
little opportunity for member-state influence’. In theory, a central carbon bank could perform a
similarly useful, independent intermediary role. In practice, she says, the likelihood of this happening
on a global basis is slim.
Managing volatility in the EU ETS
With carbon markets still in their infancy, a global version may yet happen. When the EU was ready
in 2017 to help China build its carbon market, its own ETS was struggling with an overabundance of
allowances that had depressed the carbon price, giving industries little incentive to participate in the
system. This problem has now been solved. Today, in Brussels, discussions are focused on the need
to address the volatility of carbon prices – the forecast had been for around EUR 30/tonne, but they
are now about EUR 100. This volatility is driven by several factors, including: the uncertainty caused
by continual policy change (such as the goal for reducing greenhouse gas emissions across all EU
economic sectors shifting last year from 40% by 2040 to 55%); the repercussions of the Covid-19
lockdowns on the global economy; and now the effect of economic sanctions on Russia for its war
against Ukraine.
But one factor some policymakers don’t like – or perhaps one they can do something about – is that
many market participants are financial players speculating on EU carbon price movements. Since
2018, the number of active investment funds in the ETS has tripled, to more than 300, with non-EU
financial players accounting for about a third of the market share. On the one hand, this speculation
helps to develop the market by finding a true market value for carbon. On the other, it has also
pushed up carbon prices for companies needing allowances, which in theory works against the main
aim of the ETS of encouraging participation. Another factor for policymakers to consider, however,
is that a higher price would help fund the development of green hydrogen, viewed by some as the
technology of a decarbonised future.
One proposal is to restrict access to the EU carbon market for non-EU financial players. Other
proposals include taxes on certain transactions, minimum holding periods to reduce short-term
speculation and limits on financial positions. The aim is for greater price stability, but policymakers
will also be looking to balance the competing needs of meeting the 2030 climate targets, finding the
right price that fosters the growth of the carbon market, and not choking industry with too much
costly regulation.
By James Norris
This article was originally published on China Dialogue under the Creative Commons BY NC ND
licence.
4. Greening steel industry: the way
forward
Momentum is gathering for decarbonisation of so-called hard-to-abate
sectors, including the steel industry. One solution that is generally
acknowledged to be among the most promising is green hydrogen. How can
hydrogen better fit into iron and steel sectors future? Following a recent
workshop held by the Rocky Mountain Institute (RMI), ECECP outlines
some of the biggest hurdles confronting take-up of the new technologies,
and the efforts needed to deliver the green transformation of the iron and
steel sectors.
Over recent decades, the reduction of greenhouse gas (GHG) emissions has
been a top priority for governments across the world that are racing to meet
ambitious climate goals. While significant decarbonisation progress has
been made in the electricity sector, other major energy-intensive industries
such as chemicals, iron and steel are often described as ‘hard-to-abate’.
That is because the thermodynamic efficiency of core processes is reaching
its limit and complete electrification is not technically feasible[16].
The pressure on the steel sector
Steel is an integral part of modern civilisation, providing critical material
that underpins many other key industries such as construction and car
manufacturing. However, in recent years the steel industry has been subject
to growing criticism for its poor environmental performance. Globally, the
steel sector is responsible for around 7% of the overall carbon emissions
and one third of industrial emissions. Emissions approached 2.6 Gt CO2 in
2020[17]. For every tonne of iron that is produced from iron ore, an average
of 2.21 tonnes of CO2 is emitted[18]. The great hunger for fossil fuels in the
traditional production process, notably the current predominant blast
furnace-basic oxygen furnace (BF-BOF), has made the steel sector the
biggest carbon emitter of all the heavy industries. Since a sharp reduction in
fossil fuels is needed to achieve our climate targets, massive changes are
required to align the steel sector with the net zero pathway.
In fact, steel manufacturers are facing ever more pressure to decarbonise
not only from regulators, who are setting more and more ambitious
environmental targets and imposing stricter legislation, but also from
investors voicing environmental, social and goverance (ESG) concerns.
Downstream, car manufacturers have become the biggest driving force
behind steel decarbonisation: they are keen to green their supply chains in
order to differentiate themselves from other competitors, and so have
exerted pressure on their steel suppliers, thus greatly contribute to drive the
clean transformation of the steel sector, said Frank Peter, deputy executive
director of Agora Energiewende, at the RMI workshop.
Alongside these external factors, the steel sector itself faces a changing
landscape in the coming decade. More than 70% of the world’s coal-based
blast furnaces, which currently dominate steel production, are set to be
decommissioned before 2030, and therefore will require mass reinvestment,
according to Agora’s Global Steel Transformation Tracker[19]. Meanwhile,
emerging economies with rising steel demand will need at least 170 million
tonnes of new capacity. If traditional coal-based production meets these
needs, it will result in a long-term carbon lock-in which will jeopardise
global climate goals. Due to the long lifetime of steel assets, the investment
decisions made today will largely define the carbon future of tomorrow.
Therefore, it is crucial that low-carbon technologies are embraced now.
Steel production: the green options
The steel sector has been taking innovative steps to improve its
environmental performance. Since the 1960s, the energy required to make a
tonne of crude steel has already dropped by 60 per cent, mainly thanks to
energy efficiency improvements and the increasing availability of scrap
steel which can be melted down and reused to produce secondary steel[20].
Today, the dominant modern blast furnace is currently operating close to its
efficiency limit in the reduction process. In the meantime, the use of
recycled steels also has limitations: impurities in scrap steel, such as copper,
will accumulate over time, meaning that production of new crude steel will
always be required for sectors such as car manufacturing that require high-
quality steel. Even though continued technological progress is likely, the
industry still has a long way to go to reach net zero.
Against this backdrop, transformative and breakthrough approaches are
required to green the steel sector. According to the World Steel Association
(WSA), there are three general technological pathways to net zero:
hydrogen; carbon capture, use and storage (CCUS); and direct
electrification.[21] While there is no silver bullet to deliver the necessary
change, a portfolio of technological options and combinations are now
being explored across the world[22].
Key breakthrough technologies and related projects in greening the steel sector.
Source: World Steel Association
Growing interest in hydrogen
Even though coal remains the key fuel in the iron and steel sectors, it is
clear that a fuel switch to other less carbon-intensive energy carriers has the
potential to deliver significant emission reductions. In recent years
hydrogen has become the new buzz word in the energy industries, and the
global appetite for hydrogen-based solutions in the iron and steel making
industry has grown. This is reflected in patent data and the growing
emphasis on hydrogen deployment in policy frameworks, as well as a
proliferation of announcements of pilots and demonstration projects.
Take China as an example. It is home to 52.9% of global crude steel
production[23]. Here, 258 hydrogen steel metallurgy related patents have
been granted from 2002 to July 2021, with the pace picking up since 2017.
Many more are likely to be granted around 2025, notes Frank Zhong, chief
representative of the World Steel Association’s Beijing office.
In early 2022, following China’s announcement of dual carbon pledges that
give strong impetus to the take-up of green hydrogen, the government
issued ‘Guiding Opinions on Promoting High-Quality Development of the
Iron and Steel Industry’. This paper designates ‘formulating an action plan
for hydrogen-based steel production’ as a major task, further demonstrating
its firm determination to develop clean hydrogen-based approaches. Later,
in March 2022, China released its first Mid and Long Term Plan for
Hydrogen, calling for an expansion to the application of hydrogen in
industry and other fields, while exploring the demonstration application of
hydrogen-fueled steel metallurgy.
Although hydrogen-based steel making is still in its infancy, a growing
number of hydrogen-based steel production pilots are now being planned or
are under construction across the world. According to Global Energy
Monitors Green Steel Tracker[24], of 59 green steel projects announced as
of November 2021, 31 were hydrogen-based, with the majority located in
Europe where the enabling structure is comparatively well established.
These early pilots will play a major role in the ramping-up of the
technology and proving the business case for green steel.
According to RMI’s research, there are three main ways that hydrogen can
be deployed in the steel production process: 1) as an auxiliary reducing
agent in the BF-BOF route (H2-BF) to improve the performance of
conventional blast furnaces; 2) as the primary reducing agent in direct
reduced iron (H2-DRI); 3) in smelting reduced iron (H2-SRI). By
substituting hydrogen for coking coal and natural gas in the production
process, CO2 emissions can be reduced significantly.