Copyright of Royal Dutch Shell plc CONFIDENTIAL

The Green RacePast experience, learning for the future

David HoneSenior Climate Change AdviserGroup CO2

2

Is this really happening?

Fossil fuel use grows – emissions continue to rise

0

2000

4000

6000

8000

10000

12000

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Glo

ba

l fo

ss

il e

ne

rgy

pro

du

cti

on

, mto

e.

Coal

Oil

Natural Gas

Total

Data: BP Statistical Review of World Energy

Progress is being made in developing alternative energy

0

200

400

600

800

1000

1200

1400

1600

1800

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Glo

ba

l no

n-

fos

sil

en

erg

y p

rod

uc

tio

n, m

toe

.

Hydro electricity

Other Renewables

Nuclear

Total

Data: BP Statistical Review of World Energy

But alternative energy is hardly keeping up

0

2000

4000

6000

8000

10000

12000

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Glo

ba

l no

n-

fos

sil

en

erg

y p

rod

uc

tio

n, m

toe

.

Hydro electricity

Other Renewables

Nuclear

Total

Data: BP Statistical Review of World Energy

But alternative energy is hardly keeping up

0

2000

4000

6000

8000

10000

12000

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Glo

ba

l en

erg

y p

rod

uc

tio

n, m

toe

.

Coal

Oil

Natural Gas

Hydro electricity

Other Renewables

Nuclear

Overall Total

Data: BP Statistical Review of World Energy

The story in the 21st century

0

2000

4000

6000

8000

10000

12000

14000

2000 2002 2004 2006 2008 2010

Glo

bal

en

erg

y p

rod

uct

ion

, mto

e

Total Fossil EnergyTotal non-FossilTotal Energy Use

Fossil energy86.8%

market share

Fossil energy87.0%

market share

Non-fossil adds 0.3 btoe p.a.

Fossil energy adds 2.3 btoe p.a.

ºC

6 -

5 -

4 -

3 -

2 -

1 -

0 -1990

Glo

ba

l te

mp

era

ture

ris

e Large-scale high-impact

events

Higher

VeryLow

Data: BP Statistical Review of World Energy

Energy Technology Deployment(Shell scenario projections also shown)

“Laws” of Energy Deployment

Law 1

When technologies are new, they go through a few decades of exponential growth, which in the 20th Century was characterized by scale-up at a rate of one order of magnitude a decade (corresponding to 26% annual growth). Exponential growth proceeds until the energy source becomes ‘material’ - typically around 1% of world energy.

Law 2

After ‘materiality’, growth changes to linear as the technology settles at a market share. These deployment curves are remarkably similar across different technologies.

Our response is to “adjust” the system and add layer upon layer of policy, which can raise costs

EU Emissions Trading System delivers a carbon

price into the EU economy

Cos

t to

soc

iety

$

Our response is to “adjust” the system and add layer upon layer of policy, which can raise costs

EU Emissions Trading System delivers a carbon

price into the EU economy

Renewable Energy Targets

UK Carbon Floor Price

Member State Coal Policy

Cos

t to

soc

iety

$

Our response is to “adjust” the system and add layer upon layer of policy, which can raise costs

EU Emissions Trading System delivers a carbon

price into the EU economy

Renewable Energy Targets

UK Carbon Floor Price

Local carbon taxes

Nuclear Energy Policies

Member State Coal Policy

UK Carbon Reduction

Commitment

Cos

t to

soc

iety

$

Energy Efficiency Directive

Our response is to “adjust” the system and add layer upon layer of policy, which can raise costs

EU Emissions Trading System delivers a carbon

price into the EU economy

Renewable Energy Targets

UK Carbon Floor Price

Energy Efficiency Directive

Local carbon taxes

Nuclear Energy Policies

Member State Coal Policy

UK Carbon Reduction

Commitment

“Green” politics and policies

Cos

t to

soc

iety

$

What does this mean ?

• There are physical limits to the rate at which new technologies can be deployed.

• Governments need to design a robust and long term policy framework with a clear objective to encourage change in the energy system.

• Patience is a virtue.

A policy framework to consider

B CA

Large scale abatement within the electricity sector, transport fuels and some areas of industry. Needs a carbon price to drive deployment.

Energy efficiency measures, land use practices - primarily driven by standards and regulation.

Higher cost technologies still moving down the cost curve. Needs a carbon price with additional support.

Cost of abatement€ / tonne CO2e

AbatementMTonne CO2e

A policy framework to consider

B CA

AbatementMTonne CO2e

Carbon price policy drives project implementation from left to right across the abatement curve

Cost of abatement€ / tonne CO2e

A carbon price in the economy

CO2

Goods and services pass into the economy, with the price of CO2

embedded

Emitters buy allowances from or pay tax to the government Revenue passes

through the treasury and may be used to offset costs to

the consumer, e.g. tax reduction.

$

$

$

New technologies

19

Alternative product

Number of installations

Tech

nolo

g y c

o st

Benefit to deployEarlier deployment through demonstration

Discover & DevelopMust be well funded to drive innovation.

Discover & DevelopMust be well funded to drive innovation.

0

20

40

60

80

100

1 10 100 1000

DeploymentDriven by new features and price.

DeploymentDriven by new features and price.

Demonstration (at scale)A critical step in the early commercialization of a technology

Demonstration (at scale)A critical step in the early commercialization of a technology

New energy technologies – e.g. CCS

20

Power generation without CCS

Number of installations

Tech

nolo

g y c

o st

CO2 priceEarlier deployment through demonstration

Discover & DevelopNeed to refocus and rapidly expand R&D.

Discover & DevelopNeed to refocus and rapidly expand R&D.

0

20

40

60

80

100

1 10 100 1000

DeploymentTypically driven by the CO2 market

DeploymentTypically driven by the CO2 market

DemonstrationNo early adopters and high start-up costs so this phase will need help.

DemonstrationNo early adopters and high start-up costs so this phase will need help.

A structured policy approach is needed

21

Power Generation / Industry &

Manufacturing

Transport Commercial & Domestic (Buildings)

Discover & Develop

Demonstrate

Deploy

A structured policy approach is needed

Power Generation / Industry &

Manufacturing

Transport Commercial & Domestic (Buildings)

Discover & Develop • Support for infrastructure

(e.g. grids & pipelines)• Support for advanced

fuel development• Urban planning decisions.

• Education and awareness.

Demonstrate • Fiscal support for large-scale demonstrations e.g. CCS projects

• Fiscal support for early 2nd generation biofuel manufacture.

• Public transport infrastructure

• Encouraging radical design to set new standards

Deploy • Carbon price in the economy e.g.“Cap-and-Trade”

• CCS legal framework

• “Fast-track” planning

• Vehicle efficiency standards

• Incentivise fuels based on W-t-W CO2 reduction.

• Consumer behaviour

• Efficiency standards (appliances, air-con)

• Building codes

• Encouraging “electrification”.

Broad energy production and use R&D support

23

Even modest first steps are proving very challenging

Linking can enable a global carbon market . . .

Linkages develop between all systems and more systems appear

2000 2005 2010 2015 2020 2025

Danish-ETS

UK-ETSAustralian ETS / carbon price

State and/or Federal carbon pricing

Norwegian ETS

EU-ETS

CDM evolves to includes sectors

Pre-Kyoto Kyoto Post 2012

Expanding EU-ETS

Japan technology standards

Linkage framework

New technology mechanisms evolve (e.g. for CCS)

China adopts carbon pricing mechanisms

New Zealand ETS

Global shipping “cap-and-trade”

CDMForestry mechanism

Energy politics and policies in the 21st Century

• Reducing emissions needs to remain a clear and unambiguous objective.

• Carbon price mechanisms are effective and can deliver the necessary reductions.

• Layering of additional policies can add to the cost and weaken the carbon price signal.

• A clear long term policy framework is required.

• Complimentary policies can enable new technologies (e.g. CCS) and ready them for deployment.

• Constantly changing the framework undermines its purpose.

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