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Creating the incentives for low carbon cities

Presentation by Prof. Jacqueline McGlade, Executive Director of EEA at 'Low Carbon Cities – 45th ISOCARP International Conference', Porto, Portugal, on 20 October 2009

Cities currently occupy just 2 % of the world's surface but account for half the global population, two-thirds of energy use and 76 % of energy-related CO2 output

Prof. Jacqueline McGlade

At the European Environment Agency we support sustainable development and help achieve significant and measurable improvement in Europe's environment by gathering, interpreting and disseminating timely, targeted, relevant and reliable information. 

Climate change is happening and business as usual is no longer an option

The message from our reports over recent years has been consistent and unequivocal. Climate change is happening and it's having a growing impact on ecosystems and the communities that depend on them.

The steady adoption of Western patterns of consumption and production by an expanding global population has lifted many millions out of chronic poverty in recent decades.

But continuing this trend will mean destroying the natural capital that underpins our economies and wellbeing. Continuing with 'business as usual' will mean a collapse of living standards globally. 

Cities are responsible for most of the world’s CO2 production…

A central element of industrialisation has been the steady shift of populations to cities. The concentration of economic activities in urban areas that has resulted makes them, in some senses, one of the main culprits behind GHG trends.

According to the IEA, cities currently occupy just 2 % of the world's surface but account for half the global population, two-thirds of energy use and 76 % of energy-related CO2 output.

In Europe, three-quarters of people live in cities and this is likely to rise to 80 % by 2020. Cities currently account for 69 % of energy consumption.

The environmental impact of cities stems both from their concentration of human activity but also their reliance on outside regions to meet their demand for energy and resources, and to accommodate their waste output. 

A study funded by the Greater London Authority estimates that London alone has a footprint almost 300 times its geographical area — corresponding to nearly twice the size of the United Kingdom. 

This reliance on external resources clearly has consequences. Besides increasing the carbon footprint by necessitating the transportation of goods and distribution losses transmitting energy, it also disconnects consumers from the impact of their consumption — especially where prices don't reflect the full social and environmental costs of goods and services.

But they also present important opportunities to lower per capita carbon output…

At the same time, it's quite clear that the proximity of people and businesses presents huge opportunities.

Urban dwellers in many developed countries, including the US, the EU, Australia and New Zealand, consume less energy per capita than their rural counterparts. And this primarily results from the ways that city living influences travel and housing needs.

As the slide shows, major conurbations in the UK such as London, Birmingham and Manchester have noticeably low greenhouse gas footprints, particularly in the transport sector. Rural areas of Scotland, meanwhile, have particularly high footprints.

In the transport sector, denser cohabitation means shorter journeys to work and amenities, encouraging walking and cycling, although it's important to note that various other factors play a role in behaviour, including income, car ownership, family size and structure, employment and public transport opportunities and city design.

Meanwhile, as this next slide shows, in the housing sector energy use per unit of floor area declines markedly as one moves from single-family houses to multi-family ones and high-rise buildings. 

...which is fortunate because improving energy efficiency of housing and transport poses some challenges

So some characteristics of cities tend to favour lower per capita energy use. In addition, however, cities offer opportunities for policymakers because the concentration of human activities means that measures can be attuned to local realities but have very far-reaching effects.

This is good news, because achieving energy efficiency improvements in both the housing and transport sectors poses some challenges.

The relatively strong performance of industry in improving energy efficiency owes much to the homogeneity of the sector and the scale of incentives

As the slide bears out, energy efficiency improved markedly in Europe in the period 1990–2006. But whereas industry realised a 25 % improvement, the household and transport sectors did less well.

The relatively strong performance of the industrial sector can be attributed to various factors, which make firms sensitive to market and regulatory signals and responsive to policy initiatives.

Whereas the household sector is fragmented, disorganised and heterogeneous, businesses generally operate at a scale where price signals will make a significant difference to their bottom line.

Moreover, firms are often well informed about opportunities to cut costs, geared towards gaining a competitive advantage, and both willing and able to finance short-term expenses in order to secure gains further ahead.

And innovation pays off. For instance, the German Deutsche Telecom replaced its existing heating systems in 2006 to utilize the heat generated by various IT systems in house. This saved some 126 GWh of energy.

Additionally, as a well organised sector, it is comparatively easy for policymakers to boost incentives through broad measures such as the Emissions Trading Scheme.

The household sector poses different challenges but the potential rewards are huge

Getting the incentives right for innovation in the household sector poses different challenges. But, as recent measures to push forward the adoption of energy-saving light bulbs illustrate, adapting policies to the situation offers potentially huge rewards.

In the case of energy-saving light bulbs, the fact that households can save an estimated €25–50 annually by switching from the incandescent alternatives evidently wasn't enough to overcome barriers such as lack of awareness and resistance to change.

The enormous fragmentation of the sector means that households don't have a significant incentive to change and (with some reason) don't feel that their individual action makes much difference to the environment.

Collectively, of course, the situation is hugely different, with aggregate financial savings expected to total 5–10 billion EUROS annually as a result of the shift from incandescent bulbs and an energy saving equivalent to the yearly electricity consumption of Romania.

Getting the incentives right in the housing sector will require policies attuned to local realities

Of course, a regulatory solution will only be effective sometimes. Other aspects of the household sector pose additional challenges, including building ownership and management structures and lack of funds for building improvements. Together these mean that maximising the incentives to adopt new technologies often requires mixtures of policies attuned to local realities.

As a forthcoming EEA report on energy efficiency in the residential sector points out, very little has been done so far to improve energy efficiency in buildings. But public authorities that support developing energy efficient buildings, installing new technologies and appliances, refurbishing and renovating can make a big difference at the same time as creating jobs and creating a potentially lucrative sector for small and medium-sized enterprises.

Development of real-time (smart) metering systems, capable of communicating price signals much more directly and responsively to consumers can also raise awareness and sharpen incentives. And labelling obviously has a role to play too.

Effecting systemic change in the transport sector throws up additional challenges

The transport sector likewise offers enormous opportunities to enhance energy efficiency, notably in the switch from internal combustion to electrically powered cars.

German manufacturer Bosch estimates that whereas combustion engine cars can travel 1.5–2.5 km on a kilowatt hour of energy, battery powered ones can travel 6.5 km.

Perhaps the greatest challenge here is the systemic nature of the change needed, requiring numerous complementary investments. Financing the development of an electric car, for example, makes little sense in the absence of a supporting infrastructure to charge or replace car batteries. Setting up such a system evidently necessitates huge investments and a significant amount of risk.

Despite the risks, the potential benefits available to innovators have delivered some progress — for example the current collaboration between Denmark's DONG Energy and American firm, Better Place, to establish an electric car charging network in Denmark by 2011.

Nonetheless,  big cities clearly have an opportunity to take the lead in this area  because a huge amount of urban travel occurs within city limits. That means that the refuelling infrastructure needed to support fleets of buses, taxis or car-sharing pools can be developed in confined areas.

There are already examples of frontrunners in this area: cities such as Rotterdam have launched hydrogen fuel cell buses.

And Paris recently announced plans to establish a network of some 1 400 recharging stations to support a fleet of 4 000 short-term rental cars.

Action is also needed to improve energy supply

Of course, stemming energy demand and improving efficiency is only one side of the equation. Indeed, a shift to electric vehicles will fail to realise its potential carbon savings if they are powered by coal-fuelled power stations.

Moreover, the scenarios in the EEA's energy and environment report (published late last year) indicate that electricity consumption in the EU is likely to keep rising — by as much as 25 % in the years to 2030. Since nearly all of the EU energy system depends on fossil fuels, half of them coming from outside the EU, this is a major concern.

Renewable energy potential is vast...

Given the extent of anticipated demand, it’s fortunate that the raw potential for renewable energy appears to be vast.

The EEA's Wind Energy Report, published in June, estimates that Europe's wind resources have the potential to supply twenty times the continent's projected energy demand in the year 2020.

Even when adjusted to take account of environmental, technical and economic constraints, we project that full exploitation of wind resources in 2020 could generate three times Europe's energy needs.

Other renewable sources, including solar, hydro, tidal, wave, also offer huge potential. But it's evident that unleashing that potential will require not just a fundamental alteration in the sources of our energy but equally in the location of power generation and means of storage.

But realising that potential will require fundamental shifts in infrastructure: supporting both localised generation...

Ever since the first national grid was constructed in Europe in the 1930s, most governments have sought to maximise centralisation: it has always been seen as easier to build a few large power plants than rely on a large number of smaller ones. However, the characteristics of renewable energy sources necessitate a different approach.

The diffuse nature of the energy from the sun, winds, waves and tides makes it far better suited to a decentralised generating system. Decentralised energy is more efficient, as it suffers fewer distribution losses, is cheaper as the International Agency for Energy has pointed out, and paradoxically, more secure.

There is already evidence that the vision of carbon neutral cities is achievable. In Thisted municipality, Denmark, the community has achieved over 100 per cent of its power consumption, and more than 80 per cent of its heat consumption, without the use of fossil fuels. At the same time they have boosted local employment and can generate earnings by supplying unused energy to the national grid.

Likewise, in Malmö (Sweden), an attractive new residential area in a former harbour — Västra Hamnen — comprises 1000 homes constructed from state-of-the-art insulation and heating materials and entirely supplied from locally renewable sources.

And experience in Spain demonstrates that the possibilities for local generation are not limited to new developments.  Barcelona launched a City Plan for Energy Improvement in 2002. By 2008 more than 40 000 m2 of solar panels had been installed, producing annual energy savings of over 32 000 MWh  — meeting the hot water needs of 58 000 residents.

Long-distance transmission...

At the same time, other characteristics of renewable energy point to the need for different types of infrastructure, supporting long-distance transmission of energy.

First, some energy sources, such as wind, are by nature intermittent, meaning that they sometimes provide surplus power and sometimes need to be supplemented.

Second, some potential sources — such as the vast solar resources in northern Africa — are located far from potential consumers.

The creation of a flexible and responsive European supergrid capable of transferring electricity over long distances with minimal distribution losses would help address both of these challenges. Encouragingly, the idea has received support from both Gordon Brown and Nicolas Sarkozy.

And energy storage

In addition, intermittent power sources can be managed by storing energy surpluses for subsequent use. Until now, storing energy on the necessary scale looked unfeasible. But one benefit of a shift from petrol to electrically fuelled cars would be the creation of huge electrical storage capacity.

Government should help lower the risk involved in investments, both large and small

In a remarkably short space of time we need to bring about a paradigm shift in the ways that we generate and consume energy. This creates enormous opportunities for innovators and businesses but equally big challenges.

Some of the infrastructural ideas mentioned, such as the creation of a European electricity supergrid, require international agreement and very significant investment. Without some form of policy assistance, private investors may struggle to raise necessary finance to support such schemes or simply be deterred by the risk.

But governments — at both the national and local level —have an important role to play in supporting smaller investments, such as those in distributed energy generation. Here one major challenge may be overcoming opposition to wind and solar farms based on their environmental impacts: visual, noise and potentially harming wildlife.

Experience suggests that local ownership is a key element in overcoming such objections. To facilitate this, strong case for state support to help local communities to make necessary investments.

The biggest obstacle, however, is misleading price signals

While financial risks will be important, the biggest deterrent to developing and adopting clean energy technologies is in fact their ability to compete in a market still dominated by fossil fuels — priced at levels that externalise their environmental and social impacts.

British economist, Lord Stern, captured it very succinctly in his report, The Economics of Climate Change, when he observed that "Climate change … is the greatest and widest-ranging market failure ever seen".

To put this in more concrete terms, the German Government estimates that when the full costs of damages to humans and the environment are included in energy prices, electricity generated by modern coal technology is between 6 and 8 euro cents per kWh, whereas they are only about 0.5 euro cents per kWh in the case of renewable energy".

If green technologies were competing on a level playing field with existing carbon-economy technologies then adopting them would be a simple matter.

The reality, though, is that fossil fuel prices currently reflect the cost of extraction and marketing but not the extent to which they depreciate the natural capital on which our economies depend.

Their prices are so low because we are borrowing against our future earnings.

Shifting to green economies means creating the incentives for all actors in society: public authorities, businesses, households

Sustainably improving the living standards of a growing and urbanising global population demands the creation of genuinely green economies, which create the right incentives for all actors in society: including local authorities, businesses and households.

They are characterised by key themes including:

  • preserving the assets that support our livelihoods and living off the revenues they generate. That means relying on flows of renewables instead of depleting stocks of fossil fuels, and protecting the ecosystems that supply us with life-sustaining services;
  • governance structures that ensure transparency and free flows of information on the state and trends of the economy, society and environment and the ways that individuals and organisations can contribute to reducing carbon emissions;
  • targeting taxes and subsidies in ways that promote sustainable resource use and maximise human endeavour, while ensuring an equitable and sustainable sharing of burdens now and across generations;
  • internalising all social and environmental costs and benefits in market prices, so that supply and demand for goods and services reflects their true value;
  • selecting ownership regimes that promote sustainable resource management; in some cases incentives for sustainable management are best promoted by assigning and enforcing private property rights; in some the non-exclusive character of resources (such as fisheries) may make localised collective ownership preferable; and in others the public sector may be the best steward.

The key will be designing policies that align incentives so that actors at all levels in society, from governments to households, are empowered and motivated to contribute.

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