Pragmatic Climate Policy

Over the past year, it has become quite common: politicians and experts advocating for more pragmatic climate policy. I have to admit that I have mixed feelings about this. On the one hand, it appeals to me. As an engineer and project manager, I believe that we should be realistic in setting our goals and that policy and regulations should make those goals achievable in an effective and efficient manner. On the other hand, I don't trust it one bit. I worked for Shell for a long time as an environmental and sustainability manager. When management announced that it was time for more pragmatic environmental and sustainability plans, it usually meant that less ambitious goals would be set and that there would be less budget available. In good times (read: high oil and gas prices) this was necessary because people and resources were needed for increasing production, and in bad times a pragmatic approach was necessary because there were usually reorganizations and because there was not enough manpower and budget for 'nice-to-haves'. In short, a plea for more pragmatism was in fact often a plea for less ambition and a focus on the minimum necessary.

Many of the recent pleas for climate pragmatism unfortunately fall into that category. They are mainly pleas to do less and to give less priority to climate goals. Viktor Orbán's plea for pragmatic climate policy , for example, is mainly a plea not to get in the way of farmers and the fossil fuel industry. The new government in the Netherlands also advocates pragmatism and has therefore already halted several climate measures without replacing them with more pragmatic ones. Recent pleas from the Greek and Italian prime ministers for more pragmatic climate policy focus more on economic consequences: "We cannot drive ourselves into industrial oblivion. Net Zero must be part of a broader European strategy and not the other way around". In the UK, a new Labour government seems to be going in the opposite direction and is again busy setting ambitious goals , with even supporters wondering whether this is still realistic. And the US is anyone’s guess what will happen there. Some are still hopeful for climate pragmatism and energy realism.

In addition, there are also groups that cleverly use the current political support for more climate pragmatism to push their own favorite solution. For example, there was a commentary in FD that argued that more generous rules for green hydrogen would be a form of pragmatic climate policy. And Prime Minister Schoof believes that four new nuclear power stations fit in well with the passionate pragmatic climate policy approach of his cabinet. Given the high costs of both options, it is not immediately clear why this could be considered pragmatic.

This week, the Dutch parliament will hold a round table discussion on the Draghi report and there will be committee debates on the Energy Council and on Hydrogen, green gas and other energy carriers. A good moment therefore to say a bit more on the question of how pragmatic climate policy for the Netherlands could be shaped.

What should be the characteristics of pragmatic climate policy?

Effective, also on a global scale Pragmatic policy must be effective in achieving the goals set for the Netherlands, but it must also be effective on a global scale. This means that relocating activities or production to other countries only makes sense if emissions are lower there and the activities can be carried out responsibly (people, environment). It also means that innovations with so-called multiplier impact must be sought. The focus should be on technologies or innovations for which the Netherlands is well positioned, and which are also needed at scale worldwide to achieve the climate goals. And it means that the Netherlands (via the EU) must try to use its trading position to encourage other countries to regulate fossil fuel emissions more strictly. See for example the EU’s plans for regulating methane emissions from LNG and fossil gas imports.

Efficient To keep the total costs as low as possible, a technology-neutral approach is preferable where possible. Let technologies that can deliver the same function (for example different types of hydrogen, different heating technologies, different ways to deliver flexible power) compete on price. Under pragmatic climate policy, 'efficient' also means that if the same goal (emission reduction) can be achieved faster and cheaper by fossil energy with CCS than with sustainable technologies, then that should be preferred. The SDE++ scheme is more or less based on this principle. But there are also many rules (especially from Brussels) that go against this principle. Going for the “truly sustainable” options right away sounds logical and attractive, but in practice often leads to delays, missing 2030 targets and high additional costs (see Tata example).

Simple Regulations and subsidies should be as simple, reliable and predictable as possible. Overlapping regulations for the same targets should be avoided where possible. A major difference between regulations in the US and the EU and the Netherlands is that we want to regulate and control everything in much more detail here. As a result, process costs are often very high, and transparency and effectiveness are low. For example, compare the complexity of SDE++ and the additional CO2-levy with the tax credits in the Inflation Reduction Act. And see also the recent report of the Court of Auditors on the Dutch energy efficiency regulations and what it would cost (a lot) and yield (very little) to properly check if all companies concerned are in compliance.

Fair and objective about Dutch strengths and weaknesses and about uncertainties In the Netherlands, we agree that electricity will be much more important in the future and that energy carriers such as hydrogen, ammonia and heat will probably also be needed. But then the camps quickly split into proponents and opponents of different technologies based on a mix of ideological arguments (only 'truly' sustainable options allowed), technology preferences (nuclear energy can solve all problems) and underlying interests (huge hydrogen networks). A better and objective analysis of strengths and weaknesses would be useful to inform better policy choices. Furthermore, pragmatic climate policy should also recognize that it is an illusion that we can choose a Net Zero scenario we like in 2024, and that it is then simply a matter of implementation. There are enormous uncertainties, which means that the future in 2040 and 2050 will almost certainly look very different from what we now model in our scenarios. Pragmatic climate policy should allow room for adjustments without immediately jeopardizing the emission targets. Diversification is essential to absorb the impact of dead ends (technologies or changes that are unsuccessful) and, where possible, to compensate for them with other or new options that may perform better than expected.

Carrots and sticks The basic rule for pragmatic policy could be that the government uses carrots for changes that reduce the demand for fossil energy (more renewables, nuclear energy, etc.) and sticks for changes that reduce the carbon intensity of fossil energy consumption (reduction of methane emissions and CCS). This makes the new technologies relatively cheaper and easier to implement and puts a brake on the use of fossil energy because an increasing part of the CO2-emissions caused will have to be captured and stored. Without subsidies (carrots), this will increase costs. Scaling up the necessary supporting infrastructure and innovation will initially require government support (regulations, markets, derisking) and co-financing for all technologies.

Climate policy is energy policy (and vice versa) Pragmatic climate policy acknowledges that climate and energy policy strongly influence each other. It is strange that this needs to be said. Unfortunately, climate and energy policy (reliability, affordability) are often still treated as separate policy domains. Scenario analyses clearly show how the interaction between climate choices and energy prices works. In general, for example, more ambitious goals lead to higher energy prices, especially if there are many restrictions such as limited use of CCS and biomass. Pragmatic climate policy acknowledges that affordable energy is essential for a well-functioning economy and for societal support for the energy transition. Complementary policies may be required to limit the impacts for vulnerable groups and companies.

What could this mean in concrete terms for upcoming decisions in the Netherlands?

Tata Steel At the urging of external stakeholder groups, Tata intends to reduce its emissions by switching from coal to green hydrogen. Studies have been conducted for years now and there seems to be no end in sight. Except perhaps the end of Tata in the Netherlands . It is now clear that there will not be enough green electricity and hydrogen in the Netherlands for quite a while, so consideration is being given to switching to fossil gas first or to importing green hydrogen from Norway. A study with Norway was recently announced for this purpose . The pragmatic solution here is to use blue hydrogen. Not fossil gas first, but hydrogen straight away. That is cheaper and can be realized more quickly than a switch to green hydrogen (because no import, no hydrogen network and no hydrogen storage are required). It is effective, efficient and makes use of nearby, offshore CO2 storage capacity. Furthermore, the construction of CO2-infrastructure for Tata Steel will contribute to making CO2 capture feasible for multiple, smaller companies in that region.

Ternaard and new gas fields in general Minister Hermes has creatively put the ball back in the NAM's court and has asked NAM (oil and gas company) to voluntarily withdraw the permit application for the gas field at Ternaard. This is contrary to the government policy to encourage domestic gas production as long as the Netherlands still needs gas. Under pragmatic climate policy it does indeed make sense to extract domestic gas for domestic use. It has environmental, economic and geopolitical advantages over imported LNG gas. It contributes to keeping energy affordable and reliable. But under pragmatic climate policy it is also recognized that new 'unabated' fossil energy projects pose a risk to the global climate goals and should therefore be avoided. 'Unabated' means that there is no concrete plan for reducing (CO2 capture and storage) the emissions that will be released when using fossil gas. The Netherlands and other rich countries have already decided to no longer pledge international financing for 'unabated' fossil energy projects abroad, so why should we still allow this in the Netherlands? The Netherlands could set a good example by demanding that if new gas is extracted, there must be a plan or policy to ensure that emissions from that gas are reduced to Net Zero in a timely manner.

Hydrogen backbone and hydrogen storage The Netherlands has big plans when it comes to hydrogen and wants to be at the forefront with the development of an extensive pipeline network and multiple hydrogen storage locations in salt domes, mainly in Groningen. There is a strong preference for green hydrogen to be scaled up quickly to make use of this infrastructure. And what we cannot produce ourselves, we will import. The technical and economic challenges to realize this are enormous and have been greatly underestimated up to now. A more pragmatic strategy would be a phased approach in which the focus would initially be on regional hydrogen hubs and infrastructure close to large customers and close to where green and blue hydrogen can be produced.

Peaker power plants (adjustable or flexible capacity) One of the biggest uncertainties in the energy transition is how the electricity system can be kept reliable and affordable with larger percentages of wind and sun and with increasing and highly variable power demand for buildings, transport and industry. What is clear is that the grid needs to be upgraded and modernized, and that this will take a lot of time. Based on current technology it is also likely that more gas-fired peaker power plants will be needed to meet the increasing electricity demand in periods with little sun and wind. More electrification of the energy demand therefore means more peaker gas-fired power plants. Analyses from other countries and locations (for example the UK, Texas, Germany) also come to similar conclusions. Pragmatic climate policy should look much more extensively at the costs, risks and benefits of different options for the Netherlands to always have enough flexible capacity available. Capacity compensations for existing gas-fired power plants already exist in some other countries (e.g. Belgium) and will probably also be needed in the Netherlands. Power plants that are on standby for a large part of the time are relatively expensive and inefficient. And building new peaker plants that will be idle for 90% of the time is a complete waste of money, and they take up valuable space and use up scarce resources. It is high time to investigate more flexible solutions in which a plant can supply different products depending on demand. This can be done on the basis of fossil gas, but probably also on the basis of nuclear energy or bioenergy. In this article, for example, the concept of a 'Powdrogen' plant is elaborated in which blue hydrogen and/or electricity is produced depending on the electricity price.

Tailor-made agreements The Dutch government is trying to enter into company-specific agreements with 10 to 15 large companies in the Netherlands about additional emission reductions and/or transition measures. The most positive aspect of the discussions with companies about these tailor-made agreements is that it gives the government much more and better insight into what companies need (regulations, permits, infrastructure) to be able to reduce their emissions. However, these companies all fall under the ETS (European Trading System) and will therefore have to reduce their emissions very rapidly anyway (zero in 2040). Seen from that perspective, it is a very inefficient way to achieve at best a small acceleration of Dutch emission reductions (and at EU level it changes little). Because of the slow progress of the negotiations, these agreements may end up delaying instead of accelerating emission reductions. Making extra millions or even billions of Euros available for faster emission reductions and/or more ‘truly sustainable’ measures is not efficient and not defensible under pragmatic climate policy. There are other better ways in which the government can use that money to keep the investment climate in the Netherlands attractive for large companies.

Pragmatic climate policy, concluding:

Considering all this, some preliminary conclusions can be drawn for pragmatic (but still ambitious) climate policy for the Netherlands:

?? Scaling up more sustainable energy sources and switching users to more sustainable electricity, hydrogen, heat, etc., should be continued as quickly as technically, economically and politically feasible. Measures and new regulations can be tested against the characteristics of pragmatic policy mentioned in this article.

?? The great uncertainty about how and how quickly fossil fuels can be phased out means that diversification is important: nuclear, bioenergy, carbon removal and fossil gas with CCS are all needed.

?? Whether we like it or not, there is a very good chance that fossil gas will remain an important part of the worldwide energy mix for many decades and will still provide a significant share of all energy in 2050. This offers opportunities for the Netherlands! We have an excellent location, knowledge and infrastructure to show the world how fossil gas can be used with minimal climate impact. This is already possible based on current technologies, but many interesting innovations are also still possible and needed. Integration with important industries (steel, chemicals, fertilizers), with carbon removal (biogas blending), and with keeping the electricity system reliable are important transition challenges that the Netherlands is well-placed to lead on, and that can have a significant multiplier effect for reducing global emissions.

?? A pioneering role in using fossil gas in a climate-neutral way also includes an active lobby in Brussels to implement the requirements for lower methane emissions from imported fossil gas as soon as possible. Imports from countries that do not take this problem seriously (regulation of methane emissions) should be phased out in the longer term.

?? Climate-neutral use of fossil gas will initially also require some government support, particularly for innovation, infrastructure and for the first applications (SDE++). However, pragmatic climate policy should not include endless subsidies (carrots) for fossil energy use, and so a transition in which obligations replace subsidies will be required. An interesting first step could be to only allow production from new gas fields if there is a concrete plan for emissions from fossil gas use. This could be done, for example, by selling the fossil gas from new fields in the form of blue hydrogen to Tata Steel or other customers. In this way, the Netherlands can show what it means to allow no new 'unabated' fossil energy projects.

In the longer term, introducing regulations such as the Carbon Takeback Obligation (CTBO) will be the most efficient way to make all remaining fossil fuel use climate-neutral in a timely manner. The Netherlands could explore, test and further shape this instrument together with other North Sea countries. At EU level, a CTBO is also a logical next step for the 50 Mt injection capacity obligation in 2030 for oil and gas producers (as part of the Net Zero Industry Act). A CTBO promotes producer responsibility, value chain innovations and timely development of sufficient CO2 storage capacity. If the Netherlands were to succeed in getting other countries and the EU on board, this could well become the most important contribution of the Netherlands to pragmatic international climate policy in combination with realistic energy policy.

NOTE: this article is a Google-translate of an article for the Dutch website EnergiePodium

https://www.energiepodium.nl/artikel/pragmatisch-klimaatbeleid