2012: The Year in Energy

As in most recent years, energy was constantly in the news in 2012. A post attempting to catalog every noteworthy story or event would be quite long.  However, a few big trends stand out. For starters, it's a near-certainty that the average US gasoline price will set a new record for the second year running, in both real and nominal terms. Americans are responding by choosing more fuel efficient cars. Meanwhile, fundamental shifts emerged from obscurity into the awareness of policy makers and the public.  US energy exports have become a mainstream topic of conversation, and the goal of energy independence--a concept with debatable meanings--has acquired renewed respectability after spending a couple of decades on the fringes of energy policy debate.  Perhaps more significantly, our views of climate change and future oil supplies--once aligned--have diverged. 

For renewable energy it has been the best and worst of years.  Global overcapacity in solar equipment manufacturing drove down the costs of solar panels, at least partly counteracting reductions in government incentives, especially in Europe, and making solar power more competitive.  The US is on track to add a record 3,200 MW of solar capacity this year, while China could add 5,000 MW.  However, solar manufacturers' rapid expansion depressed their margins and extended last year's string of solar bankruptcies, with firms like Abound Solar, Konarka, Solarwatt, Q-Cells and others forced to restructure or liquidate in 2012.  A similar, if less dramatic wave is working through the more mature onshore wind industry, which faces the expiration of a key US incentive, the Production Tax Credit, or PTC on December 31.  In anticipation of that loss, wind developers have added 4,728 MW of new capacity in the US through the first three quarters of 2012, the most since 2009.

Energy played a complex and possibly decisive role in the US presidential election.  Remarkably, President Obama successfully co opted his opponent's energy platform by embracing an oil and gas revival that his administration had done little to help and much to hinder, even though it appeared to conflict with his emphasis on renewable energy and climate change mitigation.  Meanwhile, the shale gas revolution was creating hundreds of thousands of direct and indirect jobs and lowering energy costs across the economy, contributing to US manufacturing competitiveness.  The resulting economic growth, while still below the level of other post-war recoveries, apparently helped the President make his case for a second term.

The inherent tension between surging US oil and natural gas production and concerns about climate change--fanned by Hurricane Sandy--reflects a major shift that occurred this year, at least as an influence on future energy policy.  Recall that until recently, memories of past energy crises, combined with the influential Peak Oil perspective, shaped our expectations of resource availability and future production.  This narrative of hydrocarbon scarcity complemented prescriptions for a rapid transition away from fossil fuels as the only viable solution to climate change, supporting a shared goal of a more sustainable energy economy based on renewable energy, smart grids and electric vehicles.   The exploitation of unconventional oil and gas resources in previously inaccessible source rock--shale gas and "tight" or shale oil--poses significant challenges to both strands of that argument.

First, it undermines the notion of energy scarcity for at least the next decade, and probably well beyond.  US natural gas production set a new record this year, and US oil production returned to levels not seen since 1997, putting increased pressure on OPEC's control over global oil pricing. Nor does the US have a monopoly on these unconventional resources. Canada looks like the next big shale gas play, with China and South Africa possibly not be far behind.  The technologies that enabled the US shale gas revolution and its oil offspring are being transferred around the world.

Yet we also learned that US energy-related CO2 emissions have fallen back to 1992 levels, largely because of a dramatic reduction in the use of coal in power generation.  While renewable energy sources like wind and solar power deserve some of the credit, natural gas-fired turbines--driven by cheap shale gas--have added three times as much net generation since 2007 as non-hydro renewables.

Shale gas and oil might not provide a long-term solution to global warming, but they could at least buy us the time to develop the innovations like improved electric vehicle batteries and low-cost grid-storage that will be necessary if renewables are to displace fossil fuels across the entire spectrum of their use--and dominance.  They could also provide the time to develop and deploy the next generation of nuclear power, including small modular reactors.

I'd like to thank my readers for your continued interest and encouragement and wish you a happy holiday season.

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Election 2012: Romney on Energy

After last week's review of President Obama's energy record and campaign materials on energy, Governor Romney's energy plans present a sharp contrast. They are based on a fundamentally different view of energy and the economy, relying on markets to allocate capital to the most productive opportunities, rather than on government to guide a mix of public and private investments along specific paths towards designated ends. They also emphasize technologies that are already deployed at scale today, not those still under development or striving to attain scale. Implicitly, the Romney plan prioritizes supplying the energy for a robust economic recovery over programs designed to address long-term environmental challenges like climate change. These positions present voters with a serious and consequential choice on November 6th.

The Romney campaign's website on energy arrays the candidate's ideas mainly in words, rather than with the kind of images and interactive features that dominate the Obama campaign's sites. Energy is the first plank of Governor Romney's five-point "Plan for a Stronger Middle Class", though it requires a little work to explore the details of his energy program. A list of bullet points  is backed up by a lengthy policy paper with numerous references to external sources, but you have to look for it.

The Romney energy plan focuses mainly on oil, gas, coal and nuclear energy, which together meet 91% of current US primary energy demand and which the Department of Energy projects will still provide nearly 90% in 2020 under the policies in place today. You won't find much on his campaign's website about the new renewables that generated electricity equivalent to 2% of our energy use last year, beyond a critique of the administration's investment in Solyndra and a commitment to R&D on new energy technologies.

Among the details of his plan are support for expanded offshore drilling, including areas such as offshore Virginia that were originally in the Obama administration's early-2010 offshore development blueprint, along with a comprehensive assessment of US resources using current technology, rather than further extrapolations based on 1980s technology. Governor Romney proposes expanding energy cooperation with both Canada and Mexico and would approve the entire Keystone XL pipeline. His goal of attaining North American energy independence is aggressive, yet recent analysis by Citigroup puts it within the realm of possibility. It appears to be based on an assessment by Wood Mackenzie, a top-notch energy consultancy, indicating that US oil and natural gas liquids output could expand by 7.6 million barrels per day, with 6.7 million of that coming from federal lands and waters currently off-limits to development. That compares to US net petroleum imports of 8.5 million barrels per day in 2011.

Another aspect of the plan aimed at streamlining the permitting of energy projects could be just as useful for utility-scale renewable energy projects as for oil and gas exploration and production. Regulatory and permitting delays are among the key reasons it takes longer and costs more to develop crucial energy and infrastructure projects here than in many of the countries against which our competitive standing has been slipping. Governor Romney also proposes giving states greater control of permitting on their non-park federal lands. That could substantially increase energy access and output, especially in the west, where the federal government owns over 280 hundred million acres, or 37% of those 11 states, net of tribal lands.

There are also some missing elements. I would have liked to see more about how renewables fit into Governor Romney's vision. He apparently supports the Renewable Fuels Standard but is silent about the increasingly urgent need to reform it. He is on record against the extension of the wind Production Tax Credit (PTC), a 20-year old subsidy roughly equivalent to the current price of natural gas, yet misses the opportunity to explain how all types of energy would be treated under his proposal to reduce corporate income tax rates while broadening the tax base--policy-speak for closing loopholes and eliminating incentives. In last night's debate he said, referring to the $2.8 billion in annual tax incentives for oil and gas identified by the Department of Energy, "... if we get that tax rate from 35 percent down to 25 percent, why that $2.8 billion is on the table. Of course it's on the table. That's probably not going to survive (if) you get that rate down to 25 percent." I'd also like to hear more about how Governor Romney would address greenhouse gas emissions once the economy returns to stronger growth.

Superficially, much of the Romney energy agenda evokes a return to the pre-2008 status quo: heavy on oil, gas and coal, light on renewables, and largely ignoring climate change. I see it from a different perspective: When Barack Obama began running for President in 2007, the US was considered by many to be tapped out on conventional energy, with domestic oil and natural gas production exhibiting signs of deep and permanent decline. In that context it made sense to look beyond those resources to the potential of renewable energy and vehicle electrification, even if the transition involved would be lengthy. That approach also appeared synergistic with reducing greenhouse gas emissions, and a strategy was born. In the meantime, however, it turned out that US oil and gas were far from exhausted, and the most productive new energy technology of this decade wasn't wind, solar or biofuels, but the combination of hydraulic fracturing ("fracking") and horizontal drilling that has unlocked hundreds of trillions of cubic feet of shale gas and tens of billions of barrels of shale oil or "tight oil" resources. Since 2008 the expansion of shale gas drilling has added as much new US energy production as over 250,000 MW of wind turbines or solar panels--8x the wind and solar power added in the same interval. To the surprise of many, the big global energy opportunity of the 20-teens is US hydrocarbons. The Romney plan reflects the unexpected energy transformation we're experiencing.

As in 2008, this blog isn't in the business of endorsing candidates. Energy remains an issue that, like the Cold War, demands bi-partisan cooperation and some level of consistency from one administration or Congress to the next. However, that doesn't prevent me from observing that the energy agendas of the two campaigns are not equally well-suited for a period of serious US fiscal constraints and shrinking federal discretionary expenditures, in which our energy security and economic growth will still depend largely on fossil fuels. In that context, it's highly relevant that the "all of the above" credentials of one candidate depend on oil and gas outcomes that his policies did little to support. Of course, energy isn't the only issue that matters, but then you wouldn't be reading this if you didn't think it was important.

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Does A Golden Age of Gas Depend on Golden Rules for Gas?

Last Friday I was in Washington, DC for the presentation of the International Energy Agency's latest report on natural gas, "Golden Rules for A Golden Age of Gas."  It is a follow-up to last year's IEA scenario describing the enormous gas potential now being unlocked by new combinations of technology. According to IEA's chief economist, Fatih Birol, who was the lead speaker at the event at the Carnegie Endowment for International Peace, the new report addresses the key uncertainty in delivering on that potential, including the potential of new gas supplies to "fracture established balances in the world energy system."  In IEA's view the resources and technologies are in place, but environmental and social challenges represent serious potential roadblocks; overcoming those obstacles calls for a new set of principles along the lines of the ones included in the report.  Fundamentally, as Dr. Birol put it, the industry must focus on its "social license to operate", if it is to develop the massive global resources of shale and other unconventional gas to the extent now being envisioned.  I believe many in the industry would agree that that license can't be taken for granted. 

The report spells out seven principles that IEA sees as prerequisites for securing the necessary concurrence from governments and publics.  While several of them merely enunciate common sense, others will likely be controversial on one side or the other--if not in theory then in their implementation.  IEA's description of these principles can be found in the report's executive summary. I would paraphrase them as:

1. Operate with transparency
2. Choose appropriate sites
3. Contain potential contaminants
4. Be vigilant with water!
5. Control emissions
6. Recognize scale
7. Regulate carefully

None of these is likely to startle my regular readers, since I've been writing about shale gas extraction and its potential economic, environmental and geopolitical consequences for several years.  The aspect of these principles that got my attention during Friday's presentation concerned IEA's admonition to "Be ready to think big."  Dr. Birol cited statistics indicating that there are currently around 100,000 unconventional wells in the US today--a figure that might include unconventional oil wells.  Supplying the levels of shale gas forecasted by IEA and other agencies would require on the order of one million wells.  That compares to a total US well population of roughly a half-million.  Drilling on that scale requires that we get it right, because if we don't, even small consequences could compound.  However, Dr. Birol also made it very clear that in the view of the IEA, the industry is entirely capable of getting it right.

The findings of this report--at least the high-level findings--have been widely embraced across the environmental and business spectrum.  Among groups embracing the report are the American Petroleum Institute and the Investor Environmental Health Network, while EPA Assistant Administrator Gina McCarthy, who was also on Friday's panel, seemed to place her agency's regulatory approach to shale gas in the context of IEA's principles.  The harshest criticism I've seen so far is that while it acknowledges the industry's work on best practices, it fails to recognize that much of this is already standard practice, at least in the US.  Along those lines, API and the American Natural Gas Alliance (ANGA) are jointly issuing a new report on methane emissions from hydraulically fractured ("fracked") gas wells today.

IEA's report and the early reactions to it clearly illustrate that despite the many thousands of unconventional gas wells that have already been drilled, and the dramatic impact of shale gas on both natural prices and gas-dependent industries, we are still in the early days of a possible global energy revolution.  The extent of that revolution hasn't yet been determined, and it will be shaped as much by the reactions of numerous stakeholders as by the investment plans of producers. Whether you see that as a good or bad thing, it's an indisputable feature of the world in which we now live.  However, I don't think it's appropriate to view IEA's seven principles exclusively as a set of rules to be imposed on a reluctant industry; they're as much about getting the rest of society comfortable with an energy resource that could provide enormous economic and environmental benefits, globally, particularly with regard to greenhouse gas emissions.  Although Dr. Birol emphasized that unleashing all this shale gas won't be sufficient to solve the climate problem, he also demonstrated that without it, our chances of reining in emissions look even worse, because the main trade-off globally is not gas vs. renewables, but gas vs. coal.  Getting this right is crucial for many reasons, and the IEA's report looks like a helpful contribution to the dialogue that must take place.

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Because That's Where the Emissions Are

Yesterday the Environmental Protection Agency released its tabulation of greenhouse gases (GHGs) from large facilities in the US. In perusing the data I couldn't help thinking of the quote attributed to Willie Sutton concerning why he robbed banks. Even if he never actually said, "Because that's where the money is," the simple logic of that analysis transfers neatly to the question of why we might be interested in assessing and ultimately managing GHG emissions from such installations. While there are other important sources, notably including motor vehicles and aircraft, the more than 6,000 sites reported in the agency's online registry account for roughly half of all US GHG emissions. Furthermore, just a quarter of these sites--power plants--contribute nearly three-fourths of US emissions from large facilities. That's where the emissions are and where US climate policy should focus.

Although that doesn't dictate that we should entirely ignore all the other facilities, it certainly raises serious questions about the threshold of reporting for the hundreds of installations emitting less than 10,000 tons of CO2-equivalent gases per year, compared to the top-100 facilities, the smallest of which emitted nearly twice that much every day.

It should also challenge the belief systems of some members of Congress concerning the relative importance of different sectors. The highest-emitting oil refinery in the country is also one of the biggest in the world by throughput capacity, at 573,000 barrels per day. Yet it comes in at #45 on the list, with only one other refinery appearing in the top 100. The entire refining sector, comprising 145 plants, emitted around 5.7% of the total GHGs represented in the registry, and thus less than 3% of the US total. Why does that matter as more than an industry talking-point? Because reducing emissions from refineries by 10%--no easy task when they are already roughly 90% efficient in terms of their total energy output vs. inputs--would be lost in the rounding in our national emissions statistics. We won't get very far chasing expensive diminishing returns.

By comparison, reducing emissions from the 1,555 power plants on the list by an average of 10% would reduce US emissions by more than 3%. And because we are blessed with many more processes for generating electricity than for refining oil, this could be achieved in a variety of ways, nor does 10% represent any kind of ceiling for what might be possible. One option would be to retire the least-efficient coal-fired plants and take up the slack at existing gas-turbine power plants, plus some additional renewables. That may happen anyway, as a consequence of other EPA regulations. We could also replace the worst coal plants with near-zero-emission nuclear power plants of advanced design, such as the AP-1000 reactor that won NRC approval late last year, or the various modular nuclear reactors now under development. Capturing and sequestering the CO2 from coal-fired power plants would be another option, if it can be perfected at a reasonable cost.

I would never suggest that climate policy could be truly simple, but the numbers the EPA just reported, combined with what we know about the lifecycle emissions from the petroleum value chain, indicate that the scope of the US climate policy debate could usefully be narrowed to focus on just two main emissions sources: power plants and the end-use combustion of hydrocarbon fuels. On the scale of overall US emissions, almost everything else is noise. Of course that leaves plenty of room for discussion and disagreement on the most effective ways to address these emissions at the lowest cost and least disruption to an already-fragile economy. We can still argue endlessly about the relative merits of putting a price on emissions, providing incentives for emission-reducing technologies, and setting command-and-control regulations. Yet when we contrast the potential effectiveness of such a limited approach with the intricacy and distortions entailed in "comprehensive" efforts like the failed Waxman-Markey climate bill of 2009, it looks like a very helpful simplification to pursue.

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The Durban Climate Deal Inkblot Test

After going into sudden-death overtime, the UN climate conference in Durban, South Africa wrapped up this weekend with an agreement that only a climate diplomat could love. Constituting in effect an agreement to agree to some future agreement, the outcome is open to interpretation. Is this the failure that was widely predicted, the breakthrough indicated by some involved, or just a fig leaf to perpetuate a seemingly endless series of climate conferences in the only manner possible, by avoiding a breakdown that might have ended the entire effort for good? From what I have read in the last day, it's probably a bit of all three. The reactions from environmental groups have certainly been a mixed bag.

Briefly, it appears that the participants agreed to begin negotiating toward a new global climate "protocol, another legal instrument or a legal outcome"--the key compromise wording that saved the day--to be adopted by 2015 and take effect by 2020. In the meantime, the Kyoto Protocol, which was due to expire at the end of next year, will be extended through 2017, even though three of the largest emitting countries, Canada, Japan and Russia, will apparently not take on binding commitments on emissions for that period, nor will the US, which never ratified Kyoto. Still, this should be sufficient to keep international emissions trading and the Clean Development Mechanism for capitalizing on projects to reduce emissions in developing countries, going in the interim. While the delegates had the good grace not to call this result another roadmap--two years after the deadline of the Bali roadmap--that's pretty much what the "Durban Platform for Enhanced Action" amounts to.

Even in a global fiscal and economic environment that made any outcome more ambitious than this a virtual non-starter, the Durban Platform doesn't inspire confidence in the UN climate process. The most notable aspect of the agreement is that for the first time emitters from both the developed and developing world have signed up to a process under which they would all be asked to take on more or less legally binding commitments to reduce emissions. As the Economist notes, this "promises to break a divisive and anachronistic distinction", and one that makes little sense when developing countries now account for more than half of global greenhouse gas emissions. US climate envoy Todd Stern was quoted as saying that the US had been seeking this kind of "symmetry...since the beginning of the Obama administration." In fact, that has been the consistent goal of US climate policy since the Clinton administration. The problem is that this all remains contingent on the details of a future negotiation and subject to ratification by future governments, many of which will change between now and the COP-21 in late 2015.

Ever since the debacle in Copenhagen two years ago, the UN climate process has looked like a weak reed. Whatever the optimum size of a committee might be, it is not one made up of 194 countries, particularly when the top 20 accounted for nearly 80% of global CO2 emissions in 2009. Even if you don't share my conclusion, reinforced by the aftermath of the recession and financial crisis, that international agreements are unlikely to result in enough emissions reductions to materially alter the trajectory of global warming, it ought to be abundantly clear that if climate change is as big a problem as the folks meeting in Durban believed, then we had better have a Plan B in mind. For some that means a much stronger focus on innovation, while for others, including myself, it also suggests we should get a lot more serious about both adaptation to climate change and the exploration of geoengineering options. Or perhaps the horse will learn to sing, after all.

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Message to Durban: It's The Economy

What if they held a UN climate conference and no one came? That's certainly not the case at this year's COP-17 (Conference of the Parties) meeting now underway in Durban, South Africa, but with expectations for dramatic progress low, and a breakthrough on the scale needed to salvage the expiring Kyoto Protocol nearly unimaginable, it could be where the UN-led process is headed. If Durban fails to deliver the goods, it won't be because the participants were any less concerned about climate change than those at past sessions. Nor will it be because of the latest release of Climategate emails, as embarrassing as some of them should be for the scientists involved. The reason is much simpler, and it's the same one that helped Bill Clinton unseat George H.W. Bush in 1992: "It's the economy, stupid." The solution to climate change is unlikely to be found in Durban or any future COP site until the leaders in Brussels, Washington and other capitals come to grips with the massive economic challenges they face and create the framework for a return to robust growth.

That observation might seem paradoxical, given the linkage between economic growth and the growth of greenhouse gas (GHG) emissions. One climate change expert at Shell recently questioned whether it's even possible to reduce these emissions, because the expansion of low-emission energy sources is merely displacing fossil fuels into other markets where the appetite for them remains insatiable. We've also seen the rebound in emissions that occurred once the US economy began to recover from the worst effects of the financial crisis and recession that began in 2008, and a new report from the International Energy Agency projects a similar result globally. Yet it's also the case that prosperity and concern for the environment go hand in hand, along with the capacity to afford the costs and penalties that a massive global reduction in GHGs would entail. It's no coincidence that the UN climate process and parallel US efforts lost most of their previous momentum during the Great Recession.

Although the "road map" that came out of 2007's Bali climate conference was ambitious, its timetable for developing a new set of binding emission-reduction commitments to dovetail with the end of the 2008-12 "first measurement period" of Kyoto looked achievable, allowing for some slippage. Just two years later, the delegates to Copenhagen were lucky to come away with a last-minute set of voluntary, non-binding commitments that, even if they were all implemented, would barely shift the trajectory of rising emissions. Nor did last year's meeting in Cancun restore the Bali road map.

At this point, even the less ambitious proposals on the agenda in Durban ultimately depend on developed countries that are grappling with high unemployment, crippling deficits and debt, and political turmoil underwriting large investments in the developing world. The present structure of the European Union--the primary supporter of action on climate change--is itself in jeopardy, and European economies are facing an oil price shock arguably as large as that of 2008. It's questionable that the EU can even pay for its own future emissions reductions, let alone subsidizing reductions and climate adaptation in the developing world. Meanwhile, support for Kyoto among other large emitting countries is flagging, and the US appears little closer to taking on binding emissions commitments than it was in 1997.

I don't dismiss the possibility that the Durban talks may accomplish more than just punting the ball to next year's session in Qatar. However, if they don't, then the folks that are footing the bills for this seemingly endless succession of sprawling confabs--wonderful for local chambers of commerce and tourism, but practically meaningless for tackling global emissions--should consider calling a hiatus pending the resolution of the global economic problems that will undermine any agreement they could reach in the interim. There might even be a scientific justification for that, in the form of a new, peer-reviewed paper in Science suggesting that the global climate's sensitivity to increasing concentrations of CO2 might not be as strong as previously thought. If Schmittner, et al, are correct, then we might have a bit more time before extreme climate change becomes imminent. Let's hope so, because it looks a lot more fruitful to reboot this whole effort once the global economy is back on an even keel.

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Energy Efficiency: An Uphill Battle on A Slippery Slope

With apologies for the dueling clichés in today's title, that image conveys the conflicting messages I received from a pair of events on the topic of energy efficiency this week. Yesterday I watched a panel discussion on energy efficiency finance, part of the valuable First Wednesday series of seminars from Resources for the Future in D.C. Yet as I listened to the discussion of creative mechanisms for overcoming the numerous financial and behavioral obstacles impeding the widespread adoption of efficiency technologies, I couldn't help framing it in the context of Tuesday's blogger call on "efficiency rebound", also known as the Jevons Paradox, hosted by the Breakthrough Institute. This latter, offsetting effect has been controversial in the US but is apparently more widely accepted in EU policy circles.

Energy efficiency is probably the energy topic to which I've devoted the least space in this blog in the last seven years. That hasn't been a deliberate slight, though perhaps it reflects the bulk of my personal experience on the supply side of energy. It's also a tricky subject because it's a moving target. We often hear efficiency described as the low-hanging fruit in discussions of energy security or emissions reductions, but that usually ignores the fact that the truly low-hanging fruit in efficiency was mainly captured during the energy crises of the 1970s and early 1980s, and in subsequent price spikes in electricity and natural gas. That doesn't mean there isn't still ample scope for further improvement, but it does leave those efforts subject to the long list of barriers described in yesterday's presentations. They include lack of funding, low awareness, landlord/tenant issues, and lack of expertise.

One of the other obstacles that intrigued me was the mismatch between the scale of most efficiency projects, even in the commercial sector, and the much larger scale of investor interest in financing efficiency, as described by the panelist from Citibank. He suggested the answer lies in aggregation, in which the financing of numerous smaller projects would be bundled and sold off in tranches to investors. If that sounds familiar, it should, because it reflects a similar approach to securitization to the one that contributed to the recent housing bubble. However, I would stress that efficiency instruments need not be inherently very risky, as long as they are assembled with due concern for the creditworthiness of the project owners, and without heroic assumptions about the risk-abating portfolio effect of aggregation. Another element that could assist this process is the sort of project performance guarantees described by the panelist from Johnson Controls. In any case there is no shortage of federal, state and local programs focused on energy efficiency financing, including the controversial Property Assessed Clean Energy (PACE) mechanism.

I hope you get the sense from this brief summary that implementing energy efficiency on a large scale is quite difficult enough in its own right, even when those investing in such improvements can safely assume that they will enjoy 100% of the promised cost savings when the projects are completed. The research on rebound by a team commissioned by the EU's Directorate General for the Environment highlighted a number of mechanisms by which efficiency gains may lead to additional energy consumption, either by the individual or organization implementing it or within the larger economy. In some cases this could even lead to post-efficiency consumption exceeding the pre-efficiency level, a condition referred to as "backfire." The potential for these offsetting effects not only makes efficiency a tougher sell on a project basis, but it also undermines the efficacy of macro-scale efficiency measures in mitigating climate change or reducing energy imports. This view is consistent with the findings concerning rebound assembled by the Breakthrough Institute.

The logic of rebound begins simply and locally, before becoming complex and widespread. When you invest in efficiency, your energy bill goes down, leaving you more money to spend on either more of the services that consume energy (e.g., transportation, lighting, heat or air conditioning) or on other goods or services, after accounting for the cost of the upgrade or the cost of financing it. Now think about what happens in the economy: the demand for energy has dropped by a little bit, as has the money spent on it. You'd expect energy prices to fall and the freed up money not spent on energy to result in consumption or investment somewhere else. But those goods and services likely consume energy, too, along with the embedded energy in the efficiency technology, the installation of which started this cascade. And as overall energy productivity goes up, economic growth should also increase, resulting in additional energy use. The EU report found evidence of rebound in the range of 10-30%, including 26% for the UK efficiency investments that were studied. For example, the UK government apparently assumes that 15% of the benefit of home insulation will be lost to rebound.

Some of these mechanisms are more intuitive than others, and I am still thinking through what I heard, particularly in terms of why much of the rebound effect wouldn't be offset by market feedback mechanisms or by the reaction of company management to disappointing post-expenditure reviews on efficiency projects. When I raised these points during the call, Dr. Maxwell, the co-leader of the EU study team, assured me that my concerns weren't supported by the empirical research they examined.

If this rebound effect is as prevalent as the evidence seems to indicate, then the implications aren't very positive. Although individuals and companies implementing efficiency measures are likely to get most of the value they expect, even if it's in some form other than direct savings on their energy bills (e.g., more mobility, more comfort, higher output) society likely wouldn't see the expected energy and emissions savings at the level of the entire economy. That requires increasing efforts on efficiency even further--against all the barriers discussed above--or expending more effort on the supply side of energy, through promotion of higher energy production and more investment in renewables. In other words, those low-hanging efficiency gains that have defied so many efforts to implement look even harder to achieve in practice and somewhat less valuable.

I'm not sure to what extent I buy into all this, yet. Direct rebound due to less expensive energy services for the individual or firm seems fairly straightforward, but the wider ripple effects involve positive and negative feedback loops requiring complex modeling to assess--with all the uncertainties to which such models are subject. Nor does it require the existence of a large rebound effect to appreciate just how difficult it will be to move the needle on total energy consumption and emissions very far by means of efficiency measures that must ultimately be implemented by individual companies and consumers that already face a large array of competing priorities. I intend to look into this further and report later on any insights that turn up.

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Secretary Chu Advised on "Prudent Development" of Oil and Gas

A news item concerning last week's release of the National Petroleum Council's "Prudent Development" report referred to a recommendation supporting a national tax on carbon. That caught my attention. Given the NPC's makeup, a consensus on such a controversial issue would be surprising. The actual text of the report proved somewhat less dramatic on the climate policy front, but no less worthwhile for its comprehensive assessment of the abundance of North American hydrocarbon resources, as well as the development approach "necessary for public trust, protection of health, safety and the environment, and access to resources." The report doesn't just focus on macro concerns about climate change and other environmental issues, but also on timely details such as the methane emissions, water and land-use impacts involved in shale gas production and other resource development.

For those not familiar with the NPC, the organization is charged with advising the Secretary of Energy on matters relating to oil and gas, though in practice it looks at a much broader array of energy issues. In 2007 I helped with the renewable energy analysis in the group's previous study, entitled "Hard Truths." The current study is one of two requested of the NPC by Secretary Chu; the other will look at future transportation fuels and is due out in the first half of next year. What makes these reports unusual is that they incorporate the views of academics, government officials, non-governmental organizations, and the legal and financial sectors, along with those of the energy industry. In the current study, just under half the participants represented oil and gas companies, while the Emissions and Carbon Regulation Subgroup included members from the National Resources Defense Council and US EPA, and the Environment and Regulatory Subgroup was chaired by someone from the Environmental Defense Fund. I think we'd all benefit from more such "strange bedfellows" collaborations.

The report's specific recommendation on carbon pricing as a mechanism for addressing greenhouse gas emissions appears in the Executive Summary and originates in an entire chapter on "Carbon and Other Emissions in the End-Use Sectors." Although it's much more generic than the Fuelfix article indicated, it's still noteworthy. It deals with the need to internalize emissions costs into fuel and technology choices, with a carbon tax mentioned as just one option among a range of measures for establishing an explicit or implicit price on carbon. It states,

"As Congress, the Administration, and relevant agencies consider energy policies, they should recognize that the most effective and efficient method to further reduce GHG emissions would be a mechanism for putting a price on carbon emissions that is national, economy-wide, market-based, visible, predictable, transparent, applicable to all sources of emissions, and part of an effective global framework."

It goes on to address non-market mechanisms such as performance standards and clean energy standards, and how a policy on carbon should be phased in. While individual oil and gas companies have supported cap and trade or a carbon tax either individually or within multi-industry groups, I can't recall such a broad cross-section of this industry going along with the idea of carbon pricing, even in this non-specific manner.

The timing of this is interesting. It's hard to envision a comprehensive climate bill passing the Congress between now and the November 2012 election, or even being introduced on anything other than a symbolic basis. The pork-laden monstrosity of the Waxman-Markey bill succeeded only in making cap and trade toxic, and I can't imagine a worse environment for introducing any kind of new tax--a price on carbon is clearly a tax--even if the concept behind cap and trade has a solid bipartisan pedigree. Short of the miraculous materialization of a carbon tax as a compromise revenue solution from the deficit-fighting Supercommittee, carbon pricing in the US looks dead until 2013 and possibly well beyond. I'm also starting to see more comments along the lines of this one from the blog of the Information Technology and Innovation Foundation suggesting that policies promoting innovation might be a lot more important in addressing climate change than any level of carbon pricing that could realistically be implemented here.

So whether you regard this recommendation by the NPC as an attempt to restart a stalled debate on carbon pricing, or merely a tardy entry in a formerly crowded field, I think it also signals that the energy industry isn't oblivious to the fact that its emissions--including the lion's share associated with end-user consumption of their products--must eventually be dealt with. Chances are, that will await a return to economic health and stability, when US consumers, voters and taxpayers might be expected to prove more willing to incur the sacrifices this will entail. The report also includes a good perspective on the considerable North American resource upside that could be unleashed with different policies than the ones now in place, and that might just hasten the arrival of more favorable economic conditions for carbon policy.

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The Anthropocene and Other Topics

For the first four years of this blog I published nearly every weekday, and as time went on occasionally struggled to find suitable topics. Lately, I've been running across more good blog topics than I could conceivably cover. I think more is at work in that than my having scaled back the blog's frequency; energy has become an integral part of so many crucial conversations in the meantime. So instead of my customary single topic, today's post includes three essentially unrelated ones, all of which I thought merited sharing with my readers.

The first item concerns compact fluorescent lighting, those "CFL" bulbs people seem to either love or hate, and upon which many base unrealistic expectations of energy and emissions reductions. According to the tracking of NEMA, the Association of Electrical and Medical Imaging Manufacturers, US demand for CFL bulbs has declined for four straight quarters, while demand for the incandescent bulbs that are being phased out by law has revived to 79% of the market. This shift begs for deeper analysis. Is it the result of consumers stocking up on 100 Watt incandescents before they disappear from store shelves next January 1 and become a new kind of black market commodity, or is it more along the lines of what happened to tire sales after steel belted radials were introduced? Like the latter, CFLs last a lot longer than the traditional product they're replacing, and at some point one would expect sales to plateau at a much lower level than incandescents previously held. Or is it the case, as in my household, that CFLs are simply not viewed as a satisfactory replacement in all the fixtures where they could be placed, because of a combination of lighting quality, cost effectiveness, and concern about potential mercury contamination?

Now let's turn to plastics. Two stories, both involving Dow Chemical, caught my eye. In the first, Dow is investing in a facility to make polyethylene, a very common plastic, from ethanol in Brazil. As the article in Technology Review notes, Brazil is one of the few places that would make sense. The process of producing ethanol from sugar cane is so energy-efficient and cost-competitive that ethanol can sensibly be substituted for the petroleum products from which it might otherwise be produced there. In the other story, Dow recently announced a process for extracting most of the available energy from non-recycled plastic waste. Taken together, these two items challenge our traditional view of the relationship between oil and plastics: not only does oil no longer have a lock on the feedstock market, but it could face competition from waste plastics in end-use energy applications, or possibly even as a potential source of synthetic oil, as I noted a couple of years ago.

Finally, I'd be remiss if I didn't recommend an article from the May 28, 2011 issue of The Economist, which had been in my reading pile for weeks. It suggests that we are living in a new epoch of the earth called the Anthropocene, signifying humanity's having become the equivalent of a force of nature in our effect on the earth and its systems. I'm intrigued by this not just because it dovetails with my view that essentially everything we do on a civilization-wide scale, including energy production and consumption, agriculture, transportation and public works, has consequences for the entire planet, but also because of its implications for what sustainability is likely to mean going forward. If the cited scientists are correct, we influence the earth's systems as much as the climate does, with climate change only one example of our impact.

The corollary to that is that an earth restored to the conditions that prevailed in the Holocene epoch from which we emerged--before we started messing with the nitrogen cycle, the carbon cycle, and other key processes--could not support the population expected by mid-century. There's just no going back to our bucolic roots, but neither is that a justification for the large-scale destruction of the environment needed to sustain humanity. The other interesting twist to this is that it's possible we will need the energy from the large-scale harnessing of solar power to conduct the intentional geoengineering that might be necessary to get the global climate back on an even keel. It's the sort of thing that gives environmentalists nightmares but makes believers in an approaching Technological Singularity nod sagely.

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Justifying $15 Trillion for Renewables

Yesterday I received a joint press release from a group of renewable energy trade associations. It touted a new report from the UN Intergovernmental Panel on Climate Change (IPCC) on the potential growth of renewable energy by 2050. The report has already garnered an impressive array of headlines, such as "Renewable Energy Can Power the World" and "Renewable Energy Key to Solving Climate Change". The headline from the Financial Times was characteristically more concrete, "World faces $15,000 bn renewable energy bill." Unfortunately, although the final report, rumored to run 1,000 pages, might support all of those conclusions when it is issued at the end of the month, the 25-page "Summary for Policymakers" falls far short of inspiring such confidence. Heaven help those policymakers if the summary is all they actually read.

I'm not even sure if "read" is even the correct verb to apply to this document. Once I got beyond the introductory paragraphs it seemed to degenerate into jargon and bureaucratese that was very hard to parse into plain meaning. The report's genesis as the product of pure consensus is readily apparent. Or as Andy Revkin of the New York Times' Dot Earth blog kindly put it, "it doesn't take readers much beyond what is already well established." That's a shame, because we don't need yet another report telling us that we are swimming in enough renewable energy to power our civilization umpteen times over, if we can merely muster the willpower to reach out and tap it. What we urgently need is a roadmap that describes a path--or preferably several possible paths--through the brambles that separate the energy status quo of 2011 from its ideal low-carbon state of 2050.

For example, we need to understand just how renewables will supplant the petroleum that currently provides around 94% of all transportation energy, at least in the US. That demand might be met by biofuels, although the report points out that the first-generation biofuels that supply nearly 3% of global road transport fuel today, but are still the only kind available on a commercial scale, have serious shortcomings. Closing the gap between 3% and 94% would require a true revolution in next-generation biofuels from sources such as cellulose and algae, yet after reading the Summary for Policymakers we are no wiser about when and how this will occur. I might note that such developments are rarely amenable to precise timetables, as the EPA is learning to its chagrin.

Alternatively, or in combination with biofuels, renewables might replace petroleum in transportation via the potentially more robust pathway of vehicle electrification, matching improved batteries with rapidly expanding supplies of intermittent renewables (wind, solar, tidal, etc.) delivered via increasingly intelligent power grids. But if that's the scenario, its crucial details are barely hinted at here.

The basic message of the summary appears to be that with enough investment, supported by the right policies, the currently identified renewable energy sources could expand by enough that in the very best case (out of 164 scenarios they considered) they could supply roughly as much energy by mid-century as we currently get from fossil fuels. That corresponds to 77% of total expected energy consumption in 2050 and may be the source of the headlines I saw. Of course the median level of those 164 scenarios is quite a bit lower, and the determination of the share of renewables in total energy relies on a projection implying that total global energy consumption will grow by an average of just 0.25% per year over the next 40 years. That suggests either a massive energy efficiency effort or minimal further economic uplift in the developing world. On a more reasonable track of 1% annual energy growth, the top scenario in the scatter chart on page 19 would meet 58% of total 2050 demand, while the median result would cover just a third of global energy needs. That's still impressive, compared to where we are today, but not quite as headline-grabbing.

I will be keenly interested to see what sort of scenarios the IPCC looked at in putting together the report on which this summary is based. Something tells me that they are likelier to fall into the category of what I would call projections or "cases" than true scenarios, which dig deeply into underlying trends and uncertainties and are not merely the output of a mechanistic model. That's not just a technical quibble, because I'm not aware of a single model-type forecast from 1970 that accurately projected the economic and sociopolitical conditions in which we find ourselves today. The intervening improvements in computing power and econometric sophistication still seem insufficient to conquer the fundamental unpredictability of looking that far into the future. But then the IPCC has a built-in bias to accept the results of such work, since long-term climate models underpin its entire effort. I hope I'm not alone in thinking that the expenditure of up to $15 trillion requires a much more rigorous justification than anything provided in this document. Whether or not Saint-Exupery really said it, a goal without a plan is just a wish.

If it seems that I'm being overly critical of a 1,000 page report that I haven't even seen on the basis of the horse-by-committee summary that I have seen, I plead guilty. But isn't that the same sin that the journalists and industry spokespeople are committing when they use this summary as the basis of glowing claims about the potential of renewables? And then there are the politicians and bureaucrats who will attempt to commit vast sums without ever reading any more than summaries such as this--at best--and without questioning the host of assumptions that went into them. If anything, this Summary for Policymakers reinforces my concern that the UN climate process has become so unwieldy and unresponsive that we must look elsewhere for leadership on this complex challenge. Meanwhile, we deserve a clearer articulation of how renewables can overcome the considerable obstacles that stand between their recent impressive performance and the achievement of the milestones this report suggests lie ahead.

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Congress Defers to EPA on Climate Policy

The confrontation over climate policy that was teed up by the results of last November's mid-term election culminated with the House of Representatives voting overwhelmingly yesterday to strip the Environmental Protection Agency of its power to regulate greenhouse gases under the Clean Air Act. However, the more crucial votes took place on Wednesday, when the Senate defeated a string of amendments that would have similarly blocked EPA's powers to regulate CO2 and other greenhouse gases (GHGs), whether entirely, only for specific sectors, or for a period of two years. This is a worrying outcome, because it means that the Congress has effectively yielded responsibility for managing these emissions to an approach that nearly everyone, including this administration's EPA Administrator, previously saw as much less desirable, for good reasons. It will impose another layer of intrusive regulations on US industry and businesses, even though it's not clear that it will achieve much in terms of reducing US greenhouse gas emissions, let alone reducing the pace of global warming.

It's worth recalling how we got to this point. A long succession of cap and trade bills, several with bi-partisan sponsorship, ultimately failed to attract enough support to become law. The most recent such legislation, the egregious Waxman-Markey bill, may have looked more like a pork-barrel bonanza than a serious attempt to get our emissions under control, but even it was based on the principle of putting a price on emissions, and harnessing the power of the market and innovation to reduce emissions at a lower cost than through classic tailpipe and smokestack regulations. The former strategy takes advantage of the fact that greenhouse gases behave very differently than the substances associated with smog and other lung-irritating air pollution. Unfortunately, the way that EPA is approaching GHGs ignores that opportunity.

With essentially no adverse local effects, it makes sense to deal with GHGs as flexibly as possible. I can think of several adjectives to describe the path on which the EPA has embarked, but flexible isn't one of them. I suspect that many of the states whose Clean Air Act implementation plans were entirely satisfactory for their originally intended purposes but now find themselves out of compliance would agree. It's ironic that during the debate over Waxman-Markey, EPA regulation was held up as the dreaded alternative to enacting a climate bill, yet now we see a majority of the Senate treating it as something worth defending.

The net result of this week's votes is a House bill that will likely be dead on arrival in the Senate, where the leadership has demonstrated sufficient support for the EPA greenhouse gas regulations that went into effect at the beginning of this year to sustain a Presidential veto of any similar measure that might squeak past the Senate later. At the same time, 17 Democratic Senators voted for some degree of constraint on EPA's powers regarding GHGs. Even if many of those individual votes were focused on blue-state or swing-state electorates going into next year's election, that at least suggests that a bi-partisan majority of Congress does not view EPA regulation as the best strategy for reducing emissions, particularly in a weak economy. And that majority could expand next year. For those of us who are concerned about climate change but also worried that EPA's command-and-control approach to emissions will cost the US economy far more than the modest emissions reductions this will yield are worth, that provides a ray of hope that the current EPA regulations aren't the last word on the subject.

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The Year of Regulation?

Some new years seem newer than others, bringing major changes rather than just the turning of a calendar page. 2011 is shaping up that way, with a return to divided government in the US and the beginning of national greenhouse gas regulation by the EPA based on that agency's interpretation of the Clean Air Act, rather than as a result of explicit new Congressional legislation. As the ongoing legal battle over this between the EPA and the state of Texas demonstrates, there's a lot at stake, and the final outcome has not yet been determined.

When the US Supreme Court ruled in 2007 that CO2 and other greenhouse gases constituted pollution that was subject to regulation under the Clean Air Act, it set in motion the process that is now culminating with the EPA's proposed rules for regulating these gases. Initially this will take the form of what the agency calls New Source Performance Standards, applying only to new facilities and modifications within existing facilitates, and only for sources emitting more than 50,000 tons per year of greenhouse gases (GHGs). That exempts residential and most business activities using less than the energy equivalent of about two gasoline tank-trucks per day. The first phase of these regulations is specifically targeted at power plants and oil refineries, and over time it could significantly alter the way that electricity is produced and oil refined in this country.

I've argued for years that this is entirely the wrong way to go about reducing emissions, because greenhouse gases are global, rather than local in effect, and a command and control approach applied to point sources of CO2 and other GHGs will miss many of the least expensive emission reduction opportunities while forcing businesses to focus their efforts on some of the most expensive. Cap and trade or some other means of establishing a price on emissions would have been much more efficient, although the version of cap and trade passed by the House of Representatives in 2009 was a miserable excuse for such a system, distorted as it was by preferential treatment for favored groups and sectors.

But this isn't just a question of economic efficiency; it's also a question of effectiveness. Regulating power plant emissions addresses 34% of total gross US GHG emissions, including roughly 92% of the emissions from the coal value chain, while regulating refineries tackles less than 10% of the emissions from the petroleum value chain--and some of the hardest ones to cut, at that. Refineries are already about 90% efficient. Squeezing even more efficiency from them--which would be the net effect of capping their GHG emissions, since most of those are associated with the combustion of fossil fuels--is likely to cost a lot more than the value of any energy savings such changes would yield. That could have a significant impact on states like Texas, which is home to more than a quarter of the country's refining capacity. The result would also increase national energy costs in either of two ways, with higher operating costs at US refineries being passed on to consumers in the price of fuels, or by reducing US refining throughput and capacity and increasing our reliance on product imports. The latter works directly against the widely-held notion that anything that reduces emissions must automatically be good for our energy security.

None of this is set in stone, although I certainly wouldn't bet against some version of it coming into effect. The incoming Republican chairman of the House Energy and Commerce Committee has already indicated his determination to restrain the regulation of GHGs by the EPA, and even without a majority in the Senate the House, which controls the government's purse strings, could make it much harder for EPA to pursue this course. At the same time, several previous sponsors of Senate energy and climate legislation have expressed interest in a new, bi-partisan approach to energy, and it's not inconceivable that watering down the proposed EPA regs could become part of a deal to establish a national low-emission energy standard that would include not just renewables, but also nuclear energy and possibly even natural gas. I will be watching these developments with great interest in the weeks and months ahead.

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The Post-Kyoto World

Saturday's conclusion of the Cancun climate talks yielded modest agreements that allowed the meeting to be described in positive terms by its hosts and organizers, but at least on the major question of a globally-binding treaty to extend or replace the expiring Kyoto Protocol, it merely kicked the can down the road to the late-2011 session in Durban, South Africa. As low as the expectations going into Cancun were, keeping the UN climate process on life support looks like a good result, compared to last year's fiasco in Copenhagen. However, in light of the objections raised by Japan, Russia, Canada and others, it's difficult to see how the Durban meeting could succeed where Cancun and Copenhagen failed. It looks increasingly likely that the replacement for Kyoto might appear face-savingly similar, but will lack that document's cohesiveness and global authority.

As I read the portion of the "Cancun Agreements" dealing with the extension of the Kyoto Protocol beyond its previously-set 2008-2012 term, the delegates mainly agreed to keep talking and to try to come up with a framework in time to avoid a "gap between the first and second commitment periods." Considering that last year's session in Copenhagen was widely viewed before its start as the last, best chance to accomplish that goal based on the timeline set in Bali two years prior, the end of 2011 looks pretty late in the game to deliver on that. Moreover, while Cancun was able to get by on low expectations, Durban will be unable to repeat that trick and avoid the kind of set-up that helped doom the Copenhagen talks.

The chasm that remains to be bridged doesn't seem to have changed much: the developing countries still insist on binding emissions reduction targets from the developed countries, to which the UN process attributes the majority of emissions under the "principle of historical responsibility, their emissions debt and addressing the needs of developing countries", but won't commit to binding targets themselves. (I've discussed this notion of "emissions debt" previously.) But while the US has signed up for voluntary emissions reductions under the Copenhagen Accord, it won't agree to binding cuts unless the world's largest emitter, China, also does. And all China appears willing to agree to, based on its Copenhagen commitments, is the sort of productivity-based reductions that the rest of the developed world rejected when the US advanced this idea for managing our emissions in the first term of the Bush administration. Even if China succeeds in cutting its emissions per GDP by 40-45% while its economy continues on its present growth trend, its overall emissions would still increase in absolute terms. Japan and some other Kyoto signatories are understandably reluctant to sign up for deeper cuts themselves, unless the world's two biggest emitters commit to sharing their pain.

And this is where the timing of any substantive Kyoto extension hits the wall of US politics. If the administration wasn't able to pass cap and trade legislation in the last Congressional session, when its party had an effective majority of 60 seats in the US Senate in 2009 and 59 in 2010, the prospect of ratifying a climate treaty with a majority of just 53 next year--including one who campaigned vocally against cap and trade--is nearly non-existent. The administration is struggling just to get the new strategic arms treaty with Russia ratified in the Lame Duck session--a treaty with solid bi-partisan endorsements from the foreign policy leadership of past administrations. The likely reception for a new climate treaty would be much less favorable than that until at least 2013 and probably beyond, in light of the ratio of seats up for reelection in 2012.

Unless I'm missing something major, without the US and China on board for binding cuts Japan and others won't agree to deeper reductions in the next round of Kyoto. That doesn't mean that the Durban Climate Conference won't cobble together an eleventh-hour agreement that looks like an extension of Kyoto, in order to avoid an irreparable rupture between the developed and developing world parties to the talks. The subtext for that is already in place in the Cancun outcome. However, it seems highly unlikely that such a document would actually do what Kyoto was intended to do. As a result, the UN process seems to be consigned to focusing on the secondary areas that progressed in Cancun, relating to funding for adaptation and technology transfer, and emissions reductions from sectors like land-use changes and forestry. With the economies of the developed world looking as weak as they do, and with domestic expenditure cuts in the EU having generated noisy and sometimes violent protests, coming up with the funding for those efforts looks more than challenging enough for now.

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Worse than Coal?

As I noted in last Wednesday's posting, one of the questions that came up in a webinar on shale gas in which I participated concerned the climate consequences of higher recent estimates of methane leakage from US natural gas systems. In reading further comments and blog postings on this subject, I was surprised to see assertions that went beyond drawing attention to the importance of the leakage of a high-value, high global-warming-impact gas, to suggest that the apparent rate of leakage renders the lifecycle emissions from natural gas as bad as those from coal, or worse. If that were true, it would have significant implications not only for the development of shale and other natural gas resources, but also for our entire emissions reduction strategy. From what I can tell, however, such claims have not been substantiated by current studies.

Several comments I received in email or on the posting pointed to the work of Professor Robert Howarth of Cornell University, and specifically to a press release describing a paper he has apparently submitted addressing the climate impact of methane leaks from shale gas production, transportation and storage. Until the details of the paper are available, the information provided in the press release simply doesn't stand on its own or merit further analysis. In the meantime, a recent EPA report evaluating greenhouse gas emissions from the oil and gas industry identifies significantly higher estimates for methane emissions from natural gas systems than those incorporated into that agency's most recent US Greenhouse Gas Inventory. I became aware of the EPA report in the course of reading one of the blog postings I alluded to above.

The EPA estimated the total CO2-equivalent methane leakage from the production, processing, transportation, storage and distribution of natural gas in the US in 2006 at 261 million tons per year. That amounts to more than 4% of total net US emissions for that year, so it is hardly insignificant. It's also about 2.5 times the figure reported in the agency's latest GHG inventory. Converting that quantity back into natural gas at normal conditions yields 656 billion cubic feet of gas, or 3.4% of marketed US natural gas production in 2006. That's a lot higher than typical leakage estimates of less than 1%, as David Lewis notes in his blog. The question is whether this higher level of leaks, or some even higher notional level of leaks proposed by other critics, would be sufficient to make the emissions from gas worse than those from coal.

To understand why that might even be possible, you have to know something about the relative strength of different greenhouse gases (GHGs). While much of the public's attention has been focused on CO2, the most prevalent man-made GHG, other gases have dozens or hundreds of times the impact on climate, per ton. Because of the way it decays in the atmosphere, methane's global warming potential (GWP) starts high and diminishes over longer time spans. Most reports, including the EPA's, use a 100-year GWP estimate indicating methane is around 21 times worse than CO2.

However, it's not correct to infer from that that upstream leaks of 3.4% of all natural gas must therefore inflate the lifecycle emissions of the gas we consume by 21 times 3.4%, or 71%. That's because a ton of methane doesn't convert to a ton of CO2 when burned; it yields 2.75 tons, as a result of basic high school chemistry:

CH4 + 2O2 --> CO2 + 2H20

So for each ton of natural gas, it's roughly 7.6 time worse for it to be vented or leaked than burned, after adjusting methane's standard GWP for the ratio of molecular weights from the above reaction equation. In fact, when I added the EPA's latest methane emissions estimates to their figures for indirect and direct CO2 emissions from natural gas in the GHG inventory, the result was very close to the 26% increase you'd get from multiplying 3.4% by 7.6. As a result, although the emissions advantage of natural gas over coal is less than it would be without such a high rate of leakage, gas still emits 35% less CO2 equivalent per BTU over its lifecycle than coal, on average.

When you consider how natural gas actually competes with coal, its effective emissions advantage should be larger than that. Even after accounting for upstream emissions (including leakage) that add 30% to its CO2 emissions from combustion, an efficient combined-cycle power plant still generates electricity with emissions per kilowatt-hour that are more than 40% lower than those from a highly-efficient coal plant. That's because the combined cycle turbine converts more than half the BTUs in its fuel into electricity, while the coal plant converts less than 40% of coal's BTUs into power. Fewer BTUs for the same output results in fewer emissions.

I don't claim my back-of-the-envelope analysis is definitive, but it certainly doesn't support the notion that gas is worse than coal. Barring conclusive evidence of a much higher level of upstream natural gas leakage than indicated by the EPA's latest work on the subject, natural gas--even with existing infrastructure--could reduce the emissions associated with coal use in power generation by at least a third, and by much more than that depending on the specific generating facilities involved. At the same time, that shouldn't be read as excusing avoidable leaks of gas. If that 3% figure is accurate or low, then several billion dollars worth of gas--even at today's depressed prices--is escaping into the atmosphere rather than being captured and turned into useful energy by gas customers. That sounds like the epitome of low-hanging fruit to me.

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Cancun Climate Talks: Irrelevant?

The mood going into this week's global climate conference in Cancun, Mexico is decidedly different than that for last year's session in Copenhagen, which had been intended to culminate the process begun two years earlier in Bali. It's not just that expectations for a comprehensive and binding global climate treaty have been dramatically lowered; much of the debate since Copenhagen has moved away from the notion that it's even possible to reduce emissions sufficiently to avert many of the adverse consequences of a warming and less stable climate. It's no coincidence that the cover story of this week's Economist is dedicated to the increased need for adaptation to climate change, while the lead op-ed in the energy pull-out section in today's Wall St. Journal highlights an agenda for making clean energy the cheapest kind--not by subsidizing it even more than we already are, but by driving innovation.

After describing the magnitude of the challenge involved in decarbonizing the global economy by enough, soon enough, to limit the increase in global average temperatures in this century to 2° C, The Economist concludes, "The fight to limit global warming to easily tolerated levels is thus over." That doesn't mean that agreements to bend the trajectory of emissions growth below the status quo trendline aren't worth pursuing, but it suggests that we need to devote much greater attention and resources to adapting to a world that will likely include more droughts, floods, famines, and human migration than we've had to deal with thus far, and for which both the drivers and consequences are being amplified by economic development and population growth. The Economist sees climate adaptation focused on three main areas: infrastructure, migration and food, and their analysis is worth reading.

Another factor I believe the magazine should have highlighted is the difficulty of undertaking any of these efforts at a time when the developed world is hobbled by weak economic growth and related deficit and debt problems that threaten to render even the current level of subsidies for renewable energy sources unsustainable. As the EU grapples with the debts of Greece and Ireland, with Portugal and Spain waiting in the wings, it's no accident that Spain has just cut its feed-in tariff for solar power, which had already been reduced from previously lavish levels. The elephant in the room in Cancun, as it was in Copenhagen, is that binding agreements requiring severe emissions reductions by and large transfer payments from the developed countries might have looked attainable when the economy was booming, but they have become much less feasible in the wake of the worst recession and financial crisis since the Great Depression.

That same fundamental challenge makes the innovation arguments raised by Ted Nordhaus and Michael Shellengerger of the Breakthrough Institute more urgent than they would be otherwise. Because today's renewable energy technologies remain more expensive without subsidies than coal, oil and natural gas--even when the consumption subsidies the latter receive are stripped away--the cost of replacing our existing, high-emitting energy sources with entirely green ones looks unaffordable in today's world. I would add that reliance on experience curve effects--building out a subsidized green energy economy and depending on volume to drive down its cost to the point of competitiveness--is unlikely close that gap, and where it can, there is no guarantee that the country providing the incentives will receive the benefits it is entitled to expect. To cite the most obvious current example, Germany has invested tens of billions of Euros subsidizing solar energy and has indeed created a globally competitive solar industry--mainly in developing Asia.

What makes Nordhaus and Shellenberger's suggestion seem much more practical than global climate treaties and mountains of green subsidies is that the money currently being spent on renewable energy deployment incentives, which constitute a small fraction of the total annual investment in energy infrastructure, would go much farther buying R&D, rather than hardware. The US investment tax credit paid to a single 100 MW wind farm could fund an entire university energy innovation laboratory and graduate degree program.

Of course none of these strategies should be regarded as entirely either/or propositions. Adaptation doesn't let us off the hook for trying to address the causes of climate change, nor does shifting more of government's limited resources into clean energy R&D mean we don't need any of the real-world learnings that only come from deploying technology and seeing how it works under uncontrolled conditions. There's also a parallel role for research into geoengineering to provide a backstop--a potential Hail Mary pass--should all of these other efforts fall short and climate change move beyond a range we can live with. If nothing else, the COP 16 meeting in Cancun might shed more light on the degree to which the UN body is the right umbrella to cover all this work.

Tomorrow at 1:00 PM EST I'll be presenting in a webinar entitled, "Natural Gas: Sustainability Friend or Foe". To sign up follow this link.

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Chicago's Climate Exchange Shuts Down

I see that the Chicago Climate Exchange (CCX) will be winding down its CO2 trading operations by the end of the year and laying off staff. This is only surprising considering that the parent company of the CCX was acquired just this summer by the Intercontinental Exchange, though mainly for its successful European emissions trading market. In case you were wondering how long the odds against enacting cap & trade legislation in the US have become, the demise of the CCX is a signpost you can't ignore. If the symbolism of a popular Democratic governor using the Waxman-Markey climate bill for target practice during his recent successful bid for the US Senate wasn't clear enough, it looks like his bullet may have also hit the CCX.

I recall a meeting with one of the founders of CCX at Texaco's corporate headquarters in New York prior to my leaving the company at the end of 2001. At that time, Texaco's management was coming around to the idea that sooner or later emissions of CO2 and other greenhouse gases would carry a price, for the first time in human history. Cap & trade offered a proven way to discover that price, based on the pioneering experience of US markets for sulfur dioxide, a cause of acid rain, and nitrogen oxides. The principles of emissions trading had been embedded in the Kyoto Protocol, largely thanks to the efforts of the US delegation, and European countries were setting up the precursors of the EU Emissions Trading System to manage mandatory carbon reductions. Such developments still appeared to be somewhere over the horizon in the US, which never ratified Kyoto, but they seemed likely to find their way here, eventually. One of the main selling points of the CCX, which was based on voluntary emission reduction commitments by member companies, was that it would provide valuable early experience in a formal market for emissions reductions, giving participants a leg up when such trading was required by law. This argument didn't persuade my former employer, but a number of other companies signed up.

If this scenario now seems like a quaint strand of alternate history--a "what if?" that never materialized--that perspective is quite recent. The prospects for CCX and wider emissions trading looked reasonable for a long time. The value of the CCX contract peaked in mid-2008, when it had become apparent that the ultimate presidential nominees of both major US political parties would be candidates who supported cap & trade, with the Republican even having previously co-authored Senate legislation on the subject. After a severe dip during the worst of the financial crisis, the contract recovered to around $2/ton after the new administration took office, but then swooned again as the Waxman-Markey bill, with its heavily skewed version of cap & trade, neared passage. As the likelihood of parallel Senate action on climate legislation receded, it never really recovered.

In its editorial on the termination of the Chicago Climate Exchange, the Wall Street Journal suggested that the market has delivered its verdict and the idea of national-level cap & trade is now dead in the US. Perhaps, but it certainly doesn't signal an end to all CO2 trading here. Aside from the state and regional programs to which the Journal alluded, companies with global operations subject to emissions caps in other countries will still be active participants in non-US emissions markets, and firms that remain committed to voluntary reductions in the US may continue to trade with each other, via brokers, or with over-the-counter market makers.

For that matter, I can't help wondering whether cap & trade is truly as dead as a Monty Python parrot or just resting. I'm reluctant to let go of an idea I've supported for a long time, but I also still see significant advantages for cap & trade over other means of putting a price on greenhouse gas emissions. Although the idea of carbon pricing may have gone out of fashion in the US, major tax reform for the purpose of deficit reduction could make it much more difficult to provide the monetary incentives for renewable energy technologies that we do today. Without those subsidies or a price on CO2, renewables will have a hard time competing with fossil fuels. And if our only other choices for emissions reduction were mandates or the command-and-control approach for which the EPA is now gearing up, then cap & trade and the emissions trading that makes it work might no longer look quite so appalling to their critics. In that case, the companies that participated in the CCX during the last seven years might not have wasted their time, after all.

FYI, I'll be participating in a webinar on the sustainability aspects of natural gas next Monday at The Energy Collective . To sign up follow this link. In the meantime, I wish my US readers a very enjoyable Thanksgiving. New postings will resume next week.

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