A Framework for Geoengineering

This week's Economist includes coverage of a recent meeting of scientists at Asilomar, in California, to discuss the ground rules for pursuing "geoengineering", the deliberate, large-scale modification of the earth's environment. The purpose of the geoengineering now under consideration is to limit or reverse the effects of climate change, presumably whether man-made or otherwise. This is a notion that provokes great anxiety or outright revulsion on the part of many who feel our only acceptable response to global warming is to return the planet to something approximating its pre-industrial state by eliminating the emissions and land-use changes that have accumulated over the last century or more. However, for those of us who doubt either the efficacy or achievability of such drastic changes in the economy and our lifestyles, geoengineering is at least a legitimate, complementary option along with mitigation, and potentially our last hope of averting a worst-case climate scenario, should one arise.

Anyone who is convinced of the dangers of global warming or climate change, whichever you prefer, implicitly accepts the potential of geoengineering, because anthropogenic climate change (AGW) ultimately amounts to an uncontrolled experiment in geoengineering on a global scale. The kinds of experiments proposed by researchers meeting at Asilomar--the site of other notable, long-view discussions in the past--would operate on a much smaller scale, at least initially, with the goal of either undoing or holding temporarily in abeyance the changes resulting from humanity's emissions of heat-trapping gases in excess of the capacity of the earth's massive natural GHG-recycling facilities to absorb. For that matter, geoengineering might even be useful if it turned out that AGW was only one of several factors combining to shift conditions away from the benevolent state that has supported humanity's rise as the dominant species on the planet.

This is an issue that I've been following for a long time, though I haven't written about it very often here. My interest in geoengineering was piqued in the 1990s by proposals to sequester large quantities of CO2 in the oceans by stimulating plankton growth where there naturally wasn't much. That's only one of many possible approaches that fall into a broad family of carbon-removal strategies constituting one of the two main geoengineering categories The Economist considered. "Solar Radiation Management", the other category, includes strategies for reducing the amount of solar energy the earth receives or retains. That could run to putting large numbers of small particles in the upper atmosphere or orbiting giant mirrors to deflect sunlight off into space. It might even be as simple as painting all rooftops white--a bit of a problem if they're all covered with dark solar panels.

The basic problem seems to be convincing everyone potentially affected--which of course might include everyone on earth, or at least their representatives--to trust researchers to keep the impact of their experiments strictly limited and under tight control. The session at Asilomar apparently endorsed a set of steps called the "Oxford Principles", which describe five key elements for gaining concurrence:

1. Geoengineering to be regulated as a public good.

2. Public participation in geoengineering decision-making.

3. Disclosure of geoengineering research and open publication of results.

4. Independent assessment of impacts.

5. Governance before deployment.

Now, these sound pretty good as a set of basic principles, particularly if your goal as a researcher, or as the institution or nation funding the research, is to get everyone onboard before you start. Among other things that might avoid having someone turn up later to accuse you of making things worse, at least locally. Geoengineering liability is a serious concern at the individual and institutional level, and it could extend to being considered an act of war at the national level, if things turned out really badly. Unfortunately, when I consider how these principles might actually work--including stifling the involvement of for-profit companies in either the funding or actual R&D role--I believe they describe a likely path to doing nothing. Imagine having tried to get the delegates at Copenhagen to agree to let someone put finely-divided salt particles into the atmosphere over, say, the Arctic, to make clouds more reflective. Might as well have tried to sell them the Brooklyn Bridge at the same time.

That's the core of the problem as I see it: If we do end up needing to deploy geoengineering, it's likely to be precisely because we were unable to get every country on earth--or even just the small subset of large emitters--on the same page with regard to climate change, let alone establish a universally-trusted body to oversee their mitigation efforts. If we yoke geoengineering to the same UNFCCC/IPCC process that brought us the Copenhagen Climate Conference and the Kyoto Protocol, then we might as well forget it and try to figure out where to invest in the likely new beachfront property of the 2050s. In any case, as appealing as the Oxford Principles might seem from a stakeholder-engagement perspective for implementing large-scale geoengineering someday in the future, they look too unwieldy to guide the small-scale R&D efforts that would be needed to determine which, if any, of these schemes actually have merit.

One possible alternative would start with the same concept of climate forcing that underpins today's climate models. (And by the way, any serious geoengineering effort is going to require really good, trustworthy global and regional climate models, the inherent limitations of which are one of the main complaints of climate skeptics.) The observed increases in CO2 and other greenhouse gases equate to roughly an extra 2 watts per square meter of heat radiation retained by the earth, out of a total average influx of around 240 w/m2 at the earth's surface. So if 1% more radiation/retention is enough to cause the global warming we have observed, then what is the maximum equivalent level of geoengineering testing we'd be willing to tolerate to see whether any of these techniques might help? 0.01%, or 1/100th of the scale of the problem itself? And what would be the most any one experiment should be allowed to fiddle with? 0.0001%, or one part per million, allowing at least 100 small experiments under the overall limit? (For experiments dealing with carbon-removal, rather than radiation management, this forcing threshold could easily be converted to its tons-per-year of CO2 equivalent.) Whatever the level, the idea would be to keep any individual experiment, and all of them together, below the level at which they could make things noticeably worse by accident--with a healthy margin for error--without preventing any work from being done on this at all.

Some regard geoengineering as yet another outgrowth of our technological hubris and thus unworthy of further research. While I respect anyone's right to that view, I would also question their commitment to the survival of the human race. That's because I'm deeply skeptical that our current approach to climate change can work fast enough and on the necessary scale to avert the worst outcomes scientists suggest we face. We already live in a geoengineered world that couldn't support a fraction of its current population if we returned it all to its natural, pre-industrial state. That's not a license for unlimited tinkering with our environment, and perhaps that's the underlying concern: that the same techniques that might be applied to reduce the impact of climate change might eventually be employed in risky attempts to fine-tune an even more optimal climate than the one we inherited. Science is like that, as demonstrated by nuclear proliferation and questionable medical practices. But while I share those misgivings with respect to the potential misuse of geoengineering, I sure want us to have some of these options in our hip pocket if we ever really need them.

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Mustangs and CAFE Standards

Over the weekend a review of Ford's new 6-cylinder Mustang in the Wall St. Journal included an interesting perspective on the contribution of stricter Corporate Average Fuel Economy (CAFE) standards to the production of a car that provides both better fuel economy and more horsepower than the preceding model, in the absence of market incentives like higher fuel prices or taxes. While I have some quibbles with the reviewer's interpretation of the sequence of events involved, he does clarify the choice we've made in pursuing vehicle efficiency gains through a mainly regulatory, rather than a more market-based route. That choice implicitly trades off obvious costs at the gas pump for hidden ones in the sticker prices of new cars, while providing nearly unlimited scope for tampering to promote specific, favored technologies, as exemplified in the joint EPA and Department of Transportation CAFE and tailpipe emissions rules that were finalized last week.

The review in question concerned the 2011 Mustang equipped with a Duratec V-6 engine developing 305 horsepower but still managing a respectable 31 highway miles per gallon, a 29% improvement over the current V-6 model and a nearly 35% improvement over the current base V-8 with which the performance of the new, more powerful six might reasonably be compared. With its 19 mpg in city driving, the effective overall 24 mpg of the new model hardly puts it into competition with efficiency leaders like the Prius or Ford's own 39 mpg Fusion hybrid, but then I'm not sure how much time the typical Mustang buyer would spend looking at such cars, even if they achieved 100 mpg. More importantly, the most cost-effective fuel savings--and thus reductions in both oil imports and greenhouse gas emissions--will for some time come from improving the fuel economy of ordinary, non-hybrid cars. Consider that the new Mustang will save the average driver 130 gallons of gasoline a year compared to the old one. Buying a hybrid Fusion instead of the regular 4-cylinder Fusion saves only 40 more gallons per year than that, though at an extra cost of at least $3,295 on the sticker price.

It's debatable whether Ford would have produced a car like the 2011 V-6 Mustang without the tougher CAFE standards set by the US Congress in late 2007 and just finalized this April 1st. While the Wall St. Journal's new car reviewer sees clear cause-and-effect and wishes to "raise a cheer for government fuel economy regulations," I can't help wondering about the impact of gasoline price volatility during the product design cycle of this car. The last time I took a serious look at the subject, car companies spent three to four years creating a new model or major redesign of an existing model, tooling up to implement it, and then starting production. In 2007 US retail gasoline prices averaged $2.84/gallon and were coming off the first-ever summer in which monthly-average prices broke the $3.00 mark and on their way to $4.00 just a year later. I see as much causality in the arrival three years later of a 31 mpg Mustang as in the much less fortuitous arrival in 2007 and 2008 of various big SUVs and pickups that would have been designed in 2004-5, when gas prices averaged $1.89 and $2.31, respectively. Although I'm sure that the impending changes in CAFE standards influenced Ford's design department to develop products like the Fusion hybrid and the new Mustang, there's also good reason to suspect that Ford responded to changing fuel prices in much the same way that consumers did, albeit with an inherent lag of several years.

As long as it remains politically suicidal to take steps to increase fuel prices and provide consumers and carmakers with some certainty that they will remain high, we can't rely on a volatile fuel market to provide consistent signals favoring higher fuel economy. There are also solid arguments for holding down fuel taxes, unless their revenues are dedicated to improved highway maintenance or returned to taxpayers via rebates or breaks on other taxes. In the absence of higher gas taxes, however, the main policy levers available for reducing national fuel consumption are high taxes on gas guzzling cars, such as those levied on engine displacement in the UK and elsewhere in Europe, or the CAFE pathway the US has followed since the 1970s--and that unintentionally helped spawn the entire SUV fad through its infamous "SUV loophole."

In its latest incarnation CAFE treats SUVs less generously but still provides manufacturers with credits for producing flexible fuel vehicles capable of burning E85 that consumers don't seem to want, by letting carmakers count them as though they used E85 half the time--1% is more like it--and then only counting the 15% gasoline content of the E85 consumed for that half. The new CAFE also treats plug-in electric vehicles as though they consume no energy at all and somehow displace two non-electric cars each. While the latter distortion might not turn out as badly as the SUV loophole, these rules--along with hefty EV subsidies for consumers--are certainly going to push carmakers in the direction of making a smaller number of full EVs at the expense of a much larger number of non-plug-in hybrids, or even modestly improved cars such as the new Mustang, which must have required a considerable investment in technology and production retooling. Stacking the deck in that manner looks like a very expensive way to reduce greenhouse gas emissions, compared to other options. I'd much rather have seen a simpler set of rules--spelled out in many fewer than 837 pages--that established the required mpg and emissions outcomes by year and left it to carmakers and consumers to work out how to achieve them.

It's easy to forget how much the fuel economy of comparable cars has improved during my lifetime. The Mustang review caught my eye because my first car was a used '65, a quintessential baby boomer car that defined its entire category. Yet even when driven conservatively, the best I could eke out of mine was about 14 mpg, and 12 wasn't an unusual result. You can run two of this year's model on the quantity of fuel my '65 consumed, and in considerably greater comfort and with about 1% of the non-greenhouse emissions. How much of that improvement should be attributed to CAFE standards, the general advance of technology over the intervening years, or because fuel prices have finally surpassed the inflation-equivalent of the $0.60/gal. or so that I was paying when I bought my first car?

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Half Full and Half Empty?

Yesterday's announcement by President Obama that his administration would allow new offshore drilling on selected portions of the Outer Continental Shelf (OCS) that had formerly been off-limits yielded a variety of reactions. Energy industry leaders were cautiously optimistic, environmentalists were disappointed or "outraged", and the Washington Post's print-edition headline called it a "political maneuver." From my perspective, it constitutes a welcome concession to the reality that the day when renewable energy sources can pick up the entire load now carried by fossil fuels is a long way off--decades, not just years--and that until then we still have some important levers to pull in minimizing the amount of foreign oil we must import. Yet however it plays in the Congressional dance to devise a "comprehensive energy bill"--the current terminology for describing legislation regulating greenhouse gas emissions--it clearly falls short of what would be required to put the medium-term energy needs of the country on a truly secure footing.

On the positive side, yesterday's announcement sets the stage for oil producers finally to gain access to offshore acreage that had been off-limits for decades as a result of a combination of Congressional and Executive drilling moratoria. So while it does not strictly speaking open up these areas for drilling--that happened in 2008 when the previous bans expired or were lifted--the President made it clear that he will not reinstate a ban for the Atlantic coast south of New Jersey or for the Chukchi and Beaufort Seas off Alaska. If you are concerned about the energy security of this country and the enormous sums we pay to import oil from abroad, that is good news, even if it will take years to go through the process that Interior Secretary Salazar has outlined.

As usual the traditional media has gauged the potential resources involved with its customary lack of insight into how oil & gas are produced in the real world, comparing them to a few years of total US consumption. The subtext here is clear: how much should we risk for a couple more years' supply of a depleting resource? The reality is quite different. Even at the low end of 39 billion barrels of recoverable oil cited by Secretary Salazar, the new zones could eventually contribute several million bbl/day for a couple of decades. If ramped up quickly enough, that could overcome the underlying decline rate of current US output and add significant net production for a decade or two, at a time when competition for the oil we are currently importing is likely to be fiercest: as the growth of Asia continues and the domestic energy needs of exporting countries skyrocket, but before renewables, conservation and vehicle electrification can achieve their full impact.

Perspective is crucial in situations like this, so let's start with some figures already familiar to my regular readers. If 39-63 billion barrels of oil doesn't sound like much compared to the vast energy appetite of the US, which even in last year's recession-dampened economy consumed 18.7 million bbl/day of oil, or when compared to the enormous reserves of the Middle East, consider that cumulative US oil production stands at around 200 billion barrels from reserves that at no point exceeded 39 billion barrels. If that sounds like a contradiction, it's because the industry has always found more oil and more ways to extract it than expected when the resources were first discovered. There is no reason to believe that won't still hold true, particularly compared to resource estimates based on technology that was current when PCs running on Intel's 286 chip were cutting-edge and cellphones were scarce and looked like bricks.

It's also worth thinking about the prospect of an extra couple of million barrels per day of domestic oil in the context of how much renewable energy we'd have to produce to provide a similar quantity of energy. Wind turbines and solar panels don't even enter into this discussion, because they do not displace any meaningful quantity of oil. That's because they produce electricity, and last year oil accounted for less than 1% of all the electricity generated in the US. On an energy-equivalent basis, each million barrels per day of additional oil production equates to the energy content of 27.9 billion gallons per year of ethanol, or more than 2.5 times last year's record US ethanol production. In terms of useful energy contributed after accounting for the energy used to produce it, that comparison grows to more like 5x: the equivalent benefit of more than 50 billion gallons per year of ethanol, or about half-again the ultimate contribution of the entire 36 billion gallon federal Renewable Fuel Standard. And even if we threw away everything but the gasoline yield from this oil, it would still displace as much imported energy as 40 million plug-in electric vehicles--for which we'd still need to come up with an electricity source.

So if there's so much potential in the areas that the President has offered up for drilling, why would anyone be disappointed or see this as a glass half empty? For starters, it imposes new drilling bans on the entire Pacific Coast and carves out of the eastern Gulf of Mexico some of the most prospective acreage closer to the Florida coast, where large natural gas deposits have already been found. And of course it doesn't even mention the Arctic National Wildlife Refuge, which the USGS estimated to contain another 10 billion barrels, give or take a few billion. Simply put, outside of the Gulf of Mexico more acreage will again be placed off-limits than will be made available for drilling, and even the expansion into the eastern Gulf will require the approval of a Congress that has not looked favorably on drilling there since it placed its own ban on that region in 2006. My disappointment at those limitations is mitigated by the knowledge that drilling there now would be a non-starter, politically. Better to begin where state and local governments are willing and some even eager. Closer to home for me, it appears that Secretary Salazar is postponing the bidding on the Lease Sale 220 area off Virginia that I blogged about a couple weeks ago from 2011 into 2012, holding up lease revenues my state badly needs to plug serious budget gaps. (This would also require Congressional approval of revenue-sharing for these bids and royalties, similar to what the Gulf Coast states currently enjoy.)

In his comments at Andrews Air Force Base President Obama made it clear that additional offshore drilling must be viewed in the context of a broader plan for addressing US energy needs. Yet because of the structure of our energy economy and the enormous relative impact of additional oil production compared to renewables at their current scale, only massive fuel economy improvements and conservation can contribute as much to reducing US oil imports, which even after last year's big drop still averaged 9.7 million bbl/day and cost approximately $210 billion. Opening up more of the OCS, which lies beyond visible range from the nation's shoreline, is a good step forward, and it is one that future administrations of both parties can build on.

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Gasoline from Sugar

It's ironic that with all the current hoopla about various alternative fuels and the electrification of personal cars--hybrids and several kinds of plug-in electric vehicles--it turns out that some of the most promising advanced energy technologies under development are designed to produce more of the same fuels that have powered cars, trucks and planes for the last century. Shell and its technology partner Virent made news this week with an announcement about their demonstration facility for turning sugar from beets or other crops into gasoline. Nor are they alone; many other companies are developing processes to turn renewable biomass into hydrocarbons, rather than the alcohols or esters that have been the principal biofuels of the last couple of decades. If any of these are successful on a scale that could compete with petroleum, it would force us to rethink our assumptions about the sustainability of what we put into our gas tanks.

The first assumption we'd need to jettison is that ethanol is good and gasoline intrinsically bad. The US and Brazil have made major commitments to using ethanol as a fuel, though from very different agricultural pathways and with very different energy, economic and emissions results. In many ways, this was making a virtue of necessity, rather than latching onto a really great fuel that had somehow been overlooked or conspired against for decades--a view you'll hear from some ethanol boosters. Unfortunately, ethanol still has all sorts of problems, even when it's made from sugar cane in the tropics using the most efficient process in the world today. Start with the fact that it's a second-rate energy carrier, delivering only 65% and 59% as much energy to the vehicle as gasoline or diesel, respectively. And while biodiesel doesn't share this drawback with ethanol, it does suffer from similar constraints on the amount that can safely be blended into fuel destined for vehicles that haven't been adapted to run on high-percentage biofuel blends.

Thanks to subsidies and mandates for its use, US ethanol consumption has expanded to the point at which we are approaching the accepted 10% limit on its inclusion in gasoline for cars not designated as Flexible Fuel Vehicles, or FFVs. The ethanol industry and its supporters have been trying to get the government to relax that limit--a move that would benefit them, but at the cost of putting more consumers' cars at risk of mechanical problems and diluting the value of what we are buying at the gas pump. No one is going to give you a discount for gasoline with 15% ethanol in it, instead of 10%, even though it will reduce your miles per gallon and thus your car's driving range by about 2%.

If the plant sugars currently being used to produce ethanol could instead be used to produce renewable gasoline and diesel fuel, it would avoid all of ethanol's compatibility and energy-content limitations, while reducing the cost of distributing fuel to service stations. Instead of having to send ethanol halfway across the country in rail cars or trucks to blending terminals, because it can't be shipped in one of the petroleum products pipelines that crisscross the nation, biogasoline would share the same highly-efficient transportation system that grew in tandem with the post-World War II expansion and dispersal of US population centers and industry. And it would do all this while emitting lower levels of greenhouse gases than petroleum-based fuels, perhaps even lower than those from corn ethanol, depending on the energy inputs required to process it. And if the sugar-to-gasoline process can be bolted onto a commercially-viable process for turning plant cellulose into sugars, biogasoline's lifecycle emissions could be reduced much further.

Now let's put this into perspective, before we conclude it sounds too good to be true. As the press release notes, Shell and Virent have a long way to go to scale up a facility making 10,000 gallons per year (gpy) of gasoline--under a barrel per day--to something that would compete with ethanol facilities producing 100 million gpy (6,500 bbl/day) or refinery units making 50,000 bbl/day. Many a process that looked good in the laboratory has failed to make that transition, which probably couldn't be accomplished in one step in any case. So, at best, this is still years away from commerciality and possibly a decade or more from wide deployment. And unless it can be easily adapted to use cellulosic feedstocks, it is subject to the same practical limitations on food crop production as current biofuels, and the same food vs. fuel competition that proved so divisive a couple of years ago, when corn prices and fuel prices had both spiked--a hardly-coincidental occurrence, considering the energy intensity of corn production.

If it does work, however, its practical advantages over ethanol are compelling, not just from the perspective of the oil industry, which would be relieved to be rid of the cost and logistical headaches ethanol has caused, but also for consumers and taxpayers. It's clear from the analysis supporting their new Renewable Fuel Standard regulations that the EPA regards biohydrocarbons as a viable alternative to current biofuels, and it just might be the pathway to ending our interminable subsidies for ethanol: 32 years and counting.

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What's the Alternative to KGL?

Although I haven't yet seen the latest discussion draft of the "tri-partisan" energy and climate proposal of Senators Kerry, Graham and Lieberman (KGL), I've been thinking about its rumored provisions for a while. These apparently include a cap & trade system for the electricity sector, eventually expanding to include most industries, and a "carbon fee" on petroleum fuels that would be linked to the cap & trade market, along with measures to increase domestic energy production from a wide range of sources, including oil. It occurs to me that the most important question about the resulting legislation may not concern its actual contents, but what we ought to compare it to.

For all the remaining uncertainty about the risks of climate change, which this week's Economist details, the US regulatory baseline for it has already moved beyond doing nothing. Having issued its Endangerment Finding, the EPA is gearing up to regulate greenhouse gas emissions from both stationary and mobile sources. Almost any other approach to these emissions would be preferable, since regulating point sources ignores the fundamental differences between CO2 and the traditional pollutants like the oxides of nitrogen or sulfur they've been dealing with for decades. If we fail to capitalize on the helpful reality that all GHG emissions anywhere are essentially equivalent in their effect on the climate, we likely won't tackle the cheapest reductions first, and that could cost us a fortune. Yet even without some form of national greenhouse gas legislation or regulations, these emissions are already being regulated at the state level through efforts such as California's A.B. 32 and the Regional Greenhouse Gas Initiative. In that context, whatever one's assessment of the underlying science, we all have a stake in Congress passing the most practical and cost-effective greenhouse gas legislation possible. Sadly, the blatant favoritism and profligate spending of the Waxman-Markey bill that passed the House last spring disqualify it on both of these criteria.

One of the biggest challenges for KGL is ensuring that their bill doesn't end up as a bloated monstrosity like Waxman-Markey. You don't need 1,000 or more pages to define a cap & trade regime or a carbon tax, or to set up "cap & dividend", under which most of the money collected from selling emissions permits would flow back to taxpayers. (That approach has its own problems.) You do need hundreds or thousands of pages, however, to accommodate all the pork and giveaways that seem to be necessary to get any major legislation passed these days, one vote at a time. Careful scrutiny of the text of the Waxman-Markey bill suggests that there is not a majority of this Congress--or perhaps of any actual Congress we're likely to get--that sees the necessity of crafting a clear response to climate change as trumping the need to score goodies for their districts and favorite causes or constituencies. Messrs. K, G and L have their work cut out for them, finding enough support for their proposal through its primary provisions, rather than accreting dozens or hundreds of tit-for-tat favors.

Perhaps the key to a successful bi/tri-partisan bill could be found in its approach to the uses of the enormous revenues it would generate. The healthcare bill that passed the House last weekend only achieved deficit neutrality by taking a huge bite out of the revenues and savings that might otherwise have gone to bringing Medicare or Social Security back into balance, and that's not a partisan talking point. If we are indeed facing an entitlements crisis on the scale that many expect, and some form of consumption tax is on the horizon as the only viable revenue alternative to a return to the bad old days of confiscatory taxation on upper-income Americans who already pay 86% of all the federal income tax collected, then energy might be a good place to start. A fee of 25 cents per gallon--roughly equivalent to $25/ton of CO2 emitted--on gasoline, diesel and jet fuel would collect on the order of a half-trillion dollars over 10 years.

If KGL do go down the path of a carbon fee on petroleum, the biggest mistake they could make would be to follow the advice of the economists and experts who advise collecting it as far "upstream" as possible. Taxing refineries is a sure recipe for offshoring one of the few remaining basic manufacturing industries in this country that has managed to remain globally competitive, even if it has fallen on hard times recently. Likewise, taxing US oil & gas exploration and production would make them uncompetitive with foreign sources free from such burdens. Instead, since most of the emissions from the petroleum value chain occur during consumption, rather than production, the best place to apply a carbon fee--can't call it a tax--is at the gas pump. This would subject domestic and imported fuels to the same cost without having to go through gyrations to manage "leakage", only to find out later that they violate international trade rules. Best of all, the government already has the mechanism in place to collect such a fee without adding another expensive bureaucracy: Simply tack it onto the federal fuel excise tax and post the amount on every fuel dispenser whenever it changes.

In a perfect world, we'd establish a price on carbon using a simple and transparent cap & trade mechanism and return every penny collected to the public, in order to minimize the burden on the economy while shifting it in the direction of greater energy efficiency and lower emissions. In the last several years it has become abundantly clear that we don't live in that world, if we ever did. I still favor cap & trade as an efficient mechanism for price discovery, but not if its implementation comes with as much baggage as Waxman-Markey carried. I will eagerly await the details of the KGL proposal to see whether they can navigate the narrow gap between an effective, efficient approach to GHG management and the political forces seeking to feast on the bonanza it represents.

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Growth vs. Emissions

An op-ed in today's Washington Post raised some thought-provoking questions about the difficulties faced by developing countries seeking to meet the energy needs of their citizens while minimizing their contribution to increasing global emissions of greenhouse gases. The problem is even trickier for South Africa, which is rich in coal--the literal bête noir of anthropogenic climate change--and relied on by neighboring countries for their electricity supplies. In the op-ed South Africa's Finance Minister, Mr. Pravin Gordhan, pleads for greater understanding of his country's situation by the World Bank and other international lenders that prefer to fund renewable energy projects and regard additional coal power capacity as counterproductive. This dilemma is central to the challenge of reducing global emissions of CO2 and other GHGs without penalizing the growth necessary to lift billions of people from poverty--or pushing others elsewhere back into it.

South Africa needs more generating capacity because its national utility Eskom has struggled to keep up with growing demand for power. There are many reasons for this, including social acceptance of electricity theft by those unable to pay for it, but mainly because until the recession the country's economy was growing at a growth rate of over 5% in real GDP. This has led to chronic blackouts and constraints on some of South Africa's key industrial sectors. The need for more capacity is thus urgent, so timing matters. Although the country currently gets about 5% of its electricity from nuclear power plants, new nukes couldn't be built fast enough to avoid years of tight power supplies. And if your grid is already unstable, adding lots of intermittent or cyclical wind and solar power isn't going to help much, without also adding expensive grid management and power storage technology.

Another aspect of the problem is financial. Even if renewables were economically attractive compared with building more coal-fired capacity--they are not without subsidies on a scale that countries like South Africa can't usually afford--much of their economic benefit comes from the trade-off between high up-front equipment costs and very low operating costs with no direct fuel expense. That's great if you have an indigenous renewable energy manufacturing base or a large, diverse economy that can easily absorb the cost of importing such equipment from other countries. However, if you don't fall into either category and the fuel being saved happens to be one of your most productive resources, this trade-off isn't very compelling. Not only does coal generate most of South Africa's power today, but it is also a major source of transportation fuels from the giant coal-to-liquids plant at Secunda. As a result, South Africa ranks ahead of France and Australia in total CO2 emissions.

According to Mr. Gordhan, South Africa wants to invest in renewables and play a constructive role in managing global emissions, but it also has an obligation to meet the energy needs of its and its inter-connected neighbors' population, for many of whom this translates into basic necessities. Without significant international energy assistance and investment, the priorities for such countries must put current needs ahead of future risks. Yet the provision of such assistance is fraught with other risks, and it cannot be extracted through the assessment of blame for historical emissions that occurred long before the current consensus on human-induced climate change coalesced. I don't see any easy answers to this, short of a cheap way to capture and sequester CO2 from coal-fired power plants, which is the subject of much research and not a little controversy.

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The Need for Reliable Energy Data

I'm back at my desk after some business travel, and the item in this morning's batch of news that caught my eye concerns the reliability of the oil industry data collected by the Energy Information Agency of the US Department of Energy. The article in today's Wall St. Journal (subscription may be required) described EIA's methods for tallying oil inventories and other industry data as "antiquated and out-of-date." Nor is the Journal the first to draw attention to this issue. Last year US News & World Report published a story that reached a similar conclusion as the Journal: the EIA doesn't have enough money in its budget to do both the work expected of it and improve its processes. Yet I can't help wondering whether the real issue we ought to be focusing on is improving the accuracy of the oil data, or getting the data for other, increasingly important energy sources up to at least the same level of timeliness, comprehensiveness and accuracy as those for oil.

Before writing this, I had a quick conversation with one of the experts at the American Petroleum Institute who is involved in reviewing and analyzing the weekly industry statistics API puts out to subscribers. Although gathered independently and on a voluntary, rather than government-mandated basis, API's reports generally reflect the same underlying data and sources as EIA's. The last time I was actually involved in submitting EIA/API data from an operating facility was in the early 1980s, when everything was faxed in and compiled manually. I was surprised to hear that some of the data still comes in that way, though most of it is apparently gathered electronically, either though electronic data interchange or via email. What he emphasized to me, though, was that regardless of how the data is actually assembled and reviewed, it actually represents an extremely accurate survey, covering something like 85-90% of the industry, with non-filers' results estimated from less frequent census-type reports. That's much more comprehensive than the sampling rate for many of the other economic statistics on which the market depends--and to which it sometimes reacts violently.

One of the problems with any such system involves how the information is used. As long as traders focus so keenly on week-to-week changes, rather than the totals, this will tend to amplify the impact of any errors that creep in. For example, in last week's EIA statistics, the entire US commercial inventory of crude oil stood at 344 million barrels, reflecting a 1 million barrel increase from the previous week. An error of just 2 million barrels in either direction--or 0.3% of the total--could have increased that inventory build to 3 million barrels or swung it to a 1 million barrel drop, with very different outcomes for oil prices. While it would be nice to think errors of that magnitude could be avoided entirely, should the market be so sensitive to such changes, knowing that no assessment like this can ever be made 100% accurate, no matter how precisely it is assembled?

While the system might lend itself to improvements such as requiring electronic data submission by all participants and adding more analysts to scrutinize the filings for errors and omissions, I suspect the more urgent priority is expanding its scope to encompass all of the energy sources on which we now depend. After all, when the current national energy information system was first devised petroleum-based fuels were essentially the whole game for transportation energy, while still accounting for a significant portion of the input to fossil fuel power plants. Today ethanol satisfies roughly 8% of US gasoline demand, and the 14-16 million barrels of inventory that the ethanol industry keeps on hand is the energy equivalent of about 7% of the 200-230 million barrels of gasoline and blending components the oil industry has at any point. Those percentages are mandated by law to grow significantly in the next decade, as biofuels displace petroleum products.

How much longer should we be satisfied with production and inventory data for biofuels that are weeks or months out of date, when we require accurate weekly updates on petroleum and its products? And consider that this picture will only become more complicated as an increasing proportion of our needs are satisfied by various renewable and distributed energy sources. If we can spend billions improving the management and storage of health data, wouldn't it be worth widening our net and spending an extra few million to get a better handle on the energy flows and stocks upon which the entire economy depends?

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