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Energy Policy

A Vision Without Vigor

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This article deals with the President’s Climate Action plan; it is complimentary to “America’s Bright Energy Future.”

The previous article explored the implications of the Energy Information Administration’s (EIA) report[1] on World Shale Oil and Shale Gas reserves. The report showed that the world’s largest reserves of shale oil and gas are within the borders of the North American Free Trade Agreement zone; and thanks to the advances in hydraulic fracturing, North America could very well be the “Middle East” of the XXIst century. The report also shows how China, Brazil, India and the EU all have major shale energy reserves within or next to their borders. The implication is that the future may see a surge in demand for more efficient natural gas to the detriment of dirtier coal, which would help reduce greenhouse gas emissions (GHG) and buy time to continue implementing the other necessary policies to prepare for and mitigate climate change.

The President’s Climate Action Plan is a comprehensive review of those “other policies” which are aimed at moving the world’s largest economy towards cleaner and more efficient energy usage. As such, the plan should target and prioritize those sectors of the economy that have the greatest impact on GHG emissions, and can most benefit from enhancements in technology and efficiency.

A Vision without Vigor

The President’s proposals are a mixed bag of policies; some good, some improvable and some notable by their absence. The Administration builds on some key successes from the past and recognizes some important steps that can be taken without the need for Congressional legislation (something which is probably not forthcoming anyway). The Obama Administration can take some credit for the change in tendency in U.S. energy intensity[2], which has notably improved since 2009:

gdpandenergy

Most notable is the fall in GHG emissions, which have fallen when compared to both GDP growth and population growth. Electricity consumption, which has grown faster than population and is another major contributor to GHG, seems to have tapered off in 2011 after a sharp recovery in 2012. By any measure, energy efficiency and GHG intensity have improved under President Obama.

Returning to the Climate Action Plan, it has some good points:

  • Improved emissions standards for existing and new power plants: The generation of electricity accounts for about 33% of all US GHG emissions[3], and coal produces 80% of the GHG emissions from that activity. Currently, there are no Federal guidelines for power plant emissions; there is a lot of room for improvement.

electricity

And the savings could be enormous. As a hypothetical exercise, the complete substitution of coal-sourced electricity by natural gas could cut carbon emissions from that activity by almost 60%, from 2,131 million metric tons of C02 equivalent to 911 million metric tons. That amount could be reduced even further with stricter regulations on[4] the capture of methane – a more powerful greenhouse gas than carbon – which is a byproduct of the extraction and transportation of natural gas, oil and coal.

replacement

  • Double renewable energy production: The Obama Administration has been a strong proponent of renewable energy and technologies and the government has provided generous subsidies to foment them. The result has been an impressive growth in renewable energy production in the President’s first term:

energyproduction

renewables

It is worth noting that the uptick in renewables really began in 2000 under President Clinton and continued to grow strongly under President W. Bush. The greatest growth has been in wind and solar power, though biomass has also benefited greatly from Federal mandates to increase the percentage of biofuels used in the economy.

This approach is not without costs, both direct and indirect. The push for more biomass fuels contributed greatly to the short of corn for animal feed during the 2012 drought, as well as to the sharp increase in prices for that commodity. Between the drought and the requirements of the Federal mandate, the U.S. actually had to import corn from Brazil. There are also the direct costs of the subsidies to renewables, which are very large in order to overcome the high cost of generating electricity from these sources. Solar power receives the largest Federal subsidies at $775 per megawatt/hour of electricity generated. Wind comes in at $56 per Mw/h, while other sources receive very moderate subsidies (on a Mw/h basis, not in absolute terms).

 weathercosts

A direct comparison of direct Federal subsidies is misleading, however, considering that the use of fossils fuels has externalities that are not being included in the overall cost of using those fuels, even though they should be. If we consider that GHG emissions are creating and exacerbating “extreme” weather events, if we account for the yearly damage caused by those events and assign them to the fossil fuels that emitted the culpable GHG’s, we come to a more accurate picture of the “true cost” to our economy of our fuel choices.

hiddensubsidies

The President is quite right to push for a doubling of renewable energy production, which would increase the total percentage of electricity generated by these sources from 5% in 2012 to 10%, so long as these were not displacing power generated from another non-polluting source. In other words, it is useless to build wind farms if they are replacing hydroelectric dams or nuclear plants; they need to replace coal-fired plants mostly, and then gas-fired plants.

  • Increase investments in climate science: This is urgently needed. Even though much more is known about weather patterns, oceanic currents and the dynamics of the global climate, these interactions are so vastly complex, that scientists are still unable to build a good predictive climate model.That is not the same thing as say that climate change is a hypothesis. We know the effect of atmospheric greenhouse gases on rates of heat dissipation; we know and can observe the loss of ice in both the poles; we can calculate the impact of changes in albedo on solar energy reflection; we have paleolithic and extraterrestrial evidence[5] of changes in climate along with changes in the composition of atmospheric gases. So while we don’t have a climate model that can today predict the exact impact of an increase in atmospheric carbon, we know that climate impacts can be unpredictable, sudden and very large. The weatherman may not be able to tell exactly when or for how long it is going to rain, but you’d be foolish to leave your umbrella at home.

    Because questions still exist with regards to size and timing of events, to the possibility of “tipping points” and to a host of other climate related questions, it is proper that the Federal government continue leading efforts to understand and quantify them. It is, after all, the responsibility of the government to defend the people and territory of the United States from harm, including those caused by natural catastrophes.

Other parts of the Administration’s plan could be improved upon:

  • Improved fuel efficiency standards for heavy transport vehicles are good and necessary, but even better would be a commitment from the Federal government to convert its entire fleet of civilian vehicles to natural gas;
  • The commitment to expand and modernize the electrical distribution grid is critical – low levels of  investment for decades has left many states, like California, with dangerously antiquated grids incapable of handling peak loads. Additionally, a more modern “smarter” grid would improve efficiency in supply and consumption, as well as enable switching between renewable and traditional sources in a more optimal fashion. However, the current plan makes no mention of tax incentives or guaranteed loans to the utility companies who will have to make the large investments needed;
  • There is no change in the biofuels policy, which is heavily biased towards corn-based fuels, with the follow-on impacts on prices for human food and animal feed.

All the Wrong Tools

Positive aspect the plan does have, but the overall sensation is one of a vision without vigor: it lacks the bold action included in previous years. This is undoubtedly as a result of previous Congresses failing to enact the bolder initiatives and the wisdom acquired by the Administration as a result. The consequence is that the two most critical elements of a good climate action plan are precisely those that are missing from the President’s initiative:

  • No Carbon Tax: Attempting to address climate change without establishing some form of market-based incentive to reduce greenhouse gas emissions is like releasing a crack addict on their own recognizance “not to do it again.”

The power of the carbon tax is two-fold: it turns externalities into quantifiable costs that private enterprise can plan for and respond to; and, it can be broadly applied and cheaply administered to change behaviors across the whole economy, not just in certain sectors. These two benefits are what make the carbon tax an indispensable element of any climate action plan.

Not only cheap to administer: the tax revenue would more than pay for the entire administrative apparatus needed to enforce and collect it, with plenty to spare. Imagine a hypothetical carbon tax of $20 per ton of CO2 equivalent. With U.S. carbon emissions in 2011 equal to 6,700 million metric tons, such a tax would have raised a maximum[6] of 134 billion dollars.

flat20tax

As a point of reference, the entire revenue generated by the ridiculously inefficient 35% corporate tax was 181 billion dollars, a year in which corporate profits were soaring back above pre-crisis historical maximums. Nor does a carbon tax have to be only about carbon, or carbon equivalents. Not all GHG’s trap heat to the same degree: some gases are far more powerful than carbon dioxide in this respect. The tax could be sloped to account for this, thus incentivizing emitters to invest in ways to reduce these emissions in particular.

slopedtax

 A well-sloped tax regime would price the more dangerous gases at greater than their GHG Potential. For example, methane (CH4) is 21 times more heat retentive than carbon dioxide (CO2): in order to incentivize methane emitters to take action, the methane tax per ton should be 25 times (or more) than that of carbon dioxide. Such a tax regime would actually raise even more revenues than a “flat” carbon tax: but that is not the point at all. The real purpose is to get the most dangerous gases out of the economic production change to the greatest extent possible.

The alternative to a carbon tax is more regulation, which is precisely what the President has opted for. The EPA can write reams of rules, regulations and mandates; hire throngs of inspectors; and probably create far more economic waste for private industry than a mere $20 per ton tax. Besides adding layers and layers of bureaucracy and complexity to an economy where these are in abundance, these sorts of micromanaging regulations are rarely effective or efficient. The possibility and temptation to cheat are too great. Just look at the financial system if you doubt the truth of this.

Coal-fired plants today could invest in carbon sequestration technologies, though most don’t because there is no economic incentive to do so. Consider two situations: one in which the Administration regulates a maximum  amount of carbon emission per plant and requires CCS to be in place; another where Congress passes a $20 per ton carbon tax that will automatically increase by 5% every year. In the first case, a coal-plant will make the minimum investment necessary to be in legal compliance, but no more. There is also the possibility that the plant will be out of compliance at time and be able to influence regulators to not apply fines or take other action.  In the second example, the plant has a substantial and measurable incentive to continue reducing carbon emissions by investing in new technologies. Those savings go directly to their bottom-line, and make the likelihood of adoption of carbon capture and storage technologies more likely:

 ccs

Given the high cost of current carbon capture and storage technologies, it is unlikely that a regime based exclusively on regulation will provide the necessary impetus to investment and development which will make this a viable alternative. If anything, the cost of CCS technology argues that a carbon tax should be set higher than $20/metric ton if we want the rapid adoption of carbon sequestration across the economy.

Herein lays the best hopes for a carbon tax: while conservative members of Congress and their constituents hate taxes in general, they are likely to hate greater government regulation and the tax on corporate profits even more[7]. Why? One reason is that a carbon tax does not fall exclusively on businesses: households would also pay the tax for their carbon emitting activities, such as gasoline consumption. The corporate tax on profits, by definition, falls exclusively on the corporations and their shareholders. Another reason is that the carbon tax could be mostly passed on to consumers in the form of higher prices for electricity and finished goods. Electrical demand in particular would be somewhat inelastic: people are hardly going to import electricity from China.

What would a $20/metric ton carbon tax mean for consumers? It would be the equivalent of[8]:

–          An increase of about $0.178 per gallon of regular gasoline;

–          An increase of about $11 per month in household electricity bills;

–          An increase of about $4.80 per propane tank used in barbecue grills.

This assumes that the full cost of the carbon tax was passed on to consumers, which is not clear, as we previously discussed.

  • Nuclear technology abandoned: Despite some language about “leading in nuclear technology” there is in fact no indication that the Administration plans to push for any new nuclear plants in the U.S. This is in sharp contradiction to the President’s bold talk of a “nuclear renaissance” in 2009 – prior to the disaster at Fukushima.

Between 2007 and 2009, the NRC received license applications for 25 new reactors from 13 companies. Despite the President’s support for nuclear power and the promise of large subsidies, those 25 applications have since been reduced to just 5 projects that are likely to be in operation by 2020. That is an enormous problem when you consider that 20% of our electricity is provided by nuclear power and the age of 104 civilian nuclear power plants operating in the U.S.

usnukes Consider that 63 of those 104 plants have already exceeded their original 30 year’s operating license and have been extended; and that another 29 will reach the end of their license within the next 5 years, and the future of nuclear power looks dim indeed.

The replacement of America’s aging reactors with new, safer, modular reactors would not only prevent an increase in GHG emissions, it could provide American firms with an important advantage in bidding for overseas sales. Nuclear is not quite as moribund in other countries as in the US, with China being a critical market. Every nuclear plant built in an emerging market is that many fewer coal plants needed.

Nuclear energy remains the cheapest, most scalable “green” energy we have available to us. Nuclear waste is, of course, a problem: but then again, so is the highly toxic byproduct of photovoltaic panel manufacturing and end-use disposal[9]. The concern for nuclear accidents is also justified, but accidents are far less likely with modern Generation IV reactors than with older technologies and worn-out equipment. The most potent argument in favor of at least one more generation of nuclear plants is the question: what would you replace them with? The answer is almost certainly coal- and gas-fired plants, not solar or wind.

The President’s Climate Action Plan should have called for a doubling of nuclear power as well as renewable souces: that would have brought the percentage of electrical energy production from nuclear and renewables above 50% for the first time since the Industrial Revolution began[10].

The President’s Climate Action Plan is an unambitious continuation of the most successful of the Administration’s previous measures with a heavy emphasis on regulation to attempt to achieve emissions goals. The ambitious and effective, but more politically difficult, goals of implementing a carbon tax and increasing nuclear power have not even been mentioned. This may be political realism, but it falls far short of what America needs. The plan seems to concede victory to the GOP opposition before there has even been a debate. It is not enough for the President to say he is “committed” to climate action if his actions fall so short on so many measures.


Sources and Notes

[1] Advanced Resources International, Inc., “EIA/ARI World Shale Gas and Shale Oil Resource Assessment,” prepared for the U.S. Department of Energy , June 2013
[2] It is not surprising that 2009 was the first full year of the Great Recession, which led to a large drop in all measures of energy consumption and intensity; but even so, none of the four measures have recovered their 2007 peaks despite the economy surpassing that level by 2011. The shale gas revolution has also had a major role in this trend.
[3] U.S. Greenhouse Gas Emissions Flow Chart, 2012, World Resource Institute; Department of Energy
[4] Among other things, methane is produced naturally by the decay of organic material: in wetlands, in landfills, in agriculture and animal husbandry.
[5] I refer here not to Little Green Men, but to the observation of the atmospheres of extraterrestrial bodies like Mars and Venus amongst others.
[6] No tax regime is 100% efficient; we could confidently estimate a carbon tax only being 80% efficient and thus generating about 105 billion dollars.
[7] See the excellent article by Ed Dolan: “Why Conservatives Should Love a Carbon Tax—and Why Some of Them Do,” 01 July 2013
[8] Calculations are from the EPA’s “Greenhouse Gas Equivalencies Calculator” page. Assumes that full cost of carbon tax is passed on to consumers.
[9] “Health and Safety Concerns of Photovoltaic Solar Panels,” Office of Innovative Partnerships and Alternative Funding, Oregon State Government
[10] “What is U.S. electricity generation by energy source?” FAQ, U.S. Energy Information Administration, 9 May 2013

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