Copenhagen: There must be a better way.
Posted on 22 October 2009 | No responses
As we watch the progress, or more likely lack thereof, in the run-up to the December Copenhagen Climate Change Conference (COP15), we keep thinking “there must be a better way.” We think the chances of a real “success” in Copenhagen, as distinct from a partial solution that is “spun” as being a success , are “vanishingly small” as one observer put it.
We are therefore leery of investments that depend too heavily on a global deal on carbon, at least for the near-term. Many alternative energy investments (solar, wind, smart grid) that would do well if a price were placed on carbon can also be justified on the grounds of rising fossil fuel prices alone. Other cleantech investments (e.g. Climate Exchange PLC–CLE in London) are more uniquely dependent on a price on carbon.
Is the UN even the right body to be pursuing a climate change treaty? We think of the UN as more of a debating society than a governmental body with a mandate and ability to get things done. Even if some agreement were to be reached, where is the believable enforcement mechanism? Is a grouping of the world’s 193 counties into “Developing” and “Developed” even a sound starting point since there are so many differences and needs among countries within each category? Developing countries understandably want to be compensated for what they see as sacrificing future economic development, but polls in developing countries say voters would not support it.
The US is said to be the key player, and the rest of the world seems to have learned from the Kyoto experience that trying to proceed without the US is unwise. US negotiators seem to have learned from the Kyoto experience too that the White House cannot take a position that is not already backed by Congress. And Congress does not appear likely to have taken a position in time. Maybe the world is trying too hard to reach a comprehensive multilateral agreement. Maybe no amount of effort will lead to an agreement among all the countries of the world, no matter how hard they try.
An NYU professor, Bruce Bueno de Mesquita (the “Predictioneer”), has gotten extensive press recently for his predictions using game theory. His methodology seems well suited for situations like the UNFCC talks. One prediction in his recent book, according to Newsweek is:
“Copenhagen will be a bust, as will its main mission: by 2040 we’ll have given up on regulating carbon emissions. Global warming will be solved with wind, rain, and solar invention.”
He also elaborated on his predictions in this article from Foreign Policy, adapted from the book.
In effect, he is saying that the countries of the world, all acting in their own best interests, are very unlikely to find common ground on the GHG emissions issue. (A look at the actual article, rather than relying on Newsweek to read it for us, reveals that he does not in fact predict that “global warming will be solved by 2040.”)
What might a better way look like?
One interesting path to a deal lies in the upcoming summits that the US has scheduled with both India and China. The speculation is that Obama will emerge from both of these meetings with bi-lateral climate, energy and perhaps trade agreements related to these sectors. With a bridge between the world’s biggest emitter of GHG’s per capita (the US) and the world’s absolute biggest emitter (China), plus an agreement with the other heavyweight in the developing world debate (India), other countries would be hard pressed to form meaningful alliances again that could scuttle the overall Copenhagen deal. The Kyoto treaty failed to make a real dent in GHG emissions. The US did not participate because the developing world did not face limits. The developing world could hide behind the lack of US participation to justify its lack of limits. Perhaps a US-China-India deal would be more success.
The wildcard, it seems, would lie in enforcement. We would guess that anything to do with India or China would include a provision for tariffs in the event of noncompliance to appease blue dog Democrats and Republicans and secure ratification. The ironic effect would be that now China and India would occupy privileged positions with the US with respect to carbon and trade that would force other countries to harmonize their own GHG emissions caps. This raises a host of other issues but, ultimately, it may be the right start.
Perhaps governments are not even the right entities to be trying solve the GHG problem. Maybe a new international agency is needed. Perhaps there are diplomats and political scientists who could design such an agency. The Nobel Prize in Economics was just co-awarded to Elinor Ostrom, a political scientist at Indiana University, for her work on the “tragedy of the commons” issue. That phrase refers to a landmark 1968 paper by biologist Garrett Hardin with the title, “The Tragedy of the Commons”. That paper said the only two ways to deal with a common resource were to privatize it or to turn it over to the government. Neither solution looks promising for the world’s skies and seas. Subsequent research has identified a third way. The research has been done under the academic name “Common Pool Resources. Elinor Ostrom was awarded the prize for showing how users themselves could develop rules and enforcement mechanisms that did not result in overuse. One of the design principles from that work would suggest that most of the Copenhagen delegates could be excused to go home early. Quoting from the Committee’s award document:
“A final lesson from the many case studies is that large-scale cooperation can be amassed gradually from below. Appropriation, provision, monitoring, enforcement, conflict resolution and governance activities can all be organized in multiple layers of nested enterprises. Once a group has a well-functioning set of rules, it is in a position to collaborate with other groups, eventually fostering cooperation between a large number of people. Formation of a large group at the outset, without forming smaller groups first, is more difficult.”
IEA: Cross Silo Thinking
Posted on 9 October 2009 | No responses
In 2008, the Financial Times columnist Gillian Tett was named best Business and Finance Journalist in the British Press Awards and was highly commended in the Reporter of the Year category for her coverage of the credit crunch. She also authored the book “Fool’s Gold” about the origins of the global financial crisis. We find her worth listening to.
Her column today in the FT (Insight: Dangers of Silo Thinking) describes, citing a new book by Larry McDonald, how the Fixed Income unit of Lehman was, for several years before the firm’s collapse, so alarmed by the American real estate market that they were hunting for ways to go “short.”
However, “while one department of Lehmans was exceedingly bearish, other departments, such as the mortgage securitisation team, were so aggressively bullish that they were increasing their exposure” – and the different departments were in such rivalry that they barely knew what the other was doing, with disastrous consequences.
“[It is] a saga that raises a wider moral, not just for bankers, but investors too. In recent months, vats of ink have been spilt to explain all the macro-economic and regulatory reasons for the financial crash.” She goes on to point out other examples of silo thinking.
The column reminded us of another very recent example of what we observe to be a break from “silo thinking” involving climate change, energy supply, and the upcoming Copenhagen global climate talks.
The International Energy Agency or IEA releases its World Energy Outlook or WEO in November each year. Last year in November the WEO-2008 marked a turning point for the IEA in that it acknowledged for the first time the likelihood of “Peak Oil.” In the forthcoming WEO-2009, the WEO will be making an even more controversial break with the past by saying
“continuing current energy policies would have catastrophic consequences for the climate.”
The report will advocate policies to limit the build up of greenhouse gasses to 450 parts per million. (Meanwhile, expect to see another group, 350.org, mount demonstrations on October 24 to call attention to the need to set the limit lower at 350 PPM instead.)
These shifts were disclosed earlier this month at a press briefing in Bangkok at UNFCC talks where the IEA released an excerpt of the WEO-2009. The excerpt was prepared and released a month early in order to make it available ahead of the Copenhagen talks.
In Bangkok, Nobuo Tanaka, the IEA Executive Director, noted that, due to the global recession, carbon dioxide emissions could fall in 2009 by as much as 3% versus 2008. He cited this as an opportunity now, ahead of renewed GDP growth, for the world to adopt policies and make investments that would limit energy-related global emissions (estimated at 28.8 Gigatons (Gt) in 2007) to only 6% above the 2007 level by 2030 (or 30.7 Gt in 2020), falling to 26.4 Gt in 2030. Without the proposed policy changes, emissions in the Reference Scenario are projected to rise to 34.5 Gt in 2020 and 40.2 Gt in 2030. The full WEO will no doubt receive extensive analysis and commentary when released November 10 in London.
Back to the dangers of silo thinking, where we began. Traditionally, the IEA has kept to its respective silo of energy analysis, with little regard for source of the primary fuel or its impact on the world.
The IEA, founded during the oil crisis of 1973-74, is supposed to be an energy policy advisor to its 28 member countries. As the IEA describes itself:
“With a staff of around 190, mainly energy experts and statisticians from its 28 member countries, the IEA conducts a broad programme of energy research, data compilation, publications and public dissemination of the latest energy policy analysis and recommendations on good practices.”
To say that the IEA including analysis on global emissions and climate change is “mission creep” would be an understatement. We find this departure to be more “mission leap” and remarkable that world’s top energy analyst would advocate policy that puts the consequences of current energy production ahead of the primary challenges of simply meeting growing energy demand.
For once it is refreshing to see an example of “cross silo” thinking by Tanaka and his staff. The question now becomes whether the rest of the world will do the same, or are we fated to repeat the mistakes of Lehman with energy instead.
What have you got for me next week?
Posted on 8 September 2009 | No responses
Last week, peak oil skeptics could breath a sigh of relief when “BP announced… a giant oil discovery at its Tiber prospect in the deepwater Gulf of Mexico.“
At 11km deep the drilling itself is notable, but the real excitement comes from parsing the word “giant.” As the FT points out, the IEA defines the term as fields with 500m to 1b proven and probable barrels.
Where does Tiber score? It is likely that BP needs more data before disclosing the numbers but did say, “Tiber represents BP’s second material discovery in the emerging Lower Tertiary play in the Gulf of Mexico, following our earlier Kaskida discovery.” Given that Kaskida is 3b barrels in place and 300-500m recoverable, Tiber is most likely larger if it is going to fill a giant’s shoes.
This, no doubt, is valuable to BP shareholders but we are not sure today’s giants are what they used to be in the greater context of oil supply and demand. If today’s demand rate is roughly 84 million barrels-per-day into an optimistic 1,000 million barrels of recoverable oil, then Tiber is worth 12 days of global supply in the grand scheme of things.
But current reserves are depleting at a current rate of 6% per year and accelerating. Also adjust for the energy intensity of Tiber’s extraction given its depth and location. Add global demand growth, and we estimate you shave 5 of the 12 days of supply from the total. Now BP has given the world a week’s worth of supply, which is why we ask what they are going to do for next week?
UPDATE:
David Strahan, a UK journalist and film-maker and author of “The Last Oil Shock: A Survival Guide to the Imminent Extinction of Petroleum Man”, made much the same points about the Tiber news when he was interviewed on BBC World Business Report on September 2, 2009. His web site contains numerous articles on the issue of oil depletion.
Burning our way to reduced emissions?
Posted on 2 September 2009 | No responses
On the face of it, that seems like an odd statement to make with respect to carbon emissions and climate change, but a growing chorus of supporters and detractors are squaring off over “biochar.”
The concept is simple and ancient: apply intense heat to biomass in the absence of oxygen (pyrolysis) and the resulting elemental carbon, or charcoal, can be used either as a fuel, along with its associated byproducts of syngas, heavy oil and heat. Or as a form of carbon sequestration when the material is buried or used as fertilizer. Left in the ground, biochar will stay intact for years, stretching out the normal carbon cycle where plant debris decomposes, emitting carbon each season. Not to mention the second order effects of enhanced fertilization and reduction in natural methane and nitrous oxide emissions.
On the policy level, the idea bears exploration. As this week’s Economist reports, very preliminary modeling shows that one to two gigatons of carbon could be sequestered annually in soils (out of global emissions that are estimated to be around 9.7 gigatons – thus not insignificant) at very low cost.
Where the debate takes hold is the issue of unintended consequences. The ETC Group recently released a published opposition to BioChar from 147 environmental and human rights groups. Along these lines, Biofuels Watch in the UK also voiced concern that a scaled effort in biochar could result in growing crops exclusively for char, displacing forests and food production – similar to the effects of ethanol production. Given the potential that biochar has to produce low cost carbon offsets if included in the CDM mechanism of any future cap and trade systems, the potential for abuse is real.
We are sympathetic to these concerns given the ethanol example, but would set the hurdle high for rejecting this solution on derivative concerns. The potential for a low cost, large scale reduction in carbon that includes both the developed and developing world has our preliminary support.
From a public investor’s perspective, the ability to invest in biochar is limited. As discussed on Alt Energy Stocks, efforts to commercialize the oil component of the output is being pursued by Dynamotive Energy Systems is overly risky. As Tom Konrad correctly points out, the commodity risk in end market prices for biofuels are not connected to the input price of the biochar inputs, setting up the potential for negative spreads. On the equipment side, the current crop of manufacturers are private (for one see Carbonscape out of New Zealand) and barriers to entry will be low. The Economist points to a potential breakthrough in continuous batch processing that may differentiate this group, but it is too early to tell.
At the moment, we would look toward the resource owners who may have a new end market for their waste.
Not an “either/or” world ahead
Posted on 1 September 2009 | No responses
Many people are wondering whether the future will be “green” or “business-as-usual.” The answer in our view is “No.” It will be neither. It will be BOTH.
Opinions about the future tend to fall into one of two camps. The “Green” camp advocates “cap-and-trade,” wind power, solar power, electric vehicles, a simpler lifestyle with less transport, and backyard gardens. The business-as-usual crowd thinks that global warming is a hoax, plenty of oil, gas, and coal exists and can be economically recovered with only modestly higher prices or even with lower prices, technology can solve resource constraints, nuclear power is always available if fossil fuels get scarce, and the needs of the economy take precedence over environmental considerations.
In the news today are two stories about what is actually happening that should give members of either “camp” reason to pause and think a bit harder.
China is investing US$1.7 billion in two Alberta oil sands projects.
The Financial Times reports that the investment needs oil at US$50 to $60 per barrel to be successful. The Chinese investment was made after ten years of watching and waiting for the price to be right. The Canadian oil sands are notorious with environmentalists as major sources of carbon emissions, downstream pollution of rivers, and marginal “energy return on energy invested”.
Another bit of news from China: BYD, the Chinese electric car producer owned 10% by Warren Buffett, has moved up by one year its plans to introduce an all-electric vehicle into the US market, in 2010.
So whose side are the Chinese on? Or is this a case of two opposing factions making these investments?
Again, the answer is neither. As oil becomes more costly to find, its price will rise. This will make cars running on gasoline more expensive to operate, and electric vehicles will be increasingly competitive. It is impossible to convert the world’s fleet of vehicles from gasoline to electric in less than a generation, and so gasoline will continue to be needed for many years. And as the price of oil rises, more sources will become economic, such as the Canadian oil sands and the deepwater resources off the coast of Brazil. Electricity will become more expensive too, in part because the world will recognize the need to place a price on carbon emissions, and the share of electricity generated from economically-viable renewables will grow.
Yet another insight into the need for the two “camps” to break out of their ideological strait jackets comes from a book published earlier this year written by veteran journalist William Tucker titled “Terrestrial Energy.” He takes climate change and “peak oil” concerns seriously, which means conservatives won’t listen to him. He also makes a compelling case that nuclear energy (based on uranium and thorium from the earth–hence terrestrial) is the alternative to fossil fuels with the greatest potential to solve both the problems of environment and energy. That means the “green” camp won’t listen to him.
In our view, both “camps” should be listening to him, and to each other.
The Trade: Links We Like
Posted on 28 August 2009 | No responses
- Sunil Paul of Spring Ventures and Gigaton Throwdown has a very good report on Gigaton website. The report looks at nine clean technologies and estimates the cost and scale that each would require to offset a gigaton of annual emissions by 2020. The quality is excellent and we especially appreciate being given the hard data behind the analysis.
- The Wall Street Journal breaks an interesting story regarding Chinese production capacity in polysilicon and wind turbine manufacturing. The massive growth in these two sectors is too much for domestic markets to handle and the government is looking to curb further capital investment. We find this timely given the allegations of dumping, particularly by the Germans, of solar modules by Chinese companies.
- The California Public Utilities Commission (CUPC) takes a new tack on feed-in tariffs by leaving pricing open to bidding on new renewable projects between 1MW and 10MW. Feed in tariffs have been too low in California to spur the kind of real growth in renewables that would allow the state to meet RPS standards. Ratepayers and utilities have had the upper hand in pricing to date while RPS has carried little consequences. It will be interesting to see if a bidding process will provide the CUPC enough political cover to finally start imposing the higher rates necessary to spur development.
A Start on Some Fresh Thinking. Is there More?
Posted on 27 August 2009 | No responses
A physicist, a chemist and an economist are stranded on a deserted island. A case of canned food washes ashore. The physicist says “I can open these cans by climbing that tree and dropping rocks on them!” The chemist says, “No, I can open these cans by creating a corrosive solution from salt water and immersing the can in that!” Then the economist speaks up and says, “Gentlemen! Why all the hard work? First we assume we have a can opener…”
“How to resolve the green paradox” by German economist Hans-Werner Sinn on the Comment page of the Financial Times today (8/27/09) is an interesting read for its theoretical implications but, like the joke, falls a bit short in practical advice.
His “green paradox” turns out to be the notion that current efforts to curb carbon emissions through alternative energy development and efficiency spending are having the unintended consequence of encouraging resource owners to accelerate the extraction of coal, gas, and oil – just the thing governments are trying to avoid.
The logic, though not very clear in this article, seems to be that by promoting the artificial and early substitution to alternative fuels through government policy destroys demand for fossil resources, pushing down their future value. In turn, the scarcity component of the Hotelling Rent equation (the technical concept) is altered such that prices fall closer to marginal cost, therefore increasing supply. The conclusion is that demand based efforts to curb carbon are ultimately counterproductive without a supply limitation.
He goes on to note the inherent difficulty, if not impossibility, of storing the carbon after the energy has been extracted from the resource. His solution is to focus more directly on encouraging the resource owners to leave the resource underground. How to do that?
The two options are a carbon tax or a cap-and-trade system. But like opening the can of soup, we are still left with the difficulty of not only reaching an agreement on how to curb emissions but how to enforce such an agreement. The article is timely given the approaching Copenhagen summit in four months, but it falls short of giving the parties solutions.
Nonetheless, Mr. Sinn’s article is one of the few we’ve seen in the mainstream press that hints at the underlying economics of exhaustible resource extraction – a topic that is worthy of further exploration.
For a recent example of one policy expert’s real world advice, see Michael Levi’s article in the latest issue of Foreign Affairs.
Between the Lines: Today’s New York Times and Cleantech
Posted on 25 August 2009 | No responses
Summer vacation season is here and we expect that Times editorial board may be having a hard time getting quality content, which may explain why they’re scraping the bottom of the barrel with “Peak Oil is a Waste of Energy” by Michael Lynch on the op-ed page.
Michael Lynch has been speaking and publishing for years about oil issues and so is not a new voice to those who specialize in the study of oil prospects. He is also currently a consultant to the oil industry and so it should come as no shock to anyone that he dismisses the concept of “peak oil” with some disdain.
We are surprised that someone with his level of experience couldn’t do a better job debating the issue, though. For example, he states, “A careful examination of the facts shows that most arguments about peak oil are based on anecdotal information, vague references and ignorance of how the oil industry goes about finding fields and extracting petroleum.”
Peak Oil may be subject to debate but certainly not for those reasons. Lynch’s piece is hardly critical of any real issues nor does it present a scenario under which resource economics increases supply in a world, as his foil Fatih Birol points out, where many of world’s major fields are showing accelerating year over year rates of decline.
At best we get from Lynch the point that, “[a]s the Saudis have proved in recent years at Ghawar, additional investment — to find new deposits and drill new wells — can keep a field’s overall production from falling” before jumping off topic to invoke Joseph Stalin as an example of political risk, presumably implying that such a thing would be manageable, if he were somehow around to influence Russian oil production (which is declining) today. Hardly a careful examination of the facts he promised us.
We’ll leave it to the more focused writers at The Oil Drum to rebut Lynch’s haphazard analysis. In the meantime, we’ll wait for the Times to find someone to make a better case for the technological leap that brings abundant and cheap oil.
Vertical Farming: Too Far Outside the Box?
Posted on 24 August 2009 | 1 response
The problem of food supplies for the world’s growing population is frequently cited whenever people talk about the problems of limited fossil fuels and climate change implications. An op-ed article in the today’s New York Times was too good to ignore: grow food inside densely populated cities using tall buildings, or vertical farming.
Could this be a new sector for cleantech investing? The author of the article, Dickson D. Despommier, a professor of public health at Columbia University, is the leading advocate of the idea and he gets to the concept of extreme urban farming by working through some strong, maybe hyperbolic assumptions. For example:
“What’s more, population increases will soon cause our farmers to run out of land. The amount of arable land per person decreased from about an acre in 1970 to roughly half an acre in 2000 and is projected to decline to about a third of an acre by 2050, according to the United Nations. With billions more people on the way, before we know it the traditional soil-based farming model developed over the last 12,000 years will no longer be a sustainable option.”
Graduate students in his “Medical Ecology” class have done a number of papers on the energy inputs and outputs and many other technical aspects of the idea, available at his web site, so we won’t wade into the population and food debate. What we find lacking appears to be an analysis of the economic viability of the idea.
Could hydroponic and aeroponic technologies make it more economic to grow crops in high-rise buildings than provide commercial office space?
Professor Despommier makes a claim that the economics would work when he says “I estimate that constructing a five-story farm, taking up one-eighth of a square city block, would cost $20 million to $30 million,”
For the return on investment, he cites this: “An actual indoor farm developed at Cornell University growing hydroponic lettuce was able to produce as many as 68 heads per square foot per year. At a retail price in New York of up to $2.50 a head for hydroponic lettuce, you can easily do the math and project profitability for other similar crops.”
We tried the math, and although it is indeed quite easy to do, it does not demonstrate profitability. $2.50 per head times 68 heads is $170 per square foot at the retail level. The farmer typically gets less than a third of the retail price. Let’s be generous and assume that the proximity of the vertical farm to the retail outlet saves on transportation costs and use one third as the ratio. $170/3 = $56 per square foot per year of revenue to the vertical farm. Maybe in the current depressed market one could find space in a NYC building for only $56 per square foot, especially considering that spectacular views would not be needed. But after rent expense, there is nothing left for any other costs associated with growing the lettuce.
While we sympathize with the issues around food quality, trade and availability, don’t expect to see the struggling commercial real estate sector turning to cash crops any time soon.
Alberta Clipper Sets Sail for the US
Posted on 21 August 2009 | No responses
Except that this Clipper is not a ship, it’s an oil pipeline to be built by Enbridge. One that stretches 1,590 kilometers from Hardisty in central Alberta to Superior, Wisconsin and will carry 450,000 barrels per day of heavy crude, with an option to expand to 800,000 barrels a day.
The US State Department issued a presidential permit today and declared its motivations for approving the deal by stating “[t]hese included increasing the diversity of available supplies among the United States’ worldwide crude oil sources in a time of considerable political tension in other major oil-producing countries and regions.”
This decision comes on the heels of report issued by the Council on Foreign Relations that highlights the important energy security component provided to the US by the Canadian Tar Sands. Scientific American gives us a key conclusion:
“The council’s analysis suggests the oil sands are unique in that they hold the potential to reduce OPEC’s revenues, thus weakening the cartel and those members that often undertake policies hostile to U.S. interests. If the oil sands could replace 2 million barrels per day of OPEC production, that would lead to a $70 billion per year cut in revenue to OPEC states, even with prices at $100 a barrel.”
The flip side of the issue is carbon intensity of bitumen production. We wonder if the decision to build this pipeline would be different if there already was a price on carbon. Michael Levi, the author of the CFR report dismisses the issue by estimating that a carbon price of $20 per ton would add only $2.21 per barrel of additional production costs to the oil sands. A price of $50 per ton of CO2 equivalent would add an extra $5.53 per barrel.
No doubt, his analysis, and similar conclusions by oil heavyweights Cambridge Energy Research Associates swayed State Department thinking towards the benefits versus the costs of enabling Tar Sands.
At the very least, this is an interesting display of the new political conflict that can arise between two previously aligned camps – those that favor energy independence and those that put climate change above all other concerns. More tellingly, the Alberta Clipper sends the signal that renewables, to be truly competitive on a scale that can compete with oil sands, will either need the price of the externality (i.e. carbon) to be a lot higher than is currently contemplated, as Levi shows, or find a way to compete in the political realm with those that persuasively argue for diversifying energy security, even if it means embracing oil sands.
