Spring Break

Energy Outlook will be on Spring Break until Monday, April 9. In the meantime, in lieu of the usual re-runs, here are some links to recent articles I found interesting but chose not to cover in a posting.

From a Minnesota researcher studying the sustainability of ethanol fuel: "Corn Can't Solve Our Problem" (free registration required)

On the useful synergies between wind power and hydropower: "Air, Water Powerful Partner in Northwest" (free registration required)

Tom Friedman looks at the implications of the TXU deal for future environmental activism:
"Marching With a Mouse" (Times Select registration required)

Austin, TX plans to implement "vehicle-to-grid" storage of renewable power in plug-in hybrid cars: "In Quest for Cleaner Energy,Texas City Touts Plug-In Car" (Online Wall St. Journal subscription required) (or read a summary on Terrablog)

Finally, on a different note, ex-astronaut and former chairman of the California Energy Commission Rusty Schweickart on the need for an international capability to deflect asteroids on a collision course with Earth: "The Sky Is Falling" (NY Times Select or archives $)

Too Many Branches

A comment on a posting earlier this week got me thinking about why solving our energy problems looks deceptively simple, when it's actually so difficult. That didn't just lead me to another recitation of my usual "energy is big" mantra, but to the notion that we're dealing with something that's big and incredibly complicated. It takes both of those concepts to explain why energy efficiency and renewable energy, as promising as they are, can solve only some of our energy problems, and only after they have penetrated the market to a much greater degree than they have. That's not a knock on either approach, both of which will be necessary in addressing climate change and energy security. It merely reflects the challenges inherent in the interconnection of so many different forms and uses of energy.

Think of all the energy we use as a gigantic tree, a Sequoia redwood. The trunk and root system represent all of our primary energy sources, amounting to 443 quadrillion BTUs in 2004. That's the equivalent of 240 million barrels of oil per day, or 117,000 gallons every second. Petroleum only accounts for about 35% of that. Now think about the tree's branches. Some of the biggest are very familiar, including liquid fuels for transportation and other uses, and the various fuels for generating electric power. Each of these has sub-branches, of course, such as the fuels for vehicles, aircraft, and ocean-going vessels. Home heating fuels are intertwined sub-branches off the liquid fuel and natural gas main branches. To put today's alternative energy efforts into perspective, consider that one of the smaller branchlets off the liquid fuels branch, representing kerosene for cooking and illumination in developing countries like India, is bigger than the entire global biofuels industry.

Wind power, one of the largest and fastest-growing sources of renewable, low-carbon electricity, could be thought of as comprising some medium-sized twigs on the mid-load (non-peak, non-baseload) electricity sub-branch. Wind contributes enough energy today to displace about 0.2% of the volume in the natural gas main branch. That's not as insignificant as it might seem, but even growing it by a factor of 10 won't alter our need to find new sources of natural gas, including bringing more remote gas to market as LNG. And note that the shifts on this branch have little effect on the baseload electricity branch, which relies on hydropower, nuclear, coal and a bit of natural gas. Changing that one will require some combination of carbon sequestration for coal, new nuclear power plants, and possibly geothermal energy.

At the risk of belaboring this analogy, there's simply nothing out there that can turn our redwood into an oak or cedar overnight. Grafting on entirely new branches, such as hydrogen, will be extremely difficult and require a lot of patience. At the same time, it's probably just as well if those who are working hard to make change happen can't see the entire tree, because it might cause them to lose heart. We can't afford that, because the tree's enormous fossil fuel roots can't carry us much farther into the future without some big modifications and important contributions for new energy sources. Problems as big and complex as this one aren't necessarily insurmountable, but solving them takes a lot longer than anyone might wish.

Fill 'Er Up

The Washington Post reports that when the auto industry CEOs met with President Bush yesterday, they pleaded for alternative fuel infrastructure to fill up the alternative fuel cars they are building. Despite decades of car makers and oil companies pointing fingers at each other over energy and environmental challenges, there's a lot to be said for the former worrying that the latter won't provide enough refueling opportunities to make owning a car requiring hydrogen, for example, convenient for consumers. The key question is who should pay for the installation of this infrastructure. It's not who you might think.

GM's CEO, in particular, has good reason to worry about the availability of alternative fuel. His company invested a fortune in the all-electric EV-1 in the 1990s, only to see it founder in the market, at least partly due to lack of recharging infrastructure, as I've described in detail in a previous posting. This is a big deal for hydrogen cars, as well, though they're years from the point at which refueling becomes the critical-path item. When the subject turns to ethanol and E-85, however, the argument gets considerably murkier.

By definition, cars that have been engineered to run on E-85, a mix of 85% ethanol and 15% gasoline, are "flexible fuel vehicles" (FFVs). That means they can run on gasoline with any fraction of ethanol from 0% to at least 85%. A shortage of E-85 pumps apparently didn't pose much of an impediment to selling "over 2 million" of these vehicles, as GM claims in its "Live Green, Go Yellow" campaign. The issue here is not selling more FFVs, but the risk that the government will stop counting them as alternative fuel vehicles that count towards carmakers' Corporate Average Fuel Economy quotas, because most of these vehicles have never used a gallon of E-85. That's worth serious money to Detroit.

So who should pay to make E-85 more widely available? Most people would probably say oil companies, but most of the service stations in the country aren't owned by the big oil companies; they're owned by small businesses, either individuals or local distributors. Selling retail gasoline isn't a terribly lucrative business, especially if you face competition from supermarkets and Walmart, who view fuel sales as a lure to customers, not a profit opportunity.

The problem at service stations is simple. A retail facility typically has only three underground tanks. One of them is in unleaded regular (ULR) service, one in premium (ULP) service, and the third most likely in diesel service. A dealer can't give up his ULR tank, because that's at least half of his throughput. And he won't give up his ULP tank, because he needs it to blend 89 octane mid-grade, which, along with ULP, provides his highest margin. That leaves the diesel tank. Switching that to E-85 is certainly possible, but how attractive is it? He must weigh lost diesel sales--plus any convenience store revenue that goes with them--against the chance that an FFV driver will pass his station to find one selling E-85. Absent a much bigger public outcry for E-85, I know that I wouldn't make that bet, myself.

Given these constraints, the choice comes down to an investment decision. Does a station owner rip up concrete to add another tank, putting his whole facility out of business for at least a month, in order to add a product for which the initial demand is probably only a few hundred gallons per month, versus the typical 100,000 gallons/month he sells on his other products? I don't see how you make a return on that investment, even after the $30,000 federal tax credit that's available.

What about providing more government assistance? Surely as taxpayers all of us have a vested interest in enabling sales of locally-grown ethanol that backs out imported oil. Well, even if the benefits of ethanol were large and unambiguous, the country saves exactly the same amount of foreign oil when a gallon of ethanol is sold as part of a 10% blend with gasoline (E-10), which requires no modifications to either service stations or cars, as when it's sold in E-85. Based on last year's ethanol production and current gasoline demand, ethanol output could nearly triple before it used up all its E-10 blending opportunities. The case for public support for converting stations to E-85 thus rests on political, rather than economic foundations.

The market isn't the answer to every problem, but in this case the market offers an important insight: if you want to make E-85 widely available, you should look to the parties that stand to gain the most from doing it. That brings us inevitably back to the carmakers, who have a major stake in ensuring that enough E-85 is available to preserve their CAFE ratings, along with citizens' groups that are passionate about energy security. A savvy auto firm might see some nice partnership opportunities in such alignments, which could eventually rope in an oil company interested in improving its image. In the meantime, the rest of us are no worse off if E-85 isn't available on every corner.

Ratcheting Up Another Notch

Last week's increase in crude oil prices seems to have had more to do with the fundamentals of supply and demand, than a change in perceived geopolitical risks. But while estimates of US demand growth have sent the oil market up and down over the last several months, tensions with Iran seem to be moving in only one direction. The Islamic Republic's pursuit of nuclear technology remains the headline issue, and the UN Security Council has just unanimously agreed to tighten sanctions, but the more immediate worry is Iran's seizure on Friday of 15 Royal Navy and Marine personnel. Although a similar crisis was resolved peacefully three years ago, it illustrates the heightened risk of miscalculation created by the proximity of one potential crisis to an another, active one.

Although the experience of pre-war intelligence on Iraq has taught us all caution, the pattern of Iran's nuclear activities makes the most sense as a program to develop nuclear weapons. Diplomatic efforts to block this path have been agonizingly slow, and the lowest-common-denominator sanctions that we and our European allies have pushed through the Security Council may seem timid to some, compared to the proliferation risk involved. However, they are starting to bite, and even Russia is chipping in with some useful commercial pressure. President Ahmadinejad doesn't look quite so formidable as he did a year ago, notwithstanding the doublespeak coming out of his foreign ministry. His position could grow even more tenuous, once Iran starts rationing gasoline. Years of heavily-subsidized gasoline prices have created more demand than the country's refineries can meet, and this is consuming precious hard currency. In this context, sustained diplomatic pressure to contain Iran's ambitions is no longer just a means of buying time; it now looks like our most promising option.

However, as long as we're fighting next door in Iraq, the downside of this approach is that it will keep generating opportunities for one side or the other to make a tactical miscalculation that could spiral out of control. Whether the orders to seize the two British patrol boats came directly from Tehran--as a tit-for-tat reprisal to the US arrest of suspicious Iranian "diplomats" in Baghdad--or from an overzealous local commander, the Iranians are playing a dangerous game. I'm not familiar with the rules of engagement under which the Coalition forces in the Persian Gulf operate, but it's not hard to imagine a different outcome to this incident, if Coalition naval or air support had been a little closer to hand, or a trigger finger on either side slipped. With both sides on edge, this sort of behavior a recipe for disaster, and I hope that message is being conveyed to Iran's diplomats in the strongest terms.

Too much of the world's oil transits those waters to take this risk lightly. Although the Persian Gulf "tanker war" of 1984-87 failed to halt the overall steep slide of oil prices at the time, the market today is tightly enough balanced that it wouldn't take much to send prices back to last summer's record highs and beyond. That might benefit Iran in the short term, increasing the value of its exports, but I suspect they'd soon find that oil weapons, like nuclear ones, are more effective as long as they remain in the realm of threats and uncertainties. The last thing the mullahs should want is to teach us how to do without their oil.

Who's Right?

Digital video recorders are wonderful. I was able to record former Vice President Gore's appearances before the House Energy and Commerce Committee and Science Committee and the Senate Committee on Environment and Public Works this Wednesday, watching most of his hours of testimony over the last couple of days. Aside from the expected debate over the details of global warming, which one Congressman characterized as being over in science but not in politics, another interesting dichotomy was also on display. In response to several questions on the merits of nuclear power in addressing the need for cleaner energy, Mr. Gore sketched out his vision of a much more networked and dispersed economy, in which central power generation plays a smaller role and so-called distributed power sources, including solar and wind energy, lead the way. It's tempting to come down on one side or the other of this debate, but like the one about alternative energy technology, the better answer probably lies with a blended solution.

Along with reprising most of the arguments from his Academy Award winning film, "An Inconvenient Truth", the former VP peppered his responses with interesting energy ideas, including the establishment of a federally-chartered Carbon-Neutral Mortgage Association, "Connie-Mae", to underwrite energy efficient home construction features that the market won't yet value in the selling price of a new house. He also pushed the idea of a smart, networked power grid to accommodate small, distributed generation from cleaner, more efficient sources. It's an appealing picture, and one that I first encountered a decade ago, in my energy scenario work. There are lots of benefits of this sort of approach, particularly in countries that are growing rapidly and have to build new energy infrastructure, anyway. Our own power grids are evolving in this direction, with trends such as "net metering", and they will need to, in order to adapt to the changing demands of their customers for higher quality, more reliable power.

However, even in this bright new world of decentralization, someone must still smelt aluminum, mill steel, build cars, and do all the other grimy, old-economy things upon which we still depend, some of us for our livelihoods, and the rest for our lifestyles. These activities require vast amounts of reliable, baseload power, of the kind that nuclear and coal-fired power plants excel at. Coal looks highly problematic in a carbon-constrained world, depending, as the new MIT study suggests, on the development and deployment of a largely untested carbon sequestration technology that will be very difficult to retrofit to existing plants. For this reason and others, nuclear energy is attracting more interest, globally.

Mr. Gore worked hard to avoid sounding rigidly anti-nuclear, focusing instead on concerns about waste storage--he opposes the Yucca Mountain waste facility--and the very large capital costs involved in building new nuclear plants. Yet despite these issues, we are likely to see the first new nuclear plant in this country in two decades get its permits within a few years. The cloud of uncertainly that the recent TXU deal has cast over new coal-fired power plants will inevitably improve the prospects for new nukes.

To refine a statistic tossed out by one Senator, in 2005 nuclear power contributed 68% of all the low-carbon electricity generated in the US. As we contemplate a cap on carbon emissions and a carbon tax or an emissions trading system--or both, as Mr. Gore advocated Wednesday--the market value of all those green electrons from wind, solar, hydropower and nuclear will go up significantly. I doubt we can rely exclusively on wind and solar energy to provide all the green electricity we'll need, and efficiency won't eliminate the role of central power plants. I'd be very surprised if the greener world we need to create didn't also feature a bigger contribution from nuclear power.

Questioning Ethanol

In the space of a few years, ethanol has become the de-facto fuel of the future, but without the kind of extensive public debate that should have accompanied such a choice. Although its political support as an agriculture and energy program has thus far seemed unassailable, an article in Business Week a few days ago described an alignment of interests coming together to oppose this headlong rush, and to attempt to put ethanol back on a free-market basis. This got me thinking about who else might be adversely affected, and thus have a stake in slowing ethanol's growth. Another industry immediately sprang to mind: soft drinks. They might not be a bad proxy for the rest of us, who stand to lose more than we gain from the steadily growing portion of the corn crop going into fuel production.

I don't know much about the soft drink business, beyond the fact that its number two ingredient by volume--after water--is high-fructose corn syrup, which is derived from the same part of the corn crop that is needed to produce ethanol. If I were running a soda bottler, I'd be very worried about what a further diversion of corn to ethanol could do to my costs. Even for companies that mainly own the brands and formulations, reduced demand for their products, due to a shift in their pricing relative to water, coffee, and other substitute drinks, would certainly create a drag on shareholder value. Nor would switching back to sugar necessarily solve the problem, given the increased use of Brazilian and Caribbean cane sugar to make ethanol, while Minnesota farmers look to turn sugar beets into yet more ethanol.

So if you're Coca Cola or Pepsi, what do you do? Well, you might join the growing coalition arguing for the repeal of corn ethanol's subsidy and tariff protection, thus exposing the corn ethanol industry to tougher competition. That might keep more corn available for sweetener production, in the long run. But with gasoline prices stuck in an uncomfortable range, while the US wages war in the Middle East oil patch, that could be risky. Concerns about ethanol sound different coming from a large corporation that stands to lose profits, as opposed to a rancher who can't afford to feed his cattle. Alternately, you could invest in a startup working on cellulosic ethanol, biodiesel, or some other alternative fuel that would compete with corn-based ethanol. You might even turn part of your own R&D team loose on the problem. The benefit of this strategy is that, even before these research avenues pay off directly, they help undermine the basis for maintaining such high subsidies for corn ethanol. Given this choice of options, I'd probably try all of them.

It's an uphill battle, but a worthwhile one, in my view. The energy and climate benefits of corn ethanol, though modestly positive, do not justify the emphasis or public funding it currently receives. We should be moving away from our disproportionate support of this single pathway, toward a more even-handed set of incentives. If we jettisoned the 51 cent/gallon ethanol blender credit, we could safely eliminate the 54 cent tariff on imported ethanol, fund a five- or ten-year federal excise tax holiday--worth 18.4 cents/gallon--for all non-petroleum fuels, and still return some money to the Treasury. If ethanol can win on those terms, then it deserves to be the fuel of the future.

Climate Change Tornado Chart

In his column in today's Washington Post, Robert Samuelson considers some of the implications from last week's MIT Coal Study presentation, which we both attended. He makes an interesting point about the inverse relationship between the efficacy of measures to address climate change and their political acceptability. Even if you disagree with his examples of solar power as weak but popular and a "hefty tax on energy" as effective but unpopular, they highlight the need for a consistent set of tools to facilitate the policy debates these matters require. Well-to-wheels analysis provides a good framework for comparing the energy and emissions consequences of different technologies, but it isn't well-suited to comparing strategies and doesn't always yield a compelling visual output. What we need is the climate change equivalent of the "tornado diagram."

When I was in Texaco's corporate planning department, one of our key tools for comparing project proposals was net present value (NPV) analysis, based on the probabilities associated with different inputs and outcomes. This method provided the expected NPV of the project, as well as a pretty clear picture of how risky it was, relative to other, similar projects. The two standard visual tools that accompanied this analysis were an S-curve, showing NPV as a function of probability, and a tornado diagram, which displayed in descending horizontal bars the objective ranking and magnitude of the risk factors inherent in the project. These charts, along with the numbers behind them, provided the basis for some great qualitative and quantitative discussions, and they had a large influence on which projects got funded.

The great thing about this kind of tool is the way in which it can bring the counter-intuitive to light. For most of the oil and gas or refining projects I was involved with, the top risk factors on the tornado diagram usually related to construction cost estimates and start-up timing. But occasionally, some other factor that no one had given much credence jumped off the page in a way that would have been much harder to convey conversationally, or numerically alone.

Imagine such a tornado diagram for climate policy, showing the ranking and magnitude of the cost/benefit relationships for a wide array of strategies, such as cap-and-trade, carbon taxes, and the various incentives for biofuels, wind and solar power, and advanced vehicles. Perhaps a carbon tax is the most effective measure we could employ to get greenhouse gas emissions under control. Seeing it ranked against the other options might serve to emphasize that point. But it's possible that some other strategy that is less appreciated or understood could be nearly as effective, and much more palatable. Being able to show, rather than just tell, people that would be really useful. The right visual tool, conveying a lot of information clearly and concisely, could help decision makers reach agreement on which measures are worth their financial and political costs, and which are not.

Gasoline Island

Yesterday’s posting grew too long to include a relevant current example of the side-effects of California’s environmentally-driven de-industrialization. While retail gasoline prices across the US have jumped by 30 cents/gallon since January, prices in California are up by 50 cents, averaging $3.07/gallon for unleaded regular last week, with a few stations charging over $3.50. Before outraged consumers clamor for another investigation of collusion and gouging, though, they might consider what previous investigations have concluded: fundamental structural problems make the California gasoline market unusually vulnerable to local refinery outages. As a Marin County paper recently put it, “the state is like an island.” That was already true when I traded West Coast refined products for Texaco in the late 1980s.

Two minutes of Googling yielded a 2003 study by the Energy Information Agency of the Department of Energy, prepared at the direction of the Congress to assess that year’s California gasoline price spikes. It includes a nice graph showing that from 1995-2003, gasoline prices in the Golden State were consistently higher and more volatile than the national average. In addition to the unique problems of switching from MTBE to ethanol that year, the EIA identified the following contributing factors:

• California’s distance from alternate gasoline supplies
• The complexities and higher cost of producing gasoline to California’s unique, environmentally-oriented specification (CARB), especially when switching from winter to summer formulations.
• California’s over-extended refining system, which has not expanded as fast as gasoline demand.

The last point is particularly important, because it has a strong influence on price volatility. Since normal demand keeps these facilities running near capacity, California refiners must plan carefully for annual plant maintenance, lining up supplies from outside the state to cover anticipated shortfalls. But when something unexpected happens, such as the recent fire at Chevron’s Richmond refinery, more imports are needed, and they are typically weeks away, depending on whether product is available from Seattle-area refiners, the Gulf Coast, Europe or Asia. In addition, once refinery production returns to normal, there is no large, local surplus from which to rebuild the inventories that help to dampen price swings.

While the media has generally been doing a better job of reporting these issues than they used to, NBC News’s coverage on Monday included an interview in which an official of the Automobile Club of Southern California blamed “speculators” for pushing the price up. In fact, it is this normal spot market price response that enables California to attract supplies from other, more distant markets. A refiner in Texas, for example, must recoup the cost of blending a tanker-sized batch of gasoline--worth over $20 million--to California’s stringent specifications, plus freight, plus enough profit to cover the risk that prices will have fallen again, by the time the cargo is discharged a couple of weeks later. Without a significant price differential between the California and Gulf Coast spot markets, no cargoes would be forthcoming.

All of this ultimately flows from decisions taken decades ago by state and local air quality regulators to control air emissions (plain old pollution, in those days) by tightening up on stationary sources--including refineries--and requiring carmakers to install better smog equipment and refiners to make cleaner-burning fuel. What they didn’t do was ask consumers to buy more efficient cars. As a result, California consumers routinely pay the higher cost of making CARB gasoline, and whenever local supplies are disrupted, they pay extra for the lack of a capacity cushion.

As I’ve suggested in the past, this is still not a bad deal for Californians. Before these regulations really took hold, air quality in the state’s big cities was very poor, especially in the Los Angeles Basin. California consumers sacrifice a little of their material standard of living at the gas pump—about 23 cents per gallon more than the rest of the country, on average since 2001—in exchange for cleaner air. Going forward, as I discussed yesterday, they will sacrifice a little more to address climate change, with benefits that won’t be nearly as immediate or noticeable. It will be interesting to see what happens to the level of consumer complaints.

The Green Coast

Sunday's Washington Post reported on a decision by the Premier of British Columbia (BC) to back down on plans to build two coal-fired power plants in the province, while aligning with California to meet ambitious green energy and climate change goals. This move follows a series of state-level energy and climate initiatives within the US, putting states and regional blocs in the lead on this issue. Although much less populous, BC, with its large hydropower resources, makes an interesting partner for California and other western states wishing to pursue green electricity, but like them, it will have to reconcile these measures with the over-arching challenge of enabling continued economic growth for their expanding populations. The California example is both half full and half empty, in this regard.

California boasts some impressive statistics on energy and emissions. The state's per capita electricity consumption is among the lowest in the US, and it has remained essentially flat over a long period, with total consumption increasing at roughly the same 1% rate as population since 1990. A benevolent climate is certainly a factor, but even after including petroleum consumption--a major consideration for a state with over 30 million cars--average per capita energy consumption is a third less than the US average. Greenhouse gas (GHG) emissions have followed a similar path and compare favorably with those of other states and countries on emissions per $ of GDP. After accounting for the emissions associated with electricity imported from neighboring states, California's total GHG emissions grew by about 15% between 1990-2004, while population grew by 20%, resulting in a slight decline in per-capita emissions. However, the US as a whole did almost as well over the same period, with emissions up by 16%, and population increasing by 18%.

California has shown it can create a successful economy that is less dependent on energy inputs than the rest of the US. And although reducing GHG emissions wasn't the goal when all this was set in motion, that has been an important result of the state's consistent environmental policies since the late 1970s, which emphasized reducing stationary sources of pollution. Ahead of much of the nation, California shifted away from heavy manufacturing and toward the technology and service sectors, which use less energy and create fewer emissions of all types. BC seems to be following a similar path to California's, as its manufacturing and natural resources production decline in importance, and services grow, so they make a compatible partner in building a larger "Green Coast."

But now things get more difficult. If California’s GHGs continued to track population growth, then meeting the legislated target of restoring them to their 1990 level by 2020 would require an absolute reduction of about 40%, relative to where they would otherwise be in 13 years. That’s a tall order, particularly since most of the reductions from changing the economy are built into the statistics above. Once you've done that, it's hard to repeat, and the remaining "low-hanging fruit" becomes rarer and hangs higher. Requiring compact fluorescent light bulbs will yield another couple of percent (2/22/07), and initiatives like the Million Solar Roofs Bill will help, too, though California's electricity sector is already quite efficient, in greenhouse gas terms.

The state generates nearly half its power from low-emission sources such as hydroelectricity, other renewables and nuclear. Natural gas-fired power plants, which emit half as much as coal, account for another 47%. Because it is already so efficient, extracting further savings will likely be more difficult and expensive. The richest lode of potential reductions here is those attributable to imported power from coal, which are larger than those from the state's own generating fleet, but this, too represents a one-time opportunity.

It would be easy to look at these statistics and suggest that California--and by inference, BC--is unlikely to meet its stated goals on emissions reduction. Instead, I think they render a necessary experiment that much more challenging. If climate change is as serious a problem as it appears, the Green Coast is blazing a trail that we must all soon follow. If they succeed, it will bode well for the rest of us. If they fail, then it will imply that we must either institute more painful measures, or simply focus on adapting to a warmer world.

The China Dilemma

Between working on my taxes, I've been thinking about one of the issues raised at Wednesday's presentation on MIT's future coal study, involving China's participation in the international effort to reduce greenhouse gas (GHG) emissions. John Deutch expressed skepticism that China would tackle its emissions any time soon, because of its focus on economic growth. He also linked this to the slower pace of action in the US, relative to other OECD member countries. It occurs to me that before we can determine the best means of getting China to deal with its contribution to global warming, we need to clarify and prioritize our own concerns about this country of 1.3 billion.

Start with the facts about China's emissions and their future trend. In 1980 China emitted only 30% as much CO2 and other GHGs as the US did. By 2000, that fraction had increased to one-half, while US emissions grew by almost a quarter. Despite its new focus on energy efficiency and renewable energy, China is on a path to reach emissions parity with the US sometime between 2009 and 2020. Although their cumulative emissions won't catch up with ours for many years, China will soon be responsible for more current GHG emissions than any other country.

Some see this as a justification for delaying US action on climate change, for reasons of fairness or economic competition. If China and the US were the only countries exposed to the consequences of these emissions, that might be a more understandable response, even though the same logic clearly didn't hold back the EU in their response to global warming. They knew that neither China nor the US were similarly committed. Still, having a neighbor whose dry, unmowed yard increases the fire hazard for the whole neighborhood doesn't let you off the hook for watering and cutting your own grass.

But that doesn't justify the position of some of the keenest partisans of prompt and aggressive action on climate change, who seem overly willing to give China a free pass on its emissions, for many of the same reasons that China and its supporters articulate, including:

• China's per-capita emissions are still much lower than those of the US or EU.
• Western countries created the problem, by burning fossil fuels for a century before China began to modernize.
• A sizable portion of China's emissions are attributable to products exported to developed countries, which have essentially "offshored" their emissions, along with the jobs and factories that go with them.

For good or ill, though, we all live on the same planet, and climate change is global in scale and effect. Whatever the merits of the above arguments, they don't outweigh the common imperative of helping China to avoid replicating our own mistakes on an even larger scale. If we assume that more aggressive US action on climate change is a necessary, but not sufficient condition for inducing China to commit to cap and subsequently reduce its GHG emissions, what are our options?

As Dr. Deutch noted on Wednesday, incentives seem to hold the key. But whether those take the form of transfers of technology or simply cash payments, this is going to be a very tough pill to swallow, in light of China's growing economic and geopolitical power. Here's the fastest-growing large economy in the world, with which the US already has an enormous trade deficit, and we're supposed to pay them not to emit? Even worse, China is starting to challenge us in sectors where we have enjoyed total dominance, at least since the end of the Cold War. January's anti-satellite test, which has created a serious, long-term hazard to manned and unmanned space operations, reminds us that China is a potential military adversary. And in congressional testimony yesterday, NASA's chief suggested that the Chinese space program could put a man on the moon before our planned return there in 2019. Why should we help China with emissions technology, when they may be diverting their own technology efforts into a new space race, or even an arms race in space?

In order to answer these questions, we must first decide whether climate change is such a serious problem that it transcends our concerns about helping an emerging rival that may end up supplanting us as the world's largest economy and greatest power. Although we've made great strides in the last few years in recognizing the dangers of global warming, I haven't seen that kind of explicit prioritization, yet. There are many areas in which we could assist China in finding a lower-emissions path, including cooperation on some of the same technologies we are developing for ourselves in biofuels, renewable energy, and advanced vehicles, along with the carbon sequestration that was the subject of yesterday's posting. Until we decide which is the bigger problem--climate change or a Chinese superpower--these efforts are likely to fall short of what's necessary. Meanwhile, every passing day increases the scale of the problem, as China builds more cars and power plants.

Oh Give Me A Home (for Carbon)

Yesterday I attended the rollout of MIT's new study on the future of coal at the offices of Resources for the Future in D.C. The study's impressive multi-disciplinary team was co-chaired by John Deutch and Ernest J. Moniz, both professors at MIT but also formerly high government officials, including Dr. Deutch's stint as Director of Central Intelligence from 1994-95. As they describe in a lengthy op-ed in today's Wall Street Journal, they concluded that without a practical and affordable means of capturing carbon dioxide from coal power plants and storing it for an extended period, the use of coal will decline dramatically from present levels, because of the level of carbon pricing necessary to stabilize greenhouse gas emissions by mid-century. While that may not surprise those who have been following the issue for some time, it is nevertheless a profound finding, since it would undo most of the existing trends and planning for the coal and utility sector.

In addition to this headline result, the team discussed the implications of this finding for the leading coal power plant technologies, including pulverized coal (PC) and integrated gasification/combined-cycle (IGCC.) Dr. Deutch made it very clear that, although IGCC can produce power with lower emissions than PC, and provides a simpler platform for carbon capture and sequestration (CCS), that does not necessarily make IGCC the best candidate for new power plants today. The reason for this somewhat counter-intuitive conclusion is the difficulty of retrofitting either technology for CCS, once a power plant is built and running. For PC or IGCC, adding CCS would be expensive, and it would entail more than "bolting a box on the back of the process." Drs. Deutch and Moniz stressed that it was premature and inappropriate to pick a technology winner, at this point. They also strongly recommended additional R&D spending on proving out all the aspects of CCS, including demonstration projects that are adequately instrumented to confirm the science of sequestration.

Furthermore, even with coal plants equipped with CCS, Dr. Deutch admonished that this could not provide the entire solution to our energy and climate problems, nor could any other single technology or strategy. That will require contributions from wind, solar, biofuels, and nuclear power, along with efficiency and conservation. He also made a strong point about the importance of these responses not being confined to the US and Europe, but including the large developing countries, especially China and India. He expressed great skepticism about bringing China on board any time soon, particularly without a US commitment to tackle our greenhouse gas emissions more aggressively than we have.

The MIT study highlights the incompatibility of energy policies that explicitly rely on coal for a growing share of our future energy needs, and the steadily increasing levels of greenhouse gases in the atmosphere. Even the availability of a viable CCS technology to manage coal's emissions would only stabilize global CO2 emissions by mid-century, but would still not stabilize atmospheric CO2 concentrations at the 450-550 ppm level that might avert the worst consequences of global warming. One study from MIT won't change the world, but its conclusions are all the more significant coming from such a pragmatic and credible group of physical scientists and engineers, who would hardly be expected to jump on the latest environmental bandwagon. When they tell us that carbon sequestration needs to be a much higher priority, it's time to listen and act.

Telling the Story

Last week I was invited to participate in a conference call interviewing John Felmy, the Chief Economist of the American Petroleum Institute (API), one of the energy trade associations I mentioned in my posting of February 27th. At the start of the call, Mr. Felmy framed it as part of the API's effort to tell the industry's story, something that has become more urgent after the hurricanes and high energy prices of the last couple of years. I agree that this is a worthy goal, and it's part of what I try to do on this weblog, as well, though from a somewhat different perspective. The call involved several other bloggers, and I encourage you to listen to it on podcast or read the transcript, both of which you'll find on the API's new EnergyTomorrow site. I'd like to expand on two of my questions, which relate to telling a compelling story about the industry's future, not just its present.

I asked Mr. Felmy whether he thought the industry were adequately positioned, in case it turned out that the DOE's forecast of a virtually unchanged energy mix in 2030 proved wrong, for whatever reason. In his affirmative response, Mr. Felmy cited the example of Shell's cellulosic ethanol investment in Iogen and referred to figures indicating that the industry invested $15 billion, or 11% of its aggregate R&D budget, in non-hydrocarbon energy technology between 2000-2005. Still, this represents a small slice of the industry's total capital expenditures, because investments in oil and gas production and oil refining still present much larger dollar and percentage returns than alternative energy investments, which entail higher risk, or at least a different kind of risk. Whether you consider this prudent or lacking in vision--and there are arguments for both--it creates a real chance that the next generation's energy giants will not only look very different from this generation's, but will include some altogether different companies.

Another question that I posed went to the heart of what a trade association can do on behalf of its members, and what it can't. I asked whether the industry might ever push for access to the substantial off-limits oil and gas resources in the US, on the basis that their total environmental impact would be lower than that of alternatives such as oil sands or coal-to-liquids (CTL). Perhaps I had been hoping for an answer close to the classic Ian Richardson line, "You might very well think that, but I couldn't possibly comment," but of course I didn't get it. I actually concur with Mr. Felmy's assessment that we will ultimately need all these fuels--or at least a contribution from all of them--along with efficiency and conservation.

At the same time, I think the basis of my question still has merit, even if it doesn't reflect the consensus of the industry, or the official view of any company within it. The industry might never ask Congress to make an exception for offshore gas drilling, while leaving offshore oil drilling constrained. It might also never publicly weigh the emissions and other environmental impacts of CTL against those of oil drilling in wilderness areas, but as citizens we ought to consider these things, and under any future greenhouse gas cap-and-trade system we must surely do so. The oil and gas industry may hope to avoid a "battle of fuels", but that is just what it faces, on several fronts; this ought to take place on as informed a basis as possible.

I don't envy the API its job of defending a large, profitable industry on which our entire way of life depends, at a time when so many people distrust big corporations and regard them as engines of income inequality and consumer exploitation. That's a shame, because that attitude won't help us find workable solutions to our energy problems. Quite the contrary, in light of the talent and resources within these companies. At the same time, I think it's helpful to have bloggers out there who understand the industry, but are able to say the things that it can't, or won't. This all contributes toward reducing the widespread misunderstanding and suspicion of the way the energy industry functions and the role it plays in modern life.

Resource Nationalism

Every now and again you run across an article that presents such a topsy-turvy view of reality, so compellingly, that you just have to nod in admiration of its author. Today's New York Times includes such an op-ed, lambasting Iraq's proposed Oil and Gas Law as the tool of evil, resource-grabbing US oil companies, the Seven Sisters (now four.) She paints a picture that would be comfortingly familiar to those who thought that the film "Syriana" (10/12/06) portrayed the real world of oil: a vast conspiracy between big corporations and the US government to invade Iraq and strip its people of their rightful oil wealth. Like all effective propaganda, it is grounded in fact, but its departures from reality speak volumes about the author's transparently anti-globalist and anti-capitalist agenda. The fulfillment of this ideology would leave the Iraqi people even worse off than they already are.

Ms. Juhasz more or less accurately describes the global shift that put most of the world's oil reserves under the control of national oil companies (NOCs), and out of reach of the international oil companies (IOCs), except on a low-margin, service-contract basis. And she is correct that the terms of the Oil and Gas Law, about which the Iraqis have been arguing for the last three years, would avoid re-creating a similar state monopoly within Iraq, thus putting it out of step with its neighbors. Iran, Kuwait and Saudi Arabia all run their oil industries as arms of government, with minimal foreign participation. Factual enough, so far. Where the fantasy begins is in Ms. Juhasz's notion that Iraq is in a position to establish its oil industry along similar lines, without enormous infusions of foreign capital and expertise--and without the incentives necessary to attract them.

It's worth recalling how and why those neighboring national oil companies took control of the foreign oil ventures on their soil. In the 1960s and early 1970s, international oil prices were low and stable, and the international companies that controlled production--paying taxes and royalties to the host nations--were intent on steadily increasing production to keep prices low and demand growing. These countries saw an opportunity to nationalize these holdings, assume direct control, and limit supplies, to their great financial benefit. I'm sure Ms. Juhasz sees the resulting transfer of wealth to OPEC's members as entirely proper. But there are crucial differences between those circumstances and today's Iraq. In the 1970s, the NOCs took over a slate of relatively new assets and were positioned to thrive from day one. In contrast, the Iraqi oil industry lies prostrate, struggling to sustain production from facilities that were maintained with spit and bailing wire during the long sanctions that kept Saddam's ambitions contained, and then further damaged by war and sabotage. Even if the civil war ended tomorrow, Iraq would require years of assistance just to maintain its energy status quo.

Iraq's oil fields hold great promise, and every IOC in the world must salivate at the prospect of being invited in to develop the country's enormous untapped reserves. But today's industry is a far cry from that of the 1960s. None of these companies, which are much more international than they were then, expects to be handed ownership of all this oil, or to run Iraq as an oil-fiefdom. Whether the ultimate contractual terms end up resembling those in fellow OPEC members Nigeria or Angola, or more like those in the UK--hardly an exploited third-world country--they need to be commercial and mutually agreeable. If in the future Iraq doesn't see the benefits it expects, or believes it was taken advantage of in a period of weakness, it would not be surprising for them to renegotiate those terms. Every company looking at Iraq understands that perfectly well, from long experience elsewhere. They have a large incentive to strike deals that will endure, rather than going up in smoke just after the big investments have been made, but before they have paid out.

Whatever the ultimate basis for international participation in the Iraqi industry, all of Ms. Juhasz's concerns are moot until the civil war subsides, a strong government emerges, and the persistent sabotage of energy infrastructure ends. Once that happens, the interests of the Iraqi people will be served best by an energy industry that can attract foreign capital and expand its output, providing employment opportunities and a growing stream of royalties and taxes, rather than being starved and hobbled by an inefficient and corrupt bureaucracy.

What Savings?

It's probably too early to tell whether we've escaped any serious glitches from the early switch to Daylight Savings Time (DST.) It was interesting hear the Congressional sponsor of this change suggest a few days ago that, aside from the other expected results of DST, it "brings a smile to everybody's faces." I wonder how many of us will be smiling when we learn that the energy savings that prompted this measure are likely to be entirely illusory--if not actually negative--based on a study of the time change's effects in Australia. As much as anything else, this exercise serves as a useful reminder of the questionable benefits of adopting 1970s-style energy policies in the 21st century.

I am sure that when extended DST was imposed during the first energy crisis of 1973-74, it saved significant quantities of energy. But it's worth recalling just how different this country was, back then. In 1970, the US population was one-third smaller, and nearly 1 in 10 Americans worked in manufacturing, compared to about 1 in 30 now. Only 40% of women were employed outside the home, compared to 60% in 2006. Today, large numbers of Americans of both sexes work "24/7" jobs that start earlier and end later, and our leisure activities are likely to be at least as energy-intensive as anything we do at the office. It's not intuitively obvious that adding an extra hour of sunlight for a few more weeks in March and October will materially change our consumption of oil, gas or electricity.

Similar concerns apply to some of the other measures that lawmakers whose personal experience extends back to the 1970s might contemplate. That includes windfall profits taxes on a US oil industry that controls a greatly diminished share of global oil production, and for which disincentives on new production result in barrel-for-barrel increases in our imports from dubious suppliers--inverting any notion of furthering energy independence. For that matter, some of the legacy policies from the first energy crisis, such as the Strategic Petroleum Reserve, need to be rethought, rather than expanded as the President suggested in January.

In the near term--barring enormous public outcry--there's probably no going back to a shorter DST, even if it becomes clear that its extension was a mistake. Reverting to the earlier schedule would require yet another round of computer system patches to replace the timetable that was just updated, and result in further confusion. But changing our clocks back on the first Sunday November, instead of in October, should remind us again that we really need energy policies tailored to how Americans live and work now, rather than to the way their parents did. And for the future, it's possible to imagine a different, more flexible kind of DST, designed not to reduce consumption, but to align the daily peak in electricity demand with the output of solar power technology.

Trade Missions

In the last week two powerful executives have taken important trips to meet with officials in nations that could supply the US with additional energy. These missions couldn't be more different in their public profile, but together they tell us a lot about the likely sources of our energy security over the next decade. President Bush is in Brazil, meeting with President Lula da Silva on the topic of ethanol production, and the CEO of ExxonMobil, Rex Tillerson, just returned from a visit to Libya, where he discussed that country's under-developed oil reserves with Muammar Qaddafi. Some might contrast these trips as the dawn of a new world of energy and a last hurrah of the old one, but I'd prefer to view them both as important aspects of the real world of energy in which we will live for the next couple of decades.

Despite problems of logistics and energy return, ethanol demand is growing, because of its environmental and energy security benefits. However, barring a prompt cost breakthrough on cellulosic ethanol technology, the US will be unable to meet the President's aggressive alternative fuel targets without help from imports. Brazil, which can produce large quantities of additional ethanol at lower costs than the US, represents the leading edge of the global trade that will be necessary to satisfy future biofuels demand in the US and other developed countries. Doing so won't be easy, because the US goal of 35 billion gallons per year by 2017 represent more than 3 times the worldwide production of fuel ethanol in 2006. That means that global ethanol output would have to sustain growth of 12% per year for 10 years, just to satisfy the US.

Creating a framework for high volumes of ethanol trade looks equally challenging, in part because of the distortions created by the US ethanol subsidy and the accompanying--and much misunderstood--tariff on imported ethanol. Today's Wall Street Journal described the lengths that producers and traders will go to, to avoid the 54 cent tariff, effectively capturing a 51 cent subsidy intended for American farmers, rather than their Latin American counterparts.

So where does Mr. Tillerson's visit fit in? Well, even at 35 billion gallons, ethanol would still only equate to a bit more than 2% of global oil production by 2017, or less than 10% of projected US oil consumption. The security of the remainder will have to be ensured in the same way that it has been for the last two-plus decades: by creating as diverse and reliable a base of suppliers as possible. Venezuela was a bulwark of that diversification throughout the 1980s and '90s, but it is now moving sharply into the "unreliable" category, with international companies of all stripes facing high political risk there. Libya can't replace Venezuela for us, even if Col. Qaddafi has turned over a new leaf, but boosting its output by a million barrels per day or more would shore up supplies to southern Europe, thus freeing up production from West Africa for Atlantic Basin customers. And for now Libya looks like a better bet than Iraq, where tens of billions of barrels of untapped oil are certain to remain in the ground until the civil war ends.

As important as President Bush's ethanol mission to Brazil is, applying the influence and leverage of the US government to opening up access to the oil reserves held by the national oil companies is even more urgent. In our understandable enthusiasm for alternative energy, we can't lose sight of the total energy mix, which will be dominated by fossil fuels for some time, yet. Balancing these complementary sources is a key element of national energy policy.

Joining Forces on Biofuels

Last month BP made headlines with its announcement of a major biofuels research alliance with the Universities of California and Illinois, and the DOE's Lawrence Berkeley Laboratory. They will endow the new Energy Biosciences Institute (EBI) with $500 million dollars of funding, which is serious money even in the oil business. A video link (high bandwidth) I received via the U.C. Berkeley alumni association provided some fascinating insights into this agreement, and I think it makes worthwhile viewing for anyone interested in biofuels and public-private partnerships on alternative energy. While pointing out some of the challenges this initiative still faces, it highlights the potential of fusing the broad, interdisciplinary approach of a couple of large public universities with the product-and-profit orientation of a big energy company. Although corporate/industry alliances are routine in many areas, the scale and focus of this one are unique within the energy industry.

As with any announcement of this kind, this video of the UC chancellor and the top researchers involved in setting up the alliance includes a sizable helping of campus pride and rah rah. When you look at the Nobel Prize roster and other vital statistics of the Berkeley campus, however, this seems entirely relevant to BP's selection of the university for this alliance. UC and its partners bring impressive capabilities to the party. (End of PR plug.)

On the webcast I heard two items that caught my attention. The first was Berkeley's intention to approach this alliance from a much wider perspective than the biological and engineering aspects of biofuels. They will involve a broad swath of disciplines, including social sciences that may be crucial in evaluating the systemic impact of expanding and re-orienting global agriculture to produce much greater volumes of fuel, while still providing the food required by a population that is expected to grow to at least 9 billion by mid-century. BP appears equally interested in that kind of inter-disciplinary breadth, as well, recognizing the importance of sustainability in determining the long-term viability of any fuel technology that might come out of this endeavor. Having spent two years on the Berkeley campus during graduate school, I can easily imagine that this was not only an attractive feature for BP, but a strict precondition for Berkeley's participation. Nor was I surprised by the reaction against the tie-up from the persistent radical fringes of the campus. Berkeley is still Berkeley, 40 years after the Free Speech Movement.

I'm also intrigued by the idea that this approach might do more than just ensure wider vetting and validation of new technology before it is implemented; it might actually stimulate entirely new ideas, through cross-fertilization that simply wouldn't be possible within a large energy concern. Oil companies employ lots of engineers, chemists, and geoscientists, but relatively few soil biologists, ecologists, or geneticists, to name just a few of the fields this effort could touch. In a way, this represents a microcosm of the original promise of the Internet, before it was deluged with spam, chatter, and misinformation. Berkeley was one of the nodes of the Arpanet, a forerunner of the Internet, and you can bet that the new EBI will have some clever networking approaches to stimulate creativity and expanded thinking on biofuels.

Finally, I liked Professor Kammen's perspective on how far $500 million goes, today. I believe he put it exactly right, that while this is now about the cost of entry for a new drug or a new car model, it's probably just enough to make a real difference on biofuels, provided that the new Energy Biosciences Institute team is smart about how they employ it. A lot of people will be watching the results.

Incentive Math

Many people are excited about the fuel-saving potential of "plug-in" hybrid vehicles (PHEVs.) Once they can be produced in large numbers, they look like a good way to decrease our consumption of gasoline--and hence our imports of foreign oil--and to shift more of the burden of transportation energy onto electricity, allowing renewable sources such as wind and solar power to fuel cars. In the meantime, developers face the classic barrier of low volume and high initial cost, and must hope for assistance from government policies to get them over this hurdle. A recent article in MIT's Technology Review described current efforts to legislate tax incentives for the purchase of PHEVs and the conversion of existing hybrids to PHEVs. At the suggested levels, however, we need to examine our priorities carefully. If reducing gasoline consumption is our top imperative, boosting plug-ins to the extent of a $4,000 tax credit is hardly the most cost-effective option.

This all boils down to some simple math, calculating the fuel savings from conventional hybrids and PHEVs, and then comparing the effective cost of the gallons saved over the life of each vehicle. To do this, let's look at three hypothetical cars, all running on gasoline, and all driven 15,000 miles per year. Vehicle A has a standard internal combustion engine and gets 22 miles per gallon--fairly typical for the US fleet. Vehicle B is a Honda Civic hybrid (or equivalent) averaging 50 mpg. Vehicle C is a PHEV getting 150 mpg on gasoline, ignoring the electricity it uses--or the implications of that for road-tax revenues.

Using these figures, a buyer switching from Vehicle A to Vehicle B saves 380 gallons of gas a year, while a buyer switching instead to Vehicle C saves 580 gallons. Thus, the PHEV avoids an extra 200 gallons of gasoline per year versus the conventional hybrid, which certainly merits a higher subsidy, if the government's aim is to reduce total fuel consumption. However, when we look at the current subsidy structure, which provides a $2,100 tax credit to someone buying the Civic Hybrid, and compare it to the proposed $4,200 tax credit to promote PHEVs, we see that over 10 years, the avoided fuel consumption for the Civic Hybrid costs taxpayers $0.55/gallon, while that from the PHEV costs us $0.72/gal. Conversely, for the money spent subsidizing one PHEV, we can promote two Civic hybrids that together yield an extra 180 gallons of savings.

The comparison looks even worse from the consumer's perspective. A Civic Hybrid is priced roughly $4,000 higher than the comparably-equipped non-hybrid Civic, while Technology Review estimates that a PHEV will be a $10,000 upgrade. So after tax credits, the Civic customer is paying an extra $1,900, while the PHEV buyer must pony up $5,800. The equivalent lifetime fuel savings cost 50 cents per gallon for the hybrid, vs. a dollar for the PHEV, again ignoring the cost of using enough electricity to reach an effective 150 mpg. Throw in power at 10 cents/kW-hr, and you're pushing $1.65 for each gallon saved. You can run this calculation for different combinations of standard cars, hybrids and PHEVs, and it will come out very much the same. Even someone buying a Toyota Prius, for which the hybrid tax credit has been virtually phased out, would end up better off than if they bought a PHEV for which they got a big tax credit, but still had to pay for electricity.

What does all this mean? For starters, I am not against plug-in hybrid cars. However, I believe we should evaluate their benefits objectively and provide incentives based on our larger goals. If those are simply to save the most oil for the least investment, then we ought to treat regular hybrids and PHEVs evenhandedly, rewarding the buyers of each proportionally for their contribution to reducing our oil imports. Using the figures above, that would result in a $3,200 tax credit for a PHEV, rather than $4,200. Better yet, if we're serious about saving gasoline, the incentives should be entirely technology-neutral, which might encourage carmakers like GM to import a few of their thriftier non-hybrid European models to the US.

If, on the other hand, we see this as a national technology play to build an advantage for manufacturers by driving PHEVs down their cost curve as rapidly as possible and making them as large a part of the vehicle fleet as rapidly as possible, then a disproportionate subsidy for PHEVs makes sense. In that case, however, should all PHEVs qualify, or only those produced by US auto firms? If the goal is to create a US edge in PHEVs, rather than just saving oil, then we ought to be explicit about it and target the incentives to deliver just that. At a time when tactics too often stand in for strategy, and technology is the answer to every question, I wonder how far such a debate would get.

Multiple Choice Process

This morning's email included a link to a Business Week article about a slate of new, non-traditional ethanol projects, including several based on the gasification of biomass. One of the great things about gasification is its ability to handle a wide variety of feedstocks, extending beyond oil, coke and coal to include, in this case, yard waste, wood chips and citrus peels. Although the article isn't very clear in describing the path from feed to gasification to end product, it suggests that some of these projects will gasify biomass to make hydrogen, ethanol and methanol. This has me scratching my head, because once you have the synthesis gas, or "syngas", that a gasifier produces, you can make essentially any hydrocarbon you want, particularly the long, straight-chain hydrocarbons of diesel fuel. Why use this expensive process to make challenging and problematic fuels, instead of one that is 100% compatible with current energy systems?

One of the biggest problems plaguing alternative fuels is infrastructure and end-use compatibility. Ethanol cannot be shipped through petroleum products pipelines, so it gets to market via costlier truck, rail and barge routes. Methanol faces similar constraints, and is a neurotoxin, as well. The logistical challenges facing hydrogen are even more daunting. Then, once these fuels reach a retail facility, the only current option for their use is in specially modified gasoline engines--or in the case of ethanol in low-volume blends with gasoline, in which the lower energy content of ethanol reduces fuel economy and vehicle range. This hardly sounds like the way to maximize the energy benefit of biomass.

Synthetic diesel fuel is another story. Compression ignition engines are typically 30% more efficient than the spark-ignition ones used with gasoline, and the properties of ultra-clean diesel from the Fischer-Tropsh synthesis process allow them to run optimally, with lower pollution than from petroleum diesel. If European-style diesel cars, with state-of-the-art particulate cleanup technology, take off in the US, demand for this kind of fuel will grow rapidly. It would also blend nicely with biodiesel, which still can't be used year-round in many northern markets, because of its poor low-temperature properties.

In terms of greenhouse gas emissions, since every carbon atom in the biomass gasification feed will ultimately result in a molecule of CO2 emitted to the atmosphere--without sequestration at the gasifier--the differences in overall emissions for the various fuel options described above depend on the efficiency of transportation and end use. Diesel handily beats hydrogen and alcohols on both counts, unless the hydrogen is feeding a fuel cell. All of this suggests that we may need to rethink our definition of biofuels to encompass any fuel from biological sources, not just those that chemically resemble current-generation biofuels, such as ethanol from corn or cane.

Biomass-to-diesel looks like a promising way to tap the environmental and energy security benefits of biofuel, even though its product is hard to distinguish from diesel made from non-renewable feedstocks. However, before climbing on the "BTL" bandwagon, we should withhold judgment until some of these plants have been built and run for a while. The solids-handling end of the gasification business can be tricky, particularly when dealing with material of inconsistent quality and characteristics. That could turn out to be a much bigger challenge for biomass gasification than the molecular engineering process that sits on the back end of these facilities, but which has been proven in over 80 years of application to oil and coal.

A Green Future

Sunday's Washington Post Outlook section featured several articles prompted by last week's TXU deal, including an interesting commentary by futurist Bruce Sterling on the development of a greener society based on a fusion of environmental values and capitalism. For anyone concerned about the threats posed by climate change and energy insecurity, but daunted by the enormous scale of the required solutions, the "dot-green" boom Mr. Sterling proposes could hold the key to shortening an otherwise lengthy transition period. Green values are a pivotal uncertainty in assessing the rate of change that is possible, but despite some notable recent signposts, this remains one uncertainty among many, and a truly green future is hardly a foregone conclusion.

If you've ever had the opportunity to hear one of Mr. Sterling's conference talks, you know how stimulating and entertaining he can be. He was in full raconteur mode yesterday, extrapolating from failed states to a failed fossil fuel economy, laying out the blueprint for a world in which environmentalism becomes deeply embedded in everything we do, including the most mundane consumer choices. What he's describing goes far beyond the "green chic" on display at last weekend's Academy Award ceremony, and he's been writing and speaking on this subject since the late 1990s, when he founded the "Viridian Design Movement", built around the idea of making green deeply trendy. This is a very appealing notion, in many ways.

However, as optimistic as Mr. Sterling's view of the future might be, there are important reasons why it represents only one possible scenario, rather than quite the inevitable future he portrays. First, even if the ideas behind it take off, it will be a long time before we can know if they will have the necessary persistence. Climate change and energy security are not problems of the moment, to be solved in the moment. Both will be with us for decades, and the pessimists are right, the effects of climate change could plague our descendants for centuries. The same inertia that made it hard to discern a dangerous warming trend from the normal variation of the climate could produce an extended period in which our best efforts appear to have little or no effect, testing both our patience and our pocketbooks.

Green values could also be trumped by urgent economic and geopolitical challenges. Mr. Sterling's "dot-green" future must unfortunately compete with darker, bleaker possibilities. The same Outlook section published another op-ed, by another novelist, warning of the potential nuclear danger from a rapidly arming China. An electromagnetic pulse attack might be as crippling as anything global warming has up its sleeve. Nor is this the only security threat that could divert attention and resources away from environmental concerns. Islamic terrorism and the numerous risks of the Middle East will hardly agree to go into suspended animation, while we all address climate change.

Still, at a time when so many people are either pessimistic about the future or overtly fear it, it's important to have optimistic voices reminding us that other paths and better outcomes remain possible. Last summer I asked, "Where is the good scenario?" Bruce Sterling offers one positive answer, amid a host of scary ones.

Emissions Guilt

Yesterday's Wall Street Journal included an article on the growing business of selling greenhouse gas emission offsets to consumers and businesses. The Journal was generally positive about the practice, while hinting that as it grows, the risks of paying for ineffective or fraudulent emissions reductions will increase. Caveat emptor. What caught my attention was their comment about how these offsets are perceived in some quarters. "Skeptical consumers are also wondering whether the programs are really offsetting their carbon footprints, or whether they're meant to just rid them of guilt." It's a legitimate question, because our experience of more than two decades of dealing with other environmental problems doesn't equip us to dismiss it easily. This perception is also one of the biggest hurdles that the offset firms face.

Climate change creates a number of new challenges for humanity, but it also provides a couple of unique opportunities. Efficient offsets fall into the latter category. Unlike for air pollutants--those nasty smog-forming compounds such as nitrates and unburned hydrocarbons, and the sulfates that cause acid rain--the effect of greenhouse gases (GHGs) is truly global, rather than local. That means that a ton of CO2 emitted in Boston has exactly the same impact on the climate as one emitted in Berlin or Beijing. The corollary is equally true for emissions cuts: any place or source is as good as another. That is the essence of the offset principle and the businesses founded on it.

When this idea is stretched too far, however, it naturally runs afoul of critics. The magnitude of greenhouse gas reductions required to stabilize global GHG emissions at a level that might stave off the worst consequences of climate change is very large, and no emitting sector can get a permanent pass. Viewed this way, the best use of offsets is as a bridge between the cuts we need to start making today, and the intrinsic reductions that will require the complete turnover of vehicle fleets and capital stock. They're also handy for emissions that can never be reduced to zero, such as those from jet aircraft. In other words, offsets provide a bootstrapping mechanism for making indirect cuts in emissions, where the direct cuts can't be done all at once or right away.

Personal cars are a good example of this. I bought a new car in 2004, and I don't expect to replace it until 2011 or 2012. When I was car-shopping, none of the hybrids met my criteria, and the only European-style diesel available was back-ordered, so I purchased a sedan with EPA ratings of 20 mpg city/29 highway. (In practice, this is more like 17/32, for an average of 22.) Since I drive about 6,000 miles a year, I'm responsible for annual CO2 emissions of 5,000 lb. Now, I could trade this car in on one that would cut these emissions by one-third to one-half. Buying a hybrid comparable to my current wheels would set me back about $10,000, after trade-in but before any hybrid tax credits. My alternative is to purchase emissions offsets for the next 5 years, then buy a more efficient model next time around--though it still won't be zero emissions by then. Five years of credits from my current supplier, TerraPass, will cost me $150 and offset 100% of my emissions. This is a no-brainer.

The Journal lists half a dozen carbon offset providers, with varying costs of reductions. European companies are going to have higher costs, reflecting the pricier emission credits markets in countries bound by the Kyoto Protocol, or credits from projects participating in Kyoto's Clean Development Mechanism. If you can reduce your own emissions directly at a lower cost than paying for offsets, such as with more efficient lighting, then you should do so. But if you can't replace every car and appliance with an ultra-efficient model--and of course there isn't enough manufacturing capacity in the world for everyone to do that in the same year--then offsets provide a nice, efficient medium-term alternative. And there shouldn't be an iota of guilt associated with using them that way.

Context of the TXU Deal

Monday's posting on the environmental aspects of the leveraged buyout of TXU by Kohlberg Kravis Roberts (KKR), Texas Pacific and their private equity partners generated a number of comments. They raised some interesting questions about the risk to Texas consumers posed by the cancellation of 8 of TXU's 11 planned coal-fired generating plants, and of the potential to meet those needs through a combination of renewable energy and greater efficiency. These questions can't be addressed without looking at the supply and demand trends in Texas, along with the state's plans for increasing the contribution of power from renewable sources. On balance, this deal isn't necessarily worse for Texas consumers than the status quo, while it's clearly better for the environment.

The Texas electricity grid is more isolated and self-sufficient than most of the regional grids in the country, with limited inter-connections to neighboring grids. Although that limits the flexibility of ERCOT, the Texas grid operator, to deal with unanticipated problems, the sheer size and geographical diversity of the Texas electricity market, which accounts for about 9% of US electricity generation, makes these concerns more manageable. ERCOT's relative isolation also makes it easier to assess the impact of future changes in supply and demand.

In a recent presentation to the Texas legislature, the head of ERCOT summarized historical supply and demand trends and laid out ERCOT's latest forecasts. They reflect the rapid disappearance of a generating surplus that as recently as 2002 provided a 35% cushion of spare capacity. ERCOT projects that this reserve margin will fall below their desired 12.5% minimum by 2009, even with projects for more than 3,000 MW of new capacity already permitted. Based on their forecast, Texas could have an actual supply deficit by 2015, if nothing were done to address this.

The other key fact that emerges from these figures is the state's heavy dependence on natural gas for power generation. Nationally, coal accounts for 50% of our electricity supply and natural gas only 19%. In contrast, Texas relies on gas for 70% of its power needs. Now, since it produces a quarter of America's natural gas from onshore and offshore sources, Texas isn't about to run out of this fuel. However, the price Texans pay for gas reflects national markets, with gas from Texas supplying industry and consumers in many other states. Barring a dramatic shift in federal policies on access to gas reserves, gas will never again see its $2/MMBTU price level of the 1990s. The current futures market reflects prices ranging from $7 to $9 over the next five years, and the economics of unconventional gas drilling, which accounts for a growing share of US supply, sets a floor price of around $5/MMBTU. Nor will LNG provide much price relief at these levels. So not only does Texas face a shortfall in generating capacity, but it is over-exposed to the high cost of natural gas for power generation. Against this backdrop, it's understandable that TXU would have wanted to make a big switch to coal.

But coal is not the only possible answer to this problem. As the state's own Energy Conservation Office indicates, Texas leads the nation in its potential for wind, solar, and other renewable energy. Last year Texas surpassed California in installed wind power capacity, with 2,370 MW. Texas has also established a Renewable Portfolio Standard (RPS) for electricity generation. Under this RPS, Texas utilities must derive 2,000 MW from renewable energy by 2009, 5,000 MW by 2015 and 10,000 MW by 2025. The 2015 figure equates to less than 7% of forecasted demand, even ignoring the lower capacity factors for intermittent sources such as wind and solar. As long as Texas has sufficient capacity from nuclear, coal and efficient gas generation to meet baseload needs, it's hard to see why most of the additional generation required couldn't come from more renewables. Efficiency investments that help to slow the growth of both peak and baseload demand will make that task easier.

In addition, with a national cap on greenhouse gas emissions looking increasingly likely--if not before the 2008 election, then soon after--it's not obvious that coal-fired power generation would remain cheaper in the long run than some of these low-emission alternatives, particularly wind or even nuclear power. Weighing all these factors, Texas consumers probably won't get much relief on electricity prices in the future, regardless of changes in the generating mix. If KKR and its partners fulfill their promises about adding renewable energy capacity and promoting efficiency, then at least from a supply and demand perspective, Texas need not be any worse off than under TXU's previous plan for a new fleet of coal plants, at least some of which would likely never have been approved or built. And in the process, the growth of the state's greenhouse gas emissions should slow significantly.