Cap & Trade: No Free Lunch

One thing I still miss about living in the New York metro area is receiving the Times on my front doorstep every morning. So instead of pouncing on Tom Friedman's latest column the morning it's published, I often don't see it for a couple of days, until I run across it on the Internet. The net effect is to raise the bar for Friedman remarks on which I feel compelled to comment, because they're usually superseded by other, more interesting topics on which to blog. Unfortunately, the theme of Mr. Friedman's column of last Saturday is likely to be with us for some time, working its way insidiously into our assessment of energy and climate policy. Cutting through its convoluted logic, it suggests that we can significantly increase the price of energy to send a signal concerning greenhouse gas emissions but somehow end up spending less on energy and becoming richer in the process. While I continue to support the basic idea of a cap & trade system for managing our emissions, touting it to the public as a free lunch seems likely to set us up for a future backlash not unlike the one the financial industry is now experiencing, after we learned that the cheap credit we've enjoyed came with a steep hidden price.

In his script for a hypothetical speech by President Obama, Mr. Friedman sets out his thesis this way: "Yes, the cost of gasoline or kilowatt hours will rise in the short term. But in the long term, your actual bills and expenses will go down because your car, appliances and factory will become steadily more productive and give you more power for less energy." This exaggeration of the basic principle that higher energy prices stimulate greater energy efficiency incorporates several basic fallacies, the most important of which is that while higher prices affect all consumers and businesses more or less immediately--some businesses may have hedged their energy purchases for a time--their capital stock of energy-consuming devices turns over slowly. It also ignores the diminishing returns to higher fuel economy. Someone buying a new, more efficient car might offset most or all of the fuel price increase via higher fuel economy, but the other 93% of car owners are stuck with higher bills for at least another year. The only means by which the remainder of the population can manage this higher expense is through reduced consumption, if not of energy then of other goods and services. We saw that effect on steroids last year, and we are still living with the hangover from it. But even the consumer who bought the frugal car might be worse off, if it cost much more than the model he would have bought otherwise. In effect, he traded some wealth for lower expenses.

The impact on businesses looks similar. While business investment is hardly a zero-sum game, higher investment in energy efficiency would come at least in part at the expense of other kinds of investment, perhaps in new computer equipment or staff hiring or training. Higher prices on energy thus promote improvements in energy productivity at the expense of other kinds of productivity. Although this certainly reduces expenses, it would take some time to reduce them in absolute, rather than merely relative terms, and without increasing top-line revenue. That might sound equivalent in terms of its impact on profits, but it often isn't. Expense improvements tend to get competed away in the marketplace, and are thus often not sustainable sources of earnings. So while business investment in energy efficiency might ultimately shield consumers from higher prices for finished goods and services, it seems unlikely to do much for corporate profits or stock valuations.

Mr. Friedman's assertion ultimately rests on an energy analogy to the experience of the electronics industry. If there is a Moore's Law for energy, it has yet to be discerned, let alone quantified. In the early phases of any new technology, "experience curve" effects can emulate Moore's Law-style improvements for a while. Then, as cumulative output grows the rate of change slows dramatically. Last year's DOE study on the feasibility of obtaining 20% of our electricity generation from wind energy included some interesting observations on cost. While the cost of new wind power fell dramatically between the 1980s and 2000, in classic experience-curve fashion, that decline appears to have bottomed out in 2002 and actually reversed somewhat since then. Moreover, when wind capacity is pushed further along its supply curve, the cost of incremental capacity is expected to go up, as prime wind locations are exhausted and new development is forced into more expensive regimes, in coastal waters or further from markets. Creating a bigger market for energy efficiency won't necessarily drive the cost of efficiency dramatically lower than it is now, or will be once the wave of efficiency investments triggered by $100 oil and $10 natural gas rolls through.

Like Mr. Friedman, I believe we should put a price on emissions of greenhouse gases--if not this year then fairly soon--in order to promote efficiency and the adoption of cleaner technologies over time. However, we shouldn't imagine this will be easy or cheap, let alone something that will create mountains of new wealth out of, literally, thin air. Haven't we all just been through something like that, to our regret? We can't suddenly start collecting fees on behalf of an environmental service--storing our waste carbon in the atmosphere--that has been free since the dawn of time and expect that this won't impose a burden on someone. More precisely, it represents a different kind of wealth transfer than the one we all complained about last year--sending our money to OPEC--in which those who use energy (most of which is still derived from fossil fuels) will send money to those who use less of it and to those who are developing new ways of producing and using it with fewer emissions--and of course to those administering these programs. That should benefit investors in green technology, but someone else will get the bill.

Dangerous Delusions

If you've read this blog for any length of time, you know that it's not my practice to single out individual officials or politicians for particular praise or criticism, preferring an even-handed and scrupulously non-partisan approach. So it is with some reluctance that I feel compelled to share my considerable alarm about the views expressed by the new Chairman of the Federal Energy Regulatory Commission (FERC), Mr. Wellinghoff. His suggestion that "baseload capacity is going to become an anachronism" and that renewable energy can meet all our future energy needs represents a dangerous delusion, at least for the next several decades. I am not dismissing the vital contribution of renewables in addressing climate change, or the potential of a smarter electricity grid to accommodate a greater share of generation from renewable sources than would be feasible today. However, while I appreciate the benefits of visionary leadership in moving the country towards those goals, that vision must be grounded in reality, and not skewed by wishful thinking or the ingrained habits of a long career spent in advocacy for renewable energy.

My first recommendation to Mr. Wellinghoff would be to read today's Washington Post op-ed by Dr. James Schlesinger, the nation's first Secretary of Energy, and Dr. James Hirsch, a former official of that department's predecessor agency. More than 30 years ago, they were responsible for the early research initiatives that helped to develop many of the renewable energy technologies that Mr. Wellinghoff promotes. Their deeply informed comments on the inherent limitations of renewable energy lead to inescapable conclusions about the need to balance these intermittent and cyclical energy sources with the stability provided by large, central generating facilities capable of producing electricity around the clock, without daily or seasonal fluctuations.

My next suggestion to him would be to invest some time analyzing the electricity statistics of Denmark, which leads the world in deriving nearly 20% of its electricity needs from wind power. These data demonstrate the dramatic seasonal variance in Denmark's wind output. In 2008 alone, the country's 3,180 MW of wind turbines generated as little as 234 gigawatt-hours (GWh) per month (May) and as much as 1,050 GWh (Jan.), resulting in monthly effective capacity factors ranging from 10% to 44% of installed capacity. The monthly stats also demonstrate how this remarkable volatility can be accommodated without causing massive disruptions to the Danish economy. This is only possible through tight integration of the Danish electricity grid with those of its neighbors via robust interconnections--big power lines. When Denmark has more wind power than it needs, it is exported to Norway, Sweden and Germany. When its wind turbines are becalmed, it draws on the enormous hydroelectric reserves of Norway and nuclear and hydropower from Sweden. Because of the variability of wind power, Denmark's electricity import/export balance fluctuates daily, monthly, seasonally, and even from year to year. But the US isn't Denmark. We have 55 times as many people, and no neighbors with bigger power grids than ours.

We can't yet know the mix of central and distributed power, or of baseload and variable power that the US will ultimately need to power our economy and meet the emissions reduction targets we will take on. Improvement of the grid and the advent of "dispatchable demand", including smarter appliances and electric vehicles that could be preferentially recharged when renewable electricity is abundant will certainly increase the amount of renewable energy that can be absorbed usefully. However, that will not entirely obviate the need for large baseload power plants, and pursuing an agenda that makes it more difficult to build at least enough new nuclear power plants by the 2020s and 2030s to maintain nuclear's present 20% share of net generation would be disastrous for both US energy security and for our ability to reduce our contribution to climate change. I can only hope that Mr. Wellinghoff is open to modifying his views, as he adapts to his new role.

The Water Behind Ethanol

US ethanol producers didn't need more bad news. Despite federal and state blending subsidies and a steadily increasing federal mandate for the use of their product, the US ethanol industry has been suffering badly from low margins in the wake of last year's oil-price collapse. A number of companies, large and small, have been forced to seek Chapter 11 bankruptcy protection. The bankrupt VeraSun, a former industry leader, recently sold seven of its plants to independent oil refiner Valero, and several others to its creditors. But while last year's "food vs. fuel" controversy has largely died down, thanks to lower corn prices, a new study from the University of Minnesota suggests that some ethanol production uses even more water than previously estimated--as much as 2,000 gallons of it for every gallon of ethanol produced in states where crops must be irrigated. This finding further undermines the environmental benefits of a fuel that saves significant amounts of oil but requires large inputs of natural gas and other fossil fuels, and thus offers only modest greenhouse gas improvements over gasoline.

As with its other environmental liabilities, most of ethanol's water impact occurs upstream of the ethanol plant. Process water for slurrying corn and boiling, fermenting and distilling fuel ethanol only accounted for 3% of the total water consumption analyzed by Chiu, Walseth and Suh in their paper, "Water Embodied in Bioethanol in the United States". They also reported a remarkably wide range for the ratio of total water consumption (irrigation and process) per unit of produced ethanol by state: under 10:1 in Iowa, Kentucky and Ohio, and over 1000:1 in California, Colorado, New Mexico and Wyoming. Fortunately the latter states contributed just 3% of the 2007 ethanol production tallied in the study, resulting in a national average of 142 gallons of water per gallon of ethanol. However, two significant ethanol-producing states, Kansas and Nebraska, accounted for 14% of ethanol production but more than half of all US water consumed for ethanol, with ratios above 500:1. A useful chart in MIT's Technology Review illustrates these variations from state to state.

These findings add to an already daunting list of concerns about the long-term sustainability of an alternative energy policy that has so far relied mainly on biofuel produced from a food crop requiring extremely high inputs of water and natural-gas-derived fertilizer. The water dependency of corn ethanol looks even more unsustainable under various scenarios of climate change, which ironically this fuel is intended to help mitigate. Simply put, if water in the West and Southwest is likely to be in even tighter supply in the future, the last thing we should be doing with it is to divert it to the production of such a water-intensive oil substitute. The urgency of converting biofuel production to cellulosic feedstocks requiring little or no irrigation is high, at least for those states with water:ethanol ratios above the national average, but unfortunately urgency and bigger research budgets don't guarantee making today's demonstration-scale cellulosic ethanol technologies economical at larger scales. Breakthroughs don't arrive on demand.

The results of Chiu, Walseth and Suh provide further support for a thorough reevaluation of US biofuel policies. Rather than trying to squeeze ever more ethanol into gasoline, with uncertain consequences for motorists, and stretching our agricultural resources by expanding unsustainable crop-based biofuels of questionable value for reducing greenhouse gas emissions, the administration should ask the Congress for authority to freeze the conventional ethanol portion of the Renewable Fuel Standard at its current level of 10.5 billion gallons for 2009. That still represents a 9% increase over 2008's consumption of 9.6 billion gallons, which took well over a trillion gallons of water to produce. Further increases should await either economic cellulose-based biofuel, or the imposition of prudent standards limiting the embodied water and fossil-energy content of this fuel. That won't help today's overbuilt ethanol industry, but it would ensure that its survivors enjoy a more viable, sustainable future.

Time to Choose

Last week's finding by the US Environmental Protection Agency that greenhouse gas emissions "threaten the public health and welfare of current and future generations" should not have come as a surprise. It has been virtually inevitable since the Supreme Court decision in Massachusetts v. EPA two years ago, and it was rendered imminent by the election last November of Barack Obama, who made responding to climate change a centerpiece of his presidential campaign. Whatever you might believe about the risks of climate change, we no longer have a choice between addressing them or ignoring them. Representative Edward Markey (D-Mass.), who chairs the Select Committee on Energy Security and Global Warming, responded to the finding by saying, "It is now a choice between regulation and legislation." I don't think that's quite accurate, particularly since his own proposed climate legislation includes many strong regulatory features. Instead, I believe the choice lies between relying primarily on an explicit price for emissions to nudge consumers and businesses away from emissions-intensive activities, and employing a more prescriptive approach using mandates, "standards", and air pollution-style rules on smokestacks and tailpipes. Long-time readers won't need to infer my position on this matter from the way I've described that choice.

I've argued the case for cap & trade numerous times on this blog and in front of various audiences, corporate and public. I've also expressed my misgivings about the imposition of a strict cap & trade system in the middle of a recession, particularly if the government intends to use the revenues from cap & trade to fund a dog's breakfast of non-energy programs, rather than returning the bulk of it to taxpayers. I've even suggested that under some circumstances a simple carbon tax might be preferable to cap & trade, since both serve the purpose of establishing a price for emissions, to which our market economy must respond by shrinking emissions-intensive sectors and growing low-emissions ones, including the renewable energy sector with its vaunted "green jobs." I've spent less time, however, examining the regulatory approach, perhaps because I regarded it as self-evidently inferior, particularly if it looks more constraining than the version of cap & trade that might accompany it. It is abundantly clear that many others do not share that view.

The main appeal of the regulatory path is that it would build on long experience in managing other environmental impacts--including many from energy systems--under existing federal and state air and water quality regulations, the federal Renewable Fuel Standard (RFS), and numerous state-level renewable electricity standards (RPSs) and other regulations. But these programs also illustrate some of the severest drawbacks of this approach, in the complexity and overlapping nature of these rules. Regulating emissions that are not incidental to, but rather a fundamental consequence of the use of our principal energy sources would add further layers of complexity without subtracting any, as cap & trade might eventually be expected to. We already have trading in Renewable Energy Certificates (RECs) for state RPS compliance, Renewable Identification Numbers for compliance with the federal RFS, and sulfur and nitrogen credits for compliance with the Clean Air Act's rules for criteria pollutants. And because the GHG emissions from motor vehicles are determined largely by how much fuel they consume, efforts at regulating tailpipe emissions become de facto fuel economy regulations, in conflict with the federal Corporate Average Fuel Economy regs. (This is the matter on which California eagerly awaits a waiver from the administration to pursue its legislated Low-Carbon Fuel Standard.) With all due respect to the dedicated professionals at the EPA, anyone contemplating leaving the regulation of greenhouse gas emissions to that agency should be required to pass a test demonstrating that they understand the EPA's notice implementing the RFS for 2009, which involves the comparatively much simpler task of setting the required ethanol percentage in gasoline for the year.

We are now at the point that I have long feared we would be, if we mislabeled carbon dioxide as a pollutant. While the consequences of excess CO2 and other naturally-occurring greenhouse gases certainly live up to the terms the EPA has applied in its finding, unleashing a pollution mentality to solve climate change will be counter-productive and unnecessarily expensive, when dealing with a phenomenon for which a ton of CO2 emitted, captured or avoided in Boston is exactly equivalent in its climate impact to a ton emitted, captured or avoided in Beijing. We would have been much better served if the Supreme Court had paraphrased the Hitchhikers Guide to the Galaxy and found that CO2 was "almost, but not quite, entirely unlike" pollution, yet here we are.

By next year's Earth Day, the 40th anniversary of the first one, I expect that we will have made our choice between these competing approaches. We see signs of this in the apparent determination of the administration to arrive at the Copenhagen climate conference this December having taken concrete steps here, and in the competing cap & trade bills making their way through the Congress. I can understand that opponents of strict legislation on climate change might regard the EPA's endangerment finding as a high-stakes game of chicken. But whether it serves as an implicit threat or merely an insurance policy against protracted legislative delay, it--rather than inaction--represents the new baseline. Anyone who has been sitting on the fence must now decide which approach is likely to be more effective in dealing with the US contribution to global warming, while simultaneously doing less harm to our economy. After long and careful scrutiny of the options, and after spending a career in an industry that has already been regulated to the gills, I find pricing emissions by far the most attractive solution. This is anything but a trivial decision, though it is one that must be made, and soon, before the default option becomes as inevitable as the endangerment finding was.

Paying $300 for Oil

Predicting the future price of oil has always been something of a sucker bet. Although the fundamentals of the moment are relatively transparent, they are subject to interpretation, and future fundamentals--and thus prices--are affected by diverse and daunting uncertainties. I've seen oil-price forecasts ranging from $20 to $200 per barrel, while the market consensus reflected in the forward pricing curve of the futures market hovers around $70 past 2010. But there's at least one market that values oil much higher, with practically no uncertainty. I'm referring to the oil price implicit in US government incentives for some hybrid cars and alternative fuels. While these programs doubtless offer benefits beyond simply displacing imported energy, including stimulating new jobs and reducing emissions, the effective price paid for the avoided energy or emissions is still relevant, because it contributes to the federal deficit and determines how much of these benefits we can afford to buy.

In a well-known mystery story Sherlock Holmes points out "the curious incident of the dog in the night-time", referring to a dog that didn't bark when it would have been expected to. In the context of energy, the dog that didn't bark is the energy we didn't consume, but might have. In particular, if we avoided consuming a gallon of gas or kilowatt-hour of electricity as a result of investing in more efficient technology, then the cost of that investment puts an implicit price on the energy we saved. When it's lower than the going rate, we get an economic return on our investment. When we pay more than a market price, the premium paid comes at the expense of other things we could have bought with the extra money. That's true at either at the personal or national level.

Consider a typical hybrid car tax credit from the IRS's list of those available in 2009, noting that the tax credits for all of Toyota's popular hybrids have expired. The Ford Escape small SUV qualifies for a $3,000 credit on the front-wheel-drive version. Based on its EPA fuel economy estimate of 32 mpg, the Escape hybrid would save 1,223 gallons of gasoline over a 100,000-mile life, compared to the 23 mpg non-hybrid 4-cylinder Escape. On an undiscounted basis that equates to $2.45/gal. for the avoided fuel. That's a little higher than current pump prices but seems reasonable enough. Still, after you factor in the $0.184/gal. federal excise tax not collected and convert to barrels, Uncle Sam is paying the purchaser of that Escape Hybrid the equivalent of $110/bbl for the fuel it won't use. Some of the other hybrids on the list look a bit better on this metric. For example, the Dodge Durango Hybrid qualifies for a $2,200 tax credit. At 21 mpg, compared to 16 mpg for the non-hybrid Durango, the same calculation yields an effective price of $70/bbl of fuel avoided.

Of course the key to this comparison is the tricky assessment of what a consumer would have bought if the tax credit weren't available. Perhaps instead of comparing the Escape Hybrid to its non-hybrid version, we should assume that the combination of $3k and the allure of a "green" hybrid might divert someone from buying a larger SUV, such as the 17 mpg Explorer. In that case, the effective price of avoided petroleum consumption would be closer to $50/bbl and a smart buy for the government and consumers alike. Unfortunately, this logic can cut both ways. A new federal tax credit offers buyers up to $7,500 toward the purchase of plug-in hybrid electric vehicles (PHEVs). Even if a future buyer of the widely-publicized 100 mpg Chevrolet Volt were lured away from buying an 18 mpg gas guzzler, the cost of avoided fuel would equate to around $75/bbl, while on the much likelier comparison to a Toyota Prius it would rise to a whopping $322/bbl, due to the diminishing returns of higher fuel economy. And that completely ignores the energy that goes into the grid electricity inputs needed to reach the notional 100 mpg estimates for a typical PHEV.

Similar comparisons are possible for other federal energy incentives, such as the $0.45/gal federal blending credit for ethanol. On the surface, this looks pretty good, at least in oil displacement terms. After adjusting for ethanol's lower energy content relative to oil, the direct cost works out to $0.68/gal. of avoided gasoline, or less than $30/bbl. However, that's before accounting for the significant inputs of oil and natural gas required to produce the corn-based ethanol that dominates the US market. With an average net energy input of 77 BTUs of fossil energy--mainly in the form of natural gas and gas-derived fertilizer--required for every 100 BTUs of corn ethanol produced, a more realistic assessment of the effective cost of the net oil-equivalent energy ethanol contributes would be around $120/bbl.

These figures are all ballpark estimates and they ignore the value of the emissions reductions that accompany the energy savings or gains involved. Nevertheless, they highlight an important, under-appreciated aspect of US energy policy that has been accepted with little dissent. I can only imagine the outcry if the Congress granted US oil producers a guaranteed price ranging from $100-300 per barrel. Yet although hybrid cars and alternative fuels have acquired an enviable "motherhood and apple pie" aura, we should be equally cautious about subsidizing them to such an extent that they embed high implicit energy costs into our economy. Just as paying over $100 per barrel for imported oil last year was rightly viewed as an unsustainable drain on our financial resources, paying over $100 per barrel to avoid those imports might prove equally unsustainable, if these subsidies are continued beyond their present expiration dates or phase-out limits.

China's Oil Strategy

I was intrigued by a couple of items I ran across in the morning papers concerning China's pursuit of new oil sources. The Chinese National Petroleum Corp. is apparently in talks with the Venezuelan state oil company, PdVSA, and Total for a heavy oil producing and upgrading concession in the Orinoco heavy oil zone, as well as discussing a partnership with Shell to bid on new oil projects in Iraq. China may still lag the US in oil imports, but it is catching up fast, and the efforts of state-controlled CNPC suggest that China has a strong sense of the importance of future oil supplies in supporting the country's economic growth. Perhaps we should take a page out of their book.

I'm not suggesting that the US consider setting up state-owned oil companies or pursuing the kind of government-to-government deals that would take large quantities of oil off the global market for years to come. Not only is that unnecessary for us but counterproductive, as well, considering the inflexibility it locks in. At the same time, it seems clear that China regards oil as a key strategic resource--a pillar industry--and that ensuring access to it remains essential for economic and national security, even in a world increasingly focused on renewable energy. Although our environmental priorities are quite different from those of China, our economic priorities have more in common. Oil represents energy diversification for China, while it is a mainstay of our own energy economy; however, both countries will consume many billions of barrels more oil before either of us reaches the point at which some combination of energy efficiency and alternative energy renders it passé.

The common thread here is access. In the case of China, it is to oil reserves around the world, as its oil industry outgrows its domestic roots. For the US, the task is more complicated. Falling oil prices have created a great opportunity to reverse the tide of resource nationalism that accompanied the rapid rise of oil prices from the $20s to nearly $150 per barrel. Countries that built their budgets on soaring oil revenues are straining, and some astute diplomacy by our government could help open some doors that had swung shut in recent years. But just as we are keen to set the right example on climate change policy, going into December's talks in Copenhagen, it is bootless to plead for access to other countries' oil fields when we restrict access to our own untapped resources so tightly.

A new report by the Department of the Interior indicates a mean estimate of "undiscovered technically recoverable resources" under the US Outer Continental Shelf of 86 billion barrels of oil and a similar quantity of natural gas, including significant quantities off the Pacific coast. To put that in perspective, the cumulative volume of the federal Renewable Fuel Standard between now and 2022--including large quantities of cellulosic ethanol that is still at least as speculative as the undiscovered oil resources highlighted by the Interior Dept.--sums to 308 billion gallons of ethanol, the energy equivalent of a little over 4 billion barrels of oil. In other words, there's potentially 40 times more energy in the oil and gas that remains to be found in our own waters than in all the ethanol and biodiesel we're required to burn over the next 14 years.

Once again, I should emphasize that this is not an either-or proposition. For all the faults and limitations of our present biofuel strategy--and they are numerous--the potential of non-food-based biofuels looks significant and too good to pass up. However, the same is also true for the opportunity represented by our own undiscovered potential oil and gas resources, which at least one study suggests could contribute over a trillion dollars in new royalties and taxes to the Treasury, if developed. Whether or not China would be as reticent as we have been about such a resource off their shores, we must recognize that the global oil game is changing in response to new players, and that it is a game we cannot yet afford to opt out of, because renewable energy is not yet ready to fill the gap that would be left, nor will it be for at least another decade or two.

Fuel of the Past?

Today's Wall St. Journal features a front-page article sounding the death-knell for the growth of US gasoline demand. The combination of recession, stricter fuel economy standards, and the hangover from last year's high gas prices, together with growing biofuels consumption, appears to herald a peak in gasoline sales. The Journal cites a forecast from ExxonMobil in support of its conclusions. However, to assess the full implications of such a shift, it's important to differentiate between a decline in the requirement for the petroleum-based components that gave gasoline its name and the demand for the fuel generically referred to as "gasoline", which in most of the country already includes up to 10% ethanol, and is likely to include a more diverse mix of non-oil constituents in the future.

According to data from the Energy Information Agency of the DOE, US average daily gasoline consumption peaked in 2007 at 9.29 million barrels per day (MBD), declining by 3.5% last year. However, if we back out the blended ethanol volumes included in that tally, petroleum-based gasoline demand peaked a year earlier at 8.93 MBD and has fallen by 5.3% since then. With a federal renewable fuel standard (RFS) that mandates ever-higher volumes of biofuels, and with the apparent breakdown of many of the trends that have been driving gasoline consumption up since the end of the energy crisis of the 1970s and early 1980s, including annual vehicle miles traveled, that 2006 figure could prove to be the high-water mark for petroleum gasoline. However, the Journal's analysis also ignored or downplayed several factors that could soften its decline, particularly for the oil-and-biofuel blend that "gasoline" has become.

The most obvious of these is low fuel prices. Since monthly gasoline demand bottomed out at around 8.5 MBD last August, we've seen demand rebound somewhat, in response to the dramatic drop in gasoline pump prices. But while this factor might be self-correcting, since higher demand will tend to push up prices, which will retard further demand growth, another factor is creating a new source of steady underlying demand growth: As the RFS ratchets higher, the energy content of gasoline falls, and it takes more gallons to travel the same distance. With 8 billion gallons of ethanol included in last year's gasoline sales, the average gallon of gas delivered 112,700 BTUs to your car in 2008. At the 13.2 billion gallons of ethanol required in 2012, that figure would fall by 1.2%, requiring a corresponding increase in volume to compensate for its lower energy content. In fact, unless sales of biodiesel ramp up significantly, relieving the pressure to blend more and more ethanol into gasoline to satisfy the RFS, the current car fleet would require 7% more of 2022's "gasoline" to drive the same total miles as last year.

Under the federal fuel economy regulations enacted in 2007, the increased demand for less-energetic fuel should eventually be overwhelmed by the energy-efficient cars expected to make up a sizable fraction of the US car fleet by 2022. If anything, those standards will become even stricter, as the administration seeks to align fuel-economy rules with California's pending tailpipe standard for greenhouse gas emissions. As with everything else, though, there's no free lunch for CAFE standards. The same weak economy that is constraining gasoline demand is depressing car sales to an even larger extent. I haven't seen any credible forecast suggesting those sales will bounce back to their pre-2008 level of roughly 16-17 million vehicles per year any time soon. At 12 million cars per year, which would represent a nice rebound from today's levels, it would take an extra 5 years to turn over the existing US fleet of 245 million light-duty vehicles (ignoring motorcycles.) That assumes no net growth in the fleet, despite US population growth of roughly 1% per year. It also remains to be seen whether fuel prices and/or tax policy will effectively nudge Americans into the more efficient cars that the government wants us to drive.

On balance I think the Journal is right to conclude that the heyday of US gasoline has passed. However, much as with Peak Oil, anyone expecting a prompt and precipitous sustained drop in US gasoline demand is likely to be disappointed by the structural inertia of an enormous, slowly-changing vehicle fleet, a growing population, and alternative fuel regulations that are steadily diluting the energy content of the fuel. That means that while oil companies can't count on gasoline sales growth here to drive future profits, the mature US gasoline sector could still serve as a cash cow for their other business lines, including the search for more oil to meet the growing energy needs of large developing countries. Every first-time car buyer in China and India adds another increment of net global demand, and the industry will have its hands full satisfying that demand, once the global economy gets back on track.

The Candy Bar Energy Diet

After becoming increasingly frustrated with insubstantial US network evening news shows, larded with equal helpings of “pessimism porn” and “feel good” stories, my wife and I recently switched back to BBC America. Last night’s news included a clever segment called, “The Ethical Man Reborn in the USA.” This featured a sardonically humorous reporter making his way across the country on public transportation to drum up concern about climate change. Yesterday’s program focused on a town hall meeting in Muskegon, Michigan, in which Mr. Rowlatt demonstrated America’s energy profligacy by converting our average daily energy consumption to its equivalent in candy bars. But while the unsubtle message of gluttony was delivered with a smile, my take-away was quite different from the intended one.

Before I could draw any serious conclusions from this little demonstration, I felt obliged to check his math. The most recent figures on per capita energy consumption from the Energy Information Agency reveal that the average American uses 337 million BTUs, or British Thermal Units, of energy in all forms per year. (That excludes the energy content of food consumed.) This works out to 233,000 kilocalories, or food Calorie equivalents, per day. Dividing by the 271 Calories in a Snickers bar gets us to 860, roughly the number of candy bars that Mr. Rowlatt showered on his audience by way of comparing our energy consumption to a daily food diet equivalent to 8-10 candy bars per person. In other words, Americans consume something like 100 times as much energy as food, thus contributing enormously—and more than most other countries—to climate change. He then swept all but a few of the bars off the table, suggesting that the heap on the floor represented the national energy diet we must go on to achieve an 80% reduction in greenhouse gas emissions by 2050.

As clever as this symbolism was--I admit I had never thought about our energy use in quite these terms before--there are a few problems with the logic, although the basic math is sound. For one thing, while our present energy mix, heavy in fossil fuels, makes energy and emissions largely synonymous, that would presumably no longer be the case in our low-emissions future. An 80% emissions cut can’t depend on an 80% energy cut, or we’ll all be starving in the dark, or at least leading lifestyles that most modern Americans would find pretty unappealing. As important as efficiency improvements are to achieving large emissions reductions, particularly early on, the long-term trend of civilization is increasing energy use, and sooner or later that will overcome efficiency. The key to achieving that 80% emissions reduction is a massive transition to low-emission energy sources. As we envision this today, that means renewables and nuclear power, with some proportion of lower-emission fossil fuels, presumably natural gas and carbon-sequestered coal. When that shift is complete, sometime later this century, we’ll still be energy gluttons in world-historical terms, but presumably cleaner ones.

OK, it’s a semi-humorous news segment and I shouldn’t scrutinize its message too deeply, right? But aside from its somewhat misleading conclusion, I found that the candy bar demonstration made tangible one of the main themes of this blog since I started it in 2004: The scale of our present energy economy greatly constrains the ease and speed of its transition to other forms. Consider biofuels. Thanks to the Green Revolution, a large continental land mass, and plenty of energy-intensive fertilizer, the US produces a substantial food surplus. We can feed ourselves abundantly and still have food left over to export to other countries. However, even the most optimistic estimate of future agricultural productivity must fall well short of assuming that we can produce energy crops equivalent to 100 times our food consumption, or even 50 times, allowing for an eventual doubling of our current energy efficiency. Even if we’re just looking at replacing our per-capita gasoline consumption, that would still require the equivalent of 36,000 Calories per day, or about 14X our food intake.

That comparison reinforces my conclusion that we cannot hope to rely solely on energy sources derived from photosynthesis—or with conversion efficiencies little higher than photosynthesis—to solve our energy and emissions problems. Advanced biofuels such as cellulosic ethanol still have the potential to be an important element of our future energy mix, but they can’t replace the concentrated energy we get from fossil fuels, and they may be no more than a bridge to a long-term energy economy based mostly on electricity derived from the atom, advanced solar and geothermal power, and augmented by intermittent power from wind, wave and tidal energy. After all, as I’m sure your mother told you years ago, we can’t live on candy bars.

Hybrid Choices

Having just returned from a brief family vacation, I spent much of the last few days driving. That afforded much time to ponder the mix of cars on our roads and the product-line choices the administration may soon be imposing as it attempts to restructure the ailing US auto industry. The conventional wisdom appears to favor building lots of hybrids, though that leaves open the question of which vehicles or vehicle types to hybridize first. It also ignores the potential of clean diesels, for which there is already more than adequate refueling infrastructure. In any case, I hope the government avoids the trap of focusing the industry's hybrid efforts mainly on small cars. That's not just because sales of small cars are suffering under current low fuel prices, but because the potential to save fuel in larger cars is much greater. Our national energy goal ought not to be hybridizing cars, but saving as much imported petroleum as possible. That means putting hybrid and other advanced powertrains where they'll do the most good.

I was surprised by the number of questions I received from friends about hybrids on this trip, including one couple who asked whether they should buy a Prius. Although hybrids' share of US car sales remains quite low, their "share of mind" appears to be much higher than those figures would suggest. However, unless the administration intends to impose high enough taxes on gasoline to drive consumers towards hybrids and smaller cars, hybrid economics look shaky at $2 gasoline, particularly for those models for which the tax credits have already phased out. Although I continue to believe that oil prices will rebound strongly once the economy recovers, I would sympathize with a consumer who is worried that the $8,000 premium for the 2010 Ford Fusion Hybrid over a base-model Fusion (or $3,300 over the best-equipped non-hybrid four-cylinder Fusion) appears hard to justify, even after the $1,700 federal tax credit now available. After all, the base Fusion is hardly a gas hog, at 20 city/28 highway. As appealing as the hybrid seems, typical annual fuel savings would be around 200 gallons--less if you do a lot of highway driving. That's pretty good, compared to the Toyota Camry Hybrid, which would only save around 130 gallons/year over the non-hybrid 4-cylinder Camry, but it only translates to $33 per month.

If we can't hybridize every car at once--and it's clear we can't and probably shouldn't even try--which ones should get the highest priority, particularly if the government, rather than the market, is calling the shots? The clear answer seems to be intensively-used urban vehicles such as taxis, delivery vans, and police patrol cars. If hybrid economics look shaky for the next few years, go where those economics look strongest, even with low fuel prices. Take that same Camry Hybrid or its Detroit counterpart and put it into taxi service, driving 20,000 miles or more per year, all in the city, and the fuel savings expand to nearly 600 gallons. Even at $2/gal, the hybrid model would pay out its higher cost in less than 6 years, and that would drop to less than 4 years with gas at $3, or 3 years at $4. Similar calculations apply to clean diesels. Although their fuel savings are somewhat lower than for hybrids, even with diesel fuel and gasoline again close to price parity, the up-front premium is also typically lower.

Targeting light-duty and heavy-duty urban vehicles would provide additional benefits, both for air quality and vehicle performance. Hybrids emit less pollution and most give at least a few miles of electric-only driving with zero local emissions. You also need a much bigger gasoline engine--with even higher fuel consumption--to deliver the same torque as an electric motor or a diesel. If the administration intends to dictate the future product mix to car companies that accept government assistance, it should base its choices on tangible benefits such as these, not just on a vague preference for "green".

Zombie Project?

A year ago, the FutureGen partnership to build a prototype low-emissions coal power plant incorporating gasification and carbon capture and sequestration (CCS) technology looked dead in the water. Now, according to Technology Review, it may be on the verge of revival. A cynic would point out that a project sited in the home state of the new President might be a little harder to kill than most. It also can't hurt that Illinois's senior Senator stands high in the leadership of the majority party. However, there may be objective reasons to carry on with the project, particularly if the cost assessments that led to its "restructuring" were flawed, as suggested in a report issued recently by the General Accounting Office. Moreover, although major R&D projects ought to be carried out as efficiently as possible, I'm not sure that project costs should be the primary criterion for evaluating a one-off proof of concept, especially for such a crucial technology.

At its estimated cost of $1.8 billion for a 275 MW power plant, FutureGen must be the most expensive coal-fired power plant project in the world, for its size. That equates to $6500/kW of capacity, roughly triple the cost of a conventional coal plant and six times the cost of the combined-cycle gas-turbine unit that its core power block resembles. In normal utility service it could never compete with the cost of power from other technologies. If the project is successful, it should produce reliable power for many years, but as a byproduct of its principal purpose, which is to demonstrate a fully-integrated process for reducing the greenhouse gases and criteria pollutants from fossil-fuel power plants to the maximum extent possible. While all of the elements of this system, involving the gasification of coal to produce hydrogen, combustion of hydrogen in a gas turbine, and the capture and sequestration of CO2 from flue gas have all been demonstrated separately, with some of these elements in routine industrial and oil-industry service, integrating them at scale and running them together to determine the suitability of such a system for wider deployment has not.

As I described recently, CCS is a key technology for addressing climate change and for holding down the cost of large-scale reductions of emissions, once we've harvested the low-hanging fruit of energy efficiency and methane destruction. That doesn't mean FutureGen should be given a blank check, unless the new management at the Department of Energy can convince themselves that, particularly in light of all the work already done on this project, it represents the quickest and most effective next step in proving the technology. In particular, they should assess whether FutureGen includes outcomes beyond a proven prototype CCS power plant, such as opportunities to transfer technology elements to improve the efficiency or cost of other new and existing facilities. For example, could it improve existing integrated gasification combined cycle (IGCC) designs to increase their efficiency advantage over supercritical pulverized coal and other conventional coal technology, and thus reduce emissions even without full CCS? Could it advance our knowledge concerning the retro-fitting of CCS to existing power plants? If the answers to these questions look promising, then FutureGen deserves reviving, even if that creates the appearance of home-state favoritism.

Note: Energy Outlook will be on vacation for a few days. New postings should resume next Wednesday or Thursday.

Perfect Energy

The recent start-up of the latest large-scale nuclear fusion experiment, the National Ignition Facility at the Lawrence Livermore National Laboratory, was greeted with the customary mix of fanfare and skepticism that has accompanied the quest for practical fusion power for as long as I have followed it, starting as a seriously nerdy child. MIT's Technology Review does a good job of describing the new facility, which will use high-powered lasers to attempt to create useful amounts of nuclear energy. But rather than focusing on the stupendous potential of fusion energy and whether this device might finally be the one to deliver on it, I'm more interested in what our dogged pursuit of this technology through decades of frustratingly slow progress says about our collective view of our current energy sources. How much of the search for fusion springs from its inherent value, and how much from our dissatisfaction with every other long-term energy option we possess?

The answer may lie in the generally-assumed characteristics of a successful commercial nuclear fusion reactor technology, providing cheap, reliable and concentrated energy from a fuel that is as ubiquitous as it is limitless, using a process that creates large amounts of power but essentially no harmful waste. Is that a realistic expectation, or merely the aggregated antonyms of the shortcomings of every existing energy source? Consider the alternatives:

• Fossil fuels are finite, and their production and use release a variety of unwanted byproducts, including greenhouse gases implicated in climate change. Their reserves are also unevenly distributed, giving rise to worrying levels of rent-seeking, resource nationalism, and geopolitical instability and insecurity.
  
• Wind power is intermittent, unpredictable and unsightly, requiring extensive adaptation of the power grid, ample fossil-fueled back-up, expensive energy storage or all of these to contribute reliably on a large scale.
  
• Solar power is more predictable than wind but still expensive, inefficient and cyclical, delivering less than a quarter of a day's peak output even in optimum locations. It takes well over 3,000 MW of solar installations to generate the same amount of energy as one 1,000 MW coal-fired power plant.
  
• Geothermal power is reliable and relatively cheap. However, the "hydrothermal" reservoirs--natural deposits of steam and very hot water--that it taps are unevenly distributed and often far from markets. Enhanced, or "dry rock" geothermal offers greater promise and flexibility, though it is still in its infancy and might also cause earthquakes.
  
• Ocean power taps waves, tides or temperature gradients, offering enormous potential while sharing many of the drawbacks of wind, solar and geothermal. It is also decades behind them in development.
  
• Biofuels' necessary shift away from unsustainable food-based feedstocks depends on unproven or expensive technology. Truly large-scale biofuel production entails harvesting and hauling vast quantities of bulky materials with low energy densities, raising serious questions about whether it can ever create a sufficient energy surplus for the rest of the economy. This limitation also applies to electricity generated from biomass.
  
• Perhaps fusion's first cousin, fission, comes closest to its ideal, providing large amounts of cheap kWhs on demand, around the clock and with very low emissions. Unfortunately, it's hobbled by the high construction cost of new reactors and concerns about safety, security, proliferation, and waste. Some of these are legitimate while others seem overblown, but the technology is no one's free lunch.

Don't get me wrong; I have always loved big science, and nothing would please me more than if the NIF performed exactly as advertised and heralded the dawn of a new era of energy abundance. However, given the long history of drawbacks and unintended consequences from all other energy sources, it seems unrealistic to suppose that any new source, including fusion, is capable of living up to all of its pre-deployment expectations. Fusion is perfect on paper, but then so is my favorite long-term energy option, space-based solar power--until the public becomes anxious about beaming megawatts of power to earth from space, or rogue nations develop anti-satellite capabilities that could hold our orbital energy supplies hostage.

I don't know what form fusion's unexpected drawbacks will take, should the NIF testing pave the way for commercial fusion power plants a decade or two from now. I do know we need a serious debate about the sorts of trade-offs we're willing to accept from any energy source we promote as part of the solution to our dual challenges of climate change and energy insecurity. At a minimum, we must move beyond the mindset in which no current technology can compete with the presumed perfection of those that are still on the drawing board or have yet to be deployed on a scale at which their flaws might become apparent. Our future energy diet will most probably be a messy mix of "all of the above", just as our current one is. Perfect energy remains an April Fool's story.