The President's Climate Plan Hinges on Natural Gas

• President Obama's plan for addressing US greenhouse gas emissions depends heavily on expanded fracking of US shale gas resources.
• Reducing power sector emissions will be expensive, unless implemented with maximum flexibility.
• The President's endorsement of climate adaptation was helpful, if overdue.

President Obama's much-anticipated speech on climate change emphasized measures affecting our production and use of energy, which accounts for 86% of US emissions of the greenhouse gases implicated in global warming.  In its recognition of the ongoing importance of fossil fuels to the economy and inclusion of climate adaptation, it probably represents the most balanced approach on this subject from this White House.  However, many of the components of this plan could prove costlier than other solutions that have been debated in recent years.

Some context is necessary.  In 2009 the US Congress, controlled by the President's party, took up comprehensive climate legislation centered on "cap-and-trade." In principle, that would have limited emissions while enabling emitters with high abatement costs to purchase offsets from others who could cut emissions less expensively. Unfortunately, the Waxman-Markey Bill's version of cap-and-trade was so distorted by handouts to favored constituencies that its effectiveness at reducing future emissions was highly questionable.  By the time it died in the Senate, it looked more like a piñata of revenue allocation than a serious effort to address climate change.

So depending on your perspective, the President's new climate plan is either a punishment for Congressional failure to pass a climate bill, or the unavoidable sequel to legislative stalemate. Its prescriptive approach to parceling out emissions cuts to different sectors, with a heavy focus on electricity generation, might prove effective at reducing some emissions but will certainly be more expensive than a broad, market-based approach.

The hallmark of the speech was the President's instruction to the Environmental Protection Agency (EPA) to develop carbon emissions standards for both new and existing power plants.  This feature had been leaked in advance, and it was hailed by many environmentalists.  How much it will cost us depends on how EPA constructs the regulations necessary to put it into effect. 

If they approach the power plant carbon standard in a manner similar to the corporate average fuel economy (CAFE) rules applied to each automaker's new car fleet, then the resulting flexibility could moderate both its cost and adverse consequences. Conversely, if they cap emissions at each individual power plant--analogous to specifying the mpg of each new car--we should expect a wave of power plant closures, including at some gas-fired plants necessary to manage peak loads and back up wind and solar power.  The implications for utility bills and electric reliability are significant, so the details will matter enormously.

The President has a point when he says that past predictions of economic harm associated with previous environmental regulations largely failed to materialize, due to the ingenuity of American businesses. However, I believe his dismissal of concerns about EPA regulation of CO2 emissions is overly cavalier, because it ignores two fundamental facts. 

First and foremost, energy-related CO2 has little in common with the pollutants the EPA has regulated in the past.  It results neither from small impurities in fuel, such as sulfur or mercury, nor as a minor byproduct of combustion with air, such as NOx.  Along with water and heat, CO2 is a primary and unavoidable outcome of all hydrocarbon combustion. We can't clean it up cheaply by purifying the fuel or adding a catalytic converter or scrubber to an exhaust pipe or smokestack.  We must either send it to the atmosphere, as we've done since the invention of fire, or chemically separate it from the exhaust, and then compress it and bury it underground, or react it chemically to produce new fuel or some other product.  So far, both of the latter options are expensive and energy-intensive.   There's simply no free lunch to be had in dealing with emissions from the fossil fuels without which, as the President admitted, "Our economy wouldn't run very well."

The other problem, familiar to my long-time readers, is scale.  President Obama said that his new plan would "double again our energy from wind and sun", as it doubled in the last four years. Unfortunately, that further doubling would only yield enough electricity to displace 9.5% of the electricity generated from coal last year, saving less than 3% of total US emissions. New nuclear power plants require many years to build, and those now under construction only offset the announced and plausible retirements of existing nuclear units.  Thus, any shortfall in electricity supply due to the retirement of additional coal plants must be made up mainly by natural gas, which a new report from the Breakthrough Institute calls the "Coal Killer". 

For the first time in a generation, it appears we have enough gas to take on such a challenge. Replacing half of 2012's coal-fired power generation would require a 50% increase in the quantity of gas sold to US generating plants last year, supported by another 20% increase in US dry gas production, to nearly 29 trillion cubic feet per year. That level of output would be consistent with the Energy Information Administration's current forecast for US production by the mid-2020's.  Of course the power sector would have to compete with other sectors that are also seeking more gas, including manufacturing and transportation, so the future price of natural gas--even with abundant shale sources--is uncertain.  The bottom line is that President Obama's plan for reducing CO2 emissions from the power sector depends mainly on raising US natural gas production through expanded hydraulic fracturing of shale deposits.

I should also briefly mention a few other aspects of the speech. The President wants to promote energy efficiency and renewable energy by having the federal government lead in their adoption.  This sounds like motherhood and apple pie, and there's no question that efficiency measures have a role to play in reducing both energy consumption and emissions.  However, they shouldn't be divorced from a broader perspective encompassing financial and operational efficiency.  I would wager that the federal government could cut its energy consumption from buildings just as quickly, and perhaps less expensively, by reducing its vast inventory of owned and leased buildings.

Federal adoption of renewable energy should also be guided by financial and operational considerations.  For example, it is desirable for the military to ensure that as many of its aircraft, ships and vehicles as possible are capable of using alternative fuels, and to certify new systems on such fuels. However, it would be counterproductive verging on irresponsible to prioritize the purchase of uncompetitively priced alternative fuels, when budget cuts and sequestration are grounding fighter squadrons and otherwise impairing readiness.  Funds are fungible, as CFOs are wont to say, and every extra dollar spent on renewable vs. ordinary jet fuel is a dollar that can't be spent on training or maintenance.  And investments in high-cost renewables could achieve more if diverted into support for innovation on improved energy technologies capable of competing without endless subsidies.

The President's remarks on the Keystone XL pipeline were consistently vague. Some supporters of the project were encouraged, while opponents could still conclude a rejection was inevitable.  From my perspective the only new element was his apparent dismissal of any objections on the basis of potential leaks and other local concerns from the final decision.

Finally, there's the issue of adaptation.  President Obama effectively acknowledged that if the climate models that underlie his plan are correct, we face additional warming and other consequences, no matter how much we reduce emissions. He proposes to "protect critical sectors of our economy and prepare the United States for the impacts of climate change that we cannot avoid."  This is overdue and ought to attract bipartisan support, irrespective of whether our elected representatives are convinced that human activities are responsible for the changes we see in the climate.  Too many people and too many assets have been placed in the path of natural disasters that could become more frequent or severe, if the globe continues to warm. Adaptation offers "no regrets" opportunities, though building more resilient infrastructure is only part of the appropriate response.  Expect to hear more about this subject in the weeks and months ahead.

The Executive Branch actions outlined in the President's speech constitute a Plan B for climate change.  They may yield emissions reductions, though likely at a higher cost than broader, more even-handed measures that have become politically unpalatable. However, in a persistently weak economy the resulting higher energy prices are also likely to threaten an emerging source of US competitive advantage. Instead of solving the politics of climate change, the President's plan could deepen the polarization that already exists on this issue.