Would An Emissions Deal Break the Keystone XL Deadlock?

• A Canadian proposal to facilitate US approval of the Keystone XL pipeline by committing to greenhouse gas reductions gets to the essence of principled objections to the project.
• The offer provides a chance for defined, quantifiable emissions reductions, instead of the highly uncertain emissions consequences of rejecting the permit for this pipeline. 

A couple of weeks ago Bloomberg and others reported that the Canadian Prime Minister had sent a letter to President Obama, proposing to work with the US to reduce greenhouse gas emissions from the oil and gas sector as a way to facilitate US approval of the Keystone XL pipeline (KXL.) It seemed an obvious way to break the current deadlock . If opposition to the pipeline is based mainly on the greenhouse gas emissions profile of Canadian oil sands crude--accurately or not--then environmentalists should have welcomed this overture. Instead, environmental groups have urged the President to reject both the offer and the pipeline.

You would never know it from protest slogans conflating all types of air pollution as if they were identical, but the characteristics and effects of greenhouse gases (GHGs) like CO2 are very different from the smog-forming emissions from automobile tailpipes or the sulfate pollution from coal power plants. For that matter, air containing 400 ppm of CO2 (0.04%) is no more harmful to breathe than pre-industrial air with 280 ppm of CO2. More importantly, the climate consequences of each ton of CO2 emitted to the atmosphere are effectively the same as for every other ton, regardless of where they are emitted or from what source. While scientists can distinguish CO2 from fossil fuel combustion from the CO2 you just exhaled, based on differences in the ratio of carbon isotopes they carry, their effect on global warming is essentially identical.

That sounds trivial, yet it has great value for expanding our options for managing the accumulation of these gases in earth’s atmosphere. Not only don’t we have to treat GHGs the way we do local air pollutants, but it can be more effective not to. In practical terms, that means that unlike the well-established approaches for mitigating smog, it isn’t necessary to tackle all GHG emissions at the source, particularly when it’s expensive or impractical to do so. Saving a ton of CO2 by preventing deforestation or improving vehicle fuel economy is exactly equivalent in its effect on the climate to reducing a ton of CO2 emitted from producing oil, which accounts for less than 20% of the emissions from the oil value chain.

Prime Minister Harper’s proposal has been greeted with skepticism by some environmental groups, including a representative of Sierra Club Canada who expressed doubt that Mr. Harper was serious. I am in no position to comment on that, other than to point out that entering into negotiations on a proposal such as this one would be an excellent test of his government’s seriousness about reducing emissions.

In fact, a proposal to approve Keystone in exchange for reducing emissions provides a test of the seriousness of all the parties involved. If the project is worth pursuing for the Canadian government and Canada’s oil sands producers, then it should be worth additional efforts on their part, over and above those already undertaken, to reduce emissions from oil sands production and to find suitable emissions offsets elsewhere. Of course it’s also a test of how serious President Obama was when he  explicitly linked approval for KXL to “whether or not this is going to significantly contribute to carbon in our atmosphere.” And because the administration’s protracted delays in approving or rejecting the project can fairly be attributed to political considerations, the proposal also tests the seriousness of “movement” organizations like 350.org that influence the politics of Keystone within the President’s political base.

Opponents of the Keystone XL project who are genuinely concerned about addressing climate change ought to at least be willing to consider a framework that links approval of this project to quantifiable and verifiable reductions in greenhouse gas emissions on a comparable scale. Since the determination of such reductions depends on the assumptions governing the alternative state of the world against which these reductions would be compared, that would require a willingness to accept a reasonable set of baseline assumptions about what would happen if this pipeline were not permitted to cross the US border. While I don’t pretend that would be easy, I have trouble seeing how one could reject such a concept outright and still claim to adhere to sound science and consensus policies.

This strikes me as an opportunity to embrace the kind of constructive and responsible compromise, the absence of which in our government so many Americans have lamented. Or, to put it bluntly, is opposition to Keystone really about greenhouse gas emissions, or is it just about symbolism?

The beauty of this offer, if it has actually been made and depending on its details, is that it provides President Obama with a potential two-fer: a pathway for approving a project that would please a large majority of Americans, along with a way to obtain significant greenhouse gas reductions--also pleasing many Americans--without requiring the highly unlikely enactment by Congress of comprehensive climate legislation. If we can do a deal with Russia over Syrian chemical weapons, there should be no impediment to doing a deal with Canada over CO2 emissions.

A different version of this posting was previously published on Energy Trends Insider. 

Sequester Oil Instead of CO2?

I've been following developments in carbon capture and sequestration (CCS) for more than a decade, so I was intrigued to run across a novel suggestion for an entirely different approach, involving the "sequestration" of undeveloped oil instead of the CO2 emitted by power plants and other industrial facilities. Even allowing for the likelihood that this trial balloon by Ecuador is either intended to enhance its government's leverage in negotiations with potential oil developers, or constitutes an outright scam--the resources in question apparently lie beneath a designated national park--the idea of selling emissions offsets based on the carbon content of forgone oil output is just plausible enough to merit a bit of analysis.

The basic idea seems clever. If it's so hard to capture the CO2 from burning fossil fuels and prevent it from accumulating in the atmosphere, why not leave the carbon in the ground and take credit for that by selling emissions offsets? The benefit of such a transaction, in both environmental and economic terms, would hinge on two key parameters: the carbon content of the specific grade of oil involved and the extent of the reservoir holding it. In other words, how many barrels would be spared, and how many tons of CO2 would be avoided for each barrel? Neither figure could be determined with certainty without some actual drilling, but non-invasive seismic techniques might supply an estimate of the approximate size of the potential reserves involved, while the quality might be guessed by analogy to actual producing fields elsewhere in the country. With these estimates in hand, we could arrive at an approximate value for the avoided emissions.

Lacking detailed information on these Ecuadoran oil reserves, I'm going to punt on quantity and focus on quality and its implications for the unit price of the resulting emissions offsets. If there's enough oil there to be of commercial interest, then that ought to be a sufficient starting point to assess the merits of leaving it in the ground as a means of combating climate change. As a first approximation on quality, let's assume the oil is similar to the Oriente crude that makes up most of Ecuador's output. Oriente is a medium-sulfur, medium-gravity crude similar to the oil produced on the Alaskan North Slope and run in many US West Coast refineries. Its API gravity is listed at 29.2, corresponding to a density of approximately 308 lb. per barrel. Applying a little basic chemistry suggests that each bbl burned would emit roughly 1004 lb. of CO2, so if we knew what the oil was worth, we could easily derive a cost per ton of CO2.

Because the oil in question is still under the ground, its price can't be looked up on an exchange. However, companies are bought and sold on the basis of reserves that have yet to be produced. A recent report from IHS Herold and Harrison Lovegrove & Co., Ltd. indicated that the average value of such M&A transactions in 2008 implied a value of $11.51/bbl for proved reserves and $5.25 for "proved plus probable." The latter figure seems more relevant to the current situation, since the reserves in question couldn't be fully proved without precisely the kind of development work this idea is designed to avoid. Applying the lower "2P" figure to the CO2 calculation above results in an equivalent value of about $11 per metric ton of CO2 offset. That's roughly the same as the estimate for the proceeds from cap & trade implicit in the federal budget the Obama administration submitted to Congress and lower than the price at which offsets are trading on the European Climate Exchange.

The basic flaw in this analysis stems from the large difference between what a company might pay for the rights to oil still in the ground, compared to its ultimate value to both the resource owner and society once produced. Fundamentally, that value is much higher than the externality cost of the greenhouse gases that would be emitted along the way. If that weren't true, Europeans wouldn't pay the equivalent of $293/bbl to fuel their cars. Even if the oil in question were only worth today's long-dated futures price of around $75/bbl less production costs and a discount for quality versus West Texas Intermediate, the price of emissions offsets would have to approach at least $100/ton CO2 before the Ecuadoran government would be truly indifferent to leaving it undeveloped. At $100/ton, many other emissions reduction strategies would look more attractive, including the brute-force, industrial capture and sequestration of CO2 from smokestacks. However high the parasitic energy cost of such CCS, it would still allow most* of the energy content of fossil fuels to be applied to providing the global economy with electricity or transportation fuels, until other sources can expand enough to replace them.

The Washington Post article on this story concludes with a quote from a program director at the Nature Conservancy who characterized the idea as "probably ahead of its time." I'd go the next step and suggest that its inherent contradictions render it generally impractical. There are many reasons to forgo the development of some oil, and if Ecuador's Yasuni National Park is truly the marvel of biodiversity and unspoiled wilderness described, then leaving its oil untouched shouldn't require financial inducements extrapolated from guesses about the resources under its surface. At the same time, it's hard to see a country contemplating development of a less sensitively situated hydrocarbon resource being able to raise enough money from the sale of emissions offsets to make up for the opportunity cost of forgone profits, royalties and taxes from a production-sharing contract, not to mention the employment and other benefits to the national economy. Schemes like this shouldn't distract us from the urgent and important work of figuring out how to make true carbon capture and sequestration practical and cost-effective.

*(A good friend pointed out that my use of "most" here could be miscontrued to imply 90% or more. In fact, current estimates indicate that CCS would consume 1/4-1/3 of the energy output of a fossil-fuel fired power plant. That's consistent with the thermodynamics of combustion and CO2.)

Climate Change and Unconventional Oil

While Americans are focused on the debate over expanded oil drilling, which might eventually add up to a million barrels per day of incremental oil production, a much larger expansion is underway north of the border, tapping Canada's oil sands reserves. Today's Financial Times (subscription required for full access) reports that environmentalists and socially-responsible investment funds are meeting today with Shell and BP, concerning the environmental and financial risks of the greenhouse gas emissions inherent in oil sands production. This has important implications for future oil supplies, particularly with oil prices falling to a level that might threaten further investment in oil sands, even without considering the cost of mitigating or offsetting the sector's CO2 emissions.

Worries about the greenhouse gas (GHG) emissions from oil sands operations are not new. Ten years ago my former company approached one of the large Canadian producers about employing Texaco's (now GE's) gasification technology to turn byproduct petroleum coke into gas to fuel the oil sands extraction process, incidentally creating an option for the CO2 to be sequestered in depleted oil and gas reservoirs. Neither the economics nor the consensus for action on climate change was sufficient to move ahead, at the time. But with Canada imposing stricter rules for industrial sources of CO2, and with a new global agreement on climate change in prospect at the end of 2009, that perspective may be shifting.

According to the FT, the groups in today's meeting in London are focused on the financial risks associated with emissions from oil sands--emissions that are several times larger than those from conventional oil production. Some are calling for a moratorium on new oil sands and oil shale projects. If oil were still over $120/bbl, that argument would carry little weight. Even if the most extreme estimate provided by Greenpeace were correct, suggesting that oil sands extraction emits 100kg more CO2 per barrel than conventional oil production, that would equate to under $4/bbl of extra cost, based on the price of 2012 emissions credits on the European Climate Exchange at current exchange rates.

Two factors render that figure more significant than it might appear. Falling oil prices are pushing new oil sands projects close to their breakeven point, according to Total, hampering the industry's ability to mitigate emissions. At the same time, the sheer magnitude of the oil sands expansion makes these emissions too large to ignore. The latest forecast from the Canadian Association of Petroleum Producers indicates that oil sands output should increase from 1.2 million barrels per day (MBD) last year to 2.8 MBD in 2015 and 3.5 MBD in 2020. Without making expensive changes in operations to reduce emissions and capture and store CO2, or buying emissions offsets, oil sands operations could increase Canada's current GHG emissions by as much as 10%. As a signatory to the Kyoto Protocol, the Canadian government cannot just look the other way, while these emissions mount.

There are many areas in which the goal of improving energy security aligns with reducing GHG emissions, including improved efficiency and more use of renewable energy. But oil sands--and by extension oil shale--represents a clear conflict between our desire to reduce our dependence on Middle Eastern oil and the need to halt the accumulation of greenhouse gases in the atmosphere. And with oil nearing $90/bbl, a $4 increase in production costs to manage CO2 could stall new development and reduce future oil output by enough to tip the global supply and demand balance even further in favor of OPEC and Russia. Unless the next administration is willing to sit down with our NAFTA partners to discuss a comprehensive North American approach to both energy and emissions, this matter will ultimately be settled in Ottowa, where neither the US Congress nor President can offer more than friendly advice.

Offsets and Behavior

It took a while for US petroleum product demand to respond to high oil prices, but once gasoline neared $4 per gallon in a slowing economy that no longer afforded consumers the opportunity to translate home equity appreciation into purchasing power, it set up the first absolute decline in gasoline use since 1991. But would this response have been so dramatic, if the majority of consumers had already locked in their fuel costs, or hedged them financially? That question has interesting parallels with regard to climate change, for which emissions offsets can provide individuals with a cost-effective temporary alternative to more difficult or expensive changes.

Having just received a renewal notice from my emissions-offset provider, it seemed like a good time to recap my family's fuel consumption for the past year, in order to calculate how much CO2 our two cars emitted. I won't pretend the Styles household is typical in its gasoline consumption. Since neither adult commutes to work, we drive less than the national average. That's just as well, since our cars' fuel economy is nothing special: the station wagon and the sports sedan both get around the national average fuel economy of roughly 22 mpg. Together they consumed 705 gallons of gasoline in the last 12 months.

Tallying our fuel use also provided an opportunity to assess the actual impact of higher fuel prices on our family budget. At an average price increase since last July of 63 cents per gallon, we spent $450 more on gasoline than in the previous year. Although that result fell short of my perceptions, it still represents money we could have spent on other goods and services, or saved. Yet I also knew I couldn't view it isolation, without considering the impact of the natural hedge provided by the oil company stock I retain as a result of my previous employment. Although its performance has been disappointing since oil began its retreat from $145 per barrel, over the last four years it has more than offset the approximately $2 per gallon increase in fuel prices we've experienced. But that isn't just a benefit of being an ex-oil company executive; anyone could have created such a hedge, if they had a spare few thousand dollars to invest.

Four years ago the average US price for regular gasoline stood at $1.90 per gallon. This week it's $3.95. Although its rise has hardly been smooth, that works out to roughly an extra 50 cents per gallon each year, compounded. For a typical car consuming 500 gallons per year, that equates to a cumulative fuel-expense increase of $2,500 over the entire period. As it turns out, $2,900 invested in a fund tracking the Amex Oil Index (XOI), a basket of oil equities, on August 1, 2004 would have grown to $5,750 by now, enough to cover the entire increase in gasoline prices and still pay a 3% return on the principal, though not without significant risk and volatility. Since oil equities are hardly a perfect proxy for fuel prices, a bolder investor might have achieved the same hedge by investing directly in a commodity fund. Alternatively, anyone lacking the capital or the inclination to tie it up this way could have locked in his or her gas purchases using a service such as MyGallons.com. (I haven't tried it and can't vouch for it in any way; caveat emptor.) And never forget that hedges can lose money; if you hedge but the price falls, you will be worse off than if you had done nothing.

Even without our natural hedge, I doubt that we'd seriously be considering trading in our pair of 4-year-old cars on new, more efficient models, in order to save that $450 per year. We don't drive enough to justify taking the resulting hit on depreciation, even if we doubled our fuel economy. Nor does our desire to reduce our greenhouse emissions alter that calculation by much. The gasoline we've burned since last July produced 7 tons of CO2. Based on the rates charged by TerraPass, we can offset that for $83.30, getting us effectively to zero emissions, rather than the reduction of 1/3 to 1/2 we might expect from newer, thriftier cars--and at a much lower cost.

Now, I've heard all the arguments about "buying indulgences" instead of making real changes in our lifestyles. Although my family has effectively negated the personal impact of higher oil prices and our vehicles' CO2 emissions, the world as a whole might be better off if we had bought a pair of hybrids, instead. However, that argument contains two fallacies, one arising from the inappropriate application of a pollution mindset to greenhouse gases, and the other reflecting the limited supply of highly fuel-efficient cars and the benefit of allocating them first to the highest-intensity users. As long as my offset provider is really investing in projects that truly reduce emissions--emissions that are equivalent in impact regardless of where on the planet they occur, and that wouldn't be cut otherwise--then for less than $100 per year we have the climate equivalent of two EVs running on wind power, minus their cachet. And we aren't competing for a hybrid with someone who drives 20,000 miles per year.

That isn't an excuse for perpetual indulgence, of course. When we do buy new cars, they will be much more efficient: diesels or hybrids, at least. And if the US hasn't enacted economy-wide cap & trade or carbon taxation by then, we'd pay to offset the remaining emissions. Similar calculations by millions of Americans may help to explain the fuel economy inertia of the US vehicle fleet, and why it will only improve incrementally within the next five years, no matter how efficient the new-car fleet becomes.

Brave New World

While lobbyists and other Congress-watchers await the reconciliation of the conflicting energy bills passed earlier this year in the US House and Senate, a piece of legislation with the prosaic title of "America's Climate Security Act" (S.2191) has begun the long process of committee review and revision. If passed by both houses in its present form--an unlikely proposition--it would trump many of the hotly-debated energy bill provisions, such as the renewable electricity standard, biofuels mandates, and higher fuel economy. The greenhouse gas "cap and trade" restrictions of "Lieberman-Warner", as the bill is also known, would mandate reducing US emissions by roughly 70% from current levels by mid-century. On a scale well beyond that of the cap-and-trade system introduced by the EU in pursuit of its commitments under the Kyoto Protocol, Lieberman-Warner would reorganize large segments of the US economy, along with those of some countries with which we trade. We stand at the threshold of a new world.

I don't have space here to provide a line by line analysis of the bill. If you're interested, the full text is available at http://www.thomas.gov/, entering S.2191 in the search box. (I apologize for many past broken links to thomas.gov, before I discovered that it doesn't retain search criteria.) For now, I'll cover the bill's key provisions and expand on them in later postings, as appropriate.

Since critics of emissions trading frequently cite the shortcomings of the EU Emissions Trading Scheme (ETS), it's important to state up front that Lieberman-Warner diverges from the former in scope, intent, and execution, sharing little more than the basic notion of a cap on covered emissions and the issuance of tradable allowances to enable those facing high costs of reduction to benefit from cheaper excess reductions by others. Most significantly, unlike the EU's focus on large industries and utilities, this bill covers the majority of US greenhouse gas emissions, whether from stationary sources or motor vehicles. The ETS also relied heavily on "grandfathering," furnishing free allowances for most of a firm's current emissions. That created a windfall for some companies and undermined the after-market for these permits, which has been highly volatile.

Lieberman-Warner limits grandfathering to 20% of emissions and then gradually phases it out entirely. In particular, oil companies would receive no free allowances, from day one. (More on this in a moment.) Instead, most allowances would be auctioned, with the proceeds allocated to fund a variety of activities, including alternative energy, carbon sequestration, and low-income energy cost relief. These benefits would be augmented by handing out some of the allowances themselves to states and a variety of other organizations. While this would ensure broad participation in the emissions market, it also appears vulnerable to criticisms of patronage.

One of the key arguments against US participation in efforts to reduce GHG emissions has been that it would result in the offshoring of our emitting industries, with Americans simply importing products and effectively exporting the associated emissions. Lieberman-Warner tackles this directly by requiring importers to purchase allowances for the intrinsic emissions of most products--effectively a GHG-equalizing tariff. We would presumably discover later whether that is permissible under the WTO.

So what would this mean for energy consumers? By requiring producers of fuel and electricity to obtain allowances or offsets for their direct emissions and for the downstream emissions of their products, and by severely limiting grandfathered emissions--to zero for petroleum products--it would drive up the price of fuel and electricity, as surely as if the price of oil, gas or coal had gone up. In other words, because Lieberman-Warner covers petroleum products at the wholesale, rather than retail level, it spares consumers the need to get involved in emissions trading, but does not spare them from the financial consequences. Now, an economist would point out that market conditions will determine whether 100% of the cost of allowances would be passed on, or something less. I think it's prudent, given the tightness of these markets today, to assume 100%. If an emissions allowance costs $10/ton of CO20-equivalent, then we should expect gasoline prices to rise by 10 cents per gallon, and coal-fired electricity by about 1 cent per kWh (less, initially, due to 20% grandfathering.)

This isn't the first such bill to be introduced in the Congress, and its prospects are uncertain. Lieberman-Warner is a bit more aggressive than the antecedent "Lieberman-McCain" (S.280), while somewhat less so--and decidedly more market-friendly--than "Sanders-Boxer" (S.309.) None of the previous cap-and-trade bills passed, but then none enjoyed centrist, bi-partisan support going into an election year in which climate change could emerge as a major campaign issue. For planning purposes, anyone potentially affected by this legislation--and that is effectively everyone except small businesses--ought to assume that something similar will be enacted within the next 2-3 years. And if a Democrat or Senator McCain wins the Presidency next year, it would stand a good chance of being signed into law. In the meantime, we can choose between taking voluntarily steps in this direction, or enjoying the final years of the no-cost emissions era.

The Cost of Carbon

Today's Washington Post includes two articles highlighting the legislative complexities of regulating US greenhouse gas emissions in a way that would provide the right balance of incentives and penalties on emissions, without damaging the economy. One article reports on the introduction of a new cap-and-trade bill co-authored by Senator Lieberman, while Congressman Dingell's op-ed extols the benefits of a straightforward carbon tax. Without rehashing the tax vs. cap argument, the country's businesses and consumers are looking for a much clearer and simpler signal: what will be the cost of emitting carbon to the environment in the future, and specifically, will it be something other than zero?

In the late 1990s I led a scenario planning project on climate change at Texaco. We concluded that the key uncertainty was not the science, but rather the public's perception of the urgency of the problem, combined with actual manifestations of climate change. (Coincidentally, one of our leading signposts was a major hurricane devastating Atlantic City--right idea, wrong place.) In the course of discussing our findings, the team realized that if the world focused on dealing with climate change, then emitting the major byproduct of combustion, carbon dioxide, would cease being free for the first time since the discovery of fire.

Having just renewed my TerraPass subscription to offset my car's emissions, I know my own cost of carbon: $8/ton of CO2, which roughly equates to 8 cents per gallon of gasoline--a handy coincidence between the stoichiometry of combustion and the English system of measures. I'm sure TerraPass collects a profit on that, but the cost to me is still much less than it's likely to be under either a carbon tax or a strong carbon cap-and-trade system.

The Lieberman-Warner bill will join a number of recent bills in proposing dramatic reductions in US CO2 emissions. It would limit our greenhouse gas output to 30% of the current level by 2050, which works out to about 65% lower than our 1990 baseline under the Kyoto Protocol. Exact predictions of the level of carbon cost required to achieve such big reductions aren't possible, but a recent MIT study estimated it could exceed $50/ton by 2020 and $150/ton by mid-century.

So whether it's the single digit per-ton cost associated with voluntary offset programs, which remain controversial, or the double- or triple-digit levels associated with strict CO2 targets, it looks like the days of free carbon emissions are ending. Legislative debates about the best way to achieve cuts tend to obscure this central reality. The sooner the government makes it clear that there will shortly be a real cost to these emissions, the sooner corporations and consumers will start to plan and act accordingly.

More Than Talk?

In his column in today's Washington Post, Robert Samuelson expresses skepticism that the current rhetoric about reducing greenhouse gas emissions will deliver much in the way of actual cuts, characterizing a broad collection of policy initiatives as "Prius Politics." While I share some of his skepticism about climate goals that lack both enabling and enforcement mechanisms, he's no more than half-right, here, and that half looks like a necessary prerequisite for tougher measures that would actually begin to deliver the proposed reductions. I also think he underestimates the impact on actual emissions, even without a gas tax or cap & trade.

Mr. Samuelson sees a divergence between the rhetoric of dramatic greenhouse gas emissions reduction targets and the inexorable forces of population and economic growth that have been driving emissions steadily upward around the world. This isn't just a question of China's enormous pool of potential consumers, who are starting to acquire the energy-intensive middle class trappings we take for granted. It's also a function of Americans choosing homes that are 60% larger than in 1970, despite declining average household size. Even with reductions in the marginal energy input per dollar of GDP, economic growth and increasing wealth will translate into higher emissions, unless we take concrete steps to reduce the latter.

However, Mr. Samuelson appears to discount the creation of a national consensus on climate change as a necessary precondition for enacting the legislation and regulations that will actually cut emissions. Attitudes toward this issue have come a long way in the last two years, but it still isn't a high priority for most Americans, who worry more about Iraq, terrorism and the economy. That's why, as he notes in his column, the Congress has focused on more indirect measures such as CAFE and cap & trade, rather than carbon or gas taxes that might be political suicide for the party in power. The scope for leaders to get far ahead of the public on this or any other issue is more limited than it was a generation ago.

That doesn't mean that emerging green attitudes lack consequences for real emissions. As the Wall Street Journal reports today, planned coal-fired power plants are being deferred or cancelled, because of environmental concerns. Every cancelled coal plant reduces future emissions in two ways: directly, from a stream of flue gas that will never exist, and indirectly, as constraints on baseload electricity generation--which wind turbines can't produce, and for which new nuclear plants are at least a decade off--will push power prices higher and deter the growth in electricity consumption. Meanwhile, concerns about emissions are becoming sufficiently mainstream for GE and other issuers to begin offering green credit cards, which will provide emissions offsets, rather than airline miles or cash back.

It's good to be reminded that high hopes and bold talk alone won't solve the climate problem, even though changing attitudes are already starting to have consequences for projects and sectors that emit greenhouse gases. But neither is this a problem that lends itself to quick solutions, imposed without broad support from the electorate. Such an approach would likely unravel the fist time the economy slowed, or energy prices spiked to new highs. In the long run, that could be a lot worse for the climate than a few years of toothless targets.

Solar Power and Offsets

A friend recently mentioned that she was interested in adding solar panels to her house, as her contribution to reducing greenhouse gas emissions. An article in yesterday's San Francisco Chronicle suggests that many Californians share the same motivation for solarizing their homes. Residential solar power is growing rapidly in the US and elsewhere, and that's all to the good. But while the large investment this entails might make sense as a way to save money on residential electricity rates, it turns out to be a pretty expensive source of emission reductions.

The Chronicle cites the cost of a typical 2 kW home photovoltaic system at about $19,000--or $15,000 after state and federal tax benefits. In sunny California, such a system would generate roughly 4500 kW-hrs of electricity per year, which would be worth around $650/year, based on the minimum rate in PG&E's current schedule. The resulting simple investment payout is pretty long, but if you assume a 20 year life and factor in future inflation in electricity costs, the effect on your property value, and the benefits of financing, you might earn a long-term return of more than 10% on your investment.

From an emissions perspective, those 4500 kW-hrs of solar electricity would save about 2700 pounds of CO2 per year, based on California's average rate of 0.61 lb/kWh. So over a 20-year lifetime, a 2 kW home system will save a total of 28 tons of CO2. The value of those avoided emissions is currently around $300 in the retail offsets market in the US and under $1000 in the official EU emissions trading system. As it happens, my friend doesn't live in California, but in a somewhat less sunny state that relies heavily on coal for its power. In her case, the avoided 20-year emissions would be closer to 75 tons. At current offset costs, however, they would still only be worth about 10% of the total price of her photovoltaic system. Unless she's paying a lot more for electricity than I think, she would be better off staying on the grid, buying offsets for 100% of her consumption and spending the rather large difference in cost on something else.

Whether my friend ultimately follows my advice is entirely her choice. But because of the role of federal incentives for solar power, I feel more than a friendly interest in her decision. We're not just talking about one solar roof, after all, but potentially millions. In light of the figures above, incentives for residential solar power start to look questionable as climate policy, at least compared with the kinds of projects behind the emissions offsets being traded in the marketplace. In other words, while residential solar power offers important benefits in reducing peak electricity demand and greenhouse gas emissions, the government appears to be paying individuals a large premium for those reductions, compared with investing in wind turbines, landfill methane converters, reforestation, and other means of cutting or capturing CO2 emissions. And the more the government spends on each ton of reductions, the fewer emissions it can reduce.

Prius in the Sky

A lot has changed since I last commented on the competing air travel visions of Airbus and Boeing two years ago. The former has stumbled, with its flagship A380 plagued by delays and manufacturing problems. Meanwhile Boeing rolled out the avatar of its new vision this week to much fanfare. Paralleling this change in fortunes, the implications of these two technologies now look different, as well. In 2005 I was concerned about the potential of thousands of A380s to put billions of new travelers in the air, consuming enormous incremental quantities of jet fuel in the process. But with the world increasingly worried about climate change and the means of managing it economically, Boeing's Dreamliner looks like the aircraft equivalent of Toyota's Prius hybrid car: the first real demonstration of a set of technologies that could dramatically reduce both fuel consumption and greenhouse gas emissions in the aviation sector, at least compared to their status quo trends.

A recent Economist article looked at this in some detail. It cited figures from the UK's Stern Report on climate change indicating that emissions from air travel, though only around 3% of the total today, are growing at a faster rate than those from other sectors. Saving 20% of fuel and emissions with the 787's better engines and lighter construction may not sound as dramatic as the doubling of fuel economy in hybrid cars, but aircraft don't offer similar opportunities to recapture braking energy, which is where hybrids derive most of their gains.

Economic growth is intertwined with mobility, and as long as the global economy keeps growing, more and more people will be flying. While planes like the 787 represent a hardware solution for minimizing the energy and environmental impacts of that growth, a broader range of strategies will be needed. Travel booking websites like Expedia already connect green consumers with the means of offsetting the emissions from their air travel, but airlines could provide this service on all their tickets at a lower cost; in the not-too-distant future, they may be required to do so.

Taxing Carbon?

After an absence of a decade, the carbon tax is back under discussion in the Congress--even if it might be a bit of a Trojan Horse this time around. However, much has changed since 1993's "BTU Tax" fight. Climate change was just emerging as an issue, then, and the price of gasoline stood at $1.10/gallon--the equivalent of about $1.45 in current dollars. Cheap fuel was our right. But with increasing numbers of Americans coming to accept that climate change is a big, looming problem, and the days of cheap gas apparently over, the response this time might just be "Why not?" instead of "Why?"

As my regular readers know, I believe cap & trade is the preferred mechanism for establishing a price on carbon dioxide and other greenhouse gases emitted to the atmosphere. However, I recognize that some very smart people have concluded that a carbon tax would be more effective and efficient, with its lower administrative requirements. Taxing emissions isn't such a bad idea, especially if you view this as a kind of tariff on legacy energy sources that were developed in a world in which carbon emissions didn't matter. After all, until the establishment of the income tax in 1913, the federal government got much of its revenue from tariffs. The biggest problem with this idea is not that it's a tax, per se, but that someone will have to determine its level. Set it too low, and the planet keeps warming for decades; too high, and the economy goes into a slump and even more industry goes to China, which is one-fourth as energy-efficient--and hence emissions-efficient--on average as we are.

This is where cap & trade shines, at least in principle. Markets do price discovery better than anything else ever invented. If you doubt that, look at eBay. Greenhouse gas emissions may not be Aunt Martha's antique china, but I defy anyone to calculate the correct level of carbon tax to reduce emissions by the desired amount without triggering a recession. (It wouldn't do that if it were truly revenue-neutral, but the chances of that seem even lower than the odds of a carbon tax passing in the first place.) Our models of the economy are good, but are they that good?

I also doubt we could gauge the right carbon tax level by observing the European cap & trade system, which implements an idea we talked them into during the negotiations for the Kyoto Protocol. The basis of comparison is weak, because the EU emissions trading system is too limited, and the European and US economies have significant sectoral differences. Nor can you look to European consumers for hints on how their US counterparts might respond to a carbon tax, since consumers in the EU haven't seen anything remotely resembling free market prices for transportation for decades, with the exception of discount air fares, and are already taxed to the hilt.

Whether Representative Dingell's proposal reflects a change of heart on this issue, or merely a prompt to his colleagues to acknowledge the costs of addressing climate change, there is much to recommend a carbon tax: it would be simple, transparent, predictable and relatively easy to assess. Its application would reveal the relative greenhouse gas contributions of our various energy sources, including corn ethanol, which would attract a higher tax than many might assume, when all its fossil fuel inputs are properly tallied. But I still see the determination of an efficient level for the tax as the fatal flaw in this idea. Perhaps a hybrid approach, with businesses subject to cap-and-trade and consumers paying a carbon tax based on the average emissions market level for the previous period, could overcome this shortcoming. In any case, the upcoming debate between advocates of these two mechanisms should be quite interesting to watch.

Taking the Climate Pledge

An op-ed in last Sunday's New York Times reminded me that the big climate change concert, Live Earth, is coming up this Saturday. It's hard not to be impressed by an event taking place simultaneously on every continent save Antarctica, and featuring a mix of the world's biggest pop stars and regional talent. Even more ambitious, however, is its organizers' stated goal of ensuring that Live Earth "inspires behavioral changes long after 7/7/07." This all comes together in the "Live Earth Pledge" that attendees and listeners will be asked to sign, committing themselves to action against climate change. Unsurprisingly, its seven points embody an aggressive view of the problem and its solutions. While some are laudable, others deserve more debate and don't reduce easily to a single line sign-off.

Here is the Pledge, point by point, with a bit of analysis:

1. To demand that my country join an international treaty within the next 2 years that cuts global warming pollution by 90% in developed countries and by more than half worldwide in time for the next generation to inherit a healthy earth--The Pledge starts off with a bang, here. It suggests that the focus of international action has shifted beyond the Kyoto Protocol to a follow-on treaty, the scope and allocated responsibilities of which aren't yet known. So far, so good. Next, it proposes targets that implicitly accept the need to stabilize atmospheric CO2 concentrations somewhere between 450 and 550 ppm, while coming down squarely on the side of the developing world in putting most of the burden on "legacy emitters": the US, EU, and other OECD countries. Acceding to China's argument that historical and per-capita metrics matter more than current aggregate emissions may be high-minded, but frankly it won't get us where we must go. We need a mechanism that also recognizes that the easiest emissions to cut are ones that haven't yet occurred--from China's exponential growth, for example--rather than imposing truly draconian cuts on established economies. Even if you accept the idea that we can reduce a lot of emissions without causing major economic harm here, cutting by 90% goes far beyond that into hardship and dislocation territory, unless it happens through technology and infrastructure turnover. It's hard to see those gradual trends satisfying the "next generation" timetable, as fuzzy as that is.
2. To take personal action to help solve the climate crisis by reducing my own CO2 pollution as much as I can and offsetting the rest to become "carbon neutral;"--This is my favorite plank, since behavioral change has the biggest potential for bypassing the long lead times for technology and fleet turnover. It also explicitly endorses tradable emissions offsets, making our emission reduction efforts more efficient by focusing them on the cheapest cuts, wherever they are found. The biggest problem with pushing this idea down to the personal level, however, is that it's not progressive: more than half of energy consumers probably can't afford to pay extra--even a little extra--to offset their CO2 emissions.
3. To fight for a moratorium on the construction of any new generating facility that burns coal without the capacity to safely trap and store the CO2--Since the technology for carbon sequestration isn't fully proven for large-scale application, I'd be happier if this had said, "without a sequestration-ready design and escrowing the funds to implement it as soon as it is available." Absent such a caveat, this part of the Pledge really says, "No new coal power plants; we will rely on renewable energy from here on out." That's quite a bet.
4. To work for a dramatic increase in the energy efficiency of my home, workplace, school, place of worship, and means of transportation;--This is a useful recognition that our individual influence extends to all sorts of affiliations we enjoy. The aim is clearly to leverage the enthusiasm of Pledge signers into realms that might not have even noticed the Live Earth event.
5. To fight for laws and policies that expand the use of renewable energy sources and reduce dependence on oil and coal;--In a surprisingly short time, this has approached the status of motherhood and apple pie. I agree with the goal, but I continue to believe the transition will take much longer, and require the consumption of many billions more barrels of oil and tons of coal than most Pledge signers will guess.
6. To plant new trees and to join with others in preserving and protecting forests; and--This really is motherhood and apple pie.
7. To buy from businesses and support leaders who share my commitment to solving the climate crisis and building a sustainable, just, and prosperous world for the 21st century.--This last plank may be the cleverest and most effective of the bunch. As individuals our influence on governments is limited. The goal of transforming our own lives to make them carbon-neutral must compete with numerous other priorities: basic needs of food, clothing, energy and shelter; paying for new-but-indispensable services like cellphones, broadband and 200 channel TV; and all the other costs of modern middle class life. But harnessing our aggregate power as consumers is quite another matter. At little or no cost to ourselves, we can reshape the priorities of the companies we patronize, redirecting hundreds of billions of dollars of business expenses and capital investments toward "greener" suppliers and projects. Curiously, this rests on an assumption that many of those who would sign the Pledge instinctively could never admit: that business often responds more quickly to the choices of customers than governments to the choices of voters.

As you might expect from a group of organizers that includes former-VP Gore, the Live Earth Pledge has an enormous amount of thought behind it, reflecting his viewpoint that climate change represents an immediate global crisis requiring immediate global action. As my regular readers know, I share a somewhat more nuanced version of that view, expressed as a need for urgent, prudent management of an enormous risk. But did I "click here"? Even though I can accept four of the seven commitments more or less as they are, and two more with a few mental reservations, I can't get past #1. The realistic timeline for a 50% cut is probably more like 30 or 40 years than 20, which suggests we'll probably overshoot 550 ppm and have to pull back harder, later, with better technology. I also see the stated allocation of responsibilities for emissions reductions as a deal breaker, regardless of which party wins the White House next year. I don't know how we'll resolve the legacy emissions issue with China and India to get a truly global deal, but ceding this up front is bad policy and a lousy negotiating strategy.

Good Offsets and Bad Offsets

It is becoming increasingly evident that a variety of prominent media outlets, with views on climate change that range from deep skeptic to true believer, are broadly unconvinced of the merits of consumer-level greenhouse gas emissions offsets. The latest shots across this nascent sector's bow were fired by the New York Times and the Financial Times, joining earlier articles from the NYT and Newsweek. Because of the absence of a common ideology, I have to conclude that journalists are finding their way to this position with the help of experts who have an ax to grind against the concept and its practitioners. The exception to this is those who have turned up genuine cases of fraud and deceptive practices. In any case, the debate must leave consumers with serious doubts about the benefit of spending good money to reduce their climate footprint this way.

First, let me state that I have no dog in this fight. Although I've periodically mentioned a particular marketer of offsets, TerraPass, my only interest in their business is as a satisfied customer. With regard to offsets in general, all I have at stake is my sincere--and I believe well-informed--conviction that they create a useful means for harvesting some inexpensive first steps toward dealing with climate change, which I regard as a very serious problem.

Objections to the practice seem to fall into three main categories:

• Offsets are illusory, providing no meaningful reduction in actual emissions, and thus have no impact on climate change.
• Offsets make it easier for consumers to ignore and perpetuate the real emissions that result from their actions and choices.
• The sector is new and unregulated, so you can't tell if you are paying a fair price for offsets, or if your money is going into a black hole, buying emissions reductions that would happen anyway or funding a clever scam.

I have the most sympathy for the third point, which is the main subject of the Financial Times' investigative report on offsets. Anyone buying emissions offsets needs to do enough research into the vendor's bona fides and track record to ensure that they are doing real things in the real world that are truly "additional" to the status quo. The second argument has some merit, too, but it ignores what I see as a likelier outcome: that as a consequence of their efforts in selling offsets, these marketers are raising consumers' awareness and providing measurement tools, the use of which will result in direct emissions reductions over and above any offset transactions.

As to the first argument, in many cases it reflects more on those making it than on the subject at hand. The comparison of offsets to papal indulgences, cited in the NY Times article, smacks of a puritanical strain of environmentalism that can't encompass any contribution from human ingenuity or market economics. For these folks, less is more, especially when it's your less. It must be galling to them that the exact equivalent of the annual CO2 output of a typical American car can be eliminated for about 1% of the cost of operating it, instead of through a draconian hike in fuel taxes or a radical vehicle redesign. And that's precisely why their arguments are misplaced: climate change is fundamentally different from any other environmental issue we've ever dealt with, and unless we approach it with minds that are open to novel solutions, our efforts to slow its progress will be much less effective than they might be. The world will be both poorer and warmer, if the critics of offsets have their way. Expect to hear a lot more about this issue in the years ahead.

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.