Withdrawal Exposes Weakness of the Paris Climate Agreement

When President Trump announced last week that the US would withdraw from the Paris Climate Agreement, he unleashed a flood of condemnation. Foreign leaders, US politicians, corporate executives, and environmental groups all roundly criticized the move. It also hasn't polled well.

As the initial reaction dies down, it's worth considering how this happened, what it means, and what might come next. The invaluable Axios news site has some noteworthy insights on the latter problem that I will get to shortly.

I am convinced it was a mistake to withdraw. In this I share the view of many current and former business leaders, including the Secretary of State, that the US was better off as a party to the deal and all the future negotiations it entails. Even if the goal was truly to renegotiate the agreement on more favorable terms, signaling withdrawal first seems counterproductive. However, I also see the consequences of our withdrawal in less catastrophic terms than most critics of the move.

As I noted not long after it was concluded, the Paris Agreement is by design much weaker than its predecessor, the Kyoto Protocol. Although the 2015 Paris deal was probably the strongest one that could have been negotiated at the time, it still represented a big compromise between developed and developing countries on who should reduce the bulk of future emissions and who should bear the responsibility for the consequences of past emissions. Its text is full of verbs like recognize, acknowledge, encourage, etc., and  the commitments it collected were essentially voluntary.

The agreement was also explicitly negotiated so as to maximize its chances of being enacted under the executive powers of the US president, without his having to refer the agreement to the US Senate for its concurrence. That implied it could be undone in the same way.

In other words, President Obama took a calculated risk that his successor(s) would choose to be bound by his Executive Order endorsing Paris. That was tantamount to a bet on his party winning the 2016 election, since most of the Republicans who had announced at the time were opposed to it, or the Clean Power Plan that was the linchpin of future US compliance with it.

Seeking Senate approval as a treaty would have been a much bigger lift--or required an even weaker agreement--but success would have provided significant political protection for the follow-on to the unratified Kyoto Protocol. Perhaps that explains why President Trump has chosen the much slower exit path--up to three years--provided within the Paris Agreement, rather than the quicker route of pulling out of the umbrella UN Framework Convention on Climate Change. The Convention was signed by President George H.W. Bush with the bipartisan advise and consent of the Senate in 1992.

Setting politics aside, it's also not obvious that US withdrawal from Paris will put our greenhouse gas emissions on a significantly different track than if we stayed in. Even the EPA's review and likely withdrawal of its previous Clean Power Plan, which underpinned the Obama administration's strategy for meeting the voluntary goal it submitted at Paris, may have only a minor impact on global emissions.

Federal climate policy has not been the main driver of recent emissions reductions in the US power sector. Cheap, abundant natural gas from shale and the rapid adoption of renewable energy under state "renewable portfolio standards", supported by federal tax credits that were extended again in 2015, have been the primary factors in overall US emissions falling by 11% since 2005. These trends look set to continue.

The bigger question is what happens globally with the US out of the Paris Agreement--assuming the administration does not reverse course again before it can issue the required formal notice to withdraw roughly 2 1/2 years from now. 

At least in the short term, I doubt much else will change. For the most part, the Nationally Determined Commitments delivered at Paris reflected what the signatories intended to do anyway. China's NDC is a perfect example. That country's ongoing air pollution crisis provides ample incentive to scale back on energy intensity and coal-fired power plants, which are the main source of its emissions. 

Increasing the role of renewable energy in its national energy mix perfectly suits China's ambitions in renewable energy technology. Exhibit A for that is a solar manufacturing sector that went from insignificance to more than 50% of the global supply of photovoltaic (PV) cells in under a decade, while China's domestic market accounted for 21% of global PV installations through 2015. 

The reactions to last week's announcement surely raised the stakes for other countries that might consider leaving. However, this action has also provided China and other high-emitting developing countries with an ironic mirror image of one of the main arguments on which the US government based its unwillingness to implement the Kyoto Protocol. 

What ought to matter more than any of the domestic and geopolitical maneuvering around the US exit is the actual impact on the global climate. Reporting on Axios, Amy Harder (formerly of the Wall St. Journal) portrayed this as a sort of emperor's clothes moment with a column entitled, "Climate change is here to stay, so deal with it." Monday's main Axios "stream" characterized her piece as a "truth bomb." 

As Harder put it, "The chances of reversing climate change are slim regardless of US involvement in the Paris agreement." That's consistent with recent assessments from the International Energy Agency and others. Citing the Bipartisan Policy Center and the UN, her column suggested a pivot to greater focus on adaptation, the hard and deeply unglamorous work of bolstering infrastructure and systems to withstand changes in the climate, including those that are already baked in. Attributing the source of changes in rainfall and sea level matters less than plugging the resulting physical gaps. That makes adaptation politically less toxic than cutting emissions, though still plenty challenging, fiscally. 

As I have been watching the fallout from last week's news, I keep coming back to comparisons to the Cold War that I made when the idea of pursuing climate policy through executive action was emerging in 2010. Like the Cold War, dealing with climate change requires a similarly enduring bipartisan coalition. Major policy swings every 4 or 8 years are just too costly and ineffective, due to the planning horizons involved.

NATO may be going through a difficult moment, but it is approaching its 70th year. After seeing its key weakness exposed, can anyone honestly look at the framework of the Paris Agreement and conclude that it is likely to last as long? Yet if climate change is as serious as many suggest, those are exactly the terms in which we should be thinking.

Is the US Ready for a Carbon Tax?

• While the Trump administration seeks to undo CO2 regulations, a group of former Republican officials has proposed a new, market-based emissions plan.
• This "carbon tax" looks simpler than EPA's Clean Power Plan or previous cap-and-trade legislation, but not simpler than the pre-Obama status quo.

The idea of taxing the carbon content of energy--and presumably the goods and services produced with it--is back in the news. A group of Republican "wise men" has floated it as an alternative to the regulation-based approach to emissions that the Obama administration pursued after its preferred "cap & trade" legislation died in the Congress.

Reduced to its basics, a carbon tax is a focused version of a consumption tax, based on usage rather than income or valuation. The level of the tax would be set by law, either as a fixed amount per ton of emissions or at an initial rate with preset future increases. What can't be known with certainty in advance is just how much a given level of carbon tax would reduce actual emissions.

This contrasts with the method of setting a price on carbon preferred by many other economists and environmental groups, called "cap & trade." In this approach, the government sets a cap, or maximum level, on emissions for a designated sector or the economy as a whole, while parties subject to the cap are allowed to trade emission allowances and credits with each other under that cap. Thus policy makers set the level of emission reductions, and allow the market to find the resulting price on carbon. In principal, that ought to be more efficient than the simpler carbon tax, because market forces should drive participants with low costs of cutting emissions to make the deepest reductions and then sell their excess cuts to others, for less than it would cost the latter to reduce by that amount.

From the late 1990s until 2009 or '10 I was convinced that cap & trade was the better approach to pricing emissions. However, the experience of watching the US Congress attempt to design a cap-and-trade system for the US economy cured my certainty. As I have described at length, the inclination of legislators to help favored companies, industries and sectors, combined with the extraordinary temptations created by the sheer scale of the revenue such a system would channel through the government's hands, revealed practical problems that look insurmountable in the real world, at least under our political system.

In fairness, cap-and-trade is currently used to promote emissions reductions in various jurisdictions, including California, the mainly northeastern states participating in the Regional Greenhouse Gas Initiative, and the European Union. From what I have observed, all of them have experienced technical difficulties involving the allocation of free allowances, inadequate liquidity, and other issues. The biggest practical problem is that the carbon prices these systems have tended to deliver might be characterized as the opposite of a Goldilocks price; i.e., they are typically high enough to generate substantial revenue, creating strong constituencies for their continuation, but too low to influence behavior very much.

For example, California's emissions credits currently trade at around $13 per metric ton of CO2, equivalent to $0.10 per gallon of gasoline containing ethanol. Would an extra $1 per fill-up make much of a difference in how much you drive, which car to buy when you replace your current car, or whether to sell your car (or forgo buying one) and take public transportation?

Moreover, California's emissions have been essentially flat since the state implemented cap-and-trade in 2012. However, since 2002 the state's electric utilities--historically the highest emitting sector--have operated and invested under a Renewable Portfolio Standard requiring them to increase the share of renewable energy in their generation mix to 20% by 2010, 33% by 2020, and now 50% by 2030. I suspect that accounts for most of the 7% drop in emissions since 2002, while the impact of a carbon price equivalent to 0.6 cents per kilowatt-hour (kWh) is likely lost in the noise. Of course a carbon tax would create its own political and practical complications.

First, consider how a carbon tax would affect different energy sources. As with cap & trade, a carbon tax should have its biggest impact on the highest-emitting forms of energy. In practice that would compound the current disadvantages for coal compared to abundant, low-priced natural gas and rapidly growing, essentially zero-emitting renewables like wind and solar power. At least on the surface, that seems at odds with the stated goal of the Trump administration to attempt to rescue the US coal industry and the communities that depend on it.

Like cap & trade, a carbon tax would also require a significant amount of new bookkeeping to track the path of "embedded emissions"--the CO2 and other greenhouse gases emitted at each step of a product or service's supply chain--through the economy. Some of this is already done voluntarily by companies participating in various sustainability reporting efforts, but it would be new for many others. The EPA, Department of Energy, and numerous non-governmental agencies have done much work to quantify such emissions, but a carbon tax would require a level of rigor and audit trail consistent with the creation of what amounts to a shadow currency within the economy.

A carbon tax also raises similar questions of how to spend the resulting revenue that have bedeviled cap & trade. At the current US emissions and assuming few sources were exempted, the proposed $40 per metric ton initial carbon tax would raise around $275 billion per year. That's 8% of this year's federal budget. It doesn't take a cynic to guess that the first inclination of any Congress enacting such a tax would be to hang onto this money to fund new programs, reduce the federal deficit, or some combination, rather than returning it to taxpayers as former Secretaries Baker and Schultz and the economists who back them suggest.

Their proposal would require that the proceeds of the carbon tax be rebated to essentially the same people who would be paying it at the gas pump or in their gas and electric bills. This sounds similar to the "Cap and Dividend" approach to cap & trade proposed by Senators Cantwell (D) and Collins (R) a few years ago. Their bill had the great advantage of simplicity, requiring just a fraction of the 1,427 pages of the 2009 Waxman-Markey cap & trade bill, the main purpose of which seemed to be to redistribute vast sums of money outside the tax code. But like W-M, it went absolutely nowhere.

Like it or not, that's my best guess of the fate of the current carbon tax idea, too. The biggest challenge facing a carbon tax today is that it would not be running as a simpler, more market-oriented alternative to prescriptive legislation or complex EPA regulations. After all, the administration's intention appears to be to eliminate the EPA's main emissions-reduction regulation, the Clean Power Plan, not to replace it.

And although the new US Secretary of State, Mr. Tillerson, is on record numerous times in support of a carbon tax, that position seems to have been put forward mainly in preference to cap & trade, rather than on its own merits in the absence of any other strict climate policy.

A carbon tax would raise the effective price of energy commodities in which we appear to have a global competitive advantage, at least for now. The current proposal may rebate the carbon tax on exports, but most economic activity starts and ends within this country. And as noted in the NY Times op-ed by Dr. Feldstein and the other economists backing this measure, the revenue recycling to consumers would be on an equal basis, rather than proportional to usage, so there would be winners and losers as with any redistributive taxation. Lower-income Americans driving older cars seem likelier to come out on the short end of that than wealthier consumers driving new cars that meet rising fuel economy standards.

Ultimately, we must ask why President Trump or his team would want to impose a new tax on US consumers and businesses to address a problem that has probably just become an even lower priority for them than it was. Notwithstanding Mr. Trump's demonstrated unpredictability, the simplest answer seems to be that he wouldn't.

US Energy Under Trump

• President-Elect Trump and his appointees plan a major policy and regulatory shift for energy, focusing more on economic benefits and less on environmental impacts.
• Obama-era regulations most at risk of roll-back are those justified mainly on climate concerns not shared by Mr. Trump and his team.
• Emissions are still likely to fall in the next four years as shale and renewable energy output grow. 

Next week's presidential inauguration will trigger the biggest policy and regulatory shift for the US energy industry in at least ten years. That's how long it has been since energy policy was set by a Republican president and Congress. Donald Trump is a different kind of Republican, though, and his goal does not seem to be a return to scarcity and high energy prices. What should we expect, instead?

To gauge how sharply the energy polices of the incoming Trump administration will diverge from those of the last eight years, we need to understand what motivates both leaders. The Obama administration's approach was driven by a deep, shared conviction that climate change is the most important challenge the US--and world--faces. The cost of energy and its impact on the economy became secondary concerns, subordinated by the belief that the added cost of climate policies would be offset in whole or part by the benefits of the green investment they unleashed--remember "green jobs"?

We saw this in President Obama's first year in office. Amid a deep recession he worked with Congress to attempt to limit greenhouse gas emissions by means of an economy-wide cap-and-trade system, on which he had campaigned. The House of Representatives passed the Waxman-Markey bill (HR.2454), a veritable dog's breakfast of economic distortions. Yet despite a filibuster-proof majority in the Senate in 2009, Waxman-Markey and every subsequent cap-and-trade bill died there.

That failure set in motion the agenda that the Obama administration has pursued ever since, to achieve via regulations the emissions reductions it could not deliver through comprehensive climate legislation. Last year's publication of the EPA's final Clean Power Plan was a key component of an effort that seems set to continue until just before Inauguration Day.

The transformation of energy regulations under President Obama was dramatic enough that a transition to any Republican administration would be a big change. The transition now in prospect will be even more jarring. Mr. Trump's rhetoric and his choices for key administration positions point to a concerted effort to unravel as many of the Obama-era regulations affecting energy as possible. That isn't just based on philosophical differences over regulation and markets. For President-Elect Trump the economy and jobs are paramount, so the Obama energy regulations must look like an unjustifiable threat to the fossil fuel supplies that still meet 81% of the nation's energy needs.

Despite that, it is unlikely the new administration will go out of its way to target renewable energy or the tax credits that have driven its growth to date. Renewables are becoming increasingly popular with conservatives. However, because Mr. Trump sees climate change as, at best, a secondary issue that may not be amenable to human intervention, his administration's won't put renewables on a pedestal as the Obama administration has done.

The biggest challenge for renewable energy may come from tax reform intended to make US companies and factories more competitive globally and shrink the incentive for them to relocate to lower-tax countries. This appears to be a high priority for the new White House and Congress, and one on which they broadly agree. If corporate tax rates drop, the value of the tax credits renewables enjoy is likely to fall, too, making wind, solar and other such projects less attractive and less competitive.

It remains to be seen how many of the Obama energy regulations can be rolled back. The most recent regulations might be averted through legislation like the Midnight Rules Relief Act, or the REINS Act, both of which would update the Congressional Review Act, a rarely used 1990s law intended to limit what presidents could impose by last-minute executive actions. Other regulations may eventually stand or fall as the courts rule. The stakes are high, particularly for regulations affecting the production of oil and gas from shale by means of hydraulic fracturing and horizontal drilling.

Energy independence was a touchstone of Mr. Trump's candidacy. Despite his campaign's focus on coal, it is fracking, as hydraulic fracturing is more commonly known, that holds the key to achieving that goal in the foreseeable future. It has been the main driver of the growth in US energy production since 2010.

The latest long-term forecast from the US Energy Information Administration (EIA) puts energy independence within reach--in the sense of the US becoming a net exporter of energy--by 2026 or sooner. However, the recent flurry of regulations affecting such things as drilling on federal land, and putting large portions of US waters off-limits for offshore drilling would not have been part of that projection. As EIA Administrator Adam Sieminski remarked at a briefing on the forecast, "If you had policy that changed relative to hydraulic fracturing, it would make a big, big difference to everything that's in here."

That's a key point, because most past notions of energy independence assumed that energy prices would have to be very high to promote lots of efficiency and conservation and stimulate large amounts of expensive new supply. The shale revolution changed that.

However, the global context is also changing. OPEC is attempting to reassert its control over the oil market, with help from non-OPEC countries like Russia. Two years of low oil prices shrank global oil and gas investment budgets by around a trillion dollars, and the International Energy Agency has warned of coming oil price spikes as a result. Forestalling tighter US regulations on fracking and offshore drilling increases the chances that US supplies could grow by enough to balance shortfalls elsewhere and avert much higher prices at the gas pump.

Energy infrastructure is likely to be another focus of the new administration, because the economic and competitive benefits of abundant energy will be diluted if, for example, Marcellus and Utica shale gas or Bakken and Permian Basin shale oil have to be exported because domestic customers don't have access to them.

That suggests an early effort to reverse decisions by the current administration to block the construction of various pipelines, starting with the Keystone XL pipeline and more recently the Dakota Access Pipeline. That will force new confrontations with activists and environmental organizations that have raised their game to a new level in the last eight years.

Such opposition would likely intensify if the new administration sought to withdraw the US from the Paris climate agreement, which recently went into effect, or submitted it for review by the US Senate as a treaty. But it's not clear that a big change in direction would require leaving Paris.

The US commitments at Paris, like those of the other signatories, were voluntary and non-binding. For that matter, recent shifts in US energy consumption and especially electricity generation have put the US in a good position to meet its initial Paris goals with little or no additional effort, as noted by outgoing Energy Secretary Moniz. The Paris Agreement will only become a major point of contention if President Trump chooses to make it one.

In his list of the top energy stories of 2016, fellow blogger Robert Rapier rated the election of Donald Trump ahead of the OPEC deal and many other important events of the year, based on its likely impact on "every segment of the US energy industry." In retrospect that was equally true of Barack Obama's election in 2008. The shift we are about to experience on energy will be that much sharper, because President Obama and President-Elect Trump both set out to make big changes to the status quo for energy, in opposite directions. We shouldn't miss one important difference, however.

The course that Barack Obama's administration followed on energy was largely predictable from the start, because it was based on openly and deeply held beliefs about energy and the environment. Donald Trump's well-known preference for deals over dogma sets up the prospect of some big surprises, in addition to what we can already anticipate.

Is the US Really Energy Independent?

Toward the end of Sunday night's presidential debate I was startled to hear Secretary Clinton reply to an audience question by stating, "We are now for the first time ever energy-independent." If the price of oil were $100, rather than $50, that might have constituted a "Free Poland" moment, recalling President Ford's famous gaffe in a 1976 debate.

This point is likely to get lost in the dueling fact-checking of both candidates' numerous claims, but while the overall US energy deficit has fallen from about a quarter of total consumption (net of exports) in 2008 to just 11% in 2015, we still import 8 million barrels per day of oil from other countries. That includes over 3 million barrels per day from OPEC, a figure that has been growing again as US oil and gas drilling slowed following the collapse of oil prices in late 2104.

Oil has always been at the heart of our notions of energy security and energy independence, because it is our most geopolitically sensitive energy source and the one for which it is hardest to devise large-scale substitutes. So although the US is certainly in a better overall position than it has been in decades, with progress on multiple aspects of energy, it is not yet energy independent, especially where it counts the most.

Moreover, the policies that Mrs. Clinton has proposed would, at least initially, be likely to expand that gap by imposing additional restrictions on hydraulic fracturing, or "fracking." Mr. Trump, for his part, seemed to devote much of his response to Mr. Bone's debate question  talking about coal, which while still a significant player in electricity production has become largely irrelevant to the topic of energy independence, because its use is being displaced by other domestic energy sources, mainly natural gas and renewables like wind and solar power.

In fact, of the various contributors to the energy independence gains the US has made from 2008-15 (shown in blue in the above chart) the largest depend on fracking. Oil still makes up most of our remaining energy deficit, after help from a million barrels per day of ethanol--50% of the energy content of which comes from domestic natural gas. Electric vehicles also help, but the roughly 400,000 on the road in the US today displace the equivalent of only about 12,000 barrels per day of oil products, too small to be visible on the scale of this graph. As a result, continued fracking of shale and tight oil resources must be the linchpin of any realistic strategy to close the remaining US energy deficit within the next decade or so.

I understand that Secretary Clinton's proposed energy policies put a higher priority on addressing climate change. However, she raised the issue of energy independence in the second debate, even though her proposals are unlikely to deliver it in the foreseeable future--or preserve our present, hard-won reduced dependence on foreign energy sources. Anyone who doubts that this is a pocketbook issue should recall where oil and gasoline prices were just three years ago, before US shale added over 4 million barrels per day to global oil supplies.

Was 2014 Really the Warmest Year?

• The media is widely reporting 2014 as the warmest year on record, yet the underlying data don't support that conclusion.
• The data actually lead to a different finding, of 2014 tied with 2010 and 2005 within the margin of error, reflecting little warming since 2005.

When I opened today's Washington Post and turned to the Opinion section, I found two op-eds that began almost identically: Eugene Robinson's column stated, "We now know that 2014 was the hottest year in recorded history," while Catherine Rampell announced, "Last year, government scientists tell us, was the hottest year on record." The President even repeated this in his State of the Union address. However, that is not really what the figures in question indicate.

I suppose it's understandable that the Post's editors and those of many other media reporting the same finding might rely on the expertise of the government agencies involved, rather than digging deeper. The Post's columnists apparently based their comments on information provided to the media by NASA's Goddard Space Flight Center. The NASA press release, entitled, "NASA, NOAA Find 2014 Warmest Year in Modern Record," included links enabling one to scrutinize the raw data upon which this conclusion was based. I've reproduced the relevant portion below in picture form as of noon today, since this data is subject to periodic revisions.

NASA's dataset displays the differences between measured temperatures and the 14.0°C average from 1951-80. On this basis it confirms that the average recorded temperature in 2014 was 0.02°C higher than the average for the previous warmest year, 2010, which was in turn 0.01°C higher than 2005's. Unfortunately, neither that page nor the press release includes any information about the uncertainty inherent in these figures, which turns out to be larger than the increase from 2010-14.

All physical measurements, including those from the weather stations providing data to NASA, are plus-or-minus some error. Averaging them doesn't entirely negate that. Within the accuracy of these temperatures, it's not possible to distinguish among 2005, 2010 and 2014; they represent a statistical tie. That fact was explained more clearly than I have done in a report on January 14, 2015, from the team of scientists at Berkeley Earth. Hardly climate skeptics, this is the same group that made headlines a couple of years ago with a comprehensive study of existing climate data.

Why does this distinction matter? After all, measured temperatures have warmed nearly 2° Fahrenheit since the early 20th century, as shown in the graph above. Whether last year or 2010 was warmer might seem like more of an academic point than a practical one. However, the refrain of "record temperature" reports gives a false sense that the warming is accelerating. Instead, as the Berkeley Earth report found, "the Earth's average temperature for the last decade has changed very little." That's a very different impression than the one created by the stories I saw, with implications for how we respond to the risks of climate change.
 

How Good Is The New Emissions Deal with China?

• President Obama's emissions deal with China sets an ambitious target for US CO2 cuts while leaving substantial headroom for emissions growth in China. 
• It will likely compound his problems, domestically, but could have significant influence on upcoming international climate negotiations.

Only an event like Tuesday's agreement between President Obama and his Chinese counterpart to limit greenhouse gas emissions (GHG) from the two countries could top the unexpected scramble in the US Senate to pass a Keystone XL pipeline bill as the big energy story of the week. The significance of the climate deal is open to interpretation, from both international and US political perspectives. Before exploring those, we should examine its consequences.

The White House announced that in exchange for the US agreeing to reduce "net greenhouse gas emissions 26-28 percent below 2005 levels by 2025", China would undertake to cap its GHG emissions by "around 2030." It also announced plans to step up a number of cooperative efforts with China in this area, including joint R&D and a jointly funded public/private carbon capture and sequestration (CCS) project in China. What does all this mean in terms of US emissions?

We need to start with the 2012 baseline in which net US emissions were already nearly 11% below 2005 levels. The current Annual Energy Outlook of the US Energy Information Administration (EIA), assuming the laws and regulations in force at the time it was produced, projects that US energy-related CO2 emissions will increase by 236 million metric tons (MT) by 2025, compared to 2012, leaving us at roughly 7% under 2005. Emissions from transportation would shrink, while those from industry would rise as the US economy grows by an expected 2.4% per year.

As I understand it that EIA forecast doesn't include the emissions that the EPA's "Clean Power Plan" for existing power plants would be expected to save if fully implemented. EPA targets reducing CO2 emissions from the US electricity sector--accounting for 39% of net emissions in 2005--by 25% by 2020 and 30% by 2030, compared to 2005. That would shave around 460 million MT from the EIA figure for 2025, getting us to nearly 15% below 2005. The additional savings to reach 26% below 2005 are thus in the neighborhood of 700 million MT per year by 2025. To put that in perspective, it's equivalent to the 2012 CO2 emissions from combustion in the entire US industrial sector, and exceeds total emissions of methane from all sectors, including agriculture, oil & gas, and landfills.

So unless I've done my sums wrong, or misinterpreted the government's data, the US/China deal commits to reducing US emissions by as much again as we've cut since 2005--largely as a result of a weaker economy and the shale gas revolution--after banking the expected savings from the 2011 fuel economy regulations, energy efficiency programs and renewable energy incentives, and an EPA plan for the power sector that is certain to run into strong opposition in the new Congress. That seems pretty ambitious to me, although it falls short of the 40% reduction recently agreed by the EU for 2030.

It's harder to assess what China's side of the deal means in practical terms. Its 2012 emissions were estimated at nearly 10 billion MT/yr, having grown by 8%/yr since 2004 and by 6%/yr since 2009. At that rate, even if its emissions peaked in 2030, they could double before starting to decline. If China's emissions growth declined to just 2% per year, consistent with the lower rates of growth in coal consumption observed recently, by 2030 it could still add nearly 4 billion MT/yr--equivalent to the current emissions of the entire EU, and 5 times the incremental US cuts to which President Obama just agreed. The most recent projection of China's emissions from the EIA had them growing by 5 billion MT by 2030 but essentially plateauing thereafter.

This falls substantially short of what would be required to keep global emissions within the range that climate models predict would limit average global temperature increases to 2°C, compared to pre-industrial levels. However, it goes well beyond China's previous commitment on emissions intensity at Copenhagen in 2009.

Now consider how this deal looks from the standpoint of US politics. Voters just resoundingly handed undivided control of the legislative branch of government to the President's opposition. Republican office-holders and those who just voted for them are likely to regard it as an unwelcome commitment of the US by a lame-duck President to a promise that only his successors could fulfill. In the process, it hands China and other countries a point with which to prod future US administrations should they fall short of its goals. In exchange, he got President Xi Jinping to admit that China can't emit CO2 limitlessly, but can still do more or less what it may have been planning, anyway. It's hard to see this making things easier in Congress for the President's existing environmental agenda.

The deal looks better from the perspective of international environmental and climate policy circles in the lead-up to the Paris climate conference, "COP21", at the end of 2015. One lesson from the Kyoto Protocol is that to be meaningful a global climate agreement must have a strong commitment from the world's largest emitters of CO2 and other GHGs. China and the US are the two biggest emitters, and the EU at #3 is effectively pre-committed. Together these three blocs account for over half of all emissions today. Having them on-side at the start raises the chances of reaching a  big agreement.

As others have observed, this deal makes it harder to argue against a global CO2 agreement based on China's relative inaction, while increasing pressure on other developing countries to agree to limit their own emissions. It also signals that despite political weakness at home, the White House will likely push for aggressive targets at COP21, setting up further conflict with Congress in the next election year. Finally, its timing is early enough to influence the negotiations but not so early as to permit close scrutiny of Chinese or US follow-through on its goals before the Paris talks begin.

How Would We Provide Enough Energy For 11 Billion People?

• Reconciling energy and environmental concerns was challenging enough when global population seemed headed for a plateau around 9 billion.
• A new forecast of up to 12 billion people by 2100 raises large questions about the capacity of current energy technologies to meet future global needs.

The combination of forecasted global economic weakness and growing non-OPEC production continues to weigh on oil prices.  Brent crude has fallen below $90 per barrel, and the US benchmark has been flirting with $80. But just when the rapid growth of energy supplies has undermined the mood of energy scarcity that prevailed for the last four decades, a group of demographers has thrown us a curve ball, though admittedly a very long one. 

In the 1970s many people were concerned about a "population explosion." Dystopian fiction--already a well-established sub-genre--featured visions of a grossly overcrowded future earth, along the lines of "Soylent Green." However, something happened on the way to such nightmares: birth rates in developed countries as well as large developing ones like China slowed in tandem with rising incomes. Instead of a world of 12 billion by 2100 or sooner, long-term population estimates in the last decade, including from the United Nations, began to focus on an eventual plateau around 9 billion.

Now it appears those lower forecasts might have been too optimistic, particularly with regard to birth rates in sub-Saharan Africa. The analysis in a paper published in Science last month suggests that growth will continue beyond the end of the current century. The authors expect global population in 2100 to reach 9.6 to 12.3 billion. That could have significant implications for energy demand and climate change, among other environmental and development issues, while in turn being influenced by them.  Nick Butler, who writes on energy for the Financial Times, looked at this from the perspective of oil and other energy sources and concluded, "None of the current technologies...offer an adequate answer."

I would take Mr. Butler's observation a step farther.  It's extremely challenging to say anything confidently concerning how much energy the world of 2100 might need, or where it will come from. Forecasts are rarely accurate beyond a few years, and even scenario methods struggle to cope with the unknown-unknowns involved in such time frames.

Recall that in 1928--as far removed from today as 2100-- world oil production was less than 5 million barrels per day, and the first chain reaction making nuclear power possible was still 14 years in the future. Natural gas was mainly viewed as a low-value byproduct of oil production, while wind power was considered quaint. And with a global population of just over 2 billion at the time, meeting the energy needs of today's 7 billion might have seemed even more daunting than supplying 11 or 12 billion does to us.

It's also worth keeping in mind that more than three-fourths of today's oil is consumed by countries with just 60% of the world's population.  The curve drops off steeply from there, leaving roughly 2 billion without modern energy services. So the energy implications of an extra two billion people by the turn of the century depend heavily on whether their energy demand looks more like today's top 4 billion or bottom 2 billion energy consumers. The recent "Africa Energy Outlook" from  the International Energy Agency (IEA) examined how energy supply on that continent might develop, along with the necessity of shifting investment from exports to domestic consumption to bridge that gap.

For that matter, even if an expansion of global fossil fuel production on the scale required to meet the needs of billions of additional consumers were possible, due to the technology that is currently unlocking oil and gas from source rock rather than conventional reservoirs--a.k.a. the shale revolution--it would bypass any notions of a "carbon budget" that might constrain the projected global temperature increase to a manageable level. It's a reasonable bet that however many people are alive in 2100, they will use less fossil fuels per capita than we do.

Consider what some of today's mainstream forecasts indicate about the future energy mix. The main "New Policies" scenario of the IEA's 2013 World Energy Outlook sees renewable energy growing from 11% to 18% of total primary energy by 2035, while its more aggressive "450" scenario has these sources supplying 26%, with commensurate reductions in fossil fuels. Shell's current long-range scenarios envision divergent futures in which fossil fuels still supply 50-60% of nearly doubled energy demand by 2060, but shrink to around 20% or less by 2100.

One big trend that could help facilitate that kind of change is electrification, which will increasingly displace liquid fuels from illumination, cooking, and even transportation. That's important because while we have few practical large-scale alternatives to petroleum for liquid fuels, we have many ways to generate electricity and could accommodate more, including the long-awaited arrival of practical nuclear fusion--perhaps along the lines announced by Lockheed Martin earlier this month--or some other, currently unanticipated energy source. Eight decades would be more than sufficient for an entirely new generating technology to become significant. 

Reconciling the energy needs of a large, growing population with preventing dangerous global warming--referred to by some as the "energy dilemma"--thus appears to require a sustained, protracted transformation of the entire energy economy. That shouldn't be a surprising insight. The bigger question is whether such a transformation can be achieved through the gradual evolution of the energy technologies available today, or whether it will require revolutionary developments. That remains a matter of considerable debate in energy circles. 

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

Calibrating Solar's Growth Potential

• A new report from the International Energy Agency suggests the possibility of solar power becoming the world's largest electricity source by 2050.
• It is noteworthy that IEA thinks this could happen, but the growth rates required, let alone the policies necessary to support them, will be challenging to sustain.

In the wake of last month's UN Climate Summit in New York City, Monday's report from the International Energy Agency (IEA) on "How solar energy could be the largest source of electricity by mid-century" ought to be welcome news. At the same time, it conflicts with perceptions that some countries are already farther along than that. So IEA's indication of the feasibility of generating 26% of global electricity from solar energy by 2050 either looks quite ambitious or quite conservative, depending on your current perspective.

For me it always comes down to the numbers, without which it's impossible to grasp systems on the scale and complexity of global energy. IEA's high-solar roadmap--it's not a forecast--includes significant contributions from both solar photovoltaic power (PV) and solar thermal electricity (STE)--often referred to as concentrating solar power, or CSP--with the former making up 16% of global electricity at mid-century and the latter around 10%. As the detailed report from IEA indicates, achieving the headline result would require global installed PV capacity to grow 35-fold between 2013 and 2050, equivalent to an average of 124 Gigawatts (GW) per year of additions, peaking at "200 GW/yr between 2025 and 2040." That's a 6x increase in installations over last year.

To put that in a US electricity generation perspective, IEA projects that the US would have to hit one million GW-hours per year from PV--roughly what we currently get from natural gas power plants--by around 2035 to meet its share of the anticipated global solar buildup. US solar installations are on a record-setting pace of nearly 7 GW this year, but matching natural gas would require 120x growth in solar generation, or a sustained compound average growth rate over 25% for the next 20-plus years. That's not impossible, as recent PV growth has been even higher, but it won't be easy to continue indefinitely, especially without further improvements in the technology, and in energy storage.

The solar thermal portion of IEA's technology roadmap looks like a much tougher challenge. STE has been losing ground to PV lately, as the costs of the latter have fallen much faster than the former, for reasons that aren't hard to understand. Making PV modules cheaper and more efficient is analogous to improving computer chip manufacturing, while making STE cheaper and more efficient is more similar to manufacturing cheaper, more efficient cars or appliances.

One of the main reasons IEA appears to have concluded that STE could suddenly start competing with PV again is its inherent thermal energy storage capability, which enables STE to supply electricity after the sun has set. While I wouldn't discount that, it looked like a bigger benefit a few years ago, before electricity storage technology started to improve. Storage of all types is still expensive, which helps explain why fast-reacting natural gas power plants offer important synergies for integrating intermittent renewables like wind and solar power. However, it looks like a reasonable bet today that batteries and other non-mechanical energy storage technologies will improve faster than thermal storage in the decades ahead.

The upshot of all this is that getting to 16% of global electricity from PV by 2050 is a stretch, and the 10% contribution from STE looks like even more than a stretch. So how does that square with recent reports that Germany--hardly a sun-worshipper's paradise--got "half its energy from solar" for a few weeks this summer? A recent post on The Energy Collective does a better job of clarifying the significance of that than I could, providing links to German government data indicating that solar's average contribution in 2013 was just 4.5% of electricity--hence less than half that in terms of total energy consumption. The author extrapolates that at current rates of annual installations, it would take Germany nearly a century to get to 50% of its electricity from the sun.

Much can happen in 35 years that we wouldn't anticipate today. For now, solar PV looks like the energy technology to beat, in terms of low lifecycle greenhouse gas emissions and long-run cost trends. But whether it reaches the levels of market penetration the IEA's report suggests are possible, or tops out at less than 5% of global electricity supply, as their baseline scenario assumes, it must function within an energy mix that includes other technologies, such as fossil fuels, nuclear power and non-solar renewables. And that's true whether or not electric vehicles take off in a big way, which would significantly increase electricity demand and make the IEA's high-end solar targets even more difficult to reach.

EPA's CO2 Rule and the Back Door to Cap & Trade

• Significant differences in EPA's proposed state CO2 targets for the power sector are reviving interest in cap & trade as a way to reduce compliance costs.
• This compounds the EPA plan's controversy and raises serious concerns about how the resulting revenue would be used.

Earlier this month the US Environmental Protection Agency released for comment its proposal for regulating the CO2 emissions from existing power plants. It follows EPA’s emissions rule for new power plants published late last year but takes a different, more expansive approach.  If implemented, the “Clean Power Plan” would reduce US emissions in the utility sector by around 25% by 2020 and 30% by 2030.

One of its most surprising features is that instead of setting emissions standards for each type of power plant or mandating a single, across-the-board emissions-reduction percentage, it imposes distinct emissions targets on each state. Based on analysis by Bloomberg New Energy Finance, some states could actually increase emissions, while others would be required to make deep cuts. The resulting disparities have apparently triggered new interest in state and regional emissions trading as a means of managing the rule’s cost.

Although emissions trading has become more controversial in recent years, it proved its worth in holding down the cost of implementing previous environmental regulations, such as the effort to reduce sulfur pollution associated with acid rain. It works by enabling facilities or companies with lower-than-average abatement costs to profit from maximizing their reductions and then selling their excess reductions to others with higher costs. The desired overall reductions are thus achieved at a lower cost to the economy than if each company or facility were required to reduce its emissions by the same amount.

Although the Clean Power Plan doesn’t require that states establish such emissions trading markets, its lengthy preamble includes a discussion of existing state greenhouse gas “cap-and-trade” markets in California and the Northeast. It also points out that measures to comply with the new rule may generate benefits in the markets for conventional pollutants, including those for the recent cross-state pollution rule. Administrator McCarthy also mentioned the benefits of multi-state markets in her speech announcing the new rule.

A patchwork of cap and trade markets across the US, including the addition of new states to mechanisms like the Regional Greenhouse Gas Initiative (RGGI), might help mitigate some of the cost of complying with 50 different CO2 targets. However, it would still be a far cry from the kind of economy-wide, comprehensive CO2 cap-and-trade system once contemplated by the US Congress.

Cap and trade was an idea that had gained significant momentum and even begun to appear inevitable, prior to the onset of the financial crisis in 2008. To supporters, it looked like a better way to limit and eventually cut greenhouse gas emissions than through command-and-control regulations. And the price it would establish for emissions would be based on the cost of achieving a desired level of reductions, rather than being set arbitrarily, as a carbon tax would be, without any guarantee of actual emissions reductions. Opponents viewed it as an unnecessary or unnecessarily complicated drag on the economy and a tax by another name, coining the pejorative term “cap-and-tax”.

Although early US cap-and-trade bills were bipartisan, including one co-sponsored by Senator McCain, the 2008 Republican Presidential nominee, the debate over cap and trade took on an increasingly partisan tone in a period of widening polarization on most major issues. The Waxman-Markey climate bill, with cap and trade as a major provision, was narrowly passed when Democrats controlled the House of Representatives in 2009, but various Senate versions failed to attract sufficient support, even when Democrats held a filibuster-proof supermajority in that body. The chances of enacting cap and trade legislation effectively died when a Republican won the vacant Senate seat for Massachusetts in January 2010. However, viewing this as a purely partisan divide is simplistic, at best.

Aside from opposition by key Senate Democrats, including one whose campaign included a vivid demonstration of his stand against Waxman-Markey, the versions of “cap and trade” debated in 2009 and 2010 bore little resemblance to the original idea. Waxman-Markey was a 1400-page monstrosity, laden with extraneous provisions and pork. Its embedded allocation of free allowances strongly favored the same electricity sector now being targeted by EPA’s Clean Power Plan, at the expense of transportation energy, for which low-carbon options remain fewer and more costly. It would have created a de facto gasoline tax, while yielding fewer net emissions reductions than a system with a level playing field. Subsequent bills, such as the Kerry-Lieberman bill in 2010, took this a step farther, removing transportation fuels from cap and trade and effectively taxing them at a rate based on the price of emissions credits.

Along the way, national CO2 cap-and-trade legislation evolved from a fairly straightforward way to harness market forces to deliver the cheapest emissions cuts available, to a mechanism for raising and redistributing large sums of money outside the tax code. In some cases that would have been done directly, such as in the gratifyingly brief Cantwell-Collins “cap-and-dividend” bill, or as indirectly and inefficiently as in Waxman-Markey. It’s no wonder the whole idea became toxic at the federal level.

Although emissions trading for greenhouse gas reduction came up short in the US Congress, it took hold elsewhere. The EU’s Emissions Trading System (ETS) is an outgrowth of the Kyoto Protocol’s emissions trading mechanism, which was included largely at the urging of the US delegation to the Kyoto climate conference in 1997. The ETS is focused on the industrial and power sectors and covers 43% of EU emissions. It has experienced significant ups and downs over the sale and allocation of emissions credits.

Cap and trade also emerged as a preferred approach for some US states seeking to reduce their emissions. California’s emissions market was established via a provision of the 2006 Climate Solutions Act (A.B. 32), and RGGI currently facilitates trading among 9 mostly northeastern states. The relatively low prices of emissions allowances in these systems–particularly in RGGI, which has traded in the range of $3-$5/ton of CO2–suggests that they may still be capturing low-hanging fruit in the early phases of steadily declining emissions caps. Their effectiveness at facilitating future low-cost emissions cuts is hard to gauge, because they also don’t exist in a vacuum.

Except for Vermont, all of the states involved have renewable electricity mandates that by their nature deliver more prescriptive emissions cuts. These markets have also been implemented in a generally weak US economy, which has constrained energy demand, and against the backdrop of the shale revolution, which has yielded significant non-mandated emissions reductions. Nor have these state and regional approaches to cap and trade entirely avoided the debates over how to spend their substantial proceeds that plagued federal cap-and-trade legislation.

For many years my view of cap and trade was that if we needed to put a price on GHG emissions, this was a better, more efficient option than an arbitrary carbon tax, or other top-down method. My experience analyzing more recent “cap-and-trade” legislation left me with serious doubts about our ability to implement a fair and effective national cap-and-trade market for CO2 and other greenhouse gases within the current political environment. Whether on a unified basis or in aggregate across many smaller systems, the enormous sums it could eventually generate are simply too tempting to expect our legislators and government agencies to administer even-handedly.

Whatever its potential benefits and pitfalls, I can’t help seeing cap and trade as a distraction in the context of the EPA’s proposed Clean Power Plan. Even at its most efficient, cap and trade couldn’t render painless the wide disparities of a plan that would require Arizona to cut emissions per megawatt-hour by more than half, and states like Texas and Oklahoma to cut by 36-38%, while Kansas, Kentucky, Missouri, Montana and even California cut by less than a quarter–and under some scenarios might even increase their overall emissions. Cap and trade would merely be a footnote on the scale of transformation the EPA’s plan envisions for the US electricity sector.

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

IEA's Roadmap for Low-Carbon Electrification in a "Golden Age" of Gas

• The IEA's latest Energy Technology Perspectives report provides a roadmap for the long transition to sustainable energy, as well as a report card on its progress.
• It also highlights the tension between the value of natural gas in decarbonizing the current energy mix, and longer-term expectations for phasing out its use.

Last month the International Energy Agency released its latest Energy Technology Perspectives (ETP), a technology roadmap extending out to mid-century, with a major focus on the increasing electrification of global energy against a backdrop of climate change. It may also shed some light on the options for achieving the emissions cuts in the US Environmental Protection Agency's proposed CO2 regulations for power plants.

This is turning out to a big season for climate-change-related reports. The ETP arrived just a week after the US National Climate Assessment, which followed the latest volume of the IPCC's Fifth Assessment Report on climate change. The ETP caught the attention of renewables-oriented news sites for its characterization of natural gas as, "a transitional fuel, not a low-carbon solution unless coupled with carbon capture and storage (CCS)."

That might seem to contradict the general tone of IEA's earlier "Golden Age of Gas" scenario, though when that study was released in 2011 it, too, included caveats about the limitations of gas in reducing greenhouse gas emissions. From that standpoint, the new ETP is no more negative about gas than the relatively rosy (for gas) Golden Age scenario was, and in fact sees gas supporting both "increasing integration of renewables and displacing coal-fired generation."

The IEA's press release for the ETP highlighted the growth of electricity as a major energy carrier, particularly in the developing world, increasing from 17% of final global energy consumption in 2011 to 23-26% by 2050. However, it also noted, "While this offers many opportunities, it does not solve all our problems; indeed it creates many new challenges."  Among other things, that alludes to the fact that while renewables such as wind and solar power have been growing rapidly, so has coal use, with the result that, as the ETP launch presentation put it, "the carbon intensity of (energy) supply is stuck."

The emissions benefits of electricity displacing oil from transportation and other fossil fuels from industrial, commercial and residential uses will be largely negated if power generation does not also shift towards lower-emitting sources such as nuclear, hydropower, geothermal, wind and solar power. The "2DS" scenario that received far more attention in the IEA's rollout than the ETP's other two scenarios, provides the prescription and justification for that transition. However, it's important to realize that the 2DS case is not a forecast or prediction; it's what scenario experts might call a "normative scenario"--one that the authors hope to encourage, rather than expect to occur.

2DS reflects the official stance of most member countries of the IEA and links to the low-emission "450" scenario in the agency's current World Energy Outlook. Both are predicated on creating a 50% chance of limiting the average global temperature increase due to climate change to 2°C (3.6°F), compared to pre-industrial conditions. That is generally thought to require keeping the atmospheric  CO2 concentration below 450 ppm (0.045%). In their launch presentation for this report, as in other recent reports, the IEA sounded the alarm that this goal may be slipping out of our grasp. April's monthly CO2 average exceeded 400 ppm for the first time since measurements began, and it is growing at around 2 ppm per year.

The IEA makes a good case that the rapid energy transition described in their 2DS scenario is feasible and economically beneficial, despite its $44 trillion price tag, providing substantial future savings in fuel costs, or more modest ones on the discounted cash flow basis on which most investments are premised. However, they are equally candid that reaching this goal will require significantly greater commitments and actions than countries have already made--or than I would assess to be politically feasible in the current global environment.

Renewables may be on-track, but many other aspects of the low-carbon transition aren't. That's especially true for new nuclear power, post-Fukushima, and carbon capture and sequestration (CCS) on which 2DS counts for 7% and 14%, respectively, of emissions reductions through 2050.

It's worth recalling that the main scenario in the World Energy Outlook was not "450", but rather the less-restrictive "New Policies" scenario, which appears to correspond to the middle "4DS" technology scenario of the ETP. (The WEO also includes a status quo "Current Policies" scenario.)  In that context we must not let the appealing outcomes envisioned in 2DS obscure the emissions-reducing benefits of natural gas in the world we are still likelier to inhabit, based on current trends, than the one we might desire.

Only under the rapid replacement of fossil fuels by renewables and nuclear power and CO2 sequestration assumed in the 2DS/ "450" scenarios would it be true that, "After 2025...emissions from gas-fired plants are higher than the average carbon intensity of the global electricity mix; natural gas loses its status as a low-carbon fuel." Presumably in the ETP's other two scenarios, that crossover would not happen until much later, if at all.

Gas is thus still a crucial bridge to a lower-carbon world, and it will not lose that status until we have made much more progress in reducing energy-related emissions than seems likely in the near future. While I certainly wouldn't bet against the continued growth of renewable energy, the slow progress of the other elements of decarbonization leaves a vital role for gas to help fuel the beneficial electrification of energy that the IEA has highlighted, for multiple decades.

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

ExxonMobil Confronts the Carbon Bubble

• Companies and investors are squaring off over the potential impact of government climate policies on asset values, particularly in the fossil fuel industry.

• ExxonMobil gave its shareholders data and assurances of asset resilience under various policies but dismissed the scenario of greatest interest to sustainability investors.

Last fall I devoted a lengthy post to the notion that future policies to address climate change expose investors in companies producing fossil fuels to a potential bubble in asset valuations. So although I am not an ExxonMobil shareholder, I was particularly interested when the company issued a report last month responding to specific shareholder concerns along these lines. Although the term “carbon asset bubble” did not appear in the report, its references to carbon budgets and the risk of stranded assets in a low-carbon scenario were aimed directly at this emerging meme.

Unsurprisingly, ExxonMobil’s management reassured investors that, “none of our hydrocarbon reserves are now or will become ‘stranded’.” Wisely avoiding past tendencies to question interpretations of climate science, their analysis appears to be grounded in mainstream views of climate change. It focuses on the costs and achievability of an extreme low-carbon scenario, and on the resilience of the company’s portfolio under various climate policies.

Exxon's analysis is based on the company’s latest Outlook for Energy, an annual global forecast broadly similar to the main “New Policies” scenario of the International Energy Agency (IEA). It has fewer similarities to the IEA’s “450″ scenario that underpins carbon bubble claims. The company expects energy demand to grow at an average of about 1% annually over the next three decades–faster than population but much slower than the global economy–with increasing efficiency and a gradual shift toward lower-emission energy sources: Gas increases faster than oil and by more BTUs in total, while coal grows for a while longer but then shrinks back to current levels. Renewables grow fastest of all, producing about as much energy in 2040 as nuclear power does today. As a result of these shifts global greenhouse gas (GHG) emissions peak around 2030 and then decline gradually.

That forecast won’t impress those advocating prompt and aggressive changes in the global energy mix to head off serious climate change, but it is not very different from the most recent global forecast of the US government’s Energy Information Administration. If anything, Exxon expects slower growth of energy and emissions than the EIA.

Ultimately, ExxonMobil's argument that it isn’t running outsized carbon asset risks depends heavily on its estimate of the implicit costs of achieving a much deeper and more rapid transition to renewables, compared to its--and others’--forecasts. It gauges this on the intensity of governments’ future climate policies, expressed in terms of their effective cost per ton of CO2 abated, and on the affordability of such measures to energy consumers, especially in the developing world, where emissions are increasing rapidly.

Without directly disputing the technical feasibility of achieving such large and rapid emissions cuts, the company's management essentially questions whether any government would or could impose the extraordinary costs necessary for that to occur. Their proxy estimate of $200/ton of CO2 for such policies is sobering. Even if the sums that would raise were all efficiently recycled by those governments–a heroic assumption–the resulting diversion of investment and increase in energy costs would adversely affect overall economic development.

The sustainable investor groups that raised this issue with ExxonMobil were apparently disappointed with the answer they got. That's not surprising, but having participated in similar exercises at Texaco, Inc., I think ExxonMobil went well beyond the kind of perfunctory reply the investors might have expected. In particular, it has provided enough data to support a more serious dialog with investors on this subject.

For example, Exxon indicated that it “stress tests” its projects and acquisitions at proxy costs of up to $80/ton of CO2, compared to current levels of $8-10/ton in the EU’s Emission Trading System. Implicit in that is the question of whether investors would reasonably expect them to test projects at $200/ton., which would equate to around $100 per average barrel of oil--roughly today's price--based on the nifty “seriatim” chart at the end of the report.

The document also includes information addressing the resiliency of the company’s assets and operations under a lower-carbon future, with their emphasis on natural gas and a global average cost of production under $12 per oil-equivalent-barrel (BOE). Climate policies would have to raise those costs and shrink the associated revenues very significantly to jeopardize current production, nor are low oil prices generally consistent with a low-carbon world. Investments in future production are another matter, though Exxon refers to the IEA’s 450 scenario to demonstrate how much additional oil and gas development would still be required in the next 20 years, even in a world that was determined to constrain global temperature increases to no more than 2°C.

ExxonMobil’s response to investors will not end the debate over the carbon bubble. While providing a lot of information, the company essentially argued that the extreme low-carbon scenario associated with the risks of a carbon bubble is irrelevant, because it can’t be achieved any time soon, irrespective of the risks associated with current emissions levels. That is close to my own view, but it is unlikely to resonate with those who are more focused on the risks of climate change than on the nuts and bolts of what it would take to avert them.

Interestingly, the company’s report on carbon risks was issued on the same day as the latest iteration of the predicted consequences of further warming from the Intergovernmental Panel on Climate Change (IPCC). In a sense each report provides context for the other, so that investors who accept the IPCC’s analysis can weigh the potential costs of global warming against the cost and scale of the changes that would be required to put the world on a crash program to avert the worst climate-change-related outcomes. They can then buy or sell accordingly.

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