2009: Energy Year in Review

As I was considering this year-end summary, it struck me that 2009 seemed to span more than a single year. It began with the economy plummeting with no obvious bottom in sight and energy demand falling with it. Later, as the financial system stabilized and the psychological impact of stimulus efforts in the US, China and the EU took hold, markets began to recover and the nascent depression became a nasty recession that apparently ended in the 3rd quarter. However, in a reversal of last year's dynamic, energy was mostly driven by the economy, instead of the former driving the latter. And unlike 2008, when oil grabbed the most headlines, the big energy stories of this year concerned natural gas and renewables, along with efforts to reduce emissions of the greenhouse gases that accompany most energy use.

For oil prices, 2009 was certainly two years in one: A weak first half in which the price of West Texas Intermediate Crude averaged just under $52 per barrel, and a much more stable second half averaging around $72. Nor did prices exhibit anything like their volatility of 2008, which started in the $90s, peaked near $150, and ended in the $40s after a dip to the low $30s. By comparison, 2009 looked more like a continuation of 2006 or 2007, as if 2008 never happened, but with the primary focus inverted from concerns about supply to worries about demand. It'll be a few months before the final figures are in, but it appears that global oil demand was down by 2% vs. 2007, with demand in the US off by a whopping 10% through September.

The impact of weaker demand on the refining sector was particularly severe, compressing margins and forcing the permanent closure of at least one major US refinery. The average US gasoline price for the year was nearly $0.90 per gallon lower than in '08, saving the average driver around $35 per month. The even larger savings in the first half probably constituted the most meaningful stimulus that most consumers were seeing at that point.

If the oil news centered on weak demand and OPEC's efforts to restrain supply, for natural gas it mainly highlighted the remarkable resurgence of US gas production, thanks to the shale gas revolution. If this trend can be sustained it has significant implications for the entire economy and for the emissions we produce. It also poses a serious dilemma for environmentalists, because the shale gas bubble and its benefits for climate change would evaporate if the drilling practice called hydraulic fracturing were to be banned or severely restricted. Also at stake is the potential revival of the US petrochemical industry, which relies much more heavily than its foreign competitors on natural gas as a feedstock, instead of oil. The jobs involved might not be exactly "green", but they are certainly desirable ones, in the sense of providing above-average wages. Government regulation of gas drilling and other aspects of the energy industry will be the trend to watch next year.

Speaking of government influence, it was crucial to the survival of the renewable energy industry in 2009. Aside from the strong vote of confidence and hefty financial commitment to renewables embodied in the stimulus bill, government grants to renewable energy developers stood in for the frozen "tax equity" market on which developers had previously relied to help finance wind farms and other facilities. US wind power capacity is on track to grow by around 28% this year to roughly 33,000 MW, though even at this impressive level it will still contribute just 2% of net electricity generation, for which the bigger story this year was the more than 10% drop in coal consumption, mainly at the expense of lower demand and higher gas-fired generation. Solar power is growing by leaps and bounds, though it still has a ways to go to catch up with wind and has already started to attract a similarly mixed reception as it moves beyond rooftops into utility-scale installations.

Meanwhile, another big renewable energy sector was kept on life support by the steadily-expanding US Renewable Fuel Standard and a 30-year-old subsidy that has outlived its usefulness. Despite this support and an import tariff designed to confine that subsidy to US producers, 2009 continued the previous year's trend of ethanol suppliers going bust. It also saw the largest of the previous year's ethanol bankruptcies progress to liquidation, as most of VeraSun's facilities were ultimately absorbed by independent refining giant Valero, which also became an active investor in next-generation biofuel technology. Yet in spite of its continued growth and the unwavering support of federal and state governments, corn-based ethanol is hurtling toward a collision with the 10% limit on blending it into a shrinking gasoline pool--a limit that ethanol supporters want to have raised to 15%, regardless of the consequences for consumers. An even bigger problem lurks for corn ethanol, which has lately been promoted for its contributions to reducing emissions. The evidence is mounting that on a global basis its emissions might even be worse than from the petroleum products it displaces. The greater our commitment to addressing climate change and sustainability, the larger the contradictions of corn ethanol will loom.

And that brings us to Copenhagen, which served as the year's great energy anti-climax. While the outcome is being touted as a "Big Step Forward," the session in Denmark failed spectacularly to deliver the expected culmination of the two-year timeline set at Bali and built upon in a series of interim meetings. Instead of a binding global treaty to replace the expiring Kyoto Protocol, the Copenhagen Accord looks like a joint promise to make a list of independent targets--a promise that was only purchased with commitments for future aid that may never materialize, or that may only come at the expense of existing forms of aid to the developing world. With action on climate legislation in the US Congress stalled for now--for good reasons, in my view--that was probably all that could realistically be accomplished. Yet it still falls short of any objective metrics for judging the session, and indeed the entire Conference of the Parties (COP) process. I wouldn't be surprised to see the COP marginalized by the Major Economies Forum, an initiative that adds the EU central government to the group of large emitters first convened by the previous administration. When the COP manifests the dysfunctionality of the UN General Assembly, then climate change needs its own version of the Security Council to get things done.

Neither Copenhagen nor Climategate spells the end of action on climate change, but they might just mark a turning point toward a more pragmatic and less dogmatic set of responses, perhaps along the lines of a compromise being floated in the US Senate that would consider the contributions of all forms of energy to a more secure energy future with lower emissions. That aligns with the gradual replacement of a narrative of oil scarcity by one of natural gas abundance and the deft use of renewables, with a much stronger emphasis on efficiency and conservation, which still look like the low-hanging fruit for both energy security and climate change.

Barring major events, this will be my last posting for the year. Best wishes for a happy and healthy New Year.

Climategate: Mountain or Molehill?

While the Copenhagen delegates, which now include many heads of state, wrangle about transparency and the size and funding of the pot of money that will be required to assist the developing world in mitigating its emissions and adapting to further climate change, another debate over transparency is brewing. Its range of potential outcomes is wide. At one end it entails a collision between science and the law--two less compatible spheres would be hard to imagine--over the issues raised by the emails and data leaked from the University of East Anglia. At the other extreme concerns about "Climategate" will gradually fade from our consciousness in the manner of Tiger Woods's fall from grace, but perhaps not without raising some interesting questions along the way.

To appreciate how matters might unfold, check out an op-ed in today's Wall St. Journal from Dr. Patrick J. Michaels, a climate scientist on the receiving end of some of those barbed emails revealed by the leak. In addition to calling into question the neutrality of the peer review process that underpins the science upon which the Copenhagen talks and any agreement that comes out of them are based, he provides a hint at the form that future legal challenges to the enforcement of such an agreement, or of rules arising from the EPA's recent endangerment finding, might take. These allegations are serious, particularly when you consider that Dr. Philip D. Jones, until this month the head of the Climate Research Unit at East Anglia, was also one of two Coordinating Lead Authors of Chapter 3 of the Fourth Assessment Review of the Intergovernmental Panel on Climate Change (IPCC.) That chapter (very large file) deals with actual observations of "surface and atmospheric climate change", including the temperature data. That makes him a key gatekeeper of the consensus.

I only ran across that connection, because I've been following a side debate concerning how actual temperature measurements at thousands of locations around the world over the last century have been tabulated. The barely civil online point-counterpoint between an anonymous blogger at The Economist and the proprietor of a well-known climate skeptic website gives a flavor for this complex topic. Along the way I was surprised to learn how frequently the actual temperature readings are adjusted, interpolated, and in some cases discarded. This involves many assumptions that I'm not qualified to question, though I am left with the conclusion that recent temperature trends fall into much the same category as the pre-measurement historical temperatures reconstructed from proxies such as tree rings. In other words, the familiar temperature trend graphs reflect mainly analysis, not primary data. That puts us all in the position of having to trust that this analysis was done properly and neutrally, and unfortunately that is precisely the trust that the leaked emails have undermined.

In a recent New York Times op-ed, Stewart Brand, an iconic figure and an acquaintance from my former work with Global Business Network when I was at Texaco, proposed a useful taxonomy for our reactions to climate change. He suggested four categories into which those with an opinion on the subject fall: Denialists, Skeptics, Warners, and Calamatists. The views of those in the first and last categories aren't likely to alter much, no matter what science and further evidence reveal about the climate. What they see reinforces pre-existing mindsets. The Skeptics and the Warners, on the other hand, are part of a legitimate scientific debate and are both amenable to adapting their views to new evidence.

I consider myself mainly a Warner in Stewart's terms, having consistently expounded the risks of climate change both in this blog and elsewhere, but I am still willing to give both sides of the argument a fair hearing. I want to see Climategate addressed openly and objectively. If the science turns out to be flawed because of bias and improper manipulation, we need to know that and correct the flaws. If the actual science is unaffected, but the means by which it has been conducted requires reform, then we need to address that as well, because if we don't the public's confidence in its findings won't be high enough to act on them. And I'd rather see this hashed out in an open scientific forum held by a body such as the AAAS and involving many disciplines outside climate science as a true jury of peers, than to see it resolved by litigation, which is where this all could be headed if scientists respond by shrugging it off or circling their wagons.

Cash Is King, Even at Copenhagen

Although apparently brief, the suspension of the Copenhagen climate conference after a walkout by the Group of 77 developing countries confirms that the talks are as much about money as about healing the world's climate. It's not just that the G77 wants the Kyoto limits on the emissions of developed countries enforced, while leaving their own emissions uncapped; it also wants the developed world to kick in sizable sums--much bigger than the 2.4 billion Euros per year offered by the EU--to cover the improvements in energy efficiency and renewable energy that would enable them to tackle the growth of their own emissions. There's a solid argument there, though it is not the guilt-based logic of "carbon debt" that I explored a few weeks ago.

An op-ed in the Saturday Wall St. Journal got me thinking about this issue over the weekend, before the G77 delegates walked out of the COP-15 session in Copenhagen. This commentary by a Berkeley physics professor and author of "Physics for Future Presidents" was bursting with enough ideas to stimulate a dozen blog postings, but its key insight was that even the massive cuts in US emissions proposed for mid-century would be of little or no consequence in curbing global emissions that are increasingly concentrated in the developing world. He suggests that the emissions of developing countries will count the most, and that these countries will only adopt emission cuts that provide clear economic benefits to them. In that context and under the current Kyoto-based framework, the strongest argument for imposing deep cuts on the US and EU is not the reduction of our own emissions--which would have a minimal direct impact on the expected increase in the earth's temperature--but the role of these cuts in creating a market for offsets generated by investments in emission-reduction projects in the uncapped developing world via the Clean Development Mechanism, or CDM. Unfortunately, this logic has already led to notable distortions of the intent of the CDM.

There has to be a better way. As Dr. Muller notes, "A dollar spent in China can reduce CO2 much more than a dollar spent in the US." Yet US voters won't countenance providing that dollar out of guilt, nor will they acquiesce to a scheme that makes China and other developing countries more competitive at their expense. Paradoxically, even domestic measures such as European feed-in tariffs and the proposed federal Renewable Electricity Standard embedded in the Waxman-Markey climate bill could create such an outcome, if Chinese and Indian green technology firms come to dominate developed country green energy markets. There are already indications of this happening in the German solar market.

Instead of the technology transfer we've been talking about for more than a decade, what may be needed is a new mechanism that actually creates markets in the developing world for clean energy hardware and know-how produced in the developed world, so that these projects create jobs and wealth in the US and EU, rather than threatening them. I'm not sure precisely what form such a deal might take, but at a minimum it should incorporate both open access to developing country markets and uniform legal protection for the physical and intellectual property of the developed-country companies making these investments.

The best thing that could come out of today's disruption at Copenhagen would be the cancellation of the big heads-of-state photo-ops planned for the final days of the conference and a determination to put the delegates back to work crafting a new agreement that creates the right recipe for focusing the lion's share of climate investments on the rapidly growing emissions of the third world, rather than on the shrinking emissions of the EU and the plateaued GHG output of the US. That would be something worthy of bringing the world's leaders together to sign.

Reconciling Emission Baselines

As the nations represented at Copenhagen debate proposals for reducing their absolute emissions or carbon intensity, I was reminded that we shouldn't just focus on the percentages being offered, but also on the reference year emissions on which these proposals are based, since these aren't necessarily comparable. That's particularly true for the US and EU, which have consistently referred to 2005 and 1990 base years, respectively. This distinction is crucial in understanding how much of what each party might commit to has already been achieved and how much remains to be accomplished.

Start with the EU, which has proposed a reduction of 20% versus its 1990 emissions levels. Based on a recently-issued report by the European Environment Agency, the 27 countries constituting the European Union today have already reduced their emissions by 10.7% as of last year, compared to 1990. According to this report their collective emissions in 2005 were 9.3% below 1990, so that 20% figure for 2020 really translates to roughly 12% below 2005--and only a bit more than 10% below where they are now--which is substantially less than the 17% reduction that the US has put on the table. However, the US proposal should also be put into context, because of the divergent emissions trends of the two regions since 1990, which was the base year for the Kyoto Protocol that has guided EU policy in the intervening years, but which the US never ratified.

Between 1990 and 2005 total US greenhouse gas emissions increased by 16.5%. After counting net emissions including all sources and sinks--mostly natural processes such as forestry that absorb these gases--the increase was about 14%. So either way, that 17% cut that US negotiators were authorized to take to Copenhagen is really 1990 less about 3-5%. At the same time, 17% vs. 2005 is no slam dunk, even if it appears that the recession helped ax 2% of our emissions as of last year, and this year could be down a bit more. A recovering economy will use more energy and emit more GHGs, even if only from the work commutes of millions of re-employed people.

While I don't expect nearly as much controversy over the choice of baseline years as surrounded the Kyoto negotiations, 1990 and 2005 represent very different worlds, with the former largely pre-dating the collapse of the high-emission Soviet bloc economies, giving rise to all those Russian "hot air" allowances and a major portion of Germany's cuts post-reunification, along with a big shift in UK power generation away from coal and toward natural gas. Although the EU has certainly instituted comprehensive policies to reduce its emissions, including a cap on industrial emissions and a union-wide Emissions Trading System, a large chunk of the reductions for the current membership were achieved before any of these policies went into effect, through the rationalization of the inefficient economies of formerly-communist Central and Eastern Europe. 1990 looks even less relevant to the current economies of large developing countries like Brazil, China and India.

On the other hand, while 2005 has much to recommend it as probably the most recent year for which fully-audited emissions data are available globally, it also represents nearly the high-water mark of a world of easy money and massively-globalized supply chains that may never return in quite the same form. Choosing it might also appear to let the US off the hook for a decade of relative inactivity on climate change, though that ignores the fact that our actual emissions have grown by much less than the 33% business-as-usual increase that was expected in the late 1990s, presumably because of the discipline imposed by the steadily-rising energy prices that accompanied our bubble economy of recent years.

Whatever emerges as the baseline for an agreement or framework coming out of Copenhagen, it ought to be a single year that provides both ease of comparison and a reasonable congruence with the realistic starting point for any actions that countries will commit to undertaking in the years ahead.