Counting All the Carbon

An editorial in this morning's Wall St. Journal reminded me that I had intended to update my readers on the latest installment in the ongoing saga concerning the global land-use impact of biofuels. The Journal's comments referred to a paper in the latest issue of Science entitled, "Fixing a Critical Climate Accounting Error", which concludes that the manner in which the greenhouse gas impacts of biofuels are currently assessed fails to account for significant emissions that occur outside the envelope normally drawn around an ethanol or biodiesel plant and the farms that supply it with feedstock. And if that omission weren't glaring enough, in the course of preparing for a meeting tomorrow I ran across another instance in which regulators appear to be turning a blind eye to the full impact of another popular option for addressing climate change, electric vehicles. As we prepare to re-orient our entire economy around the restrictions embodied in pending climate legislation, it is essential that we account for all of the emissions involved in a consistent way, and on a scale matching the global environmental problem we're trying to solve. This is crucial to making real progress on reducing emissions, rather than just making us all feel good about what we are doing.

When the emailed table of contents for the October 23 issue of Science showed up in my inbox last Friday, I spotted the name of Timothy Searchinger of Princeton University as lead author of the paper cited by the Journal today. Dr. Searchinger was also the lead author of an earlier paper in Science that I highlighted last February, when the debate concerning the global land-use implications of corn ethanol was just getting underway. Dr. Searchinger's collaborators on the new paper are an impressive bunch, including Dr. Dan Kammen, the director of the Renewable and Appropriate Energy Laboratory at U.C. Berkeley.

The report provides further evidence that it's no longer appropriate to assume that just because the carbon embodied in biofuels such as ethanol originated in green plants that absorbed it from the atmosphere, they must therefore be "carbon neutral"--other than the emissions from fossil fuels used in the cultivation, harvesting and transportation of the crops from which they are produced, along with the energy used in their processing. Additional emissions apparently result from the global displacement of the crops turned into energy here, and in some cases those emissions are on a similar order of magnitude to the direct emissions from the combustion of the biofuels--combustion that has gotten a free pass until now.

This is a highly inconvenient result for those engaged in the production of biofuels from food crops, on two levels. First, it puts the climate change justification for the subsidies and mandates responsible for the rapid ramp-up of conventional biofuel production in question. Second, the source of this doubt is no less than one of the same scientific journals in which so much of the peer-reviewed science contributing to the oft-cited scientific consensus on climate change has appeared, and subject to the same level of scientific scrutiny. Casting doubt on the source of this unwelcome message thus risks casting doubt on the entire edifice upon which the current, much-expanded biofuel endeavor rests.

Let's be clear that I don't blame the biofuel industry for promoting a product that many thought would help, but may ultimately turn out to do little or nothing to reduce the greenhouse gas emissions implicated in climate change, any more than we should blame the producers and consumers of fossil fuels for their contribution to the accumulation of those gases before the current consensus on climate change emerged. (I confess that I regard attempts to portray that consensus as having existed as long as 40 years ago as the worst kind of revisionism, since the creation of the consensus depended not on a few key insights, which might have turned out to be wrong, but on mounting evidence from the steady accumulation of peer-reviewed research during that interval.)

Having said that, I have a much harder time understanding the inclusion of an equally serious--and apparently entirely conscious--omission in the new automotive fuel economy and emissions standards jointly developed by the Environmental Protection Agency and the Department of Transportation. I had occasion to browse through the agencies' proposed text (warning: large file) yesterday and was startled to see that for purposes of calculating carmakers' fleet CO2 emission averages, it assumes that electric vehicles (EVs) and the electric usage of plug-in hybrids (PHEVs) have zero lifecycle emissions. Not only that, but the proposed regulation would count each EV as if it replaced two other emitting cars: thus, zero GHG impact not once but twice. Even the authors admit that this is false, and here I must quote,

"EPA recognizes that for each EV that is sold, in reality the total emissions off-set relative to the typical gasoline or diesel powered vehicle is not zero, as there is a corresponding increase in upstream CO2 emissions due to an increase in the requirements for electric utility generation. However, for the time frame of this proposed rule, EPA is also interested in promoting very advanced technologies such as EVs which offer the future promise of significant reductions in GHG emissions, in particular when coupled with a broader context which would include reductions from the electricity generation. For the California Paley 1 program, California assigned EVs a CO2 performance value of 130 g/mile, which was intended to represent the average CO2 emissions required to charge an EV using representative CO2 values for the California electric utility grid."

But while I appreciate the agencies' rationalization that EVs and PHEVs might be counted as having zero emissions on a purely temporary basis in order to provide incentives for carmakers to accelerate their introduction, I'm also painfully aware that other such "temporary" measures have persisted long after the original justification for them had become obsolete--and here I can't help but think of the ethanol blending credit that is now in its 31st year.

Why do these loopholes in the way we tally greenhouse gas emissions matter enough for me to hammer away at them like this? Consider the proposed vehicle rules. By ignoring emissions that occur outside these vehicles, the government is discouraging carmakers from using less exotic technologies that might actually deliver comparable savings of fuel and emissions sooner, and at a lower cost to taxpayers and consumers. A conventional Toyota Prius hybrid running on gasoline emits only 10% more grams of CO2 per mile than California claims for an EV powered by its greener-than-average state electricity mix. Since the same number of batteries could equip many more Prius-type hybrids, at a much lower cost per car than for a full EV, the benefits of rushing EVs into production seem much less compelling at this point, particularly when the government is also subsidizing the purchasers of EVs and PHEVs to the tune of many thousands of dollars per car. That will amount to billions of dollars of extra subsidies for an incremental emissions benefit that might just be negative for an EV recharged using coal-fired power.

"Start as you mean to go on," goes the old saying. We know that whatever their energy security benefits and general hi-tech niftiness, EVs are not zero-emission vehicles, just as we now understand that it is likely that burning corn ethanol releases roughly the same level of greenhouse gases as the gasoline it is intended to replace. If cap & trade bills such as Waxman-Markey and Kerry-Boxer are to have any integrity as tools for achieving genuine reductions in the global greenhouse gas emissions behind global climate change, then we must count all the emissions from all sources, no matter how politically unpalatable that may be. EPA and DOT might do well to heed this advice, too, before establishing a new, impossible-to-revoke entitlement for the manufacturers of electric vehicles.

Missing the Point on Energy and Jobs

Two emails I received yesterday delivered press releases from two organizations with very different agendas, both emphasizing the impact of energy on jobs. With US unemployment showing little response to the economic stimulus, the rebounding stock market, or the "green shoots" appearing in some sectors, it's understandable that companies, groups and even the government would want to play up the direct employment impact of key initiatives or policies. Yet when it comes to energy, I believe much of this effort misses the mark. Our employment goal for energy should not be to have as many people working in the energy sector as we can, but to have the most efficient and cost-effective energy sector possible, in order to promote job creation and retention in the rest of the economy, where the vast majority of jobs are found. Our decisions about energy policy should not depend on the creation of a few green jobs.

I'm hardly suggesting that energy jobs are insignificant or inconsequential. I've spent my entire career in energy, and I recommend it without hesitation as a field in which one's contributions can have a measurable impact on society, often with better remuneration than in many other pursuits. The Oil & Natural Gas Industry Labor-Management Committee isn't wrong to stand up for the millions of industry-related jobs at stake in the current Congressional debate on energy industry tax benefits, any more than Wind Capital Group is to highlight the 2,500 jobs associated with the supply-chain effects of their Lost Creek Wind Project. But as important as preserving or expanding energy-related jobs appears today, it is even more essential for the long-term interests of the country that we not obsess about this one aspect of energy, to the detriment of others that will affect overall US employment and international competitiveness long after the unemployment rate has returned to its normal range.

Putting this into perspective requires recalling that by its nature energy is a capital-intensive business, rather than a labor-intensive one. One way to gauge that is to look at the labor productivity of energy companies. The latest annual report of my former employer, Chevron, reveals that on average in 2008 its 61,675 employees each accounted for $4.3 million of revenue, resulting in nearly $700,000 of pre-tax net income (after covering their own salaries and all other expenses.) In the utility sector, the comparable figures for FPL Group were $1.1 million and $137,000, respectively. Even a small, rapidly-growing renewable technology firm such as First Solar enjoyed revenue and pre-tax profit per employee in 2008 of approximately $354,000 and $132,000, respectively. With its high labor productivity, the primary employment impact of energy occurs where it is consumed, not where it's produced, because energy is such a crucial input for so many sectors and the sine qua non of more than a few.

When legislation like the Kerry-Boxer climate bill, which includes many provisions that would make energy more expensive for consumers and businesses, is marketed as a jobs bill it merits a skeptical reception. Stimulating jobs in the 6-10% of the economy devoted to energy seems unlikely to compensate for the loss of jobs that would ensue throughout the broader economy, if climate legislation caused energy costs to soar. That may, however, be a necessary evil, and the question we should really be asking is not how many green jobs such legislation will create, but whether on balance its provisions are truly justified in order to address climate change--even if they resulted in a net loss of employment, as I strongly suspect they would. Unless the answer is an unequivocal yes, we could be setting our long-term energy policy on the basis of a metric that is only a minor contributor to either energy costs or total economic activity, for reasons that seem unlikely to stand the test of time.

"Feeding Frenzy"

An article in today's New York Times offers more detail on the manner in which Congressional climate legislation has fractured the energy industry into competing groups of haves and have-nots, based on how companies and sectors were treated under the Waxman-Markey bill and their hopes for receiving a better deal in the pending Kerry-Boxer bill in the Senate. Not only has it fragmented utilities along the axis of their emissions intensity, but it has also opened gaps within the oil & gas industry between companies that produce primarily natural gas and those that produce or process mainly oil. I don't know whether the authors of Waxman-Markey saw this potential in their design for allocating emission allowances, though some supporters are bound to see it as a beneficial feature. I regard it as a worrying symptom of the distortions inflicted on the basic concept of cap & trade, which remains the best option for guiding the economy toward a lower-emission future, but now seems likely to underperform its potential in a very costly way, as a result of these flaws.

As recently as a couple of years ago, few energy companies were enthusiastic about the prospect of cap & trade, because it was bound to raise their costs and reduce demand for their output, at least from energy sources with substantial emissions of CO2 and other greenhouse gases. If the bill passed by the House had treated all emissions from all sectors equally--a level playing field--we'd still see visionary companies diverging from the industry's stance, but their numbers would probably be a lot fewer for the simple reason that there wouldn't be nearly as much financial gain in it for them. When no-nonsense companies like Exelon and several of its utility peers break ranks with the US Chamber of Commerce on this issue, it's a good bet that they see a direct strategic advantage that will put money in their shareholders' pockets. Simply put, this is as good a deal as they're going to get. But while I find their support of cap and trade perfectly rational and even laudable, it should by no means be read as a sign that the Waxman-Markey approach is the best means of addressing climate change.

As I've noted in previous postings, Waxman-Markey was excessively generous in handing out emission allowances to the electricity sector, at the expense of the transportation sector. It also lavished allowances on non-emitting sectors and favored causes and groups in lieu of cash--a form of largess that fundamentally undermines the accountability of these benefits, because no one knows or can know what they will be worth when they are eventually received. Yet although this is bad policy on many levels, I see many people holding their noses and supporting the W-M approach, because they conclude that once the free allocations have phased out in 2030, we'll be left with a more or less pure cap & trade system enforcing a steadily tightening cap on emissions. The problems with this thinking lie in the enormous distortions and unnecessary economic hardship those uneven allocations will create over the next 20-plus years and the opportunity cost of the emissions reductions that could have been achieved more quickly and cheaply.

My strong preference has been for an even-handed cap & trade system that would include the broadest possible collection of emissions sources, providing great diversity of abatement costs and thus great scope for emissions trading to minimize the cost of achieving our emission reduction goals, and with most of the proceeds rebated directly from the government to taxpayers. Unfortunately, the ship has sailed on that approach--at least for now--and anyone supporting cap & trade for the elegant simplicity of its mechanism for squeezing out emissions is left hoping that the legislative excesses of one chamber of Congress will cancel out those of the other, and that somehow two bad bills will beget a good one.

No Good Choices

I find myself in a foul mood concerning climate change, after a week that has seen US choices for managing our greenhouse gas emissions narrow to a trio of unappealing options. The long-awaited draft of a Senate bill on climate change issued by the Environment and Pubic Works Committee turned out to mirror most of the bad features of the distorted Waxman-Markey bill narrowly passed by the House in June. Adding insult to injury was the announcement by the Administrator of the EPA that her agency was preparing to regulate the greenhouse gases from large emitters--power plants, refineries, and other industrial facilities--as point-sources under the Clean Air Act as soon as next year. This leaves us with three poor choices: 1) a cap & trade system harnessed to the yoke of Congressional patronage and pork, 2) command-and-control regulations likely to extract emissions reductions from the highest-cost sources and thus having the most adverse impact on the economy, and 3) a status quo that will likely result in our emissions resuming their steady climb, once the economy recovers.

With regard to the Kerry-Boxer bill, designated as the "Clean Energy Jobs and American Power Act"--no catchy "ACES" acronym there--I haven't had time to wade through its 801 pages, so I'll keep my comments brief. Contrary to the conclusion reached by the editors of the Washington Post, the bill does include a cap & trade mechanism for greenhouse gas emissions, though I can understand why they might not have looked for it under the obscure rubric of "Pollution Reduction and Investment Program". From my quick scan of that section, it strongly resembles the cap & trade aspects of Waxman-Markey, with the crucial difference that the allocation of emission allowances among various sectors has been left to other Senate committees to fill in. The only allocation clearly specified is that 25% of allowances should be auctioned, with the proceeds to go toward deficit reduction. As laudable as that sounds, I would merely note that every dollar raised by cap & trade that is not returned to taxpayers constitutes a new tax by another name and should be counted in the total tax burden on the productive economy.

Now let's turn to the EPA announcement, which has me even more concerned. Last week I received an emailed article from the Institute for Policy Integrity at NYU suggesting that under the Clean Air Act the EPA could create its own cap & trade system for greenhouse gases without requiring additional authorizing legislation. That briefly buoyed my hopes for a more pristine version of cap & trade, without the unseemly scramble to siphon off its proceeds to fund every pet project and cause of every Member or Senator whose vote was needed to pass the thing. Then I read Administrator Jackson's remarks describing the approach she has in mind, and I knew the EPA was applying its old pollution-abatement mentality to climate change, facilitiated by a Supreme Court ruling that unhelpfully labeled CO2 and other GHGs as pollutants. The new rule would impose New Source Review criteria on the greenhouse emissions from power plants, refineries and factories when they expand or modernize, and it parallels the Best Available Control Technology requirement that is at least logical for local air pollutants like SOx and NOx that result from fuel impurities and combustion byproducts, but that makes little sense when dealing with the results of the primary chemical reaction of combustion: C + O2 --> CO2.

With all due respect to Administrator Jackson, a fellow chemical engineer who I'm sure understands the technical side of this issue as well as I do, her remarks betray a deep misunderstanding of the economic consequences of regulating carbon this way. The key phrase in her comments, which focused on minimizing the impact on the small businesses she seeks to exclude from this ruling was, "...all without placing an undue burden on the businesses that make up the better part of our economy," as if that "better part" didn't consume the electricity, fuels and raw materials produced by the part she proposes to regulate--presumably the "worst part" of our economy. The reality is that the costs imposed on large emitters will inevitably fall on those same small businesses when they pay their utility bills, buy fuel and other inputs, and when they seek to sell to consumers and other businesses equally burdened by these new, higher energy costs.

There is simply no getting around the fact that regulating greenhouse gas emissions, which amounts to charging a fee for something that has been free since the discovery of fire, is going to impose a burden on the entire economy. The principle behind cap & trade is the effort to make that burden as small as possible, by encouraging those parties with the lowest costs of emissions abatement to make the biggest cuts. Industrial emissions reductions are inherently more expensive than those in many other sectors, and we need a solution that unleashes the cheapest CO2 cuts, instead of forcing the most expensive ones to be done first.

I haven't given up entirely on the hope that the final outcome from the Senate might restore some sanity to the cap & trade provisions that Messrs. Waxman and Markey so deftly used to co-opt the biggest emitters into supporters, as we've seen with the recent fracturing of the US Chamber of Commerce on this issue. Utilities like Exelon, PG&E, and PNM Resources must realize that they are unlikely to get a better deal on emissions than under Waxman-Markey, and I don't blame them for advancing their interests. But that doesn't make this the best solution for the economy, or more importantly the best way to go about reducing the emissions responsible for humanity's contribution to climate change. And if the White House needs the threat of new EPA rules to have at least one flag to wave at the global climate conference in Copenhagen in December, in case the Congress fails to pass a Waxman-Markey/Kerry-Boxer hybrid by then, I understand that, too. However, that doesn't justify actually implementing those regulations and making the task of reducing our emissions harder and more costly.