Energy
Security, Energy Poverty and Greenhouse Gas Emission Reductions
By
Dr. Margo Thorning, Managing Director
International Council for Capital Formation*
Before the
Committee on Foreign Affairs
Subcommittee on
July 11, 2007
Executive Summary
Introduction: Security of energy supplies and protection for the environment are two important policy goals on which developed countries have focused significant amounts of time and money in recent years. Developed countries have devoted less attention to the need to increase supplies of clean energy to the world’s poorest inhabitants, many of whom live on less that a dollar a day. Since energy use goes hand-in-hand with economic development, many experts think increasing the supply of clean energy for the poor should be a top priority as well.
Trends
in Energy Use and Carbon Emissions: Globally,
fossil fuels will remain the dominant source of energy to 2030, absent sharp
changes in consumption and technological breakthroughs, according to the 2006 International Energy
Agency (IEA) report. The IEA projects that global primary energy demand will
increase by an average annual rate of 1.6 percent between now and 2030 and
carbon emissions will increase by more than half during that period. Over 70
percent of the increase in demand over the projection period comes from
developing countries, with
Energy Security Requires Investment: Rising oil and gas demand, if unchecked, will
accentuate the consuming countries’ vulnerability to a severe supply disruption
and resulting price shock. OECD and developing Asian countries are projected to
become increasingly dependent on imports as their indigenous production fails
to keep pace with demand. Non-OPEC production of conventional crude oil and natural
gas liquids is set to peak within a decade. Meeting the world’s growing hunger
for energy will require over $20 trillion (in 2005 dollars) over the next 25
years.
Bringing Modern Energy to the World’s Poor: By 2030, one-third of the world's population will still be relying on biomass
(wood, charcoal, animal dung) for cooking and there will still be 1.4 billion people
in the world without electricity. The inefficient and unsustainable use of
biomass has severe consequences for health, the environment and economic
development. Shockingly, about 1.3 million people - mostly women and children -
die prematurely every year because of exposure to indoor air pollution from biomass.
Emission Trading Systems: Myths and
Realities: The European Environmental Agency’s
latest projections show that without strong new measures, the EU 15’s greenhouse gas emissions will be 7.4
percent above 1990 levels in 2010,
rather than 8 percent below as required by the Kyoto Protocol. Further, the
economic burden of
Cap and Trade
Approach to Emission Reductions: Emissions caps are not likely to
promote new technology development because they will force industry to divert
resources to near-term, “end of pipe” solutions rather than promote spending
for long-term technology innovations. A fixed cap on emissions also inevitably
collides with
Strategies to Increase Energy Security and Reduce Emission Growth and
Energy Poverty: Increased energy
security and emission reduction will depend on factors such as increased
economic growth, energy efficiency, technology developments in both fossil
fuels (carbon capture and storage, for example) and renewable fuels (wind and
solar, in particular) and possibly increased reliance on nuclear power for
electricity generation. To reduce energy poverty, vigorous and concerted
government action, with support from the industrialized countries, is needed action
to help people switch to modern cooking fuels and technologies.
Role
of International Partnerships: The
Asia Pacific Partnership on Clean Development and Climate serves as a practical
model focusing on sector-specific technologies to increase energy efficiency
and reduce emissions. Extending the framework of the AP6 to other major
emitters will allow developed countries to focus their efforts where they will
get the largest return, in terms of emission reductions for the least
cost. By focusing on the key emitters, developed
countries may find they have more resources for promoting both energy security
of supply and reducing global energy poverty.
Energy Security,
Energy Poverty and Greenhouse Gas Emission Reductions
By
Dr. Margo Thorning, Managing Director
International Council for Capital
Formation*
Before the
Committee on Foreign Affairs
Subcommittee on
July 11, 2007
Introduction
Security of energy supplies and protection for the environment are two important policy goals on which developed countries have focused significant amounts of time and money in recent years. Developed countries have devoted less attention to the need to increase supplies of clean energy to the world’s poorest inhabitants, many of whom live on less that a dollar a day. Since energy use goes hand-in-hand with economic development, many experts think increasing the supply of clean energy for the poor should be a top priority as well. My testimony attempts to put these three policy objectives in perspective and suggests ways to move forward on all three fronts. The testimony also reviews the effectiveness of current policies in the European Union and in the United States in reducing greenhouse gas emissions (GHGs) and suggests cost-effective strategies to reduce the threat of human-induced climate change.
Security of
Energy Supplies
According to Fatih Birol, Chief Economist of the International Energy
Agency, the major challenges faced by both developed and developing countries
are: (1) the growing risk of disruptions to energy supplies; (2) the threat of
environmental damage and climate change caused by energy use and production;
and (3) persistent energy poverty. As he notes in a recent article in The Energy Journal, policymakers have
devoted considerable time and resources to the first two challenges while the
need of the world’s poor for clean energy has received much less attention. [1] High energy
prices and recent geopolitical events remind us of the essential role
affordable energy plays in economic growth and human development and of the
vulnerability of the global energy system to supply disruptions. Safeguarding energy supplies is once again at
the top of the international policy agenda, yet the current pattern of energy
supply carries the possibility of environmental damage, including changes in the
global climate. The need to slow the growth in fossil-energy demand, to
increase geographic and fuel-supply diversity and to mitigate climate-destabilizing
emissions is more urgent than ever.
A Reality Check on Trends in Energy Use and Carbon
Emissions
Globally, fossil fuels will remain the dominant source of energy to
2030, absent sharp changes in consumption and technological breakthroughs, according to the 2006 International Energy
Agency (IEA) report. The IEA report projects that global primary energy
demand will increase by an average annual rate of 1.6 percent between now and
2030 and carbon emissions will increase by more than half during that period.
Over 70 percent of the increase in demand over the projection period comes from
developing countries, with
Coal will see the biggest increase in demand in absolute terms over the
next two decades, driven mainly by power generation.
- The Threat to the World’s Energy Security is Real and Growing
Rising oil and gas demand, if unchecked, will accentuate the consuming
countries’ vulnerability to a severe supply disruption and resulting price
shock. OECD and developing Asian countries are projected to become increasingly
dependent on imports as their indigenous production fails to keep pace with
demand. Non-OPEC production of conventional crude oil and natural gas liquids
is set to peak within a decade. By 2030, the OECD as a whole will import
two-thirds of its oil needs in the IEA’s base case scenario compared with 56
percent today. Much of the additional imports come from the
Oil prices still matter to the economic health of the global economy. Although most oil-importing economies around
the world have continued to grow strongly since 2002, they would have grown
even more rapidly had the price of oil and other forms of energy not increased.
Most
OECD countries have experienced a worsening of their current account balances,
most obviously the
- Investment Needed to Promote Energy Security
Meeting the world's growing hunger for energy requires massive
investment in energy-supply infrastructure, according to the IEA report. The
IEA base case calls for cumulative investment of just over $20 trillion (in
2005 dollars) over 2005-2030. The power sector accounts for 56 percent of total
investment – or around two-thirds if investment in the supply chain to meet the
fuel needs of power stations - is included. Oil investment, three-quarters of
which goes to the upstream, amounts to over $4 trillion in total over
2005-2030. There is no guarantee that all
of the investment needed will be forthcoming. Government policies, geopolitical
factors, unexpected changes in unit costs and prices, and new technology could
all affect the opportunities and incentives for private and publicly-owned
companies to invest in different parts of the various energy-supply chains. The
ability and willingness of major oil and gas producers to step up investment in
order to meet rising global demand are particularly uncertain. Capital spending
by the world's leading oil and gas companies increased sharply in nominal terms
over the course of the first half of the current decade and, according to
company plans, will rise further to 2010. But the impact on new capacity of
higher spending is being blunted by rising costs. Expressed in cost inflation-adjusted
terms, investment in 2005 was only 5 percent above that in 2000. Planned upstream investment to 2010 is
expected to slightly boost global spare capacity. Beyond the current decade, higher investment
in real terms will be needed to maintain growth in upstream and downstream
capacity.
- Impact of Global Energy Demand
on Carbon Dioxide Emissions
Global energy-related carbon-dioxide (CO2) emissions will increase by 55 percent between
2004 and 2030, or 1.7 percent per year, in the IEA’s base case scenario. Power generation contributes half of the
increase in global emissions over the projection period. Coal overtook oil in
2003 as the leading contributor to global energy-related CO2 emissions and consolidates this position through
to 2030. Developing countries account
for over three-quarters of the increase in global CO2 emissions
between 2004 and 2030 in the base case scenario. They overtake the OECD as the
biggest emitter around 2010. The share of developing countries in world emissions
rises from 39 percent in 2004 to over one-half by 2030. This increase is faster
than that of their share in energy demand, because their incremental energy use
is more carbon-intensive than that of the OECD and transition economies. In
general, the developing countries use proportionately more coal and less gas.
- Bringing Modern Energy to the World’s Poor Is an Urgent Necessity
Although the IEA projects steady progress in expanding the use of
modern household energy services in developing countries, many people will
still depend on traditional biomass in 2030. Today, 2.5 billion people use
wood, charcoal, agricultural waste and animal dung to meet most of their daily
energy needs for cooking and heating. In many countries, these resources
account for over 90 percent of total household energy consumption.
The inefficient and unsustainable use of biomass has severe
consequences for health, the environment and economic development. Shockingly,
about 1.3 million people - mostly women and children - die prematurely every
year because of exposure to indoor air pollution from biomass. The data show
that in countries where local prices have adjusted to recent high international
energy prices, the shift to cleaner, more efficient ways of cooking has
actually slowed and even reversed. In the IEA’s base case scenario, the number
of people using biomass increases to 2.6 billion by 2015 and to 2.7 billion by
2030 as population rises. That is, one-third of the world's population will
still be relying on these fuels in 2030, a share barely smaller than today, and
there will still be 1.4 billion people in the world without electricity. Action
to encourage more efficient and sustainable use of traditional biomass and help
people switch to modern cooking fuels and technologies is needed urgently. According
to Dr. Birol, providing LPG cylinders and stoves to all the people who
currently still use biomass for cooking
would boost world oil demand by a mere 1 percent and cost at most $18
billion a year. The value of the improvements to social welfare, including
saving 1.3 million lives each year, is surely worth the cost, he notes.[2] Vigorous
and concerted government action, with support from the industrialized countries,
is needed to achieve this target, together with increased funding from both
public and private sources, he concludes.
- European Union
Greenhouse Gas Emissions: Myths and Reality
As
we attempt to balance the sometimes conflicting goals of energy security,
environmental protection and energy poverty reduction it is useful to examine
the cost-effectiveness of current policies to reduce GHG emissions in developed
countries. In the European Union,
reduction of GHGs has become a major policy goal and billions of Euros, from
both the private and the public sector, have been spent on this policy
objective. Many policymakers, the media
and the public believe that the European Union’s Emission Trading System (ETS)
has produced reductions in GHG emissions and that their system could serve as a
model for the
The ETS, created in 2005, is a market-based, EU-wide
system that allows countries to “trade” (i.e., buy and sell) permits to emit CO2.
The EU 15 (the major industrial countries) have a target of an 8 percent
reduction in GHGs by 2010. As shown in Figure 1, CO2 emissions in the
EU 15 have risen sharply since 1990. Overall
emissions (including all 6 of the greenhouse gases) have held constant only
because of one-time events like the collapse of industry in
Source: Data submitted by the EU to the UNFCCC; units
are in 1000 metric tons CO2 equivalent
The European Environmental
Agency’s latest projections (October 2006)
for the EU 15 show that without strong new measures, EU 15 emissions
will be 7.4 percent above 1990 levels in
2010, rather than 8 percent below as required by the Kyoto Protocol. (See Figure 2).
Figure 2. Greenhouse Gas Emissions in the European Union Projected to Exceed
Now that the ETS has been operational for two years,
industry and households are feeling some of the effects of the system, even
though its overall impact on emission growth has been small. As the Washington
Post reported in “Europe’s Problems Color U.S. Plans to Curb Carbon Gases”
(April 9, 2007), the ETS has been a bureaucratic morass with a host of unexpected
and costly side effects and a much smaller effect on carbon emissions than
planned.
Many companies complain that the
ETS system is unfair. For example, Kollo
Holding’s factory in the
“It's crazy,” said Kusters, the plant director, as he stood
among steaming black mounds of petroleum coke and sand in northern
Of all the effects of the new rules, the rise in the price
of power has aroused the most outrage. Much of the anger of consumers and
industries has been aimed at the continent’s utility companies. Like other
firms, utilities were given slightly fewer allowances than they needed. Utilities
in much of
The chief executive of one utility, Vattenfall, which owns
a coal plant that is one of the continent's biggest carbon emitters, defended
the decision. Lars G. Josefsson, who is
also an adviser to German Chancellor Angela Merkel, said higher electricity
prices are “the intent of the whole exercise. . . . If there were no effects,
why should you have a cap-and-trade system?”
An examination of
the actual European emissions data, combined with anecdotal reports on its
actual operation in the EU like those above, reinforce the idea that a cap and
trade system is probably not an effective way to reduce GHG growth in the
Further,
several different economic analyses show that if the EU were to actually meet
its emission reduction targets under the protocol, the economic costs would be
high. For example, macroeconomic analyses
by Global Insight, Inc. show the cost of complying with
Figure 3: Impact of Purchasing Carbon Emission Permits on Gross Domestic
Product
Levels under the
on Major Industrial
Economies
Source: International
Council for Capital Formation “The Cost of the
According to Global Insight, the reason for the significant economic cost is that energy prices, driven by the cost of cap/trade emission permits, have to rise sharply in order to curb demand and reduce GHG emissions. Tighter targets for the post-2012 period will also be costly. For example, a target of reducing emissions to 60 percent below 2000 levels of emissions in the year 2050 would cause losses ranging from 1.0 percent to 4.5 percent of GDP in 2020. (This target is less stringent than the post- 2012 targets adopted by the European Commission in January, 2007.) Even the EU’s Commission for the Environment admits that emission reductions could cost as much as 1.3 percent of GDP by 2030. The fact that the European Environmental Agency projects that the EU 15 will be 7 percent above 1990 levels of emissions in 2010 (instead of 8 percent below) demonstrates that the mandatory ETS system as currently structured is not providing the desired results and that much stronger measures will be required to meet the Kyoto Protocol target as well as the new post-2012 target.
- Emission Reductions in
Several states have adopted or are considering mandatory
emission reduction targets. An examination of the GHG reduction programs in
1.
California’s
Emission Reduction Program
In August 2006, the California Legislature enacted a bill
requiring the state to sharply reduce its greenhouse gas emissions. AB 32 requires
A major stumbling block to
In fact, the latest data from the U.S.
Department of Energy’s Energy Information Administration show that
To illustrate the difficulty of reducing
consider that over the entire 1990-2000 period, per capita
emissions in
In order to meet the emission reduction target in AB 32, per capita emissions would have to fall by 13.1 percent over the 2000-2010 period and an additional 19.4 percent from 2010 to 2020 (see Table 1). In other words, the required reductions in per capita emissions are 4.5 to 6.5 times greater than what occurred from 1990 to 2000. The technologies simply do not exist to reduce total (and per capita emissions) over the next 14 years by the amounts mandated in AB 32—to say nothing of the time and expense required to replace existing energy using equipment—without severely reducing the growth in California’s Gross State Product (GSP) and in employment.
|
Table 1. |
|||||||
|
Year |
Emissions |
Population |
Per Capita |
Percentage |
AB 32 Emissions |
Required |
Percentage |
|
|
(MMTCO2E) |
(Millions) |
Emissions |
Change |
Target (MMTCO2E) |
Per Capita Emissions |
Change |
|
1990 |
426 |
29.83 |
14.28 |
|
|
|
|
|
2000 |
473 |
34.10 |
13.87 |
-2.9% |
473 |
13.87 |
|
|
2010 |
532 |
39.25 |
13.56 |
-2.3% |
473* |
12.05 |
-13.1% |
|
2020 |
600 |
43.85 |
13.68 |
0.9% |
426 |
9.71 |
-19.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
2000-2020 |
-1.4% |
|
|
-30% |
|
|
|
|
|
|
|
|
|
|
Source:
CalEPA, Climate Action Team Report to Governor Schwarzenegger and the
Legislature, March 2006. Table 5-5 Baseline Inventory Estimates (pg 64). *
Note that while AB 32 does not contain an emission reduction target for 2010,
the CAT report does. |
|||||||
2. The Regional Greenhouse Gas Initiative
In sharp contrast to the tight emission targets of
Utility CO2 emissions represent about one-third of total greenhouse gas emissions in the RGGI states. While the RGGI agreement will cap CO2 emissions from the utility sector, greenhouse gas emissions from transportation and other sectors are projected to increase. Overall, greenhouse gas emissions in the northeast RGGI region will grow, even when the RGGI program is fully operational.
In contrast to the likely significant impacts of
Challenges in Implementing a Cap and Trade Approach to
Reduce
Greenhouse Gas Emissions
Trying to reduce
In addition, a fixed cap on emissions inevitably collides with
- Impact of a Cap and Trade System on Innovation
Caps
on emissions are not likely to promote new technology development because caps
will force industry to divert resources to near-term, “end of pipe” solutions
rather than promote spending for long-term technology innovations that will
enable us to reduce GHGs and increase energy efficiency. An emission trading
system will send exactly the wrong signals to investors because it will create
uncertainty about the return on new investment. A “safety-valve” price of
carbon (designed to create a sense of confidence about future energy costs) can
easily be changed. Such uncertainty means that the hurdle rate, which new
investments must meet, will be higher (thus less investment will occur) and
they will be less willing to invest in the
- Property Rights Not Enforceable
Caps
on
- Developing Countries Not
Likely to Accept Emission Reduction Targets
Many
Strategies
to Increase Energy Security and Reduce Emission Growth and Energy Poverty
Increased energy security in the developed countries including the U.
S. and the EU will depend on factors
such as increased economic growth, energy efficiency, technology developments
in both fossil fuels (carbon capture and storage, for example) and renewable
fuels (wind and solar, in particular) and possibly increased reliance on
nuclear power for electricity generation. However, in order to reduce the
potential threat of global climate change, it will be necessary to increase
energy efficiency and reduce the growth of greenhouse gas emissions in the
developing world since that is where the strong growth in emissions is coming
from. Reducing the extreme energy poverty in the world’s poorest nations will
take a combination of technology transfer and public-private partnerships
between wealthy nations and less developed countries. Making progress on all three objectives will
require a significant commitment of resources, much of which will need to come
from the private sector.
- The Role of Economic Growth and Technology in GHG Reduction
Many
policymakers overlook the positive impact that economic growth can have on GHG
emission reductions. For example, in
2006, while the
Internationally,
the
Figure 6: Comparison of
EU and US Energy Intensity Reduction, 1992-2004
Source: EIA, International Energy Annual 2007. (Percentage changes are
calculated using Total Primary Energy Consumption per Dollar of Gross Domestic
Product.)
Technology development and deployment offers the most efficient and effective way to reduce GHG emissions and a strong economy tends to pull through capital investment faster. There are only two ways to reduce CO2 emissions from fossil fuel use - use less fossil fuel or develop technologies to use energy more efficiently to capture emissions or to substitute for fossil energy. There is an abundance of economic literature demonstrating the relationship between energy use and economic growth, as well as the negative impacts of curtailing energy use. Over the long-term, new technologies offer the most promise for affecting GHG emission rates and atmospheric concentration levels.
- Strengthening
The efforts of
In addition to slow capital cost recovery allowances,
- The Role of International Partnerships in Promoting Institutional Change and Favorable Investment Climate in Developing Countries
New research by Drs. David Montgomery and Sugandha Tuladhar of CRA International makes the case that agreements such as the Asia-Pacific Partnership on Clean Development and Climate (AP6), an agreement signed in 2005 by India, China, South Korea, Japan, Australia and the United States, offers an approach to climate change policy that can reconcile the objectives of economic growth and environmental improvement for developing countries (see www.iccfglobal.org for full paper). Together, the AP6 partners have 45 percent of the world’s population and emit 50 percent of man-made CO2 emissions. The projections of very strong growth in greenhouse gases in developing countries over the next 20 years mean that there is enormous potential for reducing emissions through market-based mechanisms for technology transfer.
Drs. Montgomery and Tuladhar
note that there are several critical factors for ensuring the success of an
international agreement which relies strongly on private sector investment for
success. Their research shows that institutional
reform is a critical issue for the AP6, because the lack of a market-oriented
investment climate is a principal obstacle to reducing greenhouse gas emissions
in
- Quantifying the Importance of Technology Transfer for Emission Reductions
As described above, technology is critically important
because emissions per dollar of income are far larger in developing countries
than in the
Opportunities exist because the technology of energy use in
developing countries embodies far higher emissions per dollar of output than
does technology used in the
Figure 7: Greenhouse Gas Emissions
Associated with Existing and New Investment in 2001
(Million tons of Carbon
per $Billion of Gross Domestic Product at Market Exchange Rates)
Source: Promoting A Positive Climate for Investment, Economic
Growth and Greenhouse Gas Reductions, W. David Montgomery and Sugandha Tuladhar
(see www.iccfglobal.org.)
CRAI calculations show that emission reductions can be
achieved by closing the technology gap. The potential from bringing the
emissions intensity of developing countries up to that currently associated
with new investment in the
Table 3: Cumulative Greenhouse Gas Emission Reductions Achievable Through Technology Transfer and Increased Investment
Source: Promoting A Positive Climate for Investment, Economic
Growth and Greenhouse Gas Reductions, W. David Montgomery and Sugandha Tuladhar
(see www.iccfglobal.org.)
In the first example in Table
3, the CRAI study assumed that in 2005 new investment in
- Strategies for
Promoting Institutional Change
Although it is clear that there is a relationship between institutions, economic growth, and greenhouse gas emissions, there is no general formula that can be applied to identify the specific institutional failures responsible for high emissions per unit of output in a specific country. If there is to be progress on institutional reform, at a minimum the key actors or stakeholders - concerned businesses, other groups with influence on opinion and policy in China, India and other developing countries (including local and regional governments), and national governments - must agree on the nature and scope of the problems and on reforms required to address the problems and identify concrete actions that each government will take to bring about institutional reforms.
For example, making progress on implementing the AP6 can be accelerated if the governments of Australia, Japan and the United States would fund research on topics such as the investment climate, the level of technology embodied in new investment, the role of foreign direct investment and potential energy savings from technology transfer, and the nature and impacts of pricing distortions on energy supply, demand and greenhouse gas emissions in China and India. Government support for research to make clear the direct consequences of proposed reforms for energy efficiency and the benefits of a market based investment climate for the overall process of economic growth would also be helpful.
- Broadening the
International Partnership to Include all Major Emitters
At the recent
G-8 Summit in
Conclusions
To be successful, international partnerships will need to
bring forth a sufficient set of offers from each country to bring about
meaningful changes in institutions with significant and quantifiable effects on
greenhouse gas emissions. These offers
would be embodied in an agreement on actions to be taken by all parties, and a
framework under which actions would be monitored and additional steps could be
agreed. This is the place where the current efforts of the AP6 partnership’s
taskforces on clean fossil energy,
renewable energy and distributed generation, power generation and transmission,
steel, aluminum, cement, coal mining and building and appliances to identify
technologies and investments that have profit potential and could also reduce emissions would become most
useful. These investments would become
in a way the reward to
The Marshall Plan is a good example of such a process. After
World War II, Europe pledged various actions with the money provided by the
The recent G-8 agreement suggests that developed countries are moving closer to achieving a consensus on how to reduce global GHG growth in a more cost-effective way than that embodied in the Kyoto Protocol. Extending the framework of the AP6 to other major emitters will allow developed countries to focus their efforts where they will get the largest return, in terms of emission reductions for the least cost. By focusing on the key emitters, developed countries may find they have more resources for promoting both energy security of supply and reducing global energy poverty.