Wednesday, November 16, 2011

Seven Billion People Running at a Fiery Wall

The energy policy debate isn't burning as hotly as it did during the record high oil prices of 2008 or the cap and trade battle of 2009, but developing countries continue to drive demand upward while industrial superpowers decide what will fuel their futures. As Paul Krugman writes, this isn’t about Solyndra; rather, it’s a question of where investments in the billions of dollars will flow in the coming decade and what channel those funds will carve on the face of our environment and society.

Market forces tend to favor efficiency in the name of profit maximization. As such, for much of human history, the fuels that delivered the most bang (watt) per buck won the day. Throughout the twentieth century, coal, other hydrocarbons, and nuclear accounted for most electricity generation while petroleum--gas and diesel--drove transportation. Several factors are overwhelming that status quo, and policy makers now have the opportunity and responsibility to decide what will power our future.

Before looking at energy sources, it’s important to understand the two opposing forces that define our prospects. One one side, more people want more energy to do more things than ever before. The world is speeding up and it takes ever more fuel to make it go. Standing in this growth’s path is the need to reign in greenhouse gasses and other pollutants in order to avert catastrophic climate change.

(Statistics and charts drawn from 2010 IEA report)
In the last fifty years, the human population has increased from approximately 3 billion to over 7 billion people. More importantly, for our purposes, billions of people have emerged from poverty with energy expectations in line with the industrial world.

In 2010, America and its 304.5 million citizens consumed 4,155.92 Terawatt hours (TWh) of energy (it takes about 1,100 nuclear power plants to produce one Terawatt hour). That’s roughly one fourth of total human energy demand and 13,647 kilowatt hours (kWh) per capita. Asia, on the other hand, with its 2.18 billion inhabitants consumed 1,570 Terawatt hours of energy, roughly 719 kWh per capita.

The average Asian consumes a fraction of the energy that his/her industrialized counterpart uses, but that’s changing. Most growth in energy demand over the last thirty years came from developing countries. China, for instance, grew from 7.9% of global energy consumption in 1973 to 16.4% in 2008. At the same time, through legislative mandates and technological innovation, developed countries are improving their energy efficiency and reducing their per-capita demand. 

The inexorable rise in energy consumption wouldn’t be a problem if not for the environmental and human costs that energy production creates. Today, most of these costs don’t appear in your utility bill or the power company’s balance sheet. When a public cost isn’t factored into the price of a good or service, economists call it an externality. Externalities amount to a hidden subsidy that distorts market forces away from products that represent a better overall value.

In the case of energy production, fossil fuels, and especially coal, escape with huge externalities from their impact on humans (asthma, pollution-related cancer, reduced quality of life) and the environment (global warming, habitat destruction, localized pollution). These externalities are resilient for a number of reasons, but will have to be accounted for to solve our energy dilemma.

  • Status quo winners that create or benefit from the externalities often hold political and economic influence that can stymie attempts at reform.
  • If rules aren’t applied universally, then regions with tougher accountability standards may lose companies and economic development to less-principled (and/or less-privileged) competitors.
  • It’s difficult for people in one jurisdiction to challenge behavior in another jurisdiction that impacts them negatively; for example, Californians who breath coal pollution that crosses the Pacific from China can’t vote to impose pollution controls on Chinese power plants. 

Currently, the international energy market is asking one question: "what’s the most efficient (lowest cost per watt) way to satisfy global energy demand?" Sooner or later, however, our current answer (fossil fuels along with a smattering of nuclear, hydroelectric, and renewables), is going to collide with the ceiling at which point greenhouse gasses in our atmosphere raise global temperatures to unbearable levels with the attending consequences (islands and coastlines lost to oceans, devastated agricultural productivity, uninhabitable drought-ridden deserts in current population centers).

The most effective way to address both questions--growing demand and climate limit--is to put a global price on the greenhouse gasses (carbon dioxide, methane, nitrous oxide, ozone) that we produce on an industrial scale (power plants, agricultural sources such as raising beef for slaughter, and transportation). This won’t be a tax on each breath you take, just on the exhaust from your car, furnace, and food. In fact, it doesn’t even need to be a tax (see cap and trade).

By setting the price of carbon through a tax or a cap, the global energy market and each individual consumer will eventually be empowered and obligated to buy energy at a price that reflects how expensive it is to produce, transport, and live with. The sooner we include this current externality, the more efficiently we’ll be able to reallocate our investments of capital, research, and development.

Greenhouse gas emissions are like interest on a loan. We borrow energy at a certain pollution interest rate, but when we don’t pay that interest--by planting enough trees to absorb carbon or sequestering emissions underground--the interest builds up until it overwhelms the principal on the loan. What is more, greenhouse gases don’t have a fixed interest rate. Past a certain point, elevated temperatures caused by our emissions cause the tundra to melt, forests to die out, and the oceans to acidify--all natural phenomena that dramatically multiply the level of atmospheric greenhouse gasses.

So, humanity needs more energy, but it can’t create too many greenhouse gas emissions in the process without destroying the balance of life as we know it. In my next post, I’ll look at several potential fuel sources and their impact on this equation.

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