Sunday, November 30, 2008

The Air in Poznan

A two week long UN conference on climate change will start tomorrow in Poznan, Poland. It will set the stage for the post-2012 climate treaty negotiations taking place in Copenhagen next year. In Poland, the aim is to 1) agree on a "plan of action" for the final negoation year, 2) "make significant progress on a number of on-going issues... including capacity-building for developing countries, reducing emissions from deforestation (REDD), technology transfer and adaptation, 3) advance understanding and commonality of views on shared vision for a new climate change regime, 4) and strengthen commitment to the process".

I believe 3) (finding a shared vision) is probably the most important thing, and that will require especially China's commitment to the treaty and faith in Obama doing his part, although his new administration will not yet be the official representative of the U.S. in these talks. We could get a glimpse of this shared (or unshared) vision during the "high-level segment" of the conference on the 11th and 12th of December when representatives from key countries will give their national statements. Although the current economic crisis might take out some proposals on near-term actions off the table, it shouldn't affect the treaty's long-term commitments and mechanisms. On the upside, there may also be some new brilliant proposals presented in Poznan. The program for the conference can be found here. Personally, I'm very excited to see where this will go.

Friday, November 28, 2008

There will be blood during the sixth technology revolution (soundbite).

I loved NYT's piece yesterday on land leases for wind farms in Wyoming. It draws an analogy between the current wind farm development and the oil patch land guys of the old days in the U.S. There's a rush to get the best land, but landowners are often seeing offers that aren't even close to a fair compensation. The landowners are responding by establishing cooperative associations to use collective bargaining strategies and to share information. I wonder which developers are mostly ranked as crooks and cronies among landowners and which companies get higher remarks.

On another note, last week Merrill Lynch published a report where they estimate that cleantech will be "the sixth technology revolution" after IT. To most of us this isn't real news. But now we know why Merrill Lynch didn't suffer as badly from subprime mortgages as some of its peers. It wasn't that they were too smart - they were simply too slow. The report is a fun read. For example, it quotes Tom Friedman's column on estimates of global energy demand in 2050. Why not just ask Britney Spears? The result is that the report tells you that the "the world used 13 terawatts (TW) of energy in 2000 rising to at least 26TW by 2050". Of course, a terawatt is a measure of power, not a flow of energy. The truth is that we used about 14.000 terawatthours of electricity alone in 2000 (according to the IEA), and the total primary energy supply was about 10.000 Mtoe (about 116.700 terawatthours). To me the report is another great example of what's happened to critical thinking and our approach to information in the 21st century. It's a soundbite document made up of several insignificant or irrelevant sources. These guys should hire someone from Columbia's IEMP program. (Not me, I'm done with the financial sector)

Tuesday, November 25, 2008

Recession Specials

In Chinese, the word crisis combines a sign for danger and another sign for opportunity. Recently, the news about the global economy have been consistently bad for investments in energy and particularly in new clean power generation. Yesterday, an article in The New York Times suggested that the economic slump would slow down the measures to mitigate GHG emissions significantly, since "heads of government have other things on their minds". Several investments in energy infrastructure have been delayed.

Although there are many reasons to be pessimistic about the economy's near-term prospects, it's not all doom and gloom for our attempt to decarbonize the global energy infrastructure. It was only recently that wind turbine manufacturers had an order backlog of two or three years. Demand outstripped supply, and equipment manufacturers had substantial pricing power. Now, major equipment manufacturers such as the Spanish Gamesa are shutting down factories because they've fulfilled their orders for the year, indicating that prices for turbines are finally declining to more reasonable levels, closer to what they were five years ago. The prices of commodities such as steel and cement have declined, and will decline further (unfortunately so will oil, gas, and coal). The cost of hiring construction workers for new projects should be more reasonable, as well. Going into 2009, electric utilities and developers with extra cash will be able to make deals that can be viewed as bargains compared to deals just a year earlier. No doubt, the situation benefits large utilities with massive war chests the most. The bargains will be found at all stages of development from untapped greenfield projects to operational assets. In addition, Barack Obama's team has been contemplating about announcing a massive stimulus package for "green economy" next year, and such a move could well inspire other countries to follow suit. We've stopped, and so we might as well think and try to see the opportunities.

Sunday, November 23, 2008

Equity in GHG Emissions

The UN climate change conference in Copenhagen next year will have to deal with two major questions: 1) what's the agreeable level of GHG concentration in the atmosphere, considering the costs and benefits of mitigating climate change, and 2) how can the cost of emissions abatement be allocated in an equitable and efficient manner, so that a treaty ratified by at least the world's largest emitters can be achieved. I have previously expressed my preference for a carbon tax over a cap-and-trade system. However, a carbon tax, although avoiding the immediate dispute over allocation of emissions allowances, would not avoid the question about efficiency and equity altogether.

I've been inclined to change my opinion about how the tax revenue should be used. I used to think every country should be able to decide for its own how to use the tax revenue (e.g. to lower taxes on labor or capital). However, a global fund for collecting carbon tax revenues could be a wiser choice at least in two respects: 1) the proceeds could be invested directly to emissions abatement where it's most efficient, and 2) the fund could act as means to transfer wealth to poorer countries with a higher marginal utility of consumption. There could be five year periods, after which the tax could be adjusted based on required level of emissions abatement and required amount of wealth transfer to compensate developing countries for their loss of wealth (stemming from the carbon tax) . The wealth transfers would not only be a matter of equity, but also one of efficiency as Chicilnisky and Heal (1994) and Sheeran (2006) have shown. There could be some graduation criteria, such as a GDP level, beyond which money would no longer transferred to a developing country. Of course, this solution raises other interesting questions which I'll deal with another Sunday.

Friday, November 21, 2008

World Energy Outlook

The IEA published its latest annual World Energy Outlook last week, and the summary can be downloaded here. I find many of their forecasts more realistic than last year. In particular, their estimates of future renewable energy supply has increased dramatically from last year, and they have decreased their estimate of OPEC's oil supply in 2030 by about 8 mb/d. Of course, this all remains to be seen. What's more interesting are the implications of their different scenarios (Reference, 550 PPM, and 450 PPM scenario) on what is required to meet the increasing demand of energy, and at the same time, mitigate climate change. (they had a somewhat similar break-down last year, as well, but I wasn't writing this blog then.)

The Reference scenario is a laissez faire scenario in terms of demand growth, efficiency, and emissions. The global demand for energy increases by 45 % from 2006 to 2030. Fossil fuels account for 80 % of total primary energy supply with coal seeing the highest increase of any energy source in absolute terms. In the 550 PPM scenario, the global energy demand increases only by 32 %, and the required shift from fossil fuels to renewable energy and investments in energy efficiency will require an additional investment of $ 4.1 trillion between 2010 and 2030 (equal to 0.24 % annual world GDP). Compared to the 550 PPM scenario, another $ 5.1 trillion will be required to meet the 450 PPM target (equivalent to 0.55 % of annual world GDP). This might not sound like too big of a sacrifice, but the challenge is enormous. The global emissions in the 450 PPM scenario in 2030 are less than the projected emissions for the non-OECD countries in the reference scenario. In other words, even if the OECD countries cut their emissions to zero, the target would still not be achieved. In addition, some of the technology required to meet the challenge (in particular, carbon capture and storage technologies) are not yet fully proven or commercial.

The world leaders will meet in Copenhagen in November 2009 to discuss the post-2012 climate treaty. Any bets on the outcome? Maybe next time I could write about the political reality of equity in global emissions.

Wednesday, November 19, 2008

Europe's Gas Market(s)

Ok, now it's finally time to start writing much shorter and more frequent postings. I hope these will be short enough for people to actually read them. I'll try to throw in some new thoughts every other day, maybe about three times a week. If I didn't have something meaningful to say at least that often, I might as well go and bury my head in the sand.

The other week, Pierre Noël sent me a link to his yet another excellent piece on European gas markets on ECFR's website. I hope the French and German policymakers will give his advice serious thought. Again, he's calling for an integrated gas market, and in particular, he's suggesting 1) a clear political mandate for the Agency for the Cooperation of Energy Regulators (ACER) to force national regulators towards common rules and their implementation. 2) A key goal should be the removal of long-term procurement contracts, and as the first step, unused capacity rights should be auctioned (so called "use-it-or-lose-it" rule) to boost liquidity. 3) The acquisition of transmission and storage assets by suppliers such as Gazprom should be screened by ACER or another EU regulator, since Gazprom has a vested interest in segmented markets, and such acquisitions clearly pose a risk to market integration. 4) The union should help the Russia-dependent central and eastern European countries to devise an action plan for energy security, and 5) Europe shouldn't waste too many resources on its external energy policy, of which Nabucco serves as a grave example.

But how do you convince Germany and France of the benefits of an integrated gas market?