European Affairs

Spring 2003

 

Opinions
How We Can Move to a New Global Energy Economy
By Reid Detchon

 

There are three major challenges related to the production and use of energy intoday’s uncertain world. They are the political and economic security threatsposed by the world’s dependence on oil; the risk to the global environmentfrom climate change; and the lack of access by the world’s poor to the modernenergy services they need for economic advancement.

The generally accepted estimate is that of the six billion people in the world,approximately two billion rely on the most primitive forms of energy. They consumea much larger share of their time and economic resources in acquiring energy thanpeople in the more developed world.

The response to these three challenges should be to make the transition to a newenergy economy. The economic opportunities for making this transition are significant,but we have to create the conditions for policy change. This means assemblingpolitical constituencies that have a desire for change and are able to influencethe political process in that direction.

The United States is very concerned about its dependence on oil from the PersianGulf, although in fact the problem is much more serious in Europe and Japan.

What do we need to do? We need to move quickly toward advanced vehicles that usefewer or no petroleum products. But we must understand the scale of the challenge.When General Motors rolled out its new hybrid vehicle, the company bragged thatit might sell a million hybrids by 2007. But given that there are a couple ofhundred million vehicles in the United States alone, with sales of 15 milliona year, it will take a very long time to replace the entire fleet at that rate.

If we want to change the oil and carbon performance of the U.S. auto fleet, wemust take much more aggressive steps if we are to make any kind of impact in themedium term, let alone in the near term. Sir Philip Watts, Chairman of the RoyalDutch Shell Group, has said that hydrogen fuel is important for the long-term.

The question is how to get to the longer-term. The allure of hydrogen should notdistract us from the need for action now. It will take 15, 20 or, perhaps, 25years for hydrogen to make a significant contribution to the energy infrastructureof the developed world.

Efficiency in vehicles will only get us part of the way to our objective. As longas we are dependent on petroleum as the only means to move our vehicles around,we will get limited benefit from advanced vehicles and from increased efficiency.Unless we stop using petroleum, or at least have a blended system with multiplefuels competing, we shall remain dependent.

What other options are there? Cellulosic sugars, or bio fuels, are the potentialsource for a variety of alternative products. It is not just a question of replacinggasoline with ethanol. In fact, substitution is much more advanced in the fieldof polymers for plastics, fine chemicals, and other commodity chemicals. DuPont,Cargill, Dow, and other big American companies are working very aggressively inthis area.

A recent report forecasts that by 2010, industrial biotechnology will accountfor about 20 percent of the worldwide chemical market, or about $280 billion insales. That is a huge number, much bigger than for medical biotechnology.

Why should we go for biomass? The environmental advantages are obvious. It isstored solar energy; and the carbon cycle is closed. Cellulose biomass is themost prevalent and abundant substance in nature. It has been calculated that,of all the organic carbon on the planet, a full 50 percent is in the form of cellulose.So if we can unlock cellulose, we really have a formidable entrant into the energymarket.

Cellulose biomass can come from a variety of waste products and will do so inthe near future. Over the longer term we could consider using specially selected,fast growing crops like hybrid poplars. Switch grass is an example of a crop thathas a variety of water, soil quality and environmental benefits. As switch grassis mowed to take off the biomass, those benefits remain behind.

Biomass fuels can greatly reduce greenhouse gas emissions. If at the same timethe efficiency of cars is increased through hybrids and fuel cells, the need forimports of petroleum can be substantially reduced.

The other advantage of biomass is that it grows practically anywhere. It willnot grow in the desert, but there is a vast abundance of biomass worldwide. Thepotential impacts on developing countries and the geopolitics of oil are stunning.

There is another interesting idea about biomass and agriculture. According tothe World Bank, agricultural subsidies, which amount worldwide to $300 billiona year, suppress world prices for agricultural products, and undermine developingcountry exports.

Subsidies in the developed world are roughly six times the level of developmentaid. The average European cow receives $2.50 a day in government subsidies andthe average Japanese cow $7.50 a day, while 75 percent of the people in Africalive on less than $2.00 a day.

These subsidies are a big point of conflict in trade negotiations between the UnitedStates and the European Union in the Doha Development Round. The World Bank estimatesthat eliminating the subsidies would increase rural income in developing countriesby $60 billion a year.

If, over time, financial support to farmers can shift from subsidies for producingfood crops to subsidies for producing energy crops, all three main challenges- oil dependence, climate change and access to energy by the world’s poor- could be dealt with in a single stroke.

A special problem is also presented by coal. There is a huge installed coal capacityaround the world, but it is only about half the level it will reach in 30 years.Two-thirds of the capacity that will be available in 30 years has not yet beenbuilt.

Very little new coal capacity will be built in the European Union and the UnitedStates, but huge amounts will be built in China, India and other developing countries.If we are to reduce carbon emissions over the next 20 to 30 years, new capacitycannot be built using existing technology.

The issue is how to get the technology right and the cost down. The developingworld can then invest in technology that will at least be capable of capturingand sequestering carbon emissions now, and there will not be a large installedcapacity using the old technology.

Capturing carbon is not something new. In the North Sea, a Norwegian company iscapturing carbon dioxide (CO2) released in natural gas production and re-injectingit below the seabed. There are coal-based technologies that essentially separatethe CO2 from the hydrogen stream.

As a result, if we can get the economics right, the coal industry could in thelong term become a highly competitive producer of low-cost hydrogen. The coalindustry could supply fuel to the transportation sector in a way that it has neverdone before.

There are several possible policy options for encouraging these developments tomove faster. We should adopt incentives and requirements for carbon capture andstorage to engage the private sector. Transition strategies are critical for ourexisting coal industry. We also need to develop a multilateral initiative to makethe new technologies available at an affordable cost to developing countries.

Another priority is to modernize electricity grids. In the United States, it isestimated that outages and various other disruptions in the power system costmore than $100 billion a year. The system is antiquated. It is based on 50 year-oldtechnology. It is insecure and easily disrupted, and it is not meeting customerneeds. The grid needs to be updated to support an increasingly digitally controlledsociety.

This would have the ancillary benefit of opening up the grid for distributed generation.It is not possible to start throwing fuel cells, wind turbines and various otherdistributed energy resources onto an electric grid and expect the grid to pickup and manage these new resources. This is particularly difficult because of alack of controls in the U.S. grid today.

It would probably cost between $50 million and $100 million over a ten or 20 yearperiod to install the controls in the U.S. electric grid that are needed justto know where the power is going, much less to manage it. If this could be done,however, there would be very substantial benefits. The Electric Power ResearchInstitute suggests that this kind of investment would help reduce energy intensityand increase the efficiency of the grid. This would have significant payoffs interms of productivity, economic growth and lower carbon emissions.

An international working group established by the Energy Futures Coalition isfocusing primarily on the poorest two billion of the world’s population,which, with population growth, might rise to three or four billion by the middleof the century. How do we get clean, affordable, reliable, energy or any kindof modern energy services to that population?

One of the possibilities the group is considering would be an energy and developmentcouncil consisting of a coalition of corporations, labor organizations, faith-basedorganizations and non-governmental organizations (NGOs) to support clean energydevelopment, both as a market opportunity and for reasons of good governance.

The council would support the implementation of the commitments to partnershipsthat were made at the Johannesburg World Summit on Sustainable Development inthe energy sector. It would encourage strong U.S. government support for cleanenergy, and mobilize private sector resources. It would also improve domesticunderstanding of energy poverty and climate issues.

A new class of investment securities, perhaps to be called global developmentbonds, could be created in order to mobilize private capital for these purposes.The aim would be to establish a tax-favored, risk-insured category of investmentsecurities that could both attract private capital and leverage U.S. governmentprograms, such as the Millennium Challenge Account.

There is a general sense that we tend to reinvent the wheel in trying to deliverenergy services to rural areas in the developing world. We propose to establisha global rural energy best practices fund to catalyze financing for 100 millionunserved rural households over the next 10 years. The fund would focus on whatworks and build on successful models emerging in developing countries.

Pilot programs would be financed through local credit and micro-credit institutions,energy service providers, local governments and NGOs. There could be an overlapbetween the global development bonds and the best practices fund because the fundmight identify projects that the global development bonds would be able to support.

Another proposal under consideration is a change in the terms of financing by exportcredit agencies and other multilateral institutions. The OECD lending guidelinesshould be revised to provide extended-term finance for clean energy projects.

All energy projects are currently limited to 10-year lending, except for nuclearpower, which managed to lobby its way to 15 years. Clean energy projects shouldalso have 15-year financing, if not more. We need to engage NGOs, clean energybusinesses and the U.S. government in an effort to advance this change withinthe OECD by defining the trade and climate benefits.

There are also discussions, which tie into work that has been done at the UN,about linking international energy resource centers and bringing them togetherthrough information networks. The feeling is that it is often a shortage of know-howthat is preventing energy from reaching the poorest areas, rather than a lackof capital or technology. Modern information and communication tools could beused to bridge those gaps.

It will be crucial to strike the right balance between the roles of the publicand private sectors. Some people say that the proper role of the federal governmentis long-term research and development that the private sector would not undertakeby itself. That is an important function, but it is not the only appropriate rolefor government. The public sector can, in effect, reflect our widely held societalgoals and set a different path toward those goals that unleashes the private sector’screativity, its power and its capital in positive ways.

Government does not do this with punitive regulation. Rather, it finds ways toencourage good behavior, reduce investment risk, and increase certainty aboutwhat the future will bring. That will, in turn, unleash a lot more investmentby the private sector than the government would ever want to contemplate.

Reid Detchon is a consultant for the Better World Fund, coordinating the development of the Energy Futures Coalition. Before that, he was Director of Special Projects in Washington for the Turner Foundation, managing a portfolio of major grants aimed at increasing the effectiveness of environmental advocacy and encouraging federal action to avert global climate change. He has served as Principal Deputy Assistant Secretary for Conservation and Renewable Energy at the U.S. Department of Energy.