Werner's Blog — Opinion, Analysis, Commentary
How can climate policy succeed without US leadership?

While climate policy in Canada has been moving steadily in the direction of carbon pricing, south of the border climate policy is in dissarray as a new administration will take office in January 2017. Nominees for key positions—the Environmental Protection Agency and the Department of Energy—suggest that much of the progress made under the Obama administration will be undone. There is little reason for optimism that US policy will take climate change seriously.

Meanwhile, here in Canada voices are growing louder that say that Canada's move to carbon pricing is foolhardy if the United States is doing nothing. Why put Canadian industries at a competitive disadvantage when Canada's contribution to greenhouse gas (GHG) emissions are just 1.6% of the world's total? Can Canada make a difference if the GHG giants China and the United States are not contributing their fair share to reducing GHGs? On the other hand, if the countries that recognize the importance of climate change simply hide behind the laggards, who will take the lead to show that responding to the challenge is far from ruinous to an economy? It is clear that British Columbia's carbon tax has done no damage to B.C.'s economy at $30/tonne, and even the proposed $50/tonne federal carbon price by 2020 is at a level that Canada's economy can cope with without suffering undue hardship—allowing for some measure to protect energy-intensive trade-exposed industries, and making sure that carbon taxes are redistributed effectively in a revenue-neutral manner.

‘The future of climate change on our planet is determined by global energy markets.’

Even if Canada and other climate-enlightened countries press ahead with climate policies, will it ever be enough to overcome the draw of cheap fossil fuels? The answer depends on another question: how can government policies in a coaltion of climate leaders affect outcomes in laggard countries? The answer is simple: through global markets. It takes a market where clean energy is cheaper than fossil fuels. No country will escape the force of the market where one energy source is cheaper than another energy source. This statement is true in both directions: if fossil fuel remains cheaper than clean energy, clean energy will only exist in a government-subsidized niche. If, however, the price of clean energy drops below some or all fossil fuels, the era of fossil fuels will wane. This leads to the next question, then: which government policies will help make clean energy sufficiently cheap so that even the climate laggards cannot escape the draw of cheaper energy from clean sources? The answer to this question is the crux of the matter for overcoming world-wide climate policy deadlock. Put simply, the future of climate change on our planet is determined by global energy markets—and in turn by innovation that drives cost reductions.

What it comes down to is the speed of innovation. Innovation is driving down the cost of major sources of renewable energy. Wind energy has reached the point where it is competitive with other energy sources even without subsidies. The US Energy Information Administration (EIA) reports Levelized Cost Of Electricity (LCOE) for plants entering service in 2022. The LCOE of $58.5/MWh for on-shore wind is virtually at the same level as conventional/advanced combined-cycle gas turbines ($56.4/MWh and $55.8/MWh). The US National Renewable Energy Laboratory (NREL) projects further cost reductions of wind energy of 24-30% by 2030 and 35%-41% by 2050. Some of the cos improvements will come from wind farms moving offshore, as they already are in many parts of Europe. Winds are stronger offshore than onshore, but building offshore farms poses new challenges. We also observe massive cost reductions for solar energy, a phenomenon that has been coined Swanson's Law. As The Economist magazined reported in 2012:

Swanson' law, named after Richard Swanson, the founder of SunPower, a big American solar-cell manufacturer, suggests that the cost of the photovoltaic cells needed to generate solar power falls by 20% with each doubling of global manufacturing capacity.

By 2016, the price of photovoltaic cells are near 60 cents per Watt. The US-EIA's 2022-LCOE for solar PV is at $74.2/MWh. That number is expeced to drop further as well. New technologies are on the horizon. Take, for example, the US company Ubiquitous Energy, which has developed transparent glass that serves as a photovoltaic system. Even though it has lower efficiency than some conventional PV systems, the potential for integrating power generation into windows is enormous.

Other renewable technologies are moving down the cost curve as well. Take geothermal systems, for which the US-EIA reports a stunningly low LCOE of $42.3/MWh. That is, by the way, the cheapest energy source on the list. This make you wonder why no geothermal power plants are in operation in Canada. Innovation is on the move for geothermal as well. Enhaned geothermal systems, which I commented on in my 15 January 2015 blog, use hydraulic stimulation, and hot sedimentary aquifers provide new opportunties as well. Combined heat-and-electricity geothermal power generation provides another promising avenue to cost reductions.

Solving the challenges of wind and solar energy (intermittency and storage, transmission over long distances) will require further innovation. But the point in time where solar energy and wind energy pull ahead of fossil fuels is clearly on the horizon. Government policy towards climate change can speed up this process by generating economies of scale. There are two types of economies of scale: static and dynamic. The static type comes from sheer production volume. Building more units brings down costs, such as Tesla's new Gigafactory in Nevada. The dynamic type comes from learning-curve effects similar to what has been observed with Swanson's Law (or Moore's Law in chip design). As more and more units are installed, companies learn what works and what doesn't, and they want to stay ahead of competitors. Innovation brings down cost over time.

‘The innovation race is on: renewable energy comes in from behind but is catching up fast.’

Of course, there is a catch. Innovation happens in the fossil fuel industry as well, and the fossil fuel industry is way ahead in terms of overall scale. The two most important innovations in the oil and gas industry in recent decades have been hydraulic fracturing and enhanced oil recovery (repressurizing old wells). These innovations will keep the production cost of oil and gas low for many years (even if prices spike from time to time due to other issues). Oil and gas is getting cheaper, and wind and solar is getting cheaper too. Which one is getting cheaper faster? The innovation race is on: renewable energy comes in from behind but is catching up fast. Who will win the innovation race depends on who innovates faster. And here renewable energy has more potential than fossil fuels, simply because it is still early days for renewable energy.

Even though the fate of fossil fuels is decided in world energy markets, groups of countries that want to lead on climate policy can help bring down the cost of renewable energy. Germany's Energiewende was and is costly to its ratepayers, but it is also apparent that this domestic policy has had huge impacts elsewhere as well: it has grown the market for wind and solar and it has stimulated much innovation.

The bottom line is that even smaller economies such as Canada can help bring about change in other countries. It is not just about being a "good citizen" and "doing the right thing" and "moral leadership" on climate change. If Canada embraces renewable energy, every wind farm and every solar farm that is built here will ultimately contribute to more innovation and further cost reductions in these industries. It is true that the climate leaders will therefore pay more for each MWh of electricity than the climate laggards who only adopt renwable energy when it has become cheaper than fossil fuels. The laggards will free-ride on the innovation effort by the leaders. The upside is that the countries that build the capacity to innovate will be home to the renewable-energy industries of the future, with high-quality jobs in engineering and high-end manufacturing.

‘Trump does not matter because he can only slow down innovation but never reverse it.’

The new administration in Washington is about to turn back the clock on environmental policy. The new leaders in Washington are either scientifically illiterate, or there are willfully and knowingly shortchanging the welfare of future generations for short-term political and economic gains. What can you expect from a US president who states publicly that "The concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non-competitive"? But not all hope is lost. State-level policies such as those in California will proceed even without backing from Washington; read for example Tatiana Schlossberg's insightful December 16, 2016 article As Trump Signals Climate Action Pullback, Local Leaders Push Forward in the New York Times. Smart companies such as Ubiquitous Energy and Tesla Motors will continue driving innovation—because there are markets for their products even without government subsidies. In the long run, Donald Trump does not matter because he can only slow down innovation but never reverse it. If natural gas is cheaper than coal, Trump will not be able to revive the coal industry. And when renewable energy becomes cheaper than gas and oil, the days of fossil fuels are numbered.

Back to policy. Which government policies will help bring about more innovation, and which will hinder such innovation? Governments have a role to play with basic research and development. And governments can help invest in infrastructure such as smart grids that facilitate distributed energy generation and storage. These are areas where markets struggle because government coordination and leadership is essential. A carbon price is also enormously helpful because it helps level the playing field among competing technologies. As the share of renewable energy grows, economies of scale will grow and help bring down costs further. Governments should not try to pick winners among competing technologies. By leveling the playing field through a carbon price, the most cost-effective technologies will win. In some cases additional action is needed. For example, geothermal energy systems are facing significant regulatory hurdles.

If the new US administration ultimately does not matter, you may ask: but what about China? China's output of greenhouse gases makes it the largest emitter in the world. China has experienced huge growth in energy demand and has satisfied much of it by supplying electricity from cheap coal—so much that one can even speak of a coal renaissance. The result of it is all too visible, as in December 2015 and again this year: air pollution is unbearable when weather conditions are poor. Burning coal kills people; recent estimates of the health impact of burning coal in China put the number of premature deaths in 2013 at 366,000. China has seen the signs of the time and is deploying more renewable energy than any other country. In 2015, China installed a record 32.5 GW of wind power (roughly half the world's total) and a record of 18.3 GW of solar power. Weening China off coal is the first order of business of climate change mitigation. Leaders in Beijing know this, and their citizens who suffer the ill effects of air pollution demand it. China will transition from coal to natural gas and ever more to renewable energy. China relies on cheap energy to power its growing economy. The best that other countries can do to help China is to make renewable energy cheaper and cheaper by growing their own renewable energy sectors.

0 25 50 75 100 125 150 Cumulative Installed Wind Capacity [GigaWatt], 2015 China 145.4 USA 74.5 Germany 44.9 India 25.1 Spain 23.0 Great Britain 13.6 Canada 11.2 France 10.4 Italy 8.96 Brazil 8.71 Rest of World 67.2

Despite ill winds from Washington, there is reason for cautious optimism. The fate of climate change is not decided in the White House, but in global energy markets. And the trend in gloabl energy markets points clearly in the direction of renewable energy. The only worry is: will the change come fast enough? According to statistics provided by the the International Energy Association In 2014, 81% of total primary energy supply came from oil, gas, and coal. And among renewables, biofuels and hydro still dominate. Wind, solar, and geothermal together only contributed 1.3%. For electricty generation, these three renewable sources contributd 4.2% of the world total. Even if the cost of renewables reaches a tipping point, the age of fossil fuels will not be over for a while. Talk about "stranded assets" in the fossil fuel industries is therefore utterly premature. I have little doubt that renewables will make major inroads in electricity generation, and the sooner the better. However, the frontier beyond electricity will be to adapt renewables for use in transportation, home heating, and industrial use. This will require enormous innovation in ancillary technologies, such as batteries, hydrogen storage, or other novel forms of achieving higher energy densities for non-fossil fuels.

Further readings:

Posted on Tuesday, December 20, 2016 at 09:55 — #Energy | #Environment
© 2024  Prof. Werner Antweiler, University of British Columbia.
[Sauder School of Business] [The University of British Columbia]