I am speaking this coming week at the Dubai Global Energy Forum. The focus of the Forum is on long term sustainable energy supply for the world. It is an important question.
We will, some time or other, possibly when most of those alive today have departed, run out of oil, gas, and coal.
While it is the case that known reserves of fossil fuel are increasing, not reducing, thanks to new technologies (like shale gas and horizontal drilling), the reality remains that fossil fuels are inherently finite.
They will run out.
We just do not know whether it will be in two, or four or more, generation’s time. But run out they will…eventually.
Gulf States, like Dubai, Saudi Arabia, and Kuwait have substantial renewable energy potential, especially for use of solar panels, whenever solar energy becomes competitive on price with coal, oil and gas. This will happen, but there is a lot more research and development to be done.
RENEWABLE ENERGIES DO NOT YET COMPETE ON PRICE, BUT SUBSIDIES ARE JUSTIFIED
I saw one estimate of the present price of electricity from different sources. It was suggested that
- Natural gas and coal could produce electricity at around £50 per megawatt hour
- Onshore wind could produce it at £100 per megawatt hour
- Offshore wind could produce it at £160 per megawatt hour and
- Roof top solar could produce it at £240 per megawatt hour.
This is why, for the time being, renewable energy needs some form of subsidy.
This subsidy is economically justified for two reasons
- Oil, gas , and coal will eventually run out
- The normal supply price of coal and gas does not include any sum to cover the long term financial damage caused by the climate change generated by coal and gas burning.
CO2 EMISSIONS ARE SPEEDING UP, NOT SLOWING DOWN
Climate change caused by the burning of fossil fuels is a huge problem. Substitution of natural gas for coal will slow down, because it generates less CO2, but it will not reverse the progressive increase the amount of CO2 in the atmosphere. This has grown from
- 355 ppm in 1990,
- to 370ppm in 2000,
- to 390ppm today.
Despite all the Summit conferences, the rate at which CO2 is being emitted is now speeding up, not slowing down.
And we can see the results in the melting of the Arctic ice cap and the weird and unpredictable effects it is having on our weather.
RENEWABLE ENERGY PRODUCTION WILL INCREASE TOO SLOWLY TO STOP CLIMATE CHANGE
Renewable fuels will not, for the foreseeable future, provide an answer to this problem. This is because global demand for energy is growing so fast, far faster than renewable energy development.
Even assuming a carbon price of $80 per tonne (assumed to be eventually put in place by Governments to disincentivize fossil fuel use), one estimate I have seen suggested that
- wind power use in electricity will increase sevenfold by 2040, from just 2% of global energy production today to just 7% by 2040, because demand will have increased so much.
- solar power use will increase twenty fold, but will still only provide 2% of global electricity by 2040, again because it will not increase fast enough to keep up with electricity demand.
And, politically, we are today far away from putting a global $80 per tonne price on carbon . The United States, with its newly discovered resources of oil and gas would resist this bitterly.
In most countries, including the United States, no charge at all is levied for pumping CO2 into the atmosphere. In some countries (including some Arab countries) the production and use of fossil fuels is actually subsidised. Taking such subsidies away would be very unpopular.
In the EU, where there is a charge for a permit under the Emission Trading Scheme, it is only at $8 per tonne at the moment, because governments insisted, when the Scheme was being introduced, on issuing so many free permits to their heavy industries. It is far below the price needed to encourage large scale substitution of renewable energy for fossil fuels.
ELECTRICITY WILL BE THE BIG CULPRIT
The biggest increase in CO2 emissions in future will come from electricity generation. Global electricity demand will grow by 85% by 2040. Heavy industry will be a big user, but so also will the Information Technology sector. Digital Warehouses already use the equivalent of the electricity that would be generated by 30 nuclear power stations.
And the decision by countries, like Germany, to abandon nuclear power will increase their use of coal to generate electricity.
The most rapid increase of all in coal fired electricity generation is taking place in China, although China is also leading the world in renewable energy development. Coal fired plants emit 32 times as much CO2 as gas fired plants, according to one estimate I have seen.
LONG TERM PROJECT FINANCE IS NEEDED
The tightening up of credit following the financial crisis has also made it more difficult to deal with the impending climate crisis. The funds are not available to finance the big structural changes that are necessary. Renewable energy, and improving energy efficiency by using lighter materials, and recycling them, will require large capital investment. The new Basel 3 rules for banks, and the EU’s new Solvency 2 rules for insurers, will make it impossible, or at least very difficult, for these two sectors to be funders or investors in long term infrastructure projects.
Pension funds could be a source of long term funding for renewable infrastructure, but they have little expertise in the field. This is a market that Ireland, with its established expertise in the international asset management and funds industries, is seeking to serve through the Green IFSC. Finding a way to provide long term finance for renewable, and energy efficiency enhancing, investments should be a top priority of the EU.
AND A LONGER TERM SOLUTION….PUTTING A REALISTIC PRICE ON CLIMATE DAMAGE
The response to the financial crisis has reminded us that knowing we have a problem, and doing something about it, are two very different things.
The problem, of a huge build up of credit in some euro area countries and consequent huge payments imbalances, was known to EU policy makers as early as 2003, but nothing was done about it until recently. A financial and banking crisis was first needed, to create enough anxiety among the public, to give policy makers space to take action. It took the collapse of Lehman Brothers, and a stop in Europe’s banking system, to generate a willingness to do something about the underlying economic and fiscal imbalances in the developed world.
Notwithstanding our level of unemployment in the developed world, the EU still taxes labour more heavily than carbon emissions. A global shift away from labour to resource taxation on the scale necessary would be politically very difficult because it would redistribute prosperity quite substantially in favour of those of working age to the detriment of others. It would require a real climate change generated crisis to make this politically feasible. Perhaps major flooding in low lying highly populated areas of the coasts of the United States of Europe may be needed.
What might happen then?
It would become politically possible to consider radical solution, such as a carbon tax, with an accompanying levy or tariff on the carbon content of imports. A carbon tax in the EU, without some levy on imports would simply penalise EU industry.
Such a proposal would get no support at the moment. But its time may come.