Wednesday, August 27, 2008

RE < C

Earlier this month:

Vapourware in the energy business...

And this:

I think we have vastly oversold the role of the market in the solution to this problem...

This is pretty radical stuff - was it those lefty Unionists again? Some hack in the marginal publications, some opinionated blogger?

This is from no less an august figure in Energy Policy than Professor David Victor, Director of the Program on Energy and Sustainable Development (PESD) based at Stanford University. Professor Victor is also a Law Professor at Stanford, and as it happens very knowledgeable about the action of world markets in coal.

One of the great challenges of the climate change crisis is to make renewable energy cost less than coals and high carbon footprint fuels. This is RE < C.

This can be done by increasing the cost of using such fuels, effectively making polluters pay for the cost of actually putting polluting substances into the environment, for example by schemes such as cap-and-trade.

But the other side of the picture is what is the economic realities affecting trade in coal?

Coal is still plentiful, and surprisingly at least to me is still a massively oversubscribed commodity. The USA are still commisioning new coal fired plants - in spring of 2007, 150 new plants were either in planning or under construction. This is surprising because the news has been full of how planned coal plant projects are being scrapped - but this is 59 or so by some accounts, plenty more are still going ahead.

China has recently become a net importer of coal, despite its massive reserves. To put how amazing this is into context, it is very expensive to ship coal - it can't be pumped and is heavy and difficult to handle, compared to its value. At least until recently - prices have been going up for coal such that there are now markets and trade in coal along routes that would not have been thought viable, according to Professor Victor.

Professor Victor highlighted the failure of the ETS scheme in Europe - one of the early innovators in market based schemes to reduce industry carbon emissions. He pointed out that in recent times the trading prices for carbon were at around 25 euros/ton - but it would need to be twice that to be in parity with gas. Here parity meaning that costs would be sufficient to cause polluters to switch to the next clean fuel alternative, being gas with solar, wind and so on dearer alternatives still.

I am not a political scientist, but I don't believe in strong, heavy government - I would like to believe that a light touch at the helm would result in the best outcomes for our nation states. However I also believe that the state must act to protect its citizens from direct and immediate harm - whether its comets from space, or asbestos in our ceilings; the State fails or succeeds in its duty to the extent that it can react potently and swiftly in the face of widespread imminent harm to its people.

With climate change, droughts, cyclones, and many other nightmare scenarios awaiting, it seems that allowing the market to decide on these matters is such a failure.

Again from Professor Victor:

My own view is that the carbon markets are a mistake - its created a casino. Should be a tax.

My guess which governments of the world will be the first to realize the sense of this? I am betting it will be Russia and China before the USA and the West, precisely because of our blind worship of the market.