I came across an article from the Breakthrough Institute which argues for the benefits of government support for new energy technologies. The story is a few months old, but still highly relevant – in any case a related story is back on their front page this week. The technology in question is hydraulic fracturing (fracking) to extract natural gas from shale formations (shale gas). Breakthrough have come to the conclusion that the boom in shale gas is largely the result of considerable early investment in the technology by the US DOE. The article argues that this technology has transformed the USA energy scene, also resulting in a drop in US CO2 emissions. But the crunch point is the comparison with the EU, where the focus on emissions reduction has been through the development of carbon pricing. Breakthrough argues that the US is shifting rapidly to a lower carbon economy on the back of successful technology push policies, whereas the EU has a failed carbon market which is now even seeing a resurgence in coal use, some of it imported from the USA.
The differing experiences in Europe and the United States illustrate the relative efficacy of direct technology push versus carbon pricing in emissions reduction and advanced technological deployment. As we wrote in a February 2012 article in Yale e360, “the existence of a better and cheaper substitute has made the transition away from coal much more viable economically, and it has put wind at the back of political efforts to oppose new coal plants, close existing ones, and put in place stronger EPA air pollution regulations.”
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America’s investments in technological innovation contrast strongly with the European Union’s preference for pricing signals. As Europe follows through on plans to build new coal plants that will burn for decades and America leads recent global decarbonization trends, we continue to find little evidence of success from the ETS or any other major carbon pricing schemes around the world.
There is no doubt that from an emissions perspective, the US is benefitting from the current gas boom. Back in June the IEA reported;
US emissions have now fallen by 430 Mt (7.7%) since 2006, the largest reduction of all countries or regions. This development has arisen from lower oil use in the transport sector (linked to efficiency improvements, higher oil prices and the economic downturn which has cut vehicle miles travelled) and a substantial shift from coal to gas in the power sector.
However, the story that Breakthrough is telling is more about linking events after the fact, rather than analyzing the real policy drivers. According to both Breakthrough and an analysis by Associated Press, DOE funding of fracking goes back decades, as does DOE funding for a range of energy technologies. However, this funding wasn’t linked to emissions reduction, but more to the general need for energy supply diversity, energy security and therefore the cost of energy. I have always argued for technology funding, it is an essential part of the policy landscape, particularly for technologies such as CCS. Canada has been active in this regard, with significant funding for CCS demonstration, such as for the Shell Quest project.
But it wasn’t the technology funding on its own that has delivered the change in the US. Price signals have played a key role, it is just that they are less transparent than the carbon price in the EU. Although there isn’t a carbon price mechanism operating in the USA today (across the whole economy), existing coal fired power stations and almost certainly any new ones being considered are still exposed to carbon pricing. This comes from the expectation of carbon pricing in the future, through regulation under the CAA or a later Congress implementing direct pricing. Shell uses such a price premise in its own projects, including those in the USA. We are on record at $40 per tonne of CO2. There are also more price signals for coal, such as from the new mercury rules.
What has worked in the USA is the combination of funding for new energy technologies and a price signal in the market which then drives deployment. It also happens that the coal fleet is old and even the longevity optimists amongst the power producers are starting to count down the number of years before replacement is due. Eventually, the combination of age, cost of natural gas, expected cost of emissions and likely investment required to keep the coal running delivers the knockout blow.
Turning to Europe, the modest resurgence in coal use comes from a similar set of sums, it’s just that the answer is different. The natural gas prices currently seen in the USA aren’t available, coal is getting cheaper thanks in part to US exports and the carbon price signal can even be locked in at relatively low and known levels by using the market. The result is less than desirable from the atmosphere’s perspective, but it is the reality of the current pricing signals. Back in June, Bloomberg reported;
Europe is burning coal at the fastest pace since 2006, as surging imports from U.S. producers such as Arch Coal Inc. (ACI) helped cut prices 26 percent in a year and benefited European power companies including EON AG. Demand for coal, the dirtiest fuel for making electricity, grew 3.3 percent last year in Europe while sales of less- polluting natural gas fell 2.1 percent, the steepest drop since 2009 . . .
None of this means that the EU approach to managing CO2 emissions is wrong or that price signals don’t do anything. Quite the reverse. It’s just that the answers coming out are currently giving some unexpected outcomes.
None of above really matters. The coal is the cheapest and definitely one of the cleanest source of energy you can get. The fact that it releases bit more plant food than hydro, gas fired or nuclear power plants is not very relevant – especially in the developing countries. It is each national government responsibility how they want to regulate and tax power generation (well EU countries don’t quite have the free will). Simply said it makes perfect sense to burn easily accessible coal reserves until abundant cheaper alternative becomes available. I don’t believe it is possible to distort the free market for too long. As we can see distorted market in USA drives coal cheaper making it even more attractive for countries not taking part in this nonsense. On the other side fracking clearly provide big boost for US economy. Not only the gas is cheaper there but also NLG and chemical feedstock boost the economy. This can enable to switch some oil consumption to LPG or LNG or export it at good price. Also converting gas to petroleum product could become economical. The only global competitor to coal is natural gas. At the moment it looks like they can coexist for very long time. Can’t say the same about the carbon tax though. Continuous economic struggle in EU is sufficient warning for other countries. Even UK politicians begin to recognise that all the green stuff comes at a price.
Technology push brings technologies to the point that the market can evaluate them relative to the existing alternatives. However, the markets may choose alternatives that do not satisfy the “smartest people in the room”, given the freedom to do so.
The “smartest people in the room” believe that they know better than all of the participants in the market. They also believe that, by distorting the market in various ways, they can force the market to make the choices the “smartest people in the room” would have them make.
Unfortunately for the “smartest people in the room”, the Law of Unintended Consequences tends to rear its ugly head and “bite them in the ass” more often than not. Perhaps they are not quite as smart as they believe they are.
I have a patented technology which could make big cash to Shell. Shell is going to produce a lot of CO2 which they plan to waste by injecting underground. Countries like Germany are going to waste a lot of renewable energy by installing loads of subsidised wind a solar energy. Due to their intermittent nature a lot of energy will be wasted when the wind speed is optimum or during sunny days. The conventional sources of energy would have to limit their production or sell energy under the market price. The solution is to convert CO2+H2O into the methanol using energy consuming electrolysis. Such commercial plant are already in operation. Methanol could be sold or used to generate electricity during peak hours. This has potential to generate a lot of $$ from in fact waste material and waste energy. David, I know that you don’t know but what about asking some of your engineering colleagues?