Liebreich: Window Opens for Obama to Let in Fresh Air on Energy Policy

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By Michael Liebreich
Chief Executive
Bloomberg New Energy Finance
Twitter: @MLiebreich

November is a month of early darkness and gathering chill in the Northern Hemisphere. It is easy to get depressed.

Surveying the wider picture, there is little at first sight to dispel that mood. President Barack Obama has been re-elected, but he still faces a Republican-dominated House of Representatives. His second-term political capital may be exhausted trying to prevent the US economy crashing over the “fiscal cliff” of $600bn of tax increases and spending cuts. Even if it is not, Team Obama has indicated that undocumented immigrants are going to be a higher priority than energy and climate.

In Europe, the capital markets remain all but on strike; policy-makers are in skittish mood, arguing over whether the struggling continent can afford the electricity bills that will result from the EU’s 2020 clean energy targets and beyond. The UK government has published a bill that might provide a stable medium-term framework for clean energy investment – but then again it might not: it is hard to tell whether it will pass, when the secretary of state for energy and climate change is barely on speaking terms with the energy minister.

The economic downturn in Europe is one of the main reasons we are anticipating full-year investment in clean energy of around $250bn this year, down from $280bn last year – the first year-on-year drop for at least eight years.

Meanwhile the International Energy Agency has published its latest World Energy Outlook, which documents “a resurgence in oil and gas supply”, especially in the US. Even in the scenario in which new clean energy policies are implemented, the agency predicts a rise in energy-related emissions from 31Gt in 2011 to 37Gt in 2035, and an average global temperature increase of 3.6 degrees Centigrade by the end of the century. The “Current Policies Scenario” looks even bleaker – emissions hitting 44Gt by 2035 and temperatures going up by between five and six degrees Celsius.

And then there is Doha, scene of the latest round of UNFCCC-organised climate talks. Despite being one of the sunniest countries in the world, it has the world’s highest per capita fossil fuel consumption. One could be forgiven for being sceptical about the chances of a major breakthrough.

Yet, even in this bleak month, it is still just about possible to keep hope alive for the development of a sustainable world energy system, in which emissions reach a peak this decade and fall thereafter, thanks to rising investment in some combination of renewables, gas, nuclear, carbon capture and storage, power storage, electric vehicles, smart grid and energy efficiency.

Let us start with US politics. In his rapid-fire response to Obama’s re-election on 6 November, our head of policy, Ethan Zindler, warned of continuing opposition from Congress to any Democrat-sponsored energy bill, and still more to any green stimulus mark two (see http://www.bnef.com/Insight/6150). But he also highlighted some specific areas where progress could be possible, now that the election is over. These include an extension of the Production Tax Credit for wind, and legislation to make master limited partnership and real estate investment trust structures available to renewable energy developers. As important for the growth of all non-coal power generation in the US, the Environmental Protection Agency will remain under Obama’s control for the next four years, meaning the agency will work on solidifying rules to curb power sector CO2 emissions and reduce its water use.

Re-elected presidents tend to see their popularity bounce as they embark on their second term, and Obama’s approval rating has already returned to its highest level since July 2009. Our expectation is that while the fiscal cliff will provide intermittently scary headlines for the next few weeks, a deal of some sort will be reached. Both Republicans and Democrats have too much to lose from any cliff-plunge. The former would have to explain to core supporters why it had allowed some $400bn of tax increases to take place and the military’s budget to be slashed. The latter would have to do the same to its followers with respect to tax hikes on middle class families and axe-blows to social programmes.

Assuming that is the way things play out, Obama should still have some political capital at his disposal to put toward other big-picture issues, including – though not first in line – energy. The politics of energy in the US are usually defined as much by geography as by party, with members of Congress tending to support in Washington whichever sub-sector of the industry employs the most voters back home. This usually offers a chance of crafting energy policy which sidesteps the maelstrom of purely partisan politics. But it will not be easy, given the extent to which the whole topic became a political football during the presidential campaign.

Obama will be helped by growing understanding of the progress on costs being made by clean energy technologies – PV and wind in particular. Shale gas is sure to remain an integral part of the Obama administration’s long-term view on US energy strategy. It will no doubt attract billions in investment over Obama’s second term, although there will be increasing realism about likely medium-term prices. Already the price of natural gas in the US has roughly doubled from its historic low of $1.80 per MMBtu earlier this year to $3.59 per MMBtu, and few analysts doubt that it will reach $5 or even $6 per MMBtu within the next few years.

For Obama to accelerate progress on clean energy meaningfully, he will have to master the skills of domestic deal-doing. Legend has it that Obama played 105 rounds of golf in his first four years in office, only one of which was with a Republican law-maker. To deliver in his second term the scale of change that eluded him during his first, he may have to make political opponents his main golf buddies. Clean energy fans will, in any case have to be realistic that Obama’s second term will be much shorter on subsidies and hand-outs for favoured technologies than the first.

But I have a second reason for optimism. In its 2012 World Energy Outlook, published this month, the IEA included for the first time an “Efficient World Scenario”, incorporating new government action around the world to bear down on energy waste. This scenario would make possible more efficient allocation of resources, and thereby boost the GDP of the US by 1.7% by 2035, that of China by 2.1% and of OECD Europe by 1.1%.

In money terms, the IEA estimates that additional investment of $11.8 trillion in efficient end-use technologies would be more than offset by a $17.5 trillion reduction in fuel bills and a $5.9 trillion cut in necessary investment in energy capacity.

For climate change worriers, the Efficient World Scenario has powerful attractions. Energy-related CO2 emissions would peak before 2020, and decline to 30.5Gt by 2035, limiting the long-term world temperature increase to three degrees Centigrade, the IEA reckons. Put another way, it would give the world more time to take action on climate change, because the emissions causing a two-degree rise in temperatures would not be locked in until 2022, as opposed to 2017 on the current trajectory.

The cynics will say that energy efficiency is the perennial “low-hanging fruit” which, like Tantalus and the grapes in Greek mythology, will always recede out of our reach each time we stretch for it. However there is beginning to be some evidence to the contrary. Last month, the market regulator for Australia’s National Electricity Market (encompassing New South Wales, South Australia, Tasmania, Victoria and Queensland) said that energy demand in the year to June 2012 was some 10% below the prediction it made as recently as 2010, and back at the same level as in 2005-06. This surprise shortfall in demand in one of the better performing OECD economies in recent years, while helped by a period of weakness for local manufacturing industry, appears to have resulted mainly from a penetration of the electricity mix by small-scale PV, as well as demand-response and efficiency action by consumers.

In the US, the Energy Information Administration reported recently that the country’s energy-related emissions fell 2.4% in 2011, even though the country’s economic output grew by 1.8% in that year.

The EIA said: “Because the decline in CO2 emissions occurred in a growing economy, the carbon intensity of the economy fell. This was mainly a result of using less energy or, in some cases, using less carbon-intensive energy, to achieve the same economic output.” Shale gas played a big part. Also important, however, was road transport, where a 27% rise in gasoline prices coincided with a “1% increase in the miles per gallon of light duty vehicles and a 1.2% drop in vehicle miles travelled. These factors combined to decrease transportation energy use by 1.4% in 2011.”

If you look at a longer-term picture for the US, there were significant year-on-year reductions in emissions in 2008 and 2009, as the recession bit, and only small increases in most of the other years in the last decade, so the 2012 total was actually 6.8% down on the figure for 2000. With more coal-to-gas switching due to take place in the power sector and the Obama administration’s corporate average fuel economy standards taking hold, the US is expected to keep a lid on emissions into the future as well.

This does not mean that we are on track for an Efficient World Scenario, far from it. The IEA’s chief economist, Fatih Birol, is quite unequivocal: “We are still on an unsustainable energy path.” But it does hint at what could be achieved, with smart policy, innovative technology and a bit of an economic tailwind. This is new information: five years ago, who would have predicted coal use and emissions would be rising in Europe – the only major developed economic bloc still committed to Kyoto – just as they are falling in the big, bad US – always portrayed as the biggest impediment to climate action? You can hear the wailing and gnashing of teeth from Brussels all the way to Doha.

Ah yes, Doha. In line with previous years, I shall not be attending. Until COP15 in Copenhagen, the process was at least serving a useful purpose in educating the world on climate change, the costs and benefits of action, and some of the geopolitical trade-offs. For all the “two weeks to save the world” rhetoric, the negotiations were always too badly structured to expect a breakthrough. Since Copenhagen, however, the annual, highly public COP failure has been damaging the world’s chances of addressing climate change, and I prefer to stay away.

The run-up to Doha – for those bothering to pay attention – has been characterised by the usual technocratic wrangling and political posturing. The technocrats have focused mainly on the institutional design of the Green Climate Fund while ignoring the elephant in the room, which is that the developed world will never route more than a fraction of their $100bn Copenhagen commitment through a vehicle so bureaucratic and unwieldy. Meanwhile the Chinese, Indians and other developing countries have as usual been playing to domestic audiences – and wasting negotiating capital – by demanding a second Kyoto commitment period. Kyoto has never looked more irrelevant – emissions have risen 45% since 1990, the first period covered only 25% of the world’s emissions, and if there is a second period it will cover even less.

The US meanwhile has made it quite clear it will sign up to no agreement that lets the developing world off the hook. Last year, in Durban, it looked like India and China had agreed, but their statements since then suggest they are rowing back.

It is possible that a newly emboldened US administration will step up the pressure. For years, the US has been the subject of ridicule for declining to sign the Kyoto accord and for refusing to legislate domestic carbon caps. This has often meant the US has been forced to play defence in the global climate talks. This year, however, the Obama team arrives at Doha with the wind at its backs. While the election was hardly a referendum on climate science, the public clearly rejected Obama’s rival, who refused to take a clear position on global warming. And US negotiators can point to the very real progress the country is making in cutting overall emissions and the CO2 intensity of its economy.

While the EPA has made it all but impossible to build a new coal-fired power generating plant in the US not equipped with carbon capture and sequestration, the same cannot be said of China and India, which each have hundreds of new coal plants on the drawing board. Meanwhile, the shale gas boom looks like changing the economics of the chemicals and heavy manufacturing industries, leading to a resurgence in US manufacturing. Thus, for the first time for many years, the US may have the opportunity to play offence in the climate game.

Frustration with China and the UNFCCC would likely put the question of Carbon Border Adjustments firmly back into play. With the cost of energy under control in the US, China has more to lose than the US in a trade war, which makes the US more likely to wave the tariff stick if China looks uncooperative.

The new Chinese leadership team, just installed, could in theory start to veer towards a new line on emissions control. More likely, however, is that it will make greater play than before of China’s commitment to clean energy. As our China team has documented in recent Research Notes, Beijing has upped its goals for new PV installations across the country. Meanwhile, there are signs that at the province level, local government entities and quasi-public entities are ready to step up their support for the solar equipment manufacturers who are struggling mightily and now often selling their wares at a loss.

Accelerating the drive towards clean energy would be consistent with the country’s previously stated goals, which has the benefit of continuity and would also help to address a growing political problem back home for Chinese leaders: massive overcapacity in the wind and solar sectors, bringing the risk of bankruptcies, unemployment and financial write-downs.
The most valuable result from Doha would be to promote a broad acknowledgement of the fact that world now has the tools – in the shape of emission regulation, support for efficiency investment, coal-to-gas switching, and competitive or near-competitive renewable power technologies – to get its carbon emissions under control.

We know a lot more about the low-carbon transition than we did in 1992, or indeed in 2007. If only we could stop playing politics and get on with it, I might be able to ignore Robbie Burns’s “November’s surly blast, making fields and forest bare.”

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