Transcript Global climate policy and energy security: two sides of the same coin?

Energy security and climate policy: two
sides of the same coin?
Peter R. Hartley
Kenneth B. Medlock III
Rice University
“We must treat energy security and climate security as
two sides of the same coin.”
Tony Blair, October 20, 2006
A basis for the claim
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Dependence on imported sources of energy can have negative macroeconomic
and strategic consequences
Most of these imported sources are fossil fuels, the combustion of which
increases CO2 emissions thereby contributing to global climate change
The US can reduce both of these undesirable consequences by reducing fossil
fuel use
We shall claim that, while this argument has merit, it also has flaws
We will focus on the US, but some of our remarks will also be relevant especially
for Japan and the EU
Possible meanings of energy security
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Related to national security as usually interpreted:
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Reduce the need to maintain influence in areas, such as the Middle East, that are rich
in natural energy resources but politically unstable or hostile to the US
Reduce dependence on foreign energy suppliers, such as Venezuela and West Africa,
which may be unreliable
Modern military forces require a substantial amount of oil products (in the case of
the US, 130-140 million barrels of oil a year)
Energy security also is related to economic security, with energy price shocks
having been implicated in macroeconomic disturbances
Large oil price shocks also produce large financial flows between importers and
exporters that can disrupt financial markets
Price uncertainty further reduces investment in safer sources of supply, tending
to exacerbate initial instability
Policies to promote energy security
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Emergency stocks (such as the SPR) can accommodate short-term shocks
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Many foreign supplies have sovereign risks that are not very predictable
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In a worldwide energy market, however, any change in supply or demand will
affect prices everywhere
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The distinction between reliable and unreliable partners is dubious
Nevertheless, security is enhanced when there are more suppliers and when
developed economies supply a higher proportion of world energy
Transparent rules, good information, and absence of trade barriers produce
integrated energy markets with many suppliers and demanders
In the long term, national energy security is also enhanced by a greater variety of
energy supply sources and by greater substitutability between energy sources
Energy efficiency
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Increased energy efficiency also reduces vulnerability to energy price shocks
Higher efficiency often requires new equipment, which can be expensive when
old equipment has a reasonable remaining operating life
Similarly, new buildings are often more energy efficient than older ones, but
insulation, double glazing and so on can also yield considerable savings
Altered business practices can also often yield substantial energy savings
Since energy efficiency can be increased in many ways, the most effective way of
achieving it is to raise the price of energy and provide incentives for firms and
consumers to respond
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The alternative of direct quantitative controls typically will cost more to produce the
same efficiency gains
What is good climate policy?
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Take it as given that anthropogenic CO2 emissions will change climate, possibly
in ways that could be significantly harmful on net
Nevertheless, it need not follow that limiting CO2 emissions is the best policy
response or even part of the optimal policy response
Actions regarding climate change can be classified into four categories
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Reducing the emissions of greenhouse gases, particularly CO2
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Increased sequestration of greenhouse gases, particularly CO2
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Limiting the chance of harmful consequences from climate change of a given
magnitude
Improved remediation of damages resulting from climate change
Reducing emissions of CO2
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For emission cuts to make sense as part of climate policy, they would need to be
more cost effective than sequestration, which is likely to be the case
US measures need to take account of “carbon leakage”, which could increase
world-wide CO2 emissions on net
If emission cuts reduce the variety of fuels or the range of suppliers to the US
market, they will reduce energy security
For the remainder of this discussion, we assume that the US emission cuts are
part of an effective policy response to climate change
If they are not, energy security and climate change policy would not be “two
sides of the same coin”
Mitigation and remediation of damages
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Measures to reduce the likelihood of large damages could include
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building dykes to protect vulnerable coastlines,
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improving evacuation plans and procedures,
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changing building codes to increase structural integrity,
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developing crops more resilient to altered climate,
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removing subsidies to activities that increase the harm, such as encouraging people
to live nearer the coast
Examples of improved remediation of damages could include:
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better disaster relief preparation,
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improved cooperation between disaster relief teams,
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developing a better civil reconstruction capability
These also are alternatives to reducing CO2 emissions that do not impinge on
energy security
Other issues to consider
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How much climate change is natural, how much is attributable to anthropogenic
non-CO2 sources, and how much results from the accumulation of CO2?
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The larger the non-CO2 components of climate change, the stronger the case for
mitigation or remediation of damages
Mitigation or remediation help protect against non-CO2 as well as CO2 sources
of climate change, while limiting CO2 addresses only one source
Controlling emissions in the future is a substitute for controlling them today
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If much uncertainty about the extent and timing of potential damages may be
resolved in the near future, the case for delay is strengthened
The possibility that uncertainty about future technologies for controlling emissions,
sequestering CO2, reducing consequences etc. will be resolved also increases the
option value of delay
Are policies toward energy security and
climate change complementary?
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Increases in energy efficiency serve both policy goals
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Increasing the use of non-fossil sources of energy also serves both goals
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In the long term, new energy technologies are essential for energy security, but more
basic research is needed to make them competitive suppliers of bulk energy
It is doubtful whether limiting diversity of fossil fuel sources can actually reduce
global CO2 emissions given the likelihood of “carbon leakage”
Coal and unconventional oil in particular provide potential energy security
benefits for the US and Canada, but these are relatively CO2-intensive fuels
Coal and unconventional oil in the US
US electricity generation
Generation by source 2006
Generating capacity 2005
Other Renewables (2%)
Other (1%)
Hydroelectric (net) (7%)
Renewables (10%)
Pumped Storage (2%)
Nuclear (11%)
Coal (33%)
Nuclear (19%)
Coal (49%)
Turbine or Diesel (14%)
Natural Gas (20%)
Combined Cycle (18%)
Petroleum (2%)
2.0%
1.5%
1.0%
Average annual net capacity growth 2005-2030
in the EIA Annual Energy Outlook, 2008 reference case
0.5%
0.0%
-0.5%
-1.0%
-1.5%
Oil & Natural Gas Steam (13%)
Modeling North American natural gas imports
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We used the Rice World Gas Trade Model (RWGTM) based on MarketBuilder
software from Altos Management Partners
The RWGTM is a dynamic spatial equilibrium model linked through time by
Hotelling-type optimization of resource extraction
Capacity expansion, both greenfield and brownfield, is based on capital,
operating and maintenance costs, and anticipated revenues
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The model is non-stochastic, but allows analysis of different scenarios
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The model predicts:
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Regional (country and sub-country level) prices, supplies and demands, interregional flows and associated capital investments
For detail see:
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Hartley, Peter and Kenneth B Medlock III, “The Baker Institute World Gas Trade Model” in Natural Gas and
Geopolitics From 1970 to 2040, ed. Jaffe, Amy, David Victor and Mark Hayes, Cambridge University Press
(2006), available online at www.rice.edu/energy
Modeling North American natural gas imports
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The demand for natural gas as an input into electricity generation in the US is
modeled conditional on the available capacities of the different types of plants
We first examined the likely evolution of LNG imports into the US, Canada and
Mexico with capacity additions as specified in the EIA reference case
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We then assumed that all the coal-fired capacity additions in the US were
required to be natural gas instead
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The imports into all three countries are examined because we allow LNG to imported
indirectly into the US via Canada and Mexico
CO2 constraints will favor natural gas a fuel, while the reference case already
assumes substantial development of nuclear and renewables capacity
Our analysis likely understates the effect since replacing coal plants by natural gas
plants would require the latter to be operated as base load
Arguably, the energy security implications of heavy dependence on Middle
Eastern suppliers of LNG are greater than heavy dependence on Middle Eastern
suppliers of oil
Reference case US LNG imports
35
35%
F
30
F
30%
F
F
F
20
F
F
F
15
10
F
5F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
25%
LNG proportion
Tcf per year
25
20%
15%
F
10%
5%
F
0
0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
F
LNG/demand
US demand (net of LNG)
Total US LNG imports
Reference case LNG trade
35
Southeast Asia
30
Australia
West Africa
20
Qatar
15
Iran
10
Other Middle East
5
North Africa
0
South America
Russia
-5
Norway
-10
Rest of World
-15
Northeast Asia
-20
Other Europe
-25
North America
-30
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
-35
South Asia
2005
Tcf per year
25
Changes in sources of US supply
2.5
Change in Canadian
net supply
2
Change in Lower 48
Production
Change in Alaska
Production
Change in LNG
imports
1
0.5
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
-0.5
2006
0
2005
Tcf per year
1.5
Energy
security
Instruments and targets
Increased energy
efficiency
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Increased non-fossil
energy
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CO2
sequestration
Damage mitigation
and remediation
Some policies can further both goals:
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Increasing energy efficiency
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Increasing non-fossil fuel sources
Some policies have conflicting effects:
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Climate
change
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CO 2 emission
constraints
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Range of effect
uncertain
CO2 emissions constraints, which can
artificially increase demand for
natural gas
Climate change policies with no effect
on energy security:
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Directly restrict use
of coal and unconventional oil
Directly limiting the use of coal and
unconventional oil
Increased sequestration
Climate damage mitigation and
remediation
Two policies compared
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Constraints on CO2 emissions would tend to:
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Encourage energy efficiency by raising the overall price of energy
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Encourage investments in non-fossil energy sources by disadvantaging fossil fuels
A similar effect could be achieved by directly taxing all energy and using the
proceeds in part to subsidize investments in non-fossil energy technologies
There are three major differences between these two options:
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The tax plus subsidy option would not disadvantage CO2-intensive fossil fuels in the
short term, thus assisting with energy security but at the expense of more CO2
The energy tax policy could provide revenue for climate change mitigation and
remediation strategies and subsidizing research into alternative energy technologies
Constraints on CO2 emissions will favor non-fossil alternatives that are currently the
most competitive whereas subsidies could be directed toward non-fossil sources that
have the greatest long term prospects
Conclusion
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Policies to address climate change and energy security are not necessarily “two
sides of the same coin”
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For the US at least, the goals are as likely to conflict as coincide, while some
measures could further one goal with little effect on the remaining goal
Perhaps the conflict in goals is less significant for Europe and Japan, where coal and
unconventional oil is less prevalent
Mitigation, remediation and sequestration also address climate change without
affecting energy security
The goals are more complementary when it comes to encouraging energy
efficiency and non-fossil energy sources
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Taxing energy use encourages energy efficiency, while the revenue could be used to
mitigate and remediate harmful effects of climate change; and
 subsidize basic R&D into alternative energy technologies
If energy security is a concern, this could make more sense than constraining the use
of coal and unconventional oil
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