Focus on Climate Change and ignore Peak Oil?  Not good enough

Focus on Climate Change and ignore Peak Oil? Not good enough

Lately I seem to be encountering many climate change activists who have a blind spot when it comes to peak oil. At present, Friends of the Earth appear to be particularly prone to this. They assert that climate change is overwhelmingly urgent (no arguments from me there) and so that the depletion of fossil fuels is largely irrelevant. In fact they argue that it can only be good news, limiting the availability of these dangerous substances which have the potential to destabilise our climate. But this ignores the reason why humanity is so loathe to wean itself off these fuels in the first place. They are exceptionally potent energy sources which greatly increase our ability to change our human infrastructure and shape the world around us. Energy is perhaps best defined as the ability to do work, and there is much work to be done in the transition to a low-carbon way of life. Imagine that we simply immediately ceased the extraction of fossil fuels - as the climate change imperative might appear to demand. We would see unbelievable human suffering as the lifeblood of our fossil fuel based societies dried up. Our critical infrastructure for food supply, transportation, heating, irrigation, electricity and so on would all fail catastrophically. So there is clearly a tension between addressing climate change and addressing peak oil. The earlier we reach fossil fuel supply limits – whether geological or voluntary – the better for climate change, but the more painful the 'peak oil' adaptation problems, and the higher the oil price. As supply limitations prompt oil price rises, more and more countries (and ultimately individuals) are priced out of the market, leaving only those with enough money able to get the oil their lifestyles demand. Economists call this 'demand destruction', and it is the mechanism the market uses to close the widening gap between supply and demand. Oil Platform - Dusk Unfortunately, markets do not distinguish between more and less essential uses of oil – if we in the UK are willing and able to pay more to run our cars than people elsewhere are able to pay to heat their homes or power their hospitals then the limited supply of oil will flow here. Demand destruction can be very cruel or even fatal for those whose demand is 'destroyed'. In early 2007, with oil prices at less than half their current level, the U.N. wrote: "Recent oil price increases have had devastating effects on many of the world's poor countries, some of which now spend as much as six times as much on fuel as they do on health. Others spend twice the money on fuel as they do on poverty alleviation. And in still others, the foreign exchange drain from higher oil prices is five times the gain from recent debt relief. Of the world's 50 poorest countries, 38 are net importers of oil, and 25 import all of their oil requirements." The more limited the supply the more demand destruction is necessary and the higher the price goes. $140 per barrel means many are simply having to go without altogether. The international oil price, then, is effectively a rough measure of how much of this cruel demand destruction is going on. The 'supply side dilemma' The question of whether we should leave some of the available fossil fuels in the ground, then, in reality becomes a question of whether the effects of increased oil demand destruction are more or less desirable than the effects of increased emissions and the resultant climate change. This is what we might call the 'supply side dilemma' – attempting to choose the lesser of two evils. Not much of a choice some might say, and it is easy to see why there are passionate advocates on both sides of the debate. But if we campaign on climate change without any acknowledgement of this tension we are easily (and probably correctly) dismissed as naively advocating the suffering and deaths of hundreds of millions of people. Not to mention giving those people a heck of an incentive to harness any fuels they can get their hands on - which may be even more polluting or carbon-intensive than oil. Peak Oil, duh. Thankfully though, there are things we can do to ameliorate both climate change and peak oil simultaneously. If we begin to wean our communities off their oil addiction voluntarily then we reduce demand, and thus reduce the need for the more painful varieties of demand destruction. We lessen the desperation for increased oil supplies and so make it easier to consider the necessary step of leaving some of it where it is as a response to climate change. The more ways we can find to reduce demand, the less difficult the global supply side dilemma becomes. It is these win-win solutions that climate change campaigners should be fighting for, and in fact they might well find that peak oil helps their cause. Try as we might to ignore peak oil, the stark reality is that the world will be getting by on around half its current level of oil production in 20 years time. And like it or not, some who are unmoved by moral arguments on climate change become rather proactive when they recognise the reality of such a severe impending threat to their way of life. Activists on peak oil and climate change should be indistinguishable - it really is one problem, and we all need to be working together to ensure that the motivation it generates is channelled in the most constructive directions. --- Edit - One important economic wrinkle that I missed when I drafted this piece. As oil depletion continues it is taking more workers/resources to produce a given amount of oil (because the easy to extract stuff is gone). In other words, productivity - output per hour worked - is dropping. In such an environment workers' wages are likely to remain stagnant, or even decline, while the cost of many commodities rises. This is a recipe for reduced growth, or even recession, and workers who cannot afford new homes, cars etc. This in turn reduces demand for oil (since it is used to both produce and run homes, cars etc), which reduces the oil price. In other words, the recipe that oil depletion leads to shortage of supply leads to rising oil prices was too simple. In fact, oil depletion leads to economic contraction and volatile prices which are sometimes very low. And indeed, these low prices at a time when oil extraction is becoming more expensive are killing much oil production. For more on this see Gail Tverberg's article or interview. This wrinkle only increases our peak oil problem, and thus makes the climate change challenge even more difficult. And it brings home that - as per my 2009 book - what we face here is an energy/emissions problem, not a money problem, and we need to learn to think in those terms. Otherwise we will sit around waiting for a signal from the markets - to tell us that radical action should have begun many years ago.
TEQs (downstream) or Cap and Dividend (upstream)?

TEQs (downstream) or Cap and Dividend (upstream)?

In the climate policy community there is a growing debate between advocates of 'upstream' and 'downstream' carbon caps (dams?). The terms draw an analogy between the flow of water in a stream and the flow of energy through an economy. 'Upstream' advocates want to regulate the few dozen fuel and energy companies that bring carbon into the economy, arguing that this is cheaper and simpler than addressing the behaviour of tens of millions of 'downstream' consumers. At first glance this seems a convincing argument, but there is one important regard in which an upstream scheme fails - it does not engage the general populace in the changes required. While this might seem a benefit in terms of simplicity it means that the fundamental changes required in society are simply not going to happen. Energy suppliers alone are not going to be able to resolve climate change. We need every citizen to see the need to change the way we live, work and play. There are a great number of suggested schemes, but two are perhaps the best thought-through and can help us to explore this debate.
Representing the downstream camp is Tradable Energy Quotas - TEQs (AKA Domestic Tradable Quotas - DTQs). This is an energy rationing scheme designed to cover the whole economies of individual nations, requiring energy users to secure allowances in order to purchase fuels and electricity. These allowances are given free-of-charge to individuals but all other organisations in the economy have to buy them. The number of allowances issued is limited in line with the national carbon cap. It would operate underneath an international framework such as Contraction and Convergence which would set the various national caps, ensuring that global emissions fall.
In the upstream corner is Cap and Dividend (AKA Sky Trust). This is a system which sets a global cap on carbon emissions, and then auctions a number of allowances determined by the global cap to fossil fuel producers, who must have them in order to be allowed to extract fossil fuels. The revenue generated by the auction is then distributed to every person in the world on an equal basis - this is the 'dividend'. Both schemes aim to provide a means to implement the global cap on emissions necessitated by the severity of our climate emergency, and both schemes allow for trading of allowances/permits once they have been issued. Cap and Dividend would clearly be simpler and cheaper to introduce, however, as it only involves interactions with a small number of companies worldwide, followed by a relatively straightforward financial payment to the people of the world. On the other hand TEQs would provide greater public engagement and opportunities for behaviour change. This inverse relationship between financial savings and public engagement is as we might expect. But clearly effectiveness in addressing the combined challenge of climate change and energy resource depletion is the most important criterion for evaluating such schemes. If we can achieve that more cheaply and easily then all well and good, but as Dr. Richard Gammon put it to Congress in 1999, “If you think mitigated climate change is expensive, try unmitigated climate change”. Effectiveness is far and away the critical concern for many reasons, but ultimately an ineffective scheme will cost us a lot more than an effective one anyway. Cap and Dividend advocates argue that implementing a cap guarantees effectiveness, thus leaving cost the defining factor in the decision. But this ignores the true nature of the problem we face, which is not just an abstract exercise in administering carbon caps. In reality the speed of energy descent required by our societies in order to avoid catastrophic climate change is extremely demanding, especially in the context of energy resource depletion. Achieving the necessary changes in our energy infrastructure and in our lifestyles in the timescale available presents possibly the greatest challenge humanity has yet faced.
Change the laws of physics
This is why a number of Government and industry papers have suggested that there should be a 'soft cap', with a 'safety valve' in case living within the cap proves too challenging. However, undermining the cap in this way is clearly inappropriate to a situation where we are facing the possibility of permanently destabilising our atmosphere and life-support systems. We need a scheme that helps societies adapt to the constraints of the cap, without causing such strain that there are deafening cries for safety valves or softened caps. We must engage the populace in the necessary transition at the local and individual level, as well as working with the big industrial emitters. As last week’s Environmental Audit Committee report stated, upstream schemes, “rely on price signals transmitted down through the economy to deter customers from buying carbon intensive goods or services—with the same downstream effect as a carbon tax. We remain to be convinced that price signals alone, especially when offset by the [additional income from the dividend], would encourage significant behavioural change comparable with that resulting from a carbon allowance. Larry Lohmann, author of the outstanding Carbon Trading: A Critical Conversation on Climate Change, Privatisation and Power, which highlights many of the fundamental shortcomings of existing upstream trading schemes such as the EU ETS, recently commented that, “The problem is that it’s not clear how price can incentivise structural change of the kind required for the climate problem. Historically, price has not been effective in stimulating the kinds of social transformation needed – although it has been effective in stimulating other kinds of change (usually far more marginal). Social and technological change of the kind at issue has come about in other ways.” Now I should stress at this point that Larry Lohmann would not necessarily support TEQs either, and a thorough examination of how TEQs relates to the criticisms of carbon trading in his report is something I am currently engaged in, prior to discussing the matter with him directly. But having outlined the shortcomings of Cap and Dividend in trying to address energy resource depletion and climate change purely via the price signal, I should outline how TEQs differs in this regard.
Energy and The Common Purpose
Energy, not money The first key point is that TEQs is denominated in terms of energy, not money. This is because it was designed from the outset to address both energy depletion and climate change. It would guarantee an assured entitlement of fuel and energy to every individual in the country, in a way that C&D does not. Cap and Dividend is designed solely with regard to climate change, and so an additional energy rationing system – like TEQs – would be needed to deal with any oil or gas supply disruptions, which would rather negate the cost savings of such a scheme. Yet even if we were to ignore the realities of energy resource depletion, the shrinking carbon cap is itself going to mean a shrinking supply of energy to the economy. So again we require some form of rationing system lest we are back to 'rationing by price', whereby the poor are simply expected to do without. Small-scale solutions within a large-scale framework The second point is that TEQs - devised by my colleague Dr. David Fleming - is explicitly a national scheme, not a global one. In my humble opinion, the most brilliant thing ever to pass David's lips is that, “Large scale problems do not require large-scale solutions – they require small-scale solutions within a large-scale framework.” I find this deeply inspiring, reminding us that schemes like Contraction and Convergence, Cap and Dividend and Tradable Energy Quotas exist only as frameworks to stimulate local action. We are tempted to think of them as solutions in themselves, but we must remember that it is at the local and individual levels where all the real changes take place – that is after all where everyone in the world lives. The correct role of these large-scale frameworks is to support and encourage local responsibility, while providing the assurance that enough action is taking place to address the scale of our global problems. And this is why TEQs is defined strictly as a national scheme – because collective motivation is necessary on a scale in which individual effort is seen as being significant. It does not work on a scale so large that individuals lose the sense of belonging, or the belief that their individual contributions make a difference. Common Purpose The third key point is that ‘upstream’ regulation like Cap and Dividend only involves the fossil fuel companies. While this might seem a benefit in terms of simplicity it means that the fundamental changes required in society are not going to happen – while it is perhaps fashionable to hold them responsible for every aspect of our energy and climate problems, in reality our individual and community lifestyles need transformation too. And perhaps even more crucially, to achieve the dramatic change in infrastructures necessitated by climate change we need cooperation between the different sectors of society, united in a single simple scheme. It is a critical feature of TEQs that it is designed to stimulate and enable constructive interaction both between households and between households and all other users – companies, local authorities, transport providers and national government. In short, the scheme is explicitly designed to stimulate common purpose in a nation. The fixed quantity of energy available under TEQs makes it obvious that high consumption by one person leaves less for everyone else. Lower demand means lower prices, so it becomes in the collective interest that the price of TEQs allowances should be low. There is an incentive to collaborate to make it happen, and TEQs thus generates a social and economic culture that is intelligently, effectively and collectively working towards the shared goal of living happily within our energy and emissions constraints. Cap and Dividend, unfortunately, might have the opposite effect. While it incentivises individuals to reduce their personal energy use, it also appears to incentivise them to encourage increased energy use in the world as a whole, as by doing so they push up the demand for emissions permits, and so increase the dividend they receive. Such a perverse incentive is entirely at odds with the required common purpose. To sum up then, the key argument in favour of upstream schemes is that they would be cheaper and simpler than downstream alternatives (which they would be), but there are good reasons to suspect that they would represent a cheap and ineffective response to both climate change and energy depletion, which would be the greatest of all fool’s economies.