FOREIGN AFFAIRS
July/Aug. 2003, pp. 132-155
Reprinted by
permission of FOREIGN AFFAIRS, July/August, 2003. Copyright 2003 by the Council
on Foreign Relations, Inc. www.foreignaffairs.org
The Future of Energy Policy
By Timothy E. Wirth, C. Boyden Gray, and John D. Podesta
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The
Big Questions
A
century ago, Lord Selborne, the first lord of the Admiralty, dismissed the idea
of fueling the British navy with something other than coal, which the island
nation had in great abundance. "The substitution of oil for coal is
impossible," he pronounced, "because oil does not exist in this world
in sufficient quantities." Seven years later, the young Winston Churchill
was appointed first lord and charged with winning the escalating Anglo-German
race for naval superiority. As Daniel Yergin chronicled in The Prize,
Churchill saw that oil would increase ship speed and reduce refueling time--key
strategic advantages--and ordered oil-burning battleships to be built,
committing the navy to this new fuel. Churchill's was a strategic choice, bold,
creative, and farsighted. The energy choices the world faces today are no less
consequential, and America's response must be as insightful.
Energy
is fundamental to U.S. domestic prosperity and national security. In fact, the
complex ties between energy and U.S. national interests have drawn tighter over
time. The advent of globalization, the growing gap between rich and poor, the
war on terrorism, and the need to safeguard the earth's environment are all
intertwined with energy concerns.
The
profound changes of recent decades and the pressing challenges of the
twenty-first century warrant recognizing energy's central role in America's
future and the need for much more ambitious and creative approaches. Yet the
current debate about U.S. energy policy is mainly about tax breaks for expanded
production, access to public lands, and nuances of electricity
regulation--difficult issues all, but inadequate for the larger challenges the
United States faces. The staleness of the policy dialogue reflects a failure to
recognize the importance of energy to the issues it affects: defense and
homeland security, the economy, and the environment. What is needed is a
purposeful, strategic energy policy, not a grab bag drawn from interest-group
wish lists.
U.S.
energy policies to date have failed to address three great challenges. The
first is the danger to political and economic security posed by the world's
dependence on oil. Next is the risk to the global environment from climate
change, caused primarily by the combustion of fossil fuels. Finally, the lack
of access by the world's poor to modern energy services, agricultural
opportunities, and other basics needed for economic advancement is a deep
concern.
None
of these problems of dependence, climate change, or poverty can be solved
overnight, but aggressive goals and practical short-term initiatives can
jump-start the move to clean and secure energy practices. The key challenges
can be overcome with a blend of carefully targeted policy interventions that
build on the power of the market, public-private partnerships in financing and
technology development, and, perhaps most important, the development of a
political coalition that abandons traditional assumptions and brings together
energy interests that have so far engaged only in conflict. Turning this
ambitious, long-term agenda into reality requires a sober assessment of the
United States' critical energy challenges and the interests that can be
mobilized for the necessary political change.
Declaration
of Dependence
U.S.
dependence on oil leaves the country's economic, security, and environmental
destiny to forces beyond America's control. Reducing this exposure--especially
in the transportation sector, which is 95 percent dependent on petroleum--must
be a primary goal of national energy policy.
Since
October 1973, when Arab nations imposed a six-month embargo on oil exports to
the United States, America has vowed to reduce its dependence on foreign oil.
Each of the last seven U.S. presidents has pledged to steer the nation toward
greater energy security, but the problem has only grown worse. Imports have
passed 50 percent of total oil consumption and are projected to reach more than
60 percent by 2010. Of the one trillion barrels of world reserves, only four
percent are to be found in the United States, and fully two-thirds are in the
Persian Gulf. A quarter of U.S. imports are from that volatile region, and
other key trading partners are substantially more dependent on the Persian
Gulf: Japan, for example, buys 75 percent of its oil from that region. China's
economic growth is also rapidly increasing its dependence on Persian Gulf oil.
The
intensity of oil use in the transportation sector makes the American economy
vulnerable to the actions of other states. A study by Oak Ridge National
Laboratory estimates a $7 trillion cost to the U.S. economy from the oil market
upheavals of the last 30 years. Indeed, every economic recession in the past 40
years has been preceded by a significant increase in oil prices.
Diversification
of U.S. oil imports is not an adequate answer. Oil is like any other
commodity--the last unit sold determines its price. The United States could
shift all its purchases to sources that are relatively safe politically, such
as Canada and Mexico, and it would still not be protected. The global price is
what matters most. This means, for example, that if a terrorist sets off a
"dirty bomb" in the Saudi port of Ras Tanura, the price of oil will
spike everywhere in the world, dramatically affecting the U.S. economy.
Nor
are supply disruptions and price shocks the only risks that oil dependence
creates for U.S. national security. The flow of funds to certain oil-producing
states has financed widespread corruption, perpetuated repressive regimes,
funded radical anti-American fundamentalism, and fed hatreds that derive from
rigid rule and stark contrasts between rich and poor. Terrorism and aggression
are byproducts of these realities. Iraq tried to use its oil wealth to buy the
ingredients for weapons of mass destruction. In the future, some oil-producing
states may seek to swap assured access to oil for the weapons themselves. It is
also increasingly clear that the riches from oil trickle down to those who
would do harm to America and its friends. If this situation remains unchanged,
the United States will find itself sending soldiers into battle again and
again, adding the lives of American men and women in uniform to the already
high cost of oil.
It's
Getting Hot in Here
From
the issue of local air pollution to those of regional acid rain and global
climate change, energy policy and environmental policy are inextricably
intertwined and must be addressed together. The prospect of climate change
represents the greatest threat. There is almost complete consensus in the
international community that our climate is changing and warming; the only
disagreement lies in how fast it is occurring and how much this will affect the
globe. Life as we know it is based on climatic conditions that result from
certain concentrations of "greenhouse" gases. We alter the
composition of the atmosphere at our peril. The United States cannot duck this
reality; Americans must make new energy choices that reduce their contribution
to global emissions and help lead the rest of the world toward an
environmentally sound future.
The
clearest consequences of increased concentrations of carbon in the atmosphere
have now been well documented: rising temperatures and sea levels, altered
precipitation patterns, increased storm intensity, and the destruction or
migration of important ecosystems. Most unsettling, however, is the growing
scientific concern that climatic changes may not happen gradually, as has been
commonly assumed. In a recent report, the National Research Council warned:
"Recent
scientific evidence shows that major and widespread climate changes have
occurred with startling speed. For example, roughly half the north Atlantic
warming since the last ice age was achieved in only a decade....Abrupt climate
changes were especially common when the climate system was being forced to
change most rapidly. Thus, greenhouse warming and other human alterations of
the earth system may increase the possibility of large, abrupt, and unwelcome
regional or global climatic events.
Preventing
catastrophic climate change is, at its core, an energy challenge. Globally,
fossil fuel production and use accounts for nearly 60 percent of the emissions
that are causing the earth's atmospheric greenhouse to trap more heat. In the
United States, the number is 85 percent. To avoid worsening the problem,
governments around the world would have to take immediate, far-reaching steps:
dramatically reducing the burning of fossil fuels, slowing deforestation,
altering agricultural practices, and stemming the use of certain chemicals.
Because change of this magnitude will take so much time, and because there is
so much momentum built into the current rate of carbon release, it will be
impossible to hold atmospheric concentrations at the current level of 380 parts
per million (which is already one-third higher than preindustrial levels). More
realistically, studies for the Intergovernmental Panel on Climate Change
suggest that an extremely ambitious program to reduce worldwide carbon
emissions by as much as two-thirds by the end of the century will be necessary
just to hold the level of accumulated carbon in the earth's atmosphere below
550 parts per million--roughly double preindustrial levels. Even if this goal is
reached, the likely result is that sea levels will rise significantly and
species extinction will increase.
Because
energy consumption is so vital to industrialized economies, the barriers, both
economic and political, to developing international agreements on climate
change have been very high. Although most countries, including the United
States, have ratified the UN Framework Convention on Climate Change,
implementation has been much more problematic. The Kyoto Protocol, which seeks
to implement the convention, is too modest in its scope and at the same time
unrealistically ambitious in its timetable for the United States. It must be
supplemented by U.S.-led initiatives that start quickly yet leave sufficient
time for the private investment needed to achieve the treaty's objective:
stabilization of greenhouse gases in the atmosphere at a safe level.
Obviously,
Washington cannot hope to attain this goal unless it also engages developing
countries, whose greenhouse gas emissions are growing much faster than those of
industrialized countries. To help maintain stability in the world's climate
system, China, India, Brazil, and others must, as their economies and
populations grow, fuel their development with economically competitive clean
energy options.
Arrested
Development
Without
access to modern, reliable energy sources, economic development is not
possible. And in this era of globalization, economic performance around the
world affects U.S. economic fortunes and U.S. security. America's environmental
destiny is also bound up in the energy choices that developing countries will
make in coming decades. And because poverty is such a long-term destabilizing
force, U.S. national security compels an enlightened approach to international access
to energy.
Of
the world's six billion people, one-third enjoy the kind of energy on demand
that Americans take for granted (electricity at the flick of a switch), and
another third have such energy services intermittently. The final third--two billion
people--simply lack access to modern energy services. Not coincidentally, the
energy-deprived are the world's most impoverished, living on less than $2 per
day. And their ranks will grow: according to UN estimates, the total population
of the 50 poorest nations will triple in size over the next 50 years.
For
the poor, especially the rural poor, obtaining even a meager amount of energy
comes at a high cost: exposure to hazardous indoor air pollution and the
environmentally destructive drudgery of gathering fuel wood and dried animal
waste. Equally important, the poor lack the benefits of modern energy services:
lights to read by, refrigeration to store medicines, transportation to get
products to market, let alone telecommunications and information
technology--all prerequisites for economic growth and poverty alleviation.
Moreover,
for most developing countries, the necessity of obtaining oil for the
transportation sector saps precious foreign exchange and sends scarce dollars
abroad, away from critical social needs such as education and health that are
unlikely to attract private investment. Many developing countries also suffer
from misdirected energy subsidies to both consumers and investors, including
the use of government resources to underwrite inefficient energy monopolies and
the capture of benefits by urban elites at the expense of the rural poor. This
mismanagement of energy resources contributes to impoverishment and inequity,
breeding unrest and violence and making the delivery of sustainable energy even
more difficult.
Furthermore,
global climate change disproportionately hurts the poor. Half of all jobs
worldwide depend directly on natural resources that are potentially affected by
human-induced climate change: fisheries, forests, and agriculture. For example,
70 million people in Bangladesh live in crowded lowlands near the sea, and very
large populations in Indonesia and Malaysia are similarly threatened by rising
sea levels. In Africa, we can already see agricultural productivity diminished
by drought, less availability of potable water, and intensifying hunger and
malnutrition. Mass flight from such conditions could destabilize fragile
governments and erode investments in poverty reduction.
Hurry
the Future
Energy
is a common thread weaving through the fabric of critical American interests
and global challenges. U.S. strategic energy policy must take into account the
three central concerns outlined above--economic security, environmental
protection, and poverty alleviation--and set aggressive goals for overcoming
them. Leadership from Washington is critical because the United States is so
big, so economically powerful, and so vulnerable to oil shocks and terrorism.
This is a time of opportunity, too--a major technological revolution is
beginning in energy, with great potential markets. And finally, the reality is
that where the United States goes, others will likely follow. America's example
for good or for ill sets the tempo and the direction of action far beyond its
borders and far into the future.
Unfortunately,
energy policymaking in the United States in recent years has been neither
decisive nor strategic. U.S. energy policy is reminiscent of Mark Twain's quip
about the weather: everyone talks about it, but no one does anything. This
inertia has deep roots. Vested interests--in the oil, utility, and
transportation industries, for example--have been powerful economic and
political players, protecting the status quo and brooking little interference
from the outside. Similarly, the environmental lobby has proved itself able to
block proposals it opposes but less successful in advancing initiatives it
favors. As a consequence, little progress has been made toward breaking the
gridlock.
America's
inability to develop a farsighted, purposeful energy policy is a reflection of
the political climate as well. Too often, complex energy issues have been
reduced to pithy sound bites. Every decade or so, Washington enacts a
"comprehensive" energy policy, but with few exceptions these measures
do little but affect energy practices on the margin, and U.S. strategic
interests are kicked down the road.
No
issues symbolize the numbing lack of progress on energy policy more clearly
than the debates over drilling in the Arctic National Wildlife Refuge and
increasing corporate average fuel economy. Both issues have been argued over
exhaustively, frequently, and fruitlessly. Indeed, the acronyms "ANWR"
and "CAFE" have themselves become shorthand for a quarter century of
legislative gridlock.
The
time has come to craft a long-term strategic approach to energy. A central
feature must be public-private coalitions for change that bring together
business, labor, and environmental advocates. The first step must be to focus
on what is important and define what needs to be accomplished. Three
far-reaching, 25-year goals encapsulate America's long-term interests and
should guide its energy policies.
First,
America should address its dependence on oil by cutting U.S. oil consumption by
a third, setting an example for the rest of the world and breaking the grip of
the global oil cartel. Second, to take on the dangers faced by the world's
climate, America should cut its carbon emissions by a third, as a stimulus to a
two-thirds global reduction by the end of the century. Finally, the United
States should develop, deploy, and disseminate clean energy technologies and
institute trade policies that can increase the access of poor people around the
world to modern energy services and agricultural markets. Such moves will
improve the lives of billions of people, stimulate economic growth, and create
new markets for American goods and services.
Both
public and private leadership will be needed to put together the technological
innovation and political will to transform the American and world energy
systems. Market mechanisms can help address the various economic,
environmental, and security interests at stake. Aligning the interests of key
stakeholders can build a coalition with enough political muscle to break the
status quo. As President George W. Bush put it in his first address to
Congress, government has an important role, but not one so large as to crowd
out initiative and hard work, private charity, and the private economy. With
the public and private sectors working together properly, government incentives
and private initiatives can "hurry the future."
A
broad-based, cooperative coalition for change is the missing, indispensable
ingredient in transforming a strategic energy vision into reality. Long-time
antagonists who are willing to set aside historical divisions and think boldly
can create a shared vision for the future that goes beyond the lowest common
denominator. Wherever one sits on the political spectrum, it is clear that we
need to act, and we need to act in coalition.
Bringing
in the Market
Using
the market to find the cheapest possible methods to reduce pollution has proved
effective in curbing acid rain and should be considered in other instances. In
the case of acid rain, the winning strategy was an outgrowth of the work of
Project 88, a bipartisan effort to find innovative solutions to major environmental
and natural-resource problems. Fifteen years ago, Project 88 advanced the
notion that inefficient natural-resource use and environmental degradation can
be reduced by ensuring that consumers and producers face the true costs of
their decisions--not just their direct costs, but the full social costs. It
recommended a strategy of tradable permits for industrial pollutants,
particularly with regard to power-plant emissions of sulfur dioxide, a
principal cause of acid rain. This novel strategy was central to breaking a
decade-long impasse on the issue, when President George H.W. Bush and
congressional leaders agreed to a market-based, cap-and-trade system.
A
dozen years later, the acid rain-control program is achieving its goals at a
cost far lower than even the most optimistic initial estimates. This success
owes to the fact that it combined economic efficiency with long-term planning
certainty: the program set out a 20-year time line to reduce sulfur dioxide
emissions from power plants by more than half, and it used the market to make
the least costly reductions. The economic benefits of this policy have been
estimated to exceed the costs by an order of magnitude.
The
same tools can be applied to emissions of greenhouse gases and other pollution issues.
Now is the time for Washington to send a signal and get investment moving
toward less-carbon-intensive fuels and technologies. Because fossil fuels are
so deeply embedded in the U.S. energy system, the most practical and efficient
way to cut back carbon emissions is an economy-wide market mechanism, which
will, over time, provide powerful incentives for investment in renewable
energy, improved efficiency, and other low-carbon options.
The
myriad machines that use fossil fuels are long-lived, and change comes slowly
to them. Changes aimed at reducing carbon dioxide emissions are so fundamental
that they will in most cases require replacement of existing capital
stock--whether power plants, industrial equipment, or even automobiles--to
control emissions, increase efficiency, or redesign production. Sudden changes
that force premature retirement of these assets can be expensive, wasteful, and
disruptive, especially to the labor force. Well-designed policies and
incentives to accelerate the turnover of capital stock can avoid this outcome
by encouraging investment in new technologies that increase productivity,
reduce emissions, and stimulate job creation.
Uncertainty
is the bane of long-term investors, and investment in such technologies today
is discouraged by corporate uncertainty about climate change. Many U.S.
companies--particularly those with operations in other countries--are prepared
to embark on aggressive and innovative strategies to reduce the emission of
greenhouse gases. But without a market signal to justify this course, they
wait. Meanwhile, investments in carbon-intensive facilities such as coal-fired
power plants are held back in the United States by the specter of significant
carbon costs in the future, which are surely coming.
Because
the carbon dioxide emitted today will warm the planet for a century or more, we
must get started immediately. Because the world's energy systems are vast,
complex, and expensive, economies will need time to adjust capital investment
strategies and realize the benefits of existing assets. And because the
transformation will be so large, there must be a commitment to an energy future
that looks very different from the system of today.
Three
elements are necessary to begin. First, there should be an initial, modest
restriction on carbon emissions, coupled with an aggressive emissions-trading
program. This policy would start to pay a premium for increased energy
efficiency and would encourage greenhouse gas reductions worldwide. Second, governments
should create a transition period of 10 to 15 years, during which they provide
incentives for the development and use of low- and no-carbon technologies.
Finally, it must be established with absolute certainty that at the end of the
transition period, the limits on carbon will turn sharply and rapidly downward
until market forces stabilize emissions at a safe and sustainable level. In
economic terms, this kind of early signal informs investment and reduces the
cost of change in the economy.
The
United States must also engage the developing world. Emissions of greenhouse
gases are growing faster in poor countries than in rich ones, and in time the
developing world will assume the majority share. Therefore, the earth's climate
cannot be protected unless the developing countries take on binding commitments
to limit their emissions. A global system to reduce emissions will ensure that
the marketplace can find the most efficient reductions and that developing
countries introduce clean energy technologies as their economies grow. Policies
that reduce dependence on crude oil can also encourage the developing world to
restrain greenhouse gas emissions and provide it with the resources to do so.1
(1C.
Boyden Gray, while skeptical of the climate science, believes that there are
sufficient unrelated benefits from a comprehensive, market-oriented, and
worldwide approach that involves all sources, sinks, and countries, and
sufficient cost savings associated with such an approach, that the risk of
disadvantaging the United States or endangering the world economy by proceeding
in this manner is minimal.)
Partnering
Up
Accompanying
marketplace incentives must be a set of new public-private partnerships,
smoothing and speeding the transition to a new energy future. Partnerships must
be formed behind five central goals: more-advanced vehicles, better fuels to
run them, carbon sequestration from coal, modernized electric grids, and new
tools for financing global energy development. Strong political constituencies,
allied as never before, could be found in each of these partnerships. They
would be brought together by the need for a broader energy vision and partly by
their own self-interest. These five new partnership initiatives are not all
that needs to be done; they should complement ongoing and much-needed support
for using natural gas as a transition fuel, broadening mass transit,
encouraging energy efficiency in buildings and appliances, and greatly
increasing the use of renewable energy sources. The future role of nuclear
power remains unclear; its enormous potential to produce carbon-free
electricity is clouded by continuing serious concerns about safety,
proliferation, radioactive waste, and cost.
But
these five new partnerships would have unique characteristics: they would bring
together unlikely allies, energize large constituencies, and form an unusual
and powerful coalition that could alter energy policy, set a truly visionary
new course, and hurry the transition toward a better future.
Retooling
Detroit
Displacing
oil in the American economy will address simultaneously the problems of
dependence and climate change in the United States, while providing cleaner
alternatives for the millions of new vehicles that will hit the world's
roadways as other nations develop in coming years. Two-thirds of the oil
consumed in the United States goes into the transportation sector, particularly
the gas tanks of the country's 220 million cars and trucks. The voracious
consumption of petroleum simultaneously puts the nation in thrall to foreign
oil producers and accounts for more than a third of all U.S. carbon dioxide
emissions. In one way or another, all of the parties involved--automakers,
autoworkers, environmental groups, consumers--agree on the desirability of
advanced vehicles that run cleaner and go farther on a gallon of gas (or
eventually dispense with gasoline altogether), yet the fuel economy of the
vehicle fleet has been dropping.
New
technologies have emerged in recent years that could produce substantial gains
in fuel economy without compromising other consumer preferences. These
technologies include hybrid electric power trains, clean diesels, incremental
improvements to conventional gasoline engines, and eventually hydrogen fuel
cells. But changing the fleet, within the required timetable, costs money.
Automakers are understandably reluctant to increase the cost of their products
with new, less-familiar technologies, especially now, when competitive pricing
and soft demand are squeezing the market.
Society
as a whole should be a co-investor in these new technologies. If automakers
agree to reinvent their product lines and manufacturing processes, consumers
will be able to get the performance they want, and automakers the profit they
need, while enabling more-efficient, more-climate-friendly vehicles to enter
the market rapidly. As a priority, Washington should support sharply
accelerated adoption of hybrid technology as a step toward the Bush
administration's goal of a "freedom car" powered by clean-burning
hydrogen.
Hybrid
technology employs advanced combustion and electric motor capabilities to
improve efficiency sharply. This technology is available now, not 15 or 20
years in the future. Ford will begin building a hybrid version of its Escape
sport utility vehicle later this year, General Motors will release two hybrid
pickups this year and plans ten more such offerings by 2006, and Japanese
automakers are well down the line in integrating hybrid technology into an
array of vehicles. But without some greater incentive structure, the transition
to broad manufacture and consumer acceptance of hybrids will be slow, too slow
to help significantly on the issues of dependence and climate in the necessary
time frame. Getting millions of hybrid vehicles on the road quickly will
require policy that is as smart as the technology. An aggressive set of tax
incentives would jump-start acceptance of hybrid vehicles by consumers and
drive penetration of the technology across different vehicle types. The result
would be improved fuel efficiency throughout the fleet, millions of gallons of
fuel saved, and countless tons of carbon dioxide emissions avoided. For
example, a government investment of $10 billion for a combination of manufacturing
changes and direct consumer incentives would spur the production of millions,
not thousands, of new hybrid vehicles; accelerate the spread of the technology;
and build consumer acceptance, all without threatening the U.S. manufacturing
base.
Regulatory
flexibility can also help. Auto companies and fleet operators ought to be able
to help finance hybrid car purchases by cutting certain emissions below
baseline and then selling credits to manufacturers, utilities, and other
emitters, at least on a pilot basis. For example, given the exceedingly high
cost of cutting back on nitrogen oxide emissions in places such as California,
opportunities for trading emission credits between car companies and industrial
emitters--now prohibited--could provide incentives far more powerful than tax
breaks.
Hybrid
and other advanced technologies already exist, but they will remain as stuck as
a car in a traffic jam unless an unprecedented alliance breaks the gridlock.
Such an alliance is taking shape now. A broad coalition of oft-warring
interests from industry, labor, and the environmental ranks is currently
working on an incentive package to stimulate development of advanced technology
vehicles.
Fuel
Growth
A
second and similar partnership is emerging around the potential for growing
fuel in the United States. In this partnership, American farmers--and the large
and powerful block of farm-state politicians--have an opportunity to create a
potentially profitable new market, make common cause with large and small
agricultural producers around the world, and contribute to a better
environmental future. Through this partnership, Washington can help governments
overcome the key impasse in the Doha Round of trade talks by reducing or
eliminating agricultural export subsidies that distort global markets and
devastate developing countries.
Many
Americans know about the nascent steps the country has taken to encourage a
domestic ethanol industry--transforming ears of corn into gallons of gas. But
the real promise of fuel farming remains largely untapped. New industrial
biotechnology processes are revolutionizing the conversion of agricultural
crops and waste products to energy. By intensifying the nation's commitment to
this emerging industry and diversifying bioenergy feedstocks, the United States
can reduce oil consumption and carbon dioxide emissions while stimulating
economic growth in rural areas and enabling the cultivation of transportation
fuels in virtually every nation.
Encouraging
agricultural-based fuel supplies squarely addresses one of the toughest
entanglements in current trade discussions. The impasse over farm subsidies
threatens the success of the Doha Round and the further expansion of global
trade. Yet these subsidies have strong political support, particularly in
Europe, which provides agricultural supports for social reasons--to preserve a
way of life.
Subsidies
for food crops and other core commodities squeeze developing countries
especially hard. The World Bank estimates that the $300 billion worth of annual
agricultural subsidies in industrialized countries suppresses world prices and
undermines developing-country exports. In total, these subsidies are about six
times higher than current development-assistance levels. The average European
cow receives $2.50 per day in government subsidies, the average Japanese cow
$7.50, yet 75 percent of people in Africa live on less than $2 per day. Another
recent World Bank study found that full elimination of agricultural protection
and production subsidies in industrialized countries would increase global
trade in agriculture by 17 percent and raise agricultural and food exports from
low- and middle-income countries by 24 percent. As a result, total annual rural
income in these countries would rise by about $60 billion.
As
the developing countries' agricultural sector becomes self-sustaining, their
farmers will be able to mix production of food and textile crops with energy
crops that have a robust and growing market. Thus, shifting farm export
subsidies to support biomass fuels would encourage the production and reduce
the costs of agriculturally derived petroleum substitutes, while also breaking
down distortions in world markets and barriers to trade for farmers in
developing countries.
Offering
these benefits to developing countries may also help entice them to participate
in a worldwide carbon cap-and-trade system, which would bring developed-country
investment to carbon dioxide reduction measures in the developing world, where
such actions would be much cheaper. Cutting carbon dioxide in developing
countries will address a broad range of environmental and regulatory equity
issues, while also improving public health as various local air pollutants are
reduced along with carbon dioxide (ozone and acid rain precursors, for example,
as well as particulates and toxic emissions).
The
major breakthrough for the use of bioenergy will lie in the commercialization
of chemical and biological conversion techniques that can make cost-effective
use of cellulosic plant material (e.g., corn stalks, wheat straw, rice hulls).
Currently, ethanol is produced from the starch in corn kernels, as opposed to
the woody (cellulosic) material in the stalk and leaves. Conversion of
cellulose would enable the use of agricultural waste products, providing a
double dividend for farmers (only 50 percent of harvested food and feed crops
are used at present). Other materials (grasses, wood wastes, even municipal
waste) could also be utilized. In the long run, crops grown for energy
markets--using sustainable management and consistent with biodiversity--could
greatly increase the supply of cellulose.
The
current ethanol industry, based on corn, produced 1.6 billion gallons of
ethanol in 2000, or slightly more than one percent of total gasoline
consumption in the United States. Available waste materials could increase
ethanol production by a factor of ten, and low-cost crops grown as ethanol
feedstocks could triple that number yet again. One of the great advantages of
ethanol is that it can constitute both a short- and a long-term answer to oil
dependence: long-term, because it will be an efficient and carbon-friendly
liquid carrier of hydrogen for fuel cells, when they become cost-effective; and
short-term, because ethanol can be cleanly used as an alternative fuel with
today's technology in blends of up to 85 percent in flexible-fuel vehicles.
Importantly, the production of these vehicles--i.e., cars that can run equally
well on ethanol or gasoline--is a simple and low-cost adjustment to
conventional automotive manufacturing. About four million such cars and
minivans are already on the road.
Cellulosic
ethanol also can be "carbon neutral"--the carbon dioxide given off
during its production and use is the same carbon dioxide that was absorbed from
the atmosphere by the biomass feedstocks as they grew. Enzymatic conversion of
cellulose, based on recent advances in biotechnology, would significantly reduce
the energy required to produce ethanol and virtually eliminate the net
increases in carbon dioxide emissions associated with the use of traditional
fuels.
Washington
should pursue a well-focused program to make bioenergy a low-risk commercial
choice, funded at a level commensurate with its potential benefits to national
security, trade, and the environment. This may be the only way that the United
States can ensure--in a few years, as opposed to a few decades--a significant
supply of renewable, sustainable, and indigenous fuel alternatives to imported
oil or limited natural gas reserves.
Cleaning
up Coal
Just
as more-efficient cars and trucks that run on domestically grown fuel will
address the dependence and emissions problems caused by oil, so, too, an
innovative partnership is focusing on the future of coal, the world's most
abundant but most carbon-intensive fossil fuel. This novel and unlikely
partnership among industry, labor, and environmental advocates is coalescing
around a far-reaching clean-coal technology--the sequestration, through
underground disposal, of carbon generated from coal combustion--that has the
potential to enable the continued use of coal as a primary energy source while
also protecting the climate.
Electricity
is the fastest growing form of energy worldwide, critical for industrial
nations and developing countries alike. Over the past decade, total world
electricity demand grew by 29 percent, and it is likely to continue growing.
According to the 2002 World Energy Outlook, two-thirds of the world's
total power-generation capacity that will be on-line in 2030 has not yet been
built. Coal is fueling the largest share of power generation now and will
supply an increasing percentage of growth in the future, particularly in the
developing world. Over the next 30 years, China and India alone will account
for two-thirds of the increase in total world coal demand, principally for
electricity.
But
the history of coal has also been characterized by environmental degradation.
The climate-change issue arose on the heels of acid rain concerns, blackened
skies, and local air-pollution issues. Globally, coal combustion now accounts
for almost 40 percent of all fossil-based carbon dioxide emissions (just behind
oil, the leading emission source), and coal burning results in more carbon
emitted per unit of energy than any other source. But coal also has very
significant advantages: availability and price. So the challenges are to make
this cheap, abundant resource more climate-friendly and to make its valuable
product--electricity--more accessible and available.
Technologies
that allow the capture and sequestration of carbon emissions can transform the
future of the coal industry. Carbon dioxide, the most pervasive byproduct of
coal burning, can be captured in gaseous form prior to or as a byproduct of
combustion and stored underground in deep geologic formations (e.g., depleted
oil and gas wells, coal seams, deep saline aquifers). Initial steps toward a
broader sequestration strategy are already being taken in commercial practice.
Thirty-two million tons of carbon dioxide are injected into oil fields in the
United States annually for enhanced oil recovery. Off the coast of Norway, one
million tons of carbon dioxide a year are being pumped into a saline formation
underneath the seabed.
The
key challenges related to managing carbon dioxide from coal are the costs of
capture and storage. Industry and government have begun work on both. The Bush
administration recently launched the "FutureGen" project, a $1
billion partnership with industry to develop a cost-effective new generation of
coal-fired power plants that emit no greenhouse gases into the atmosphere. And
a variety of partnerships are underway to explore the best long-term
sequestration options.
Perfecting
and commercializing carbon capture and sequestration would allow the United
States and others to exploit vast coal reserves in a climate-friendly fashion.
And global demand for technically effective and financially feasible
sequestration presages very large new international markets. A successful
carbon sequestration program would be a boon to technology suppliers and the
mining industry alike. In addition, carbon-capture technology, which leaves
behind a hydrogen stream, could make coal a low-cost source of hydrogen for
fuel cells in buildings and cars and reduce U.S. dependence on oil.
The
transition to this future will be tricky. The greatest danger the coal industry
faces in the United States is that as carbon emissions are gradually
constrained, it will give up market share piece by piece to natural gas and
lose its ability to recover. Washington must promote policies to mitigate that
outcome, such as aggressive research and development on cheaper capture and
storage of carbon, subsidies for advanced coal technology for sale in domestic
and overseas markets, and incentives for power plants that commit to switching
to carbon-free technology by a certain date. All of these tools could lessen
the harm to the industry and its workers as coal is cleaned up.
Digital
Revolution
The
electricity distribution system in the United States is perhaps the most
underappreciated and vulnerable part of the country's national infrastructure.
In this digital age, the need for high-quality, reliable electricity makes the
transmission grid almost as vast and as important as the highway system. The
electricity business now generates $224 billion a year in revenues, accounting
for about four percent of the U.S. GDP. Its value to the economy is multiples
of its cost.
Yet
the nation's electric power system is antiquated, fragile, and inefficient,
operating for the most part on 50-year-old technology. Running today's digital
society through yesterday's grid is like running the Internet through a
telephone switchboard. Routine outages and power-quality disturbances cost U.S.
businesses tens of billions of dollars a year. A serious accident or an act of
sabotage could cripple major regions for days or weeks and do enormous damage
to the economy, much like a disruption in oil supply.
Lack
of investment in critical infrastructure and surging demand for high-quality,
digital-grade electricity have taxed the transmission and distribution system
to its limit. Most credible forecasts predict that this underinvestment will
continue. Additionally, microprocessor-based technologies have radically
altered the nature of the electrical load, resulting in electricity demand that
is incompatible with a power system created to meet the needs of an analog
economy. This has led to problems with quality and reliability that
particularly affect such high-tech industries as telecommunications, data
storage and retrieval services, the financial industry, biotechnology,
electronics fabrication, and other businesses that use continuous-process
manufacturing.
Rewiring
the grid with advanced computer controls would allow power to be distributed
more efficiently, safely, and securely and would facilitate the spread of
distributed generation (via fuel cells and solar panels, for instance). It
would at once save energy, create jobs, reduce emissions, and enhance American
security.
Development
of a self-healing transmission and distribution system--capable of
automatically anticipating and responding to disturbances, while continually
optimizing its own performance--will be critical for meeting the future
electricity needs of an increasingly digital society. The benefits of a
self-healing grid would include not only enhanced reliability, but also
innovative customer services, real-time load management, reduced costs, and
increased throughput on existing lines via more-effective power-flow control.
Standardized "plug and play" interfaces for both power and
communications systems would allow distributed generation to proliferate. The
self-healing grid would also increase grid security in response to the threat
of terrorism.
Public
recognition that the electricity network is inefficient and shockingly
vulnerable to disruption and attack is the first step toward building support
for a "smart" grid. Policy change must follow. A mechanism is needed
to compensate both public and private investors. Regulatory agencies at the
state and federal level will need to provide appropriately attractive rates of
return to deploy this new technology. Interconnection standards should be
clarified and barriers removed. Performance metrics should be incorporated in
voluntary system standards set by the North American Electric Reliability
Council.
Transformation
of the power grid would result in greater productivity growth, higher economic
growth, lower carbon emissions, and increased national security. These
advantages, in turn, can help grow the smart-grid partnership among
private-sector beneficiaries--whether in Silicon Valley or in a biotechnology
manufacturing plant--and those in government whose involvement is needed to
repair this fragile system.
Pay
It Forward
Of
all the partnerships forged to create a new energy future, the one with the
world's poor may have the most effect on collective security, the environment,
and common economic prosperity. The world is looking at a tripling of energy
use by 2050, as the economies of China, India, and other developing nations
increase economic output. Even with that growth, the modern energy-services gap
faced by nearly two billion people will not be closed. And if that growth
occurs using outdated and polluting energy sources, climate-altering emissions
will grow dramatically. In human and environmental terms, this scenario
presents an unacceptable future and a daunting challenge.
An
international response that faces up to the scale and scope of the challenge
requires three broad and complementary actions: improved national policy and
governance frameworks, increased national and international resource
commitments, and targeted investment strategies. The United States can make an
enormous difference in all three areas--and advance its own national
interests--with policy, regulatory investment, and resource assistance to
developing countries. In addition, by providing international leadership in
energy technology and policy, the United States can help create potentially
enormous new markets for American suppliers of goods and services in the energy
sector.
Approximately
$50 billion per year is spent on international aid by all the countries in the
Organization for Economic Cooperation and Development combined--representing
only one-third of one percent of their aggregate GDP. Clearly, this formal
"aid" funding does not reflect the potential of OECD nations to spur
development. And only a minor fraction of official development assistance is
spent on energy. Although development assistance can be catalytic in nature
(particularly in reorienting policy frameworks), financing on the order
required must depend on the mobilization of public resources in developing
countries and of private capital, both local and international.
To
help encourage local enterprise, Washington needs to galvanize the
international community around community-based projects that actually work and
target policies and scarce resources to help bring them to scale. The current
patchwork quilt of bilateral and multilateral efforts is simply too balkanized
and spread too thin. A new "Global Rural Energy Fund" that allocates
assistance on the basis of "what works" would help bridge the yawning
gap between pilot projects that are actually delivering results and the capital
needed to make them standard practice.
In
order for private investment to spur market adoption of clean energy
technologies, at least three critical financial barriers must be overcome: high
transaction costs (for small projects), high capital costs (relative to
traditional alternatives), and inability to capture life-cycle cost savings
(for instance, over a period of 30 years for hydroelectric projects and 20
years for solar ones). To overcome these barriers, innovative financing
techniques are needed that can reduce the risk to and mobilize investment by
the private sector--for example, with extended-term financing for low-carbon
energy technologies.
In
addition, the United States should create a new category of investment
securities, called "Global Development Bonds." These would combine
tax benefits, political risk insurance, and matching funds from the U.S.
government, subject to the funds' being used in selected countries (consistent
with the president's Millennium Challenge Account initiative) and for specified
sustainable-development purposes. Other nations could create similar
instruments.
By
authorizing these securities, the United States would benefit in several ways.
It would leverage private-sector funds in a way that foreign aid now does not.
It would improve the effectiveness of dollars flowing overseas because the
funds would flow through many competing channels, seeking best applications
through market forces. It would improve the efficiency of moving money into key
developing countries because the private sector works faster and at much lower
overhead cost than government. And it would open up new export opportunities
for U.S. businesses and help restore American esteem in the international
community.
Coalitions
for Change
The
problem of global oil dependence has long been apparent, whereas concern about
climate change is comparatively new. Both issues suffer from their sheer size
and scope: many people simply believe that the problems are intractable and
that practical solutions are beyond our reach and imagination. Focusing on
practical solutions of the kind described above is a strategy for political
change, a strategy based on restoring hope that the world's energy systems can
be turned in a new direction.
A
strategic energy policy will unite diverse political constituencies and forge
common cause among stakeholders that are often at odds. The environmental
community's objective is not to shut down coal, it is to shut down carbon;
zero-carbon coal thus is something to agree on. The automotive and oil
industries' objective is not to prop up dictators in the Middle East or to
sully the natural world, it is to provide a return to their shareholders;
making fuels, cars, trucks, and buses that are clean and profitable thus is
something to agree on.
Most
of all, a collaborative strategic approach holds out hope for ending dependence
on oil, eliminating excess carbon dioxide emissions, and providing clean and
reliable energy services and agricultural opportunity to the world's poor. The
result would be to "hurry the future" by unleashing a torrent of
innovation that will stimulate economic growth, create new jobs, improve
productivity, and increase prosperity and security for the United States and
the world.