Green finance special section
THE URGENT DRIVES out the important every time. The financial tidal waves emanating from $2 trillion of US sub-prime (and Alt-A) mortgages melting down has immediate effects on credit markets, stock markets, the economy and all asset prices. This drives concerns about climate change off the front page. Another factor pushing climate change policy action and economic/financial market consequences to the fringe is (paradoxically) soaring energy prices. Whatever action to combat climate change might eventually emerge, it is likely to involve a mix of carbon-emission taxes and quota trading that will achieve results by raising energy costs. As energy costs have been raised anyhow – to the distaste of ordinary people – by the combination of global boom, severe Chinese economic overheating, and speculation by investors pursuing the illusion of energy/commodity futures as an "asset class", governments are hardly looking for ways of making themselves unpopular by taxing energy further.
Perhaps recent energy cost increases have been enough anyhow for the time being. In a considered global programme of energy price escalation, it is unlikely that anybody a few years back would have proposed an immediate doubling of the chief market price for world energy: crude oil. Yet the crude price, after dipping briefly to $10 at end-1998 and early-1999 at the end of the Asian crisis (a bit more for West Texas Intermediate, WTI) reached a prevailing price level of $25 in the early years of this decade (see Chart 1). Now, a mere five (relatively non-inflationary) years later, oil users would be very happy if it transpires that the prevailing price level is as low as $50. In fact, it is probably $60, up some two and a half times. While coal and natural gas are up by less, this is quite a major incentive to lower energy use. And while prices may come down cyclically in the global slowdown we are entering the consensus is that the medium-term upward trend will resume – and it is hard to dispute this.
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Chart 1: Crude oil prices |
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Monthly average, except latest, $/barrel |
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Source: Lombard Street Research |
It is fortunate that the market is doing the "heavy lifting" on climate change action, because the forces of resistance are strong: multiple layers of opinion in the US; much of energy-guzzling Asia and the vanguard of the forces for change – the "greens" – have a fatal tendency toward frivolous irrelevancy. Most obviously, they:
• concentrate their efforts on headline-grabbing gimmicks, rather than serious argument over the main issues;
• conflate their climate-change approach with other "green" issues by gross over-emphasis on transport, especially air travel;
• fatally weaken their case, and their entitlement to be taken seriously, by denial of the chief way forward in reducing carbon emissions from energy use: nuclear electricity.
The arguments for climate change action presented in the report commissioned for the UK government from Sir Nicholas Stern, published in 2006 are important because his logic has been severely attacked by many economists, and is in important respects fatally flawed. Yet his conclusion – that action to contain carbon emissions is vital – can be supported on much simpler grounds than the ones he advances. As we are here concerned with the economic and financial consequences of the issue, that conclusion is the key point: getting the argument in support of it is important, but the consequences start from the conclusion.
Chart 2 shows the error of undue focus on transport as a means of reducing greenhouse gas emissions. This is doubly true of air transport, which only accounts for three percentage points of the 14% transport quota shown in the chart. The top two sources of greenhouse gases are electricity usage and (surprisingly) deforestation, with industry, agriculture and transport equal third. Deforestation is a separate matter, being the only aspect of mitigating greenhouse gas emissions where either cutting energy demand or substituting carbon-light energy sources is not directly relevant. Indirectly it affects the energy issue, as cutting down of forest for alternative land use, generally agriculture, might be motivated by the desire to produce sugar-cane-based ethanol (as an "environment-friendly" fuel) in Brazil, for example. Even in the US, reforestation of formerly agricultural land is common and could be more so; the corn-based ethanol idea as a gasoline substitute might not save many carbon emissions, therefore, aside from its effect in driving up food prices.
| Chart 2: Sources of Global Greenhouse gas emissions |
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Source: Stern Report |
Transport (in total – not just much-abused air travel) makes a little over half of electricity’s contribution to greenhouse gas emissions and is already heavily taxed. Any form of even-handed treatment of various sources of greenhouse gases will be heavier in its effects on electricity, which throughout the world is for the most part lightly taxed, or not all – quite the contrary, it is often subsidized. Any approach that focuses on making transport more expensive, or controlling it by other means, is likely to be founded on populist evasion of this chief point.
The Greens have correctly seen that carbon-light electricity production might cut the Gordian Knot, as far as electricity is concerned. But this does not justify focusing purely on transport, because they are further crippled by their resolute opposition to nuclear electricity generation, an inheritance from genuine problems in the past that have been heavily emphasized by environmentalists. Chart 3 illustrates the scale of gains to be made from avoiding carbon fuels in electricity generation. Natural gas causes emissions 10 times greater than biomass and solar, and 15 to 20 times greater than nuclear, wind power and geothermal. Coal is roughly twice as productive of greenhouse gases as natural gas, per KwH of electricity. The world average of emissions is some 500gm/KwH, and is almost certainly expanding as China’s huge electrification programme is largely coal-based.
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Chart 3: CO2-equivalent emissions in electricity |
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Generation by primary energy sources, gram/kilowatt-hour |
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Source: US Nuclear Energy Institute (German electricity production analysis) |
Nuclear power accounts for about 16% of world electricity output but is as high as 80% in France. We therefore come up against country statistics such as (for 2004) around 900gm of CO2 per kilowatt-hour generated in China and India, 575gm in the US, 450gm in the UK, Germany, and Italy, and under 90gm in France. You do not have to be a nuclear physicist to see where that directs climate change policy. Although solar and wind-based power are equally carbon-light, they vary enormously in both availability by region and, given changes in the weather, potential output per production unit over a given day (or week, or any other period). Reliable, low-carbon electric power will depend on a major expansion of nuclear power.