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Symposium 2009

Proposal - The Energy Shift and Its Impact on Global Climate Change

The Challenge

The future global economy is likely to consume ever more energy, especially with the rising energy demand of developing countries such as China and India. At the same time, the tremendous risk of cl ...

The future global economy is likely to consume ever more energy, especially with the rising energy demand of developing countries such as China and India. At the same time, the tremendous risk of climate change associated with the use of fossil fuels makes supplying this energy increasingly difficult.

The unprecedented volatility in energy prices of the last few years, and the policy imperative to reduce greenhouse gas emissions, have produced deep uncertainty about the future of energy, and especially about the future of fossil fuels. A broad shift toward lower-carbon alternatives is now well under way, but on its current path, is happening too slowly to achieve the reductions in emissions that scientists consider essential to slow the pace of global warming.

Energy prices will continue to be volatile, due to the inherent lags in bringing new capacity on line in a time of sharp shifts in demand, as well as to concerns about long-term energy availability and security and the impact of climate change legislation on the costs of using different fuels. The pressure to shift away from coal, despite its low cost and abundant supplies, will continue. Natural gas, on the other hand, will be favored due to its relatively low greenhouse gas emissions (roughly half that of coal) and sharply rising estimates of potential reserves. Slowing the growth in energy demand will require a significant focus on energy conservation. Many low cost opportunities are available, such as improvements in insulation, better maintenance of heating systems, and smart thermostats (See www.businessfuture.com for more in: Energy Shift: Game-Changing Options for Fueling the Future; Eric Spiegel and Neil McArthur with Rob Norton; Booz & Company and McGraw-Hill, 2009.)

While much of the popular debate about controlling emissions centers around transportation solutions, most of the reductions in the short to intermediate term will need to come from the power generation sector. Both sectors face significant uncertainties.


Transportation

The long-term trend in transportation will be towards alternative power trains, and, thus five key themes are likely to drive the shape and pace of change.

  • Conventional diesel will likely gain share both in Europe and other regions like the US.
  • Biofuels will increase in production volume but overall market penetration will be slow outside of specific nations and regions, such as Brazil and the Midwestern US.
  • Conventional hybrids will likely gain market share in the short term, particularly among environmentally conscious consumers.
  • Long term options are likely to focus on all-electric and hydrogen vehicles, although both face significant uncertainty – hydrogen more-so than electric.


Power generation

The mix of fuels used to generate the electricity will have to change significantly. Producers will have to make decisions surrounding which fuel to ‘bet on’ for future electricity generation.

  • Coal is currently not a feasible option for investment in most developed countries, due to the high costs of carbon capture and sequestration (CCS) using today’s technology. While this may change, CCS is not expected to have a major impact over the next decade or more.
  • Natural gas will play a key role. Estimates of reserves have risen significantly in the last few years, particularly in North America, due to the expansion of unconventional sources. Increasing gas supplies, in the form of liquefied natural gas, which is a globally traded commodity, will likely set the price for CO2 in the U.S. as a cap and trade system is implemented.
  • Nuclear energy will emerge as an economic alternative if greenhouse gas restrictions are implemented and natural gas prices remain high, despite concerns related to safety and security. Its viability, however, will depend on government backing and commitment.
  • Renewables are potentially important suppliers of world energy in the long term, but remain cost-uncompetitive in the current environment. Their future role will thus be determined by the extent of governmental support and technology improvements, especially for solar.


Policy

Policy responses to lower greenhouse gas emissions have been modest to date. Most national and regional goals established in earlier years for reducing greenhouse gas emissions have not been met, and recent developments have been discouraging. The energy legislation currently under consideration in the U.S., for example, seems likely to result in a compromise with modest goals for emissions reductions. On the international front, the greenhouse-gas reductions agreed at the G8 summit in July represented a retreat from goals that many nations had set in earlier years. Moreover, the fact that China and India – two nations where energy use and greenhouse gas emissions are growing rapidly – opted out of the agreement suggests that its effect will be limited.

As the shift to lower carbon fuels unfolds over the next several years, two possible scenarios seem possible: one is a “scramble” scenario where companies and countries rush to secure energy resources, fearing that energy security is a zero-sum game, and efforts to contain global warming falter. The other is a “blueprint” scenario, in which challenges surrounding energy security, supply and environment are anticipated and tackled through global policy agreement and increased public-private coalitions. The latter scenario would result in a much more stable and predictable business and regulatory climate.

To speed the shift towards less carbon-intensive energy sources and to create conditions in which private sector companies can plan effectively for the future, policymakers should pursue three overarching goals:

  • National and international authorities must resolve uncertainties around carbon pricing and a common global set of regulations and targets are needed, at least among the major economies, or the backsliding will continue.
  • The concept of energy security must be raised to a global level (not at national levels) or the world will sub-optimize its efforts to abate greenhouse gases.
  • Governments should focus on technologies with the most promise of delivering large-scale, low-carbon energy, rather than allowing politics to drive investment to low-priority or high-cost areas, as is often the case today.

 

Shumeet Banerji, Booz & Company
July 2009

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