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Current U.S. energy policy: Risk management that is worse than ever

Current U.S. energy policy is, in fact, a hodgepodge of disconnected policies designed for specific constituencies with no coherent goal. The country has subsidies for fossil fuels, subsidies for nuclear power, subsidies for wind and solar, and subsidies for insulating and retrofitting buildings. We also have energy standards for some appliances and miles per gallon standards for automobiles.

What never gets asked and answered definitively in the policy debate is this: What should our ultimate goal be and when should we aim to achieve it? The first part of the question has elicited so many answers from so many constituencies that I may not be able to represent them all here. But here is an attempt to categorize the main lines of thinking concerning the country’s energy goals:

  1. Seek the cheapest price for energy with the implication that environmental consequences should not be tallied as part of the cost.
  2. Complete a transition to renewable energy as quickly as possible while drastically reducing the burning of fossil fuels.
  3. Replace all fossil fuel energy with nuclear power.
  4. Develop all sources of energy to make sure we have enough at reasonable prices. This is often called the “all-of-the-above strategy.”

 

Goal 1 is really the argument put forth by the fossil fuel industry and therefore a defense of the status quo. Goal 2 is the dream of every climate change activist and clean-tech executive. Goal 3 seemed to be gaining some momentum before the accident at Japan’s Fukushima Daiichi nuclear plant dashed hopes for a widespread nuclear renaissance.

Goal 4 is being touted by my congressman who heads the U.S. House Committee on Energy and Commerce, and it is the policy of Obama administration.  The so-called all-of-the-above strategy is the de facto energy policy of the United States, and the one which I described above as a hodgepodge of disconnected policies designed for specific constituencies with no coherent goal.

Our energy policy wouldn’t matter except for two things:

  1. Fossil fuels supply more than 80 percent of the world’s energy, and they are finite. We cannot count on them to supply energy to us indefinitely. We simply do not know when their rate of production might turn down though a bumpy plateau in global oil production since 2005 is an ominous sign.
     
  2. Climate change induced in large part by the burning of fossil fuels is proceeding faster than models have predicted. We don’t have much time to reduce our carbon emissions radically in order to avert the risk of catastrophic climate consequences.

No one knows the future, not my congressman, not President Obama, not the fossil fuel industry, not even climate scientists. But, we can outline the risks we face based on what we know today.

About fossil fuel supplies we know two key things. Already mentioned is that production of oil proper (crude plus lease condensate) has stagnated since 2005. Second, the remaining fossil fuels, especially oil and natural gas, will come from deposits that in general are smaller, less concentrated, harder to extract (in some cases due to geology, in others because of their location such as deep under the seabed and in the Arctic) and  harder to refine. This means these fuels will be far more costly and be produced at rates that are unlikely to rival the rates of the previous easy-to-get oil and natural gas.

About climate change we now know that it is proceeding faster than anticipated by climate modelers. That means the worst effects could arrive much sooner than expected, within a couple decades instead of several decades.

When it comes to oil and natural gas, it’s possible that yet-to-be-invented technology will make them cheaper and easier to extract in the future. We just don’t know. Even if that technology arrives, the ever increasing difficulty of accessing new deposits may more than wipe out any cost and productivity advantages.

It’s possible that climate change might slow down. But, that seems unlikely since events that are markers for the progress of climate change such as the melting of Arctic ice are occurring much sooner than anticipated. A few years ago it was thought that the Arctic might become ice-free in the summer by mid-century if we maintained our current greenhouse gas emissions trajectory. Now, some models suggest it could occur by 2020.

The point is that when it comes to fossil fuel supplies most of the current information suggests that supplies will likely not be as abundant or as cheap as the industry has been leading people to believe. And, when it comes to climate change, the effects and the time of their arrival have been consistently underestimated.

To manage energy supplies and climate risks, the United States has done little in terms of policy that makes sense given the gravity of the challenges it and the world face.

It is important to note that risk is not merely a function of probability. Rather, it is the product of probability times severity. But, neither variable can be assessed in a strictly numerical way given how complex the energy and climate systems are. We do know, however, that if the pessimistic scenarios for both energy and climate arrive, we are in deep, deep trouble.

Here is a key insight into risk management. The accuracy of any forecast decays quickly with time. That means that when it comes to long-term forecasts, it is not the forecast itself, but the RANGE of possible outcomes that is more important. Any forecast that doesn’t include a range is practically worthless for scenario planning purposes and probably designed to deceive rather than inform you.

And, it’s not the benign outcome that should concern us, but rather the possible dire outcomes. Why is this so? As Nassim Nicholas Taleb, author of several books relating to risk including Fooled by Randomness and The Black Swan reminds us: "[I]t does not matter how frequently something succeeds if failure is too costly to bear."

It seems obvious that the destruction of modern civilization as we know it due to inadequate energy supplies and rapid climate change ought to be something we consider “too costly to bear.” And yet, America continues with energy policies that are almost certain to fail because we are largely repeating what we've done before.

The de facto American all-of-the-above energy policy implies that increasing the rate of fossil fuel combustion should be one of our goals. That policy also fails to concentrate enough capital spending on the infrastructure (mostly electrical) needed to exploit renewable energy.

So, we end up with a strategy that assumes that fossil fuel supplies will remain adequate for decades and that climate change will remain largely benign during this period. This is not so much managing risks as ignoring them.

Some will point out that the administration is working on carbon sequestration so as to make it possible to increase fossil fuel consumption and reduce carbon emissions at the same time. The idea that carbon sequestration could achieve this result in time to avert a climate catastrophe has already been laid to rest by some fairly straightforward calculations done by energy expert Vaclav Smil. In 2010 he wrote:

This means that in order to sequester just a fifth of current CO2emissions we would have to create an entirely new worldwide absorption-gathering-compression-transportation-storage industry whose annual throughput would have to be about 70 percent larger than the annual volume now handled by the global crude oil industry whose immense infrastructure of wells, pipelines, compressor stations and storages took generations to build. Technically possible—but not within a timeframe that would prevent CO2 from rising above 450 ppm [parts per million]. And remember not only that this would contain just 20 percent of today’s CO2 emissions but also this crucial difference: The oil industry has invested in its enormous infrastructure in order to make a profit, to sell its product on an energy-hungry market (at around $100 per barrel and 7.2 barrels per tonne that comes to about $700 per tonne)—but (one way or another) the taxpayers of rich countries would have to pay for huge capital costs and significant operating burdens of any massive CCS [carbon capture and storage].

Perhaps the simplest way to manage the energy transition we must undergo would be to impose a high and ever rising tax on carbon. Such a tax would not favor one particular solution to carbon-free energy. But, it would move people to conserve and to switch from carbon fuels. It would also provide inventors and businesses with the incentive needed to work out the quickest, most economical path to a renewable energy economy.

Quite often politicians and representatives of the fossil fuel industry—sometimes it’s difficult to tell the difference—will say that the United States shouldn’t undergo this energy transition alone because it will be put at a competitive disadvantage on world markets. Saying this is really the equivalent of saying that we should maintain our current course until it becomes obvious—even to the most dimwitted—that  we are all committing suicide.

Waiting for catastrophe to happen before acting means that it’s too late to act. It is precisely this scenario that proper risk management is designed to avoid. If I were to grade America’s risk management strategy with regard to energy supply and climate change, I would, not surprisingly, give it a failing grade.

I only wish the damage inflicted by that strategy were limited to bad marks. Instead, the real-world consequences are almost certain to grow larger and larger, the longer the country ignores intelligent risk management principles.

Oil refinery image via shutterstock. Reproduced at Resilience.org with permission.

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