Weaning From Fossil Fuels and Growing a Green Economy

Policies must play catch-up to innovation. Such was the case with the electric utility industry in the United States: The industry began in the early 1880s, and the federal government's regulation of utilities began in the 1930s, with the Depression underway.

Similar innovation in technology and policy development could be underway for renewable energy. The mantra of green jobs and green industries from an expansion of carbon-mitigation activities like solar and wind farms, biomass and hydro systems, nuclear and other clean-energy sources has been around for a while, but the challenge is implementation.

Pronouncements by President Barack Obama in his second inaugural address and State of the Union address, to lead in sustainable energy, have rekindled ambitions not just in the US but also elsewhere. Worldwide implementation may require getting comfortable with many different culturally appropriate approaches. There are many ways to encourage carbon mitigation, but perhaps no single panacea. To move forward, expect to rely on a mix of voluntary and mandatory carbon schemes even as purists aim for a single overarching global climate-emissions treaty.

Traditional means of implementing carbon financing have been through mandatory carbon economics, particularly that enforced by the Kyoto Protocol treaty drawn up in December 1997 and recently extended up to 2020 during COP-18, the November climate summit held in Doha, Qatar. The treaty enforces the carbon development mechanism, or CDM, popularly known as "carbon credits." Normally CDM pays for a portion of the project, just to push non-viable projects into viability. Typically, the amount financed by CDM is a small percentage of the project cost.

Even now, the protocol covers only 15 percent of the world's emissions. Because of the treaty's instability prior to Doha COP-18, the price per ton of greenhouse gases in the carbon markets dropped precipitously while the amount of CO2 emitted actually rose. The treaty's extension is expected to stabilize market jitters, at least until 2020, but the lack of countries pledging support does not bode well for the CDM.

Complicating matters are subsidies worldwide for the fossil-fuels sector, which distort pricing.

This is a problem because the claim that renewables are expensive is not fair. Subsidies for fossil fuels are not attacked, but those for renewables such as Feed-in-Tariffs are. Only if subsidies are removed can the true cost of renewables versus fossil fuels be measured. In December 2012, Bloomberg reported that rich countries spend five times more for fossil-fuel subsidies than they do for climate aid.

According to calculations done by the Washington-based Oil Change International, 22 industrialized nations in 2011 paid $58.7 billion in subsidies to the oil, coal and gas industries and to consumers of these fuels, compared with climate-aid flows of $11.2 billion. Removal of these subsidies is key.

Voluntary encouragement of carbon mitigation is also gaining ground, driven by corporates and individuals who pursue carbon mitigation no matter what governments do. Bloomberg New Energy Finance estimated the voluntary market was worth US$576M in 2011. The voluntary carbon market emerged from the Kyoto Protocol CDM: Instead of relying on a mitigation treaty, the voluntary market relies on the desire of companies like Google and General Motors and even individuals who want to claim that their carbon footprint is zero by purchasing carbon offsets.

In the case of individuals, such as airline passengers, they purchase the offsets from the airline individually. The airline collects these and then purchases carbon offsets, either from CDM or the voluntary markets.

One pragmatic trend springing up in recent years is emphasis shifting away from a mandatory global climate treaty to programs enacted by states, countries and cities. For example, China enacted its own cap-and-trade scheme in October 2012, initially at 60 yuan per ton of CO2. Australia has enacted a carbon tax, and California has started a cap-and-trade program.

There has been strong resistance to many of these carbon-mitigation financing programs. Australia and Prime Minister Julia Gillard have encountered opposition to the carbon tax. The tax was designed to help Australia meet carbon-emission targets, but recently the Gillard administration has resorted to giving cash bonuses to families hard hit by the carbon tax, up to A$100 per child and A$250 per pensioner.

In California, industry groups such as the California Manufacturers & Technology Association and the Western States Petroleum Association argued the cap-and-trade measure is another reason for businesses to relocate out of state.

Putting a price on carbon, viewed as the proper way to encourage moves toward low carbon, is especially difficult during a recession. Discussions about putting a price on carbon in the United States will most likely be blocked by Republicans who control the US House of Representatives and Tea Party conservatives who wield influence in Republican primaries.

Meanwhile, externalities such as health costs are not currently factored into cost-benefit discussions, which mean that coal plants still show up in feasibility studies as the "least expensive" power source. Also, the variable costs of fossil fuel, including fluctuating prices, versus the fixed cost of solar and wind plants are not factored into long-term costs.

The price of coal, for example, could suddenly rise because of world events or supply-chain breakdowns, while such scenarios do not affect solar and wind plants. But the finance industry prioritizes fossil-fuel projects over renewables. Bankers' commissions from work on renewables pale in comparison to the large commissions from big power plants and the status quo.

Energy efficiency is another approach for reducing dependence on fossil fuels. Many building and factory owners pay lip service to energy efficiency, but do not really want to replace older and less efficient boilers, compressors and other major electrical loads, because these systems still work. As long as subsidies are in place, savings in electricity costs are not incentive enough, and many property owners lack the upfront funds for widespread equipment replacement. Likewise, many hesitate, anticipating even more technological advances in efficiency and conservation.

And technology progress and research continue to drive down costs: improvements in efficiency, such as the current approximately 20 percent efficiency of photovoltaic silicon-based solar cells; manufacturing cost reductions; and use of better but less expensive materials. A worldwide alliance of companies, perhaps similar to the SEMATECH alliance formed by US semiconductor companies to challenge foreign threats, might be in order for the solar and wind industries despite their competition with one another.

Noticeable to long-time observers of carbon financing is the shift from the single unifying Kyoto Protocol treaty to one that has fragmented into many measures like carbon tax, cap and trade, and other schemes. While another attempt at a global treaty will again be done in 2015 using the Durban framework, to take effect after Kyoto expires in 2020, we need to recognize the reality as it is right now – that we now have many schemes. More innovation is not a problem. People and countries around the world may have different approaches to problems. Some cultures might be comfortable with a top-down dictated approach, while others prefer voluntary action.

While we all aspire for a single unifying climate treaty and continue to pursue it in 2015, as backup we must get comfortable with the many different plans underway -- whether that means voluntary action for some and mandatory programs for others. We do not always have to agree on the means in order to move forward towards our common objective – in this case, climate change avoidance.

(Dennis Posadas is an Asia-based fellow of the Climate Institute and author of Greenergized: A Business Fable on Clean Energy (UK: Greenleaf, 2013). This is reprinted with permission from the Yale Center for the Study of Globalization.)