Bursting the Carbon Bubble

There’s a new meme running wild on the internet that goes something like this.

The world’s energy majors are valued by the market on the basis that coal, oil and gas reserves can be turned into real economic value, making them an attractive punt for investors. However, if tough climate change legislation kicks in through international regulation, then the majors are in trouble and may in fact be massively overvalued. The claim is that we now have a rapidly inflating ‘carbon bubble’ of unburnable fossil fuels. And if the bubble bursts, investors will lose their shirt.

But there are two problems with this argument. First, as economist Richard Tol points out, from the valuation of coal, oil and gas companies it’s clear that the market expects us to be burning fossil fuels some time to come. Share price is after all an estimate of future expectations, not just current value. That’s not to say the market is correct, but prices simply reflect a cold assessment of reality as seen by investors. Based on current valuations, their call is that governments will not enact draconian restrictions on fossil fuel use any time soon. 
      

All hail the rise of the robots

I became acutely aware of the droid takeover whist travelling through Schiphol airport. Like many regular flyers, I witnessed long ago the substitution of blue-uniformed KLM check-in staff with rows of sliver touch screens. But what’s new at Schiphol is that even the baggage drop-off desks have gone, replaced by yet another row of quiet and efficient machines.

For those yet to experience the full techno-glory of it, a low door slides open and luggage is placed inside. The door shuts, and then quickly re-opens with the luggage spookily gone. There is a vaguely disturbing fear that it will never be seen again. Quietly it seems, the droids are taking over. Not in a sci-fi cull of warm meat by cold steel, but in a subtle, silent and ultimately glorious revolution. And as the humans whose labour is being culled we should rejoice.

Misanthropic, elderly, rich white male takes an interest in the fecundity of poor, young African women

The casual misanthropy of the darker corners of Green thinking has been on display again in the broadsheets, with broadcaster Sir David Attenborough’s off-hand comment that humanity is “a plague on the Earth”. Ironically, this renewed interest in the fecundity of young African women arises mainly from elderly white men such as Attenborough, a patron of the Optimum Population Trust (OPT).

As some may recall, the OPT was the organisation which implicitly likened raising a third child to buying a patio heater, for the carbon footprint that both leave, cheerily noting that “each addition to the population that does not take place saves 744 tonnes of Carbon dioxide”. Call me sentimental, but I rather thought that my own three children were simply wonderful new humans who bring meaning and new potential to the world, rather than another few outsized carbon footprints.

But while the OPT has long campaigned for fewer people, their brand leading scheme PopOffsets, an abbreviated name presumably for an abbreviated world, takes carbon off-setting to wonderful new heights of misanthropy. It truly is a Whisky, Tango Foxtrot moment. We can now be absolved of any eco-guilt, in effect by culling the ranks of the poor.

So, you’re an eco-conscious family but still want to fly on holiday later this year? The beaches of the Mediterranean or the Chianti of Tuscany can still be yours. The price is simply a few less kids elsewhere in the world. Type in the amount of carbon you want to be forgiven for and the online OPT calculator will let you know how much to contribute to their PopOffset fund, which will then be used to avoid the requisite number of carbon emitting humans being born. The going rate set by the OPT is £10 per tonne of Carbon dioxide, which equates to about £7440 per human life according to their bleak, cold and rather chilling calculus.

Now here’s a crazy idea. Rather seeking to decimate the ranks of the poor, perhaps we could simply improve their lot. We know that falling family size correlates strongly with growing GDP per capita, and we know that GDP per capita correlates strongly with energy use. As an alternative to the misanthropic plans of the OPT, the poor can became prosperous using cheap energy, replacing carbohydrate fuelled farm labour with powered machines, growing economies and delivering education and other public services. The end result would be shared prosperity, a stable population and a world in which human life is valued at more than the price of carbon.

Let’s not forget, the demographic transition to near zero population growth which took place in the developed world was the result of the mechanisation of food production, access to education and the provision of pensions and other instruments of social security from the surplus of production. All of these have of course been overwhelmingly progressive developments.

If the OPT could only escape from the intellectual straight jacket of carbon foot printing, perhaps they could see that each new human is an asset, not a simply a carbon emitting liability and that the tragedy of poverty is that so much human potential for change remains untapped. It is through humans, and human innovation alone, that resources are actively created. As industrial physicist Cesare Marchetti also points out, upper bounds on population are a function of our assumptions, and our imaginations.

So sure, let’s provide ready access to family planning for the developing world as the OPT demand, but let’s make sure they have universal education, modern health care, electrification, telecommunications, food security, tap water and sanitation, rapid transportation and a long, long list of the other products of the industrial revolution which we now enjoy.

The misanthropy of the OPT is in their miserable, simple-minded prioritisation of fewer humans over genuine economic and social development. Prosperity firstly enriches lives and then delivers a stable population as an added bonus. Their view of new humans as nothing more than consumers and polluters rather than creators and innovators is simply appalling. 

Ultimately, the answer to the crushing poverty of subsistence farming is not more subsistence farming

The Enough Food (IF) campaign rightly highlights the impact of the crushing poverty caused by small-scale subsistence farming in the developing world, noting that resources are required to help “small farmers to improve their productivity”. However, in seeking to support small-scale farmers, we should remember that the goal of economic development must ultimately be to make them, or at least their children and grandchildren, metaphorically redundant.

Escaping from the poverty of an economy dependent on labour intensive agriculture will require the same transition which the developed nations enjoyed after the industrial revolution, when hydrocarbon-fuelled machines replaced carbohydrate-fuelled human labour. Through the resulting, historically unprecedented prosperity which we now enjoy in the developed nations, nurses are free to nurse and teachers teach only because their calorie needs are met through efficient, large-scale mechanised agriculture. Innovation, and the efficient use of energy dense fuels, freed us from the land to engage in these more progressive pursuits. This same transition from an economy based on labour intensive agriculture to one based on efficient agriculture and modern manufacturing is clearly required elsewhere. 

As a historical example, a wonderful advertisement from Successful Farming in 1921 urges farmers to "Keep The Boy In School". It's worth repeating the entire text here:

"The pressure of urgent spring work is often the cause of keeping the boy out of school for several months. It may seem necessary - but it isn't fair to the boy! You are placing a life handicap in his path if you deprive him of education. In this age, education is becoming more and more essential for success and prestige in all walks of life, including farming.

Should you feel that your own education was neglected, through no fault of yours, then you naturally will want your children to enjoy the benefits of a real education - to have some things you may have missed.

With the help of a Case Kerosene Tractor it is possible for one man to do more work in a given time, than a good man and an industrious boy, together, working with horses. By investing in a Case Tractor and Detour Plow and Harrow outfit now, your boy can get his schooling without interruption, and the Spring work will not suffer by his absence.

Keep the boy in school - and let a Case Kerosene Tractor take his place in the field. You'll never regret either investment.''

This friends is human progress.

Similarly, the end of labour intensive agriculture in the developed nations led to urbanisation, the specialisation of labor through manufacturing and ultimately the efficient delivery of valued public services. This is the same transition is evident in China and other once impoverished economies which are now enjoy growing GDP per capita, life expectancy and a host of other metrics such as participation rates in higher education.

Finally, we should also note that some proponents of small-scale farming, and indeed some development charities themselves, enforce a prohibition on the use GM technologies by small-scale farmers and actively promote labour-intensive organic farming. It is of course the labour intensity of inefficient agriculture which is one of the causes of poverty itself. This is the same misplaced thinking that once promoted land-hungry biofuels, which Enough Food now rightly highlights as one of the contributors to poverty in developing world.  

Energy and Environment: News from the State of Euphoria

Let’s play a game. The rules are simple.

Imagine you’re the Minister of State with responsibility for Energy in a small country on the northern fringes of Europe. With apologies to David Lodge, we’ll call this country Euphoria. As a member of the newly elected Green-leaning government, your ministerial role is to deploy low carbon energy in this island State of Euphoria, whilst keeping the lights on.

In the frustrating days of opposition you were able to imagine a bright Green future of large-scale energy storage, tidal power around the coast of Euphoria, carbon capture and storage and a host of other technologies which haven't yet reached industrial-scale. You'll invest heavily in energy R&D, but now you’re in power, you need to deal in the reality of nuclear, gas and wind as the practical tools at your disposal (coal has long been killed off by EU directive). The key question is how much of each?

Are fossil fuels subsidised more than renewables?

The International Energy Agency made the news with the headline claim that fossil fuels attract six times the subsidy of renewable energy. Inevitably, the headline was picked up and repackaged by most NGOs, trade bodies and commentators into a simple message - big oil is dipping our pockets to make a fast buck at the expense of clean energy.

However, like most headlines, when unpacked the reality is somewhat different. For example, according to the REN21 report, in 2010 renewable energy accounted for a little over 15% of global energy consumption, compared to 80% for fossil fuels. However, approximately half of that renewable consumption was traditional biomass, the global poor burning wood and animal waste with appalling health impacts. Discounting long-standing hydro and (mostly) Chinese solar water heaters, new renewables such as wind and solar PV accounted for less than 1% of global energy consumption, as did biofuels. So while it’s claimed that fossil fuels attract six times the subsidy of renewables, fossil fuels generate not far off 80 times more energy than heavily subsidised new renewables. Per unit of energy actually consumed then, renewables appear to attract subsidy over 10 times greater than fossil fuels.

Energy targets, biscuits and Mao Zedong

When Mao Zedong set national targets for steel production during the Great Leap Forward in late 1950s China, the end result was a massive misallocation of labour and resources, inefficient steel production and ultimately the impoverishment of the population.

It is surprising then that the recent report from the Scottish Parliament Economy, Energy and Tourism Committee into Scotland's renewable energy targets did not ask the simple question - why is a state mandated target for the equivalent of 100% of Scotland's electrical energy production to be generated from renewable resources by 2020 actually necessary?

Clearly, with sufficient production subsidy, capital will be attracted to invest and the target will be met on schedule. But therein lies the problem. Capital from banks or elsewhere needs to be repaid, and with a suitable return on investment. What will no doubt be welcome investment for the renewable energy industry will in the end be a cost to be bourne by consumers and other industries. The key question is not whether arbitrary targets can be met, but if the associated investment is productive?

Fear the boom and bust for Green energy

Tomorrow’s prosperity creating today’s debts

Many will have enjoyed Stephanie Flanders recent BBC 2 series, Masters of Money, covering Keynes, Hayek and Marx. For those who missed it, or are pushed for time, the Keynes versus Hayek debate is compressed down to 8 minutes of gangster rap in a well-known YouTube video, Fear the Boom and Bust. If you’ve not seen it, watch it.

What YouTube captures, but 60 minutes of BBC doesn’t quite unpick, is the insightful and elegantly delivered rap lyric, “malinvestments wreck the econo-mee”. This is Hayek down to a single line.

So what are these malinvestments, and just what have they got to do with our current economic predicament? Well, everything.

For Hayek, malinvestments are the result of easy credit, resulting in what should be tomorrow’s prosperity creating today’s debts. But malinvestments aren’t just about easy credit, they’re about how poor investments can undermine wider economic productivity, which is of course the ultimate engine of prosperity.

Saving carbon, pounds and pence

My previous blog post considered the impact of plant service life and capacity factor on wind and nuclear generation.  We used very round numbers (ignoring OPEX and financing) to illustrate how hard our investments in capital will work for us, both in terms of electrical energy generated and carbon displaced. The basic point was that nuclear has an advantage of 3 in capacity factor (90% nuclear against 30% wind) and another advantage of 3 in plant life (60 years nuclear, 20 years wind). So whatever wind does, nuclear has an in-built order of magnitude advantage. That’s a tough challenge.

But if we follow the advice of most environmental NGOs and don’t use nuclear, how else can we generate cost effective electrical energy and displace carbon dioxide. Well, the Institute for Public Policy Research think that wind can be part of the answer, as detailed in their recent report, Beyond the Bluster.

Counting carbon, pounds and pence

Mark Lynas and Chris Goodal recently presented data in the Guardian which demonstrates that wind is displacing output from Combined Cycle Gas Turbines, MW-hr for MW-hr. Such quantitative analysis is to be welcomed and certainly adds to the debate. We clearly need to deal in numbers with units rather than simply words.

It can be seen from the data presented that as wind output rises, the production share of efficient Combined Cycle Gas Turbines (with emissions of order 350 kg CO2 per MW-hr) indeed falls. However, the production share of coal (with emissions of order 900 kg CO2 per MW-hr) remains unchanged. At present, wind is therefore displacing relatively clean and efficient gas, rather than base-load coal, which is our largest source of carbon. 

To evaluate the merit of energy technologies, we firstly need to remember that low cost energy drives our economy and underpins the historically unprecedented prosperity we now enjoy. In choosing a future energy mix we therefore firstly need to ensure that it is low cost (£/MW-hr), and then that it efficiently displaces carbon dioxide (£/tonne CO2). We need our investments to be productive and to work hard for us.