Interlinked Crises

Providing the growing supplies of secure, reliable, and affordable energy needed to fuel prosperity for all without causing environmental consequences is perhaps the greatest challenge facing human civili-zation in the twenty-first century. The energy problem is simultaneously a security crisis, an economic crisis, an environmental crisis, and an energy access crisis:

• A security crisis. A wide range of current and former senior national security officials have made it clear that both the U.S. and global addictions to fossil fuels pose a severe security chal-lenge (CNA 2009, Daniel 2010). The U.S. and world economies are increasingly dependent on oil supplies located in some of the most politically volatile regions of the world (though sup-pliers and consumers are deeply dependent on each other, making the “oil weapon” difficult to wield). High energy prices fill the coffers of some of the world’s most hostile governments.

Militaries around the world are deeply dependent on fossil fuels that compromise operations (Defense Science Board 2008) and raise security concerns—as the casualties from fuel supply trucks in Iraq and the recent terrorist attacks on fuel shipments in Pakistan to provide fuel to NATO troops in Afghanistan make clear (Simeone 2009, BBC 2010). With most population growth taking place in those regions with limited energy access or low energy use, a scarcer en-ergy market could also lead to civil unrest in many places around the world and could threaten national and international security. It is becoming increasingly clear that the natural disasters, refugee flows, and intensification of poverty that will result in some regions if climate change is not addressed will pose risks to international peace and security (CNA 2007). In addition, a global expansion of nuclear power without improvements in technology and institutional controls could increase the danger of nuclear proliferation and terrorism (as well as the risks of nuclear accidents).

• An economic crisis. The United States sends $700 million dollars a day overseas just to pur-chase petroleum, an amount representing roughly half the U.S. trade deficit (U.S. Census Bureau 2010). Volatile oil and gas prices disrupt investment planning, drive businesses into bankruptcy, and push families into sudden poverty. Where once the United States was the undisputed world leader in clean energy technology, other countries are now making progress, particularly in the areas of manufacturing and commercialization, in some technologies: China is now the world’s largest producer of both solar cells and wind turbines, and China, Europe, and other countries, such as South Korea and Japan, are investing heavily in developing new energy technologies.³

3 According to a recent report, in 2009, for the first time, “core clean energy” (i.e., new renewables, biofuels, and energy effi-ciency) private investments in Asia and Oceania ($40.8 billion) were larger than those in the Americas ($32.3 billion). These estimates of private investments include asset finance, IPOs, private equity, venture capital, and estimates of corporate RD&D

Large investments in the world’s energy infrastructure are expected between 2010 and 2030, on the order of tens of trillions of dollars,⁴ and clean energy investments are expected to grow over time.⁵ Capturing a large share of this market could lead to new jobs and increased revenues, but this will depend in part on the United States’ success in developing innovative new energy products and services.

• An environmental crisis. From oil spills in the ocean to air pollution choking many cities around the world, to global climate disruption, production and use of energy causes most of the worst environmental problems the world faces, at local, regional, and global scales. Climate disruption and ocean acidification, in particular, are heavily driven by the carbon emissions from burning fossil fuels.⁶ The environmental impacts of the energy sector are already slowing economies, which results in the deaths of thousands of people globally every day⁷, and adding to the burden of human misery—and these impacts are accelerating. Climate change could result in increasing damages from climate disruption for decades to come.

• An energy access crisis. Energy innovation also has an important role to play in increasing ac-cess to modern forms of energy (electricity and liquid and gaseous fuels) to about one third of the world’s population. The current inefficient and dirty indoor combustion of coal and biomass has large health, economic development, and environmental costs.

These huge, interlinked challenges must be met, for affordable and reliable energy supplies are the life-blood of the economy of the United States.⁸

investments. Private investments in Europe were already larger than those in the Americas, totaling $43.7 billion in 2009 (UNEP SEFI, Bloomberg New Energy Finance 2010). Moving on to public investments, the IEA statistics show that in 2008, a group of European countries including Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, and the United Kingdom had invested

$4.7 billion in energy RD&D; Japan $4.3 billion; and the United States $4.4 billion (IEA 2010b). In terms of public investment as a fraction of GDP, in 2007, Australia, Denmark, France, Japan, Korea, and China were making greater investments than the United States (AEIC 2010).

4 In a “business as usual” scenario in which energy-related CO₂ emissions would double by 2030 globally, total investments in energy supply and use would be about $26 trillion between 2010 and 2030. An additional $10.5 trillion would be necessary to realize a 50% reduction in global annual CO2 emissions (IEA 2009b).

5 Joint reports from the United Nations Environment Program (UNEP) and the Renewable Energy Policy Network for the 21st Century (REN21) estimated that, in 2009, global investment in “core clean energy” (i.e., new renewables, biofuels, and energy efficiency) were $162 billion (UNEP SEFI, Bloomberg New Energy Finance 2010).

6 Today, some 80% of the world’s energy supply comes from burning fossil fuels, which is the largest contributor to emissions of heat-trapping gases, with oil providing the single largest contribution to global energy supply.

7 The World Health Organization estimated in 2006 that, every year, 1.5 million people die from inhaling indoor pollutants that exceed accepted guideline limits from the burning of coal and biomass such as wood, dung, and crop residue (Rehfuess, Cor-valan & Neira 2006).

8 Today, an estimated 2.4 billion people, more than a third of the world’s population, rely on wood, charcoal, and dung as their principal energy sources, and an estimated 1.6 billion have no access to electricity (UNDP 2005). Expanding the supply of modern energy will be a critical element of lifting billions of people out of abject poverty.

With a growing world population and growing economies, however, the latest scenarios⁹ suggest that global primary energy consumption may increase to 1.5-3 times the current demand by 2050, making these challenges far more difficult to address. These scenarios also indicate that fossil fuels are likely to provide most of the world’s energy supply for decades to come. Indeed, despite projected growth in renewable energy supplies, in its “new policies scenario,”¹⁰ the International Energy Agency expects the use of natural gas to grow faster than any other energy source in the decades ahead, and the use of coal to increase until 2019. See Figure 1.1.¹¹

This ever-growing reliance on burning fossil fuels simply cannot be sustained—the economic, security, and environmental costs will all prove to be unacceptably high. Indeed, it may simply not be possible to meet growing projected demands for oil and gas at an acceptable cost. While there is debate over when

“peak oil” will occur, there is little debate that, at some point in the decades to come, oil production will stop growing and eventually decline, even as energy demand continues to grow. Price spikes, supply dis-ruptions, and political tensions over scarce supplies are likely to become increasingly common. At the same time, there is a growing scientific consensus that, in order to avoid catastrophic climate disruption, steep reductions in global emissions of heat-trapping gases, perhaps in the range of 50% below today’s levels, must be achieved by roughly 2050.¹² The need to develop alternatives to fossil fuels that can be deployed at a massive scale—especially for transportation fuels—is real and urgent.

As the International Energy Agency has put it: “Current global trends in energy supply and use are unsustainable—environmentally, economically, socially…. It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the… central energy challenges fac-ing us…. What is needed is nothfac-ing short of an energy technology revolution” (IEA 2009a). To meet the challenges, both major innovations in energy technology and new international policies and

institu-9 The “Baseline” scenario of the International Energy Agency of the Organization for Economic Cooperation and Development (IEA/OECD), for example, envisions a global, primary energy supply growing 1.4% per year on average from 2007 to 2050, increasing by almost exactly a factor of two, from 12,020 million tons of oil equivalent (Mtoe, equivalent to 503 exajoules) to 22,078 Mtoe (924 exajoules) in 2050. In this scenario, global electricity production increases by 134%. See (IEA 2010a). Simi-larly, the U.S. Energy Information Administration (EIA) reference case envisions 1.5% annual growth in world energy demand from 2006-2030, resulting in 678 quadrillion British Thermal Units (BTU) (715 exajoules) of world primary energy demand by 2030. If this annual growth continued to 2050, it would result in a global demand of some 960 exajoules, nearly twice 2006 demand and very similar to the IEA/OECD baseline scenario. The EIA reference case envisions central station electricity generation growing by 2.4% per year, which would nearly triple global production by 2050. See EIA 2009, OECD 2008. Other relevant scenarios are found in Metz et al. 2007, IAEA 2008, and European Commission 2006. Under the new policies scenario of the recently released IEA’s World Energy Outlook 2010, world primary energy demand would increase by 36% between 2008 and 2035, growing at 1.2% per year on average (IEA 2010c).

10 The “New Policies” scenario is a new feature of the IEA’s World Energy Outlook 2010, and takes into account the broad policy commitments and plans that have been announced by countries around the world, including the national pledges to reduce greenhouse gas emissions and plans to phase out fossil-energy subsidies, even where the measures to implement these commit-ments have yet to be identified or announced.

11 It is worth mentioning that these projections assume oil supply availability that is more optimistic than other scenarios. It is hard to say what estimate is more accurate (IEA 2009b).

12 For a reflection of this growing consensus, see, for example G8+5 Academies 2009.

tions will be needed.¹³ Broad international action and cooperation will be essential: no separate solution implemented within a single country, or even region, will suffice.

The scale of what must be done to meet these challenges is staggering, as the global energy system (the infrastructure of exploration facilities, transmission lines, pipelines, power plants, buildings, vehicles, etc.) is huge. The International Energy Agency estimates that simply maintaining “business as usual” will require $26 trillion in energy-related investments between now and 2030. To begin getting on a path to stabilize long-term concentrations of greenhouse gases in the atmosphere at 450 parts per million of CO2 -equivalent would require an additional $10.5 trillion in global energy investments by 2030 (IEA 2009c).

Some recent reports have suggested that expanded investments in energy RD&D alone will be enough to meet these challenges (American Enterprise Institute, Brookings Institution, and Breakthrough Insti-tute, 2010), that by developing lower-cost low-carbon energy sources, societies can avoid painful steps such as putting a substantial price on dumping carbon into the atmosphere, which could increase en-ergy prices to consumers.¹⁴ Our work makes clear that this view is deeply wrong, for two key reasons.

First, the challenges are so great that there will be a need to deploy both technologies that can compete on their own with entrenched, incumbent technologies without any account taken for externalities such as carbon emissions and technologies that cannot yet overcome the market barriers to widespread de-ployment without some form of demand-side policies. In the modeling described in Chapter 2 and the appendices, we found that even a dramatic expansion of federal funding for energy RD&D, and the most optimistic expert predictions of the results of that innovation investment, would simply not be enough

13 For recent discussions, see, for example, IEA 2009b, IEA 2010a, Gallagher 2009, and Velikhov et al. 2006.

14 In addition to RD&D, this report also refers to several other steps designed to provide limited support for initial deployments of several classes of new energy technologies, including initial military procurements, and a reform of deployment subsidies designed to focus on driving down costs. The report holds open the possibility of only a very small carbon price, designed to fund RD&D rather than to give the private sector strong incentives to deploy low-carbon technologies.

1980 1990 2000 2010 2020

0 1000 2000 3000 4000 5000

Million tons of oil equivalent (Mtoe)

Biomass Nuclear

Other Renewables Coal

Gas Oil

2030 2035

Hydro

FIGURE 1.1. Energy demand by fuel type in the New Policies Scenario. (IEA 2010c)

to achieve the dramatic reductions in U.S. carbon emissions (or the dramatic reductions in U.S. oil use) likely to be needed by 2050 unless this expanded RD&D is coupled with demand-side policies that have the effect of putting a substantial price on carbon emissions. (Indeed, a broader suite of demand-side policies will ultimately be needed, given the different market barriers to deployment of low-carbon tech-nologies that exist in different sectors.) In fact, entire classes of technology that are likely to be crucial to achieving deep reductions in emissions—such as capturing and sequestering carbon from the burn-ing of fossil fuels—are unlikely to ever be economically competitive if the costs to society of dumpburn-ing carbon into the atmosphere are not taken into account.

Second, in the absence of a substantial carbon price, innovation itself will be slowed, because the private sector will have little incentive to invest in developing low-carbon technologies. The survey of private sector energy innovation described in Chapter 3 makes it clear that expected prices and their effect on potential profits are the dominant factors affecting private sector energy innovation investment deci-sions. In July 2011, American Electric Power announced that it would abandon its plans to carry out a large-scale demonstration of technology to capture and sequester carbon from an existing coal plant because, in the absence of a carbon price, the concept was simply not economically viable. As this re-port makes clear, to accelerate the full cycle of innovation from invention to deployment will require substantial government support on both the “supply side” and the “demand side” of energy technologies.

Of course, in recommending major new federal investments in ERD3, we are conscious of the huge U.S.

federal deficit and the need to bring government revenues and spending into better balance over the long term. But just as a private firm borrows to make investments that are critical to its future profitabil-ity, the U.S. government must not neglect critically needed, long-term investments in the rush to bal-ance the budget. As the PCAST report suggested, it may make sense to achieve a substantial portion of the needed investment through new approaches and revenue streams outside the usual appropriations process—as was done in the past when the Federal Energy Regulatory Commission approved a small surcharge on interstate transportation of natural gas that was used to finance gas RD&D (PCAST 2010, p. 16). But one way or another, a central theme of this report is that the United States must make a larger investment in new energy technologies if it is to meet the energy challenges of the twenty-first century.