Future Trade Agenda: Fossil fuels

I recent­ly post­ed some “ideas”:http://www.inquit.com/textpattern/index.php?event=article&ID=336 on the short-term to do list for the next Aus­tralian trade min­is­ter. This is the first of what I intend will be a series of arti­cles about some longer term chal­lenges for Aus­tralian trade ande­co­nom­ic poli­cies that I believe mer­it much clos­er atten­tion and plan­ning. h4. Why we need a big­ger pic­ture Most trade min­is­ters, in Aus­tralia and else­where, make their pol­i­cy deci­sions look­ing back­wards at the recent past. We spend most of our mon­ey devel­op­ing exports and mar­kets that saw growth in the (recent) past. We adjust lev­els of indus­try pro­tec­tion and sup­port based on job loss­es in indus­tries whose promis­es almost always belonged to yes­ter­day. The huge vol­ume of inter­na­tion­al sta­tis­tics on prices and move­ments of goods and ser­vices and mon­ey need­ed to make pol­i­cy pro­jec­tions are, inevitably, a year or so out of date. Also, most trade pol­i­cy is made under an intense focus on the par­tic­u­lar: the pri­vate inter­ests of this firm or that indus­try group in some prod­uct or some oth­er export des­ti­na­tion. Ulti­mate­ly, its all about serv­ing the inter­ests of a firm (hard­ly ever a con­sumer) in turn­ing a prof­it in the short-term: a time span of just a year or so when prices are like­ly to be very much the same as they are right now. But a lot of things that mat­ter a great deal to our pros­per­i­ty don’t hap­pen in the short-term and don’t arise from the for­tunes of a par­tic­u­lar indus­try or mar­ket. They need to be viewed in a much big­ger pic­ture-frame.

One of the most impor­tant big­ger-pic­ture items for Aus­tralia con­cerns the future of our most valu­able exports; the ener­gy resources that cur­rent­ly fuel our nation­al wealth. h4. Our exports are led by fos­sil-fuels In 2002–3 Coal ($11.9 bil­lion) and Crude petro­le­um ($5.9 bil­lion) were Aus­trali­a’s largest mer­chan­dise export items account­ing for more than 15% of our mer­chan­dise epx­orts. They were val­ued at almost twice the third and fourth most valu­able exports. Of course, our exports of fos­sil-fuels come in dif­fer­ent forms: exports of met­als, for exam­ple, such as pig-iron or alu­minum or steel, fab­ri­cat­ed using coal-fired ener­gy, are in a sense ‘fos­sil-fuel exports’. But my argu­ment can be made by con­sid­er­ing only our exports of the real thing. Our car­bon-fuel exports have expe­ri­enced stun­ning growth in recent years. mer­chan­dise exports. Since 1997–98, the val­ue of exports of Coal has increased by an aver­age 7 per cent each year and crude petro­le­um exports by 33 per­cent. The Aus­tralian Min­er­als Coun­cil believes that this lev­el of sales of coal and LNG will con­tin­ue because there are no alter­nate ener­gy sources capa­ble of sus­tain­ing the same base-load lev­el of pow­er gen­er­a­tion. The Exec­u­tive Direc­tor, Mitch Hooke, respond­ing to the entry-into-force of the “Kyoto Protocol”:http://unfccc.int/resource/convkp.html, was quot­ed in the “Aus­tralian Finan­cial Review”:http://www.afr.com on 1 Octo­ber as claim­ing that fos­sil fuels will con­tin­ue to meet “90 per­cent of the world’s ener­gy requirements”.

IEA: pow­er by fuel

Hooke’s claims are a rea­son­able reas­sur­ance that the sky won’t fall once the Kyoto Pro­to­col and its car­bon emis­sion tar­gets start to bite. His assur­ance about the world’s depen­dence on fos­sil-fuels for pow­er gen­er­a­tion makes sense, how­ev­er, only in the con­text of cur­rent prices (the def­i­n­i­tion of the short term). Nei­ther he, nor the glob­al pro­duc­tion indus­try, has any priv­i­leged infor­ma­tion about the future, par­tic­u­lar­ly when the future is like­ly to be shaped by facts that can’t be empir­i­cal­ly deter­mined. This is pol­i­tics, not geol­o­gy or even, nec­es­sar­i­ly, ratio­nal eco­nom­ic choice. Two fac­tors still weigh strong­ly in favor of “busi­ness as usu­al” for the fos­sil-fuel exporters:
# The fos­sil-fuel pow­er gen­er­a­tion indus­try has pow­er­ful momen­tum, due to scale alone: cer­tain­ly suf­fi­cient to intro­duce a long peri­od of laten­cy into any change in future growth trends.  Despite a grad­ual loss of mar­ket share over the past 30 years (see the IEA graph, above), the scale of installed gen­er­a­tion capac­i­ty that depends on car­bon-based fuel is immense: amost 40 per­cent of glob­al elec­tric­i­ty sup­ply in 2003 was coal-fired.
# “Glob­al cooperation”:http://usinfo.state.gov/gi/Archive/2003/Jul/03–735618.html on tech­nolo­gies such as car­bon sequestration[1] will prob­a­bly pro­long demand for coal and oil from Aus­tralia and the clean­er-burn­ing LNG has a still brighter future. | Fuel | % of pow­er|
| coal|38.54|
| oil|7.51|
| gas|18.19|
| biomass|0.72|
| waste|0.37|
| nuclear|17.07|
| hydro|17.02|
| geothermal|0.31|
| solar PV|0.00|
| solar thermal|0.00|
| oth­er sources|0.26|
|Source: Inter­na­tion­al Ener­gy Agency || But this base-load pow­er gen­er­a­tion is over­whelm­ing­ly in the hands of pub­lic util­i­ties around the world. In the Unit­ed States, util­i­ties sub­ject to pub­lic reg­u­la­tion account­ed for 88 per­cent of the pow­er gen­er­at­ed. (data from the “US Envi­ron­ment Pro­tec­tion Agency”:http://www.epa.gov/compliance/resources/publications/assistance/sectors/notebooks/power2pt1.pdf).  Soon­er or lat­er, these util­i­ties are respon­sive to the polit­i­cal envi­ron­ment in which they operate.

Graph from US CCSP

For those capa­ble of read­ing the polti­cial tell­tales, the wind is set­ting hard against growth in fos­sil fuels for base-load pow­er gen­er­a­tion. Even in GW’s Wash­ing­ton, where scep­ti­cism about the link between cli­mate change and human activities—including the cre­ation of car­bon aerosols—is strongest, the pol­i­cy ori­en­ta­tion has changed. Here’s an extract from the most recent report of the key US inter-agency sci­ence-pol­i­cy group on cli­mate change, the Com­mit­tee on Cli­mate Change Sci­ence Pol­i­cy . bq. Com­par­i­son of index trends in obser­va­tions and mod­el sim­u­la­tions shows that North Amer­i­can tem­per­a­ture changes from 1950 to 1999 were unlike­ly to be due only to nat­ur­al cli­mate vari­a­tions. Observed trends over this peri­od are con­sis­tent with sim­u­la­tions that include anthro­pogenic forc­ing from increas­ing atmos­pher­ic green­house gas­es and sul­fate aerosols. How­ev­er, most of the observed warm­ing from 1900 to 1949 was like­ly due to nat­ur­al cli­mate vari­a­tion. (“Unit­ed States’ CCSP report 2004”:http://www.usgcrp.gov/usgcrp/Library/ocp2004‑5/ocp2004-5-hi-clivar.htm empha­sis added) This does­n’t set­tle the ques­tion, of course: far from it. Evi­dence of asso­ci­a­tion between human action and cli­mate change needs to be much stronger in view of the much larg­er “his­tor­i­cal vari­a­tions in climate”:http://www.junkscience.com/MSU_Temps/Blair.htm, even dur­ing the past few hun­dred years, that have no plau­si­ble asso­ci­a­tion with human action. But on this point, at least, the polit­i­cal cli­mate is much eas­i­er to read than the glob­al tem­per­a­ture. Tony Blair’s deci­sion to “make an issue”:http://www.independent-media.tv/itemprint.cfm?fmedia_id=8965&fcategory_desc=Environment of glob­al pol­i­cy respons­es to cli­mate change at the lev­el of the G8—whatever his per­son­al polit­i­cal motives—is a key indi­ca­tor of an increas­ing sense of urgency that will sur­round the issue. The pur­sua­sive force of evi­dence for recent human forc­ing of cli­mate change is suf­fi­cient to make it a major fac­tor in every polit­i­cal cal­cu­la­tion about future pow­er gen­er­a­tion. And every severe weath­er event will be, albeit wrong­ly, assim­i­lat­ed to the evi­dence in the pop­u­lar view. h4. His­to­ry les­son In an increas­ing­ly charged and con­fus­ing pub­lic debate it might not mat­ter whether the Kyoto treaty’s mech­a­nisms for reduc­ing car­bon emis­sions are effec­tive or not, nor whether reduced emis­sions will affect the rate of warming.

Graph from Aus­tralian UIC

Expe­ri­ence warns us that a decline in demand dri­ven by pub­lic dread can be sur­pris­ing­ly fast. Those with long mem­o­ries will recall what hap­pened to the ura­ni­um ‘yel­low­cake’ export indus­try that was con­fi­dent­ly expect­ed to be a major long-term Aus­tralian export indus­try as late as the mid-1970s. By the mid-1980s—following a series of expen­sive reac­tor dis­as­ters at Three Mile Island and then at Chernobyl—new reac­tor con­struc­tion in Europe, North Amer­i­ca and Japan vir­tu­al­ly ceased. Pub­lic util­i­ties could no longer jus­ti­fy the cost of instal­la­tions that were hard­er to locate than a new air­port, as pop­u­lar as Nation­al Social­ism and more bound in red-tape than the Japan­ese impe­r­i­al house­hold. After a brief, heady, peri­od as a ‘cham­pi­on’ of future resor­ces exports, the ura­ni­um busi­ness became vir­tu­al­ly mori­bund in less than a decade, despite sup­port from both sides of Aus­tralian pol­i­tics for ful­fill­ment of exist­ing con­tracts. Explo­ration ceased in the ear­ly 1980s as the spot price of USD50 per lb. for U3O8 fell quick­ly to about USD10 per lb. where it has remained since. The dif­fer­ence between the nuclear indus­try of the 1970s and today’s fos­sil-fuel-based pow­er gen­er­a­tion indus­try is, as already not­ed, the scale of installed fos­sil-fuel-based gen­er­a­tion capac­i­ty. But this capac­i­ty mere­ly slows the like­ly rate of change: it does not pro­tect, final­ly, against it. The invest­ment inten­tions of pub­lic util­i­ties, in devel­op­ing and indus­tri­al­ized coun­tries, are like­ly to be the deter­min­ing fac­tor for our fos­sil-fuel exports as they were for ura­ni­um. In Aus­tralia, pan­gloss­ian expres­sions of con­fi­dence in the future of fos­sil fuel exports remain stan­dard soap-box fare. bq. “For the fore­see­able future, coal, oil and gas will meet the bulk of Aus­trali­a’s ener­gy needs,” he told the Nation­al Press Club. “Aus­tralia can­not afford to put at risk … indus­tries that direct­ly employ 120,000 Aus­tralians and which earn more than $24 bil­lion a year in export income.” (“The Age”:http://www.theage.com.au/articles/2004/06/15/1087244916277.html) empha­sis added But we should­n’t allow our own rhetoric to blind us to glob­al real­i­ty. The point is that it’s our cus­tomers that will put this indus­try at risk: not choic­es made in Aus­tralia. Fos­sil fuels could well be head­ed for a rever­sal as spec­tac­u­lar in its way as that of Ura­ni­um in the 1970s. The impact may be slow­er, but the mass of the col­li­sion will be much larg­er. So far, how­ev­er, there is no hint of gov­ern­ment plan­ning for a rever­sal in the spec­tac­u­lar growth of our two most impor­tant mer­chan­dise exports. Hard­ly any debate, no strate­gies, no alter­na­tives being eval­u­at­ed. fn1. Grow­ing plants and car­bon-metab­o­liz­ing micro-organ­isms: a strat­e­gy favoured by the G W Bush administration

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