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on prices and movements of goods and services and money needed to make policy projections are, inevitably, a year or so out of date.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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