Early in June, I wrote about Germany's preparation for a framework that would let energy companies extract oil and natural gas through hydraulic fracturing. This was in response to Russia's advance into Crimea and the potential for natural gas deliveries being curtailed, which Russia has utilized twice in the last six years. Well on June 16, 2014, Russia curtailed gas again after a long-running gas-pricing dispute failed to produce a breakthrough in talks. The Russians wanted payment first. On June 17, 2014, there was an explosion of a natural gas pipeline in central Ukraine. The cause was likely poor maintenance of the pipeline system. Herein lies the problem with altering a country's energy mix without vision. Germany reacted with a knee-jerk when Fukushima occurred. Prior to that, Germany's mix was appropriate given the country's economic and energy attributes. But to shut down 50% of its nuclear capacity within a year, with the rest scheduled to come off line in the future and without a backup plan, was not good long-term strategic planning. It comes with a huge expense and energy future insecurity.
In the last few weeks, the energy industry in France is pressuring the government to reconsider their ban on hydraulic fracturing. At issue is the concern over groundwater pollution and cultural values. For France, they can redirect the pressure onto the energy companies because most of their electrical energy is generated from nuclear power plants. Despite approximately 80% of their electrical energy being produced from nuclear power plants, France did not overreact to Fukushima, as did Germany. France actually benefited from not over-reacting as Germany sought most of its make up electrical power from France for the closing of its nuclear power plants.
The point of illustrating Germany and France, it that the energy debate is complicated and is not one-size fits all. Each country has its energy strengths and weaknesses. When governments governed for their constituents and not for themselves, they put long-term energy plans into effect that accounted for population growth, industry growth and supply of energy at hand. Policies were established based on those projections. It seems that governments are reacting to emotion and re-election pressures, rather than acting as a collective brain trust to protect us from ourselves.
Environmental consideration is important, but should be thought through along each country's own supply and demand mix. Just because the globe is interconnected, does not mean that we should all move in the same direction simultaneously. There are too many jobs at stake, huge economies at stake, huge taxes at stake. Watching Europe adjust its energy mix in the last year after making huge, poorly thought through strategies, should be an eye-opening learning exercise.
We do need to cut CO2 emissions and they are being cut in the developed countries (maybe not as fast as everyone wants, but it is a lot faster than expected - thanks to cheap natural gas). Once solar reaches grid parity (which is not far off), the next big wave of CO2 emissions reductions will take place. Additionally, changing personal and corporate habits will contribute to more CO2 reductions as new technologies are developed and employed. In the US, the biggest cuts could come from smaller, more fuel efficient vehicles, but this takes time and money as the turnover of vehicles is between 12 and 14 years. Make no mistake though, it is happening. The next big cut could come from reduced energy consumption at home by making the home more energy efficient and smarter (this takes time and money as well, because not everyone can afford the upgrades or technologies or to leave their large suburban home for a small urban apartment without placing massive pressures across every aspect of business). For the developing countries, pressure is being applied in many ways - by the developed countries, NATO, WTO, etc. It is also being addressed by its people, who are leaving the country because of wholesale pollution. They are also finding their voices and speaking up about the severity of the pollution.
So, how do we get there faster? While I am not a fan of government heavy-handedness, a carbon tax seems to me to be a better method than carbon trading. And if appropriately applied, could reduce the CO2 emissions quickly. If the carbon tax is set up as a trust, like the Highway Trust Fund, then the tax revenues from a CO2 emissions tax would go into the trust fund to be paid out in alternative energy subsidies or be used to replace utilities old, coal-fired power plants with new electrical generating plants. The worst thing that could be done is creating a carbon trading system. We lose and the carbon traders at the banks, investment banks, etc. (Goldman Sachs, JP Morgan, etc.) win. But everyone must remember, nothing is free. Everything comes with a cost - higher usage fees, taxes, energy consumption mandates, etc.
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