13 seconds in march

PHOTO POST

In these parts we can usually hear spring coming long before we can see it.

On the second day of March when this coyote was making midday rounds, the marsh was frozen solid and it didn’t even feel like spring – except that the snowflakes landed almost like soft rain.

Midday Rounds (click images for larger view)

But non-wintering birds had already started to appear, and the quiet of winter was punctuated by sounds we hadn’t heard here for months.

Smooth Operator

A few Long-Tailed Ducks started to show up in late February. This one was taking shelter in the harbour on a blustery early-March afternoon.

A more surprising visitor on the same day was a Common Loon, which had been stranded after landing on a rooftop in Oshawa. Unable to launch into flight except from water, this one was rescued and set free in Bowmanville harbour.

Portrait of a Loon

A quick look around

One way to gauge the spring was by watching the ice dwindle on the harbour breakwaters. Though the ice at the very ends of the breakwaters is still hanging on, ice on the lower rocks was gradually washed away by waves or melted by the strengthening sun.

Breakwater, March 13

Breakwater, March 27

It was a warm sunny afternoon when we had a delightful surprise visit from a pair of Trumpeter Swans.

Nice to meet you

The largest native bird in North America, Trumpeter Swans were nearly extinct in the mid-20th century, and had been extirpated from Ontario some 200 years ago. But dedicated work by volunteers over the past 30 years has resulted in a population of hundreds of these birds in Ontario, along with as many as 50,000 on the continent as a whole.

These feet are made for swimming

In spite of a few warm afternoons, most nights and mornings have stayed below freezing, and it’s hard to think how some of the really small birds stay warm.

Fluffed

The Black-Capped Chickadee seems to stay comfortable right through the winter – but at least it has the ability to fluff up its luxurious plumage for maximum warmth.

Announcement

The Red-Winged Blackbirds return from their migrations long before there is a hint of new growth in the marsh, and perhaps they stay warm through aerobic vocal workouts.

Slippery Slope

The song of a Killdeer in March is more surprising. A pair stopped by the harbour on March 27 and found the sand at water’s edge was still an icy slide.

But each spring sunrise lets us know the chill is only temporary.

Due East plus 13

Top photo: Due East (click here for larger view). The top photo and the bottom photo were taken 13 seconds apart.

Pulling the plug on fossil fuel production subsidies

Also published at Resilience.org

How long would the fossil fuel economy last if we took it off life support?

Or to state the question more narrowly and less provocatively, what would happen if we removed existing subsidies to fossil fuel production?

Some fossil fuel producers are still highly profitable even without subsidies, of course. But a growing body of research shows that many new petroleum-extraction projects are economically marginal at best.

Since the global economy is addicted to energy-fueled growth, even a modest drop in fossil fuel supply – for example, the impact on global oil supplies if the US fracking industry were to crash – would have major consequences for the current economic order.

On the other hand, climate justice demands a rapid overall reduction to fossil fuel consumption, and from that standpoint subsidies aimed at maintaining current fossil fuel supply levels are counterproductive, to say the least.

As a 2015 review of subsidies put it:

“G20 country governments are providing $444 billion a year in subsidies for the production of fossil fuels. Their continued support for fossil fuel production marries bad economics with potentially disastrous consequences for the climate.” 1

This essay will consider the issue of fossil-fuel production subsidies from several angles:

  • Subsidies are becoming more important to fossil fuel producers as producers shift to unconventional oil production.
  • Many countries, including G20 countries, have paid lip service to the need to cut fossil fuel subsidies – but action has not followed.
  • Until recently most climate change mitigation policy has been focused on reducing demand, but a strong focus on reducing supply could be an important strategy for Green New Deal campaigners.

Ending subsidies to producers can play a key role in taking the fossil fuel economy off life support – or we can wait for the planet to take our civilization off life support.

Producer subsidies and the bottom line

A 2014 paper from the Oxford Centre for the Analysis of Resource Rich Economies takes a broad look at subsidization trends in many countries and over several decades. In “Into the Mire”2, Radoslav Stefanski aims to get around the problem of scarce or inconsistent data by, in his words, “a method of so-called revealed preference to back out subsidies.”

Stefanski does not focus specifically on subsidies to producers. Instead, he is concerned with inferring an overall net subsidy rate, which is the difference between subsidies aimed at either fossil fuel producers and consumers, and the taxes levied on fossil fuels at the production and consumption end.

He finds that “between 1980 and 2000 the world spent – on average – 268 billion USD (measured in 1990 PPP terms) a year on implicit fossil fuel subsidies.” Starting from the late 1990s, however – when it should have been clear that it was globally essential to begin the transition away from fossil-fuel dependence – the rate of subsidization grew rapidly in several regions.

In particular, Stefanski finds, “the vast majority of the increase comes from just two countries: China and the US.”

In North America, he says “until the 1990s the policy was fairly neutral with a slight tendency towards subsidization. Subsequently however, fossil fuel subsidies exploded and the region became the second highest subsidizing region after East Asia.”

Not only did the global price of oil see a rapid rise after 2000, but North American production saw a huge growth in production through two unconventional methods: hydraulic fracturing of oil-bearing shale, and mining of tar sands. These oil resources had been known for decades, but getting the oil out had always been too expensive for significant production.

A 2017 paper in Nature Energy shows how crucial subsidies have been in making such production increases possible.

Entitled “Effect of subsidies to fossil fuel companies on United States crude oil production”, the paper quantifies the importance of state and federal subsidies for new oil extraction projects.

The authors found that at then-current prices of about US$50 per barrel,

“tax preferences and other subsidies push nearly half of new, yet-to-be-developed oil investments into profitability, potentially increasing US oil production by 17 billion barrels over the next few decades.3”

The projects that would only be profitable if current subsidies continue include roughly half of those in the largest shale oil areas, and most of the deep-sea sites in the Gulf of Mexico – all areas which have been critical in the growth of a reputed new energy superpower often referred to triumphantly as “Saudi America”.

From Erickson et al, “Effect of subsidies to fossil fuel companies on United States crude oil production”, 2017.

The authors also estimate the greenhouse gas emissions that will result from continuing these subsidies to otherwise-failing projects. In their tally, the additional carbon emissions coming from these projects would amount to 20% of the US carbon budget between now and 2050, given the widely accepted need to keep global warming to a limit of 2°C. In other words, the additional carbon emissions from US oil due to producer subsidies is far from trivial.

Extending this theme to other jurisdictions with high-cost oil – think Canada, for example – the authors of Empty Promises note “the highest cost fields that benefit most from subsidisation often have higher carbon intensity per unit of fuel produced.”4,5

The Nature Energy study is based on an oil price of US$50 per barrel, and says that subsidies may not be so important for profitability at substantially higher prices.

Another recent look at the fracking boom, however, reveals that the US fracking boom – particularly fracking for crude oil as opposed to natural gas – has been financially marginal even when prices hovered near $100 per barrel.

Bethany McLean’s book Saudi America6 is a breezy look at the US fracking industry from its origins up to 2018. Her focus is mostly financial: the profitability (or not) of the fracking industry as a whole, for individual companies, and for the financial institutions which have backed it. Her major conclusion is “The biggest reason to doubt the most breathless predictions  about America’s future as an oil and gas colossus has more to do with Wall Street than with geopolitics or geology. The fracking of oil, in particular, rests on a financial foundation that is far less secure than most people realize.” (Saudi America, page 17)

Citing the work of investment analyst David Einhorn, she writes

“Einhorn found that from 2006 to 2014, the fracking firms had spent $80 billion more than they had received from selling oil and gas. Even when oil was at $100 a barrel, none of them generated excess cash flow—in fact, in 2014, when oil was at $100 for part of the year, the group burned through $20 billion.” (Saudi America, page 54-55)

It seems sensible to think that if firms can stay solvent when their product sells for $50 per barrel, surely they must make huge profits at $100 per barrel. But it’s not that simple, McLean explains, because of the non-constant pricing of the many services that go into fracking a well.

“Service costs are cyclical, meaning that as the price of oil rises and demand for services increases, the costs rise too. As the price of oil falls and demand dwindles, service companies slash to the bone in an effort to retain what meager business there is.” (Saudi America, page 90)

In the long run, clearly, the fracking industry is not financially sustainable unless each of the essential services that make up the industry are financially sustainable. That must include, of course, the financial services that make this capital-intensive business possible.

“If it weren’t for historically low interest rates, it’s not clear there would even have been a fracking boom,” McLean writes, adding that “The fracking boom has been fueled mostly by overheated investment capital, not by cash flow.”7

These low interest rates represent opportunity to cash-strapped drillers, and they represent a huge challenge for many financial interests:

“low interest rates haven’t just meant lower borrowing costs for debt-laden companies. The lack of return elsewhere also led pension funds, which need to be able to pay retirees, to invest massive amounts of money with hedge funds that invest in high yield debt, like that of energy firms, and with private equity firms—which, in turn, shoveled money into shale companies, because in a world devoid of growth, shale at least was growing.” (Saudi America, page 91)

But if the industry as a whole is cash-flow negative, then it can’t end well for either drillers or investors, and the whole enterprise may only be able to stay afloat – even in the short term – due to producer subsidies.

Supply and demand

Many regulatory and fiscal policies designed to reduce carbon emissions have focused on reducing demand. The excellent and wide-ranging book Designing Climate Solutions by Hal Harvey et al. (reviewed here) is almost exclusively devoted to measures that will reduce fossil fuel demand – though the authors state in passing that it is important to eliminate all fossil fuel subsidies.

The authors of the Nature Energy paper on US producer subsidies note that

“How subsidies to consumers affect energy decision-making is relatively well studied, in part because these subsidies have comparatively clear impacts on price …. The impact of subsidies to fossil fuel producers on decision-making is much less well understood ….” 8

Nevertheless there has been a strong trend in climate activism to stop the expansion of fossil fuels on the supply side – think of the fossil fuel divestment movement and the movement to prevent the construction of new pipelines.

A 2018 paper in the journal Climatic Change says that policymakers too are taking another look at the importance of supply-side measures: “A key insight driving these new approaches is that the political and economic interests and institutions that underpin fossil fuel production help to perpetuate fossil fuel use and even to increase it.”9

The issue of “lock-in” is an obvious reason to stop fossil fuel production subsidies – and an obvious reason that large fossil fuel interests, including associated lending agencies and governments, work behind the scenes to retain such subsidies.

Producer subsidies create perverse incentives that will tend to maintain the market position of otherwise uneconomic fossil fuel sources. Subsidies help keep frackers alive and producing rather than filing for bankruptcy. Subsidies help finance the huge upfront costs of bringing new tar sands extraction projects on line, and then with the “sunk costs” already invested these projects are incentivized to keep pumping out oil even when they are selling it at a loss. Subsidy-enabled production can contribute to overproduction, lowering the costs of fossil fuels and making it more difficult for renewable energy technologies to compete. And subsidy-enabled production increases the “carbon entanglement” of financial services which are invested in such projects and thus have strong incentive to keep extraction going rather than leaving fossil fuel in the ground.

Carbon-entangled governments tend to be just as closely tied to big banks as they are to fossil fuel companies. Sadly, it comes as no surprise that in 2018 the G7 Fossil Fuels Subsidy Scorecard noted that “not a single G7 government has ended fiscal support or public finance to oil and gas production, with Canada providing the highest levels of support (per unit of GDP).”10

Fossil fuel producer subsidies and the Green New Deal

Major international climate change conferences have long agreed that fossil fuel subsidies must be phased out, ASAP, but little progress has been made.

The first step in getting out of a deep hole is to stop digging, and at this point in our climate crisis it seems crazy or criminal to keep digging the hole of fossil fuel lock-in by subsidizing new extraction projects.

Many major fossil fuel corporations have expressed their support for carbon taxes as a preferred method of addressing the climate change challenge. I am not aware, however, of such corporate leaders advocating the simpler and more obvious approach of removing all fossil fuel subsidies.

Perhaps this is because they know that carbon taxes almost always start out too small to make much difference, and that every attempt to raise them will stir intense opposition from lower- and middle-income consumers who feel the bite of such taxes most directly.

The costs of producer subsidies, on the other hand, are spread across the entire population, while the benefits are concentrated very effectively among fossil fuel corporations and their financial backers. And by boosting the supply of fossil fuels, especially oil, to a level that could not be maintained under “free market” requirements for profitability, these subsidies maintain the hope of continuous economic growth based on supposedly cheap energy.

The sudden popularity of “Green New Deal” ideas in several countries raises essential questions about political strategy. There is no single silver bullet, and a range of political and economic changes will need to be made. Though one major goal – eliminate most fossil fuel use by about 2030 and the rest by 2050 – is simple and clear, there are many means to move towards that goal, not all of them equally effective or equally feasible.

A swift elimination of producer subsidies, and a redirection of those funds to employment retraining and rehiring in renewable energy projects, strikes me as a potential political winner. Major fossil fuel interests, including big investment firms, can be counted on to oppose such a shift, of course – but they have shown themselves to be determined lobbyists for the preservation of the fossil fuel economy anyway.

Among the overwhelming majority of voters without big financial portfolios, the cessation of handouts to corporations strikes me as an easier sell than carbon taxes levied directly and regressively on consumers.


Photo at top: port of IJmuiden, Netherlands, September 2018.

Footnotes

1 Empty Promises: G20 subsidies to oil, gas and coal production, published by Overseas Development Institute and Oilchange International, 2015, page 11

2 “Into the Mire: A closer look at fossil fuel subsidies”, by Radoslav Stefanski, 2014.

3 Peter Erickson, Adrian Down, Michael Lazarus and Doug Koplow, “Effect of subsidies to fossil fuel companies on United States crude oil production”, Nature Energy 2, pages 891-898 (2017).

4 Empty Promises: G20 subsidies to oil, gas and coal production, published by Overseas Development Institute and Oilchange International, 2015, page 17

5 The same hurdles to unsubsidized profitability apparently apply outside of North America. See, for example, this article detailing how major fracking ventures in Argentina are likely to stall or fail due to declining subsidies: “IEEFA report: Argentina’s Vaca Muerta Patagonia fracking plan is financially risky, fiscally perilous”, March 21, 2019

6  Saudi America: The Truth About Fracking and How It’s Changing the World, by Bethany McLean. Columbia Global Reports, 2018.

7 McLean’s reading echoes the analysis in the 2017 book Oil and the Western Economic Crisis, by Cambridge University economist Helen Thompson.

8 Peter Erickson, Adrian Down, Michael Lazarus and Doug Koplow, “Effect of subsidies to fossil fuel companies on United States crude oil production”, Nature Energy 2, pages 891-898 (2017).

9 Michael Lazarus and Harro van Asselt, “Fossil fuel supply and climate policy: exploring the road less taken,” Climatic Change, August 2018, page 1

10 G7 Fossil Fuels Subsidy Scorecard, Overseas Development Institute, Oilchange International, NRDC, IISD, June 2018, page 9

Designing Climate Solutions – a big-picture view that doesn’t skimp on details

Also published at Resilience.org

Let us pause for a moment of thanks to the policy wonks, who work within the limitations of whatever is currently politically permissible and take important steps forward in their branches of bureaucracy.

Let us also give thanks to those who cannot work within those limitations, and who are determined to transform what is and is not politically permissible.

Designing Climate Solutions: A Policy Guide for Low-Carbon Energy is published by Island Press, November 2018.

An excellent new book from Island Press makes clear that both approaches to the challenge of climate disruption are necessary, though it deals almost exclusively with the work of policy design and implementation.

Designing Climate Solutions, by Hal Harvey with Robbie Orvis and Jeffrey Rissman, is a thoughtful and thorough discussion of policy options aimed at reducing greenhouse gas emissions.

Harvey is particularly focused on discovering which specific policies are likely to have the biggest – and equally important, the quickest – impact on our cumulative greenhouse gas emissions. But he also pays close attention to the fine details of policy design which, if ignored, can cause the best-intentioned policies to miss their potentials.

One of the many strengths of the book is the wealth of graphics which present complex information in visually effective formats.

A political acceptable baseline

Though political wrangling is barely discussed, Harvey notes that “It goes without saying that a key consideration of any climate policy is whether it stands a chance of being enacted. A highly abating and perfectly designed policy is not worth pursuing if there is no chance it can be implemented.”

He takes as a starting point the target of the Paris Agreement of 2015, which has received agreement in principle from nearly all countries: to reduce emissions enough by 2050 to give us at least a 50% chance of avoiding more than 2°C global warming. (We’ll return later to the question of the reasonableness of that goal.)

Throughout the book, then, different aspects of climate policy are evaluated for their relative contributions to the 2°C goal.

Working with a climate policy computer model which is discussed in detail in an appendix and which is available online, Harvey presents this framework: a “business as usual” scenario would result in emissions of 2,253 Gigatons of CO2-equivalent from 2020 to 2050, but that must be reduced by 1,185 Gigatons.

The following chart presents what Harvey’s team believes is the realistic contribution of various sectors to the emission-reduction goal.

“Figure 3.4 – Policy contributions to meeting the 2°C global warming target.” (From Hal Harvey et. al., Designing Climate Solutions, Island Press, page 67)

The key point from this chart is that about 70% of the reductions are projected to come in three broad areas: changes to industrial production, conversion of electrical generation (“power sector”) to renewable energy, and cross-sector pricing of carbon emissions in line with their true social costs.

(The way things are categorized makes a big difference. For example, agriculture is slotted as a subset of the industrial sector, which boosts the relative importance of this sector for emissions-reduction potential.)

Harvey buttresses the argument by looking at the costs – or in many cases, cost-savings – of emissions-reduction policies. The following chart shows the relative costs of policies on the vertical dimension, and their relative contribution to emissions reduction on the horizontal dimension.

“Figure 3.2 – The policy cost curve shows the cost-effectiveness and emission reduction potential of different policies.” (From Hal Harvey et. al., Designing Climate Solutions, Island Press, page 59)

 

The data portrayed in this chart can guide policy in two important ways: policy-makers can focus on the areas which make the most difference in emissions, while also being mindful of the cost issues that can be so important in getting political buy-in.

It may come as a surprise that the transportation and building sectors, in this framework, are responsible for only small slices of overall emission reductions.

Building Codes and Appliance Standards are pegged to contribute about 5% of the emission reductions, while a suite of transportation policies could together contribute about 7% of emission reductions.

A clear view of the overriding importance of reducing cumulative emissions by 2050 helps explain these seemingly small contributions – and why it would nevertheless be a mistake to neglect these sectors.

To achieve climate policy goals it’s critical to reduce emissions quickly – and that’s hard to do in the building and transportation sectors. Building stock tends to last for generations, and major appliances typically last 10 years or more. Likewise car, truck and bus fleets tend to stay on the road for ten years or more. Thus the best building codes and the best standards for vehicle efficiency will have a very limited impact on carbon emissions over the next 15 years. By the same token, even the most rapid electrification possible of car and truck fleets won’t have full impact on emissions until the electric grid is generally decarbonized.

These are among the reasons that decarbonizing the electric grid, along with cross-sector pricing of carbon emissions, are so important to emissions reduction in the short term.

Meanwhile, though, it is also essential to get on with the slower work of upgrading buildings, appliances, transportation systems, and decarbonized agricultural and industrial processes. In the longer term, especially after 2050 when it will be essential to achieve zero net carbon emissions, even (relatively) minor contributions to emissions will be important. But as Harvey puts it, “There is no mopping up the last 10 percent of carbon emissions if we don’t eliminate the first 90 percent!”

International case studies

Harvey gets deep into the nuances of policy with an excellent discussion of the differences between carbon taxes and carbon caps. This helps readers to understand the value of hybrid approaches, and the importance in some countries of policies to limit “leakage”, whereby major industries simply shift production to jurisdictions without carbon prices or caps.

The many case studies – from the US, Germany, China, Japan, and other countries – illustrate policy designs that work especially well, or conversely, policies that have resulted in unintentional consequences which reduce their effectiveness.

These case studies also provide a reminder of the amount of hard work and dedication that mostly unsung bureaucrats have put in to the cause of mitigating climate disruption. As much as we may mourn that political leadership has been sorely lacking and that we appear to be losing the battle to forestall climate disaster, it seems undeniable that we would be considerably worse off if it weren’t for the accomplishments of civil servants who have eked out small gains in their own sectors.

For example, the hard-won feed-in tariffs and other policies promoting renewable energies for electric generation haven’t yet resulted in a wholesale transformation of the grid – but they’ve resulted in an exponential drop in the cost per kilowatt of solar- and wind-generated power. Performance standards for many types of engines have resulted in significant improvements in energy efficiency. These improvements have so far mostly been offset by our economy’s furious push to sell more and bigger products – but these efficiency gains could nevertheless play a key role in a sane economic system of the future.

The 2° gamble

Although most of the book is devoted to details of particular policies, Harvey’s admirably lucid discussion of the urgency of the climate challenge makes clear that we need far greater commitment from the highest levels of political leadership.

He notes that the reality of climate action has been far less impressive than the high-minded rhetoric. With few exceptions the nations responsible for most of the carbon emissions have been woefully slow to act, which makes the challenge both more urgent and more difficult.

Harvey illustrates this point with the chart below. The black solid and dotted lines represent the necessary progress with emissions, if we had been smart enough to ensure emissions peaked in 2015. The red lines show what may now be the best-case scenario – an emissions peak in 2030 – and the much more drastic reductions that will then be required to have a 50% chance of keeping global warming to 2°C or less.

“Figure I-7. The longer the delay in peaking emissions, the harder it becomes to meet the same carbon budget.” (From Hal Harvey et. al., Designing Climate Solutions, Island Press, page 9)

We might well ask if a 50% likelihood of worldwide climate catastrophe is a prudent and reasonable policy aim, or certifiably bonkers. Still, a 50/50 chance of disaster is somewhat better than assured civilizational collapse, which is the destination of “business as usual.”

In any case, the political climate has changed considerably in the short time since Harvey and colleagues prepared Designing Climate Solutions. With the challenge to the political status quo embodied in the Green New Deal movement, it now seems plausible that some major carbon-emitting countries will enact more appropriate greenhouse-gas emission targets in the next few years. If that comes to pass, these new goals will need to be translated into effective policy, and the many lessons in Designing Climate Solutions will remain important.

What about fossil fuel subsidies?

In a book of such wide and ambitious scope, it is inevitable that some important facets are omitted or given short shrift.

The issues of deforestation and forest degradation are duly noted, but Harvey declines to delve into this subject by explaining that “The science, the policies, and the actors for reducing emissions from land use are very different from those for energy and industrial processes, and they deserve separate treatment from experts in land use policy.”

The issue of embodied carbon does not come up in the text. In assessing the replacement of fossil-powered vehicle fleets by electric vehicles, for example, is the embodied carbon inherent in current manufacturing processes a significant factor? Readers will need to search elsewhere for that answer.

Also noteworthy is the absence of any acknowledgement that economic growth itself may be a problem. For all the discussion of ways to transform industrial processes, there is no discussion of whether the scale of industrial output should also be reduced. In most countries today, of course, a civil servant who tries to promote degrowth will soon become an expert in unemployment, but that highlights the need for a wider and deeper look at economic fundamentals than is currently politically permissible.

The missing subject that seems most germane to the book’s central purpose, though, is the issue of subsidies for fossil fuels. Harvey does state in passing that “for many sectors and technologies, pricing is the key. Removing subsidies for fossil fuels is the first step – though still widely ignored.” Indeed, many countries have paid lip service to the need to stop subsidizing fossil fuels, but few have taken action along these lines.

But throughout Harvey’s extensive examination of pricing signals – e.g., feed-in tariffs, carbon taxes, carbon caps, low-interest loans to renewable energy projects – there is no discussion of the degree to which existing fossil fuel subsidies continue to undercut the goals of climate policy and retard the transition to a low-carbon economy.

In my next post I’ll take up this subject with a look at how some governments, while tepidly supporting the transformation envisioned in the Paris Agreements, continue to safeguard their fossil fuel sectors through generous subsidies.


Illustration at top adapted from Designing Climate Solutions cover by David Ter Avanesyan.

the light of a nearby star

PHOTO POST

A tree at the base of the Port Darlington breakwater stands watch over wind and waves and grows a new coat during winter storms.

Last week’s blasts from the west whipped up the waves and funnelled splashes high into the tree.

Crescent (click images for larger views)

By the heat of the noon-day sun the glow was a glorious spectacle.

Splash, slowed

But the sun’s rise through this tree called me to the beach at dawn, day after day.

A moment of sunrise

Cold fire with twigs

Sunrise moment II

Convergence


Photo at top: Arcs (click here for larger view)