OECD Observer
Energy: Finding a new gear

Global warming, finite fossil fuels and geopolitical risks make a shift to renewable energies inevitable. Though it is a challenge fraught with uncertainties, no action would be worse. An alternative, workable energy strategy is within reach.

Is there a silver bullet to resolving the energy challenges of our time? The answer is no. To those who take refreshment in the heady ambrosia of wind farms and solar panels as the solution to the world’s energy problems, such news may be disheartening. Renewable energy technologies as they exist now are simply incapable of meeting future energy needs. But the same also goes for protagonists of nuclear energy, as there is not enough fissionable fuel available even to supply all of today’s electricity. There is also a message for conservationists and those worried about climate change: even in the best of scenarios, fossil fuels will still provide for the majority of our energy needs for some time to come.

Despite this rather simplistic outline, there is good news. We can change, as indeed we must. It will take time, effort and money, but new strategies are possible that would use energy in cleaner, safer, more cost-effective ways.

For now, we achieve the opposite on all scores. Our energy habits are unsustainable because they are dirty, wasteful and their consequences disastrous for the environment and even in some cases irreversible. This stark conclusion was spelt out by the International Energy Agency (IEA) in its 2006 edition of the World Energy Outlook, published in November. As the IEA’s chief economist, Fatih Birol, puts it, “on its current course, the future global energy situation will remain vulnerable, dirty and expensive.”

In other words, new policy strategies cannot afford to stay business-as-usual, but must make energy clean, clever and competitive. And it must address three problems: rising energy demand, security of supply, and carbon-dioxide emissions, a contributing cause of climate change.

The IEA report presents two scenarios, set within the timeframe of 2004-2030: one based on the likely evolution of current energy trends–a so-called reference scenario, and an alternative scenario that would result if policymakers adopted measures now being considered to develop an energy mix.

Global primary energy demand–which is to say, energy in its initial form, before exportation and refinement–is expected to increase by more than one-half by 2030, with over 70% of that demand coming from developing countries, 30% from China alone. Fossil fuels, such as oil, coal and gas will continue to provide most of this energy, and for good reason: fossil fuel is energy in an extremely compact form. Compared to the single watt generated from a square meter of biomass or 10 watts from wind power, the equivalent in fossil fuels generates 100 to 1,000 watts. Furthermore, many countries have ample reserves of these fuels.

Indigenous fuel reserves also dispel fears of supply disruption. Recent natural disasters such as hurricanes in the Gulf of Mexico, and geopolitical events such as the gas dispute between Russia and Ukraine, civil unrest in Nigeria, nationalisation of hydrocarbons in Bolivia, and enduring conflict in the Middle East have all contributed to making energy security a priority.

But for many people, the main concern is carbon-dioxide emissions and their role in climate change. While arguments that climate change is a natural phenomenon in the earth’s history are now widely dismissed as at least disingenuous, we cannot formulate measures with any degree of certainty as to their success simply because we have no precedent on which to base our decisions.

The recent Stern Review commissioned by the UK government predicts an average temperature increase of 2% by 2035 if nothing is done to reduce emissions, and that, over a longer period, there is a 50% chance that temperatures will rise in excess of 5°, a difference as great as from the last ice age until today. The consequences for physical and human geography would be enormous. Losses to GDP will reach about 5% per year, and in the worst case, 20%.

Right now, we are on our way to a 55% increase of CO2 by 2030. Again, more than three quarters of these emissions will come from developing countries. Moreover, to complicate matters further, coal is back in fashion. “There seems to be a big comeback of coal,” says Dr Birol. “One of the consequences is CO2 will grow faster than energy demand.”

t is now painfully clear that the emissions targets set in the Kyoto Protocol will most likely not be met. Nothing anyone does will have anything but a marginal effect on emissions before 2010. The reason is that emissions figures are volatile. Levels in the 1990s soared between 2000 and 2004; China alone more than doubled its output.

Yet if measures considered in the alternative scenario set out by the IEA are adopted, we can reduce emissions by 16% relative to the reference scenario. Capping emissions at their present level would require the implementation of all the measures considered, coupled with unprecedented technological innovation. In short, this would require tremendous political will.

Policymakers should expect resistance. Governments may be hard-pressed to convince businesses of the urgency and necessity of implementing new measures, and must create incentives if they are to be followed. Since research and development occur primarily in the private sector, governments will have to provide a favourable environment for investment.

This is simply because investment will have to be massive. Up to $20,000 billion will have to be pumped into energy infrastructures, with more than half directed to developing countries. Attracting such investment will not be easy. But if the measures in the alternative scenario are adopted, they should pay for themselves. When compared with the reference scenario, cumulative investment ends up being $560 billion lower. Consumers save $8,100 billion on fuel. If the economic gains outweigh costs, why should new policies be so difficult to implement?

First, we should remember that we are not facing an energy shortage. Prices are high, but fuel reserves are plentiful. Arguments that climate change is inevitable and cataclysmic have not persuaded everyone. Even if they did, immense difficulties remain. Renewable energy from wind farms and biofuels require large tracts of land, but in the highly populated world of 2030, most arable land will be needed to grow food.

Public resistance to wind farms and nuclear power is well known, but resistance to efficiency? Improving efficiency is the cheapest and quickest way to meet energy demands, as it requires minimal investment in energy infrastructures. Yet from the consumer’s point of view, efficiency is of minor concern when buying electrical appliances. And although car-buyers in the US and increasingly in Europe support efficiency in principle, mainly because of fuel prices, they still prefer larger cars because they believe smaller vehicles are less safe, less comfortable.

As one moves down the line from producer to consumer, more decisions are made by individuals than by corporations or committees, making them difficult to harmonise. Partial information about energy performance, lack of awareness about potential savings, and individual preferences and fears complicate the task of putting new measures into practice. Uncertainty about the feasibility or safety of certain technologies, such as carbon storage or nuclear waste disposal, does nothing to strengthen confidence in policies that promote their use. Whether we like it or not, policymakers are working–if not in the dark–at best in a dimly lit room; and it cannot be otherwise, because we have never before faced a challenge of this scope.

But if there is no smoke without fire, the converse is equally true, for our societies require ever more energy, and will get it by whatever means necessary. And that means smoke. Our present course, however, is unsustainable; should we ignore that fact, we face the possibility of upheaval. Fortunately, we have a choice.

For its alternative scenario, the IEA analysed more than 1,400 policies, each of them under consideration by various governments. None of them is merely wishful thinking. It was found that if just 12 of those policies were adopted, CO2 emissions would drop by 40%.

For Dr Birol, decisions made in the next 10 years will be crucial for two reasons. First, in many OECD countries, power plants that were built just after the Second World War, when economic development took off, are about to retire. “The kind of technology we opt for now will be crucial to determine the next 50 years, because a power plant has a lifetime of 60 years, ” he says. The second reason is development, with major countries like India, China and others booming. This means more energy investment accumulating in those countries in the next 10 years. Dr Birol firmly believes the window for action is now: “If those investments are not done in a sustainable manner, then we will have to live with the consequences for the next 50 to 60 years, if not longer.” L.T.


IEA (2006) World Energy Outlook 2006, Paris.

Contact Fatih.Birol@iea.org

©OECD Observer No 258/259, December 2006