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Beware simple answers?

These are times of profound challenges for the energy industry and for climate change policy both in the UK and globally – being able to keep prices low, dramatically reduce greenhouse gas emissions and avoid relying on unstable regions for our energy see

These are times of profound challenges for the energy industry and for climate change policy both in the UK and globally – being able to keep prices low, dramatically reduce greenhouse gas emissions and avoid relying on unstable regions for our energy seems an impossible combination. 

It did not always seem so difficult.  Throughout the 1990s, the UK had the luxury of being an oil and gas exporter.  The shift from coal to gas in electricity generation helped reduce UK greenhouse gas emissions and was perfectly timed to enable the UK to meet its Kyoto commitments, almost effortlessly.  Liberalised markets appeared to be able to deliver cheaper and cleaner electricity. 

Unfortunately, self-sufficiency in oil and gas ended between 2000 and 2010, as oil and gas production in the North Sea declined. Aggressive long-term targets of reducing emissions 80% below 1990 levels by 2050, supported by all major parties, appear challenging or, more likely, implausible. The accepted dominance of market liberalism combined with independent regulation in the electricity sector, for which the UK has long been known a world leader, has been challenged and cross-party support for the existing arrangements has eroded, driven by rising concerns over fuel bills. 

At the international level, the failure of the Copenhagen negotiations in 2009 has left a vacuum and a survey of major emitters offer only a few glimmers of hope.  Emissions in the US have reduced slightly in the face of economic troubles and the boom in shale gas, but US climate policy remains highly dysfunctional driven by sharp partisan divisions and mired in politicized debates over the science. 

Global CO2 emissions rose by 1 billion tons in 2011 and 720 million tons of that increase was from China. Some measures to address climate change have been enacted, but most of these are being done for good domestic reasons, such as developing indigenous industry and reducing ever-growing reliance on foreign sources of not only oil and gas, but also uranium and now coal – China already extracts 3 billion tons of coal a year, but within the last few years it has moved from being self-sufficient to the largest importer of coal in the world. 

For the EU, the current economic downturn (plus generous allocations to industry and built-in ‘hot air’ in the form of excess permits from eastern Europe available because of the collapse of their economies and emissions following the end of the Soviet system) has led to a collapse in the price of permits for CO2 in the EU Emissions Trading System.  Aside from a vanishing carbon price, calls for the EU to take further steps on emissions reduction led by the UK and Denmark have been stymied by internal divisions, with opposition led by eastern European member states. 

Two magic bullets tend to reliably emerge in these debates over how to ‘solve’ these problems – energy efficiency and innovation.  Both are, of course, essential as part of any serious effort to develop new domestic sources or reduce emissions and fuel bills via improvements in energy efficiency.  The dramatic rise in shale gas production in the US as a result of the diffusion of horizontal drilling technologies has halved the price of natural gas and decreased US reliance on foreign sources, but much like North Sea oil and gas for the UK, this offers America a temporary respite for perhaps a decade or two, but does nothing to alter the fundamental challenges.

On energy efficiency there are many ‘good news stories’.  The International Energy Agency, for example, finds that certain countries, such as Sweden and the Netherlands, have been particularly successful at reducing energy intensity by over 1% a year since 1990 because of energy efficiency, but this has been accomplished via an enormous suite of measures ranging from windows in buildings to industrial motors.  And yet, the EU will likely fail to meet its overall energy efficiency target.

Both innovation and efficiency are a combination of many different improvements (some large but mostly small) across numerous sectors and technologies. Most popular claims over both innovation and energy efficiency take little cognizance of the fact that enormous reductions in energy intensity are already built into greenhouse gas emissions projections and simply maintaining existing trends require enormous investments. Technology can deliver solutions, but it will not resolve these problems.

Given the need for tradeoffs, the answers unfortunately lie in the messiness of politics.  It may sound obvious, but the solution to reducing emissions lies in making carbon dioxide, and hence fossil fuels, more expensive.  Energy independence may sound alluring but speaks to a populist and dated desire to control our own resources in a highly globalised world.  Public concerns over higher prices, driven at least in part by the cost of supporting low-carbon options (and energy security), will create pressures on politicians to set aside or at least ease back from their environmental commitments.  Somehow reconciling these three competing objectives of affordability, security and environment will be the single major challenge for energy policy going forward.


Judge Business School

University of Cambridge