Fossil Fuel Issue Analysis 2014-2016

In the fall of 2014, the Advisory Committee on Socially Responsible Investing (ACSRI) chose fossil fuels as its next topic for review. As part of the educational process, the following information was gathered to provide an overview on the debate around fossil fuels.

What Is Climate Change

Definition of climate change and global warming, from the Center for Climate and Energy Solutions:

“Global warming” refers to the increase of the Earth’s average surface temperature due to a build-up of greenhouse gases in the atmosphere. “Climate change” is a broader term that refers to weather trends observed over relatively long periods of time (many decades or longer). Climate change can include many variables (temperature, precipitation, wind direction, wind speed) and different geographic scales (over a continent, within an ocean, for the Northern Hemisphere, for the planet).

The case for urgency in policy responses to address climate change is based upon a view of the science community most commonly captured in reports of the United Nations Intergovernmental Panel on Climate Change (IPCC). The report states that production of CO₂ from burning of fossil fuels connected to human industrial and consumer activity is driving an accelerated increase in global temperatures—this translates to melting glaciers, rising sea levels, and increasingly dramatic weather activity. The principal methodology underlying the IPCC reports is computer modeling that extrapolates future trends based on historical average surface temperatures and other phenomena. The models—at least as presented in summary form—link CO₂ production to overall increases in average temperature. Based on these models, the IPCC has recommended a variety of policies designed to reduce drastically carbon output.

The following discussion summarizes the current state of the issues around climate change. It is divided into several parts:

1. Physics of Climate Change

Changes in the Earth’s physical climate system occur on all time-scales and on all spatial-scales. While there is ample geological evidence (Peters, 2012) for infrequent (on geological timescales), but rapid and large changes in regional (and sometimes global) average temperatures, over the past several centuries there is strong and increasing evidence of long-term human-driven change that is superimposed on natural variability (Huber and Knutti, 2012; IPCC, 2013).

The major factor underlying this increased human influence is the increase in greenhouse gas (GHG) concentrations in the atmosphere, of which CO₂ is the most important (Myhre et al., 2013). Over the past century, fossil fuel combustion is responsible for roughly half of the extra CO₂ in the atmosphere, and over the last few decades, roughly 80–90% of anthropogenic emissions (Boden et al., 2015), as confirmed by observed changes in the isotopic composition of CO₂ in the atmosphere (Francey et al., 1999). Other greenhouse gases (e.g., methane, nitrous oxide, chloroflourocarbons) show similar trends, as do accumulations of particulates (a serious health hazard), some of which have significant cooling effects.

The effects of this changing climate are clearly evident. Temperatures at the Earth’s surface and in the lower atmosphere are rising; snow and ice cover have decreased in most areas; sea ice in the Arctic has decreased dramatically; atmospheric water vapor is increasing; sea level is rising; growing season length has increased in some regions; the ocean is becoming more acidic; many terrestrial, freshwater, and marine species have begun shifting their geographic ranges, seasonal activities, migration patterns, and abundances; and there are increasing trends in extremes of heat and heavy precipitation events, and decreases in extreme cold (see Melillo et al., 2014 for a summary).

Our understanding of the basic physics of greenhouse gases dates to the 19th century. Research dating to the 1960s explains theoretically, experimentally, and numerically why CO₂ production is linked to overall increases in average temperature. The observed pattern warming is consistent only with the addition of GHGs to the atmosphere, such as warming in the lower atmosphere and cooling in the upper atmosphere, and the relatively larger changes at higher latitudes. As expected, there is significant variation in the location, timing, and year-to-year variability because of natural variability in climate, and because our scientific understanding of the complex climate system is inevitably imperfect (Walsh et al., 2014; IPCC, 2013).

2. The Future of Climate

General circulation models of the Earth’s climate system (more recently including important biogeochemical cycles as well) are used both to simulate past climates as a consequence of all the known influences on climate (both natural and human-made), and to attempt to predict future climates, assuming future emissions of GHGs. Key results from climate models include the following:

• The models are largely successful in explaining decade-to-decade variability, including the recent “climate hiatus” (Meehl et al., 2013), and have even successfully simulated the short-term effects of natural events such as large volcanic eruptions (Robock, 2000 and many others).
• The models reproduce historical climate over the past century only when human influences are included. Put another way, the models cannot explain the recent warming when they account only for natural variation (Huber and Knutti, 2012; IPCC, 2013).
• The models ability to simulate future changes in climate for either particular locations or for individual seasons and years, is generally poor, due to their coarse representation of the Earth’s surface and atmosphere in these models (largely due to limitations in computing power), uncertainties in the underlying physics (e.g., the role of clouds and aerosols in a perturbed climate), and because predictions of the future climate require assumptions about future emissions of GHGs, which will be largely determined by a host of human decisions.

The models will continue to improve over time, as our fundamental scientific understanding of the climate system improves. But we know of no predictable physical or biogeochemical process that would reverse the trends in the climate system that are already under way, as long as GHGs continue to accumulate in the atmosphere.

While many details of the physics of the climate system are uncertain, and while precise predictions for local geographic areas are likely to remain elusive, there is very little serious scientific debate over whether human-driven climate change is happening.

3. Climate Impacts and Societal Implications

There is substantial observational evidence of impacts to natural resources, agriculture, infrastructure, health, and other important societal sectors as a consequence of climate variability and change—both domestically and internationally. Estimating climate impacts in the future depends in part on estimating how severe and/or rapid the change in climate will be, and understanding the vulnerability/sensitivity of the resources in question. Some impacts will be positive, such as longer growing seasons in some temperate regions, and more efficient shipping routes and easier access to oil and gas resources in an increasingly ice-free Arctic.

Continued abundance of greenhouse gases in the atmosphere will increase the risk of severe, pervasive, and in some cases irreversible detrimental impacts. Climate change is likely to reduce agricultural productivity in regions that are already marginal for agriculture, and potentially threaten food security that is based on these assets; reduce renewable surface water and groundwater resources in most dry subtropical regions, intensifying competition for water among sectors; impair human health especially in developing countries; and increase the displacement of peoples. In urban areas climate change is expected to increase risks for people, assets, economies, and ecosystems, including risks from heat stress, increased photochemical pollution, storms and extreme precipitation, inland and coastal flooding, sea-level rise, and storm surges. Many of these changes have other contributing factors, and in some cases, those factors are clearly more important than climate change at the current time (e.g., loss of biological diversity).

More immediate climate impacts are often driven by weather events, such as tropical storms or extreme rainfall or drought, and the relationship between the frequency and intensity of those events and climate change is often debated in both the scientific literature and the media. For phenomena like vulnerability to sea-level rise, for example, patterns of coastal development can contribute as much or more to observed storm damage as does sea-level rise and the storm surge itself.

The first estimates of economic damages made in the 1990s placed the aggregate economic cost in the range of a couple of percentage points of world GDP (Tol, 2009) to potentially small positive effects. More recent estimates place the cost as high as 8% of world GDP (UNEP, 2010). The damage cost of climate change is expected to increase by about 2% per year (Anthoff et al., 2011). Current scientific consensus, as summarized by IPCC (2014a) is that for every 2 deg C rise in global temperatures, aggregate damages are estimated to be between 0.2 and 2.0% of global income, with a better than even chance that the impact will more costly.

The World Health Organization estimates that an additional 250,000 people will die annually between 2030 and 2050 from conditions caused or worsened by climate change (Hales et al., 2014). This is small compared to other common environmental health burdens, but is projected to grow after mid-century, especially if emissions remain large.

It also is expected that the costs of climate change will be disproportionately borne by the world’s poor in terms of the cost and availability of food (Nelson et al., 2013), mortality and morbidity (Hales et al., 2014), and displacement by sea level rise (Dasgupta et al., 2009). Climate change could exacerbate water scarcity in countries/regions that already have water scarcity challenges (Niang et al., 2014). The inequitable burden of the costs of climate change extends to lower income populations in developed countries. The US national security community has become concerned that some climate impacts in the developing world might have the potential to destabilize societies and political regimes, and has referred to climate change as a threat multiplier (CNA, 2014). At the same time, it is important to recognize that economic development, and thus the possibility of moving an economy away from subsistence level and toward efficiencies of production and division of labor, correlates highly with availability of significant (and growing) quantities of energy (World Bank, 2015).

4. Climate Strategies

4.1 Adaptation

Because climate change is already affecting important sectors of the global and domestic economy, has the potential to become significantly worse, and cannot be immediately remediated, adapting to change that cannot be avoided is an important response in both public and private sectors. Potential responses might, and in some cases do include everything from breeding drought-resistant crops, hardening coastal infrastructure through sea walls, adjusting building codes, re-building natural defenses such as coastal wetlands, implementing early warning systems for heat waves, and a wide variety of other responses, depending on the sector (IPCC, 2014a). Both public policy and private responses/investments are being made to make these changes in both developed and developing countries.

4.2 Mitigation

Mitigation strategies focus on replacing carbon based fuels (oil, natural gas, coal) with low-carbon sources, and on improving the efficiency with which energy is used at the point of end use. The replacement of fossil fuels is a formidable task because our lifestyles and patterns of production are built around them. According to the 2014 Key World Energy Statistics released by the International Energy Agency (IEA) in 2014 worldwide energy use amounted to over 13,000 million tons of oil equivalent (MTOE) of which all non-carbon-based renewables (solar, wind, and geothermal) accounted for approximately 1.1% (hydroelectric energy accounted for another 2.4%). In contrast, fossil fuels accounted for 31% (oil), 21% (natural gas), and 29% (coal), or a total of 81% of the world’s energy supply. Also, the world’s energy demand is not stagnant, but growing as the world GDP increases. Energy consumption will grow more rapidly in the large, rapidly developing economies, such as China and India.

It will be an enormous technological and economic challenge for the world is to move away from the vast natural resources and capital infrastructure of fossil fuel-based energy to economically viable alternative low carbon sources of energy such as wind and solar. Today, nuclear power is the most widely deployed low carbon source of energy, although it accounts for only 5% of the total energy supply according to the survey cited above; however, its future will be determined by investors’ assessment about its future cost, and public reaction to issues such as reactor safety and waste disposal (EIA, 2013; Deutch et al., 2003).

The transformation to renewable energy is likely to take at least decades. Here is a short summary of the current state of the options. Depending on the prices of fossil fuels, the cost of onshore wind power in many regions of the world is now in a competitive range with base load electricity generation from coal, natural gas, and nuclear sources, even without subsidies (EIA, 2014; Kost et al., 2013). Electricity from offshore wind and solar photovoltaic (PV) facilities are, on average, more expensive than power from conventional sources. However, over the past couple of decades the cost of electricity from wind and PV has declined by 15 to 20% for each doubling of cumulative production (Lindman and Söderholm, 2012; de La Tour, et al., 2013) giving hope that they will soon become competitive with the use of the more mature technologies of fossil fuels and nuclear power for electricity generation. The hope is that with the relatively static costs for conventional energy and falling costs for renewables, the economic incentives will continue to shift toward renewables. But growing global demand for energy, particularly in highly populous non-OECD countries—moving from 500 circa 2010 to over 800 quadrillion BTUs per year by 2040 (Peterson, 2013) imposes significant challenges for transition, because of the diverse embedded uses of conventional sources for transportation and agriculture. Some analyses suggest that the time horizon for transition is significantly and necessarily longer (Smil, 2015).

An alternative to using renewable energy sources is to employ carbon capture and storage (CCS) to conventional fossil fuel powered energy production. Conceptually, carbon capture and storage CCS is an attractive mitigation technology because it reduces CO₂ emissions to the atmosphere while continuing the use of the assets already in place for energy from fossil fuels. To date, the feasibility of the individual components of a CCS system have been demonstrated, but CCS has not yet been applied to a single large, commercial fossil fuel power plant (Benson et al., 2012; Bruckner et al., 2014), an important step in proving the commercial viability of this technology.

Compared to the cost of recapitalizing the energy supply chain, investments in improved energy efficiency are less expensive ways to reduce carbon emissions. There is debate about the exact magnitude of potential savings. However, there is ample evidence of substantial low hanging fruit in the form of improvements in the efficiency of lighting, appliances, vehicles, and buildings that abate carbon emissions more cheaply than new low carbon generation capacity (nuclear, solar, wind, and fossil plants with carbon capture and storage) kWh (EPA, 2006; Billingsley et al., 2014; Molina, 2014).

Large investments in public transportation systems and substantial changes in life styles will be needed, especially in more prosperous countries, if this effort is going to have impact.

4.3 Policy Instruments

Both domestically and internationally, most policy proposals for addressing greenhouse gas emissions seek to raise the price of carbon emitted to the atmosphere to account for the economic damages from those emissions. This is true whether the instruments proposed are emissions trading, carbon taxes, or command and control regulation (IPCC, 2014b).

The ability of energy markets to make socially optimal decisions is hampered by two important market distortions: externalities and subsidies. The use of fossil fuels imposes external costs on society. All forms of energy receive government subsidies, with fossil fuels, as the dominant energy supply, receiving a substantial share; in an IMF Report Coady et al. (2015) estimated the fossil fuel subsidy to be $5.3 trillion per year. This analysis does employ a broad definition of subsidy and includes estimates for the unfunded damages caused by air pollution, global warming, and other domestic consequences, such as transportation congestion and road cost, as subsidies associated with fossil fuel energy use. According to the Congressional Budget Office, the largest share of US energy-related tax preferences has been devoted to renewable energy programs (Dinan and Webre, 2012).

Externalities and subsidies associated with fossil fuels may distort market signals, in effect understating the full costs of fossil fuels.

Many argue that the most-cost effective way to reduce GHG emissions is via economic instruments such as a carbon tax or an emissions trading system (ETS) (Stavins, 2014). The practicality of the ETS has been demonstrated in the United States’ national acid rain program (Siikamäki et al., 2012) and the NOx Budget Trading Program in the Northeast (Butraw, and Szambelan, 2009), and by the European Union’s Emissions Trading System, although the success of the EU ETS is debated (Betz, 2015). Carbon taxes have been implemented on relatively modest and targeted scales in a number of nations and municipalities (World Bank, 2015). Widespread implementation of these and other climate-related policies have both strong support and opposition from special interest groups. Pure command and control regulation, while potentially effective, is likely to be more expensive than economic instruments such as a cap-and-trade system or a carbon tax.

International policies for both mitigation and adaptation are hotly debated, with significant differences in goals and approach for developed and developing countries. In the US, there are significant differences in national policy proposals—from no action required, to voluntary emissions reductions, to cap-and-trade, to carbon taxes, and to regulatory action under the Clean Air Act. No national legislative consensus has emerged. At the state level, there is substantial policy experimentation, from regional cap-and-trade programs (e.g., the Regional Greenhouse Gas Initiative) to state-level caps and regulation (e.g., California).

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