forwarded email from the BC Sustainable Energy Association - Fossil industry faces a perfect political and technological storm

Fossil industry faces a perfect political and technological storm

The IMF says we can no longer afford the economic wastage of fossil fuels, turning the green energy debate upside down as world leaders plan a binding climate deal in Paris

  < http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/ >

By Ambrose Evans-Pritchard < http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/ >
http://www.telegraph.co.uk/finance/economics/11633745/Fossil-industry-faces-a-perfect-political-and-technological-storm.html
< http://www.telegraph.co.uk/finance/economics/11633745/Fossil-industry-faces-a-perfect-political-and-technological-storm.html >5:23PM BST 27 May 2015


The political noose is tightening on the global fossil fuel industry. It is a fair bet that world leaders will agree this year to impose a draconian “tax” on carbon emissions that entirely changes the financial calculus for coal, oil, and gas, and may ultimately devalue much of their asset base to zero.

The International Monetary Fund < http://www.telegraph.co.uk/finance/comment/11627647/IMF-fuel-subsidies-are-not-what-they-seem.html > has let off the first thunder-clap < https://www.imf.org/external/pubs/ft/wp/2015/wp15105.pdf>. An astonishing report - blandly titled "How Large Are Global Energy Subsidies" - alleges that the fossil nexus enjoys hidden support worth 6.5pc of world GDP.

This will amount to $5.7 trillion in 2015, mostly due to environmental costs and damage to health, and mostly stemming from coal. The World Health Organisation - also on cue - has sharply revised up its estimates of early deaths from fine particulates and sulphur dioxide from coal plants.

The killer point is that this architecture of subsidy is a "drag on economic growth" as well as being a transfer from poor to rich. It pushes up tax rates and crowds out more productive investment. The world would be richer - and more dynamic - if the burning of fossils was priced properly.

• Big banks flag dangers of financial bubblee in oil and commodities < http://www.telegraph.co.uk/finance/oilprices/11598230/Big-banks-flag-dangers-of-financial-bubble-in-oil-and-commodities.html >
• G20: fossil fuel fears could hhammer global financial system < http://www.telegraph.co.uk/finance/11563768/G20-to-probe-carbon-bubble-risk-to-global-financial-system.html >

This is a deeply-threatening line of attack for those accustomed to arguing that solar or wind are a prohibitive luxury, while coal, oil, and gas remain the only realistic way to power the world economy. The annual subsidy bill for renewables is just $77bn, trivial by comparison.



The British electricity group SSE (ex Scottish and Southern Energy) is already adapting to the new mood. It will close its Ferrybridge coal-powered plant next year, citing the emerging political consensus that coal "has a limited role in the future".

The IMF bases its analysis on the work Arthur Pigou < http://www.palgrave.com/page/detail/the-economics-of-welfare-ac-pigou/?K=9780230249318 >, the early 20th Century economist who advocated taxes to stop investors keeping all the profit while dumping the costs on the rest of society.

The Fund has set off a storm of protest. Subsidies are not quite the same as costs. Oil veterans retort that they have been paying 'social' taxes for a long time.

But whether or not you agree with the IMF’s forensic accounting the publication of such claims by the world's premier financial body is itself a striking fact. The IMF is political to its fingertips. It rarely deviates far from the thinking of the US Treasury.



It is becoming clearer that last year's sweeping deal on climate change between the US and China was an historical inflexion point, the beginning of the end for a century of fossil dominance. At a single stroke it defused the 'North-South' conflict that has bedevilled climate policy and that caused the collapse of the Copenhagen talks in 2009.

Todd Stern, the chief US climate negotiator, said the chemistry is radically different today as sherpas prepare for the COPS 21 summit in Paris this December. "The two 800-pound gorillas are working together," he said.

Mr Stern claims that a constellation of states responsible for 60pc of global CO2 emissions are "already on board" for a binding deal, aimed at limiting the rise in carbon to 450 particles per million (ppm) and capping the rise in temperature to 2C degrees above pre-industrial levels by the end of the century. Climate scientists warn that we are currently on course for 4C degrees.



Potsdam Institute

Some countries have been startlingly bold. Mexico has vowed to cut gases by 40pc within fifteen years - and Black Carbon by 70pc - if there is a binding accord. Gabon has promised to cut emissions to 62pc below the current trend path within a decade. The hold-outs are a diminishing alliance, struggling to make a moral counter-argument.

China has of course gone green with the zeal of the converted. "We are going to punish any violators who destroy the environment with an iron hand," said president Xi Jinping in March.

Two coal-powered stations were shut down in Beijing that month. The last will be mothballed next year. Deutsche Bank expects China's coal use to peak as soon as 2016, an unthinkable prospect five years ago.

The Communist Party knows its own survival is at stake. Anti-smog protests are spreading in the big cities, a political mass movement in waiting. " < https://www.youtube.com/watch?v=T6X2uwlQGQM> Under the Dome < https://www.youtube.com/watch?v=T6X2uwlQGQM>", a documentary on the country's toxic air and water, racked up over 100 million views on the internet within 24 hours two months ago. Beijing's censors suppressed it in panic.



Mr Xi promises to cap total CO2 emission by 2030, building 1000 gigawatts (GW) of solar, wind, and nuclear power in fifteen years. His country already has more wind power (115 GW) installed than Britain's entire energy system. It plans to add another 22 GW this year - equal to 15 nuclear reactors - building hundreds of miles of turbines across the North China steppe.

The International Energy Agency says that two-thirds of all fossil fuel reserves booked by global companies can never be burned if the world reaches a 2C accord in Paris. The assets will be worthless.



The carbon pricing regime that must ineluctably follow any such accord - even if phased in gradually - would surely call into question a raft of deep-water drilling projects, and as well as the vast Kashagan filed in the Caspian where break-even costs have risen to $100 a barrel. The North Sea industry would go into run-off.

A report by University College London said the Arctic would never be developed under a 2C degree policy. Over 75pc of Canada's oil would have to stay in the ground, as would 95pc of coal reserves in the US, Russia, and the Middle East, unless there are radical advances in carbon capture and storage.

The Bank of England has launched an enquiry to determine how much of the $5.5 trillion invested in fossil fuel exploration and development over the last six years is really viable, and whether it could become the new ‘subprime’ for the global financial system. This probe has now spread to the whole G20 < http://www.telegraph.co.uk/finance/economics/11563768/G20-to-probe-carbon-bubble-risk-to-global-financial-system.html >.



Carbon Tracker estimates that $1.1 trillion of investment has gone on ventures that will require oil prices above $95 a barrel over the next decade to break even.

The big oil producers deny that they will be sitting on "stranded assets" under a 2C degree policy. Exxon insists that all its reserves will be needed - and much more besides - to meet rising global energy demand. Yet these companies cannot all be right. It is mathematically impossible.

Jeremy Leggett, the chairman of Carbon Tracker, said Exxon is "placing a bet" that there will be no change in CO2 policy. "It asks its investors to be assured that there is zero risk – precisely zero risk," he ssaid.

A far-reaching climate deal would have been impossible a decade ago. There was little on the horizon to replace fossil fuel. This has suddenly changed.

The advances in the cost and efficiency solar power are by now well-known. The US Solar Energy Industries Association (SEIA) says the average prices of photovoltaic modules dropped from $8 a watt in 2007 to $2.70 last year.



The new generation of cells cost around $0.80 a watt. First Solar is already producing modules for $0.40. Its commercial technology can capture 21.5pc of the sun's energy.

In China, Wuxi Suntech Power claims the 'levelized' cost of electricity from solar modules will match the country's coal-powered stations as soon as next year.

A new report < http://www.iea.org/publications/freepublications/publication/Tracking_Clean_Energy_Progress_2015.pdf > by the IEA says utility-scale solar is already operating at plants in Chile and Mexico, selling into the spot market without subsidies. Developers in the United Arab Emirates have signed contracts to deliver electricity from solar projects for as little as $59 per megawatt hour, matching the cheapest hydropower.


Less known is that the cost of battery storage is also falling fast. We are moving much closer to the day when it will be cheaper for those in low or mid latitudes to store energy when the sun is shining and release it later, than to draw power from the grid.

The IEA estimates that the cost of a lithium-ion battery for grid-scale storage has fallen by more than three-quarters since 2008. The batteries last over three times as long.


Tesla's Elon Musk  < http://www.telegraph.co.uk/news/science/science-news/11577823/House-battery-to-store-energy-will-change-entire-infrastructure-of-the-world.html >is jumping in with his usual bravado, vowing to liberate consumers from the grid and transform the "entire energy infrastructure of the world".

His Powerwall rechargeable battery can clip on a garage wall and will retail for $3,000 to $3,500 (before installation costs), far lower than anything on the market.

Can Elon Musk and Tesla save the mining industry? < http://www.telegraph.co.uk/finance/newsbysector/industry/mining/11621896/Can-Elon-Musk-and-Tesla-save-the-mining-industry.html >
• Inside the crazy world of Elon Musk < http://www.telegraph.co.uk/news/worldnews/northamerica/usa/11601393/Inside-the-crazy-world-of-Elon-Musk-in-quotes.html >

This is surely just the beginning. The world's scientific superpower is now throwing itself into the fight with gusto, conducting over 220 research projects into various forms of battery storage. Harvard University is working on an organic flow-battery < http://www.nature.com/nature/journal/v505/n7482/full/nature12909.html > - using quinones from rhubarb - that aims to cut costs by two thirds in three years and end reliance on rare earth minerals.

With luck, we will overcome the curse of solar intermittency before the end of the decade. Mass production will follow by the mid-2020s. The switch to solar will by then be unstoppable.

Fossils fuels are caught in a pincer squeeze, threatened with a 'Pigouvian' climate tax just at the moment when the upstart technologies are coming of age.

Advocates of green energy must restrain their Schadenfreude. Coal drove the industrial revolution. Cheap energy from oil and gas has lifted billions of people out of poverty.

Shell, BP, Exxon, Chevron, and their earlier incarnations, have done mankind a service, carrying out their work diligently in broad accord with the political consensus of an earlier time.

The industry deserves a 'prosperity medal', and an honourable valediction.