Economic Incentives to Reduce GHGs

In his recent inaugural address, President Obama cited climate change as one policy area he intended to pursue in his second term.  Many commentators welcomed this inclusion, but pointed out the difficulties of securing political agreement on the subject.  In the near term, therefore, prospects for policy change are uncertain.

In the meantime, the U.S. already has been cutting back on greenhouse gas emissions.  In part this is due to the recent recession and slow economic growth.  But in part it is due to economic incentives.  In this note, I explore some of those incentives and the behavior they have induced. 

Energy is a costly input

Energy generally combines with capital, labor and land to produce goods and services.  Though there are substitution possibilities amongst these various inputs, energy more often is complementary to the others, raising their productivity as more is utilized.  Thus, for example, more energy enables workers to raise output per labor hour, and it enables land to produce more product per acre. 

But energy also is costly, providing an incentive for managers to economize its use.  As relative prices of energy and other inputs change and as energy saving technology advances, new possibilities open up.  Over time, the trend is for people to find ways to use energy such that it becomes more productive per unit employed.

U.S. Energy Productivity

Over long periods, the trend in U.S. energy productivity is unmistakable.  The Energy Information Administration has documented energy use per dollar of real GDP over the past 40 years.  The table below shows these numbers starting in 1973 and every ten years since, ending in 2011, the last year for which data is available.  The numbers illustrate that over the period the U.S. has more than doubled the amount of output it secures from a given amount of energy.  

Savings in Energy Costs

The increase in energy productivity means that, averaged over the entire economy, managers can produce the same output as before with less than half the energy.  That’s a lot of savings!

But the dollar savings actually are bigger than this.  They would be the same as the increase in productivity had inflation-adjusted prices of energy stayed the same.  But they haven’t.  On balance, they’ve gone up, in some cases a lot.  The next table shows inflation-adjusted retail prices (expressed in 1982-1984 dollars) for common forms of energy in 1973 and again in 2011. 

The retail prices of oil, here represented by gasoline, and of natural gas have risen in real terms while that of electricity has declined slightly.  Since oil and gas make up almost 2/3 of U.S. energy use, it’s pretty clear that real prices of energy in the U.S. on average have risen.  This implies that the savings from less use of energy per unit of GDP actually are greater than the productivity gain alone.  In the cases of oil and gas in particular, economization has resulted in very substantial dollar savings. 

Implications for Climate Policy

Market based activity isn’t the same as policy measures to deal with climate change.  However, the record indicates that people likely will continue to look for ways to use energy more productively and to economize its use.  Applied to fossil fuels, this clearly will help reduce GHG emissions below what they otherwise would be.  That’s important to understand, encourage, and act on.  And it’s a reason why we wrote Climate Change: What You Can Do Now.  We hope the things we suggest in that book further the effort.    

Where are U.S. CO2 Emissions Headed?

What’s been happening recently with respect to U.S. greenhouse gas emissions, and more importantly, what’s likely to happen in the future? 

Those who follow this issue closely probably already know that U.S. emissions from fossil fuel sources (principally carbon dioxide) have been declining recently.  This is due to a combination of a slowing economy, large new supplies of natural gas, tighter regulation of coal-based power plants, and individual efforts throughout the country to use energy more efficiently.   The accompanying chart shows U.S. CO₂ emissions from 2000 through the first eight months of 2012, where the 2012 number is extrapolated to a full year.  Since 2007 the trend generally has been downwards, though the total briefly rose in 2010.  

Reasonably good news for the present, but where are things headed?  Obviously this will depend greatly on policy, which is far from settled.  However, a couple of recent projections of aggregate U.S. energy use shed some light.  First, the Energy Information Administration (EIA), the statistical arm of the Department of Energy, makes an annual forecast of long range U.S. energy demand.  The latest forecast, AEO2013, shows 5.69 billion tons of CO₂ emissions in 2040.  That’s a decline from the peak shown in 2007, but an increase of about 1.5 percent over the 2010 number.  According to the EIA forecast, U.S. energy demand will rise by about 5 percent through 2040 but substitution of renewables for fossil fuels will ameliorate the gain in CO₂. 

A different projection, however, comes from ExxonMobil Corporation.  That company also publishes an annual long range forecast of U.S. energy demand and supply (ExxonMobil).  In its 2012 forecast, U.S. energy demand actually declines by 9 percent between 2010 and 2040, while energy production shifts towards lower carbon fuels.  Consequently, according to this forecast, U.S. CO₂ emissions will decline by 25 percent from 2010 to 2040. 

Of course independently made forecasts are not likely to wholly agree with one another.  But the difference between EIA and ExxonMobil is striking.  On the one hand an increase in energy demand and emissions, on the other a decrease in both.  What might account for such differences?

Most likely, the two forecasts differ substantially in their assumptions about future energy prices.  EIA lays out its assumptions, but ExxonMobil, as a private company, does not.  It seems safe to infer, though, that ExxonMobil thinks the price of fossil fuels will be higher than does EIA.  Such higher prices are not necessarily good news for consumers, but they do portend a different path for CO₂ emissions. 

The reality is that future energy prices are impossible to predict, so it’s hard to say whether EIA or ExxonMobil’s CO₂ projections are the more likely.  Nevertheless, the company’s forecast for U.S. CO₂ emissions is more consistent with recent trends than is EIA’s.   In that respect, at least, we can hope that it is closer to the truth.   

Big Week For NOAA…Scenarios and Arctic Report Cards

Amidst moving over the weekend and a packed work schedule this past week, I’d barely had a chance to indulge my penchant for keeping up with latest news and pursuing report releases. Luckily, a colleague passed along the National Oceanic and Atmospheric Administration (NOAA) Climate Office release of the “Global Sea Level Rise Scenarios for the United States National Climate Assessment.”

This was big news as it provides long awaited scenarios that can now be used for US focused climate adaptation efforts. It also, however, served to reemphasize the need for scenarios with coverage outside of the US and that include low-probability, high impact scenarios.

Last week, I had the pleasure of speaking with Sandra Erwin of National Defense Magazine to discuss some takeaways from a unique NOAA Climate Services Division-sponsored workshop held back in March, 2012. It brought together national security and climate services practitioners and spurred some insightful discussions that later evolved into the LMI report “Climate: Opportunities for Improving Engagement Between NOAA and the US National Security Community.”

One theme voiced by workshop participants was the need to “develop climate change predictions endorsed by the federal government.”

The NCA scenarios represent important progress in this regard, particularly as federal agencies issue policy to support their climate adaptation planning efforts. These sea level rise scenarios should help practitioners immensely by providing a starting point for their functional analysis, planning, and adaptation efforts, whether federal office buildings, defense facilities, supporting infrastructure in local communities, and domestic disaster preparedness. I particularly appreciated the up front introduction to the range of average scenarios, practitioner uses for each, and the big drivers of uncertainty. Of the scenarios presented, the “Highest Scenario” and its use in applications “where there is little tolerance for risk (e.g., new infrastructure)” should nicely serve the needs of our coastal military installations and their infrastructure planning and adaptation efforts. 

These scenarios benefited from defense community contributors, such as SERDP and the US Army Corps of Engineers, who have been making significant progress wrestling with and analyzing climate-driven infrastructure challenges at several military installations. Truly, the interagency collaboration that produced the NCA scenarios is precisely the type of outcomes we sought to reinforce with our report.

Participants at the NOAA CPASW workshop identified the need to better understand location-specific impacts, such as tidal variation, even under mean sea level rise scenarios. They likewise emphasized the utility of “low-probability, high-impact” scenarios approved for use by defense planners and the intelligence community. This summer I’d posted some thoughts on how the defense and intelligence community analyze and plan for the likely contingencies, 90% probabilities, but also consider and war game the worst case scenarios, say >2.0 meters sea level rise impacts. Exploring, considering, and accepting the “10% scenarios” for war gaming and planning purposes may be the next opportunity for dialog between climate services providers and the national security community, particularly scenarios applicable outside of the US. 

Close collaboration and early successes here could help the defense and intelligence communities tame the climate “black swan” somewhat but also help frame the analysis of its potential second- and third-order impacts to the future security environment.

Another NOAA report, its most recent Arctic Report Card, was released last week and reinforced the need to consider more than the average scenario. I’d been aware of the summer’s big melt of the Greenland Ice Sheet but didn’t fully appreciate the extent of this year’s record setting reduction in Arctic snow and ice cover. It certainly has not been an “average” summer above 66° North latitude this year. As such, it seems prudent to consider the lower probability scenarios and their potential impacts on the future security environment so we can tune our plans and prepare our contingencies as necessary.

NEW REPORT: Forecasting National Security

One of the key elements of responding to a changing climate is establishing new partnerships that may not have previously been thought of, and leveraging resources that are available but not used to the fullest capacity. My fellow book authors Jeremey Alcorn and Rachael Jonassen believe there are opportunities for NOAA and the national security community to work together on this common challenge, and have documented these in a new paper.

In Jeremey and Rachael’s report, Climate: Opportunities for Improving Engagement Between NOAA and the US National Security Community, which was independently funded by the LMI Research Institute, they identify six key areas where the special work of NOAA can play a big role in meeting the challenges that climate change presents to our national security.

Below I’m posting the reports’ executive summary for your perusal; the full report can be found here.

Executive Summary

Six themes emerge from a workshop that discussed potential new climate products and services from the National Oceanic and Atmospheric Administration (NOAA) that could serve needs in the national security community. These themes are the following:

1. Prepare and respond to climate variability and adapt to climate change.

2. Develop climate change predictions endorsed by the federal government.

3. Support national security with NOAA climate products.

4. Move from data access to data application.

5. Sustain cooperation.

6. Consider emerging product areas.

The first theme addresses published statements that imply adaptation to climate variability will help to adapt to climate change. This is not always true. A counterexample is coastal adaptation now in an area that a rising sea level will inundate soon. Greater clarity can help ensure appropriate allocation of adaptation resources. This issue is important to the national defense community both because of its large investment in infrastructure and possible compromise of continuity of operations.

The second theme responds to the lack of any official federal statement of what projected climate changes agencies are obliged to consider in adaptation plans. Such plans are required by laws and regulations that do not stipulate which potential changes to consider. This disconnect could compromise national security planning.

NOAA produces an official forecast of climate for the United States that extends to 1 year in the future. Forecasts are available from NOAA international desks for areas outside the United States. Theme 3 proposes a dialogue on greater use of NOAA products outside the United States.

New software, new media, and new hardware offer opportunities for NOAA to develop better ways to access data that would nurture greater use. Users also need tools (“apps”) for deeper and more efficient analysis of existing data. Theme 4 shows how NOAA could partner with the national security community to address both of these opportunities.

Effective use of the climate products and services NOAA now provides can be enhanced through a program that facilitates more productive interaction with the national security community. Such interaction can identify, develop, and apply useful products and services. Theme 5 lays the groundwork for effective partnership dealing with the long-term challenges that climate change poses to US national security.

Theme 6 describes several opportunities for early focus. Two are ripe for early action. First, NOAA could use the existing official long-term forecast to develop predictions of active layer thickness in permafrost within Alaska. This information can help protect energy supplies and improve planning for military mobility in Arctic regions. Second, NOAA could work in cooperation with the Naval Oceanographic Office to calculate estimates of tidal range with higher sea level. Such information informs the vulnerability of coastal military installations.

These six opportunities could allow NOAA to better serve the needs of the country and NOAA’s mission to “understand and predict changes in climate.” Together, they could help the national security community respond to challenges from climate variability and climate change.