Luc Vallée is chief strategist at Laurentian Bank Securities. Jean Michaud is managing director and senior commodity strategist at CoreCommodity Management
There are risks to waiting for absolute and definitive answers on climate change. Equally counterproductive are calls to divest from fossil fuels immediately. Unfortunately, fossil fuels are still indispensable. Yet, we could significantly reduce harmful emissions without curbing global growth by increasing energy efficiency. However, this requires accepting certain hard facts about energy and adapting to the constraints.
Weaning ourselves from fossil fuels will be difficult. Although technologies are evolving rapidly, a low-carbon economy is still a distant reality. The concept of energy return on investment (EROI) – how much energy is produced by "investing" a unit of energy – can help explain why.
In theory, a utility with an EROI only slightly greater than "one" produces an energy surplus. In practice, however, a much higher threshold is required. This is because employees at your local power plant need energy to drive to work. They, in turn, inhabit homes requiring energy and shop at stores employing workers who also drive and shop. And as we get richer, we want more schools and hospitals, and the demand for energy grows further, increasing the required EROI threshold.
A low EROI in our rich and complex world would require that most resources be devoted to producing energy to meet our needs – a contradiction. In a low EROI world, we would more likely be poorer and our energy demand would hence be much lower.
Efficient energy generation has been the source of our prosperity. Increases in EROI, by lowering the cost of energy, explain accelerating world growth during the Industrial Revolution. Lately, however, as innovation has lagged growth in global energy demand, energy costs have increased, curbing productivity growth – a dangerous trend if it were to persist.
Alternative energies might offer some answers but are not yet stand-alone sustainable solutions. Because of their intermittence, for the sun and the wind to permanently and reliably replace fossil fuels we would have to significantly multiply their capacity and link them in an extensive energy grid. Unfortunately, such an infrastructure would reduce the efficiency of our power generation.
The sun and the wind are free and solar panels are getting cheaper, but these energy sources are ill-suited to respond to peaks in demand and their integration into existing power grids is challenging. For example, during peak hours or when the wind or the sun are in short supply, coal or nuclear plants are often used as backups. However, although coal power-plant outputs can be somewhat modulated, neither has the flexibility to be stopped and restarted according to demand. By the time the cost of renewables is added to that of their 24/7 backup facilities, total costs are up significantly while harmful emissions remain virtually flat.
Moreover, without storage (batteries), our capacity to deploy more renewables may be peaking as many utilities now sell their surplus at subsidized prices or even pay customers to absorb the excess. Storage of solar and wind energy might one day alleviate the problem. However, large-scale lithium batteries are still uneconomical today.
Natural gas, a hydrocarbon abundant and cleaner than both oil and coal, presents an opportunity. Gas-fuelled utilities can be turned on and off and, as such, are better suited to manage peaks and complement renewables. Yet, it is imperative that methane leaks – more damaging to the climate than CO2 – be controlled as gas usage spreads.
On the other hand, hydroelectricity has a good EROI and is storable (using dams or water pumping). However, its scalability is limited. Nuclear (high EROI and emission-free) and geothermal (available 24/7 and emission-free) energies have many of the desired attributes of energy production. But while nuclear will remain part of the solution to limit emissions, it faces its own challenges. As for geothermal power, experts estimate it will fulfill less than 1 per cent of our energy needs in 2040. Fusion is promising but probably still decades away.
Such constraints are currently limiting the potential of renewable energy. Thus, unless the world population stops growing, the use of fossil fuels will continue increasing for the foreseeable future.
At this point, it's a question of how fast both energy generation and consumption efficiency can evolve relative to energy demand. Our growing appetite for energy dictates that maintaining the EROI of our energy infrastructure is a minimal condition to sustain economic growth. Yet, the current pace of innovation is too slow to meet the emission-reduction targets of the Paris Agreement on climate change signed in April.
In a 2008 study, McKinsey & Co. estimated that to meet similar objectives by 2050 with current technologies, the then-nine billion inhabitants of this planet would be limited to riding their cars for 30 kilometres or eating two meals a day, but could not do both, nor anything else. In other words, in a few decades, we could be facing severe austerity or the wrath of the climate. .
Much better would be to reduce our energy consumption by improving energy efficiency. While the best energy sources have already been exploited, improving energy efficiency has not been sufficiently emphasized .
According to McKinsey, better building insulation, more efficient lighting and the retrofitting of industrial equipment are very cost-effective, energy-saving initiatives. Adopting efficient building codes could thus go a long way to limit emissions, and allowing for accelerated depreciation on energy-efficient equipment and furnaces would help provide incentives. Limiting urban sprawl and the sharing economy also have the potential to reduce our consumption of energy, as many assets could be used more efficiently.
Electric vehicles also make sense where the carbon intensity of electricity generation is low, as does using natural gas for trucks and ships, especially as it produces less CO2 than oil.
Another avenue would be to focus on employing energy sources for their optimal use. Using electricity for heating is generally wasteful. While the efficiency of generating electricity with natural-gas turbines does not exceed 60 per cent owing to heat loss, the efficiency of a gas furnace can reach 96 per cent. We should thus envision redesigning our power grids to deliver more hydroelectricity and nuclear power and use more gas for heating. Yet, nuclear – reliable but non-flexible – should not be used in conjunction with intermittent sources.
Moreover, as approximately 45 per cent of CO2 emissions from fossils fuels come from coal, replacing coal by abundant and cleaner natural gas would deliver substantial emission reductions. Replacing coal power plants with wind and solar, and using gas turbines as backup, would further reduce emissions. It is estimated that operating wind or solar in tandem with gas would reduce emissions by approximately 60 per cent relative to producing power from a stand-alone coal-fired power plant.
Providing incentives to tilt consumption away from energy-intensive goods and services is also promising. This would shift consumption habits and businesses would likely adapt. As such, economists generally support taxing carbon. Yet, there might be a better way to achieve our objectives by targeting all energies, not just fossil fuels. For instance, why encourage excessive local consumption of Quebec's inexpensive hydroelectricity when excess energy could displace coal-generated electricity elsewhere?
Taxing energy production is also inefficient. A Canadian manufacturer could move its plant to China, where energy is not taxed and its goods, often produced there using more energy, may eventually be transported and sold back to Canadians, creating even more waste. To streamline energy consumption, it would be better to target consumption based on the total energy intensity of the finished goods and services. Similarly, subsidizing renewables can backfire by encouraging energy consumption. As suggested in The Economist recently, resources should rather be invested in R&D to develop battery technology, carbon capture and storage, etc.
Denying the problem, wishing that it will go away or waiting for everyone to agree won't lead us anywhere. While reducing our carbon footprint by 80 per cent by the middle of the century might be unrealistic, that should not stop us from implementing readily available solutions.