Energy & Environmental Policy Technology Policy

Are Exxon and IPCC both right? If yes, what does this mean for policymakers?

Twenty-six years ago, as the average LBJ student was just getting started in life, the Intergovernmental Panel on Climate Change (IPCC) was formed to organize the international scientific community of climate change research.  Later that same year, in July 1988, NASA’s Jim Hansen provided a now famous Senate testimony to a sweltering hot chamber.  Legend has it that congressional staffers intentionally turned off the air conditioning in the Capitol for added effect, and Dr.  Hansen told the committee, ”It is time to stop waffling so much and say that the evidence is pretty strong that the greenhouse effect is here.”

Now fast-forward twenty five years to last Monday, March 30th 2014.   Led by 309 of the world’s brightest scientific minds, IPCC Working Group II released its Fifth Assessment Report to the United Nations.  No longer gingerly exploring a new field of science, this report is direct and in places frightening, especially its warnings on food supply.  Unsurprisingly, the IPCC reaffirms that a business-as-usual continuation of our current energy system results in an additional 3.5 -4.0 degrees Celsius of global temperature rise this century.  For perspective, this equates roughly to the difference in average annual temperature between Atlanta, GA and Denver, CO.  Without needing to bog down in the science and worst case scenarios, we can intuit the differences between Atlanta and Denver.  The food, water, buildings, recreation, and public infrastructure systems are very different.  How much will it cost to redesign these systems?  Or move them around the whole world?   Reflecting increasingly strong language coming from the scientific community, Princeton’s Michael Oppenheimer, a lead author of the report, described the conundrum as “We’re all sitting ducks.”

Now fast-forward just one day to March 31st.  ExxonMobil, the world’s largest publically traded oil company, released a report responding to growing shareholder concern that government commitments to limiting global warming to 2 degrees C threatens future production of Exxon’s products.   This divestment movement has been a steadily growing momentum for the last 18-24 months, and it was initiated by a report on the “carbon bubble” from the Carbon Tracker Institute that was then pushed on college campuses by the environmental group   Perhaps inspired by student activism, these financial concerns have gained momentum in some of the world’s largest financial institutions including the World Bank, HSBC Bank and the California public employee pension funds.  By any measure, these are not radical organizations set on building a fantasy world.  It does seem clear, from the best available scientific data, that either the world’s governments will abandon their commitments to 2 degrees C of warming, or the stock prices of publicly traded oil-companies are over-valued.

What did Exxon say in response to concerned shareholders?  They acknowledged all of the above.  Climate change will continue to progress, and the world should do what it can to mitigate the damage and adapt.  And yes, if governments did seriously limit the use of fossil fuels, that would be a threat to Exxon’s business model.   But Exxon was very clear that this is “highly unlikely” to happen.  The world is too dependent on the 87% of primary energy provided by fossil fuels.  The enormous energy system does not change that quickly.

Before being critical of ExxonMobil for their directness, we should probably consider other sources of data.  As it turns out, Exxon’s projections are not different than our most trusted public energy institutions.  The outlooks from the U.S. Energy Information Agency (EIA) and the International Energy Agency (IEA) are substantially the same.  In an early release of their Annual Energy Outlook for 2014, the EIA bluntly projects, “The fossil fuel share of (U.S.) energy consumption falls from 82% in 2012 to 80% in 2040.”   This is nowhere close to the change needed to keep our commitment to a 2 degree C warmer world.  Now, after considering these other sources, should we give Exxon credit for at least being straight with us?  I would argue, yes, we should.  The world, as we know it today, will continue to rely on fossil fuels for decades to come.

Where does this leave us as policymakers?  First, we should acknowledge that both Exxon and the IPCC can be right.  With everything we know today about the future of the energy system, both climate change and meeting growing energy demand will be serious challenges we face as public leaders.   But wouldn’t it be better to maintain a stable, healthy environment and have plenty of energy?  Or as Frank Underwood said better, “If you don’t like how the table is set, turn over the table.”   Fortunately, creating revolutionary change is something that government policy does well.

Economist Vernon Ruttan has argued that long-term government investment has been the primary driver for almost every major technological innovation of the last century.  Dr. Ruttan examines the US mass production system, aviation technology, space technology, information technology, the Internet, and nuclear power and concludes that government investment was critical in each of these revolutionary, non-incremental changes in technology.  The National Science Foundation (NSF) funded the algorithm that launched Google,  and as Mariana Mazzucato describes in detail in her 2013 work “The Entrepreneurial State”, “All the technologies which make the iPhone ‘smart’ are also state-funded … the internet, wireless networks, the global positioning system, microelectronics, touchscreen displays and the latest voice-activated SIRI personal assistant.”  Apple and Steve Jobs deserve credit for combining these technologies into a brilliant product backed by powerful marketing, outsourced manufacturing, and logistics.  These are skills that are sharply honed in a competitive, private sector.  However, when this competition is at its best, there is little left over for the type of forward-looking R&D that has historically created completely new classes of technology. This role has been reserved for the state.

We, as today’s policymakers, have the primary responsibility for driving the next radical innovations.  Only a misunderstanding of the history of innovation would lead us to conclude otherwise.   Quoting again from Mazuzucato, “The ‘green’ industry is still in its early stages: it is characterized by both market and technological uncertainty.  It will not develop ‘naturally’ through market forces…In the face of such uncertainty, the business sector will not enter until the riskiest and most capital intensive investments have been made (by government)…..As in the early stage of IT, biotech, and nanotech industries, there is little indication that the business sector alone would enter the new ‘green’ sector and drive it forward in the absence of strong and active government policy.”

For today, both Exxon and IPCC are right.  Maybe we should turn over the table.

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