China announced on March 20 that it would raise retail gasoline prices to more than $5 a gallon. Two days later, the government announced its intention to cap consumption of coal at 3.9 billion tons a year, only 10 percent above its current level.
Concern for the environment is not driving these moves. Instead, they are a byproduct of economic fundamentals, including the fact that importing oil at more than $100 a barrel and coal at $125 a ton or more threatens China’s record trade surpluses. Indeed, in the past three years, high prices for imported oil and coal have contributed to three trade deficits in China.
Alarmed by these trends, Chinese Premier Wen Jiabao called in January for restructuring global oil markets, saying they had “deviated, to a great extent, from the supply-and-demand relations of the real economy.” The premier called on the Group of 20 to establish “just, equitable and binding international rules” to govern the oil trade (an appeal not wildly applauded in the Persian Gulf region where he made it).
Energy politics are riling India, as well. A recent report charged that the government had shortchanged Indian taxpayers $210 billion by awarding coal leases to domestic power companies. Coal India, the domestic monopoly that is 90 percent owned by the government, is supposed to guarantee power needs without major price increases. But minority shareholders have sued over the price restraint; meanwhile, dozens of power plants hobble along with only a few days’ supply of fuel.
Global coal and oil prices are largely a product of producer cartels and government consumers. In Asia, the main coal producers are Indonesia and Australia, with U.S. producers eager to enter the market. The price-setting consumers are China and India. For oil, the principal players are Saudi Arabia, Iran, Kuwait and Russia, with Venezuela and Iraq in the wings. There are four potentially price-making consumers — the U.S., the European Union, Japan and China. Unlike the producers, the consumers lack coordination.
Because coal and oil prices are set by organized cartels facing disorganized importers, they are volatile, subject to relatively modest shifts in demand that produce significant price swings. The volume and price of fossil fuels that power carbon-importing economies plummet, or soar, in unison. Just a 7 percent change in oil demand can double or halve prices.
How can growing economies avoid being strangled by expensive carbon? First, by recognizing that the world is locked into fossil fuels not because they are cheap, but because they are familiar.
The benefits of transitioning to renewable energy are immense. Because marginal demand has a big impact on price, increasing fossil-fuel efficiency, or supplanting oil or coal with renewables, can lead to sizable decreases in demand. At the off-peak hour of 2 a.m., electricity produced by an old coal- power plant in India might cost only $0.10 a kilowatt-hour, even delivered. Solar, which costs $0.15 a kilowatt-hour during the daytime, has a hard time competing with that. But an afternoon kilowatt-hour in the heart of downtown Bangalore, produced by a generator powered by imported diesel, costs at least $0.50. Subsidizing solar developers to replace that diesel is comparable to winning a trifecta. India gets clean energy while avoiding imported diesel. And the nation’s electric grid grows more efficient and reliable because the solar electrons are available when Bangalore most needs them — on hot afternoons.
Similarly, using renewable power for a rural mobile- communications tower in Kenya can supplant diesel generation, which can cost $1 a kilowatt-hour or more. (In countries with especially poor energy security, where much power is lost, it can cost $5 a kilowatt-hour.) At such energy choke-points, the cost of solar panels is competitive with the price of fossil fuels. Solar generation is not undermined by cost, but by regulatory barriers, lack of distribution and a shortage of credit.
Oil-importing nations in Africa need new transportation infrastructure. Yet the World Bank and other development agencies focus on building highways, which hook these countries on oil they can’t afford, instead of on railroads, which can be powered by abundant domestic solar electricity. Why do development agencies keep providing loans for power plants without regard to the huge waste that results when these plants squeeze electrons through leaky and primitive grids? Why aren’t we making sure that India, for example, can use every electron it generates? Why isn’t a smart grid for Asia and Africa at the top of the development agenda?
Misplaced priorities hinder energy development in myriad ways. Although innovative energy entails high capital costs, it also leads to low operating costs; once you mount a solar panel or wind turbine, the fuel is essentially free. Because interest rates in developed economies are a fraction of those in emerging ones, perhaps the simplest formula for meeting the world’s energy needs is for nations in the Organization for Economic Cooperation and Development and institutions such as the World Bank to leverage their low borrowing costs to enable Africa, China and India to reduce their dependence on fossil fuels while accelerating global markets in renewables and raising the efficiency of their energy sectors.
The terms of a global low-carbon deal are there for the taking: Developed nations can help finance low-carbon projects in emerging economies at U.S. or EU interest rates. Thus the World Bank can become a financier of clean innovation, not the dirty status quo. Africa, China and India, in turn, can leverage their development needs, focusing on producing energy where it is most scarce and where the price of renewables is most competitive.
We can create a virtuous cycle, in which energy innovation for the benefit of those in greatest need reduces energy costs for emerging economies while also improving the economics of clean energy for developed nations — and helping to stabilize the climate in the process.
Copyright 2012 Bloomberg