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Climate Change and the Carbon Bubble Reality Check

David Hone's picture
Chief Climate Change Adviser Shell International Ltd.

David Hone serves as the Chief Climate Change Advisor for Royal Dutch Shell. He combines his work with his responsibilities as a board member of the International Emissions Trading Association...

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In recent months there has been a renewed look at the idea of a financial carbon bubble, or unburnable carbon reserves. Most recently, a report from The Carbon Tracker with a forward by Lord Stern of the Grantham Research Institute on Climate Change (London School of Economics), argued that serious risks are accumulating for investors in high carbon assets, such as coal mining companies and the oil and gas industry.

The idea of the “carbon bubble” is based on a concept that I have discussed many times in this blog: that there is a finite limit to the “atmospheric space” for CO2 while still ensuring that warming does not rise above 2 °C. That limit is about one trillion tonnes of carbon

Towards the trillionth tonne

The issue of the bubble arises because the combined proven oil, gas and coal reserves currently on the books of fossil fuel companies (and governments in the case of NOCs) will produce far more than this amount of CO2 when consumed. This implies that in a world where the 2 °C limit is imposed and achieved, most of the future value generation of the companies involved will never be realized and therefore investors in them today are looking at a financial bubble that may well burst in front them. According to my analysis and the global reserves data in the BP Statistical Review of World Energy, we get to about 1.6 trillion tonnes of carbon as shown below. This equates to the use of total current fossil energy reserves of about 900 billion tonnes of carbon equivalent (the balance comes from the use of cement and land use change).

 Towards two trillion tonnes

 The report clearly sets out the global carbon budget, the reserves outlook, the current capital flow being consumed to expand those reserves and comes to the additional conclusion that this part of the global energy system will also waste trillions in capex over the coming decade as it develops more reserves that could also become unburnable. The report authors argue that even the massive application of carbon capture and storage will do little to help the situation.

There is really nothing to argue about in terms of the CO2 math itself. It is certainly the case that current proven reserves will take us well past 2 °C if completely consumed and the CO2 emitted. But now comes the reality check!

What is missing in the report is any discussion about the dynamics of the global energy system, the need to meet energy demand and of course the rapid growth we are seeing in that demand. To bring all this math into the equation it is probably best to turn to the new Shell Energy Scenarios, released about two months ago. I discussed these at some length a few weeks back.

In the context of this discussion, the initial focus should probably be on the Oceans scenario in that it sees the very rapid introduction of solar energy, with eventual large scale displacement of fossil fuels in the second half of the century. Global energy demand rises from 535 EJ in 2010 to 777 EJ in 2030 and 1056 EJ in 2060. Although solar (mainly PV) is the largest single energy source by that time, total carbon consumed through fossil fuel use amounts to 800 billion tonnes carbon by the end of the century, just a bit less than current proven reserves (900 billion tonnes as indicated above). The large consumption of fossil fuel is required simply to meet energy needs as renewable energy attempts to catch up with overall demand (which it won’t do until sometime in the 22nd century). This change is purely through the market and social dynamics present in the Oceans scenario, which sees strong growth, improved energy efficiency driven by higher prices and solar eventually dominating. CCS comes in later in the century, removing about 100 billion tonnes of carbon.

 NLS Cumulative Emissions

By contrast, Mountains is a fossil fuel scenario, but with heavy reliance on CCS from about 2030. Total fossil fuel use is over a trillion tonnes of carbon equivalent, which exceeds current proven reserves. However, CCS removes some 300 billion tonnes of carbon, giving an overall accumulation of 1.25 trillion tonnes by 2100 (current accumulation plus fossil use to 2100 plus land use change and cement). This is still above the trillion tonne limit, but is the overall lower emissions outlook.

The key lesson from the scenarios in this regard is that both a rapid growth in renewable energy and the early use of CCS are required to manage emissions throughout this century. The paradox is that these exist in different scenarios with entirely different underlying economic and social drivers. It’s quite hard to have both – a world that likes fossil fuel readily gives permission to CCS going forward, but doesn’t really see huge segments of the nergy market taken by renewable energy. Nuclear is strong though. Conversely, the distributed energy solar world of Oceans doesn’t want to hear about CCS and therefore leaves it until physical climate pressures (e.g. extreme weather events) force action.

The reality check for the “carbon bubble” proponents is that global energy demands still need to be met and that there are limits to the growth rate of fossil energy substitutes, even as climate goals come under pressure.

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Schalk Cloete's picture
Schalk Cloete on May 3, 2013

Agreed, David. CCS is the best possible compromise between the risks of burning fossil fuels (runaway global warming) and the risks of not burning fossil fuels (economic collapse). Renewable energy advocates simply refuse to acknowledge the latter and, somewhat counter-intuitively, end up worsening the former as well. 

For example, coal currently costs about $100/ton (although most coal is extracted for less than half this price) giving you 24 GJ of energy for use whenever needed. $100 can get about 40 Wp of utility scale solar at current unsustainably low prices. At a 7% discount rate, a 15% capacity factor and a 30 year lifetime, this 40 Wp of solar is worth 2.4 GJ of energy today – one order of magnitude less.

Yes, 60% of coal is used for electricity generation at a significant cost and exergy loss. For example, one article found that an 80:1 coal mine mouth EROI is reduced to 25:1 when this coal is used for electricity generation. However, even though solar power generates electricity directly, massive infrastructure buildouts will be necessary to overcome the variability over a wide range of time and length scales. Another study found that the solar PV EROI reduced from 7:1 to 2:1 (much too low to sustain civilization) when 4 hours of battery storage was added. 

An enormous gap therefore remains between the renewable energy dream and objective reality. By subsidizing the buildout of a massive PV overcapacity for manufacturing first generation panels that could never sustain our complex civilization is therefore a massive misallocation of capital. Yes, it is perfectly fine to invest hudreds of millions in renewable energy RD&D, but “investing” hundreds of billions in the heavily subsidized deployment of current renewable energy technology is very dangerous indeed. We need to wake up and we need to wake up soon…

Rick Engebretson's picture
Rick Engebretson on May 3, 2013

Thanks for the open minded thought process. All good questions. I wish I had more time for analysis. As always, I would like to add a new dimension to the discussion: water.

It is helpful to remember that before WWII the US had very little industry or population on the West Coast. Only after massive water projects during the Depression did the “desert bloom” and lights go on. The same happened with massive water projects to allow farming in the Dakotas and shipping on the Mississippi. The Great Lakes are a man made global shipping port.

There seems to be a great deal of water resource development worldwide. Siberia, China, India, Canada. Europe was defined by arterial waterways. The Amazon basin. These water resources create new, local climate, as well as biomass carbon sinks. This process is as old as Egypt on the Nile.

I don’t know where it goes from here. I realize what I say seems totally unrelated to the topic. But there seems to be a dynamic variable dimension (water) that is missing from most climate/energy discussion and “conventional wisdom.”

Rick Engebretson's picture
Rick Engebretson on May 3, 2013

Thanks Jim. I don’t have a crystal ball. So I don’t predict rain or the stock market. But yeah, kind of crazy experts these days.

Hundred year floods happening every year since farmers put drain tile in. Then we have hundred year drought. We were lucky to have late snow to keep farmers out of the frozen fields this year and allow water to soak in. Very little run-off this year with a lot of snow.

With or without oil, are there many dry regions on earth where they aren’t shooting at each other, or us?

The EU financial crisis can largely be translated as a North/South water crisis.

Now California is already burning up what little vegetation they have.

That’s my biggest criticism of OTEC; we need all the water evaporation we can get from over-heated ocean surface. Rain is distilled water. Too many people are now drinking water that was already used by someone else. Fresh water is also higher in energy content, thus cools the earth.

Rick Engebretson's picture
Rick Engebretson on May 3, 2013

Yes Jim, I realize they are different projects. Sorry if I slur my thoughts.

My grandparents farmed in the Red River Valley near Fargo. Saw people put drainage in different places. As you say, drained and irrigated is the modern way.

I’m not sure how much water gets back to the ocean, anymore. The Mississippi River nearly stalled last summer. Many are concerned with the water level of Lake Superior.

Nathan Wilson's picture
Nathan Wilson on May 4, 2013

Coal is fuel, not energy.  The user still has to buy the equipment that converts it into the desired form, and cleans up the exhaust.  When looking at the cost of ready to use energy (electricity or steam for process heat), coal costs about the same as nuclear power (and does much greater harm to the environment and human health).

When used as backup power for variable renewables (i.e. operating at low capacity factor with fast ramping), natural gas is a more workable solution, so will be dominant.  (With good forecasting, existing coal plants can still contribute though).

Coal can probably beat nuclear for the cost of synthetic transportation fuel.  A coal to ammonia (with CC&S) program could be the best hope for a (quasi-)sustainable future for the coal industry.

Schalk Cloete's picture
Schalk Cloete on May 5, 2013

True, that is why I compared the equipment needed to convert fossil fuels to the desired form of energy to the equipment needed to balance renewables. I think the embedded energy and efficiency losses for these two classes of equipment will be similar, thereby making a fossil fuel-dominated energy sector roughly 10 times cheaper than a renewables-dominated energy sector. 

Regarding the coal vs gas debate, I am still not convinced about the shale gas revolution. Many experts point to the rapid depletion rate of shale wells and other environmental concerns that could bring an end to the current low prices in the US much sooner than expected. Also, given the total failure of mainstream energy forecasts to see the plateau of conventional oil, I take the current optimistic shale gas forecasts with a pinch of salt. 

The fundamental problem with gas is that it has a low (and dropping) EROI of just over 10:1 while coal remains quite stable at about 80:1. A complex society needs an EROI of roughly 10:1 to keep on functioning and I doubt whether gas (unconventional gas in particular) will be able to provide that on a global scale. 

One can only speculate about what this might mean for the longer term future, but it is important to also consider the case where optimistic natural gas forecasts do not come true and the world is left with coal as the only energy source with an EROI sufficient to sustain our complex civilization. 

Schalk Cloete's picture
Schalk Cloete on May 5, 2013

You can raise GDP by paying people to dig holes and then fill them back up again. This is a classic analogy for  Keynesian economic stimulus. However, the money received by these people (whose work contribute nothing to society as a whole) has to come from the production of others – either through higher taxes or, in the case of money printing, through inflation. Sure, you can print money and pay lots of people to do unnecessary things (as most of the West is currently doing) just to keep unemployment down and maintain an illusion of economic growth, but sooner or later this will catch up to you… 

Similarly, if you employ energy sources which are one order of magnitude less efficient than current energy sources, this will have to be heavily subsidized, leading to higher taxes and inflation. Sure, this can be done while the inefficient energy sources still make only a small contribution (renewables other than hydro currently contribute about 1.5% of global energy), but you can only push it so far. 

CCS will also be less efficient than conventional sources, but will still be much more efficient than a renewables-dominated energy sector with all the additional storage, long-distance distribution and low capacity factor fossil fuel plants needed for balancing intermittent renewables. 

In addition, renewables can simply not be deployed fast enough to have any meaningful impact on climate change. The current rate of renewables deployment is about 50 times too low and the trend of total installed capacity is already turning linear (implying that the rate of deployment is becoming constant). All mainstream forecasts say that renewables other than hydro will contribute only about 5% by 2030 by which time atmospheric CO2 will already be long past 450 ppm. 

CCS, on the other hand, can be deployed much faster. For example, adding CCS to one modern coal plant is the CO2 equivalent of filling the roofs of 1 million American family homes with solar panels. In addition, CCS can also retrofit existing plants, thereby reducing CO2 emissions that are already locked in by existing infrastructure – something which might be very important given how greatly we are likely to overshoot the recommendations of climate science. 

Most importantly, however, CCS will require no additional changes to current energy networks and equipment. Renewables, on the other hand, will require a wide range of storage/distribution solutions and a total revamp of industries such as automotive, steelmaking and cement. This will definitely need to be done at some time in the long-term future, but doing this within the timeframes mandated by climite science is simply not possible. 

Schalk Cloete's picture
Schalk Cloete on May 5, 2013

I’m not debating the urgency of climate action, Jim; I’m merely debating the nature of this action. Combating climate change through renewables is simply not possible. If you take the time to objectively look at the numbers and the opinions of specialists (not newspaper reporters), you will see this for yourself. 

The scientific concensus on the cost of first generation CCS is about $40/ton or about 4 cents/kWh added to the price of coal-fired electricity. Second generation technology can slice this in half. 2 cents/kWh would hardly be noticed. For perspective, German consumers currently pay about 7 cents/kWh to subsidize wind and solar which, in total, contributed a mere 12% of their electricity in 2012. 

Gary Tulie's picture
Gary Tulie on May 5, 2013

At $100 per ton, the fuel cost of coal fired power is around $0.04 per kWh disregarding the hardware, operation and maintenance, and externalities of the fuel use. 

Once the capital and O & M costs are added in, you are probably looking at around $0.06 to $0.07 per kWh. 

Add on the cost to the environment of mining, coal related pollution, impact on the health of miners, and climate change impact, I would suggest that at a conservative estimate the full cost of coal generated electricity is probably around $0.09 to $0.10 per kWh, or perhaps another $0.01 to $0.02 if you carry out CCS.

The cost of solar power is declining year on year, and whilst the current cost does not reflect a real market, it is likely that real costs per watt of installed solar will drop below $2 per watt in Europe in the next two years or so, and in the USA as soon as they get their act together and remove the unnecessary administrative burdens which make solar power so much more expensive there.

In good locations, solar arrays can generate >1500 kWh per year per kW peak (even 2000 in the best locations) so that with a 5% discount rate, and a conservative 20 year life, I would estimate the current cost of solar power at around $0.13 per kWh in Southern Europe which is only marginally higher than the current real cost of coal fired generation. What’s more, solar power is on a steady downward cost trend whilst fossil fueled generation is on a clear upward cost trend.

A further point in solar power’s favour is that in sunny climate areas – which are best suited to its deployment, peak demand is driven by air conditioning loads for much of the year with peak demand coinciding fairly well with solar power generation – especially if a reasonable proportion is directed towards the west to catch the afternoon sun.

Schalk Cloete's picture
Schalk Cloete on May 6, 2013

When comparing coal to PV it is important that we compare apples to apples. Firstly, if you want to refer to PV in good locations, you also have to consider coal from good locations. Only a small fraction of global coal production actually requires the $100/ton price to be profitable. Before globalization really kicked into high gear in the early 2000’s after coal-guzzling China joined the WTO, thermal coal sold for $20/ton. Much of the global coal supply can still be extracted for that price, implying that prices will fall precipitously when coal demand is reduced through a strong carbon tax. 

Secondly, the intermittency issue will greatly increase the effective price of solar PV. One day of battery storage roughly doubles the price, but this form of storage will be worthless to compensate for longer cloudy spells and slow seasonal variations in solar insolation. For this, solutions such as massive pumped hydro or chemical storage through hydrogen or ammonia will be required. These solutions will have to be rolled out on a truly massive scale and also lose about half of the electricity generated in the energy conversion process. 

Thirdly, it is very important to remember that externalities per unit energy delivered are also a function of the total installed capacity. PV currently delivers close to two orders of magnitude less energy than coal. That means that the external costs of coal are highly accentuated while those of PV are hardly noticable. For example, mining conditions for coal in China are bad because the massive demand requires the expoitation of lower quality and deeper coal seams. Air quality in China is bad because of the massive over-use and poor placement of coal plants. If PV delivered as much energy as coal, PV panels, batteries, pumped hydro and other conversion plants would be everywhere, rare earth mining would be much more dangerous than it is now, e-waste from solar panels and batteries would be a massive concern and energy prices would be sky-high. If coal demand was as low as PV demand today, coal mining would be virtually hazard-free and air pollution from coal combustion would be negligible. 

Fourthly, one also needs to consider the large amounts of coal that are used directly in industrial processes such as steelmaking and cement. These processes do not lose much of the thermal energy in coal to entropy such as is the case of thermal power plants and using solar electricity for such processes will  probably not become viable within this century. 

Finally, the downward trends in PV and the upward trends in fossil fuel prices depend completely on continued economic growth requiring continued increases in total global energy consumption. However, many pundits are starting to seriously consider a limits to growth scenario where global economic growth stagnates and energy consumption declines. Such a scenario would rapidly reduce fossil fuel prices and slash renewable energy subsidies, quickly reversing the price convergence trend. Obviously, this is far from certain, but when one looks at the fiscal situation in many western countries, the threat of climate change and unfavourable societal trends in demographics, inequality, population density and structural unemployment, such a situation must be considered.  

All together, I think my rough estimate that current solar PV technology is roughly one order of magnitude less useful as a dominant power source than coal is fairly conservative, but let’s wait and see what the future brings. I just fear that this heavily subsidized ideological push towards renewables will end up doing much more harm than good by demanding an extremely high price per ton of CO2 avoided, thereby wasting lots of precious time and money while doing virtually nothing to mitigate climate change. 

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