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Preparing the US for the energy transition

Former President Obama special assistant Jason Bordoff says that government and industry need to work together to tackle climate change

Jason Bordoff is one of the world's top energy policy experts, with experience spanning academia, industry groups and the White House. He is an advocate of the government working with industry to mitigate and reverse climate change, creating efficient international markets and protecting the interests of the workers most affected by the energy transition.

Bordoff's most prominent role was working in the Obama administration, from April 2009. He served until January 2013 as special assistant to the president and senior director for energy and climate change on the staff of the National Security Council. Before that he held senior policy positions on the White House's National Economic Council and Council on Environmental Quality.

Since leaving the administration, Bordoff became the professor of professional practice in international & public affairs, Columbia School of International & Public Affairs (Sipa). He serves as founding director of Sipa's center on global energy policy.

Bordoff is a member of the Council on Foreign Relations and the National Petroleum Council. He is a consultant to the National Intelligence Council and serves on the boards of non-profit organisation Winrock International, the New York Energy Forum and the Association of Marshall Scholars. Before joining the White House, he was the policy director of the Hamilton Project at think tank the Brookings Institution.

Bordoff spoke to Petroleum Economist ahead of making a special address to Gastech delegates on the first day of the Houston event.

PE: On paper there are big differences between the energy policies of Presidents Obama and Trump. How much impact has the change had on the industry?

JB: The Trump administration has rolled back the Clean Power Plan, fuel economy standards and emission regulations. But, most importantly, it has lost the opportunity to strengthen and advance US climate policies, which would have happened in a different administration.

"The best way to protect ourselves from oil supply disruptions is to reduce how much oil we use in the first place"

This administration clearly has a strong interest in promoting US energy production and exports—but I do not know whether its policies meaningfully change either. Dramatic increases in oil and gas production have been a strong tailwind supporting US economic growth since the global financial crisis. It was soaring in the previous administration and most exports began with permits approved by it. The industry is driven by market forces, far more than policy. Commercial transactions determine the level and destination of LNG exports, not government decisions.

PE: A lot is made about energy self-sufficiency. Is this an important goal?

JB: Why it is meaningful is often mischaracterised, including by Trump. His administration says self-sufficiency means we have less interest in Middle Eastern conflicts. But it is a global market—if there is a crisis in the Strait of Hormuz, US consumers feel it whether we import or not. We are part of a global market and securing global flows is important.

Self-sufficiency is important to the extent that it reduces the adverse GDP impacts of a global oil price spike. The increase in US oil and gas has delivered large economic and geopolitical benefits, but the best way to protect ourselves from oil supply disruptions is to reduce how much oil we use in the first place.

The geopolitical implications of US production are real. It makes it much more challenging for Opec to manage the market—cutting production may just mean it gives up market share to the US at a faster rate. Shale has had a dampening effect on prices, which made it easier for the US to impose sanctions on Iran. It is remarkable that prices barely budged when Iranian oil was pulled from the market and Iran stopped tankers in the Strait of Hormuz. Part of this was due to demand—macroeconomic concerns and trade tensions—but also the dramatic growth in supply.

The natural gas and LNG story is probably even more consequential. Gas markets had been largely disconnected, with oil-price linked contracts and destination restrictions. US exports have been a very large contributor to the creation of a flexible global gas market.

Supply and demand of gas now determines the price more directly. If global markets are soft and prices rise in Asia, more supply is pulled into the region. LNG exporters can index to a hub price, which allows markets to function more effectively. It enhances energy security while reducing the cost to consumers and the leverage of traditional suppliers, such as Russia.

PE: A presidential election is approaching—would a carbon tax win or lose candidates votes?

JB: There are different views. Some Democratic candidates explicitly support a carbon price while others have been cryptic, giving themselves flexibility to clarify their positions down the road.

“While we have not yet seen an across-the-board shift in the industry or Republicans to recognise that climate change is real, there is very encouraging movement in that direction”

Politicians are understandably concerned about raising energy prices, and the political consequences. There are real equity issues—the distribution of costs—around raising prices. When US politicians see yellow vest protesters in Paris it makes them nervous. Nonetheless, several members of Congress have introduced carbon tax bills recently, both Democrat and Republican. If we are serious about climate change a carbon price is an essential, if not sufficient on a standalone basis, part of the policy mix.

We have done a lot of work on modelling the effect of putting a price on carbon. In the US, a $50/t carbon tax would move coal out of the mix much more quickly than people expect and reduce emissions by around 40pc from the 2005 level by 2030. 80pc of these reductions would come from the power sector as it is the cheapest place to achieve gains. There are many alternatives such as gas, renewables and nuclear—at least preventing its retirement—to coal. In Europe the carbon price is already around €30/t ($33/t), and it's making a difference.

PE: The energy transition also has huge consequences for the workforce nationally. Can it be managed equitably?

JB: Absolutely. We recently wrote about it in our paper The Risk of Fiscal Collapse in Coal-Reliant Communities. People are concerned about what the transition would mean for their jobs and communities. Policymakers need to take it seriously and come up with real solutions.

There have already been a lot of coal power station retirements. Coal has declined significantly over the last decade, largely in response to market forces. Despite rolling back the Clean Power Plan—which is misguided—the US will probably still meet its target because the electricity sector is reducing carbon intensity on its own.

We should not overstate the employment impact of environmental regulation. Employment in the coal sector has been declining for a very long time, driven by automation, technology and market forces. In the 1920s the US coal industry employed about 800,000 people, in the 2000s it employed around 110,000 and now it stands at about 60,000. It is not a huge number of jobs—but they are concentrated in communities that would be hit hard.

We know that some policies work well, such as the community grant programmes put in place by the Obama administration. A lot of work has been done to determine which policies are most helpful to dislocated communities. We need to think about protecting the healthcare and pensions of the workers impacted by this transition. We have not done a great job in the past. It is an economic problem, for decades communities have been hit by the loss of manufacturing as a result of globalisation and automation.

PE: Some people suggest the National Environmental Policy Act (Nepa) approval process unnecessarily slows down energy and infrastructure projects. Can it be streamlined without negative consequences?

JB: This debate happened in the Obama administration as well. We tried to streamline the processes—but government inertia makes it challenging for oil and gas pipelines. Likewise, Russell Gold's new book Superpower sets out why it is nearly impossible to gain a permit for a high-speed transmission line for renewable energy. The problem is that government is much slower and bureaucratic than it should be.

We need to streamline the process while being sensitive to the important role the Nepa plays in providing policymakers with environmental impact information. There may be ways to mitigate the environmental impact with small changes. Nepa reviews should not be used to stymie projects and tie them up in litigation. That is true for renewables, for oil and gas, or anything else.

Some find the review processes burdensome and say it should be easier. That view may be borne of frustration with the way reviews sometimes get used in litigation, to make it more challenging to permit projects. Both sides of the aisle could do a better job of making permitting decisions more efficient, while ensuring Nepa reviews serve the critical environmental role for which they are intended.

PE: A few huge wind projects have recently been signed off on the east coast states. Is this the beginning of a major trend?

JB: Renewables have grown very quickly and this trend will definitely continue, which is really exciting. Costs have fallen dramatically and have become increasingly competitive with gas and coal, in most cases without subsidies. The cost of battery storage is also coming down.

PE: What policies are needed to hit climate targets?

JB: We need to put a price on carbon and invest heavily in innovation. Governments need to think about areas where a carbon price would not move the needle—especially transportation. We know from behavioural economics that consumers do not always respond to price signals the way we hope. We need to think about sectors we often forget about such as aviation, shipping and heavy-duty trucking as well as the industrial and agricultural sectors. Given some of these limitations, there is an argument for improving efficiency standards for cars, as well as buildings.

“Larger US companies, and some independents, are talking much more about their role in the move to a clean energy economy”

Technologies such as solar and wind do not necessarily produce the high temperatures needed for the industrial sector. We need to think about hydrogen, carbon capture and other solutions—so we need to invest a lot in innovation. We need to think about policies that target non-CO2 gases, such as methane.

Given how little progress we have made over several decades, any scenario that takes the COP21 target seriously must include negative emissions. This could be land-based negative emissions, such as biomass with carbon capture, or machines that remove CO2 from the air, such as the Hinwil plant operating in Switzerland today. [US oil producer] Occidental has begun work with Carbon Engineering on a plant to directly remove CO2 from the air. We need a broad suite of technologies.

PE: There are diverse views about climate change across the industry and political spectrum. Are we any closer to a consensus?

JB: It is interesting to see the variation across the industry. While we have not yet seen an across-the-board shift in the industry or Republicans to recognise that climate change is real, there is very encouraging movement in that direction. The political divide in the US should not be whether climate change is real—but what we do about it.

One of the largest offshore wind projects in the US—which was just won by [Norway's] Equinor—shows oil and gas companies are investing in low carbon technology, although it still makes up a relatively small share of total capex. The industry is talking more about its role in achieving a lower carbon mix. This includes the emission intensity of operations, taking methane seriously and addressing flaring in the Permian.

Europeans have historically been more progressive, but we are also seeing movement in the US. ExxonMobil, Chevron and Occidental have joined the Oil and Gas Climate Initiative. While we still need to ramp up the level of ambition, larger US companies, and some independents, are talking much more about their role in the move to a clean energy economy. 

PE: It sounds like the industry is already acting. Is additional regulation needed?

JB: Yes. We are still moving in the wrong direction. Emissions continue to rise every year—last year at their fastest rate since 2011—so we clearly need regulation. Corporate leadership can help us understand the most sensible, cost-effective path to meet these targets but it is not going to solve the problem alone.

Adding more solar and wind is not enough. Policymakers need viable pathways to decarbonise the industrial sector, beyond putting a price on carbon. It is helpful when companies take the lead in hydrogen, carbon capture or other areas and puts them in a better position for the inevitable policy response.

I do not think it is plausible that in 10 years the public broadly will be complacent about the impacts of climate change, so the question is not whether we will do something about climate change—the question is what—and companies would be well-served to position themselves now for that.

PE: Can climate change be addressed at the national level—or is international cooperation a necessity?

JB: Climate change is the ultimate collective action problem. If you act alone, you incur costs but do not make much progress. That is the theory behind the Paris Agreement. It did not, by any means, get us to where we need to be. But it made an important step in that direction and, most importantly, put in place a confidence-building process.

Every few years the global community would have come together to assess the promises and pledges they had made and collectively take a bigger step. That is lost. With the US pulling out, I do not see the other major emitters putting themselves on a path well above and beyond their Paris commitments to deep decarbonisation. We need to reverse our position and rebuild international trust.

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