Everyone seems shocked and discouraged by the outcome in Copenhagen. They shouldn’t be. We must control emissions. So why wasn’t there a deal that made everyone happy? Because that’s the nature of multilateral negotiations, with scores of parties with scores of interests. They are always, always like this, as anyone who has studied them knows: no one gets what they want, unless they can hold the final decision hostage. For an example of that strategy, look at the health care bill in Congress, tied up by the cynical calculations of Senators Ben Nelson and Joe Lieberman. Look back at the Kyoto Protocol.

Governor Arnold Schwarzenegger had it right when he told ABC News that the negotiations were a lot of “kabuki”. (Do you really think President Obama’s sudden appearance at a meeting the Chinese did not expect him at wasn’t theater, too? So was China’s Wen Jiabao’s decision to send lower-level officials to meet with President Obama.)

The negotiating process follows a very specific arc. The more parties, the more complex, fraught and risky it becomes. So with almost 200 countries present, the odds of a clean, pure agreement on a sweeping, binding law were always practically nil, even in the fairly weak field of international law.

Negotiations, like all games, are the process of the passage of time and its contained events. Early in any negotiation, most of the time is spent posturing, jockeying for position, and deciding angle. Testing the waters, testing the other side, making friends and allies, setting up competing early drafts of an agreement — particularly ones that suits your interests best, while giving the other side just enough to stay interested. These preemies never work — if they did, the other side would know for sure they are not getting all they could. But they do begin to give people a vague sense of what matters for a framework.

Most Americans find such behavior exasperating, infuriating. We think: just agree! Or come up with something better that we like too — right now! Then again, most Americans hate to haggle: it’s bad form. The rest of the world works differently.

Last minute negotiations — and they always come down to the last minute— are fuelled by some desperation to save face by getting something done, a sense that the other side is now (on some level) a partner in all this, and a certain amount of the game of chicken. Sometimes exhaustion allows for compromises that would never otherwise be considered.

Copenhagen achieved some things: focus on the problems of poor countries and climate change; money to prevent de-forestation. True, emissions were not cut; there is no enforcement. As with the mice trying to decide who bells the cat, no one was willing to risk their interests for a common good. So there is a lot of disgruntlement. Failure is like that.

But there is the future (by that I mean next year). Perhaps now that everyone has had their say in pure democratic form and seen what a mess that can make, coalitions will come together and each send a representative team to cut down on the number of parties at the bargaining table. Such a step would increase the odds of success next time. Apparently, Copenhagen itself was only a step towards dealing with climate change, as was Kyoto before it.  A big problem will get a mammoth negotiation. It will take years, but humanity will survive – it has through all the catastrophes of time. (The world has been about to end so often and for so many reasons, it can be hard to keep track.)

Compromise has its costs and is slow; that’s the downside to democracy. But would anyone like to change systems?

Overview

2009 was all about China. Early in the year, when energy prices crashed due to disappearing demand, oil sank to slightly more than $30 barrel from its mid-2008 high of $147 and natural gas from $14 to around $3 per thousand cubic feet. China, flush with cash, for all practical purposes stabilized the market by going on a spending/investment spree in Africa, South America, even Russia. By the end of the year, oil prices had climbed back to more than $70 a barrel, due to the plummeting value of the dollar. (Gas prices has only rebounded to around $5 per thousand cubic feet.)

2009 also saw several countries attempt to use their natural resources for political power — most notably Russia’s decision to freeze Europe last winter (literally) in its displeasure with Ukraine and its natural gas pipeline bottleneck. Result? Europe is desperately developing alternatives sources and pipelines for gas.

Mining prices also tanked early on, with the same response from China. In mid-summer, China ominously arrested employees of mining giant Rio Tinto of charges of spying.

A number of gigantic mergers took place in 2009; most recently oil mega-company Exxon, seeking to become a major player in natural gas, bought regular-size-giant company, XTO, in a deal worth $41 billion.

Finally, 2009 will probably be remembered for the rise of new energy sources — not only green energy, but a transition to unconventional sources of natural gas, including coalbed methane and shale gas. Billions of dollars are being invested, due to new technology.

Those Who Made It The Year It Was:

The Winner: China, for the reasons cited above.

Honorable mention: President Umaru Yar’Adua of Nigeria for taking the first concrete steps to ending the fighting in the Niger Delta, and
President Luiz Lula da Silva of Brazil (for using the energy market) and President Michelle Bachelet of Chile (for using Chile’s copper-based sovereign wealth) to limit the recession’s impact on their countries.

The Rogues’ Gallery: Vladimir Putin of Russia; Ali Ben Bongo (for growing up to be an oil autocrat just like his dad); Hugo Chavez (for the priceless rebuke to his countrymen on the energy shortage: “Some people sing in the bath for half an hour. What kind of communism is that? Three minutes is more than enough!”); Paul Kagame of Rwanda (a hero for ending the genocide there, but who has tacitly allowed the bloodbath in the DRC to continue); Alan Garcia of Peru (for deciding that the indigenous people of his country were too ignorant to understand his leasing of their land in the Amazonian basin); and Idriss Deby of Chad (for using oil to keep himself in power and exacerbate an already tense region).

What Was That Again? (Most Unexpected Event)
China’s announcement that it tends to monopolize its rare earth minerals required for emerging green technology.

Oh, Crystal Ball… What to look for in Energy and Natural Resources in 2010
Conflict
1) Fallout following the Iraqi elections. Big question what will the Kurds do? What about relations between Sunni and Shiite?
2) The strong possibility of war in Sudan, this time between the North and South again. The South, with the oil, votes on secession in 2011.
Power politics
1) More power politics from Iran and Russia.
2) More pipelines in development create  more opportunities for profit, energy and political obstruction.
3) The main US question: will the US Congress actually pass a meaningful energy legislation after the chaos of health care?
Money
1) The outcome of the push for global financial transparency in the extractive sector — will dozens of developing countries who have “committed” to making their dealings transparent actually make good?
2) How will China’s acquisitions affect global demand and long-term prices?
3) Can everyone working together keep oil prices stable to sustain the global equilibrium of today?
Green energy
1) Ethanol begins to wilt; farmers go back to growing food for the starving world.
2) Coal has the stake pulled out of its heart by friends in Congress and China, natural gas tries to stab it back in.
3) Water supply becomes a serious problem for green energy
4) We arrive at the gloomy realization that there are no easy answers when it comes to weaning ourselves off oil.

The International Energy Agency is out with its 2009 World Energy Outlook. Some of the revelations presented at the Council on Foreign Relations in New York on Monday were hardly startling: energy demand and investment down due to global recession, but demand expected to return and grow, China using more energy, etc.

But a couple of its predictions and analyses are both surprising and useful.
• To use an image, unless we cut back on energy needs, within 20 years we will need the equivalent of four Saudi Arabias to meet demand.
• Depending on the policies chosen, China alone could bring about 25% of the needed reductions in emissions to help with climate change. And they seem to be interested in moving that way. It isn’t so much that China is keen on greening the planet as it is concerned about its own energy security. Fatih Birol, the chief economist for the IEA, calls it the fear-of-the-return-of-$147-a-barrel-oil.  This sentiment is echoed not only in China but in much of the developing world, where countries have much shallower pockets, face local pollution problems from increasing fossil fuel use, and still remember the economic catastrophe of the oil shocks of the 1970s.
• The third was the emphasis on unconventional natural gas, mostly meaning shale gas. Although the IEA predicts a glut of natural gas, especially in the US, and that low prices mean that there won’t be sufficient investment (at least till gas hits $5 per million BTUs — it’s in the $3-4 range now), I do know that it has not slowed corporate interest and leasing in the Marcellus gas field. Recent leases in north central Pennsylvania were going for around $5,000 an acre with steep royalties. In Texas, sections of the Barnett shale deposit have gone for $25,000+ an acre (proven). There is a glut but at least in the US, investment in gas is moving forward fast.

Last year, Tim DeChristopher, a student in Utah, bid $1.8 million he did not have in a federal oil lease auction. He won the leases. He stated he did it to protect the environment and to prevent further global warming, arguing that the danger from this drilling was too great and immediate to try to stop it any other way. This week the judge in the case, Dee Benson, disagreed, citing the lack of imminent danger. DeChristopher is now facing felony charges of making false statements and interfering with a (government) auction.

Coincidentally, several days earlier in New York City, the State of New York Department of Environmental Conservation held a public hearing on new regulations allowing natural gas drilling in the Marcellus shale deposit in upstate New York.

The Marcellus, which supposedly holds enough gas to power the entire country for 20 years, also crosses the Catskill/Delaware River watershed, a major source of water for the City.

Stuyvesant Auditorium was packed, with the audience, many with placards, overwhelmingly against the drilling. Public input started with local politicians fulminating (this is what talented politicians do well). Their anger was directed at the hydraulic fracturing process used to release the gas during drilling; their fear is that there will be an accident and some of this probably poisonous fracking glop will end up in the New York City water supply, which is comes from the Catskills almost totally untreated. They can yell, but their anger was misdirected and so, ineffective.

There are any number of perfectly good reasons to be concerned over the leasing of land for oil or gas drilling, but to voice a complaint effectively, there are some common sense considerations:

1) Do your homework so you know what you are talking about. The problem with the city’s analysis is that it is infinitely more likely that gallons of the fracking fluid will mess up some rural site, ruining that land and maybe the water for local farmers (who don’t seem worried enough about this and should know better — it has happened before). Even in a worst case scenario, only the most miniscule amount of the fluids will make it into the watershed, and then be diluted by trillions of gallons of water before getting to the City. Ironically, the environmental groups that got up afterwards to give public comments made more sense. Their objections very sensibly focused on the horrendous mess of a plan the state government has offered in its haste to cash in on the Marcellus craze. Some of its allowances include drilling and using explosive technology within 1000 feet of  century-old water tunnels. Anyone with a brain has to ask: Really? Is this for real? The plan is badly thought-out and needs to be re-done with more sensible regulations, protections, oversight and back-up plans. New Yorkers might be comforted by the knowledge that because of competent regulation and oversight, the City of Fort Worth has allowed shale oil drilling and hydrofracking in hundreds of wells within city limits for years without contamination of the city’s water — although there have been problems in the less regulated rural areas. In Mr. DeChristopher’s case, he should have understood the whole situation even a little, before reacting on emotional impulse. Any drilling takes years to bring to fruition and there are many other means, especially legal, to protest or halt the sale of the leases.

2) Focus on the real problem. The marginal information used by all the New York politicians must have come from some external press release because it was so universally parroted and so completely unrelated to the very real dangers that can occur from poor drilling regulation, oversight and drilling. These include the disposal of the “salty” waste water that comes with drilling and the subsequent extraction (much worse and in much greater volume that hydro-fracturing fluids), the preventable careless overuse of local water supplies to drill and frack (a million gallons per well – which can be recycled if the companies are pushed), and the lack of adequate oversight or emergency and clean-up plans. Surely Mr. DeChristopher is not (and was not) the only one extremely concerned about the wholesale land sale by the Bush administration, its lamentable environmental record, and excessively cozy arrangements with energy companies. Mr. DeChristopher might have worked to rally people of the West, who have vastly inadequate legal, regulatory, and environmental protections and sought legal challenges. Plenty of people in Western states are working on the same issue: he ahd a ready-made constituency.

3) Understand the entire picture. No matter how New Yorkers City demands a moratorium on leasing upstate, it will not protect the water supply in total, because Pennsylvania also shares the watershed and is unaffected by any New York regulations.

4) Be honest about why you’re doing it. Is it concern about the environment or a distrust and dislike of oil or gas companies? Is it water protection or is it you don’t want your bucolic country retreat less bucolic? In short, are you representing your own interest or a genuine public one? Nothing wrong with self interest — but any argument is strengthened if you are coming from a legitimate place, and self interest is quite often as legitimate as anything else. And honesty usually makes for a better solution.

4) The solution is public and legal, hire a specialist, and expect the fight will cost money and take time. Both Mr. DeChristopher and the City protesters are right to be concerned — the problem is that each acted in a way that would have been better for the other scenario — Mr. DeChristopher in a public fight using a legal or state challenge, the city people in offering to buy the most risky sites. Fortunately for the people in Western states, Secretary of the Interior Ken Salazar has begun to smell a rat in how oil and gas leases were distributed under the last administration. At the end of last month, he resumed shale oil leasing in the West with dramatic curtailments of the previous leases.

Not all gas leasing can or should be stopped. Energy is essential for the country too and the overwhelming majority of gas wells have not been damaging to people or the environment in any meaningful way. (Leaving global warming out of the immediate equation.) But oversight is critical.

The best ways to challenge leasing for oil and gas is to get all the information, figure out the realistic costs and benefits and dangers, and weigh the best legal and economic options. Certainly the man who spoke up for the local people of upstate New York’s Sullivan County made sense. He had requested a state list of the previous accidents and problems from drilling, demanded that protections and environmental considerations be put in place first, and that New York State regulations be re-thought and re-written. He had a worthwhile point.

While I am not a specialist in green technology, I could not help but be depressed by an article in the New York Times Tuesday about China’s rare earth minerals and metals.  

The Times and many other papers announced Tuesday that China which “currently accounts for 93 percent of production of so-called rare earth elements” plans to cut its exports of these minerals in order to get manufacturers to open plants in China. Today, China did a bit of backpedaling to reassure the rest of the world that rare earth materials would still be available.

While obscure, these elements and metals are used in a number of green technologies, including magnets for wind turbines and batteries in hybrid cars, and in missile systems.

What especially caught my eye was the Times report that

“some of the minerals crucial to green technologies are extracted in China using methods that inflict serious damage on the local environment. China dominates global rare earth production partly because of its willingness until now to tolerate highly polluting, low-cost mining.

To get at the materials, powerful acid is pumped down bore holes. There it dissolves some of the rare earths, and the slurry is then pumped into leaky artificial ponds with earthen dams, according to mining specialists.”

Western green technology at the cost of extreme pollution in another country. China’s environmental problems, not limited to the mining sector, are well-known. How do environmentalists resolve this moral dilemma? They cannot force China to clean up its act; they cannot repudiate hybrid cars and other green technology. Will environmentalists support development of rare earth extraction elsewhere, like in Australia, California, and Canada? Can green technology engineers find alternatives to rare earth? I will be interested in following how they resolve this predicament.

A Gallup poll done two weeks ago reveals that of all industries, Americans rated the oil and gas worst, even worse than banking, GM and lawyers.

There have been some annoyed, defensive responses from workers in the oil and gas field — understandable since most people in the industry are hard-working, honest and understandably offended at being categorized as disreputable.

These complaints are undercut by recent oil company actions, like this month’s artificially staged “grassroots” events in Texas against stronger emissions controls. The New York Times reported:

“The event on Tuesday was organized by a group called Energy Citizens, which is backed by the American Petroleum Institute, the oil industry’s main trade group. Many of the people attending the demonstration were employees of oil companies who work in Houston and were bused from their workplaces…
For its part, the oil industry plans to raise the pressure in coming weeks through its public rallies so that it can negotiate more favorable terms in the Senate than it got in the House. The strategy was outlined by the American Petroleum Institute in a memorandum sent to its members, which include Exxon Mobil, Chevron and ConocoPhillips. The memorandum, not meant for the public, was obtained by the environmental group Greenpeace last week.”

In a related story, PR firms for the coal industry were found to have sent more than five dozen fake letters ( supposedly from groups like senior centers and the NAACP) opposing new climate change laws to members of Congress. The PR company, Bonner and Associates, blamed it on a rogue temp. The coal industry has apologized. But it’s understandable that public suspicion continues.

The consulting and market research company Point Carbon predicts that “Phase 3 of the European Union’s Emissions Trading Scheme [from 2013] (EU ETS) could see the price of an EU Allowance rise from €30/ton in 2013 to €40/t in 2016.” ETS allowances fell to nearly €8/t this year and have recovered slightly since. Firms sold allowances to raise funds as traditional revenue plummeted in the slowing economy. This combined with the abundance of credits put downward pressure on allowance values.

Point Carbon’s prediction gives a baseline to energy firms that tend to make long-term investment decisions. But in practice the report may be of little use. The analysis does not assess market conditions per se, but rather the political climate that governs the ETS. Predicting the political air in, say, France five years from now is highly complex, predicting it in the 27-nation EU, downright impossible. Add to the mix that the government controls the supply of ETS and the market may be far more difficult to forecast than oil where analysts can at least track supply to some degree.

The report does have some merit, however. …..click here to read more

Forging a new partnership between the United States and China can help address climate change, but only if regulatory and market shortcomings can be overcome.

A new alignment on energy and the environment between China and the United States sounds like a formula capable of delivering real solutions on climate-change issues. China’s abundant scientific research-and-development resources and manufacturing capacity not only help carbon sink testing and the scaling up of renewable energies become more feasible, but also less costly.

However, the potential cost effectiveness of reducing emissions in China could prove more of a liability than a benefit where the environment is concerned. Systemic regulatory and market shortcomings demonstrate the difficulty of managing and preventing environmental degradation and guaranteeing public health in a developing country context. One example is in the power sector, where in some cases emissions performance has not matched infrastructure upgrades as expected because the use of low-grade coal has gone unmonitored. Does the new US administration have the will to face the prospect that a low-cost approach might be inimical to a low-carbon strategy? Will they ensure careful planning and responsible oversight?

The recent release of a joint Asia Society and Pew Center on Global Climate Change report (see “Road to rapprochement” by Banning Garrett and Jonathan Adams), followed by secretary of state Hillary Clinton’s trip to China, generated considerable US interest in enhancing US-China coordination on energy and the environment.

Grand bilateral collaboration undoubtedly can help reduce the rate of growth of emissions in both countries, and bring much needed efficiency improvements to China’s outdated power production and transmission infrastructure. And a powerful US-China nexus may help break post-Kyoto gridlock at Copenhagen in December. However, a partnership between the world’s largest carbon dioxide emitters is not the “holy grail” for preventing further environmental degradation. Though full of promise, the “China advantage” comes with its own pitfalls. …..click here to read more

Chevron CEO David O’Reilly spoke out last week against the Administration’s plan to use a cap and trade system to limit carbon emissions. His stance against US policy is nothing new.

from a policy standpoint, America has been moving in the wrong direction for a very long time.

He further outlines his list of grudges against US policy: taxes, restrictions on oil and gas development, and the belief that we can drill our way to energy independence (although the latter is not policy).

With such a grudge list, his apprehension against a cap and trade system is no surprise. His call for a carbon tax after he berated US policy is.

One of the main reasons why people support a carbon tax to limit carbon emissions is because it is simple and easy to employ quickly. (For other reasons check out the Carbon Center’s rationale.) In addition, it can also reduce emissions as well as a cap and trade system because it increases the cost of CO2. (The debate has become more intense recently as cap and trade legislation is being discussed.) O’Reilly’s decision to support the tax, however, is part business calculation, part negotiating tactic.

O’Reilly wants a stable and predictable business environment. A cap and trade system, which puts a variable cost to a unit of emissions, is intended to create incentives when demand to pollute is high. But the oil and gas industry with its long-term investment does not like short-term instability. Rex Tillerson, CEO of ExxonMobil, derided Europe’s cap and trade system last year, saying it is “all about moving the money around” as people buy and sell emission credits. Although a tax may increase the cost of their products, it would reduce uncertainty in their cost structures, which may be a greater management obstacle.

Cynics argue that he is trying to forestall the debate on climate action by bringing forth unpalatable idea: a call for a tax during a recession, which the American public is loathe to support. After all, it’s highly improbable you will see him lobbying for a $.50 gas tax just as you would not see a CEO of a steel company ask to increase taxes of iron ore.

O’Reilly knows that future climate legislation is near certainty. The more supportive he appears of some type of legislation, the more likely his views will be accepted in the debate.

The Waxman-Markey bill signals Washington’s intentions to pony up to fund deforestation prevention as part of overall climate legislation. But will climate scientists, C-15 negotiators, developing countries and environmental groups agree on an international forest protection program that everyone, including the trees, can live with?

Scientists and climate policy makers now agree that saving forests is one of the most important things we can do to fight climate change. But that has not always been the case.

When the Kyoto Protocol was formulated, only reforestation and afforestation – not deforestation prevention – were deemed eligible carbon offsets. By stripping forest conservation of any functional value, a perverse incentive structure emerged: Cutting and replanting trees provided non-Annex 1 countries an optional revenue stream, but keeping living trees standing did not.

As the next round of negotiations approaches, new scientific findings are challenging the beliefs and motivations that led to the earlier exclusion of forest conservation.

First, a study released last September challenged the assumption that old growth forests cease sequestering carbon from the atmosphere once they reach a certain age.

Second, land use, land use change and the forestry sector now constitute one-fifth of the world’s emissions. Because trees emit carbon once they are felled, an increase in deforestation would mean even greater emissions.

Despite consensus on the importance of deforestation prevention, though, there is little accord on how to achieve it.

The REDD initiative – Reducing Emissions from Deforestation and Degradation – seeks to provide developing countries with a monetary incentive for preventing deforestation. Since 2005, when it was first proposed by the governments of Papua New Guinea and Costa Rica, REDD has become a key element of the UN Framework Convention on Climate Change discussions.

“There is broad consensus now that the post-2012 agreement will include some sort of incentives for tropical countries to reduce their deforestation,” said Steve Schwartzman, Environmental Defense Fund co-director. Already, the UN-REDD policy board has approved $18 million to support pilot programs.

However, considerable controversy still surrounds REDD, with the latest debate centered on the best financing mechanisms.

The U.S. climate legislation proposed by Reps. Henry Waxman and Ed Markey would make REDD a key piece of its offsetting strategy. It would do this through three major sources of funding: offsets, a supplemental pollution reduction program, and strategic reserve auctions. …..click here to read more