13. How Do We Get There?

EACH AUTUMN SINCE 1999, a group of experts on energy and international relations has met with a handful of U.S. intelligence officials at a large, Georgian-style brick hotel just outside Washington for a closed-door conference entitled the Geopolitics of Energy in 2015. Organized by a government brain trust called the National Intelligence Council, "2015" is part of an effort by the U.S. intelligence community to imagine the global energy system of the future—not because the Central Intelligence Agency, the National Security Agency, or the Defense Department cares one way or another about hydrogen fuel cells or compact fluorescent light bulbs, but because energy affects global stability and global stability is key to American security.

At the 2002 session, held in mid-October, discussions revolved around a set of four scenarios, developed by the National Intelligence Council, which mapped out four different pathways to a new energy economy. The first two scenarios had fairly optimistic outcomes. One, entitled "Green as Green Can Be," began with what its authors called a "headline-grabbing environmental disaster" that "galvanizes public opinion" and causes the United States, Europe, and Japan to pursue "aggressively environmental policies," including heavy new gasoline taxes and stricter pollution regulations. The policies cut oil demand so significantly that by 2020, the world is using thirteen million barrels a day less than under most baseline forecasts. Scenario number two was even rosier: this time, a series of technology breakthroughs in everything from wind and solar energy to fuel cells and energy efficiency has led to substantial declines in energy intensity worldwide.

As the day wore on, the scenarios became bleaker—or perhaps more realistic. In the third scenario, participants discussed the consequences of a "peak" in conventional oil production, occurring sometime between 2010 and 2015. In this scenario, declining output from fields in the North Sea, Alaska, Venezuela, and Iran push oil prices to forty dollars. Higher energy prices begin eating into national economies, pushing the global economy toward recession.

The last scenario, entitled "A Darker Middle East," was the grimmest. Here, the U.S. defeat of Saddam Hussein has backfired, alienating many in the Arab world and leading to the overthrow of Saudi Arabia, Kuwait, and other "relatively friendly Arab governments by nationalist Islamic regimes." With U.S. forces tied up in Iraq and Afghanistan, the United States is reluctant to intervene militarily. Meanwhile, new nationalist governments in Saudi Arabia and Kuwait cut oil production by 20 percent for three years, and 10 percent thereafter. The crimp in supply, coupled with terrorist attacks on international oil shipments, pushes prices for crude to fifty dollars a barrel for five years—thereby setting the stage for the end to a modern energy economy based on cheap oil.

For each scenario, participants had been invited to assess coolly the geopolitical implications: which countries would benefit, say, or how international alliances might be affected. But some in attendance found the exercise unsettling—less because of the gory details of war and disruption in the grim scenarios than because of the implausibility of the optimistic story lines. In today's political climate, the idea of an energy future created proactively, by thoughtful policy or a technological breakthrough, struck some as highly unlikely. "I don't see anything really changing without some monumental event that forces change," Robert Ebel, a well-known energy analyst at the Center for Strategic and International Studies, told me later. Other participants were downright cynical. "No one takes these exercises seriously enough," remarked a gas industry analyst with long experience working with government. "Sure, a few people there seemed genuinely worried, but most were pretty complacent, which is pretty much how government and industry are about energy. They think that the energy future isn't going to be a whole lot different from the energy past, and to the extent that things are going to change, you can't predict it, or do anything about it, so why bother trying?"

***

Such cynicism is no longer surprising. The more we learn about the history and character of our energy system, the harder it becomes to see how the world can escape some kind of wrenching disruption, given current trends. We know, for example, that our energy demand will eventually exceed our capability to supply it safely, especially in the developing world. Competition for energy resources will increasingly drive international relations, and produce conflict. Energy markets will continue to ignore the external costs of fossil fuels, thus confining new technologies to the margins and gradually poisoning the thin layer of soil, water, and air that supports all life.

And yet, the alternative scenarios—in which the world shifts gears and revolutionizes the way we make and use energy—are often more depressing, in part because we are increasingly aware of just how difficult change will be. In the simplest terms, the energy challenge of the twenty-first century will be to satisfy a dramatically larger demand for energy, while producing dramatically less carbon. Yet the availability of carbon-free energy on a mass scale—whether produced from renewable sources, like solar and wind, or from decarbonized fossil fuels—will not happen without significant technological developments. And such breakthroughs aren't likely until the market regards carbon as a cost to be avoided—not just in "progressive" enclaves like Germany or England, but in the big economies of Russia, China, and, above all, the United States.

Yet this, too, is increasingly difficult to imagine. Whereas European policymakers have finally begun shifting, however haltingly, toward a low-carbon energy regime, the United States, the one nation whose participation in any worldwide energy revolution is essential, seems unable to move without being pushed. The last American energy revolution came only in response to crisis—the 1974 Arab oil embargo—and since then, U.S. energy policy has become even more fractured and obsessed with supply. One possible opportunity for change—post-September 11, when the links between massive U.S. energy consumption and its high-risk foreign policy were starkly evident—came and went with little apparent impact on U.S energy policy. If anything, American political leaders have since then become even more hostile to the notion of a "new" energy economy, and more persuaded that the heart of American energy policy is, and always will be, defending "security of supply."

This is why, for many energy experts, true change in the global energy system is virtually impossible, except in response to some serious shock. In this somewhat pessimistic view, the question is not whether the world can avoid some kind of energy-related disaster, but whether our response will be reactionary and short-term, or constructive and long-term.

What kind of disruption is it likely to be? Nearly all the energy experts, oil company officials, and political analysts I've interviewed over the last several years believe that the most likely scenario involves upheaval in the Middle East. If the aging Saudi crown prince were to die (a commonly cited possibility), analysts say a succession battle could ensue between powerful Wahhabi clerics, who want to push Saudi Arabia toward a conservative Islamic theocracy a la Iran, and Saudi moderates, who hope for a more progressive, pro-Western regime. Experts say the struggle, even if not violent, could easily slow or halt Saudi export operations and cut world production by nearly 12 percent. In such dire circumstances world leaders, especially in the United States, would be forced into a series of tough choices that could alter the course of the energy future.

If such a disruption occurred today, analysts say, given how critical oil is to the global economy, and given the current political environment in the United States, there would be extraordinary pressure for military intervention—particularly if Saudi Arabia appeared to be tilting toward fundamentalism. As one foreign policy analyst who works closely with the CIA told me, "there is simply no way the United States would allow an Osama bin Laden to control the world's largest oil reserves."

That would be a grim dilemma indeed. If America launched a second military action, it might restore world oil supplies, at least temporarily, but the move would surely fuel Islamic rage, further destabilizing the Middle East and almost guaranteeing future supply disruptions. Yet if America declined to strike—if, for example, domestic political opposition halted a second Middle Eastern venture—and if Saudi oil were not immediately restored, importing nations would face an equally stark prospect—and none more so than the United States. Because it has made so little progress toward diversifying away from oil, a Saudi-centered disruption would be economically devastating. The closest precedent we have is the Iranian revolution, which took five million barrels out of production and sent prices up to forty dollars a barrel, or a hundred current dollars. Losing the Saudis' ten million barrels of daily production, though world emergency reserves would initially soften the blow, would be easily as destructive. Fuel-sensitive businesses, like airlines and trucking companies, would be affected immediately and drastically. Layoffs would ripple through the economy, sowing panic and causing companies to delay investments and expansions, and leading to more layoffs. And because energy costs affect the costs of producing goods and services but also hurt consumer buying power, higher oil prices would lead to the recession-inflation mix known as stagflation.

As the damage mounted, policymakers would be increasingly likely to take defensive and short-term actions, which, though necessary under the circumstances, could end any move toward a more progressive energy economy. To ease high energy prices, for example, regulators might waive emission requirements for coal-fired power plants. American policymakers would try to increase domestic oil production, by opening off-limits areas to drilling. They would also encourage additional production of "unconventional" oils, from the tar sands in Alberta, for example, and probably waive emission-control requirements there, too. "You can imagine a really ugly future where we're making massive quantities of synthetic fuels from coal and heavy oils and seeing huge increases in our carbon emissions," says Dan Lashof, an energy analyst with the environmentalist group Natural Resources Defense Council.¹ As recession set in, Congress would drop any plans to require automakers to raise efficiency standards. Lawmakers would also cut funding for nonessential energy programs, including R&D for hydrogen and subsidies for wind power and other renewable industries.

Such a defensive energy strategy would have catastrophic long-term impacts. Were the United States to move deeper into a traditional hydrocarbon economy, and further away from even a pretense of reducing CO₂ emissions, analysts fear that European governments might be pressured into delaying their own aggressive CO₂ reduction goals. As one U.S. climate policy expert put it, "any new U.S. move away from a climate policy could easily delay policy action in other countries, both by mobilizing the forces within those countries which are opposed to climate action, such as business lobbies, and also by giving cover to any leaders unwilling to take on climate change." China and India, too, could feel less pressure from the West to modernize their own energy economies and might resume the rapid expansion of conventional coal-fired power plants. If these developments occurred, energy analysts say, keeping atmospheric concentrations of CO₂ below the 550 parts-per-million threshold would prove impossible and catastrophic warming would become all but inevitable.

In the meantime, high oil prices would have encouraged a frenzy of new oil exploration and production—both in OPEC countries and in remote and hard-to-reach non-OPEC fields previously written off as too costly to develop. This new oil might reach the market within two to three years, bringing some price relief. Ultimately, however, this surge of high-priced oil production would only speed the depletion of non-OPEC oil reserves—and hasten the day when OPEC, even with a weakened Saudi Arabia, gains true pricing power over world oil markets.

***

Now let's consider a more optimistic scenario. Let's look at a future narrative in which the United States and the rest of the energy economy don't react defensively to a crisis, retreating deeper into the hydrocarbon economy, but rather move in an entirely different direction. Let's start by supposing that our oil disruption takes place under different circumstances. Suppose that our Saudi succession struggle occurs not today, but a few years from now—say, 2008—and is slightly less severe, provoking a loss of just five million barrels of production. More important, suppose that, in the meantime, American confidence in energy has been badly shaken by a series of smaller, almost preparatory energy crises, and that consumers and politicians alike no longer find comfort in the energy status quo. Suppose that things have gone badly in Iraq, and that Americans are in no mood for any more oil interventions. Suppose that a progression of blackouts and natural gas price spikes have persuaded consumers that traditional U.S. energy policy has failed and that energy is too critical to be left entirely to the "free market." Suppose that, despite U.S. efforts to undercut OPEC, the cartel has kept oil prices above thirty dollars a barrel, and that these higher prices have eroded the economy, while spurring interest in efficiency and non-oil alternatives. Suppose that "energy security" and "volatility" have become nightly news topics, and that stories about civil strife in places like Nigeria and Bolivia, or the pipeline "wars" between China and Japan, are routine fare on front pages and Sunday talk shows.

Suppose, further, that the data on climate have become irrefutable. Imagine that the effects of global warming that we've already begun to see today—the heavier rainstorms and killer flash floods, the more intense summer droughts and forest fires, the steady declines in the mountain snow pack that most of the western United States depends on for water—start happening so frequently and with such great intensity and damage that we begin to register an atmosphere of crisis. Suppose that a few big states grow even more frustrated than they are now over federal energy policy, to the point where they begin acting independently: upping emissions requirements for cars and trucks (as has already happened in California and New York), phasing in a carbon tax or cap-and-trade system (as is under consideration by northeastern states), or launching programs to replace the unreliable regional grids with new "distributed generation" microgrids. "You could easily picture a situation where states start doing things on their own," one climate policy expert at a U.S. environmental group told me, "and pretty soon, you have a patchwork of different and sometimes conflicting state regulations, which annoys the hell out of industry because it's having to adapt to all these different laws, and pretty soon industry is actually asking Congress to adopt some kind of uniform carbon tax."

In such a political environment, analysts suggest, the United States might respond quite differently to a disruption or some other energy "event" than it would today. Rather than struggling to defend the energy status quo—say, by invading some oil-rich region—U.S. lawmakers might be willing to risk a more progressive and interventionist energy policy—one intended to balance the necessary focus on increased supply with a new emphasis on energy efficiency and low- and no-carbon fuels and energy technologies.

Such a sweeping policy, were it to be enacted, would probably be built around a core of long-term goals—among them, staying within a hundred-year carbon budget, and moving toward a hydrogen economy. Significantly, this new policy would emphasize the concept of a "bridge" economy, a transitional phase designed to arrest the worst of the current energy trends, while giving us more flexibility in eventually creating a new energy system. To encourage this transitional stage, the policy would focus on three near-term objectives designed to jump-start the process: first, an immediate move to expand natural gas imports; second, the rapid deployment of a carbon tax; and third, dramatically improved automotive fuel efficiency.

Just as important, whereas past energy policies have been centralized, top-down efforts—with government picking the winning technology and forcing compliance—analysts say that this policy would have to be a blend of incentives and constraints. First, the United States would commit to spending substantial sums—as much as twenty billion dollars a year—for the long-term energy research that is critical to achieving core breakthroughs, but that private companies are typically unwilling to fund themselves. At the same time, government would set specific targets—such as emission levels or miles per gallon—complete with penalties for failure, but would allow the market considerable leeway in meeting those goals. Thus, if federal (or state) governments required that the fleet average for new vehicles sold in America be boosted to forty miles per gallon by 2020, for example, automakers would be largely free to choose how to achieve that goal. Similarly, where the government might set specific targets for a carbon budget or emissions levels, utilities would choose how they hit those targets.

***

Because the bridge economy will be fueled initially by gas, the first step for U.S. policymakers will be to dramatically increase the availability of gas as quickly as possible. Government will move immediately and aggressively to boost gas supplies—partly by increasing domestic drilling, but mainly through a rapid expansion of gas imports. American officials could accelerate construction of the long-delayed gas pipeline from Alaska and Canada to the lower forty-eight states by offering price supports and "soft financing" (low-interest loans with long payoff periods), to encourage skittish energy companies to make the necessary investments. As one industry analyst told me, "if the Feds asked companies to map out the cheapest pipeline route and then offered loan guarantees or soft financing, we could have that pipeline built in three years, max." Longer term, the United States would step up the approval process for construction of dozens of new sites for LNG regas terminals along the U.S. coasts and would work with Mexico to build up regas capacity in Baja.

Most of this new gas supply would be sucked up by the burgeoning gas power market, as coal-fired power plants were rapidly replaced by cleaner gas facilities, including smaller microturbines in office buildings and distributed power systems. As gas supplies gradually climbed, surplus gas would go toward other transitional energy uses. Natural gas could fuel fleets of specially converted buses, taxis, and other vehicles, especially government fleets, and slowly replace oil's share of the transportation market with a cleaner-burning fuel. As special "gas-to-liquids" technology developed, gas could be refined directly into synthetic gasoline and diesel for transportation—although this probably wouldn't be a major fuel source until after 2010. One important use of gas would be as a transitional feedstock to make hydrogen for fuel cells. Gas-derived hydrogen would itself serve as a transitional fuel, powering government fleets of fuel cell cars, as well as stationary fuel cells in experimental distributed power grids—thus helping push fuel cells from the research lab into the market.

In the long term, the gas bridge economy might run for two to three decades. During this time, the rate of emissions growth would begin to slow. A new model for a more distributed power system would be operating in places around the country. Fuel cells would be slowly but steadily penetrating both the automotive markets and the stationary power markets and laying the groundwork for the eventual emergence of a hydrogen economy once technologies to make hydrogen from renewable technologies, like solar or wind, or from clean coal, became cost-competitive.

***

The second component in an energy bridging strategy would be the adoption of a carbon penalty. Even the Bush administration recognizes the importance of this "market mechanism" as a catalyst for long-term climate and energy policy, but it has feared antagonizing the politically powerful coal interests, which believe such a penalty would put them out of business. A more progressive future administration could neutralize that resistance by making the carbon penalty part of an aggressive government campaign to develop clean coal as a long-term, carbon-free fuel.

First, analysts say, the White House would need to "de-Kyoto-ize" the debate over climate and CO₂ emissions. Rather than concentrating on the 1997 treaty (which is impossible for the United States to comply with today, and would be less achievable by 2008), the United States would embark unilaterally on its own domestic emission reduction campaign, possibly with the idea of rejoining a modified international effort at some point in the future. The government would create a carbon budget for each industrial sector, starting with the worst offender—power generation—and would assess a modest penalty for each ton of carbon. Rather than impose an actual carbon tax, the government, borrowing any useful lessons from the European systems, would encourage a carbon-trading system.

To ease the economic pain of a carbon penalty and deflect political opposition, the new American carbon cap-and-trade regime could be delayed—some analysts suggest starting it in 2018. The carbon penalty itself would also begin low—perhaps five or ten dollars per ton. It would rise gradually over the next two decades to a maximum of around one hundred dollars per ton, but with provisions for flexibility as new information emerges about carbon costs, or if the economic burdens of the tax are found to be too high. With the delayed schedule and low starting costs, utilities and other big emitters could plan ahead for the additional costs, phasing out high-emission assets slowly enough to avoid costly premature retirement.

Equally critically, by pairing the carbon penalty with a well-funded R & D program to develop technologies for coal gasification and carbon capture and sequestration—the essence of clean coal—the administration could create a long-term, carbon-free fuel solution while coopting coal interests. After years of being told that coal and climate policy don't mix, coal companies, unions, and utilities—as well as their allies in Congress—could become climate policy champions. "Right now, the coal industry sees itself as going out of business," says Reid Detchon, executive director of the Energy Future Coalition. Any policy that "can give them a brighter future, where coal is not the hated fuel, would be a huge winning scenario."

The cost of such a "winning scenario" would be relatively cheap. By some estimates, to have a near-zero-emissions clean-coal power plant, with carbon capture capabilities, up and running by 2020, the federal government will need to spend around twenty billion dollars, or a little more than a billion a year—a sizable sum, but far less than the government now spends subsidizing the oil and nuclear industries. The payoffs, if clean-coal technology succeeds, would be huge. An aggressive research and development program, coupled with the construction of a fleet of demonstration units, would drive down the costs of the gasification and carbon capture technologies, making these state-of-the-art power plants competitive on the U.S. power market and letting U.S. manufacturers begin selling this critical technology on the world market.

Over the longer term, a successful coal gasification industry could become a cornerstone of a hydrogen economy. Coal gas is rich in hydrogen, which means that, as coal gasification technology becomes more widespread and cost-effective, these high-tech factories could be used to convert coal, one of the cheapest and most plentiful fuels in the world, into lowcost hydrogen for use in large stationary fuel cells and, ultimately, in fuel cells for automobiles.

***

The third and final piece of the U.S. bridging strategy would be a no-holds-barred, multifront campaign to cut Americans' high consumption of oil and other energy. The White House would encourage stepped-up production of oil alternatives, such as biofuels from farm waste and, if CO₂ emissions could be controlled, synthetic crudes from Alberta tar sands. More importantly, the administration would move immediately to improve energy efficiency across the American energy economy—in homes and businesses, at industrial sites, in manufacturing processes, and above all in the transportation sector.

Boosting automotive fuel efficiency would have a huge, positive impact on long-term U.S. emissions and energy consumption—but could also be the most politically challenging to achieve. Although dramatic improvements in fuel efficiency are already technically feasible, there are few incentives to bring these kinds of cars to market. Since 1987, U.S. automakers, arguing that making cars more efficient would be too expensive and that American consumers don't care about fuel efficiency anyway, have stalled efforts to raise efficiency standards. While two-dollar-a-gallon fuel taxes in Europe and Japan have discouraged large cars there, that is not politically tenable in the United States; a more modest tax—say fifty cents a gallon—might fly, but it would have little effect: below a certain threshold, consumers don't take fuel costs into account when choosing a new car.

But many efficiency advocates and energy experts say that a U.S. president could break this decades-long impasse with a market-based "bridging" strategy that helps Detroit move away from existing automotive technologies and toward a low- or no-carbon vehicle. The key would be timing. Rather than forcing automakers to jump immediately to some new technology, like fuel cells, government would aim to improve the efficiency and emissions of existing internal-combustion technology. Whereas past policies have put the onus on Detroit to build fewer gas guzzlers, this policy would simply make gas guzzlers less attractive to consumers. Through a mechanism known as a "feebate," consumers choosing a vehicle that gets twenty miles per gallon or less would have to pay a stiff penalty, or fee—many advocates recommend as much as five thousand dollars. In contrast, someone buying a vehicle getting forty miles per gallon or better would receive a rebate in the same amount.

The feebate logic is simple: when buying a car, American consumers pay far more attention to up-front costs, such as sticker price, than to "life-cycle" costs, such as fuel or maintenance. Adding five thousand dollars to the sticker price, auto industry analysts say, would be enough to persuade most buyers to look at more efficient models. These buyers' purchase choices would then send a clear signal to automakers that greater fuel efficiency is a key selling point—and essentially harness market forces to improve fleet efficiency. Better still, because a feebate system is "revenue-neutral"—that is, fees collected pay for the rebates—it wouldn't require a budget battle in Congress.

American automakers and unions would probably fight feebates. Because Japanese and German automakers currently build and sell more fuel-efficient cars than American companies do today, foreign companies would have an advantage under the feebate program, at least until American companies could shift their own fleets toward greater fuel efficiency. But an activist U.S president could dissolve that resistance by offering two things. First, the White House would promote a market-based system that capped fleet emissions for each year but allowed carmakers to trade efficiency credits with one another, much as utilities would trade carbon emissions.² Second, the White House would offer Detroit a gold-plated olive branch: substantial subsidies or financial incentives to help American automakers and the unions make the transition to more fuel-efficient cars.

Such a bailout would be expensive, costing hundreds of million dollars, at least, and would provoke attacks from free-market proponents and fiscal conservatives. Even some environmental groups would be furious, charging that the White House was rewarding Detroit for decades of obfuscation and delay. But the deal could reasonably be pitched to the public as a national security issue—a kind of automotive version of the multibillion-dollar airline bailout enacted after the September 11 attacks. More to the point, a bailout may be the only way Detroit can be persuaded to improve efficiency without a costly political fight that could delay other elements of the U.S. energy program. "Basically, we're talking about a deal, a grand quid quo pro," concedes one former White House energy policy adviser who is now helping to craft an innovative automotive strategy. "In return for a promise of significant improvement in fuel economy, Detroit would basically get a massive bailout to pay for it to retool."

What is important about such a policy is that it recognizes the risks of forcing automakers to adopt untried, unproven technology. Fuel cells may indeed become the dominant power source for automobiles, and a critical part of long-term climate and energy strategies. But a self-sustaining fuel cell car industry is, at best, at least two decades away, and probably more—too long to wait to begin reducing our automotive emissions or energy use. Instead, under this plan, automakers would start cutting emissions immediately, through existing technologies, most probably gasoline-electric and diesel-electric hybrids, and perhaps direct-injection diesels and lean-burn ICEs. Within a decade, half the new cars on the road could be getting forty to sixty miles per gallon. This would cut CO₂ emissions dramatically and reduce oil demand by as much as five million barrels a day—in effect, we'd be improving energy security while buying ourselves another decade or two to develop a no-carbon transportation alternative. "It's the old adage that the perfect is the enemy of the good," says one energy analyst who works with the U.S. government. "You don't need to get to zero-emission fuel cells right away. If you can get to fifty miles to the gallon with a gasoline-electric hybrid, it means you've cut emissions and you can still use oil for a long time."

Eventually, of course, any bridging strategy would need to produce vehicles that are emission-free—which at this point probably means cars and trucks that run on some kind of fuel cell. The federal government could hasten this along in two ways. First, heavy investment in basic fuel cell research would speed solutions to such critical engineering obstacles as reliability, materials costs (especially platinum catalysts), and fuel storage issues. Second, a well-funded commitment to begin using fuel cells in fleets of government vehicles, such as the U.S. Postal Service trucks, or in cars for federal or state carpools, would create a small but important market for fuel cell vehicles. Last, just as the government now heavily subsidizes oil and gas production through tax breaks, during the bridge phase of the energy transition, energy companies and other producers, including homeowners with microelectrolyzers, would receive incentives for producing hydrogen.

***

As the bridging strategy takes hold, the outlines of the transitional energy economy would emerge. Traditional hydrocarbon systems would be gradually replaced or upgraded with a diverse mix of fuels and technologies. Energy production and distribution would become more and more decentralized. Each development would bring immediate benefits, such as lower emissions or improved efficiency, but would also help foster a longer-term change in the way we make and use energy.

In the auto industry, for example, the combination of consumer feebates, government R&D funding, and fleet rollouts would give carmakers and fuel producers a low-risk environment in which to launch new automotive technologies and fueling systems, including a hydrogen system, while building critical public awareness. Joan Ogden, at the University of California, Davis, notes that yearly fleet vehicle sales total 750,000 cars and trucks. If just a fifth of those sales involved fuel cell vehicles each year, she says, within a decade, the United States could have 3,000,000 vehicles on the road—a number that many experts say would provide a kind of critical mass for the new industry. At that level, volumes would be large enough to begin to make mass production cost-competitive, while providing energy companies with enough of a market for hydrogen fuel to justify adding refining capacity.

We would see a similar ripple effect from a carbon tax. As carbon became a rising cost, power companies would accelerate efforts to avoid it—either by using emission credits, or, as credits become too expensive, by moving to other, less carbon-intensive ways of generating power. At first, utilities would probably begin replacing older, coal-fired plants with gas-fired turbines (a likelihood that makes increased gas supply all the more critical). As carbon costs continued to climb, utilities would have an incentive to look at other options. Companies might consider building state-of-the-art power plants using IGCC if the technology were cost-competitive. As carbon costs climbed still higher, utilities might add on the more expensive carbon capture and sequestration technology—which, in theory, could be available and cost-competitive by then.

Utilities would also invest heavily in renewable power. Wind farms are already approaching cost competitiveness in some regions and would quickly become competitive in nearly any market as coal-fired power became more heavily penalized. As demand for renewable energy climbs, rising economies of scale would steadily bring down manufacturing costs for wind turbines as well as solar panels, allowing wind and solar farms to compete in more segments of the power market. For example, as wind power became more cost-competitive, it could be used more often as a base load, with more expensive gas-fired power being brought in during peak periods. Greater manufacturing volumes for solar panels would also intensify the pace of research and technical breakthroughs, including cheap, relatively efficient photovoltaic film that would, when applied to all building surfaces, dramatically improve the power-generating capacity of a specific site.

Granted, renewables still won't be as dependable as conventional power. Intermittency will remain a challenge to utilities and power managers, and there are clearly limits to the share of the market wind power could capture, regardless of carbon's rising cost. Yet many energy analysts believe that theoretical limits to renewables—for example, that wind can provide no more than a fifth of a market's power needs without causing disruptions—are based on the older grid model, with its huge central power plants and inefficient transmission lines and routing technologies. In the more decentralized models now under consideration, renewables will be able to play a much larger role.

In one experimental model, for example, utilities would use a combination of gas turbines and wind power to effectively invert the traditional base-and-peak-load scheduling model. First, a "smart" grid using hyperefficient switches and computerized power routing would be built to link several dozen regional wind farms, allowing operators to draw on power quickly from anywhere on the grid. If a scheduled delivery from a particular wind farm failed because of lack of wind, operators could quickly take a delivery of surplus power from any other wind farms with power to spare, thus smoothing out the supply curve. If shortfalls—due to unexpected wind deficits or periods of peak demand—were unavoidable, quick-starting gas-fired generators could be ramped up to fill in gaps in supply.

Such a model would require an overbuilding of wind-generating capacity, at additional expense, and would be dependent on careful site selection and a regionwide configuration to maximize the chances that wind was blowing somewhere in the system. Energy analysts say, though, that such a system, if carefully designed, would allow wind energy to take over a greater share of the base-load supply and cut the need for gas- and coal-fired power plants.

Overcoming the lower power density of renewable energy technology would be far harder—at least until hydrogen electrolysis became cost-effective. By as early as 2035, however, according to scenarios developed by the Pew Center on Global Climate Change, electricity from huge wind farms in the sparsely populated Midwest could be cost-effectively converted into batches of hydrogen. The hydrogen could then be piped to distant cities, much as natural gas is piped today, where it could be either used to make electricity in huge fuel cell power plants or sent to fueling stations for fuel cell cars.

Hybrid systems like these would dovetail with the larger movement, already under way, to revamp the overburdened U.S. power system. Even now, federal regulators are reassessing the impact of the 1990s deregulation trend, and many analysts expect that the government will reregulate parts of the power system, especially power lines and other pieces of the outdated transmission infrastructure that private utilities were reluctant to upgrade. As part of that movement, advocates say, the government could easily push a new grid structure, designed for maximum efficiency and flexibility, with new "smart" technologies that allow for faster, more efficient power scheduling and a wider range of power sources, renewable and conventional. A key feature would be the building of "microgrids," smaller, stand-alone systems that would let communities and businesses generate their own power. These systems would use whatever mix of renewable and traditional technologies was most economical. And with "net metering" (which is already available in thirty states) these systems could sell any power surplus back to the main grid.

This configuration would allow individual consumers to become power generators, as we saw in Chapter 8. It could also help address some of the obstacles to the development of a hydrogen economy; for example, until unit costs drop on automotive fuel cells, few consumers will be able to justify buying a fuel cell car simply for personal transportation. But keep in mind that fuel cell cars are not simply transportation devices: a fuel cell is a rolling generator—it doesn't "care" whether the electricity it produces goes to its own wheels or is sent elsewhere. In theory, when the owners of fuel cell cars parked at home or at work, they could plug their vehicles into the local microgrid and sell the fuel cells' power either to their employers or to utilities at daytime, high-demand rates.

Of course, this wouldn't be a money-making deal: as mini-power plants, automotive fuel cells couldn't compete with conventional power generators or even large stationary fuel cells. But as a way to partly offset the high capital costs of buying a fuel cell car, this plug-in approach could help the automotive fuel cell become economical sooner—while providing the power system with an additional source of power. This, say hydrogen enthusiasts, would be the first step toward integrating two markets that have long been separate—cars and power. "The beauty of hydrogen," says renewables researcher John Turner, "is that it blurs the differences between transportation and power, because it can be used for either."

***

It is important to note that the impact of an American bridging strategy would go well beyond the U.S. energy economy. Because the United States is so large a market for world energy products, a U.S. energy revolution would function as a catalyst in the transformation of the global energy economy, initiating a "domino effect" in energy that could ultimately change everything from emissions and energy use in the developing world to our oil-dominated geopolitical order.

The last time the United States got really serious about energy efficiency—after the 1974 oil price shocks—U.S. oil use fell so low that OPEC was nearly wiped out. A more permanent reduction—even if partly offset by rising demand in the fast-growing Asian economies—would completely change the global oil order. As oil prices fell—to as low as fifteen dollars a barrel, some analysts say—many big oil states would see their geopolitical status tumble. Some, like Russia, Venezuela, Iran, and Qatar, which have enormous gas reserves, could compensate by stepping up efforts to sell gas, especially to gas-hungry markets like China, India, and the United States. Other petrostates—like Mexico and Algeria, for instance—might be pushed into bankruptcy and would then require a massive, and inevitably United States-led, bailout.

Falling oil prices would also splinter OPEC. As Saudi Arabia, Kuwait, the United Arab Emirates, and Nigeria all tried to compensate for lower prices by boosting oil production, analysts say the inevitable glut would drive prices down further. Oil revenues would fall so sharply that many OPEC countries would suffer profound civil unrest. Some analysts believe unstable countries like Saudi Arabia would collapse. Others, however, argue that such lender nations as the United States, Europe, and Japan would step in quickly with financing packages—but would condition any loan on a commitment to economic and political reform. In either case, OPEC's power over the oil market would decline dramatically—as would petrostates' ability to finance terrorism.

Even as U.S. policies were undermining the existing energy order, they would be encouraging the development of a more sustainable one. A U.S. initiative to develop clean-coal technology, for example, would dramatically change the significance of an Asian economy powered by coal. If American companies can bring down the costs of IGCC and carbon capture technology sufficiently, China and India might find themselves able to burn their coal without dooming the climate to catastrophic warming.

In fact, many energy experts believe that the United States should not wait until the Chinese and Indians can afford clean-coal technology but should offer the technology as soon as it becomes available and should even subsidize the purchases, simply to avoid the catastrophe of an Asian energy economy based on dirty coal. Such energy charity would not be cheap: by one estimate, subsidies of that kind could run the United States at least ten billion dollars for the first hundred plants—a cost that conservative policymakers would oppose. But advocates of such clean-technology exports counter with three points. First, because China and India have little choice but to burn coal, if the United States hopes to avoid climate change, it has little choice but to help the Chinese and Indians adopt clean-coal technology. As one climate expert put it: "America is going to pay for climate, one way or another. It can either pay now to try to mitigate some of the effects, or it can pay later, when droughts and floods start decimating the developing world."

Second, advocates say that the United States could attach strings to its technology, making the offer contingent, for example, on a promise from Beijing to stop undercutting U.S. currency or dumping products on the U.S. market. Third, China and India will not be the only markets for U.S.-built clean-coal technology: many experts believe that the technology, once costs have been driven down, could give rise to a lucrative American export business—and reverse a depressing trend in which the United States has lost the lead in wind technology to the Danes and in solar technology to the Japanese. "We have to start looking at this less as a climate policy than as an economic stimulus for the U.S. industrial sector," argues Detchon. "We should be approaching this at scale, not as one-off R&D projects, but in a way that will make these units competitive overseas, where the bulk of the growth is. This is going to be a growth market, and the United States needs to build up a real manufacturing strength."³

Not every technology export will be so lucrative, particularly where the poorest countries are concerned. By lobbying multilateral lending institutions, such as the World Bank and the International Financial Corporation, to coordinate financing for the massive LNG projects, the United States and other Western governments could help accelerate the laudable effort to bring gas into China, India, and other "emerging markets." For the desperately energy-poor countries in Asia, Africa, and South America, the U.S. energy policy would need to be part of a broader development policy that included aid for basic energy purchases, transfers of U.S. energy technology, especially power systems, and, over the longer term, initiatives that encouraged third-world economic growth. Indeed, one of the most straightforward strategies all industrialized nations could pursue, experts say, would be to open up their own home markets to third-world agricultural exports, so that developing nations could begin earning hard currency to buy their own new energy technologies.

Politically, a new U.S. energy policy would send a powerful message to the rest of the players in the global energy economy. Just as a carbon tax would signal the markets that a new competition had begun, so a progressive, aggressive American energy policy would give a warning to international businesses, many of which now regard the United States as a lucrative dumping ground for older high-carbon technology. It would signal energy producers—companies and states—that they would need to start making investments for a new energy business, with differing demands and product requirements. Above all, a progressive energy policy would not only show trade partners in Japan and Europe that the United States is serious about climate but would give the United States the leverage it needs to force much-needed changes in the Kyoto treaty. With a carbon program and a serious commitment to improve efficiency and develop clean-energy technologies, says one U.S. climate expert, "the United States could really shape a global climate policy. We could basically say to Europe, 'Here is an American answer to climate that is far better than Kyoto. Here are the practical steps we're going to take to reduce emissions, far more effectively than your cockamamie Kyoto protocol.'"

Similarly, the United States would finally have the moral credibility to win promises of cooperation from India and China. As James MacKenzie, the former White House energy analyst who now works on climate issues for the Washington-based World Resources Institute, told me, Chinese climate researchers and policymakers know precisely what China must do to begin to deal with emissions but have thus far been able to use U.S. intransigence as an excuse for their own inaction. "Whenever you bring up the question of what the Chinese should be doing about climate, they just smile. They ask, 'Why should we in China listen to the United States and take all these steps to protect the climate, when the United States won't take the same steps itself?'"

With a nudge from the United States, argues Chris Flavin, the renewables optimist at World Watch Institute, China could move away from its "destiny" as a dirty coal energy economy. Indeed, given China's urgent air quality problems, a growing middle class that will demand environmental quality, and a strategic desire to become a high-tech economy, Flavin says, Beijing is essentially already under great domestic pressure to look beyond coal and is already turning toward alternatives—gas, which is in short supply, but also renewables, especially wind, a resource China has in abundance. Once China's growing expertise in technology and manufacturing and its cheap labor costs are factored in, Flavin says, it has the basis for a large-scale wind industry—something the right push from the West could set in motion. "As China moves forward," asks Flavin, "is it really likely to do something that no other country has ever done: run a modern, high-tech, postindustrial economy on a hundred-year-old energy source?"

Flavin, for one, thinks not. During a visit two years ago to lobby reluctant Chinese government officials to invest in renewable energy, Flavin was pleasantly surprised to find in his hotel parking lot a truck owned by NEG Micon, a Danish company that is one of the world's largest wind turbine manufacturers. Flavin was elated: "At least one leading renewable-energy company, located halfway around the world, is confident enough of its business prospects in China that it now has its own vehicles in Beijing."

***

There is, of course, a real danger in relying on such hopeful scenarios. As important as optimistic forecasts may be in reminding us what is possible, they can also distract us from what is probable —namely, that the transition to a new energy system will be enormously challenging and the outcome almost completely uncertain. We may know, for example, that the energy economy of 2030 will be a hybrid of sorts, meeting demand with alternatives fuels and improved efficiencies, yet still heavily reliant on hydrocarbons—but we have little idea how large a share each energy source will be providing. We know that oil will have ceded some of its share of the transportation sector to some combinations of alternative fuels or energy technologies, but again, it is unclear which alternatives, or at what price. We know that our climate will be warmer, and that our various environments will be changed, perhaps forever, but we don't know how dramatically or fatally. Above all, we know that our energy lifestyle—how much we use and how we use it—will have changed, perhaps radically, but we don't know whether these changes will have been proactive and considered or reactionary and shortsighted.

In this sense, envisioning an energy future is as much about knowing what can't happen as imagining what can. We know, for example, that although the transformation of the energy economy will be market-driven, we won't get to the future we need without some degree of government intervention. We know that although the world must use energy differently than it does now—more efficiently and more thoughtfully—we can't realistically expect individuals, organizations, or nations to use less energy willingly if doing so means accepting lower living standards. We also know that a real energy revolution cannot happen without the involvement of Japan, Europe, and the United States—the only nations with the economic strength and technological know-how to bring this future into being, but also the countries with the most to lose should this transition fail.

We know that for all the importance that technology will have, we cannot expect a technological magic bullet. Of course, breakthroughs in some core technology can radically alter the course of the energy economy—the invention of the gasoline engine was a critical impetus for the early development of the oil-based energy economy, and some new breakthrough (a cheaper automotive fuel cell, for example, or a dramatically more efficient solar panel) could completely change the path of our energy future.

Yet we have also seen enough to realize that what technology gives us it can also take away. Human history is littered with brilliant mistakes—promising innovations that through inherent weakness, or poor timing, or simple bad luck, failed to deliver on their promise. Nuclear power was regarded for decades as the energy of the future, a clean, quiet power source that seemed well on its way to a dominant share of the energy market—until the accidents at Three Mile Island and Chernobyl. Almost instantly, "nukes" became a huge liability, opening a massive gap in the global power supply that nations are still struggling to fill with other energy sources. "Failures in technology can be just as big a disruption to the energy economy as any kind of geopolitical crisis," says Gerald Stokes, director of the Joint Global Change Research Institute in Maryland. "What happens when the first hydrogen fueling station in Germany blows up, or you get a massive leak from a CO ₂ pipeline that suffocates a bunch of people? An accident like that could terminate a technology and eliminate an entire energy option overnight."

The only way to minimize such risks is by hedging our bets—by putting in place policies that encourage countries and companies to innovate, but also by aggressively pursuing as many technologies as we can afford to. We may, for example, end up using a single fuel, like hydrogen, for our transportation and power, yet employ a broad range of technologies for generating that hydrogen: solar, wind, and tidal, perhaps, as well as others we have yet to imagine. In short, we need to have more options, not fewer. This means both avoiding the tendency to back a single technological horse—fuel cells over gasoline-electric hybrids, for instance—and avoiding the impulse to ostracize technologies out of hand. Making synthetic crude from tar sands may be unfeasible now, but with some future breakthrough in carbon capture technologies, it might play an important role in the transition to a post-oil economy.

Likewise, whereas nuclear energy seems untenable today for a host of technological, economic, and political reasons, breakthroughs in design, manufacturing, and waste storage could resuscitate "nukes" as a viable energy option. The "demonization of nuclear power is not helpful in a world which, for better or worse, gets nearly a fifth of its electricity from fissioning uranium and where many countries would find themselves in a precarious situation in regard to their electricity supply if they were to opt for a rapid closure of their reactors," says Vaclav Smil, an expert in energy and economics at the University of Manitoba. For all its risks and flaws, Smil says, nuclear power has been essential in keeping CO₂ emissions from being far worse than they are today. If all electricity that is currently produced by nuclear plants were to be produced by coal-burning plants, Smil says, global CO₂ emissions would be about a third higher—2.3 billion tons—than they are today. "Curiously," Smil notes, "this impressive total of avoided emissions is almost never mentioned in current debates about the management of greenhouse gases."

Yet like most of those who devote their waking moments to imagining our shift to a new energy economy, Smil is far less concerned with the technology that we embrace than with our ability to see these technologies as mere elements in a larger, proactive, and very long-term energy strategy. As Smil puts it, the "critical ingredients of an eventual success are straightforward: beginning the quest immediately, progressing from small steps to grander solutions, persevering not just for years but for generations—and always keeping in mind that our blunders may accelerate the demise of modern, high-energy civilizations, while our successes may extend its lifespan for centuries, perhaps even for millennia." ⁴

***

Which path will we take? When I began work on this book, it was with a profound sense of pessimism. Given what I knew of the problems associated with the modern energy economy—from pollution and declining production to mounting carbon emissions—I was dubious that the process could be turned around in time to make a difference. Experts talked endlessly of disruptions so savage that they would push the world into a kind of permanent energy crisis, a "forever war" in which concerns about future consequences like energy poverty or climate were sacrificed for near-term "security of supply." Or perhaps we could manage to avoid a disruption for a few years or decades, meanwhile letting our "business-as-usual" energy economy move forward, its various instabilities and volatilities proliferating by the year, setting us up for a megadisruption from which civilization simply would not recover.

Today, my perspective is far more complex. I've come to see that the energy business is so innovative and fast to react and has proven so capable of overcoming obstacles in the past that I no longer doubt that companies themselves will be able to cope with the coming challenges—provided they get the right signals from government.

Here, too, the world is changing. For every reluctant policymaker in Congress and the White House, in Beijing and Moscow, in Riyadh and Lagos, there are leaders who are either brave enough to push for a new energy order or smart enough to see the political or economic advantages to moving forward. Iceland is launching the world's first hydrogen economy. Germany, Denmark, and Holland are adding renewables capacity at rates that exceed even their own optimistic projections.

And Europe isn't the only place where politicians are seeing green. In October 2003, Republicans in the U.S. Senate only narrowly defeated a bill that would have capped CO ₂ emissions and created a national system for emissions trading. Despite heavy lobbying by mining, automotive, and utility interests, forty-three senators voted for the Climate Stewardship Act—the best performance for any climate-related federal legislation in the U.S. Senate—and its main sponsors, Democrat Joe Lieberman and maverick Republican John McCain, say they may reintroduce the bill in spring of 2004.⁵ Lieberman and McCain aren't alone. Only a few weeks earlier, California's new governor, the cigar-chomping, Humvee-driving, archconservative Arnold Schwarzenegger, floored energy advocates when, less than forty-eight hours after being elected, he rolled out a plan to accelerate California's already aggressive targets for energy efficiency and renewable energy. If Schwarzenegger follows through—and the jury is still out—not only will California rival Germany and Denmark in the ambitiousness of its energy plans, but the Golden State will create an important and badly needed domestic market for new energy technologies, as well as a model for other states and even the federal government. One can even imagine a wave of miniature, state-led energy revolutions—not because other U.S. politicians will want to emulate Arnold Schwarzenegger, but because the evidence of the failing energy system will gradually become more conspicuous and thus harder for even the less daring among our politicians to ignore.

Perhaps most encouragingly, we may have more time than we think to overcome the current political inertia. In today's political environment, for example, pushing a carbon tax seems almost impossible. But as John Holdren, the former White House climate adviser, has pointed out, an entire climate policy need not be formulated and put in place today. Indeed, it might be preferable to put off some elements of a climate strategy. Al-locations for per capita CO₂ emissions, for example, which many climate experts see as inevitable, would be strongly opposed in Washington today because those allocations favor developing countries and disadvantage wealthy states. But, says Holdren, such a policy "does not need to be politically feasible today, because [per capita CO₂ emissions allocations] would not need to begin being phased in before 2015 or 2020, by which time people's everyday experience of the impacts of climate change is likely to have stretched considerably the scope of what domestic and international politics will allow."⁶ This is the perverse benefit of a slow-motion calamity: for a few decades, at least, the tougher decisions can wait.

Frankly, though, the thought of any kind of delay, no matter how rationally justified, terrifies me. No matter how successful or diverse our technology portfolio is, and no matter what kind of time frame we are working with, the sheer magnitude and complexity and unpredictability of the task at hand gives us little choice but to start transforming our energy system now. Energy poverty is not some future problem that may or may not materialize, but one that is occurring right now and will generate widespread instability and conflict if it is not immediately addressed. Even the long-term energy problems, like the decline of cheap oil or rising CO₂ concentrations, call for immediate action. It may be true that we can take two or even three decades to deploy carbon-free technologies and policies without seriously exceeding our 550ppm carbon budget. The point to remember here, though, is that to have those technologies ready by 2030, we need to start working on them today.

Starting now dramatically improves our chances of success, because it means we have more options, more freedom in how we deal with our energy problems. Starting now will allow our solutions more time to work, which means that we could take the cheaper, low-intensity routes—the incremental improvements in energy efficiency, for example, or the gradual improvements from low- to no-emission cars, or the cost-effective phasing out of coal-fired power plants—rather than having to make a last-minute, potentially ruinous leap to fuel cells. Starting now means we can test a fuller range of energy technologies and develop a full range of energy tools and methods and policies that give us an energy economy that is more diverse, more flexible, and, we hope, more effective.

Conversely, the costs of inaction are significant. Each year that we fail to commit to serious energy research and development or fail to begin slowing the growth of energy demand through fuel efficiency, each year that we allow the markets to continue treating carbon as cost-free, is another year in which our already unstable energy economy moves so much closer to the point of no return. Every delay means that our various energy gaps, when we finally get around to addressing them, will be wider and costlier to fill. By then, it will be too late for low-cost solutions and diverse portfolios and smooth, incremental transitions. Instead, we will need large-scale solutions that can be deployed rapidly. Little room will remain for concerns about sustainability or efficiency or equity, and our chances for long-term success will be seriously impaired.

The implications are stark. If we are to have any chance at building the kind of energy future we want, rather than having one foisted upon us, we need to begin constructing that future today—not in 2010, when the political atmosphere has perhaps become more favorable; not in 2020, when non-OPEC oil may have plateaued and rising oil prices are pounding our energy economy into a new, not altogether desirable shape; and certainly not after some supply disruption or energy war makes us even more defensive and reactionary and xenophobic, and thus even less inclined to save the world. In other words, we no longer have the luxury of simply waiting to see how the energy economy evolves and hoping for the best. From now on, we must take a proactive role in building our energy future, first by understanding why and how our energy system must be transformed, and then by working to ensure that the shift takes place. For, ultimately, the question facing us isn't whether our energy systems will change—indeed, the process is already well under way—but whether we can live with the outcome.