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March 2009 The Best is Yet to Come! Fall 2008, Volume 17, Number 2 Climate Change Don Fowke FCMC and Julian Fairfield FCA Business strategy needs to recognize the growing public pressure for action on global warming in both Canada and the United States, and the American need for greater energy security. In 2007 the Intergovernmental Panel on Climate Change (IPCC) was awarded the Nobel Peace Prize for its comprehensive evaluation of the effects of carbon dioxide emissions on the planet. IPCC calculate that, in order to hold the rise of temperatures to below 2 degrees C by the year 2050, we need to reduce carbon dioxide equivalent (CO2e) to 30% of the levels that were emitted across the planet in the year 2000. Exhibit 1 suggests how dramatic these conclusions are for the typical developed country. Using an assumed GDP growth rate of 2.5% per annum, and an energy intensiveness of 60% (where each 1% growth in GDP implies a 0.6% growth in energy consumption) the IPCC targets imply a reduction of CO2e emissions by 13% in 2010, 40% in 2020, 55% in 2030 and 86% by 2050 from the emissions implied in a “Business as Usual” projection.
For CEOs in major companies, with planning horizons 10 to 20 years and beyond, and especially those who must contemplate capital investments with useful lives beyond 20 years, getting a clear sense of what all of this means is both important and difficult. In Canada in 2005 about 610 megatons of CO2e were emitted into the atmosphere. Some 120 megatons were emitted by electric power plants, mostly burning coal. Another 200 megatons were emitted by transport, about 2/3 of this by road vehicles. Some 80 megatons were emitted by buildings, 80 megatons by extraction and processing, and 45 megatons by manufacturing. Other fugitive emissions make up the 65 megaton balance.
In short, we must plan for a transport and electricity energy system that is close to zero carbon. All of these shifts and conversions are feasible in a 40 year time frame, as the useful life of a coal fired generating plant is roughly 30 years and of an automobile roughly 15 years. Indeed, shifting vehicles from internal combustion engines to electrical propulsion promises greater efficiencies in energy conversion, and substantially lower costs. Businesses considering investments in these changes face the uncertainty of if, how, and when these changes might unfold. Canada and the United States have not been leaders in addressing the climate change challenge. Canada paid lip service to the Kyoto Accord, but did nothing. The United States repudiated Kyoto. In both countries there is a general grass roots political sense that climate change is a problem that needs to be addressed, but beyond good intentions political will has not materialized. Businesses work to reduce their carbon footprint, as do many individuals and public organizations. There remains enough skepticism about whether climate change is real, and if it is, whether human emissions are the cause, to dilute focus on the challenge. Without a major political shift, we are likely to see a three phase process that unfolds over the next 10 – 20 years. The first phase is a period of hiatus where things are to uncertain to make large rational investments. This is roughly where we are today with some moderate focus on efficiency and with most investments being small, reduced carbon and moderate time frames. In the second phase a range of initiatives will come into play to substantially improve our use of energy by around 20 – 30%, both by reducing consumption and by making more efficient the use of the energy we consume. This will create a breathing space where legacy assets can be run to economic life. New growth and replacement assets will be required to be green and clean and operate at close to zero CO2e emissions. At the end of this step most dirty legacy assets will be retired or at the end of their useful life. In the third phase, the remaining dirty assets may well be subsidized into retirement. The core issue is “how long is the first phase?” There are, however, other forces which are moving both the United States and Canada in a direction consistent with that indicated by the climate change challenge. These have to do with energy security and flow from US dependence on offshore oil, especially that from politically unstable regions. President Nixon first pointed to this issue in the 1970’s, and both presidential candidates in the 2008 election have highlighted it and expressed support for expansion of nuclear power in the United States. It seems clear that energy security will become a cornerstone of US policy in the decades ahead.
Canada is an importer of oil for Eastern Canadian needs, but overall a net exporter of both oil and natural gas from the the three Western provinces to the United States. Like the US, Canada’s conventional oil pools are either peaked, dwindling or expensive offshore production fields. The big and growing capacity is in the Athabaska Oil Sands in Alberta, and to a lesser degree, Saskatchewan.
This difficulty plays itself out in Canadian politics, and a resulting lack of coherence on policy. In the recent federal election the Liberal party’s green shift, or “green shaft” as it is known in the West, was seen as a plan to tax Alberta resource extraction to pay for lower income taxes in Ontario and Quebec.The very large capital investments in the Oil Sands have a useful life of 30 – 50 years, and seem inconsistent with the need to avoid hydrocarbon investments of that time horizon. However, this is does not need to be the case. Paradoxically, the Oil Sands are on the path to a lower carbon economy. While estimates vary about when the world will hit “peak oil”, and therefore have supplies dwindle, the US demand for secure continental oil supplies will grow dramatically for at least the next 30 years. It is clear that oil from the Oil Sands will be needed in the transition to a lower carbon economy in Canada and especially the United States, and beyond that for petrochemical and other industrial The challenge is to make the oil sands production processes cleaner and consistent Nuclear power and the Athabaska Oil Sands, the bete noir of the environmental movement, are key components of s successful climate change strategy in North America.
The thread in all of this is that there is a consistent and coherent pattern in the scattered tea leaves of climate change and energy security that can guide public policy, as well as strategic positioning and long term planning for CEOs looking out over a 10 – 20 year time horizon for their businesses. _____________ The New Management Network
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Meeting these targets in the developed world would imply revolutionary changes in the way energy is deployed in economic activity.
Reduced usage and energy efficiencies might reduce “Business as Usual” emissions by 40% by 2050. The additional reduction of about 45% would need to come partly from de-commissioning
coal power plants and replacing
them with nuclear stations. This is the direction of policy in Ontario. Much of the remainder would need to come from conversion of automobiles, trucks and trains from hydrocarbons to electric or hydrogen propellants.
In Canada some 80 megatons of CO2e were emitted by extraction and processing operations in 2005. A significant portion of this was related to the Oil Sands in Alberta. This deposit rivals Saudia Arabia in petroleum reserves, and its development is both the current engine of economic growth in Canada and a substantial source of friendly petroleum for the United States. The Oil Sands remain an environmentally
There are technical questions that need to be resolved in a 10 - 20 year time frame. These have to do with changes in the way bitument is hydrated to convert it to crude oil, and with the development
of generation IV nuclear reactors that are designed to support the electric, hydrogen and heat needs of the oil sands. These are more important questions to address than carbon capture and sequestration, which will likely prove to be uneconomic and ineffective as method for mitigating the carbon footprint of the oil sands. For all of this to come into alignment, there needs to be a coherence of strategies between the nuclear and oil sands industries and a government policy and incentive framework that operates in a much longer time frame than at present
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