Climate Change: Technology to the Rescue?
Continued world economic growth can only take place with energy, and lots of it. But today we are faced with a clear recognition of the potentially catastrophic effects of climate change on future generations. One hope is that technology will come to the rescue. Well, foolish us. Right now, we are faced with an underfunded, disjointed, proprietary and ineffective series of research programs, many of which stall before implementation.
The ever-present commercials sponsored by the oil giants on clean white screens with happy suburban families using a single joule of energy to power their SUVs and tree-lined manses are worse than just wishful thinking. Within the energy industry itself, R&D budgets are woefully low. A review carried out by PFC Energy in 2007, showed that of the top one hundred R&D spenders in the world, only one was an energy company-and it was ninety-ninth on the list. As a whole, energy companies reinvested less than 0.4 percent of revenues in R&D, significantly less than most other industry sectors. To put this into perspective, the combined annual R&D investment of the oil and gas industry is equivalent to thirty hours of global auto-fuel sales. Moreso, since the majority of this R&D is focused on the supply side, it is possible that annual R&D targeted specifically at energy efficiency and carbon management is closer to one hour of global auto-fuel sales. And, with a few exceptions, R&D investment by national oil companies, which control almost 80 percent of world oil reserves, is virtually nonexistent.
Since 2005, a number of oil and gas companies have stepped up their R&D budgets. But their investments are still dwarfed by those of the pharmaceutical, automotive and information technology sectors. This shows a surprising lack of long-term vision. The bottom line is that energy-industry R&D investment is too low, focused mainly on the oil and gas supply side, and is neither transparent nor consistently reported.
Incentives & Regulation Needed
Worse still, when novel technologies are developed, the energy industry is very slow to adopt them. Studies have shown that it can take almost thirty years for companies to adopt breakthrough technologies. Such conservatism is understandable given the high risks of the industry. But the irony is that energy companies want to see the results of pilot tests, yet few are willing to carry them out.
On one of the most critical challenges related to climate change-permanently storing carbon dioxide below ground, often termed carbon capture and storage (CCS)-policymakers appear to be counting on the energy industry for solutions. Here, the industry's aversion to technological risk could prove a major obstacle. Also, energy companies find themselves expected to invest in huge projects without any certainty of future regulation or potential profit. Apart from reputation reward, there are no obvious financial returns. A further deterrent, the potential leakage of stored carbon dioxide presents a significant environmental risk, for which pioneering companies could be held liable. This is hardly an incentive to proceed. To overcome these disincentives, governments and international organizations need to provide regulatory guidance on carbon policies and pricing or there will be little or no movement. Providing clarity on carbon regulation and pricing could shift significant private-sector R&D towards decarbonizing energy, and direct support of large demonstration projects could allow even the most conservative companies to invest in and later implement these technologies on a large scale. Radical change in the energy industry's cultural attitude to technological risk and new-technology adoption is a must.
Like most other sectors, the energy industry is keenly defensive of patent and intellectual-property rights. With the exception of companies providing services to the energy industry, competitive pressures significantly delay or even inhibit the spread of technology between energy companies and between the private and public sectors, making energy R&D heavily compartmentalized. Yet many climate-change experts, and indeed the IMF, believe that technology sharing and diffusion are essential. Major innovations rarely come from eureka moments. This is about creating a globally networked research community, extending outside of energy itself, to tackle the twin challenges of using energy more efficiently and developing viable low-carbon fuels. If such a network could be established on a commercial footing, perhaps innovation around technological solutions to climate change could be vastly accelerated, and the trillions of dollars of sovereign wealth funds, accrued from producing oil, may find a natural home.
Technology must be rescued before it can rescue us.
Lew Watts is the president and CEO of PFC Energy.