We are still far from defining the pathway to an energy future that will be sustainable in both economic and environmental terms. One step in the right direction is for energy prices to reflect the full price of producing energy, much of which consists of externalities -- costs not captured by the energy markets because they are not incurred by market participants.

by Maurice Strong (published in the Havard International Review, Summer 1997)

As the world enters the next millennium, human civilization is undergoing profound changes that are often difficult to perceive. Energy use is very much at the foundation of these crucial changes; energy supply and security - and the viability of the electric power industry - will play a large part in determining our planet's future.

Nowhere is the challenge of sustainable development more clear than in the case of energy, which is at the centre of the relationship between environmental and economic policy. Virtually every environmental issue - from local garbage dumps to the deterioration of the global climate - has an energy component. It is imperative that global economic development be sustainable.

To achieve this, policy must address the environmental deterioration associated with unsustainable energy use, including the global socio-economic inequities between North and the South, which are so often the root cause of global conflicts involving energy supplies.

The prospect of a significant increase in Third World energy consumption over the next 30 years, an increase of between a factor of two and there, underlines a critical point: the industrialized world must reduce its environmental impact in order to "leave space" for developing countries to meet their own needs and aspirations.

There is now overwhelming evidence that the industrialized world cannot continue its historical patterns of production and consumption; but it is equally clear that the developing world cannot follow the environmentally destructive path of the developed world. The challenge is to devise sustainable means of providing the energy required by both developed and developing countries through significant increases in efficiency coupled with cleaner production.

It is critical that developing countries meet their rapidly growing energy needs in ways that will not move the human community beyond the thresholds of environmental security. The developed world, however, cannot expect them to respond to mere exhortations not to repeat the wasteful and harmful practices once practised by currently industrialized countries. This is recognized explicitly in the UN Framework Convention on Climate Change (FCCC) which places the initial burden on the member nations of the Organization for Economic Cooperation and Development (OECD) to set an example by significantly improving the efficiency of their own production and energy use, leaving space for developing countries to grow. OECD countries must ensure that developing countries have access to the latest, most environmentally sound and efficient energy technologies and to the necessary finances to purchase them.

The OECD must also take the lead in the research and development of new technologies and in finding solutions to the unresolved problems of existing technologies, including nuclear power technology. Funding for energy research and development from both the public and private sector has been steadily decreasing. OECD government funding for energy research and development has decreased by more than 30 percent over the past 15 years, a decrease equivalent to reduction by a factor of two relative to GOP. The share of funding allocated to the development of energy-efficient and renewable-energy technologies are minor components of the total energy research budget, about 10 percent and 8 percent, respectively.

Energy Efficiency for Tomorrow

The most immediate and cost-effective course toward a sustainable energy future is energy efficiency. Two of the major ingredients of sustainable development are economics and efficiency, or "eco-efficiency" as it is called -- efficiency in the use of materials and energy and in the prevention, disposal, and recycling of wastes. This was the main thesis of the book Changing Course, produced as the principal industry input to the Earth Summit by the Business Council for Sustainable Development. The book argued that a policy of sustainable development demands a reshaping of industrial civilization, creating a new generation of opportunities for industry, especially the energy sector.

Indeed, energy efficiency makes a much sense economically as it does environmentally. Increased energy efficiency and other changes in the energy sector have enormous potential to help consumers cut their energy use. For example, the experience of industrialized countries like Japan has demonstrated that environmental improvement and efficiency in the use of energy and resources is fully compatible with good economic performance.

Despite recent progress in more industrialized countries toward greater efficiency in the production and use of energy, the potential for even greater efficiency is immense. The International Panel for Climate Change (IPCC) has concluded that, using current technologies, emissions of greenhouse gases could be cut between 10 and 30 per cent at little or no cost to society over the next 25 years. The Electric Power Research Institute in the United States, hardly a radical organization, has estimated that US energy needs could be met without reductions in the standard of living, with 55 percent less electrical energy than is now consumed. Others estimate that the savings could be as much as 75 percent. In developing countries. which are even less energy efficient, the potential for improvement is even greater and the economic incentives more compelling. As was pointed out in the 1995 report of the World Energy Council's Task Force on "Energy for Tomorrow's World," developing countries will require an estimated US $30 trillion of new investment in energy facilities by the year 2020 if they are to meet their growing needs on the basis of current patterns of use and efficiency. This figure is nearly 50 percent greater than the entire world GNP-dearly an unlikely prospect.

The Industry and the Environment

It is the gross imbalances and distortions in the economic life and behaviour of developed countries that have given rise to the environmental risks the world now confronts. The key to the future security of both the energy industry and the environment is in focusing on the inter-relationship between the two. It is only through changes in economic management and behaviour and through the use of innovative financial mechanisms that a secure and sustainable balance can be struck between economic, environmental, and social needs and aspirations.

Energy production can contribute to a wide range of environmental problems, but none has more dramatic consequences for the future of the earth than that of climate change. A report released by the IPCC underscores the urgent need to reduce carbon dioxide emissions to the modest targets of the FCCC for the year 2000. Unfortunately, for the United States and other OECD countries, the environmental threat associated with climate change is often overshadowed by the more immediate political threats to energy security.

Today, however, nearly all governments recognize that climate change is a serious issue and that the emissions of greenhouse gases must be reduced. There are three key questions. First, what is the appropriate level of stabilization of atmospheric carbon dioxide? Second, what is the appropriate pathway to stabilization? Finally, what are the most appropriate technologies and policies? It is quite clear that any final stabilization target chosen to reduce the threat of human-induced climate change will require global emissions to be eventually reduced to only one-third of today's level. More efficient production and use of energy, coupled with a move toward renewable energy sources, will also address the two critical aspects of air pollution: local (particulates) and regional (acid deposition) air pollution, which are causing significant public health problems and ecological damage in developing countries.

As climate change negotiations continue, there seems to be an increased willingness on the part of DECO countries and countries with economies in transition to support legally binding targets for reducing greenhouse gas emissions. Within this context the private sector can play a powerful role as a source of innovation and action in promoting market-based climate protection policies and mechanisms. Given the large differences in the marginal abatement costs for carbon emissions, reductions, and sequestration between developed and developing countries, there is a significant economic incentive for both developed and developing countries to engage in carbon trading.

Trading can result in the transfer of both advanced environmentally friendly technologies and a resource rent to developing countries while reducing costs in developed countries. Even with modest commitments to reduce greenhouse gas emissions on behalf of OECD countries, the volume of carbon trading could well exceed U5$100 billion annually, thus providing a significant resource flow in addition to conventional government aid. Consequently, emissions trading and joint implementation are receiving more and more attention as instruments that can provide countries and companies with the needed flexibility to meet their environmental commitments in a cost-effective way.

One country, Costa Rica, is actively preparing for the eventuality of emissions trading. As part of a recent proposal, the Costa Rican government and the Earth Council have developed an alliance to market four million tons of carbon Certifiable Tradable Offsets (CTOs). This pioneering effort will be one of the first practical examples of opening the international market for trading of greenhouse gases by generating CTOs as a new carbon bond commodity.

The Earth Council has engaged the support of Chicago-based Centre Financial Products to market the sales of these CTOs at least initially on the Chicago Board of Exchange. The proceeds of these sales will serve two purposes. First, they will launch the consolidation of over half a million hectares of National Parks and Natural Reserves in Costa Rica, which are not currently in the hands of the state. Second, they will fund the development of the Earth Center, a multiple-use residential, business, and conference centre combined with a state-of-the-art educational theme park devoted to the topic or biodiversity, with a specific focus on Costa Rica's rich heritage of national parks and protected areas. The Earth Center is an innovative concept which will serve as a gateway to Costa Rica, support the non-destructive uses of the National Parks system, and create a benchmark for sustainable design and construction. Carbon benefits would only accrue once all activities to protect forested areas have been completed. The Earth Council is also working with Centre Financial Products to establish a private entity, the Global Environment Trading System (GETS), to work with international agencies and governments to develop and administer a market mechanism for broader carbon emissions trading.

Forgoing Fossil Fuels

Although the fossil fuel era is far from over, the way in which world energy needs are met will most certainly change in the next century because the current energy mix is clearly not viable in the longer term. We are still far from defining the pathway to an energy future that will be sustainable in both economic and environmental terms. One step in the right direction is for energy prices to reflect the full price of producing energy, much of which consists of externalities -- costs not captured by the energy markets because they are not incurred by market participants. The price of energy should internalize these local, regional, and global environmental externalities. As long as energy prices remain at artificially low levels, there is little incentive to develop alternatives to dependence on either fossil or nuclear energy.

The sources of energy are likely to change as well. The dominant role of petroleum in the energy mix will inevitably decline, although this may be driven initially more by environmental than supply constraints in the foreseeable future. Natural gas has established itself as the primary fuel source for this period of transition. Nuclear power, which was once seen as the miracle cure for all energy ills, also faces an uncertain future. On the positive side is the fact that nuclear power docs not contribute to carbon dioxide emissions. But the very magnitude of the consequences of a nuclear accident, the long term nature of the risks associated with disposal and storage of nuclear wastes, and the potential for nuclear proliferation have undermined public confidence in and acceptance of nuclear power in many countries. Continued reminders of the pervasive damage caused by the Chernobyl accident underscore these concerns. There is a very real risk of another catastrophic nuclear accident, and, should one occur, public concern over the wisdom of reliance on nuclear power would certainly be exacerbated. Although industry experts have confidence in the solutions they have developed for these problems, the public, too, must have confidence in them if the nuclear industry is to have the strong and sustained political support required to give the industry a new lease on life.

Further complicating the debate over nuclear power, many existing nuclear plants are aging and thus becoming increasingly vulnerable to breakdown and accidents. Maintaining them is becoming increasingly costly and rehabilitating them to extend their life will involve major capital expenditures. This is bound to have the effect of re-igniting public controversy concerning the role of nuclear energy. But this controversy should be welcomed rather than feared; a new dialogue on nuclear energy will have to take place in the context of a broad debate on the global energy future and on the mix of sources which will produce a sustainable balance between economic, environmental, and social needs. An informed public dialogue on these issues is essential to providing the basis on which political leaders and policymakers can base the difficult decisions they will have to make.

Another important component of this dialogue is, of course, the role of new and renewable sources in our future energy mix. While it seems clear that these sources will continue to provide only a small fraction of global energy needs in the near term, it is equally clear that their contribution must grow substantially in the period ahead. There have been promising progress in the development of solar energy, fuel cells, hydrogen conversion, wind power, and biomass power sources. This exciting new research could provide a breakthrough to new, sustainable energy sources. But these technologies are unlikely to produce early solutions to the world's energy problems. If alternative energy technologies are to provide vlable long-term solutions, they must be given strong new stimuli and support.

The impetus for the development of alternative sources could best come through substantially higher energy prices, but this is unlikely in the short term. However, a binding protocol under the FCCC could result in higher energy prices and a significant resource rent to developing countries which would stimulate both the public and private sectors to develop the next generation of cheaper, safer, and cleaner energy technologies. The impetus for research must come through government policy designed to support energy-related research through incentives and finance. Unfortunately, this is a time when even the mention of new financial commitments is an anathema to governments, But shifting even a portion of the subsidies, direct and indirect, which governments already provide in one form or another to other sources of energy, would give a strong incentive for the development of these new sources. Which subsidies may be useful in the near term to facilitate market penetration of new technologies, they should only be used for a short time period. Otherwise. they will start to distort the market and inhibit other new technologies from being developed and marketed. In Canada and the United States, for example, where gasoline taxes are much less than they are in other OECD countries, there are still substantial incentives to oil and gas exploration and development. And of the development of new and renewable sources were to receive only a portion of the subsidies that the nuclear industry has received, the prospects for development of new and renewable energy sources would be greatly accelerated.

Removing the Roadblocks to Sustainability

The Earth Council, in partnership with the Institute for Research on Public Expenditure located in the Netherlands, has just completed an in-depth review of the disincentives to sustainable development which exist in various sectors, including energy, road transport, water, and agriculture. The study found that subsidies in these four sectors are now costing the world upwards of US$700 billion - as much as the arms race. The report demonstrates dramatically that, in many cases, subsidies provide disincentives to sustainable development while denying the poor the benefits which better deployment of these resources could produce.

One idea that will not be easy to sell, but which may nevertheless be worth championing, is the levying of a form of it carbon tax - a tax on the carbon content of oil, coal, or natural gas consumption -- which might be more appropriately termed an "Earth increment." Some OECD countries have already experimented with carbon taxes, But this proposal would be specifically earmarked to fund measures designed to effect the transition to a sustainable energy future and, in particular, to cover the incremental costs to developing countries of utilizing the best state-of-the-art technologies in meeting their energy needs on a sustainable basis. It would also include support for the research and development of new and renewable energy sources and programs of education and awareness, Although the Organization of Petroleum Exporting Countries (OPEC) and some OECD countries have strongly opposed, for valid reasons, any form of carbon tax, they also have a long record of lending generous support to other developing countries, and may be willing to cooperate in a measure of this kind. Even a very modest carbon tax could generate substantial revenues, For example, a tax of U5$1Oper ton of carbon would generate a revenue from energy production and energy use of US$60 billion annually-seven times the current annual energy research and development expenditure by OECD governments of about US$8.5 billion per year. A US$l0 per ton carbon tax is equivalent to a tax on gasoline of less than five cents per gallon.

No country will have a more profound and decisive impact on these issues than the United States and OECD countries. Although most future energy growth will take place in developing countries, the policies established, examples set, and positions taken by the United Slates and OECD countries in the international arena will clearly be the prime factors in shaping the global energy future and in doing so, they will decisively shape the planers environmental future as well. This is particularly true of climate change. It is greatly encouraging, therefore, that the International Energy Association and the energy ministers of the E-7 countries are focusing so much attention on these issues. Given the long lead times that characterize major changes in the energy industry, the decisions made today will our energy future. Should no action be taken by the time the problems which will arise from inaction have become acute, it will be too late to fix them.

The necessary changes will not be easy; some may even think them unrealistic. Witness the public outcry and the political response in the United States to the recent and relatively modest increase in gasoline prices. But political realities change to accommodate the underlying realities that drive the process of civilizational change. The global energy dilemma will not go away by itself; delay will only compound the world's energy problems and make effective policy even more elusive.