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[Episode #22] – Can Economics Guide the Energy Transition?


Is conventional, free-market economic theory really up to the task of energy transition and combating climate change? Can we let the so-called invisible hand of the market guide us through the troubled waters ahead, or will we need firm policy direction and deliberate, top-down planning to secure the best outcomes? How useful can free markets be, in transitioning us away from coal, and meeting our climate targets and securing enough carbon-free power to run our societies? Will they be any help at all in supporting technologies like carbon capture and sequestration, or geoengineering? Can negative discount rates help us pay for climate change mitigation projects? And what does the future hold for oil? We discuss all of these questions and more with veteran energy editor Ed Crooks of the Financial Times.

Guest: Ed Crooks is the US industry and energy editor at the Financial Times

On Twitter: @Ed_Crooks

On the Web: Ed Crooks articles at FT

Recording date: June 27, 2016

Air date: July 27, 2016

Geek rating: 6

Chris Nelder: Welcome, Ed, to The Energy Transition Show.

Ed Crooks : Well thank you very much. Thanks for having me on.

Chris Nelder: You know I guess we could start anywhere of all the things that we talk about, but perhaps we should start with this: given the many things that we have to change and the vast energy system that just underpins and runs our entire global economy and the resistance to those changes that incumbents, particularly the fossil fuel producers have, do you have faith in markets and laissez faire economics to really sort out the right solutions for climate change and energy transition? And if so, why?

Ed Crooks : Well I guess my starting point is that yes I do have a great deal of faith that markets and laissez faire economics. I'm going to then probably go on to qualify that with a large number of reservations. But I think as a general point, yes, certainly I think markets have proved they're worth down the decades and the centuries. Basic intuition I always think with markets is that what are markets and why do they work? The answer is there a way of processing information. It's a way of distributing information around an economy in terms of what is needed and what isn't needed, and it's a way of also setting incentives so that what's needed is provided. And again it's proved that with a much more efficient way of disseminating information around the economy than to try any kind of central planning, and obviously it's well known when you just think about the difficulty of understanding in any economy all the billions and billions of different products that are available, services that are needed, people are interacting in that economy, clearly it's beyond any person's ability to manage that and to manage that efficiently. And even given sort of unlimited computing power there's still nothing we could do that would make that kind of perfect allocation of resources. In part, of course, it's just because all knowledge about the future is imperfect. And you've talked about this plenty of times and we've discussed it in the past, just this issue about energy forecasting, as in a lot of other types of forecasting, is very imperfect, right. You know people have made huge mistakes about things. You know no one saw the U.S. shale boom coming for instance. Few people saw how fast the price of renewable energy would fall over the past decade or so. And so if you try to plan things too much, if you try to impose structure and say well I'm the smart guy here, I know what's going to happen, I can put in place the right frameworks and I can put in place the industries and the supply that will be there to meet the demand that I know is going to be there, then that's the way to make some very big mistakes. So I think that's I guess as I say the fundamental underlying intuition of market economies is that they are better at allocating resources in general than a planned economy. And that's obviously again, the obvious cliches but they're cliches because they are true. If you look at the Soviet Union or if you look at Venezuela perhaps more recently or other attempts at planning an economy, on the whole those experiments have been extremely unsuccessful and have clearly lagged way behind market economies, behind competition and so on. And so that's again I think a bit of a sense that in general, when we think about any kind of issue, any kind of problem in economic allocation and allocation of resources the market should be your first tool. Otherwise that's the basic first principle that you're going to want to go to is to say what is the market solution here.

Chris Nelder: Right. But you know that's not to say just because you can't perfectly plan an entire economy doesn't mean that you shouldn't attempt to plan some part of an economy, right. And just because a market is your first resource doesn't mean that it's always and only your last resource, right. I mean there's a lot of finer shades of control here that we could actually use successfully. It doesn't have to be absolute.

Ed Crooks : Yeah I think that's exactly right. And I think as I said when you start with that model of the market then next step you come to after that is ok, so where do markets work? What are the cases where they fail for a number of different reasons? What are the key kinds of market failure that we might want to think about? And what are the possible ways to address that? And I guess obviously again when we're thinking about environment, the classic one there is this idea of external costs, when there is a cost to some economic activity that's not born by the person engaging in that activity then the market, the pure market, the free market solution doesn't work. If there is something which companies are able to pollute without being forced to pay the cost of that pollution then you will get more pollution then society would want.

Chris Nelder: Right. So technically you're saying that the market is lacking information there, right.

Ed Crooks : Exactly. Both the two things of information and also incentives. There is no incentive for the polluter to control that pollution unless the costs are internalized. So an external cost becomes internalized and, as in the classic, then the polluter pays.

Chris Nelder: Right. So moving from theory to more of a real world example, let's talk about some concrete cases. So let's start with an easy one, retiring a coal fired power plant. Anyone who understands the climate change challenge would agree that getting the coal out of our power supply has to be priority one. But markets alone wouldn't have achieved that. They haven't achieved it. It wouldn't be happening right now if we hadn't in fact spent the past several decades gradually implementing ever more stringent policies limiting its emissions of various pollutants, and we've done some of that using market mechanisms putting a price on things and so on. But is it really markets at work? Aren't we actually saying you know what, coal is bad, all these emissions are bad, we just have to put some hard fast rules into place and say you're just not going to do it beyond this level. What can markets really do to get coal out of the mix now?

Ed Crooks : Well I think you exactly put your finger on it there, it's what you might call a mixed economy. So we've had market forces working but also being given a nudge by government. And as you say one of the crucial things in terms of curbing pollution from the coal industry was the system of markets for emissions permits for sulfur and nitrogen oxides and that again by allowing those permits to be traded have been extremely effective in reducing the pollution from the coal industry over the decades as you say.

Chris Nelder: But now we arrive at the Clean Power Plan, which isn't really using that kind of a mechanism.

Ed Crooks : Well indeed, but perhaps just before we go off the Clean Power Plan, think about some of the things that are kind of biting, because obviously the Clean Power Plan is still in the future and that's being fought through the courts as we speak and is certainly vulnerable to a change of administration and so on. But immediately we've had various other kinds of regulations on coal fired power including most recently the mercury and air toxic regulations which again have tended to make coal fired generation more expensive, and if you've got a coal fired plant you've had to fit new equipment to it to control those that mercury and air toxic emissions. So certainly you're right, that's a bit of policy and that has had the effect of raising the cost of coal power and that's getting at the point about internalising the externalities, that's basically what's happened there. The coal industry pollution that was inflicted on all the people now, the coal industry itself or the coal fired generators have to bear some of the cost of that. Because other thing, don't forget the other thing that's been huge in terms of what's happened to the U.S. coal industry is competition from cheap natural gas, and that's the thing we're actually still worried about 10 years ago, actually more recently than that, at the turn of the decade even, coal was still generating about a half of America's electricity and now it's down to about a third, very roughly give or take. And a lot of the reason that shift more recently has been competition from cheap gas and the rise of gas again which is now about equal with coal, maybe slightly ahead in terms of also generating about a third of America's power. And, well well all know the reasons why that's happened, that's about the shale boom and everything that's happened there.

Chris Nelder: But of course as well, I mean that's really only covered about half of what coal gave up in terms of market share, where the other bit was provided by renewables mainly.

Ed Crooks : Yeah, very true. And that's absolutely right. But, as I say, natural gas has been part of it. And then you say well has that been a market at work? There are arguments saying that there was quite a lot of government support for the natural gas industry down the years. There was tax breaks to encourage unconventional gas development using government support for research into unconventional gas and so on. Quite a lot of funding that as it were laid part of the seed corn from which the shale industry eventually grew. But even so there's also a lot of competition, a lot of private enterprises there, a lot of individual companies and entrepreneurs seeking to make money out of that industry who were responsible for this huge growth in shale gas production. It's now well over half of all U.S. gas production. There has been a lot of talk over that collapse in U.S. natural gas prices which in turn has driven a lot of the shift away from coal. So I guess I guess you call that a mixed economy. It's been partly market and partly not.

Chris Nelder: But that's almost an accidental way of the market pushing coal out. I'm trying to focus a little more here on energy transition, recognizing that getting coal out of the power mix ought to be a very deliberate and specific policy objective of our response to climate change. So if we insist on taking a market approach to that objective how would we do it?

Ed Crooks : Well I think the answer would be to continue on that trend we've seen in recent years which would be to encourage more use of natural gas. It's still, in terms of cost and well the combination of cost and flexibility essentially and dispatchability, if you're matching up similar resources like natural gas, it's still a more cost effective solution than wind and solar largely. I mean there's lots of different qualifications to that, but again.

Chris Nelder: Yeah. I mean there's a lot of places where wind and solar are competing just fine against natural gas as well.

Ed Crooks : Absolutely. And that depends on you know what time of day you are talking about and so on. So it's absolutely not a kind of an always and everywhere issue, but still for a lot of the country at a lot of the time then natural gas still is the cheapest option. And you can see that's why again a lot of private sector utilities and power generators with profit maximizing motives that they've got, they're choosing to build natural gas plants rather than anything else. And that is having the effects that are displacing coal fired generation and that is driving down the CO2 emissions from power generation. So you carry on down the road we're on already and you will certainly see more reduction in the total emissions from U.S. factories.

Chris Nelder: OK. Well, let's take another tack on this then. Suppose you believe as I do that we actually run into a non-trivial risk of drilling out the best sweet spots in the best natural gas plays in America over the next let's say five years. And then at that point gas prices are bound to go back up to the point where they're easily much more expensive than coal. So you can no longer count on gas being a market mechanism to drive coal out. What do you do now?

Ed Crooks : Well then you undoubtedly have to think again. And that's, who knows right how that's going to pan out. Others say forescasts h ave been wrong in the past and they're going to be wrong again in the future. So it's not at all clear whether that is actually going to be the course of natural gas production, and natural gas prices. But as you say, suppose it is, and it's certainly a possibility we can't rule out, then you are going to have to think about something else. And then clearly the question is going to be what is it that we can do in terms of putting in incentives of various kinds. And obviously there's lots of mechanisms in place already but whether it's renewable portfolio standards or feed-in tariffs or tax credits or whatever it might be, there will be something that will be needed to help the low carbon alternatives, which then if we were to forget? natural gas, then we are looking at renewables and looking at storage, you're going to have to do something to support those against coal because if you don't, as you say, in a completely unsubsidized market with a level playing field still there will be quite a lot of places where coal is still the lowest cost option. And then if you're serious about displacing coal for power generation you're going to have to do something. So in otherwords I'm not being a free market absolutist here, but I'm just saying that you need to have a policy and markets really working together.

Chris Nelder: Well yeah. OK, Fair enough. I mean I'm sort of surprised that you haven't mentioned putting a price on carbon. I mean to me that seems like the obvious policy prescription, the obvious answer to my question.

Ed Crooks : And indeed it is. You're Absolutely right. That would certainly be the most efficient way to do it. The crucial question there is why are you doing it? Well the answer is, as you say, you're trying to drive high carbon sources of generation off the grid and you want to be technology neutral to the extent you can, you don't really want to be picking winners. You want the market to be able to find the best cost ways of getting rid of carbon because that's again the most cost effective way to do it and you want to impose least burden on the economy by doing it. So as you say, definitely the smartest way to do that, set a tax on carbon, and then let the private sector innovate and discover how they can use that to make a profit and find the most cost effective ways to reduce carbon. The problem of course is just practicalities and that's, I don't think you'd find anyone really who would try to argue that the Clean Power Plan is kind of the first best solution. I think even its staunchest allies would say that some kind of price on carbon whether it's a carbon tax or some kind of emissions trading system, and obviously as was proposed in Waxman-Markey, something like that would be a better and a more cost effective way to reduce carbon than the kind of complexity of the regulatory systems and so on and the targets that are going to be imposed by the Clean Power Plan. But given that that's apparently unpalatable.

Chris Nelder: Not to mention Grover Norquist's pledge. I mean isn't that really why we don't have a carbon tax?

Ed Crooks : And indeed Grover Norquist's pledge which is, yeah as you say, that is clearly a very significant issue for as long as the present Congress lasts with its present complexion. And again these things are not forever, but if you need to get it move on and you need to start reducing carbon rapidly, as I think it's pretty clear that we do, then yeah I agree that politics is a big obstacle.

Chris Nelder: So suppose slap politics weren't an obstacle. I mea, suppose you Ed Crooks were Energy Secretary or whatever, King of America, and you had the ability to just choose your policy mechanism, and you had to go coal out of the grid. What would you choose? Would you choose a carbon tax? Would you choose some sort of a nonmarket policy standard like a renewable portfolio standard? What would you choose?

Ed Crooks : Yes, so I would definitely choose a carbon price on the grounds that that's a policy that works with the market and I say encourages the greatest efficiency and encourages the private sector to get involved and compete and to innovate in order to find the best solutions for reducing carbon. I think I'm still very much on the fence between a carbon tax and an emissions trading system. I always used to be very strongly favoring the emissions trading system which seems, it essentially targets the right thing which is what you care about actually is not the price of carbon. What you really care about is the quantity of carbon that's put into the atmosphere. And that's the way the emission trading system works is you set a cap, because it's cap and trade, you set a cap and then you allow people to trade within that to fund the best ways to hit that cap or to stay within the cap. And again that's a small policy that hits the right target and that allows people the lowest cost solutions to stay within the cap. The problem of course is that it is subject to abuse. It is subject to political wrangling. I mean if you see what happened in the European Union, there's been a lot of debate over where they should set the cap and so on, because the European economy has been so weak the cap has turned out to be much too high. And also you get volatility.

Chris Nelder: Which actually kind of more supports your point is that those who were in charge of making those projections blew it. They got a number too high.

Ed Crooks : Exactly. No, that's right. And then the other thing that you get then as a consequence is that you get volatility in the price of carbon which makes it hard for people to plan and plan investments. In particularly you've got a lot more renewable investment, and that's what you're seeing then now. Quite a lot of going on in Europe is people sort of putting in various kinds of fudges and budges to sort of supplement the carbon price that they've got in the emissions trading system because people find that, particularly if you're trying to do something complex, certainly if you're trying to build a new nuclear power plant for instance, which is obviously low carbon but a huge expense at a big risk, but also for things like offshore wind farms, anything that's kind of novel technology that's got some risk associated with it people if you add onto that the risk of what the carbon price is going to be you'll find that people won't invest. So that's a strong argument I think for the other approach, which although may seem quite different isn't really all that different than having a carbon tax, which again, same principle: put a price on carbon, you set the tax and then you give people more certainty. And then the problem is then you're not controlling the volume. So whatever the word might be is kind of an output your policy rather than being an input into it. But again you can adjust the tax if you find that your emissions are getting much too high or indeed much to low.

Chris Nelder: Well exactly. But you know can we phase coal out quickly enough to actually meet our climate targets with either an emissions trading system or a carbon tax? I mean many people think not particularly where it concerns coal power in the developing world and where you might not even have these kinds of stringent emissions controls.

Ed Crooks : Yeah, the issue here really is it's not so much about being market or nonmarket, it's about the cost of energy overall and the cost of different types of energy. And that's the crucial thing I think that governments and the international community has to reckon with. Which of course as you say in developing countries that still have enormous demand for coal power because still access to electricity is limited in many countries and in the countries that do have access to electricity they want more of it as they get more fridges and air conditioning and TV and all the other things that we enjoy. So there is a fundamental tension between that huge pressure for more energy coming from the population of these countries and the demand to curb emissions and not certainly to cap them from emerging economies but to control how much emissions grow under control emissions intensity and the emissions intensity of their GDP in order to take part in some kind of global climate framework as was agreed at Paris. So there is a tension there which, that desire for low cost energy pushes people towards coal. The desire to curb emissions pushes people towards renewables, that's sort of intrinsic to the technology really and it's about policy choices and that will be the same whether you've got a market or not-market system. And so if you had no policy action at all then it's clear that you would just get a lot more coal. So I don't at all disagree. I think the premise of your question, which is that if you want to get coal out of developing economies or at the very least control how much coal grows in developing emerging economies, you're going to require some pretty hands off policy action. But that's as I say, that would be whatever it is the type of framework that you choose simply because of the different nature of the technologies.

Chris Nelder: OK. So I also think about trying to take sort of a the other sort of market based approach. So what we've been talking about so far is basically Pigovian taxes, right. We're taxing away the thing that we don't want. But what about using a deliberate market approach to incentivise the thing you do want. I was writing articles probably 10 years ago saying this whole concept of carbon pricing and cap and trade that was so vogue at the time was really wrong headed because it was punitive and it would naturally engender all sorts of pushback from coal companies and from other fossil fuel incumbents. And instead what we should do is really focus our policy mechanisms on incentivizing the alternative so instead of just trying to stop up the tailpipe, just put a different fuel in the engine and everything will work out. And I think that's basically what we've been doing since then, like for the last 10 years. And we certainly have not had a carbon tax.

Ed Crooks : No no, I think that's absolutely right. As you say that's always politically more palatable to do that so you offer a production tax credit for wind or the investment tax credit for solar and other renewables. And as you say that's a much more popular way to go than putting a tax on fossil fuels. I mean I guess you'd say really it's the same thing right, that's the difference of presentation. It's not that difference of economic reality because the money comes from somewhere. If you're taxing one thing more than the other whether you put the tax on one thing and then put it on the other, or whether you give a tax break one thing and not for the other thing, you simply mean the economics are actually fundamentally the same.

Chris Nelder: Yes in theory. However when you're incentivizing something like wind and solar with a direct incentive to say you get this incentive for building wind or for building solar, that is different than if you're just sort of collecting money from carbon emissions in this giant general fund and then that fund has to be distributed, because that's when all of the abuse creeps. That's when the distribution of those funds doesn't necessarily go to wind and solar or the other things that you do want. So you know I think there's more than just a difference of presentation there.

Ed Crooks : Yeah, no, I agree with that. There's a political difference as well. And again one way to get around that issue about the abuse and the fraud and some of the shenanigans would be to make it very clear if you put a carbon tax in that you would then give the tax revenues in some kind of rebate. So you would have a revenue neutral carbon tax that would be balanced by cuts in payroll taxes or something like that. Which seems, as you say, in any kind of pure Pigovian terms seems like the most kind of absolute no brainer. I mean it's obviously clear, should be obviously clear to everybody that if you tax something you get less of it, any tax on anything is a disincentive to it. So why it is that we tax wages and profits, which are good things right, we should be wanting people to have money and to make profits, and we don't tax pollution. I mean it's nut. Absolutely crazy. And sometimes, and quite often even on the Republican side of politics, you will find people who understand that argument and get it and will advocate for that. But as you say they does seem to be Grover Norquist's intervention that does seem to be, even that argument is quite a hard one to make.

Chris Nelder: All right well, you know I'd consider that a fairly simple example that we just talked through. Let's go through aslightly more difficult one. Nuclear power. You know right now we're seeing nuclear plants being scheduled for closure left and right because they simply cannot compete against the cheap natural gas and renewable alternatives. Some people are worried that by shutting down that low carbon capacity we're actually making it more difficult to meet our emissions targets and we that should be doing something, anything really, to keep them running in the interest of climate action including special subsidies. So you know there are people out there arguing for special subsidies for nuclear or capacity markets or carbon pricing, and they seem to be just sort of willing to throw any interest or any commitment to the free market to the wind in the service of getting that job done. And even there I'm not sure that carbon pricing would actually be sufficient to keep nukes in the money anyway, even if we had a carbon price. Because of course it would equally incentivise renewables and demand response and efficiency and all those other things which also compete directly with nuclear. So I don't know. I mean how can markets help us here with the problem of losing low carbon nuclear capacity?

Ed Crooks : I agree this is a tough problem and as you say the way market forces are clearly working now is very much against nuclear power. And I think it's no coincidence if you look at the places where new nuclear capacity is being put in at the moment, it's in essentially nonmarket economy, it's a joke. It's in nonmarket economies like China obviously, which is the biggest investment in new nuclear power. Past the Middle East, you have the United Arab Emirates and so on.

Chris Nelder: Or vertically integrated utilities in the U.S.

Ed Crooks : Well yeah but also because France is another one. And also Georgia, that's Georgia U.S., not Georgia in Europe. What's essentially going on there is it's a vertically integrated utility which is basically getting to pass on all of the cost onto consumers. They have an agreement with the regulators there in Georgia, and within limits, and I know there's been some debate and argument over the cost recovery. But basically what's going on in there is that they've been told Georgia Power that's building the new plants of Vogtle is being told that they can get back whatever they spend on those plants. And that's what's given them the confidence to invest and that's the only reason they're able to get ahead. If they were having to compete in a free market against people putting up gas fired plants which are much cheaper to build, much more certain, a much less construction risk in them, and still for the moment have very cheap fuel, there'll be no contest and no one will build a nuclear plant at all. So I think essentially what markets are doing now is militating against nuclear power and the striking thing has been that not only are markets militating against new nuclear but it will militating against old nuclear even. And when you look at the costs that have to be borne, there's a whole generation of the U.S. nuclear fleet that's really coming up towards the end of its designed life. For instance the Diablo Canyon example, I think that's 20/24/25 years when their licenses run out, if you were to keep them going beyond that, if you were to try to keep on going beyond that there's a lot of work that would have to be done to those reactors. There are issues with the water intakes and outputs and so on and again. Money would have to be spent there. And given where prices are, given the competition from natural gas and low cost renewables that just doesn't seem economically viable. So question, is there something that could be done? Is that a market failure that needs addressing? I'm not 100 percent sure that is. I think as you say if you take carbon pricing and if you think that what we're trying to do is reduce carbon here, then you should be letting the market work and you should be letting the market find most cost effective ways of reducing those emissions. And I think if you impose higher cost solutions on an economy and on an electorate that's where you start to get economic damage from your energy policies, and then you also you get into political trouble and those are risks probably that you don't want to be taking. And so that's why it's best to just let the market work and let those lower cost solutions come through. Now all of that said, it is possible that there is a sort of a time preference issue here. And it's possible that we're being shortsighted and just thinking that nuclear is inefficient and not cost effective because it happens right now to be more expensive than natural gas. And as you say, if you right about natural gas supplies tightening very sharply in five years time and the price of natural gas going through the roof and we shut down our nuclear plants now, then we might regret that and we think that was a really stupid thing to do, and why didn't we keep a more balanced portfolio. Why didn't we manage that risk better by keeping more diversity in our electricity supplies and preparing ourselves for this eventuality and putting in a system that would be less effective and less damaged by high gas prices. And maybe you all think that and maybe you could save at the cost of that, so that's why on those grounds you could justify a kind of nonmarket intervention and to think that you should just put in extra special subsidy into nuclear power. But I think the case is by no means clear cut.

Chris Nelder: Well you know to be frank I mean when I look at the cost curves and sort of the adoption curves as well of alternatives, natural gas and all the renewables, it seems to me that renewables clearly have the winning hand here. I mean they're starting from a very low base but their compound annual growth rate is ridiculous and they will think pretty quickly overtake natural gas for new capacity additions if they haven't actually already in the United States, it's kind of hard to tell with most current data, and worldwide. I mean we're seeing prices all around the world at under 4 cents a kilowatt hour for wind and solar projects. Under 3 cents in Dubai. That's going to be really tough for anything to compete with.

Ed Crooks : Yeah. And different places in different times then obviously you need to do something at night and so on, so it doesn't mean you're going to be able to do without fossil fuel power altogether. But yes, certainly, that does seem to be the way things are heading. And as you say if you think about that competing against nuclear power, as you say, if you're worried about the price risk from a possible spike in natural gas prices, probably renewables would be the more cost effective hedge against that rather than nuclear. And that's clearly what Pacific Gas and Electric are thinking when they are setting out their decison and why they're taking that decision to shut Diablo Canyon. That's very much the way they view the world. And I don't necessarily think they are wrong.

Chris Nelder: I mean they're pretty clearly losing money right now. So there's only so far you want to go down that road before you say you know guys, we probably stop doing this. So, OK. Well then I think we both agree that to the extent that we might decide as a society that we have to keep our existing nuclear fleet in operation for a while longer irrespective of the economics that there might be some sort of an intervention, a nonmarket intervention, some special subsidy or something to keep it around. But you know even in that case I see, I wouldn't say it's impossible that that approach could keep our nuclear fleet alive, but I wouldn't say it's a given either. You know I mean just the cost of alternatives like demand response, demand flexibility, efficiency, all those things, it's just so much lower. And we really have, we are far from having picked all the low hanging fruit in those domains. So I think from a policy perspective you'd have to say you know it makes more sense for us to spend our money. We just get so much more bang for the buck if we spend that on efficiency and demand response and demand flexibility and some of these other kinds of rooftop solar and so on before we start putting in special payments to keep our nuclear fleet alive.

Ed Crooks : No, I think that is absolutely right. And then of course storage is also the other big one. And I know obviously storage is not essential as you say because you've got the market response and so on, storage isn't essential to have a greatly increased use of renewables on the grid in most places. But even so, it will make a big difference and that's going to be the thing which if we really see a big shift in the cost of storage then all bets are off on other energy types I think.

Chris Nelder: Yes exactly. Yeah, the reason I didn't mention storage just now is because the cost hasn't come down to that point yet, but I think looking out maybe five six years we could easily see it happening. That would really I think be the end of any hope at all for nuclear is if storage got down to the kind of price point that it needs to be out to really support high renewable generation mix.

Ed Crooks : Yeah, I think that's absolutely right.

Chris Nelder: OK let's go to the hardest one of all. Carbon capture and sequestration.

Ed Crooks : Yeah.

Chris Nelder: It's quite clear to me at least that CCS is just never going to work without hundreds of billions of dollars in Federal subsidies. In fact former IEA director Maria van der Hoeven said as much to me directly. And even if it did have all those subsidies, I'm not even sure that they'd be able to compete with renewables. I mean I just think that the time isn't going to work out for them. And so CCS there is to me not a market based solution either.

Ed Crooks : Yeah, no, I think that's exactly right. I think CCS is one of those things where we should only do because you're worried about climate change. In every other form of energy, and certainly in the case of renewables, there are other reasons why you might want to invest in them. There's the local pollution issues, there is energy security, there's portfolio mix and not wanting to be exposed to price risk of fossil fuels. Carbon capture, you only do it because you want to keep carbon dioxide out of the atmosphere. And so it's a technology that hangs or falls entirely on your climate policy and on your carbon price. And there's a little bit of it as you know, some of the pilot projects that have gone ahead so far have been improving their economics by selling the carbon that they capture. And as you know carbon dioxide is a useful tertiary for oil recovery, so you inject it into oil fields, mature oil fields and you can squeeze a bit more oil out of them. And for that use, carbon dioxide has a price and it was about 30 dollars per tonne a couple of years back. So that actually make quite a big difference to the economics of carbon capture. And of course one of the ironies about the oil price fall is that tertiary recovery has become less attractive and so the price of carbon dioxide has gone down, so that particular route to helping the economics of carbon capture hasn't really been helped. But the other thing is that on the scale that it would have to be introduced, if you think about the number of fossil fuel power plants that are in the world that produces vastly more carbon dioxide than we could ever be practically used for the oil industry, the oil industry doesn't have anything like the same demand for CO2, even if it were all in the right place which of course it's not. Most of it is being generated by power plants that are a long way from any oilfield. So you are having to find purpose designed places to store your gas in. That's a very politically contentious issue. It has proved in Europe a few times, they've tried to do it there, there has been a lot of local opposition. People don't like the idea of CO2 being stored under their feet. And still just the capture technology itself is very expensive. The way of extracting CO2 from flue gas is costly and takes a lot of the power of the plant as well do it. So for all those reasons it's a very difficult technology. And as you say if you have any other possible solution for reducing CO2, that's not going to be the one you're going to go to. And I think again a carbon pricing regime whether it's a tax or an emissions trading system that by itself is just never going to support carbon capture. Now that's not to say it'll never work and certainly you hear all sorts of interesting ideas. There was one the other day that got reported quite a bit about sort of casting CO2 into stone. You hear, there's an interesting idea that Exxon Mobil are looking at where you use it in fuel cells and you can actually generate power during the capture process using the flue gas to create a pure stream of CO2 and to generate power at the same time. So if any of those things would work then I guess it might look a bit different and it's certainly worth putting investment into those and again research into that kind of blue sky technology. That's the stuff that the market doesn't do at all well then again that's a clear case for policy intervention to back those kind of things. But absent that kind of technological breakthrough I think you're right, I can't wait to see a role in the market for carbon capture.

Chris Nelder: Well under the umbrella purpose of doing something about climate change and supporting energy transition I gotta say I mean we're kind of knocking down the alternatives pretty quickly here.

Ed Crooks : Indeed we are.

Chris Nelder: And we don't really have any great market solutions to any of them. Now what do we have left? What haven't we talked about? We haven't talked about geoengineering and space based something or other, right. And those are clearly not going to work under any sort of a market structure.

Ed Crooks : No indeed and probably not under any other structure right. Those are the things where I mean geoengineering always makes me laugh. The kind of the idea that we can manage the climate sensitively enough that we can kind of you know tune it to precisely the right degree of cooling to offset the warming that we're going to get from extra CO2. It just seems nuts to me. I always things of it like stepping into a hotel shower where you've got an unfamiliar control knob and you turn it and it's much too hot and you turn it back and it's much too cold. You know it's setting it to precisely the right temperature is extremely difficult.

Chris Nelder: And if we struggle with hotel shower controls what do we think we can really do with the climate, right.

Ed Crooks : Exactly. And so, actually again, despite the kind of hopes and ambitions of some of the people who advocate geoengineering, I think the idea of leaving that to the market, something which has again you could say probably the greatest external impact of all because it would be the entire planet that will be affected, I think that would be absolutely insane to do that. And that's the kind of thing clearly which if we were so desperate that we haven't decided even taking the technical risks into account it was worth doing, that's obviously something which could not be left to market mechanisms. I mean I think that said there are potentially some of these sort of kind of little carbon sequestration type ideas on a small scale that may have some potential and again perhaps if you could reward those through carbon pricing kind of framework they might be worth trying.

Chris Nelder: What are you talking about here, like biochar or something like that?

Ed Crooks : Yeah exactly. Biochar and those kind of things, those kind of essentially the archetypal tree-type idea where carbon dioxide is captured from the atmosphere and stored in some kind of material. Those kind of things maybe, perhaps, you could imagine if the technology could be made to work then they could be fitted again into some kind of carbon pricing system. But you know you're heading to the outer reaches really here and again, given as you've been saying, given there are a lot of technologies that do actually work that we've got in use right now and that we can demonstrate their effectiveness and their cost effectiveness here and now today, it does seem rash really to be relying on a lot of stuff that is just a pipe dream in someone's imagination or a sketch on a bit of paper. You know we don't need to go to any of those things.

Chris Nelder: I mean I guess the only other kind of market based tool that I thought might still have some hope for helping us deal with climate change is this concept of a negative discount rate. And you know when I first started reading and writing about that couple of years ago it seemed downright goofy. Now look where we are. Worldwide we've got trillions of dollars hanging out there at effectively negative discount rates right now.

Ed Crooks : Yeah, it's very good point which I had not thought about, but you're exactly right.

Chris Nelder: And so you know Lord Nicholas Stern, William Nordhaus, some other people have carried on a very interesting and vigorous debate if you are into economics about how something like a negative discount rate can be useful specifically applied to climate change mitigation projects. The theory being that some person two generations in the future is going to have such a massively greater benefit than the discounted cost to a person today for doing a climate change mitigation project that it would be worth it. You know so you know it would be something like put a wall around New York City today, a seawall, right, to prevent against another hurricane Superstorm Sandy wrecking everything. And let's say it cost your average person of New York today 100 dollars a year to do that, right. Well that would be an inconvenience for them but not at a ridiculous expense. Whereas a person two generations from now living in New York City, that seawall might be the difference between having a city and not having one at all, in which case the benefit would massively outweigh the present cost. So I worked with that concept actually with the project I was doing with the state of Maryland when I was helping them develop a kind of cost benefit analysis for projects the state invests in, and in certain circumstances be like for setting land aside for preservation purposes, I think it makes sense to look at a negative discount rate you know when you're doing your net present value analysis. I mean do you have any interest in those kinds of ideas?

Ed Crooks : Yeah I mean I think that's absolutely fascinating. I think it is certainly worth thinking about. I mean when you think about know the Stern Nordhaus debate and all those debates on what is the right discount rate to use, it always seems to me that the uncertainties involved are so great it's kind of silly to pretend that you're going to get a definitive answer and when you're doing a cost benefit analysis you're going to be able to come up with well you know this is plus five billion and that's minus five billion, so let's do this and not do that. A lot of the time really it seems to me that kind of the arguments are, their standing in, economics is standing in for the ethics really. And you know what you're actually doing is your trying to make ethical judgments and value judgments that really the mathematics and the economics can't settle for you. You have a sense of is it right for us to look after the interests of future generations or not. And if it is should we look after them a lot and to the best of our ability or shouldn't we. And then what you think it is, you've done this professionally, but it seems to me that you can kind of do with the arithmetic what you like, at the end of the day it won't answer those questions for you.

Chris Nelder: I think that's true. And I wasn't actually looking to it as necessarily a way of answering a question but more as a way of bounding the analysis, right. As a way of saying well if you invest this amount of money in let's say preserving a chunk of Chesapeake wetlands that's very useful for storm surge mitigation and it's also an important habitat and it contains rare species and that's helping us deal with runoff into the watershed and all these kinds of issues right, that if you're trying to decide whether or not it's a good investment to do that, you're automatically making an ethical decision granted. But it also helps to be able to say well is it is it bigger than a breadbox?You know if I invest a dollar am I getting two dollars and benefits back or a hundred?

Ed Crooks : Yeah and that's certainly true. And also again it's useful I think comparing between different projects. We have a budget of this, we could spend it on this type of climate mitigation or that type of climate mitigation, what should we spend it on. Again you can see that's where doing those kind of calculations are worth having. It has it's limits that kind of an answer.

Chris Nelder: Well maybe we should move on to a topic that's a little closer to our personal passions: oil. So just to recap our listeners, you've been very bullish about unconventional oil, like tight oil, and I've been a skeptic. For the benefit of listeners who might not know, you and I actually made a bet about this in August 2013 about tight oil in the Bakken play. And that bet was that you thought that by the end of 2014, by the last day of 2014, North Dakota's production would be over 1 million barrels a day. And I bet that it wouldn't. And you won that bet. And as it turned out December 2014 was actually the month that North Dakota production peaked at 1.2 million barrels a day. Of course there's no way we could have known about that 15 months earlier but that actually turned out to be the actual month of the peak in the Bakken, and now it's fallen from about 1.2 million barrels a day down to about 1.1. And it seems pretty likely to me that it will actually slip below 1 million barrels a day once again by the end of this year. So, that said, I owe you a dinner fair and square. However let's revisit our thinking on that bet. So first of all, how did actual Bakken production meet or diverge from your expectations? I mean I assume that you didn't actually think that Bakken was going to peak in that very month, and then decline.

Ed Crooks : No I certainly didn't. And again, as I said before, I think the lesson of history is to be extremely cautious and humble about any kind of prediction you might want to make about in this area. I mean the reason I disagreed with you I guess at that time was it just seemed clear to me when you looked at the rig count, when you looked at how many rigs were working, when you looked at how big productivity was increasing, and when you look at the kind of things the companies were saying, there was still tremendous optimism around there at that point. There was still, although that the finances were quite strained, I don't think anyone was really making money in drilling but they were all still getting financing. It was a time of quantitative easing, there still being very strong, there was plenty of money around, high liquidity in the markets and people were able to raise money extremely easily both from the banks and from the equity markets. And so it just didn't seem plausible to me that activity would slow so sharply that you would get to drop very significantly within the space of as you say about the coming 15 months as it was. So that was why it, again, I claim no kind of precision at all. I had no idea that the December 2014 would in fact turn out to be the peak, but it was just instinct really that made me think that it wasn't going to be declining that fast. My memory is that did we not then, there was kind of talk about another bet even that.

Chris Nelder: Yes and I'll get to that in a minute.

Ed Crooks : But I think that we had a couple because did we not also discuss the possibility of whether North Dakota production will be over or under a million barrels per day at the end of 2050?

Chris Nelder: At 2025, yeah.

Ed Crooks : Oh yeah. I misremembered. I remember you always debated the question of whether it be under under a million barrels per day in 2015 and I was pretty confident that, not to go into production, would have fallen by then because of the very sharp slope of inactivity because another rigs dropping off, and so on. And because of the fast decline of those shale wells, I was pretty confident that North Dakota production would be below a million barrels a day by the end of 2050. And if I was wrong about that, wasn't it still there at 1.1 or so, and actually I think it's still above a million right now as we speak. So I'm not claiming to be any great sage on this, but it seemed to be the way the industry was going.

Chris Nelder: Yeah, so, I do have a few notes here about our subsequent bet. And we actually made just a few months later in November 2013. My bet there was that total U.S. production in December 2025 would be below where it was then, which was actually 7.7 million barrels a day. So total U.S. production has fallen from its April 2015 peak of 9.7 million barrels a day to about 8.7 today. So we're already down about 1 million barrels a day in just over a year's time. So basically to be in the money on our second bet about 2025, there needs to be another 1 million barrels a day decline between now and 2025. And to me that seems well within reason, unless there's some sort of a sustained very high price scenario between now and then. So what's your expectation on that? Do you think that we might actually have a sustained higher price scenario that we'll put all the drillers back to work and get us back over 9 million barrels a day? I don't know I mean the world's really changed a lot since late 2013.

Ed Crooks : Indeed it has. And no doubt that will change a lot more in the coming years. I mean I don't think it's one of these things that when you think back where were we 10 years ago? U.S. oil production was about 5 million barrels a day and heading down maybe five and a half at the time heading to its low-point which is down the like five somewhere. I think any idea, I wonder what the odds you could have got on it rising to another.

Chris Nelder: On the fracking revolution happening.

Ed Crooks : Yeah, yeah, exactly. Rising to another peak at 9.7 million barrels a day in 2015, I think people would have thought you were crazy. So what's it going to be 10 years from now? I'm going to be very cautious about any estimate I would make on that. I'm not going to commit anything. Oh yeah, I'll stick you another dinner on it, but I certainly wouldn't bet anything more than that. And I would guess that it probably will be above that 7.7 million barrels per day. And I think the reason as you say, the crucial factor in here is going to be the price. And I think reason being that if we believe that the world economy doesn't completely fall to pieces over the coming decade, and who knows it might do that. It's happened before, there's no reason to think it couldn't happen again. Let's say that it doesn't. If it doesn't then oil demand will continue to grow and it's been growing upwards about a million barrels per day or so for the last few years, and let's say it carries on at that rate, if it does that then the supply is going to have to come from somewhere, and for that supply to come forward there's going to have to be an increase in price. I think it's very unlikely that we could maintain that kind of growth and production with a price of only 50 dollars per barrel, therefore if the price goes higher then I think we're going to see quite a lot of that shale production become profitable again. And so we will see an increase in activity. You're going to see more drilling come up and you're going to see U.S. production bottom out at some point maybe next year and start to rise again. Now will that be enough to get it up beyond 7.7 million barrels per day in 2025? I'm confident, but I think there's a good chance that it will.

Chris Nelder: Well of course it's not an unlimited scale to the price either. I mean there is a consumer price tolerance. You know if we get out to let's say 2030 and it takes 300/400 dolalrs a barrel to keep U.S. production using tight oil at anywhere near 8 million barrels a day, that might very well not play, right.

Ed Crooks : And I think that's exactly right and I think that's a very important indicator to keep an eye on. One good way to think about it I think is the proportion of GDP that is spent on oil. And that's a probably interesting indicator just to be following.

Chris Nelder: James Hamilton's work on that.

Ed Crooks : Exactly yeah. That's right. And he has I think demonstrated very convincingly when that ratio goes too high, when when the country is spending too much of its income.

Chris Nelder: I'm trying to remember what he found. Wasn't it about 6 percent or something like that?

Ed Crooks : Yeah I think that's right. We should check that. But anyway the crucial point being that there is a level above which it will cause a lot of economic damage and we saw it in the 1970s and we saw it again arguably in 2008. And obviously there was a lot of other things also went on in 2008.

Chris Nelder: Yeah, just a few.

Ed Crooks : The subprime mortgages industry. Just a few, exactly. And I think it's pretty hard to get away from the idea that the oil price was part of what went on there and part of the reason why the economic downturn was so severe. And of course it's worth bearing in mind that it wasn't just sort of the peak above 140 dollars in 2008 but that kind of the inexorable climb up from well from a low point of about 11 dollars at the turn of the decade giving up like ten dollars every year. Subsequently to that, that did kind of ratchet up the pressure on consumers and on American consumers in particular, and that would certainly contribute to people finding their finances stretched and eventual collapse when it came in 2008. So I think that there are limits to how high a price can go. It's not indefinite. But I also think we could, but that that ratio, that ratio of spending oil to GDP is actually pretty low at the moment. And so I think we could certainly take higher prices for a while that would get that additional supply going without necessarily crashing the economy.

Chris Nelder: Right. So we're getting along okay here at 50 dollars a barrel today, or actually a little under. We know that we had serious demand destruction and economic sort of everything falling apart when we got to 150. So to me that's a useful reference right. You know you can conduct some business between 50 and 150 let's say. Do you have a different threshold in mind that you think about?

Ed Crooks : Well I think that's right. But I think it's also worth thinking about the world economy was still going pretty well, even at about a hundred. So there was not rapid growth and certainly you could say that the kind of the rebound after the Great Financial Crisis was a lot slower than we'd have liked and certainly a lot slower than a lot of people expected it to be. Job growth was very slow and so on. So that was not a fantastic economy, but it was a growing economy and it was slowly getting better and so maybe that's a kind of as you say roughly kind of half way the middle. If 50 is fine, 150 is disastrous, 100 is kind of just about a okay, not great but it's survivable.

Chris Nelder: And I think sustainable. I think 100 dollars a barrel at least in today's industry produces a pretty steady flow.

Ed Crooks : I certainly think that is right. And actually I think now when you look at what's happened in the U.S. shale industry and how much costs have fallen there, I think we've seen a kind of a real frenzy of activity. If prices did go back to 100 again I think you'd see a lot of excitement and a lot of money pouring back into that industry again.

Chris Nelder: Until we drill out the sweet spots.

Ed Crooks : Until we drill out the sweet spots. Which is, again, when is that going to happen? I always think about it as a race right. The geology is deteriorating because the sweet spot's being drilled out. But at the same time the technology is improving all the time and getting more sophisticated, you're getting longer laterals, people are getting smarter about the way they frack, targeting fracking, more precisely and so on. And so there's a tradeoff there. And sometimes the geology wins and sometimes the technology wins and we've been in a phase where the technology has been winning for quite a few years. And it's quite possible I think that'll continue to win for a bit longer. It's one of the things again, just in terms of being cautious about making predictions is that it's worth remembering just how young the shale industry is. You look at the very first shale oil wells, the first tests of experimental wells were drilled in 2008, results started coming in in 2008/2009. The industry's only ever been on an upturn and then it collapsed. Since then we haven't still been through one sort of complete cycle of up and down and up again. So we still have an enormous amount to learn about it.

Chris Nelder: Yeah I would agree with that. When I look back and try to think what was I thinking when we made that bet in August 2013, I think I thought the tight oil production would actually grow more slowly than it did. I think the main thing I missed there was not so much about the technology improvements, but I didn't think investors and banks would be so willing to continue feeding that much debt to the frackers long after it was apparent that they were never gonna get to the point where they could drill out a cash flow and would need constant infusions of more debt. I thought that once that became clear the debt stream would dry up. But it didn't. And secondly I expected tight oil production to actually peak out because the sweet spots had been drilled out and fracking had just become unprofitable even at 100 dollars a barrel. But in fact we're in decline again because oil fell below 50 and made it unprofitable that way.

Ed Crooks : Yeah. You know there's that great John Maynard's Keynes quote about you know how the market can always stay irrational for longer than you think. You know that you may be absolutely right, that kind of avoid anything crazy but the market can stay irrational longer than you can stay liquid. So it's possible to get into trouble by kind of being right at the wrong time. And I think you know there was, as you say, we were just in these conditions of extreme financial looseness during that kind of 2010/11/12/13/14 period when money was being thrown at people, it was very very hard to find good returns on anything. And if you look at an example, just think about the tech bubble. Think about the unicorns and think about all these companies that have risen up and become extremely highly valued despite having no profits and sometimes barely any revenue. Again very similar phenomenon of investment funds looking for some kind of return anywhere and putting that money on