Monday, June 23, 2008

Rudd's wasted energy

Illustration: Spooner

Australia should tackle the energy challenge with vision and bold leadership.

WHEN a new tide sweeps all before it, you have two choices: try to hold your place by swimming backwards against the tide, or decide quickly to ride with it so you can make the most of it.

This is the third big rise in oil prices in 35 years. We should know how to deal with them. We know that governments cannot shield us from rising oil prices without using our own money to do it. And we know that governments that level with the public and drive adaptation to change can turn it into something positive.

Brendan Nelson has made his choice: he wants us to swim backwards against the tide, raiding our savings to try to offset the petrol price rises. Kevin Rudd is yet to decide, and is being swept away helplessly by the tide, without actually heading anywhere. Yet this tide is taking us where he will have to lead us anyway.

The real problem with the PM's office is simple: it needs fewer tactics, more strategy. Rudd and his ministers must decide quickly what the big changes are they want to make, how they plan to make them, then put them into action and tell us why. That's leadership.

It is obvious that one of Labor's big changes will have to be tackling climate change — and that it will do so by making energy use more expensive. Despite this, Rudd campaigned last year on making petrol cheaper, has yet to switch tack, and left it to his climate change adviser Ross Garnaut to point out that higher petrol prices now will reduce the pain ahead.

Back in the 1970s, no country was more exposed to rising oil prices than Japan. Like China a generation later, it relied on cheap oil and coal to power its industrial transformation. When oil prices shot up, Japan's leaders realised it had to change the way it operated, and change fast. And it did.

Oil-fired power stations were rebuilt to run on coal. Car-makers such as Toyota made fuel efficiency a priority. The Government ran a national campaign to get business and households to turn down heaters and air-conditioners. Nuclear power spread, and Japan invested heavily to end the link between energy use and GDP.

It worked. Today, Japan and Australia have similar living standards, yet Australia emits 2½ times more greenhouse gases per head than Japan. In the '70s, Japan was not alone in riding the tide. The International Energy Agency, little sister of the OECD, says the world cut its oil use 10% in response to the price rises of 1973 and 1979. Yet a similar price rise between 2004 and 2006 saw demand grow by 3%.

Why the difference? Nobuo Tanaka, executive director of the IEA, points out that in the '70s plenty of oil was burnt to generate electricity, and it was not hard to switch from that. And demand has shifted from rich countries, where markets rule, to developing countries where prices are subsidised — so governments, not consumers, foot the bill for rising prices, muting the market response.

And in the '70s, governments led. Between 1974 and 1980, in the rich countries, government investment in energy R&D doubled in volume. One in every nine R&D dollars was spent on energy R&D. This time, governments have not lifted their R&D effort, and only one in every 30 R&D dollars is spent on future energy sources.

Two weeks ago, while meeting with G8 energy ministers, Tanaka launched a visionary attempt by his staff to work out how the world could cut global greenhouse gas emissions to half their 2005 levels by 2050. His bottom line is that it's doable, but it will be very, very hard, require all options to be used, and require almost $A50 trillion of new investments.

The IEA's Energy Technology Perspectives sums up its best guess, given what we know and can foresee about future prices and technologies. Between now and 2050, each year, on average, the world would need to build 17,750 wind turbines, 55 carbon capture and storage systems, 32 nuclear power plants, 100 biomass-powered generators, lots of hydro and 80 centralised solar energy plants, while installing 215 million square meters of solar panels a year on its rooftops.

Wind would be the main source of new power, followed by solar — but with big contributions from nuclear, geothermal, hydro, and coal and gas stations with carbon capture and storage. Politically, that is challenging. The technological and economic tests could be even tougher.

But that's only part of it. The biggest potential source of savings, say the IEA experts, is huge increases in energy efficiency — so that, for example, cars average only a litre or two of oil per 100 kilometres, new buildings generate as much power as they use, and appliances use minimal amounts. Cars would run on "second-generation biofuels", and industry, too, would bury its carbon emissions in the ground.

If the optimists are right about new technologies, the IEA predicts, we can do all this: mostly for between $A40 and $A125 per tonne of greenhouse gas saved, some of it up to $A200 a tonne. But if the pessimists are right, we might have to pay up to $A500 a tonne to cut emissions in half.

The enemy now, Tanaka told ministers, is time. To achieve higher economic performance, higher energy security and less climate change, governments must do three things: "implement, implement, implement". Rather than swimming against the tide, like Nelson, Tanaka urged ministers "to resist the growing pressure to cut fuel taxes … If consumers were faced with the reality of current prices, they would be able to make more efficient long-term choices."

Today's oil prices are inflated by a bubble of speculation, by wars in Iraq and Nigeria, and by OPEC maximising its profits. But take all that away, and you still have the reality that oil demand is soaring and supply is not. We can swim with the tide or against it.

Tim Colebatch is economics editor.

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