World Energy Outlook 2012 – Part III: Coal

What is likely to be missed from news about the World Energy Outlook 2012 report is the role of coal in the future global energy mix.  With recent attention on natural gas (See Penley on Energy and Education) and the focus of most news reports on the US surpassing Saudi Arabia in oil production by 2020, the anticipated role of coal was lost.  Yet, the report forecasts that, even with new, restrictive policies, global demand for coal will actually grow by 1 percent compound average annual rate.  Coal demand is expected to more than doubles by 2035 in India.

It is clear that coal will play a very large role in our future energy mix.  In the last decade, it was coal that met 45 percent of the energy demand, per the Outlook 2012.  Without policy changes associated with greenhouse gas emissions, the forecast is for coal to still grow at a 1.9 percent rate.  At that pace, coal would surpass oil as the leading fuel by 2025.  But even so, its proportion of the total energy mix would decline from the last decade’s 45 percent to 30 percent by 2035.  Renewables and natural gas will play a much larger role.

The role of coal in our energy future depends upon a variety of factors, but leading among those are government policy and technology development.  Of particular import to coal producers is the potential role that government can play in establishing policies that encourage replacement of coal by cleaner fuels, ranging from a variety of renewables to natural gas.  The power sector would be most affected by these policies, and they would change the role of coal where policies are implemented.

Of course, there are alternative scenarios that leave coal as a much bigger player in the future.  Among them is the development of new technology for coal gasification or carbon capture and sequestration.  Both are receiving the attention of researchers in academia and industry, and both have the potential to substantially reduce emissions from coal.  The challenge remains of sufficient investment in the research needed to produce viable, large scale, financially successful technology (see a review of the area in Underground coal gasification: From fundamentals to applications in the Progress in Energy and Combustion Science journal).

In the immediate future without substantial change to policies coal use will continue to grow at a rapid rate.  In 2011, coal demand grew by 5.6 percent, a growth rate that was similar to 2010 and far more rapid than 2009 when it was flat.  With increased demand for electrical power in developing countries, the very rapid 55% increase in coal demand over the last decade is understandable.  In 2010 65 percent of global coal demand was consumed in power generation.  Even with the advent of new policy restrictions, the 2012 report projects growth in coal demand in non-OECD countries at a compound average annual growth rate of 1.4 percent between 2010 and 2035.  That would mean that the global growth rate is still almost 1 percent despite a decline that is greater than 1 percent in OECD countries.

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Tax Policy and US Strategic Interests

The political climate of a presidential race often leads to distortions.  Candidates necessarily position their arguments in ways that are intended to be starkly different from one another as a means of definition and attracting our votes.  The media sometimes abet the distortion by representing one candidate’s views as extreme when compared with the competitor.

This is exactly what is occurring now with regard to energy policy.  Recently, the Center for American Progress Action Fund (CAP) criticized Governor Romney’s proposed corporate tax plan for allegedly providing reductions for oil companies like ExxonMobil, BP, etc.  The report claims that oil and gas companies pocket $2.3 billion annually through “special tax breaks” and that the proposed reduction to the corporate tax rate could double those.  But the thinly veiled argument makes clear what appears to be its fundamental interest – portraying oil companies negatively and distorting the differences between Governor Romney’s tax plans and those the President has espoused.

Governor Romney’s proposal is to reduce corporate taxes from 35 percent to 25 percent.  Today, the US has the highest rate among developed countries, however, the US still collects less corporate tax revenue as a percentage of GDP than most other industrialized countries.  See my blog, “A Revenue Neutral Tax Swap: A Sensible Approach to Climate Change.”  The complexity of our tax code leaves plenty of room for strategically designed tax incentives, but leveling the corporate rate will make the American business environment more competitive.

The tax code has very different impacts by industry.  The oil industry ‘s effective tax rate is not one of the highest rates; petroleum producing companies have an effective federal corporate tax rate of 11.3 percent according to a report in the Economist.  This rate is lower than banking, trucking and tobacco, but it is higher than medical supplies, drugs, and computer software.  Yet, the oil and gas industry pays a higher effective rate compared to the average S&P Index company, according to the Wall Street Journal, and between 2006 and 2010, ExxonMobil paid more in tax than it made in earnings.

The corporate tax code has numerous purposes but it should be as neutral as possible in order to promote creative economic growth with the understandable constraints of our strategic national interests.  One can certainly argue that we have a strategic interest in sufficient energy to promote economic growth; one could also maintain that we have a strategic security interest in domestic sources of energy, including not only oil and natural gas but renewables as well.

While opponents try to tie Governor Romney to “Big Oil,” they largely ignore President Obama’s failure to make promised reforms to the corporate tax code.  Similar arguments can be made that the President has promoted tax policies and federal programs that support select industries and businesses – e.g., those from the renewable energy industry.  As a result the Administration has been tied to failed federal investments in risky renewable energy endeavors and efforts to limit the growth of atmospheric carbon via energy policy.  The Obama Administration has provided loans with rates well below those indicated by the risks inherent in the renewable energy industry, and some of those companies have failed.  It has supported tax breaks – call them subsidies – for solar energy which has a very minimal carbon footprint.

Unfortunately, because of the nature of campaigns it will likely have to wait until after November, but we should be focused on formulating policy good for the US.  That policy should include reform to the federal corporate tax code with the goal of making it as neutral as possible in order to encourage innovation and economic prosperity.  But it must also recognize critical social, health, economic and security interests that will drive us to limit the code’s neutrality with selected tax breaks.  Those are likely to include domestic energy production – from drilling, fracking, and harnessing the energy of the sun, wind etc.  Call them special interests with special interest tax breaks if you wish; they should however be defined in terms of US strategic interests and held to a high standard for evaluating their impact in leading to indicated strategic outcomes.