On april 6, the world's second largest oil company, bp Amoco, became the world's largest solar energy company. It spent us $45 million to win control of Solarex, preparing itself for life after oil. But the timing does not make sense. Oil prices are plunging like never before. In real terms, oil is cheaper today than it was in 1973. Prices have fallen by half in the last two years to a mere us $10 per barrel. And prices may fall further, giving a fillip to consumption, oil analysts say. Simultaneously, plummeting oil prices widen the gap between oil and solar energy prices, preventing solar energy from becoming a viable option.
So why is bp Amoco investing in a technology that has no market value today? The company could be positioning itself for the non-fossil fuel market in a world concerned about the impact of climate change induced by use of fossil fuels. Under the 1997 Kyoto Protocol, industrialised countries have agree d to cut carbon emissions by 5.2 per cent below 1990 levels by 2008-2012.
It is clear that the world will need a transition from its current carbon energy dependence to non-carbon options if global warming is to be averted. A recent study by the University of Hawaii points out the benefits that will accrue to the world with the rapid adoption of solar energy technologies. According to the study, if the world uses all its fossil fuel reserves, carbon emissions would reach a peak of 49 billion tonnes in 2175, and global temperatures would rise by 6C. But if solar energy prices decline by 50 per cent each decade, all economic sectors will be run on solar energy by 2065. And global temperatures would rise only by 1.5C, declining after 2055 as solar energy kicks in. In this scenario, the global mean temperatures in 2195 would be the same as 1995. Global warming would then truly be averted.
Given these factors, the bp Amoco investment makes great market sense. But it is not clear if the world is sensible enough to move towards more sustainable options.
At present, industrialised countries are confronting the issue of global warming in a shortsighted and unfair manner. They would like to correct their carbon balance sheet by purchasing emission units from other countries, and as cheaply as possible. The Kyoto Protocol provides for three mechanisms -- Clean Development Mechanism ( cdm ), Joint Implementation and Emission Trading -- to allow a carbon market to flourish.
In principle, there is nothing wrong with trading. In fact, it would be perfectly justified to say that countries that have overused their share of carbon emissions can buy emission units from countries that are under-utilising their share, namely the developing countries. And, in this manner, provide the right incentive to developing countries to invest in cleaner technologies.
The problem is that industrialised countries' concern is the "economic effectiveness" of the Kyoto Protocol. The us , for instance, is expecting to buy over 80-90 per cent of its carbon reduction target from developing countries. The estimates put forward by the us government assume that whereas reducing carbon emissions through domestic action would cost us $125 per tonne of carbon emissions, the cost of doing the same through emission trading would be as low as us $14-20 per tonne of carbon emissions.
In fact, it is now understood that the cost could be as low as us $3-4 per tonne of carbon emissions. This is primarily why the us and other industrialised countries want the quick use of the cdm . Under cdm , countries of the North would invest in energy-efficient and clean technology projects in the South and would take the credit for the carbon reduction in their balance sheet.
The problem with cdm is that it allows industrialised countries to mop up cheap emission reduction options of developing countries. But once these cheap options are exhausted, the very rationale of cdm will disappear. Industrialised countries would argue that it is economically better for them to go back to domestic action. And, as these countries would not have taken action domestically till then, climate change would still be a serious threat. Further, there will be greater pressure on developing countries to take legally-binding commitments to cut their emissions. But they will have to do so at much higher cost.
Worse still, a cdm built on the principle of the "cheapest option" would not allow developing countries to invest in non-fossil fuel systems. Under the current market conditions, the cost of carbon abatement through solar energy would cost anywhere between us $50 and us $110 per tonne of carbon emissions saved. Given the large number of people in developing countries who are not part of the electricity grid, the option of moving to solar energy would make eminent sense for the South.
But this would require governments to set up this framework so that the world moves towards cleaner energy sources. It must also be remembered that in the late 1970s, when the oil crisis was hitting the world, oil companies were also buying solar energy companies. But then their interest was to control these emerging technologies and to kill their growth. We would hope that bp Amoco does not have such intentions. And that even if it does, governments do not allow it to succeed.
----- Anil Agarwal
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