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Keystone Crux: Obama Climate Policy Wrestles With Supply and Demand Basics

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President Obama insisted during his speech announcing his climate action plan that when it comes to the Keystone XL pipeline, "Our national interest will be served only if this project does not significantly exacerbate the problem of carbon pollution." This standard sets a clear and important benchmark for all fossil fuel projects. The rest of his administration, including the State Department and Department of the Interior (DOI), needs to wake up to the basic realities of supply and demand when it comes to the extraction and export of fossil fuels.

So far, DOI and State have failed to recognize that boosting the supply of the most carbon intense fossil fuels like tar sands and coal will increase carbon pollution. This purposeful blindness was explicit in the State Department's impact assessment of the Keystone pipeline. The Department of the Interior, which literally supplies publicly-owned coal, oil, and gas, also has long maintained this view that is divorced from reality. The Council on Environmental Quality has condoned this blind eye to DOI supplying the fossil fuel market.

With the drug trade, politicians worry over both supply and demand. From raiding marijuana plantations at home to bombing coca fields with pesticides in Latin America, the U.S. administration has put a lot of energy into restricting the supply of drugs. "This is your brain on drugs." There are more arrests related to marijuana possession than for violent crime. Dealers, users, middlemen, everyone and anyone connected with the drug trade are targeted to restrict the market.

The 'drug war' has been misguided by overemphasizing supply, while criminalizing demand rather than being rational about it. But the federal government has operated under pretty undeniable logic that by choosing to participate in a market, an actor legitimizes that market. Selling bolsters supply. Buying affirms demand. Making transactions easier, with pipelines and ports, bolsters both supply and demand. Globally traded fossil fuels, like drugs and everything else, are subject to these market dynamics.

With fossil fuels, the demand-side only approach is really a dealer's excuse. Regarding coal exports, this dealer's excuse is promoted by Richard Morse and Frank Wolak, both affiliated with Stanford University. Morse is cited in the press about coal exports as a managing partner at Supercritical Capital, LLC, which appears to consult for the fossil fuel industry. He previously worked for BP. EPRINC, formerly the Petroleum Research Foundation and run by a long-time oil lobbyist of course in favor of Keystone, made a similar argument.

Morse and Wolak argue that exporting more coal doesn't mean more coal will be burned, and will in fact be good for the environment. They are right to say environmentalists like me won't be convinced of their reasoning, but it's not just because I'm emotional about global warming.

A central point piece of this argument is the observation that China doesn't respond immediately to price signals, but this is myopic. Eventually Chinese public and private utility investors do respond to price signals. In any case, China may not represent the majority of demand for U.S. thermal coal. And investors respond to price signals everywhere, even if at different speeds, in Japan, Singapore, India, South Korea, Europe, Brazil, and everywhere else buying or looking to buy U.S. coal, oil, and gas. Dumping coal on the market over time means it costs less than it otherwise would, and as a rule lower price leads to higher demand (barring completely inflexible regulations).

But, for argument's sake, let's falsely assume Chinese thermal coal demand represents the vast majority of U.S. imports, and that the Chinese coal demand is totally elastic to price.

Morse and Wolak also predict that exporting more U.S. coal means the price of using coal in the U.S. goes up. Being able to get a higher price overseas, coal companies like Peabody will charge more for everyone. This benefits the climate because the U.S. will then burn relatively cheaper gas, which results in less carbon dioxide than burning coal. Economist Tom Power argues that such a conclusion about U.S. coal exports is "inconsistent with both the basic principles of economics as well as the abundant literature regarding energy use and consumption patterns in Asia."

First of all, the U.S. is burning less coal anyway, in part due to the profound and ever-expanding acceptance that it is a public health nuisance. EPA is threatening to continue forcing the industry to internalize its costs, and Obama's recent speech reconfirms that utilities should fear comeuppance for their GHG footprint. The fracking boom driving down gas prices may be less responsible than renewables uptake for coal demand falling. Exporting vast supplies of coal likely pushes the global price of thermal coal downward. Indeed, global coal prices have fallen as U.S. exports have risen.

Because of relatively higher emissions from extraction, processing and transport, the climate benefit of using gas over coal can be negligible or nonexistent. Add this to the fact that the coal is burned abroad anyway. In 2010, Wolak and Morse may not have been able to predict that the Obama administration would want to export fracked gas too, which may alter their expectations of low gas prices far into the future.

Morse and Wolak contended that China's coal demand is inevitable and that coal imports just swap out use of Chinese coal. In reality, Chinese policies to drive down coal demand may soon shame American standards, with a carbon trading mechanism for utilities, efficiency requirements, and while trying not to get our hopes up, possibly even an economy-wide cap before 2020. Increasing the availability of coal is a threat to these policies. But, assuming these Chinese policies were total fiction, there would be nothing keeping China from burning both U.S. imported coal and their own coal later. Similarly, Obama allowing KXL does not mean other Canadian tar sands pipelines won't be built too.

The Wolak-Morse econometric analysis is obviously simplistic and wrong. It's also immoral.

Using their logic, one could conclude that exporting domestically produced cocaine to China would be a good way to raise the price and therefore lower domestic consumption. As they assume with coal demand, one might assume Chinese cocaine addiction is a lost cause. If it's a lost cause, we might as well make some money from it. Peabody, Ambre Energy, Arch Coal, Cloud Peak Energy, Warren Buffett's BNSF Railway, and so many unscrupulous investors hope to profit from a dramatic expansion of U.S. coal exports. They are more than happy to have Stanford academics make a twisted moral justification for them.

Right now the world burns too much coal, oil, and gas. Period. People have long been dying because of the local pollution caused by extraction and combustion - thousands annually die just from mercury pollution in the United States caused by the coal industry. Each year the fossil fuel industry kills millions of people also through climate impacts like Superstorms, heat waves, and freak floods. We have a very short window to dramatically reduce climate pollution before we lock in tipping points and catastrophic warming.

The Obama administration, including through the Army Corps of Engineers and Department of the Interior, should do everything in its power to halt new infrastructure that would facilitate the extraction, shipment, and burning of fossil fuels. If countries extract less and export less, there will be less on the global market. If countries extract more and export more, there will be more on the global market. What matters to the climate is fossil fuels burned ever and anywhere, not just next week in China.

President Obama's speech makes clear that as long as his State Department understands the basics of supply and demand, the Keystone XL pipeline will not be approved. Once he admits to himself that helping supply Canadian tar sands oil would be significantly bad for the climate, he will need to wrestle with the rest of his administration's support for expanding global supply of fossil fuels.

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