by Hugh Ebbutt

A key issue has risen to the top of the international agenda: climate change. An unprecedented gathering of world leaders from over 190 countries, came together in Copenhagen, Denmark, December 7-18, at the United Nations Climate Change Conference, to try to decide what to do about it. Not entirely surprisingly, they could not all agree then and there on the best solution. The limited accord agreed by a few key countries, including, at last, both the United States and China, was widely and rightly condemned for not going far enough. But, if followed through, this “letter of intent” will be an important first step – particularly for those now committed to real action.

Leaders from all over the world now clearly recognize the damage that aspects of our increasingly consumer-driven lifestyles and industrialized production sometimes inadvertently inflict on our environment. These include burning fossil fuels and destroying the world’s remaining forests. This growing recognition was abundantly clear in Copenhagen. Now, with so many engaged, the big decisions needed to more effectively address the long-term challenge may eventually follow.

Should producers and consumers of energy start to pay the real cost of these externalities, or should we leave it to smarter generations to come? Some factors, like smog, soot, congestion and noise, mainly affect just those nearby, living in the same dirty city. Others, like viruses, are more difficult to see spreading and more difficult to combat. Going forward, policy makers will have to decide how to proceed.

The Heat Is On

The ten years that just ended are set to be the warmest decade globally since records began – as each of the two decades were before. 2009 itself is now set to be the fifth warmest year worldwide since 1850. Indeed the four warmest years recorded since then were in 1998, 2005, 2003, 2002, as the respected Hadley Centre in the U.K. reported in its 160-year record of global surface temperatures. All of the ten warmest years were since 1997.

Local variations like the recent cold snap in the United States – when even places like Houston received several inches of snow – and other natural variations from such regional and cyclical events as El Niño in the Pacific do not hide the warming trend around the globe. Retreating glaciers and massive columns of ice crashing into the sea – from the Himalayas to Greenland and Antarctica – tell their own stark and undeniable story.

A clear warming trend has become evident over decades. “Independent analyses made by the U.S. National Climatic Data Center and the National Aeronautics and Space Administration’s Goddard Institute for Space Studies show similar results,” said the U.K.’s Meteorological Office in December. “These figures highlight that the world continues to see global temperature rise, most of which is due to increasing emissions of greenhouse gases (GHGs) into the atmosphere, and clearly shows that the argument that global warming has stopped is flawed.”

As awareness of the side effects of economic growth rises, people are clearly getting greener. Consumers are demanding more evidence of stronger environmental credentials from well-known brands and chains. Businesses and countries that respond to this groundswell, ahead of others, may well benefit – both by reducing their dependence on imported carbon heavy fuels and by developing expertise in alternative energy technologies. Danish exports of their growing capabilities in this area rose 19 percent in 2008, around four times faster than all their other exports.

Pressure has been growing for governments to start addressing the potentially catastrophic climate change. The vast majority of governments now accept what the world’s leading climate scientists have been saying with increasing force and urgency for almost two decades. When policy makers and world leaders gathered in Copenhagen to try to set a new political climate, they recognized the need to spend money to limit rising temperatures.

Building on the start made at Copenhagen, the leading consumer countries must agree on targets for 2020 that are meaningful and legally binding under their own laws during 2010. Then, more importantly, they will need to set carbon prices, energy standards and new technology incentives high enough to make changes in their domestic economies that encourage lower emissions and kick-start a well-planned transition to cleaner and less carbon-intense energy sources. Otherwise, the world may have to start thinking hard about an effective plan B.

Recognizing the Problem

“Without a change in policy, the world is on a path for a rise in global temperature of up to 6°C, with catastrophic consequences for our climate,” according to the International Energy Association (IEA). This is more than the difference in temperature between the last ice age (or, more precisely, glacial period) and now, but over just tens of years instead of the 12,500 years since the end of the last glacial period.

A few facts are very clear: we have put millions of tons of carbon and other GHGs into the thin layer of the atmosphere over the last 70 or more years. The concentration of this in the air has risen dramatically over the same period, swamping natural carbon sinks, such as the shrinking rain forests. Indeed the level is now 386 parts per million – much higher than the 280 ppm before countries industrialized. Emissions are a shocking 30 percent higher since the United Nations Framework Convention on Climate Change (UNFCCC) treaty was signed in June 1992, as the December 5, 2009, issue of The Economist points out in its excellent special report on the carbon economy.

Average temperatures have risen, too, over the same few decades, by over 1.33°F (0.74°C) already, largely matching the expected greenhouse effect and far faster than observed previous geological changes. More than 90 percent of the world’s ice is melting, much of it at an accelerating rate. Most of the glaciers in the Himalayas could be gone by 2035, cutting off summer river flows. Air temperatures are rising twice as fast in the Arctic, and scientists now expect summer sea ice to disappear from many areas within the next decade or two, instead of by the end of the century as they thought ten years ago. Decreasing reflectivity of less snow or ice cover and ice sheets from Greenland and elsewhere slipping faster into the sea, from melt water running down fissures and reducing friction at the base, are among observed reinforcing feedback effects.

Skeptics have found interesting and hopeful reversals in the complex and evolving picture. They claimed that Arctic sea ice expanded dramatically in the winter of 2008. It did, and it does every winter! But many observations show the decades-long and now accelerating retreat of glaciers and ice. The contention, sometimes put forward, that the extensive findings of all this science are just some sort of global Da Vince Code-like conspiracy concocted, motivated and somehow secretly coordinated by hundreds of separate researchers – just to secure larger research grants or for some other untoward collective motive – seems pretty absurd. Why would over 150 respected leaders in their fields from 30 countries be willing to sacrifice their reputations just for that?

Strangely, most of those, including people like former Republican vice presidential nominee Sarah Palin, so strongly opposed to the idea that humans are causing a good part of the sudden temperature rise observed since industrialization, rarely manage to offer any convincing alternative cause for why this sharp change from normal, natural cycles is occurring. If researchers are able to establish a cause that is significantly different from the ongoing enormous industrial pollution and emissions – whether solar, terrestrial or cosmic – the world will need to redirect its efforts and focus on finding either a different kind of cure or ways to avert the worst of its damaging effects.

The scientific evidence that human activity is a significant cause of global warming is accepted by most of the world’s climate scientists and by the independent government scientific advisors of most nations. Among the last to accept the human connection was the American Association of Petroleum Geologists (AAPG) in 2007. The greener citizens of Europe seem more ready to recognize a significant human cause and the need to do something about it, while in the United States around a third of those polled still disagree (or have not yet seen the evidence) that the world has warmed abnormally fast over the last sixty or seventy years.

Recorded natural disasters worldwide have risen from 200 to 400 a year over the past two decades. Seven out of ten were recorded as “climate related” and between 1998 and 2007 they affected 2.2 billion people – a third of the planet.

As the subject of climate change gets closer to hitting people’s pocketbooks, opinions have become more polarized and divisive – along the normal political lines, especially in the United States. At a time of economic strife, can the world afford what amounts to a global detox? Some are still skeptical. But some seem averse to paying for any of the externalities, even during a more secure economy.

Intriguingly, most of those still vehemently questioning the science seem to be motivated by their own strong political views, rather than by real insights into the science. They are often the same “more profits today” group we have seen in the past. Is the tail wagging the dog here? Some of those on the right seem to be highly uncomfortable with the economic consequences. Perhaps those to the left would be comfortable with a firmer referee, a reduction of the worst excesses of unfettered, free-for-all capitalism and assurances of a cleaner, fairer playing field for existing and new players. Perhaps a solution to align both sides of the political aisle could be to focus on the big growth opportunities that loom, with a shift to more electric cars and cleaner, low-carbon energy.

Encouragingly, younger people – particularly those under 30, including those in the United States – are showing more concern about rising temperatures and their potential consequences – from falling fish stocks in acidic seas to more water shortages, failing crops and accelerating loss of biodiversity beyond our cities. While the future course of environmental change is not certain, one might draw a parallel to being told by doctors about a serious heart condition. To avert the danger it is possible to take some precautions, such as eating less fat, exercising and taking pills that may minimize or delay the worst. Others might simply keep going without change, hoping for the best and perhaps banking on some better medication being available later to deal with the expected, more serious symptoms. Usually prevention is better than a cure.

Rising populations in developing countries will only make things worse. More income for more city dwellers means more energy use, more fumes and the need for more water, land and food. In places like China and Brazil, concerns about local air quality and cutting dependence on energy imports are also strong drivers for burning less fossil fuel. China has made a commitment to cut its 2005 levels of carbon dioxide emitted for each unit of GDP by up to 45 percent by 2020.

Addressing the Likely Culprit

To avoid dangerously fast climate change, we should seek to limit the temperature increase to about 2°C. For this, it is estimated that GHG concentrations would need to be stabilized at around 450 ppm CO2-equivalent. We may already be too late for that, and some, for example those on President Barack Obama’s team, seem to be focusing on 500-550 as a more realistic global target. Carbon emissions were rising at 1 percent each year last decade, but that accelerated to 3 percent a year between 2000 and 2008, mainly driven by China. Energy use puffs out nearly 85 percent of these emissions. Even after the financial crisis, the IEA’s projected rise in emissions in its business-as-usual scenario would reach 40 billion tonnes a year by 2030. This would more than double the concentration of those gases in the atmosphere to around 1000 ppm of CO2-equivalent by the end of this century.

In the IEA’s 450-ppm scenario, “global energy-related carbon emissions need to peak by 2020 at under 31 billion tonnes a year” and decline by 16 percent over the following decade – 34 percent below its reference scenario. The financial crisis has helped by reducing energy demand, and CO2 emissions could fall by as much as 3 percent in 2009. It has also led to a deferral of investment in polluting technologies, which will lower pollution levels by 5 percent out to 2020. Going forward, end-use efficiency could provide about half of this, with more renewable energy, nuclear and less dirty coal-fired power generation, especially in the developing world, providing the rest. To achieve this scenario, the IEA estimates that additional investment of $10.5 trillion a year will be needed over the next 20 years.

Currently we look more on track for a 550 ppm and 3°C scenario. So we should also be devising a very good plan B. This might include some untested geo-engineering approaches from capturing CO2 directly from the air. Examples range from artificial carbon-absorbing trees and enhanced rock weathering to reforestation, or more drastic measures with unknown side effects such as stratospheric aerosols to reflect more sunlight as volcanic eruptions have in the past. Otherwise we are potentially leaving our grandchildren with catastrophically damaging environmental changes, flooded coastal cities, food and water shortages and enormous refugee problems.

Agreement on Targets, But Not How to Get There

Most now expect a progressive tightening of green standards, just as most now expect better rules to ensure safety at work. Many businesses are now ready to act but they will not do so until there is a stable international regulatory framework in place. Groups like Combat Climate Change – which includes BP, Gazprom, CNPC and over 60 other large companies – wanted a clear political signal on GHGs to come out of Copenhagen with a binding deal on targets to follow. “We need ‘the world’ to decide what the rules are going to be,” as ConocoPhillips CEP Jim Mulva stated at the Oil and Money conference in London in October.

Tony Hayward, CEO of BP, suggested that greater government intervention is needed. While he favors free markets, he sees that “the scale and complexity of this particular challenge is different from the usual workings of a market economy. Mitigating climate change and ensuring energy security are of such magnitude that the free market alone cannot provide them without assistance.”

Many of the world’s leaders recognized a big potential opportunity and turning point in Copenhagen. Around 120 of them, including U.S. President Obama and Russian President Dmitry Medvedev, attended the slightly chaotic concluding session and some of the crucial side meetings on December 18. But whether such a large and disparate group of both countries and leaders, each with their own agendas and playing mostly to their home audiences, could really agree on any meaningful targets – without good preparation or a clear model to follow - was another matter.

The steep global recession in 2009 also may not be a good time to ask people to pay for some insurance now against a risk – however catastrophic – 30 years in the future. Despite the obvious economic and security impacts on our children and grandchildren, the current deal is weaker than many would like. Copenhagen is at least a start, helped by Obama’s last-minute commitment, perhaps in part to shame a cautious U.S. Senate, to reduce America’s carbon output. An average American consumes an astonishing quarter of his or her own body weight in oil and gas each day. This is about a hundred times the calories eaten in a normal diet.

The developed world, which has put most of the GHGs into the atmosphere over the last 70 or more years, finds it hard to agree on how much help to give the developing world not to repeat the same mistakes, even as we outsource most of our dirtier manufacturing to them. The Copenhagen Accord does signal some progress here – at least on future pledges.

As we move into 2010, a good example for policy makers to draw on is the ozone layer and chlorofluorocarbon (CFC) problem. Once recognized – and despite lots of initial squeals from the CFC industry – a good regulatory framework of both sticks and carrots quickly stimulated new technical solutions and at a much lower cost than forecast. So the widely held industry views that new rules and targets should be “based on only technology that already works” and that things will only change slowly may not be entirely true.

A path must be chosen that crystallizes the goal of reducing carbon. A straight tax incentive has the advantage of being simpler, more transparent and faster to set, so it could get things moving faster. The level of tax needs to be reasonably stable and, unless agreed by international treaty, may possibly be reset each new election. Cap and trade looks more gradual, as most energy companies unsurprisingly prefer. But it is also potentially open to abuse. James Hansen, head of NASA’s Goddard Institute for Space Studies, has compared it to the Catholic church’s practice of selling indulgences in the middle ages. “The bishops got rich and the sinners got redemption. Both parties liked that arrangement, despite its absurdity.” Most of the revenues here might flow to financial traders (again) with little real reduction in GHG. Either way, the level needs to be high enough to send a strong and clear signal to business to invest in new R&D and in profitable growth projects, and so take some real and practical steps to start the clean energy transition.

What Needs to Change

Business as usual is not sustainable. Gas may be a good bridge to a lower carbon future. But gas alone is not going to enable us to get to the IEA’s 450 scenario and meet our expected energy needs. We need to waste a lot less, as well as create a more diverse energy mix that will enable both better energy security and help address climate change. Waste less, care more and save more for generations ahead. Big investments will be needed to lower the carbon output of our energy system. But energy companies, which will have to deliver most of these investments, do need more clarity and policy stability globally before committing scarce capital resources to the long lead-time projects need to meet rising demand with cleaner energy.

It is clear that boom and bust does not encourage investing for the long term. Without a credible and enduring framework, the energy industry is unlikely to invest enough in either maintaining or increasing our energy supply. So we need to invest the time to create the measures needed to address the worst of climate change’s likely effects and reverse what we can of its probable causes.

Making a Choice

People are concerned about poverty, water, food, energy and worsening disparities in how these are distributed, as well as by the ugly and depressing impacts on the natural world around us. Most want to avoid or minimize these outcomes.

Awareness is also growing that the world is getting crowded. The human population rose tenfold in the last 250 years, and with it, consumption of all kinds - particularly by the richest 15 percent. Limiting population growth is a difficult issue for the world to address. One encouraging sign is that enabling women to become educated quickly leads to more stable populations. With a likely scramble for ever scarcer and more costly key resources, we need to take a more holistic view of global security.

Copenhagen looks to be just one step on a long road to a lower carbon world, one full of exciting investment opportunities for those with a clear vision of where we should be going. These leaders and innovators will need enough commitment to invest in new technologies before carbon regulation and long-term pricing are reasonably settled. We now need to focus on the next ten years, and teamwork and brain power are a winning combination. The rest will have to try to catch up later, just as those in mainframes and fixed wire telecoms had to, as the world’s energy system progressively moves on to meet a growing world’s new needs.

The goal of policy makers should be to protect their countries and their people from severe shocks – or at least the worst of their effects. This goes for oil, water, food or refugee crises, and for foreseeable financial and physical disasters of conflict in an increasingly fragmented, crowded and contentious world.

Most people, educated or not, if given the choice between having just 2 percent more money or taking steps and precautions to ensure a safer future for their grandchildren, would choose their grandchildren’s future. Some are happy to spend more to ensure a good education for future generations. Spending a similar amount to produce more from the energy we use – in part by reducing waste particularly as energy costs rise – and accelerate the needed move to a lower carbon, less oil-based economy looks to be a wise investment. Some of the technologies and products have already been developed and just need a gentle push to be used on a larger scale.

The financial and human costs of having to try to adapt to even the mid-range of outcomes predicted by most climate scientists look pretty bleak. It would be an unprecedented human disaster. In financial terms alone, such a daunting prospect would completely dwarf the money spent globally on the recent bank bailouts.

The direction of travel now is pretty clear. The aspirational but commitment-light accord struck at the eleventh hour in Copenhagen between the United States, China, India, South Africa and Brazil is at least a start. Progress, as with anything, is only likely to pick up once real targets are identified. To do this, the ground needs to be prepared better, certainly well before the 2010 Climate Change Conference in Mexico City, to align key countries and potential forward-thinking leaders, including the G20, and to set a clear path to respond more effectively to the emerging global threat. If a practical agreement is delayed too long, it may well be too little, too late.

Despite the many good speeches on expanding freedom, democracy and our supposedly civilized way of life, our children and grandchildren may well look back and wonder what kind of values our generation really held. “If you could see most of this coming, why did you do so little about it?” We need to become a little less narrowly self-interested and think ahead. What do we want our epitaphs to say? A little more focus now on prevention and preparation against what many now see as probable disaster ahead – even if just as insurance – would seem to make a lot of sense.

Hugh Ebbutt is an upstream energy consultant based in London. Originally an explorer with BP, he has worked in E&P with Chevron and Hess and as a vice president with CRA International. He also led Arthur D. Little’s Upstream Energy group in Houston.