The concept of a “green recovery” is a compelling topic of discussion at the World Economic Forum this week in Dailan, China. It stems from the United Nations Environment Program calling for investment of 1% of global GDP (nearly $750 billion) to promote a sustainable economic recovery.

A “green recovery” speaks to two of the most important issues of our time –- the efficient use of energy and the realistic understanding of energy’s role in the global economy. It’s a role that can help lift millions of people out of poverty, while addressing a healthier environment.

We all aspire to a more environmentally sound approach to energy, but to address these aspirations we need to be realistic about energy. Call it “energy realism.”

“Energy realism” is a commitment to a long-term view of the role of all forms of energy in our lives, and the need to be realistic about the true scale and complexity of the energy challenges that confront the global community.

Every day, the world uses, from all energy sources, the equivalent of 245 million barrels of oil. Eighty-five percent of the global economy is powered by oil, natural gas and coal, despite the enormous progress we’ve made toward alternative energy sources.

Worldwide, we use 50 percent more energy than we did only 20 years ago. And 20 years from now, demand will have risen by another 30 percent or so.

Faced with this level of demand growth, energy realism requires that we develop all the energy we can, in every available form. No single source is the only answer. We need it all – oil and gas, nuclear and coal, solar and wind and biofuels.

Alternatives and renewables have strong promise, and over time, they’ll meet a far bigger share of global demand. But it’s unrealistic to suppose that they can replace conventional energy in the short term. Today’s global energy system is enormous and took more than a century to build. We must be realistic in how quickly technology and economics will permit a transition away from fossil fuels.

If one looks at the data, there is no avoiding one simple conclusion: the sheer scale of our energy needs is far beyond the capacity of any one source or technology. So we must balance energy aspirations with energy realism and agree that for the foreseeable future we need to develop it all.

We can do so with a shared goal of managing the transition to lower-carbon energy. But it will require a long-term commitment and, again, a grasp of the true size and scale of the undertaking.

For example, if we were to replace today’s global transportation system with a zero-carbon solution — all cars, trucks, buses, trains, planes and ships — we would reduce greenhouse gas emissions by only 15 percent. If we were to replace the entire global power generation system, we would reduce greenhouse gas emissions by only another 25 percent. So combined, that’s only a 40 percent reduction.

Yet there are serious and systematic ways of reducing carbon emissions for the long term. We need to set carbon reduction goals that are high – but goals that are also realistic. We need to willingly accept the associated costs that we all must bear. And we need to be realistic that an economy entirely free of fossil fuels may be beyond our reach.

But energy realism also holds the promise that we can make meaningful progress, and there are actions we can take today. The most immediate and cost-effective thing we can do is to maximize conservation through energy efficiency.

In the U.S., for example, we’ve made great strides in energy efficiency. In fact, we use half as much energy per unit of GDP as we did a generation ago.

For over a century, innovation, collaboration and partnerships have been the backbone of a global energy infrastructure that interconnects and powers the world.  Our ongoing challenging is to find the common ground we need for that enhanced collaboration.

As we look to the future, we must continue to seek common ground on meeting the world’s long term energy needs while addressing environmental concerns – balancing the energy aspirations with energy realism, for the common good of all.

President Obama is in favor of moving towards “energy independence,” but his new 2010 Budget specifically seeks to raise taxes on domestic oil exploration by $31 billion over 10 years, a larger tax increase than on any other industry. In addition, oil and gas producers would bear a disproportionately heavy share of other tax increases on business, more than $320 billion.

Surely a president who desires energy independence would leave oil companies alone so that America could develop greater domestic reserves.  But this is not the case.

The ostensible rationale for the tax increases is that the current tax system “distorts markets by encouraging more investment in the oil and gas industry than would occur under a neutral system. To the extent expensing encourages overproduction of oil and gas, it is detrimental to long-term energy security…” This wording, with reference to credits, lower tax rates, special treatment, and accelerated depreciation, is repeated eight times in the Treasury Department’s Green Book, a description of proposed spending and revenue changes in the budget.

President Obama believes that subsidies for renewable energy are acceptable, even though renewable energy is only responsible for 4 percent of America’s supply.  He does not consider expenditures of $60 billion on “clean energy investments” to be distortions.  But oil, which accounts for almost 40 percent of America’s energy usage, is a different matter, apparently deserving of higher taxes to limit overproduction. With fuel prices close to $5 a gallon last summer, we could have used a little overproduction.

If America is to reduce use of imported fuels, it needs to raise domestic production to increase long-term energy security. Every additional barrel of oil produced in America is one barrel fewer that needs to be imported.  The oil and gas industry already employs more than 1.5 million workers, and has the potential to employ many more.

Estimates of American oil and natural gas reserves keep growing, potentially generating more job opportunities.  In 2007, 200 trillion cubic feet of natural gas, equivalent to 33 billion barrels of oil, or about 18 years of U.S. oil production, were found in the Haynesville Shale, a rock formation in northern Louisiana. Discoveries have also been made in Texas, Arkansas, and Pennsylvania. New optimism about U.S. gas reserves and production capacity has been pushing natural gas prices down.  Since the fuel is there, why propose new taxes to discourage production?

President Obama’s new tax proposals, rather than leading towards energy independence, would drive oil and gas production abroad.  New taxes would place American producers at a disadvantage in the global market, punishing domestic American oil and gas companies and benefiting countries with large reserves such as Venezuela, Saudi Arabia, Iran and Russia.  Does President Obama really want these countries, all under fire for their neglect of basic human rights, to get richer at our expense?

Moving towards energy independence is under attack from another quarter—extreme environmentalists. After Tuesday’s failure of California ballot initiatives to cut spending, Californians might take seriously Governor Arnold Schwarzenegger proposal to allow additional offshore drilling from Platform Irene, off the coast of Santa Barbara, which would raise $1.8 billion. But drilling on the Outer Continental Shelf remains unpopular. It’s telling that residents find it preferable to release 40,000 prisoners from jail or fire thousands of teachers—rather than drill offshore, which could bring in a steady stream of revenue to the state capital of Sacramento.

Until the United States has the technology to operate its 250 million motor vehicles without gasoline and natural gas, we need more domestic exploration, not less.  At some point, maybe later this year, maybe in 2010, our economy is going to shift to post-recession recovery, and oil and gas consumption are going to rise.  We don’t want a repeat of $5 gasoline and sky-high home heating bills.

After an eighteen year sabbatical, we fiction writers have recently put Russia back foursquare into its role as a novelist’s favorite fierce antagonist.  For decades, thrillers were dominated by the threatening Soviet imagery spun by John Le Carré, Tom Clancy and Frederick Forsythe.  Now, recent offerings like Daniel Silva’s “Moscow Rules”, Ted Bell’s “Tsar”, and my own “Pipeline” again reassign Russia its place of concern for political leaders, intelligence agencies and military planners.

That Russia provides good material is no surprise. The non-fiction Russia uses natural resources for coercion.  It militarily overwhelms a small neighbor. It crushes domestic dissension through physical or psychological intimidation. It suffers from near-obsessive mistrust of foreigners’ intentions.  Oligarchs and Kremlin bureaucrats are locked in a maze of corruption, mafia and violence.

So, how does America reconcile this reality with its foreign policy needs? As it considers its options with Russia, the new administration must wrestle with two potentially contradictory considerations.  On the one hand, no matter how good the fodder for fiction, Washington must ”reset” relations that have gone badly off track with this prominent nuclear-tipped, 11 time-zone behemoth.

On the other hand, events in the financial and energy markets may have inadvertently exposed an uncomfortable quandary: Does the New Russia actually matter all that much?

As demand and prices for its commodities soared, Russia has gotten rich without making much of anything.  When is the last time you bought something with a ‘Made in Russia’ label?  No textiles.  No computers.  No cars of any worth. No refrigerators or washing machines. No services. Even Stolichnaya is now bottled in Latvia.

Depressed energy prices and weak demand means that petro-states have lost the saber they used to rattle.  As the Kremlin’s finances flounder, some see a possibility that Vladmir Putin could even lose his hold on power – but not before Putin’s Siloviki (security bureaucrats) apparatus fights tooth and nail to hang on to money and clout.

Worsening matters for Russia, western environmental and national security concerns are accelerating technologies that could reduce the west’s dependence on hydrocarbons.  When the United States announces a serious conservation policy that reduces fossil fuel consumption – and with President Barack Obama this will happen – Moscow could find its long term geostrategic position increasingly eroded.

Yet, notwithstanding its difficulties, let’s remember that engaging Russia is better policy than the previous administration’s pinballing between infatuation and thoughtless antagonism.  Yes, Moscow hasn’t exactly been a reliable ally.   But as Professor Dimitri Simes says: “Nor has it acted like an enemy, much less an enemy with global ambitions and a hostile and messianic ideology.”

It is clear now that the Bush administration’s desire to place advanced warning missile defense systems so close to Russia’s borders was a miscalculation.  Similarly mistaken was the willy-nilly rhetoric of NATO expansion.

At a time of so many competing financial, military and political priorities, U.S. policy must first and foremost prevent Russia’s return to the top of America’s international worries.  U.S. policy needs breathing space to tackle priority number one: the growing arc of Mideast violence from the Mediterranean to the Hindu Kush.

Perhaps the place to start is to communicate a willingness to revisit missile defense. Iran’s early February satellite launch may now have impeded the removal of the Polish-based anti-missile sites.

But the United States can agree to provide Russia ongoing, verifiable reassurances that the systems will remain directed at “rogue states” and have nothing at all to do with Russia.

Given the regime in Moscow, this is a relationship fraught with difficulty. But it can be kept on track through pragmatic engagement.  Both countries will benefit from meaningful cooperation on Iranian nuclear advances, terrorism, non-proliferation and the spread of nuclear materials.

Turning down the rhetoric and finding a few areas of real joint interest would bring an welcoming respite to the frost in Russo-American relations.

Pity us authors, though.  We risk losing this fascinating subject all over again.

- Robert Engle is the Michael Armellino Professor of Finance at New York University Stern School of Business and a Nobel Laureate. His views are his own. -

We have faced energy crises before. The last energy crisis was about running out of oil. This one is about the fear that we might not. The future health of our planet is jeopardized by the greenhouse gases emitted by our industrial society. But can we afford an expensive energy policy in this time of economic distress?

The simplest and best solution to reducing emissions is thought by most economists to be a comprehensive tax on the emission of greenhouse gases. Only in this way will individuals and businesses that avoid the tax be doing what is socially desirable. Only in this way will it become profitable to find substitute energy sources; no longer would it be necessary to subsidize alternatives. The price of oil will rise naturally when we begin to run out, but in this proposal, the price would rise before we reach the bitter end. It is only a matter of timing.

However, a tax is generally considered politically impossible and in this time of deepening recession, it is especially unpalatable. But what about the money - what happens to the money that is raised by this tax? This revenue could be divided evenly among all U.S. residents and sent out in a periodic cheque. This check could even be sent before the tax revenue was received. A substantial emission tax would generate a substantial check. This could be used for anything but might well be used to buy a more fuel efficient car, insulate a house, move closer to work or otherwise reduce the impact of the impending tax.

Because this tax would be returned to consumers, it would stimulate the economy. The sectors that might expect benefits would be automobiles, construction and real estate. These all can use good news. Because of the per capita redistribution, this would be particularly beneficial to low income groups who would pay less than an equal share of the taxes. Because the tax would reduce our consumption of oil, we would be sending fewer petrodollars abroad and instead returning it to Americans.

We already know that high oil prices induced dramatic changes in our economic behavior which had clear benefits for reduced emissions. Driving miles fell, sales of SUVs fell and the only growth areas of automobile sales were in small cars. Housing prices fell more in the distant suburbs than in the central cities, and public transportation rider ship increased. But these gains are now being reversed as the price of oil has dropped dramatically.

In order to achieve the long term climate benefits, it is necessary to insure that there is a permanent shift in the price of emissions rather than a temporary shift. Car buyers, home buyers, builders, public transportation planners and alternative energy producers will reverse their decisions and reduce their investment and research unless they are assured that oil prices will stay permanently high.

When the recession is over, it no longer makes sense to redistribute the tax revenue. Instead, the revenue could be invested in a sovereign fund, passively managed and dedicated to the major unfunded social costs of the upcoming decades – social security and Medicare. The fund should be managed by a semi-independent agency much like the Federal Reserve. This agency would monitor the progress on reduction of greenhouse gasses and recommend adjustments in the surcharge.

One policy will solve both global warming and long run fiscal deficit. Workers several decades from now will not have to be taxed so heavily to support social security and they will not have to be taxed so heavily to solve climate change. The long run risks offset. Essentially the tax on income and payroll is replaced by a tax on carbon. The tax is placed on a “bad” rather than a “good.” Today’s working generation will in part save for its own retirement out of this tax revenue.

What happens if we are wrong? Suppose the planet is able to fix itself. Suppose we find an inexpensive way to sequester carbon dioxide. Then would we have broken the economy for no good reason? The answer is that we would have stimulated the economy in the recession, saved the social security system, improved our balance of payments and increased the time until we exhaust the world’s petroleum. This is not a bad outcome.

The gas dispute between Russia and Ukraine that has left hundreds of thousands of Europeans shivering in the winter cold is bound to accelerate plodding European Union efforts to build a common energy policy.

The cut-off of Russian gas supplies to Europe via Ukraine highlighted how little progress the 27-nation EU has made in connecting national energy networks and diversifying supplies since the first such crisis three years ago.

“A similar situation occurred in 2006 and we Europeans now feel guilty about not having done what we said we would do,” said an EU energy official, who declined to be identified because of the sensitivity of his position.

Unlike 2006, when the Europeans broadly sided with Ukraine’s pro-Western, democratic government, the EU has remained strictly neutral this time in what it regards as mostly a commercial dispute over gas pricing and unpaid bills.

Both sides broke undertakings to Brussels on continuity of supply. The lack of transparency on contracts, the role of murky intermediaries and coalition feuding in Kiev all made it harder to sympathise with Ukraine this time, the EU official said.

“The Russians were having a good gas war until they overreacted by cutting supplies to the EU. As in the war with Georgia last year, they could not resist the urge to teach former Soviet republics a lesson,” he said.

Russian giant Gazprom’s demand for Ukraine to pay market prices is not unreasonable, but television images of Prime Minister Vladimir Putin ordering the company to turn off the taps to Europe belies talk of a purely commercial issue.

Several EU states have increased gas stocks since 2006 and avoided major disruption. But Bulgaria, the poorest EU newcomer, and western Balkans states Croatia and Bosnia were caught with no stocks at all. Supplies to 18 countries have been affected.

That prompted the EU to intervene. Czech Prime Minister Mirek Topolanek, the EU presidency holder, persuaded Moscow and Kiev to sign a deal allowing EU monitors to check the transit of gas across Ukraine to get supplies to Europe flowing again.

MUTUAL MISTRUST

Progress on integrating the European gas market by linking up national pipeline systems has been very slow, partly due to mutual mistrust among EU nations, as well as divergent business interests and political differences on relations with Moscow.

Member states still do not share information with each other about the price their energy companies pay Gazprom for gas. The executive European Commission and the EU Council secretariat have been struggling to collate such data since 2006.

“We preach transparency but we do not practice it among ourselves,” the EU energy official said.
Poland has led a chorus of new members from central and eastern Europe calling for energy “solidarity” within the EU to reduce the former Soviet satellites’ dependency on Moscow, which provides a quarter of the EU’s gas.

But Germany, Europe’s biggest gas consumer, opposes any emergency EU pooling arrangement for gas stocks, arguing that this is a commercial matter for utility companies.

Berlin is keen to manage its energy relationship with Russia without the involvement of Brussels. It resisted any EU involvement in the Ukraine dispute until the leaders of Bulgaria and Croatia appealed personally to Chancellor Angela Merkel.

EU officials say the crisis should spur European leaders at a March summit to put political momentum and public money behind plans to build cross-border energy interconnectors in Europe.

They may also agree on minimum requirements for gas storage as the EU has for national oil stocks.
And they will likely give higher priority to diversifying gas suppliers, supply routes and delivery mechanisms in particular to develop liquefied natural gas (LNG) facilities.

Among suppliers, the EU is eyeing Qatar and Nigeria for LNG as well as Algeria, Norway, Azerbaijan, Iraq and Central Asian countries for piped gas.

Russia is using the crisis to underline the cost for its NordStream and South Stream projects to carry Russian gas directly to European consumers via pipelines under the Baltic and Black seas, bypassing Ukraine, Belarus and Poland.

The dispute will also add political weight to the Nabucco project, backed by both the EU and the United States, to pipe Caspian and Middle East gas to central Europe via Turkey, but there are doubts about finding enough gas to fill the pipeline.

None of these projects offers an early solution, given the long lead times and high cost. EU officials say they are not an “either/or”. There will be enough demand and enough gas to justify all three extra pipelines, they say.

In the shorter term, the capacity of existing pipelines can be expanded. But the main quick gains for European gas security would come from linking national networks into a single market and improving energy efficiency, especially in central Europe.

For previous columns by Paul Taylor, click here.

A few days before the election, Barack Obama told Time’s Joe Klein:

Finding the new driver of our economy is going to be critical. There’s no better driver that pervades all aspects of our economy than a new energy economy … That’s going to be my No. 1 priority when I get into office.

That’s exactly the right choice for numerous economic, geopolitical, and ecological reasons. By spawning “a new energy economy,” Obama can create millions of new jobs, decrease our dependence on foreign oil and avert catastrophic climate change. But the politics of launching that new energy economy — even with enlarged majorities in Congress — remains challenging.

In facing this challenge, Obama will be constrained both by a gargantuan budget deficit and his campaign vow not to raise taxes on anyone making under $250,000 a year. And because of the recession, he can’t suck buying power out of the economy. On the contrary, he needs to stimulate spending by consumers.

He also faces a tight international timetable: in December 2009, the nations of the world will assemble in Copenhagen to negotiate a successor to the Kyoto Protocol. If Obama is to have any credibility in those negotiations, he must pass significant legislation before then.

How, then, can he fulfill his No. 1 priority?

There are many opinions about what should be part of a comprehensive energy policy, but the centerpiece nearly everyone agrees on — the great lever that will tip the whole economy toward clean energy — is a strong, descending cap on carbon emissions. If done correctly, such a cap will raise the price of polluting, spur innovation and conservation, and shift billions of dollars of private investment into new technologies for the next 40 years. But designing the cap correctly is critical; a half-baked, loophole-ridden and overly complex system will do more harm than good. The devil is in the details — and, of course, in the politics.

The most critical details involve where to place the cap and what to do with the permits the cap will create. The simplest and most effective place to put the cap is upstream — that is, on the small number of companies that bring carbon into the economy. An upstream cap could be administered without monitoring smokestacks, without a large bureaucracy, and without favoring some companies over others. It would work for the obvious reason that, if carbon doesn’t come into the economy, it can’t go out.

The declining number of permits that would be issued under the cap should then be auctioned rather than given away free — all polluters would pay, and there would be no politically chosen winners or windfall profits. Fortunately, Obama pledged during the campaign to do just this. But that leads to another crucial detail: what to do with the auction revenue, which over time will total trillions of dollars?

There are two possibilities: spend the money on a variety of energy-related programs, or give the money back to the people. While there’s broad agreement that some public spending is necessary to solve the climate crisis, it’s by no means clear that permit revenues should be used for that purpose. The reason is that permit revenues, though initially paid by energy companies, are ultimately paid by consumers in the form of higher energy prices. They are, in effect, a sales tax on carbon — a tax that will fall on millions of Americans earning under $250,000 a year, and that will rise as the cap tightens.

Obama’s best choice is to fund energy-related programs from other sources (including long-term debt) and return all the carbon revenue to the people. This can be done through yearly tax credits, or better yet through monthly cash dividends wired like Social Security payments to people’s bank accounts or debit cards. The advantage of cash dividends is that they’d tangibly and frequently remind people that higher carbon prices are coming back to them — and help them pay mortgages and other bills that fall due on a monthly basis. The whole system might then be called “cap-and-dividend” or “cap and cash back.”

Like Social Security benefits, carbon dividends would be taxed as ordinary income; the government would then recoup about 25 percent of the revenue and could use that money as it sees fit. More importantly, ordinary families would get the lion’s share of the auction revenue, and get it in a way that rewards conservation. Since everyone would get the same amount back, those who use the most carbon would lose and those who use the least would gain — their dividends would exceed what they pay in higher prices. Low-income families in particular would gain because they use less energy than others and would pay little or no taxes on their dividends. In addition, the overall economy would benefit from this periodic replenishment of consumer demand.

The most persuasive argument for cap-and-dividend, though, isn’t economic but political. As the presidential campaign revealed, energy prices are an explosive issue. A carbon cap will raise fuel prices not just once, but for years to come. The potential for backlash — for frenzied cries of “Drill, baby, drill!” — is never-ending. If America is to reduce carbon emissions to the level scientists say is necessary, it’s crucial that families’ pocketbooks be protected for the duration. Cap-and-dividend does this by permanently linking dividends to carbon prices. As carbon prices rise, so — automatically — do dividends. If voters scream about rising fuel prices, as they surely will, politicians can truthfully say, “How you fare is up to you. If you guzzle, you lose; if you conserve, you gain.”

Moreover, for a carbon cap to endure, it must have broad bipartisan support. A revenue-neutral cap is far more likely to garner Republican support than one that’s linked to a large increase in government spending. Consider, for example, Senator Bob Corker of Tennessee, who supports a declining cap on carbon but not a spending bill that earmarks trillions of dollars over 40 years. Though it’s not glaringly evident, there are more Republicans like him. This doesn’t mean Obama shouldn’t spend public money on energy; it means he should separate such spending from the cap.

The ultimate reason for paying equal dividends from carbon revenue may be this: it fits Obama’s vision of how government ought to work. In this vision, the government’s job is to serve ordinary people, not special interests. It is to be fair and transparent. And it is to unite rather than divide us, to move us from a “you’re on your own” society to one in which “we’re all in this together.”

Cap-and-dividend fits this vision perfectly. It curbs carbon emissions in a way that’s simple to understand and administer, favors no special interests, and provides a degree of security to all. It treats all Americans as co-owners of the air and allocates trillions of dollars in a completely transparent way. It would be a signature Obama policy, one that sets the tone for his whole administration and remains as memorably linked to him as Social Security is to Roosevelt.

(Pictured above: President Bush walks with President-elect Barack Obama at the White House, November 10, 2008. REUTERS/Kevin Lamarque)