Economists Attempt to Quantify Potential For Greenhouse Gas Reduction in Hawai‘i

posted in: August 2008 | 0

Last year, economists with the consulting firm McKinsey & Co. released their analysis of what it would cost to abate green- house gas emissions in the United States. The December 2007 report – Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost? – examined all of the world’s industries and, using a maximum cost of 40 Euros/ton above business-as-usual costs, de- termined how much greenhouse gas abate- ment could reasonably be achieved in the United States by the year 2030. The report, which evaluated some 250 different abate- ment options, concluded that based on an abatement cost of $50/ton (using a now- hopelessly outdated conversion rate of $1.20 to one Euro) of greenhouse gas and an oil cost of $60/barrel (also a figure the world is un- likely to see again), the United States could reduce its greenhouse gas emissions in 2030 by 3 to 4.5 billion tons using proven or high- potential technologies.

Shortly after the report’s release, the U.S. Department of Energy asked McKinsey to do a similar analysis for Hawai‘i as part of the Hawai‘i Clean Energy Initiative, a DOE- State of Hawai‘i project aimed at boosting renewable energy use and decreasing energy demand so that by 2030, 70 percent of the state’s energy will come from clean sources. On June 5, a team from McKinsey presented that analysis to the state Greenhouse Gas Emissions Reduction Task Force, whose job it is to help the state reduce its emissions to 1990 levels (18.4 megatons) by 2020.

The McKinsey report, “Reducing Hawai‘i’s Oil Dependence and Greenhouse Gas Emissions,” states that Hawai‘i can go farther and faster than the rest of the country when it comes to reducing its greenhouse gas emissions because it need not rely on a large number of untested technologies. Using the top ten technologies, McKinsey’s Matt Rogers

told the task force, Hawai‘i can achieve 80 percent of its emission reduction potential.

While Rogers said Hawai‘i’s small size allowed the analysis to be very specific, McKinsey’s Nicholas Hodson warned that the analysis is not meant to be “spot-on accurate.” Its main goal was to evaluate a range of technologies in a consistent manner. Hodson said that some of the factors absent from the analysis are international and ma- rine travel and “imported carbon,” which is the carbon dioxide emitted during produc- tion of imported goods. Calculating imported carbon, Hodson said, “gets really compli- cated really fast.” Also not included in the analysis are the costs of policy implementa- tion, dynamic impacts of carbon prices, changes in consumer lifestyles or behavior, and broader societal costs or benefits.

Given those caveats, Hodson said that by 2030, Hawai‘i could reduce its annual oil imports under a “mid-range case” by 17 mil- lion barrels. Under a “high-range” case, that number jumps to 30 million barrels. Today, Hawai‘i imports more than 40 million barrels of oil a year and, according to the McKinsey report, that number will grow to more than 60 million barrels by 2030 if the state doesn’t change its energy sources or curb its demands.

Under a business-as-usual scenario, Hawai‘i would emit 31 megatons per year of greenhouse gas. However, Hodson said, those emissions could be reduced by 7.8 megatons a year under a mid-range scenario and 13 megatons in a high-range. To put things yet another way, the state could achieve a reduc- tion of 28 percent of its carbon-based energy demand under a mid-range scenario, and a 48 percent reduction under a high-range.

McKinsey representatives noted their analysis was based on oil costing less than half its current price (around $140 a barrel in mid-July). They said that as the price of oil in- creases, so do savings associated with abatement, while the price of renewable resources stays the same.

“In some ways, [these scenarios represent] an insurance policy to hedge against the high price of crude oil,” said McKinsey’s Brandon Davito.

For Ted Peck of the state Department of Business, Economic Development, and Tourism’s Energy Planning and Policy branch, the study puts to rest any doubt that greenhouse gas emission abatement is eco- nomically infeasible.

“There’s been a lot of discussion about how it’s going to be so expensive to abate greenhouse gases. If you look at the report, it’s hard to conclude that that’s going to be the case. The cost curve is based on $60 a barrel of oil…. Even if you take the things that would cost $150/ton of greenhouse gas…all of that today is in the money,” he said. “We are going to be able to abate greenhouse gas and it’s not going to cost us an arm and a leg.”


What kinds of changes must Hawai‘i make under these scenarios?

The medium case calls for the implemen- tation of 45 different technologies, while the high case includes 56. In both cases, businesses and residents throughout the state need to immediately switch to energy-efficient elec- tronics and lighting. McKinsey’s abatement curve shows that the top five most cost-effective abatement measures, which each save about $150 for each metric ton of green- house gas saved, fall under energy-efficient commercial and residential electronics and lighting.

More efficient transportation and appli- ances also save money. Solar, geothermal, gas recovery from landfills, and hydropower, among other renewable energy sources, are also included in the mix, as well as afforesta- tion (planting forest where none has histori- cally grown, such as on pasture and crop land) and reforestation. Biodiesel from algae, biokerosene, ocean thermal energy conver- sion, electric vehicles, biomass gasification, and carbon capture and sequestration were some of the technologies excluded from the analysis because they face technological and/ or commercial obstacles.

Biofuel production plays a major role in the analysis and accounts for the largest emis- sion reductions in both mid- and high-range cases. The report assumes that all existing sugarcane would be used for ethanol produc- tion and that sugarcane-based biofuel pro- duction would max out at the 1969 levels of sugarcane production. In the high case, they

estimated 360,000 acres of sugarcane would be used for ethanol production in addition to cellulosic biofuel production on the Big Is- land.

The report also assumed that there would be significant increases in plug-in hybrid vehicles powered by renewables, and that wind power would be developed on Lana‘i. Under the high case, wind-generated elec- tricity from Maui County would be trans- mitted to O‘ahu via an undersea cable.


At the task force’s June and July meetings, members questioned the report’s assump- tions about the potential for biofuel produc- tion using sugarcane. One member noted that meeting the water requirements for the acreage proposed would be an obstacle. And task force chair Larry Lau, deputy director of the state Health Department’s Environmen- tal Management Division, questioned whether planting 360,000 acres of sugarcane can even be done anymore.

Regarding water issues, Rogers said that allocation, not the quantity of water, is the binding constraint in Hawai‘i and that for all

of the technologies, policy decisions have to be made on what the trade-offs will be. Hodson added that water infrastructure is a very significant issue, and according to Davito, it would cost $20 million to bring the required irrigation systems “back up to a functional level.”

In response to Lau’s question, Davito explained that the biofuel projections as- sumed a “friction-free environment” and that sugarcane acreage was based on figures in a report done by the Hawai‘i Natural Energy Institute. Davito said that such production was “feasible, but it would require a signifi- cant amount of dedication on the part of the state to reach that level.” To this, Lau said that in addition to water issues, a lot of the land that was once used for sugarcane production has been urbanized or is being used for diver- sified agriculture.

Lau also asked whether any technological breakthroughs needed to be made to trans- mit electricity between islands with a cable. Davito said that the cable that would connect Maui to O‘ahu would be similar to those connecting Scandinavian countries to Ger- many and the Tory Islands to British Columbia. He added that an O‘ahu-Kaua‘i or Maui-Hawai‘i cable would also be technologically feasible, but he was not sure of the cost for those.

Task force member and Hawai‘i Sierra Club executive director Jeff Mikulina noted that the most cost-effective abatement tech- nologies – things like switching to energy- efficient light bulbs – were not constrained by permitting or natural resource issues, which led one member of the public to ask what was preventing people from using efficiency tech- nologies since they seemed to be a goldmine of savings.

Rogers said that, in part, the high initial cost of the technologies is to blame.

“A new home builder will not put in the extra $2,000 to install energy-efficient fix- tures that may save the buyer many times that over time because he’ll lose the sale to a neighboring builder who didn’t put them in. No manufacturer wants to be the first to incorporate a new technology because it’s more expensive. If it’s a standard, they’ll put it in,” he said. He added that observations of the industrial sector suggest that if a manufac- turing plant saves energy in one area, the savings are seen in a different area. “So the incentive for a unit manager to save energy is

not there. Companies with an energy czar that’s looking over the whole thing actually capture the benefits more than those in which each section’s energy use is overseen by sec- tion managers. Those are some of the reasons efficiency opportunities still linger,” he said.

Feasibility questions aside, could Hawai‘i meet its legislative mandate to reduce green- house gas emissions to 1990 levels by 2020 under either of McKinsey’s scenarios? Ac- cording to Davito, Hawai‘i would slightly exceed 1990 levels for greenhouse gas under the medium case. However, in the high case, “Hawai‘i would be able to achieve 13 megatons of abatement, which gets…slightly under the levels of 1990,” excluding emissions from international and marine travel, he said.

Mikulina pointed out that McKinsey’s analysis used 2030 as its goal date, while the state’s deadline under 2007’s Act 234 is 2020. In response, Davito admitted that while the high case analysis suggests that at 2030 Hawai‘i should be at 1990 emission levels, “It’s unclear whether you could make that level by 2020.”

The report notes that if abatement options that cost more than $50 a ton are imple- mented, “Hawai‘i would be well below 1990 GHG (greenhouse gas) levels” by 2030.

The Right Approach

Implementing either of McKinsey’s scenarios would be a struggle, to say the least. Still, Rogers said, Hawai‘i is in a better position to reduce its oil consumption and greenhouse gas emissions than the rest of the country, since Hawai‘i has more natural resources and proven technologies to work with.

“This isn’t trying to launch 250 initia- tives,” Rogers said. “It’s really launching a finite set of initiatives that actually move along well…The question is what is the right approach to developing local ethanol, wind, and geothermal resources, because capturing those relatively quickly provides a foundation for doing a set of these other things.”

Transmission and distribution infrastruc- ture upgrades are key, he said, particularly for things like electric hybrid vehicles that are powered by renewable resources and “further out” approaches, such as algae-based biodiesel and wind technologies that “may come into the money in the next 20 years.”

With regard to ethanol, task force member and former Matson Navigation Co. senior vice president Gary North said his company had just helped the Legislature pass a bill for $618 million in port upgrades, which don’t include any ethanol-related facilities.

“I think that clearly, if you’re going to be running ethanol from Maui and Kaua‘i and from the Big Island, you’re going to need huge amounts of investment [in harbor facilities]…In Kahului there’s basically no place to go and Kawaihae [on Hawai‘i] there’s is someplace to go but [it needs] a lot of invest- ment,” as does Kaua‘i, he said. “You really need to look at those numbers if you’re going to grow that much sugarcane and make that much ethanol.”

Without a clear and consistent policy framework, questions about who’s paying and how costs and benefits are distributed will result in the continued delay of economically and environmentally attractive investments, Rogers said.

For Hawai‘i, the motivation to establish such a framework is clear, Rogers said: “You get a double whammy: You get declining revenues because people stop flying when energy prices are high and stop coming, and you get higher costs at exactly the same time…. The question is, can you substitute some capital today to essentially protect you against that risk going forward and at the same time capture some significant environmental benefits and really provide a leadership model for what the rest of the United States is going to be wrestling with?”

While Lau told Environment Hawai‘i that the Sunshine Law bars him from speak- ing in detail about how the task force plans to use the McKinsey report, he confessed that “it’s too early to say [how it will be used]. I’d probably want to take up some of the issues with the [task force’s] analysis committee.”

As an individual, Lau said he found the report, “very stimulating, just the idea of the relative cost or savings from various options and the amount of energy involved with each. People can argue the details, but it would be important to look at major trends in the analysis. Obviously if we can save with efficiencies, we should be pushing for those things.” Echoing his earlier comments to McKinsey, Lau added that he was “very curious” about the feasibility of reinstitut- ing large-scale agriculture for biofuel and said he had “thoughts on the fact that the greatest reduction in emissions comes from biofuel production and that the acreage is based on peak sugar numbers.”

DBEDT’s Peck notes that McKinsey’s report is just a projection, an approxima- tion, and that the state’s bioenergy master plan, which is currently being drafted, will fill out a lot of the uncertainty about biofuels. He said that while a study released earlier this year stated that biofuels weren’t reduc- ing emissions, “it compared pristine rainforests to cutting [them] down and planting biofuels. We have a lot of fallow land that isn’t sequestering any greenhouse gas.”

“The devil is in the details. We have a lot of things in front of us,” he said, adding that there will be tradeoffs and there has been a lot of discussion with DOH and the task force about systemic changes needed.

“It’s analogous to critical infrastructure built years ago. Buildings built by the mili- tary and government were not built with security in mind….Greenhouse gas applica- tions are not incorporated in the planning process yet at a systemic level,” he said. For example, “Municipal solid waste is an area where a lot of decisions are being made on all islands without thought to greenhouse gas emissions,” he said.

— Teresa Dawson

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