The Secondary Effects of a Hi-tech Transition

The Secondary Effects of a Hi-tech Transition

Robert Johnston
The intensive use of technology is fundamental for the decarbonization of the energy system. However, blockchain, artificial intelligence, robotics and big data also have consequences that will entail risks and political headwinds for governments

The energy revolution is disrupting both markets and countries. The drive toward decarbonization of the energy sector in line with the Paris Agreement or even more aggressive pathways will not happen without technological transformation on a global scale. Yet “global” assumes governments will be willing partners to fund and enable deep decarbonization, both through direct support and incentives, as well as increasing penalties for business-as-usual fossil fuel production and consumption. Government action in these areas is inadequate and uneven at best. Traditional concerns about energy security and economic growth, as well as affordability and access to reliable energy, have more recently been further exacerbated by the global trend toward populism. Populist leaders find it easy to position climate as a global problem whose costs and responsibilities should be borne by others.

The next layer in the challenge is to look deeper at how growing reliance on tools such as blockchain, artificial intelligence, robotics and Big Data affect the global challenges to climate action. It is argued here that these technologies represent potential breakthroughs on decarbonization but also bear secondary effects that will drive political risk and headwinds for governments to move on climate action.

Examples of the incredible transformative potential of these technologies include the prospective development of autonomous vehicle fleets and advanced grid management systems to accommodate the integration of distributed renewable energy generation at massive scale. We also see significant promise in the use of digital ledgers to enable cross-border carbon markets such as those envisioned in Article 6 of the Paris Agreement. On the other hand, the shift to autonomous vehicles and cloud-based grid management is clouded by cybersecurity questions as new modes of critical infrastructure are being created. Greater use of AI-enabled autonomous vehicles will also disrupt traditional labor markets in driving and vehicle maintenance. Employment impact is also the downside of the growing use of artificial intelligence and robotics in oil and gas production—usage that is driving lower costs and higher profitability also translates to fewer workers per rig.


Jobs, automation, and the energy sector

Technology is central to any deep decarbonization pathway. This statement is true both for new zero-emissions technologies and for traditional oil and gas producers adjusting their business model to a world of more uncertain demand and rising competitive pressures. Yet one of the downsides of these technologies is their effect on traditional employment patterns in the energy and transportation sectors. This in turn could have the unintended consequence of weakening the traditional political support and influence the industries have been able to mobilize through their erstwhile vital role in creating high wage blue collar jobs.

Electric and clean energy vehicles (CEVs) provide an interesting case study. With the transportation sector accounting for 24 percent of global GHG emissions in 2017, the need for breakthrough technology is critical. The IEA Sustainable Development Scenario illustrates the vital role that CEVs will play in achieving decarbonization in line with the “EV30@30” scenario, in which electric vehicles grow to 250 million units by 2030. This scenario would displace 4.3 million barrels per day (bpd) of oil demand versus the business-as-usual case.

While experts debate the technological and political barriers to achieving this scenario, a couple of facts seem clear. First, China will be the dominant manufacturer of EVs. Both in terms of annual sales and control of supply chains for batteries, China has strong energy security, industrial policy, and environmental policy incentives to lead this emerging sector. Chinese firms constitute seven of the ten largest global battery manufacturers and China has the most secure position in critical mineral supply chain as well.  Second, overall employment in the EV sector is likely to be lower than with internal combustion engines. This is already shaking up labor markets in the US auto sector.

Together, these trends create a new political dynamic for the auto sector. What will their political influence and ability to affect and shape public policy be in a world where they are employing fewer workers per manufactured vehicle? And what will the implications of China’s dominant position in electric vehicles and batteries be for their energy security and geopolitical strategy? As US and European automakers pursue JVs in China, we have already seen a backlash from the Trump administration with its intense focus on the fairness of China trade and its strong appetite for “reshoring” of US manufacturing.

The dynamics around technology and automation in the upstream sector have some similarities to what is taking place in the automobile industry, but also some key differences. Decarbonization is a key factor of course - in terms of managing the life cycle emissions of production but also in terms of longer-term demand for oil and gas along various decarbonization pathways. Recent technological innovation in the upstream has primarily been driven by an imbalanced market and weak industry returns, particularly in the 2015-2017 time frame. Both in US shale and in deepwater, weak market conditions created a focus on cost reduction through replacing manual labor processes with digital and automation-based strategies, including artificial intelligence and robotics. In the more rapid decarbonization scenarios there would be continued pressure on the oil sector to reduce cost and avoid risk wherever possible, with technology being a key survival mechanism. As in the auto sector, employment effects would be significant. Like the auto sector, the shift toward fewer and more high-skilled jobs will impact the political standing of the oil and gas sector. In particular, the trade-offs between GHG-intensive oil and gas production and the economic benefits of large numbers of jobs will be reassessed.


Cybersecurity: new challenge for autonomous vehicles and smart grids

One of the most promising decarbonization pathways is the application of big data and artificial intelligence to breakthrough energy technologies like autonomous vehicles and smart grids. In the case of autonomous vehicles, there are significant gains to economic productivity and (potentially) safety, but the potential benefits in terms of decarbonization of the transport sector are more uncertain. The potential benefits would be linked to a sharp reduction in vehicle ownership and a greater reliance on various forms of ride sharing and fleets. But it is also possible that total vehicle miles traveled and fuel consumption could remain the same or even increase. Another significant uncertainty for self-driving vehicles is security, a critical barrier for consumer trust and safety. Media reports document a range of vulnerabilities from hackers targeting wireless key locks to ignition and braking systems. In one high profile case, “white hat” hackers working for Chrysler manage to hack into a Jeep operating on a test track and shut off its ignition, leading the company to recall 1.4 million vehicles. These problems have mostly manifested with “connected” vehicles but will become even more serious as “fully autonomous” vehicles capture a larger share of the fleet.

Security issues are also material for the smart grid sector. Smart grids help enable the deployment and integration of distributed generation technologies such as small-scale solar or fuel cells. Such networks are characterized by two-way flow of electric power, a vastly larger number of nodes in the system than traditional grids built around large central power stations, and greater complexity in managing grid stability. The GHG reduction benefits are considerable, both through enabling greater utilization of renewable resources and greater efficiency through fewer line losses and better customer data on usage. But as with autonomous vehicles, the “connected” nature of the smart grid will create opportunities for hackers and vulnerabilities in the reliability and security of electric power critical infrastructure.

As autonomous fleets of clean energy vehicles grow and smart grid deployment expands, the pathway to “deeper decarbonization” becomes more viable. At the same time, the very definition of energy security will change from securing fossil fuel reserves in unstable countries and transit routes to managing staggeringly complex data-driven transportation and electricity systems. The August 9th blackout in the UK was in part attributed to an underestimation of how much reserve electricity is needed to back up growing amounts of local distributed solar and other small-scale generation. The changing nature of the electricity system will require new forms of resilience.


Blockchain and the “digital ledger” for International Transferrable Mitigation Outcomes

Technology also holds the potential to enable a critical element of developing global carbon markets. Past efforts around the Clean Development Mechanism, in which developed countries receive carbon credits for funding “offset” projects in developing markets, have been plagued by inefficiency and corruption. These issues are again surfacing in the context of proposals to finalize Article 6 of the Paris Agreement and efforts to establish International Transferrable Mitigation Outcomes (ITMO) built around fuel-switching of LNG for coal.

The logic of ITMOs is that it would support the development of LNG in countries with strong environmental and GHG regulatory frameworks, particularly for projects with the lowest GHG life cycle emissions. The ITMO would allow LNG developers to acquire or share a carbon credit that is generated when a consumer substitutes LNG for coal or even potentially for higher-GHG LNG. Environmentalists argue that for ITMOs to work, there must be an efficient and credible system to verify the lower GHG properties of the fuel and that an actual emissions reduction is taking place when the fuel is used to substitute for a higher GHG fuel.

The government of British Columbia is working with the LNG sector “to bring together the previously separate domains of Clean Growth and Digital Trust.” BC LNG is subject to a carbon tax and developers are committed to using zero-emissions hydro-electricity to power their plants, resulting in a low GHG life cycle impact. In doing so, the province would be a leader in the creation of “Digital ITMOs.” Using emerging standards, protocols and technologies from organizations such as the World Wide Web Consortium and the Linux Foundation’s Hyperledger Project, the Digital ITMO process would aim to enable parties to issue digitally verifiable certifications regarding the GHG characteristics sources and sinks within their jurisdiction.

In the case of LNG, the BC gas would be assigned a digital identity verifying its origin, its GHG characteristics, and potentially other financial, legal and technical information. By creating government-regulated digital certification, a buyer could be certain that the LNG purchased has the lower GHG and origin characteristics that they require. For the seller, the Digital ITMO would facilitate the verification of the GHG reduction that takes place when the buyer uses the LNG to displace coal or higher-GHG gas from another source. Such verification confirms that an emissions reduction is taking place and the economic value from that reduction can be divided between buyer and seller in a number of ways. Without the innovative and low cost technology enabler of the “digital ledger,” the political and market barriers to implementing ITMOs are unlikely to succeed.


Robert Johnston

He returned in 2018 to leading the firm’s Global Energy and Natural Resources (GENR) group after serving as Eurasia Group’s chief executive officer for five years and steering it through a period of strong growth and global expansion.