Let's leverage American LNG exports into a Global Grand Bargain on energy
What the Biden administration should be doing (but likely will not)
I typically do not like to write about the “topic of the day” in my Substack column. Chasing “the latest big issue” is both exhausting and rarely goes anywhere useful. I do, however, sometimes do so when the topic impacts my main interests, and I have a very different take from most commentators.
There has been a lot of discussion on the Biden administration’s recent decision to hold up permitting the construction of Liquified Natural Gas (LNG) terminal ports. This important decision limits the ability of North American gas companies to export natural gas, particularly to Europe. Since the Russian invasion of Ukraine in Feb 2022, Europe, and particularly Germany, has been desperately searching for alternative sources of natural gas. North America with its massive natural gas reserves due to shale gas is the logical replacement source.
Much of the coverage seems to be missing that the decision has key trade-offs, which make the decision fairly complicated. At stake are:
Global carbon emissions
Domestic natural gas prices in North America
Energy security for Europe
NATO military security
Most of the coverage that I have seen focuses on the first factor. Those who favor Green energy policies cheer the Biden administration, while those who do not jeer the Biden administration. Others question what the impact will be on global carbon emissions.
As usual, my take is completely different. I will start with the following observations that I have already spelled out in previous articles:
Vast amounts of controllable energy are essential for material progress for wealthy and developing nations. Fossil fuels will play the dominant role for the foreseeable future.
Greens make a mistake lumping natural gas with coal by using the category “fossil fuels.” By far the biggest producer of global carbon emissions is coal, particularly in Asia.
Natural gas is the most cost-effective energy source for phasing out coal.
A blend of natural gas, nuclear, and hydro-electric power are far superior means to:
reduce carbon emissions while
maintaining long-term economic growth than Green energy policies.
Solar and wind, even with batteries, cannot possibly replace coal in the USA or Asia.
The Shale gas revolution in the United States offers a fabulous opportunity for North America to “have its cake and eat it too.”
The technologies, skills, and organizations associated with the Shale gas revolution can be exported from the USA to the rest of the world if foreign governments allow it to happen.
Shale gas reserves are widely dispersed throughout the world and are likely to grow substantially in the future. The main barrier to spreading the Shale gas revolution to the rest of the world is government policy.
Europe desperately needs natural gas for its energy security and military security, but it is preventing the exploration and drilling in its own fields.
The USA has a self-interest in ensuring that NATO allies in Europe also have energy security and growing economies.
American LNG exports have the potential to increase natural gas prices in the United States undermining its economic growth. In fact, they already caused a spike in Henry Hub prices in 2022, although increased shale gas production in 2023 has brought the price back down.
Put all that together and you have a viable policy platform regarding LNG exports. The primary reason for Europe’s energy and security problems are Green energy policies. These policies not only threaten Europe’s security but NATO in general.
See also my other posts on Energy:
The disaster of Green energy policies, particularly in Europe
I believe that this government-sponsored Green Energy transition:
Undermines Europe’s energy security and NATO’s military security.
Will inevitably fail to achieve its goal of Netzero by 2050
Make virtually no difference in future global temperatures.
Cost tens of trillions of dollars (an estimated $1.77 in 2023 alone)
Is far less applicable to some regions, particularly Asia where half the world’s population, than other regions.
Greatly increase energy prices
Will slow down and potentially choke off economic growth in wealthy nations
Will particularly hurt the poor, working class, and racial minorities in those nations
Make it far more difficult for developing nations to industrialize.
Is completely unnecessary.
Worse, supporters of the Green energy transition are completely unwilling to acknowledge failure regardless of results. If unrestrained by other political actors, they will keep pushing until they completely destroy the material progress that took us centuries to build.
And even after the collapse, most Greens will just say that we did not push hard enough.
Now is the time for a Pivot on energy policy
Right now the United States has an enormous amount of leverage over Europe. Europe desperately needs our natural gas, but Europe is likely to use that gas as another just method of avoiding the irresolvable dilemma that Green energy policies have put them in. In the past Europeans temporarily overcame the dilemma by importing vast amounts of Russian natural gas. That was a big mistake, and Ukraine is paying the price.
If allowed to do so, Europe will merely replace Russian natural gas with American LNG (to cover up the problems) and continue their Green energy policies. Meanwhile, the Europeans will drain American gas reserves, and potentially drive up natural gas prices for American consumers.
The Biden administration has a tremendous opportunity to:
Enhance Europe’s energy security
Enhance NATO military security
Undercut China’s and Russia’s economic and military power
Promote long-term economic growth
Cut global carbon emissions
But the Biden administration can only do so if it completely abandons Green energy policies and uses the opportunity to leverage the Europeans to do the same.
A Grand Bargain on energy policy
The Biden administration should explicitly tie the decision to export LNG to nations that agree to what I call the Grand Bargain.
Each nation that wants American LNG imports must agree to the following:
Construct an abundant, affordable, and secure electrical grid based on natural gas, nuclear power, and hydroelectric power. The exact blend will differ based on geography and local cost structure.
Phase out all subsidies and mandates for renewable power. It was these subsidies and mandates which caused the problem in the first place.
The focus should be on abundant, affordable, and secure energy sources. Renewable energy sources can act as a supplement where geography and economics allow, but natural gas, nuclear, and hydroelectric power will do the heavy lifting.Phase out coal power, by far the worst offender in carbon emissions, pollution, and degrading health.
Impose a coal tax on all goods mined, processed, transported, and manufactured using coal or electricity generated from coal. This will give the entire world, particularly China, a strong economic incentive to move off coal. Such a coal tax is the only viable way to reduce Chinese coal use which is the principal cause of global carbon emissions.
The revenues from the coal tax can only be used for costs directly related to ramping up production and distribution of:
Natural gas
Nuclear power
Hydroelectric power
Roll back government restrictions on the exploration, drilling, and distribution of natural gas on public and private land.
Allow American shale gas companies to explore and drill within potential conventional and shale gas fields on their territory. This will make natural gas so affordable that the global energy sector wants to shift from coal to natural gas.
Once a nation has fully transitioned off of coal and onto natural gas, nuclear power, and hydroelectric power, use the revenues from the coal tax to:
Gradually shift the transportation sector from petroleum to electricity, starting with transport within wealthy metro regions and then expanding to longer-range transportation.
Assist Asia and developing nations that also agree to the Grand Bargain with the capital and technical skills required to gradually transition from coal and wood-burning to an electrical grid and industrial sector based upon a blend of natural gas, nuclear power, and hydroelectric power. Affordable and abundant natural gas is key to this transition.
In return for the above, the United States agrees to:
Keep natural gas production and distribution high enough to serve recipients’ energy needs. American gas reserves are plenty to do so for decades.
Create innovation prizes for new energy sources that have all the advantages of fossil fuels and nuclear power but without pollution, radiation, or carbon emissions.
Provide financial and technical assistance for funding installations of this new energy source, once it becomes practical and cost-effective.
Expanding the Grand Bargain
The initial focus of the Grand Bargain should be our European NATO allies. Then Japan and other non-NATO allies can be folded in. In the long run, we should seek to add India, Indonesia, and even China. Each nation included could do so in return for security cooperation and the incentive of getting revenue from the coal tax.
In the long run, this Grand Bargain would be a win-win for all nations. Developing nations would get assistance with their energy needs, they would receive the economic benefits of abundant and affordable energy, and they would get cleaner air from eliminating coal. Wealthy nations get to continue their economic growth, while radically reducing global carbon emissions far beyond anything possible using renewable energy.
A Global Bargain With Teeth
My proposed global agreement has both strong incentives and enforcement mechanisms. All nations will feel the negative incentives of the coal tax whether they agree to the bargain or not. They will only get the benefits of American LNG imports if they agree to phase out coal and allow natural gas exploration, drilling, and distribution on their soil.
The nation most unlikely to accept this Grand Bargain is China, because it has far more coal plants than any other nation. China also has export industries that are heavily dependent upon their energy production.
This is where the coal tax is far better than current Green policies. Green energy policies have been pushed overseas primarily by periodic global climate agreements that consist mainly of empty promises. Any nation that chooses not to follow through on those promises suffers no negative consequences. And because those promises to limit carbon emissions seriously undermine long-term economic growth, developing nations are smart enough to not promise anything. The result has been global climate agreements that are increasingly just farcical political theater.
Unlike current global carbon reduction treaties, the coal tax gives other nations a method for forcing compliance. The United States, Europe, and Japan could establish a coal tax on all domestic and imported goods regardless of whether other nations agree to it.
The coal tax on imports would function as a de facto tariff as long as the exporting nations continue the widespread use of coal. So any nation that refuses to go along with the Grand Bargain receives all the pain from the coal tax without any of the benefits of helping implement the Third Energy Transition.
In the short run, if China refuses to go along with this, then export industries might shift from China to American soil. They would do so not because of concern for climate change, but because they want to avoid paying coal taxes.
A coal tax would have a devastating effect on the Chinese economy, unless it is combined with a shift from coal to natural gas, nuclear, and hydroelectric power plants. Entering the Grand Bargain would make the transition easier.
Without such an agreement the increased costs due to the coal tax would undermine the cost advantage of Chinese industries and turn it into a cost disadvantage. Unable to profitably export to the United States, Europe, and Japan, Chinese export industries would collapse just when they are undergoing economic and demographic strains.
Greens will hate the Grand Bargain
The largest barriers to this Grand Bargain are Green ideology and the institutions that support it. It is time for environmentalists to seriously question their current strategy. They must acknowledge that solar and wind will not come close to replacing fossil fuels, nuclear power, or hydroelectric dams within the next few generations. Fortunately, there is a much easier transition to a dynamic global economy and declining global carbon emissions.
It is not too late to change, and if you truly believe that we are facing a crisis, you cannot reject my proposed alternative out of hand.
Until such a Grand Bargain is reached, however, all developing nations must choose between:
expanding usage of fossil fuels, or
poverty with cooler temperatures.
They will choose fossil fuels, and they should do so.
Waging economic warfare on China and Russia
A more selective Grand Bargain that includes only American national security allies would also be a highly effective means of waging economic warfare against China and Russia. A coal tax would seriously undermine Chinese manufacturing exports, a key part of their economy. American LNG and crude oil exports would seriously undermine Russian energy exports, also a key part of their economy. The combined effect would radically undercut the global influence of those two increasingly hostile nations.
Europe, Japan, South Korea, and Taiwan would greatly benefit from American energy exports. Europe, in particular, would benefit from American assistance to rebuild their domestic gas industries. Energy security would solidify military alliances.
India and Indonesia, two potential allies against China, may not be terribly excited about this bargain because of their heavy coal usage. They may be skeptical that Western nations will follow through on their part of the bargain. But both nations are far less dependent upon coal to fund export industries than China is. And both nations will want access to American crude oil and LNG exports.
Western assistance in constructing an abundant, affordable, and secure energy sector in India and Indonesia would greatly help their domestic economic growth and help them to see the benefits of cooperating with the United States on security issues.
An aggressive China, Western military power, energy abundance, and economic growth all give India and Indonesia reasons to side with the West in the emerging Cold War 2.0. Reduced carbon emissions and pollution would be the icing on the cake.
Let’s not miss this opportunity
This is a unique opportunity for the United States. We may never have this type of leverage again. It also helps to mitigate many problems simultaneously. In total, this plan is a radical departure from current energy policies, and the likely result will be to:
Cut global carbon emissions, particularly in Asia
Enhance Europe’s energy security
Enhance NATO military security
Undercut China’s and Russia’s economic and military power
Promote long-term economic growth in both wealthy nations and developing nations
See also my other posts on Energy:
Why not go for a full tax on carbon emissions, implemented in the same manner? It would impact coal and wood burning much more than LNG, addressing the root cause.
I also wonder if the grand bargain idea might increase geopolitical tensions vis a vid China in particular? Seeing as they would probably reject such a deal if it comes from the US, and with their economic and demographic problems, they might accelerate the plan to retake Taiwan, for example.
I agree with the thrust to export both LNG and the technology to produce it as far and wide as possible. I agree with the logic for and the benefits of implementing a coal tax - you’ve begun to persuade me that at this moment in history, it makes more sense than a general carbon tax.
The only thing I have left to be persuaded on is that solar will not meaningfully displace energy sources like nuclear, especially within nations like the US where we cannot successfully complete a buildout, given the tremendous learning rate for solar + battery technology. Known improvements put very cheap solar within reach, and just getting any storage tech right enables a winning local electricity source. This is from Ramez Naam, Austin Vernon, and Casey Handmer (his personal profit incentive via Terraform noted).