The prices for gas and for carbon need to be high enough to make some difference, so that means there will be some pain. And it needs to be stable enough so that people can make long-term investments for deploying alternative technologies.
TR: When we look at oil companies, there's a lot of entrenched positions and not much movement. That seems to be a basic institutional problem.
SK: I can only talk about one company that I know well. I've found the folks at BP eager to listen, to learn, to engage in discussions, and to try to do the best job that they can in balancing the short-term operations of the company against these longer-term things. After all, they have a business to run; they have shareholders to report to. They have a responsibility to produce [a certain percentage] of the world's oil every day, which the world needs. So it's a balancing act.
One of the things I have learned, which was surprising but makes sense in retrospect, is that companies are wonderful optimizers of their situation. If the government sets the playing rules appropriately, they will respond strongly and rapidly. So it is a question of getting the right policies in place, as well as a push from within the company.
TR: So the markets aren't going to solve these problems?
SK: Left to its own devices, the market will not price the externality of carbon dioxide, nor will it effectively deal with the security-of-supply problem. I think [that's] because it's longer term, and the markets have a shorter-term focus. I think markets are good for tactical allocation, but it's not obvious to me that they're the right thing for strategic allocation [or] longer-term planning.
TR: Are you hopeful we're going to be able to meet these challenges?
SK: I'm optimistic about security of supply. I see many sources for liquid hydrocarbons. I see great potential for efficiency improvements in U.S. transportation fleets. I am less optimistic about carbon dioxide emissions reductions. The world should give it its best shot, but there are so many forces aligned against it that I think it's going to be very difficult for the world to stabilize emissions, let alone stabilize concentrations of carbon dioxide in the atmosphere.
Carbon dioxide lives in the atmosphere for a very long time--a thousand years or so. What that means is that the atmosphere is accumulating emissions, and emissions right now are on an exponential growth path--2 or 3 percent a year. If we manage to make modest reductions in emissions, it will only be in the rate at which the concentration grows, but it won't stop the growth. So the usual societal response of dealing with a problem partially is not good enough to deal with the CO2 problem. We really need major changes in the ways we produce and use energy if we're going to prevent concentrations from rising. I don't think people understand that.