High Oil Prices Can Help the Environment
As the northern winter draws closer, surging fossil-fuel prices have left many consumers worried. But there may be a silver lining in the form of more aggressive US efforts to tackle climate change – provided the political will for such measures exists.
What Europe's Energy Crunch Reveals
Societies that cannot accept today’s energy prices are unlikely to prepare adequately for the green transition, regardless of their long-term net-zero promises. They are instead likely to act too late and thus too suddenly, which will be not only economically costly, but also politically untenable.
BRUSSELS – This month represents an important milestone in the fight against global warming – and not only because of the United Nations Climate Change Conference (COP26) currently underway in Glasgow. Although many countries announced ambitious emissions-reduction targets in the run-up to the gathering, these often extend a generation into the future, to 2050 or even 2060.
Meanwhile, governments in Europe and elsewhere face an immediate energy crisis in the form of surging gas and oil prices. And how they react to it will reveal much more than their long-term net-zero pledges do about their ability to manage the concrete challenges of the green transition.
The current energy-price spike is a classic case of an accident that was waiting to happen. Years of low prices, combined with regulatory pressure on banks to reduce their exposure to brown industries, have naturally depressed investment in fossil fuels. A faster-than-expected rebound from the COVID-19 recession, plus somewhat colder weather in the Northern hemisphere, were then enough to drive up prices to their highest levels in a decade.
Elevated fossil-fuel prices are in principle ideal drivers of a green transition, because they make renewable energy more competitive. But the problem is that consumers had become accustomed to low prices and are now up in arms about the sudden surge.
The phenomenon is not new. Many Central and Eastern European countries faced a similar issue when they lost access to cheap energy supplies from the Soviet Union in the early 1990s. Until then, energy prices in the region had been so low that most buildings were not adequately insulated, and heating was not even metered. The switch to market prices caused particularly acute problems for large numbers of retirees living in shoddy apartment buildings, because their pensions were suddenly lower than their heating bills.
For most economists, the solution was clear: governments should raise energy prices to market levels, and use some of the increased revenues to pay poorer households a lump sum to cover the higher cost. All the major multilateral and European institutions – including the International Monetary Fund, the World Bank, and the European Commission – supported this approach, and the region’s governments implemented it gradually over time.
Central and Eastern Europe has not yet fully solved the problem – housing remains less energy-efficient than in Western Europe – but most countries in the region have made substantial progress. One interesting lesson from their differing performance is that the quality of a country’s governance strongly influences its rate of energy-efficiency improvement.
For example, Estonia, which often tops regional governance rankings, has boosted its energy efficiency faster than some Western Balkan countries, where the quality of governance is much poorer and energy-market distortions remain. In Bulgaria, about 33% of the population report that they feel unable to keep their home adequately warm – a key element in the European Union’s definition of energy poverty. The corresponding share in Estonia is less than 3%, despite the fact that winters there last much longer and the number of heating degree days is over 50% higher than Bulgaria’s.
Increasing energy prices gradually while providing income support to the needy seems straightforward but is hard to implement in practice. There will always be groups in society that have other valid claims for income support, and raising prices steadily over time requires careful, limited interventions in the energy market. Dealing with a large increase in energy prices – as many European countries are now doing – is thus always a test not only of government, but also of society as a whole.
A key feature of a resilient society is its ability to avoid a build-up of vulnerabilities, including in the energy sector. Spain, where the government is currently panicking in the face of sharply higher household electricity prices, provides a striking example. The government previously encouraged families to take out electricity contracts at spot prices, which seemed like a great bargain when prices were low in recent years. But such arrangements become politically untenable when spot prices suddenly double or triple.
Similarly, adjustable-rate mortgages were widely popular in many countries during the period of low interest rates that preceded the global financial crisis, but these products proved highly damaging when rates spiked in 2008-09. But the Spanish government is now doubling down on its earlier mistake by promising that households will not pay more for electricity than they did in 2018.
Spain’s electricity dilemma highlights the cost of prolonged periods of low energy prices. Politically, of course, they are very convenient. But they lead firms and individuals to build business models and livelihoods on cheap energy, thus making any eventual upward price adjustment much more difficult.
France’s “yellow vest” movement, often cited as an obstacle to green policies, provides another example. The uprising that began in 2018 consisted mainly of people whose jobs and lifestyle depended on commuting by car – and thus on cheap gasoline. They represented a small proportion of French society (the number of yellow vest activists remained low), but a highly vocal one.
In cases like these, the question for political systems is how to take care of a small minority whose livelihood is threatened by change. The easy answer is to provide fuel subsidies. But subsidies are not a viable long-run solution, because the government would have to raise them each time the cost of commuting by car increases, as it must under any decarbonization scenario.
The conclusion is simple: societies that cannot accept today’s energy prices are unlikely to prepare adequately for the green transition, regardless of their net-zero promises for 2050 or beyond. They are instead likely to act too late and thus too suddenly, which will be not only economically costly, but also politically untenable.
Clean Energy Has Won the Economic Race
For decades, spectacularly inaccurate forecasts have underestimated the potential of clean energy, buying time for the fossil-fuel industry. But as two new analyses from authoritative institutions show, renewables have already convinced the market and are now poised for exponential growth.
DENVER – For decades, we at the Rocky Mountain Institute (now RMI) have argued that the transition to clean energy will cost less and proceed faster than governments, firms, and many analysts expect. In recent years, this outlook has been fully vindicated: costs of renewables have consistently fallen faster than expected, while deployment has proceeded more rapidly than predicted, thereby reducing costs even further.
Thanks to this virtuous cycle, renewables have broken through. And now, new analyses from two authoritative research institutions have added to the mountain of data showing that a rapid clean-energy transition is the least expensive path forward.
Policymakers, business leaders, and financial institutions urgently need to consider the promising implications of this development. With the United Nations Climate Change Conference (COP26) in Glasgow fast approaching, it is imperative that world leaders recognize that achieving the Paris climate agreement’s 1.5° Celsius warming target is not about making sacrifices; it is about seizing opportunities. The negotiation process must be reframed so that it is less about burden-sharing and more about a lucrative race to deploy cleaner, cheaper energy technologies.
With the world already suffering from climate-driven extreme weather events, a rapid clean-energy transition also has the virtue of being the safest route ahead. If we fail at this historic task, we risk not only wasting trillions of dollars but also pushing civilization further down a dangerous and potentially catastrophic path of climate change.
One can only guess why forecasters have, for decades, underestimated the falling costs and accelerating pace of deployment for renewables. But the results are clear: bad predictions have underwritten trillions of dollars of investment in energy infrastructure that is not only more expensive but also more damaging to human society and all life on the planet.
We now face what may be our last chance to correct for decades of missed opportunities. Either we will continue to waste trillions more on a system that is killing us, or we will move rapidly to the cheaper, cleaner, more advanced energy solutions of the future.
New studies have shed light on how a rapid clean-energy transition would work. In the International Renewable Energy Agency (IRENA) report The Renewable Spring, lead author Kingsmill Bond shows that renewables are following the same exponential growth curve as past technology revolutions, hewing to predictable and well-understood patterns.
Accordingly, Bond notes that the energy transition will continue to attract capital and build its own momentum. But this process can and should be supported to ensure that it proceeds as quickly as possible. Policymakers who want to drive change must create an enabling environment for the optimal flow of capital. Bond clearly lays out the sequence of steps that this process entails.
Examining past energy revolutions reveals several important insights. First, capital is attracted to technological disruptions, and tends to flow to the areas of growth and opportunity associated with the start of these revolutions. As a result, once a new set of technologies passes its gestation period, capital becomes widely available. Second, financial markets draw forward change. As capital moves, it speeds up the process of change by allocating new capital to growth industries, and by withdrawing it from those in decline.
The current signals from financial markets show that we are in the first phase of a predictable energy transition, with spectacular outperformance by new energy sectors and the de-rating of the fossil-fuel sector. This is the point where wise policymakers can step in to establish the necessary institutional framework to accelerate the energy transition and realize the economic benefits of building local clean-energy supply chains. As we can see from market trends highlighted in the IRENA report, the shift is already well underway.
Reinforcing the findings from the IRENA report, a recent analysis from the Institute for New Economic Thinking (INET) at the Oxford Martin School shows that a rapid transition to clean energy solutions will save trillions of dollars, in addition to keeping the world aligned with the Paris agreement’s 1.5°C goal. A slower deployment path would be financially costlier than a faster one and would incur significantly higher climate costs from avoidable disasters and deteriorating living conditions.
Owing to the power of exponential growth, an accelerated path for renewables is eminently achievable. The INET Oxford report finds that if the deployment of solar, wind, batteries, and hydrogen electrolyzers continues to follow exponential growth trends for another decade, the world will be on track to achieve net-zero-emissions energy generation within 25 years.
In its own coverage of the report, Bloomberg News suggests as a “conservative estimate” that a rapid clean-energy transition would save $26 trillion compared with continuing with today’s energy system. After all, the more solar and wind power we build, the greater the price reductions for those technologies.
Moreover, in his own response to the INET Oxford study, Bill McKibben of 350.org points out that the cost of fossil fuels will not fall, and that any technological learning curve advantage for oil and gas will be offset by the fact that the world’s easy-access reserves have already been exploited. Hence, he warns that precisely because solar and wind will save consumers money, the fossil-fuel industry will continue to try to slow down the transition in order to mitigate its own losses.
We must not allow any further delay. As we approach COP26, it is essential that world leaders understand that we already have cleaner, cheaper energy solutions ready to deploy now. Hitting our 1.5°C target is not about making sacrifices; it is about seizing opportunities. If we get to work now, we can save trillions of dollars and avert the climate devastation that otherwise will be visited upon our children and grandchildren.
The Rich World's Climate Hypocrisy
Many of the statements by developed-country leaders at the COP26 summit in Glasgow are at odds with their actual climate policies, and with what they say in other settings. Their short-sighted strategy ultimately benefits no one – including the powerful corporate interests whose immediate financial interests it serves.
NEW DELHI – Many people around the world already consider the United Nations Climate Change Conference (COP26) in Glasgow a disappointment. That is a massive understatement. Global leaders – especially in the developed world – still fail to grasp the gravity of the climate challenge. Although they acknowledge its severity and urgency in their speeches, they mostly pursue short-term national interests and make conveniently distant “net-zero” emissions pledges without clear and immediate commitments to act.
Making matters worse, many rich-country leaders’ statements in Glasgow are at odds with their actual climate strategies, and with what they say in other settings. So, while G7 leaders at the summit were issuing underwhelming green commitments for several decades in the future, they were busy allowing and enabling more fossil-fuel investment that will generate additional production and greenhouse-gas emissions over the medium term.
For example, could the real US government please stand up and declare itself? In his recent address in Glasgow, President Joe Biden said that “as we see current volatility in energy prices, rather than cast it as a reason to back off our clean energy goals, we must view it as a call to action.” Indeed, “high energy prices only reinforce the urgent need to diversify sources, double down on clean energy deployment, and adapt promising new clean-energy technologies.”
But just three days later, the Biden administration claimed that OPEC+ is endangering the global economic recovery by not increasing oil production. It even warned that the United States is prepared to use “all tools” necessary to reduce fuel prices.
This is one of the most blatant recent examples of climate hypocrisy by a developed-country leader, but it is by no means the only one. And the duplicity extends to the proceedings at COP26 itself, where developing-country negotiators are apparently finding that advanced economies’ positions in closed-door meetings are quite different from their public stances.
Rich countries, which are responsible for the dominant share of global carbon-dioxide emissions to date, are dithering on longstanding commitments to provide climate finance to developing countries. They are also resisting a proposed operational definition that would prevent them from fudging what counts as climate finance. And they are still treating adaptation to climate change as a separate stream, and refusing to provide finance to avert, minimize, and address the loss and damage associated with climate change in the worst-affected countries.
The declared COP26 promises also reveal the developed world’s double standards. A group of 20 countries, including the US, pledged to end public financing for “unabated” fossil-fuel projects, including those powered by coal, by the end of 2022. But the prohibition applies only to international projects, not domestic ones. Significantly, the US and several other signatories refused to join the 23 countries that separately committed to stop new coal-power projects within their borders and phase out existing coal infrastructure.
But even if the pledges in Glasgow had been more solid, rich-country governments, in particular, face a major credibility problem. They have previously made too many empty climate promises, undermining the interests of developing countries that have contributed little to climate change. Advanced economies have made emissions-reduction commitments that they have not kept, and reneged on their assurances to developing countries regarding not only climate finance but also technology transfer.
The climate finance commitment is now 12 years old. At COP15 in Copenhagen, advanced economies promised to provide $100 billion per year to the developing world, and the 2015 Paris climate agreement made it clear that all developing countries would be eligible for such financing. This amount is trivial relative to developing countries’ need, which is in the trillions of dollars, and also when compared to the vast sums that rich countries have spent on fiscal and monetary support for their economies during the COVID-19 pandemic.
But the developed world has not fulfilled even this relatively modest pledge. In 2019, total climate finance channeled to developing countries was less than $80 billion; the average amount each year since 2013 was only $67 billion. And this figure massively overstated the actual flows from developed-country governments, because bilateral public climate finance (which should have been provided to the developing world under the Paris accord) averaged less than $27 billion per year. The remainder came from multilateral institutions – including development banks – and private finance, which rich-country governments sought to take credit for mobilizing. Compared to this paltry sum, global fossil-fuel subsidies amounted to an estimated $555 billion per year from 2017 to 2019.
Likewise, the rich world’s promises of green technology transfer have become mere lip service. Developed-country governments allowed domestic companies to cling to intellectual-property rights that block the spread of critical knowledge for climate mitigation and adaptation. When countries like China and India have sought to encourage their own renewable-energy industries, the US, in particular, has filed complaints with the World Trade Organization.
This short-sighted strategy ultimately benefits no one, including the firms whose immediate financial interests it serves, because it accelerates the planet’s destruction and the revenge of nature on what now appears to be terminally stupid humanity. The student and activist marches in Glasgow against this myopic approach are important, but are nowhere near enough to force governments to change course.
The problem is that powerful corporate interests are clearly intertwined with political leadership. People around the world, and especially in the Global North, must become much more vociferous in insisting on meaningful climate action and a real change in economic strategy that resonates beyond national borders. Only that can end the rich world’s green hypocrisy and save us all.
How to Make Decarbonization Economically Sustainable
This year's energy price volatility offers a painful reminder of what the transition to a net-zero-emissions economy entails. For the effort to succeed, countries at all levels of development will have to be brought along, which means that the world will need to do much more to manage energy supply.
LONDON – With all eyes on the United Nations Climate Change Conference (COP26) in Glasgow this month, there has been ample media coverage of youth protests, high-level diplomacy, and new agreements to reduce methane and protect the world’s forests. But no task is more important than making decarbonization compatible with efforts to foster economic development in neglected parts of the world. If developing economies – and lower-income people in developed economies – are not brought along, global climate targets will remain out of reach.
Reading recent commentaries on this topic, I have found myself reminiscing about the oil crises of the 1970s, which I studied closely as part of my PhD. Among the most stimulating analyses is a policy brief for the Peterson Institute for International Economics by my good friend Jean Pisani-Ferry, who argues that “Climate policy is macroeconomic policy, and the implications will be significant.” He, too, sees many comparisons – as well as key contrasts – to the 1970s oil shock.
I have written before about my PhD experience when offering predictions of what might happen to crude-oil prices. I reflect often on those lonely, uncertain three years, because while I was fortunate to be able to undertake such a project, I sometimes suspect that mine was not as worthy as others. Not only did I have extremely poor data to work with, but it was also hard to prove anything. Still, in addition to testing my capacity for independent thought, I learned an invaluable lesson: Never trust anyone when it comes to forecasting oil prices.
Consider the research on the 1970s oil crises that was published at the time (most of which I surveyed as part of my studies, and have kept ever since). The consensus then was that the shocks had ushered in a new era of erratic but persistent increases in oil prices. In fact, the exact opposite happened throughout most of the 1980s and 1990s.
The reason for this trend is still not entirely clear. But among the likely explanations are that there was a strong supply response to higher prices in the form of increased investment in oil production and exploration, as well as in alternatives; and a strong demand response, reflected in improvements in energy efficiency. Japanese energy-consumption patterns since the 1970s provide significant evidence to support this hypothesis.
Many of the commentators and policy advisers who are now pushing for a higher carbon tax are hoping to recreate this demand-side scenario without the corresponding movements on the supply side. But as we have seen this year, there is a problem with this approach, because we cannot move from 80% fossil fuels to 0% overnight. Stronger initiatives to discourage or even penalize fossil-fuel production and financing means that there will be less marginal supply of fossil fuels sloshing around. That is precisely the point of such policies. And yet, when there is a demand spike for energy – owing to a strong recovery from a recession, as is happening now – we will need all the energy we can get. Otherwise, there will be price mayhem, with all the social and political instability that entails.
The upshot is that policymakers who are already confronting the massive challenge of moving the world away from fossil fuels also must come up with ways to prevent severe oil, gas, and electricity price volatility.
One counterintuitive idea is for G20 policymakers – or perhaps all UN member states – to agree on a scheme of expanded oil, gas, and maybe even coal reserves, on the condition that these reserves would be tapped only in an emergency. For example, the agreed benchmark could be a movement of spot prices by more than two standard deviations away from the 200-day moving average.
To be sure, there would be serious challenges to such a scheme. If the reserves aren’t big enough, some bad actor could try to precipitate a supply crisis and then profit massively as a supplier of last resort. But that is all the more reason to agree to a framework that is solid enough – and reserves that are large enough – to forestall any such threat. Moreover, without a global strategic reserve initiative, the spikes in energy price experienced this year could become a new normal, potentially derailing the other agreements that emerge from global climate conferences.
We have entered a new era in which the climate crisis, and what it will mean for future generations, is finally receiving the global attention it needs. But we have also entered a period in which policymakers will need to do more to ensure that the benefits of capitalism are more evenly shared. That means sparing developing economies – and lower-income people everywhere – from the turmoil fueled by shocks to global energy prices. Failing that, rich countries’ lofty net-zero commitments, made with the best of intentions, will have been for naught.
CAMBRIDGE – Prices of fossil fuels increased sharply in October. European prices for natural gas hit a record peak. Prices for thermal coal in China have also reached all-time highs. The price of US crude oil is above $80 a barrel, its highest level in seven years, prompting US President Joe Biden’s administration in August to call on OPEC and other major oil-exporting countries to increase production.
Although these high prices partly reflect country-specific factors, there must be some more fundamental cause. After all, as with fuel prices, indices of mineral and agricultural commodity prices have also recovered from a six-year slump, re-attaining their 2014 levels. The long-standing correlation of different commodity prices suggests a common macroeconomic explanation. And the obvious reason why energy prices have risen in 2021 is rapid global economic growth.
But what are the environmental implications of elevated fossil-fuel prices, specifically with respect to the fight against climate change? The question is particularly salient as officials from over 200 countries prepare to gather in Glasgow for the UN Climate Change Conference (COP26), where they are expected to declare their intention to achieve net-zero carbon-dioxide emissions by 2050.
On one hand, the effect of high oil, gas, and coal prices on consumers is good for the environment, because they discourage demand for fossil fuels. On the other hand, the effect of high prices on producers is bad for the environment, because they encourage supply.
But today’s higher fossil-fuel prices have so far provided a weaker-than-expected stimulus to private investment in the sector. This suggests that firms may have reached a tipping point in how seriously they take the need to combat global warming. They know a green-energy transition is coming.
Now might therefore be the right time for the United States to reconsider a carbon tax or a (largely equivalent) system of tradable emissions permits, also known as “cap and trade.” Currently, much of the revenue from higher oil and gas prices goes to Russia, Saudi Arabia, and other foreign producers. Why not keep this revenue at home? The proceeds of the tax or permit auction could be returned as a dividend to citizens by cutting other taxes, thereby maximizing the scheme’s political acceptability.
The important point is that putting a price on carbon would be by far the most efficient way to achieve the CO2-emissions reductions necessary to limit global warming to 1.5° Celsius, relative to pre-industrial levels.
In the US, a cap-and-trade system has been considered politically impossible since the demise in Congress of the McCain-Lieberman Climate Stewardship Act in 2007 and the Waxman-Markey American Clean Energy and Security Act in 2009. But perhaps the failure earlier this month of Biden’s attempt to get a clean electricity program through Congress offers an opening for a sensible alternative: a carbon tax.
True, the effective regulation of greenhouse-gas (GHG) emissions – such as through a carbon tax or a cap-and-trade scheme – can generate strong political resistance anywhere. Lawmakers may balk at imposing an extra operating cost on US manufacturers if so-called carbon leakage, or the relocation of carbon-intensive activities to countries with a lower carbon price, put these firms at a competitive disadvantage.
But, logically, the US is perhaps the last country that should worry about others free-riding on its climate efforts. The free-rider problem discouraging most other countries from fully implementing the 2015 Paris climate agreement is above all a fear that the US will not take strong action to cut GHG emissions (and that China’s emissions will continue to grow rapidly). If America assumes a climate leadership role, others are likely to follow.
The US has historically been the world’s largest CO2 emitter. China now emits far more in total, but US per capita emissions are still more than twice as high as China’s.
European countries have perhaps done the most to cut emissions. And ironically, the supposedly more statist Europeans have adopted market mechanisms in pursuit of this goal, while the market-oriented US has considered this approach to be less feasible politically than direct regulation.
Europe has two particularly important market mechanisms: high taxes on gasoline, and the European Union’s Emissions Trading System. This scheme’s current substantial price of €59 ($69) per ton of emitted CO2 is credibly expected to rise over this decade.
What about countries that don’t do their fair share? The EU is now moving forward with a carbon border adjustment mechanism, which imposes a levy on imports of carbon-intensive steel, aluminum, cement, fertilizer, and electricity from countries that are not imposing a carbon price comparable to the EU’s.
In general, there is an acute danger that such border adjustment tariffs could be protectionist and violate World Trade Organization rules. But they need not do so if implemented under rules established multilaterally as an adjunct to the Paris accord. An elementary requirement of such a regime is that the country, or group of countries, that imposes a carbon border adjustment tariff (CBAT) must be a participant in good standing under the international agreement.
The US would not currently meet this requirement. It would first need to do its share to fight climate change before it qualified for a USCBAT that could assure domestic industry of continued international competitiveness. The US should thus move swiftly to tax carbon (incidentally reducing the need to import oil).
As the northern winter draws closer, surging fossil-fuel prices have left many consumers worried. But there may be a silver lining in the form of more effective US efforts to tackle climate change – provided the political will for such measures exists.