When growth is strong, governments are urged to allow its exploitation, and when growth is weak they are urged not to worsen matters, says Simon Upton
IN the 30 or so years that climate change has been a global concern, governments have optimistically assumed that a green transition would happen naturally, as rising fossil fuel prices nudged consumers toward low-carbon alternatives.
The impediment, it was believed, was on the production side, as gushing returns on oilfield investments spurred more ambitious exploration. Today, the tables have turned. With oil prices languishing at $40 a barrel, fossil fuel companies do not need governments to tell them to stop investing. The challenge has moved to the consumer. With fuel prices so low, how can consumption patterns be changed?
Cheaper energy could generate enough growth to drive oil prices back up. But nobody predicts a rebound strong enough to prompt the radical transformation that will be required if countries are to meet their emissions-reduction goals.
A 2015 OECD report shows how far behind countries are on their targets — never mind their commitment to limit the global temperature rise to below 2°C. Meanwhile, oil majors are keen to remind us that we will need to burn fossil fuels for many more years, as we shift to a new energy economy.
So what are governments to do? There is near-universal agreement that no one will benefit from a dangerously warmer planet. But different countries have different interests, depending on whether they are oil exporters or importers, and whether their economies are developed.
Oil-producing, developing countries should consider whether their resources have an economic future, given diminishing scope for emissions. Saudi Arabia, Iraq, and Iran — where oil is plentiful and cheap to extract — will stay in business for some time. Even if the world rapidly decarbonises, oil consumption will remain high enough for their resources to be worth extracting.
But countries with less generous oil endowments need to implement economic reforms and eliminate subsidies. Saudi Arabia is no longer prepared to sacrifice market share to prop up costly producers. Its decision to maintain output at current levels — neutering the OPEC cartel — has dampened competing supplies; nearly $400bn of fossil fuel investments have been shelved.
Many governments have been forced to act. Russia has announced a 10% cut in public spending as oil prices continue to slide this year. And Indonesia should save $14bn by scrapping gasoline subsidies and capping support for diesel fuel.
On the other side of the spectrum, oil-importing developed countries are most efficient users of fossil fuels. Their economies, having proved they can cope with oil at $100 a barrel, do not need cheap energy to thrive. It is, therefore, a good time to introduce carbon taxes, so that the oil windfall is not gobbled up at the gas station. These countries should shelve any delusions of finding ‘black gold’, enjoy the short-run benefits of cheap oil, and act, now, to align infrastructure investments to changing technology.
Meanwhile, oil-producing developed countries should bank the remaining rents to enable capital substitution and ensure life after oil. This is what Norway has done.
Finally, governments of oil-importing developing countries will have the most urgent need for energy, and the widest array of possibilities to meet that need. They will be looking to the global community for support and will need to take a hard look at whether the energy solutions on offer are modern or sustainable. The burden of proof must be on fossil-fuel-based solutions — particularly coal — to demonstrate their competitiveness, after accounting for the environmental, health, and social costs. It can seem like there is never a right time to take climate action. When growth is strong, people urge governments not to derail the gravy train. (There is little evidence to suggest that a well-signalled, progressive implementation of a carbon tax would weigh on growth.) When growth is weak, people ask incredulously how climate-policy advocates could consider making things worse.
There will never be a perfect moment for introducing new climate policies. Long-run problems require policies that send long-run signals. And these policies cannot be constantly fine-tuned to the volatility of the moment. Attempting to do so only fuels further volatility (which is what really hurts growth). Now is as good a time as any to act. And we should do so under no illusion that the transformative outcome will be smooth. There will be many losers. But there will also be winners, as new technologies create new business opportunities. Governments that protect the status quo will not only fail on climate change; they will impose higher social costs, even as they lose out on the economic opportunities created by reform.
Climate-change policies must lubricate change, not stop it in its tracks. Once investors see that the fossil-fuel game is over, governments must let the effects of the resulting capital reallocation play out.
Simon Upton is environment director at the OECD.
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