Global climate policy is on a fatally misguided path – partly because it was for years dominated by greens and left wingers largely attributing climate change to capitalism and advocating austerity and sufficiency as the solution.
Driven by this narrative, the focus of climate protection lies on consumption of fossil fuels – in other words, on the demand side. The argument starts with the Paris climate agreement, under which most major countries have now communicated net-zero targets for greenhouse gas emissions. And it ends with municipal citizens’ panels, where people eagerly discuss how they can change consumption patterns and reduce their personal carbon footprints.
What is forgotten is the supply side. Countries with oil, gas or coal reserves will exploit them as long as the market price exceeds production costs. Since the latter are usually low, there has hitherto been no visible impact of price on production volumes. The supply of fossil fuels is extremely price inelastic – and therefore hardly influenced by consumption patterns.
While many countries are bitterly disputing whether net zero should only be achieved in 2050 or by 2040, nations with ample fossil fuels reserves do not envisage output cuts until at least 2040, let alone reductions to zero, and foresee output continuing to rise!
Just take the US and Saudi Arabia, the world’s two largest oil producers, which plan to increase their daily production quota from 17 to 20 and from 12 to 15 million barrels per day respectively over the next decade. With natural gas, the two most important producers, the US and Russia, plan to raise output from 950 to 1,130 and from 750 to 850 to 1,000 billion cubic meters per year respectively by 2040. Even in the case of coal – the energy source with the worst CO2 footprint – there are only signs of a slight decline in global production by 2040.
The problem is obvious: what is produced will also be consumed. If demand from ‘green’ countries with restrictive climate protection policies falls, the price of the available fossil fuels will drop (other things being equal) so much that the entire supply surplus will be demanded by less green takers. That would eliminate any beneficial climate impact from the ‘greens’, which would provide a de facto oil price subsidy for more polluting counterparts. Any climate policy that does not address this issue is ineffective. There are three ways to escape this supply trap.
- The most direct answer would be to convince fossil fuel producers to leave their assets in the ground. The most obvious way to do this would be through compensation. But while conceivable financially, any such scheme would be a political non-starter. Any such arrangement, especially with a politically unstable producer, would have to last for decades and be honoured by both sides. And who could imagine the global community agreeing to pay, say, Saudi Arabia, more than $100 billion a year for leaving its oil and gas underground?
- The production of fossil fuels would dry up, or at least be severely curtailed, when a market environment were reached in which producers could no longer profitably sell even those fuels with the lowest extraction costs. This will only happen when alternative energy sources can outcompete fossil fuels in price and ease of handling. Fossil fuels would then become obsolete – and remain unused. How to achieve that is through innovation, not by adapting consumption patterns.
- Since the second point is unlikely to be achieved in time to meet the Paris climate target, technological methods for recovering CO2 from the atmosphere should be actively pursued. Such methods already exist but have yet to reach market maturity because they are currently too expensive. If only as much money were invested in such methods as in other climate protection measures, they could potentially make a significant contribution to curbing climate change very soon.
Of course, all three approaches lack the “let’s save the earth” romanticism of consumer appeals. But they are the only approaches likely to impact the fight against climate change
This article was originally published in the NZZ am Sonntag of 9 January 2022.