Action on climate change is sometimes presented as being in conflict with economic growth. Since growth in the industrial age has been underpinned by oil, some believe that any attempt to reduce our dependency on oil is an assault on prosperity. In fact the opposite is true. As access to conventional oil becomes harder the twin objectives of:
- avoiding economic shocks through oil price volatility; and
- fostering sustainable economic development,
both depend on a managed transition of the economy to alternative sources of energy.
In 2005, Robert Hirsch, in a report prepared for the US Government, wrote as follows:
The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking …
Mitigating the peaking of world conventional oil production presents a classic risk management problem:
- Mitigation initiated earlier than required may turn out to be premature, if peaking is long delayed.
- If peaking is imminent, failure to initiate timely mitigation could be extremely damaging.
Prudent risk management requires the planning and implementation of mitigation well before peaking. Early mitigation will almost certainly be less expensive than delayed mitigation. A unique aspect of the world oil peaking problem is that its timing is uncertain …
It is striking how similar the argument is to the rationale for urgent action on climate change. Yet Hirsch was not concerned with climate change; he was concerned with safeguarding the global economy.
Oil is a limited natural resource. Hirsch may not have predicted the shale boom in the US, but that does not change the fundamentals of his argument. Few deny the inevitability of an energy transition in the near future.
As indicated by the graphic above (published in the Finanical Times in August 2016, and derived from sources such as the BP Statistical Review) ‘peak oil’ is not far away. The productivity of existing oil fields is facing an annual decline rate of 4 to 4.5 per cent, ‘meaning the world must discover and bring online the equivalent of a new Saudi Arabia – or one could equally say, a new United States, complete with shale boom – very four years, or perhaps every three, in order merely to maintain current rates of production.’
(see Timothy Mitchells’s Carbon Democracy, citing ‘Shaping the Global Oil Peak: A review of the Evidence of Field Sizes, Reserve Growth, Decline Rates and Depletion Rates’, Energy 37:1, 2012: 709-24).Without a planned transition to alternative energy sources, in Hirsch’s words, ‘the economic, social, and political costs will be unprecedented’.
Meanwhile the Governor of the Bank of England, Mark Carney, has warned that only a third to a fifth of existing fossil fuels can actually be burnt.
And the Attorney General of New York is investigating ExxonMobil for fraudulent misrepresentation to the Securities and Exchange Commission (i.e. for overstating the value of its assets).
Put another way, the carbon majors can only burn a fraction of what they already have; but they are spending billions looking for more in order to maintain share price (i.e. by compensating for the diminishing value of their existing reserves / assets).
The world has just two choices:
- Transition to a clean energy base in time to avert catastrophic climate change and sustain economic prosperity; or
- Continue to emit greenhouse gases on a scale which causes catastrophic climate change, and then, a short while later, face the social, economic and political consequences of dependence on a diminishing supplies of conventional oil.
The potential for clean energy is almost unlimited: every day the sun pours out 5,000 times more energy than total human demand. Clean technologies and advances in energy efficiency are developing fast.
It appears the global economy will need to decarbonise by 2050 for there to be a good chance of limiting warming to 2 degrees Celsius (see here).
Given the technical progress that has already been made, there’s no doubt that would be achievable with concerted political support and the alignment of market forces: human capacity to innovate has overcome greater obstacles.
However there are two reasons why, for the moment, the goal appears out of sight:
- Despite efforts from NGOs in Paris the target has not been accepted politically. Article 4 of the Paris Agreement sets only the inadequate target of achieving carbon neutrality ‘in the second half of this century’ (as shown in the graphic above, decarbonisation by 2100 leaves us on track for 3-4 degrees of warming).
- Far from market forces being aligned to the goal, IMF estimates that global subsidies for fossil fuels currently amount to $3.5 trillion p/a (ie $10million per second). We are actively preventing the market from working in our long-term interest.
It is easy to see why this happens: energy is base of the economy, and the fossil fuel sector provides, for many, jobs and profit. Nevertheless fossil fuel subsidies are a force in the wrong direction, inhibiting the investment in clean technology on which our future depends.
Plan B is to address these obstacles by:
- defining the goal through judicial decisions; and
- harnessing market forces to the goal by ensuring the polluter pays.
Economic analysis supports the common sense assessment that ‘a burning planet will not support long-term economic prosperity.’ In 2005, Gordon Brown, then the UK Chancellor, commissioned Nicholas Stern, previously chief economist at the World Bank, to prepare a report on the economics of climate change. The report concluded that unchecked climate change would entail a loss of consumption of between 5% and 20% by 2050; whereas the costs of tackling climate change would be only 1 %.
If the Stern report proved controversial, AR5 likewise concludes that the transition to clean energy will support continuing high levels of economic growth. Baseline scenarios for growth in global consumption over the century, ignoring climate change, range from 300% to 900%. Mitigation scenarios likely to limit warming to 2 degrees reduce this by only a small fraction – 3% to 11%. In other words global consumption by 2100 might have grown by 297% instead of a baseline projection of 300%; or 889% instead of a projection of 900%.
Very little is known about the economic cost of warming above 3 degrees C relative to the current temperature level.
Economics is an uncertain science: if it’s difficult to predict the political consequences of warming of 3 to 4 degrees Celsius, the economic impact will be harder still.
It should be obvious, however, that limiting warming to 2 degrees Celsius in combination with growth of 297% – 889% by 2100, would be a more favourable outcome against all measures (including the economic) than a world that was warmer by 3-4 degrees (in which conventional reserves of oil will have long been exhausted in any event).
In September 2015, Mark Carney, the Governor of the Bank of England, warned that climate change will lead to financial crises and falling living standards unless the world’s leading countries do more to ensure their companies come clean about their current and future carbon emissions. In a speech to the insurance market Lloyd’s of London, Carney said insurers were heavily exposed to climate change risks and that time was running out to deal with global warming.
Decarbonisation by 2050 is:
- vital to our security;
- technically viable if markets can be harnessed to the goal; and
- key to our future prosperity.