To win the race against climate change, fossil fuel producers need to curtail supplies. Global cooperation and broad societal consensus are key.
On the eve of this year’s COP climate meetings in Poland, UN Secretary General António Guterres declared that climate change is “a race we must win.” But not everyone is racing in the same direction. Most fossil fuel producers have been racing for growth, while some consumers continue to look for cheap gas and powerful cars despite ominous signs of aggravating climate impacts.
These attitudes are understandable: many governments remain dependent on fossil fuel revenues, and hydrocarbons are still deeply embedded in the world’s economy. Yet this does not mean that the status quo should continue.
Efforts to reduce demand for fossil fuels are helping, but it is now quite clear that demand-side actions to reduce greenhouse gas emissions are not enough. Increasing carbon taxation on consumers has been relatively effective, but carbon taxes are facing increasing political resistance and can lead to a major backlash, as we are seeing with France’s current fuel riots. While the shift to renewable energy is gaining momentum, it is too slow. Per capita demand for energy has also been on the decline in the US and many European countries for the past decade, but major new energy consumers such as China and India will take time to follow suit. As the Intergovernmental Panel on Climate Change (IPCC) recently pointed out, the current transition is still too slow to meet climate change targets.
Beyond the concerns around climate change, fossil fuel dependence is also a concern for the producers. The volatility of fossil fuel prices creates uncertainty over the viability of future fossil fuel markets, increases investment risks and speculative behaviour, and destabilizes public finances for governments dependent on fossil fuel taxes.
In short, the energy transition needs to be managed not only from the demand-side, but also through supply-side measures.
Supply-side measures seek to proactively constrain the production, transportation or transformation of fossil fuels. Such measures include government-led initiatives such as moratoriums, and tradable production quotas (a system of trading the rights to a share of global fossil fuel production).
Civil society and the private sector can also have an impact on demand. Reducing investments into future fossil fuel exploration and production can prevent long-term carbon “lock-in,” which occurs when fossil fuel infrastructure that are too costly to abandon keep consumption and emissions going. Divestment can also avoid the problem of holding “stranded” fossil fuel assets, financial investments in fossil fuel projects that do not find customers for their production and become commercially unviable.
The government can constrain supply by banning fossil fuel exploration and extraction in certain locations, for example, the Arctic, and by prohibiting the production of the most expensive and polluting types of fossil fuels, such as brown coal.
So far, supply-side measures have been adopted in 106 countries. While this may seem substantial, most of the measures have consisted of relatively ineffective efforts by ethical investors and environmental groups. The philanthropic consulting group Arabella Advisors estimates that $6.2 trillion in investments have been diverted from the fossil fuel sector through the divestment movement. But a recent study estimated the actual withdrawal of funds from fossil fuel companies would only amount to $36 billion, about 10 percent of the market capitalization value of Exxon Mobil alone. Environmental groups have helped stop or delay some projects, most notably gas fracking projects and a few pipelines, but out of 57 high-profile projects that have faced high level of opposition, about half nonetheless went ahead, often after the criminalization and violent repression of activists.
Supply cuts by producers themselves remain the most effective supply-side option for emission reductions. But such voluntary cuts have so far have been driven by short-term economic calculations to prop-up prices. Genuine long-term, environmentally driven decisions are extremely rare, at least at the national government level. Some smaller fossil fuel producers such as Belize, Costa Rica, France and New Zealand have undertaken reductions.
Things could change, however. Many producer countries already seek to diversify their economy away from fossil fuel export dependence to avoid “resource curse” effects such as volatile revenues and higher risk of violent conflicts. Saudi Arabia has already signalled its interest to reduce fossil fuel export dependence. In “best practice” petro-states such as Norway, public opinion is shifting toward voluntarily leaving oil in the ground for climate reasons. In Alberta, the provincial government recently mandated a temporary 8.7 percent cut in production to reduce a major glut in stocks and try to push up crude oil prices. In the US, many municipalities have passed gas fracking bans, Arctic drilling is under review, and California is considering cutting future production.
To succeed, supply-side efforts need a coalition of fossil fuel producers, workers, and consumers in order to orchestrate a just transition to a low carbon economy. This will require preventing a shift in production and revenues away from countries that voluntarily cut their production over to “free-riding” countries that are not taking any action. Most countries will balk at the idea of cutting their production if their market share is taken over by other producers with more carbon-heavy fuel deposits and dismal environmental records. A just transition should also protect fossil fuel workers and fossil-fuel-dependent economies, help them to adjust and, in some cases, to get compensated.
All of this means that a broad societal consensus needs to be reached about where and how production cuts will take place. Most fossil-fuel-producing regions and workers will resist a transition if it means they are going to lose economically. Thus, the transition should not just be away from fossil fuels, but also toward new economic sectors. Short-term compensation for affected regions and workers, medium-term industrial diversification and long-term changes in economic models will be required. Finally, most consumers will resist higher fossil fuel prices, thus it will be essential that there are affordable alternative energy sources and zero-emissions modes of transportation.
The first group of fossil fuel producers to consider cuts should be those that can afford to cut production: high-income countries that have low fossil-fuel dependence, diversified economies, and a fossil-fuel workforce that can move to other sectors (including renewables). Australia, Canada, Norway and the UK come to mind immediately, but also possibly the US, the EU, and wealthy East Asian countries. Supply cuts here should serve as a powerful signal of a supply-driven transition.
For these cuts not to result in greater fossil production elsewhere, there would have to be a system at the global level to limit new production. Such commitments would be very difficult to achieve, but the European Union’s Emissions Trading System, which allocates GHG emission allowances to companies as part of an overall cap on total emissions, could serve as a template to establish a trustworthy trading system of production rights. To incentivize producers, access to fossil fuel markets could be restricted for noncomplying players (as in the Kimberley Process for ethical diamond mining).
Global cooperation to reduce supplies would require an effective monitoring system, perhaps building on the International Energy Forum’s Joint Oil Data Initiative for global oil data transparency. Collaborative efforts led by the International Energy Agency could include the International Energy Forum, the Organization of Petroleum Exporting Countries (OPEC) and industry associations. Together they could play an important coordinating and monitoring role among fossil fuel producers and consumers.
The next producer group to implement cuts should consist of middle-to high-income countries that are still heavily dependent on fossil-fuel-production revenues. This will be the most diverse and difficult coalition to form, although 14 of them are already part of OPEC. In those cases, supply cuts would need to be accompanied by an effective and long-term economic diversification of their economies, which will be a major challenge. Economic diversification needs to be better understood and addressed, but some key approaches include building human capital, improving governance institutions, and pursuing long-term, export-oriented sectoral policies.
Low-income countries that are producers depend on fossil fuel export revenues, but they have a much lower capacity for managing a transition away from fossil fuel. For these countries, international assistance should be provided to support the transition, with the development banks and international donors playing a major role.
By integrating fossil fuel production cuts into climate policy, parties to the UN Framework Convention on Climate Change can help address both climate concerns and fossil-fuel- dependence concerns. Economic models of supply cuts, such as those tested for US leasing policy for fossil fuel extraction on federal lands, limits on California oil production, and production tax on major coal producers, point to significant reductions in emissions. With current climate negotiations (COP 24) taking place in Katowice, a Polish coal mining city, the time seems right for further considering supply-side action to address climate change.
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