Maria van der Hoeven, IEA: Use cheap oil to put a price on carbon

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With the drop in oil prices “delivering a shot of economic stimulus to consumers around the world”, policymakers have a “once-in-a-generation” chance to take actions to cut our reliance on fossil fuels, writes Maria van der Hoeven, Executive Director of the International Energy Agency (IEA). She urges policymakers in developed countries to use the drop in oil prices to put a price on carbon.

The plunge in oil prices may be good for consumers and the global economy, but it could also encourage greater use of fossil fuels and thereby hurt efforts to make our planet’s energy system more sustainable. Policymakers from around the world can prevent this by taking advantage of cheaper oil to make meaningful changes in the way we price energy. But this moment will not last forever: the time to act is now.

Today’s bear market in oil is merely reflecting the changes in supply and demand that were set loose by the bull market of the last several years. The more than 50 percent increase in U.S. oil production in recent years resulted at least in part from high prices. Similarly, prices played a key role in efforts to make cars and trucks consume less fuel, which has translated into lower oil demand growth worldwide.

As supply has outpaced demand, oil prices have fallen nearly 40 percent from their June peaks. Some observers are likening this era to the bear market in oil that began in the mid-1980s. Back then, policymakers in certain countries could have taken advantage of the plunge in oil prices to tighten vehicle fuel-efficiency standards, which would have protected motorists from the inevitable run-up in prices. But instead they generally took a laissez-faire approach, and consumers flocked to larger, thirstier vehicles. When oil prices began rising, owners of those vehicles paid dearly at the pump.

What a difference a protracted spell of high prices makes. Formerly a laggard, the United States raised fuel efficiency standards for new light-duty vehicles by more than 14 percent between 2008 and 2013; standards will be tightened further in the years to come, reducing U.S. dependence on oil by 2 million barrels a day by 2025, according to the U.S. government. This will improve U.S. energy security and curb emissions of the greenhouse gases that are causing the planet to warm. And if past experience offers any lessons, now is not the time to ease up — especially given the pressing need to transform our planet’s energy system.

With its heavy reliance on fossil fuels, the current system is on course to deliver at least a 4-degree Celsius increase in global temperatures if no changes are made. It is no secret that we need radical action, but efforts thus far have been sluggish at best. In the International Energy Agency’s annual assessment of efforts to transform the energy system, renewables represent the only bright spot in an otherwise-bleak picture of clean-energy progress.

But now there is a ray of hope: with the drop in oil prices delivering a shot of economic stimulus to consumers around the world, policymakers have leeway to take actions that even a year ago would have been unthinkable. It all depends on national circumstances, of course, but two areas spring to mind. The first is eliminating subsidies to fossil-fuel consumption. In 2013, governments around the world spent $550 billion on these subsidies, which encourage waste. Reforming such subsidy schemes is difficult, as the short-term costs imposed on certain groups of society can be burdensome and induce political opposition. But such opposition may well be muted now, in the current climate of lower oil prices, than it would have been a year ago.

By the same token, policymakers in major energy consuming countries should take advantage of the oil market’s collapse to introduce carbon pricing, taxes or low-carbon mandates, or to strengthen existing schemes. Such actions would encourage more efficient use of energy, would boost the economic case for carbon capture and storage, and would promote low-carbon energy sources such as renewables and nuclear power. Moreover, higher taxes on transport fuels would help finance clean energy research, development and deployment. If such schemes are designed properly, and put in place in an environment of lower energy prices, economic discomfort can be minimized. Indeed, many studies suggest they can yield a net economic benefit.

The worst course of action would be complacency in the face of low oil prices. We saw this 30 years ago, but back then the prospect of climate change barely registered as a policy concern. Today we know otherwise: policymakers must keep a long-term perspective. They have a once-in-a-generation chance to get us back on track. Let’s hope they seize this moment.

Editor’s Note

maria-van-der-hoeven-afpMaria van der Hoeven is executive director of the International Energy Agency (IEA). Follow her on www.twitter.com/VanderHoeven_M

This article was first published by The Huffington Post and was then offered for publication by the IEA to Energy Post.

Comments

  1. says

    It didn’t appear to me car manufactures made any objections to the increases in auto fuel efficiency that is supposed to have fleet averages of 54.5 mpg by 2025. One way to meet that average is with dual fuel cars that run on gasoline on E-85. The alcohol portion of E-85 is not supposed to contribute to carbon dioxide increases. Thus a car running on E-85 gets gasoline mileages of 120 mpg or more.

    My guess is car manufacturers will make one quarter of their cars dual fuel and assume they run on E-85 all the time. The other three quarters of their fleet will get 30 mpg and when you average these by 0.75 x 30 + 0.25 x 125 = 54 mpg. Problem solved.

    I think ethanol puts out more carbon dioxide than gasoline; but that is another problem. Whatever is done, carbon dioxide levels won’t change, no global warming takes place and every one is happy.

    James H. Rust, Professor of nuclear engineering (U. S.)

  2. Phil Northcott says

    It does seem like a good opportunity. And a carbon-killing carbon tax is better than job-killing job taxes (e.g. payroll taxes of all kinds).

    The challenge is that any economy imposing large carbon taxes puts its own products and services at a competitive disadvantage. Charging carbon tax both on domestic production (a typical carbon tax) and on imports (an import duty based on carbon intensity of production) would level the playing field, and allow big consumers (the EU and NAFTA countries) to affect manufacturing practice worldwide.

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