Exclusive reporting and opinion by Mathew Carr (CarrZee.org)
June 8-17, 2023 — LONDON — The declining fossil-fuel prices around the world are good for consumers. They might be good for the climate, too.
On the surface, cheaper natural gas, coal and crude oil make these polluting fuels more attractive versus the green alternatives. That’s not good as it could boost use of them.
The Dutch natural gas price, a global proxy, has dropped a massive 91% from its Ukraine-wartime peak. Coal is down by more than three quarters. Even prices in the crude-oil market rigged by OPEC+ have fallen 25% from their recent highs.
The earlier super-expensive levels hold a benefit that may surprise some people.
“As natural gas prices fall from their peak levels, this provides an opportunity to phase in a carbon price without increasing gas prices above recently experienced levels,” the International Monetary Fund told CarrZee in an emailed reply to questions.
“So a background of falling international energy prices may help to reduce political opposition in countries that are considering scaling up carbon pricing,” it said. The fund has a global role trying to stabilize financial markets and economies, especially in nations facing war, unrest or physical disasters. How this might play out is quite intriguing.
The erosion of this political opposition is absolutely key because the past 30 years of climate talks have failed partly because of climate-action skepticism driven by misinformation and selfish politics. Now, the world has rarely seen fuel prices fall by so much. (A supplementary reason why lower fossil-fuel prices will help is that they make the fuels less profitable, which will deter new investments in the sector, alongside the tighter regulation of GHG.)
Below, the IMF and some others set out how, this time, global climate action can have a different outcome.
Gas’s Huge Fall
Coal Drop
Crude’s Smaller Decline
How to save the climate, 2023 version
Four reasons why things are different this time
1.
The higher fossil fuel prices have “softened up” the global population – politicians, voters and companies. They experienced them, lived them, didn’t love them, yet (mostly) survived.
The calculation that the IMF and others are making is that the experience of the past two years makes the more-ambitious-climate action required for big emissions cuts over the next several years easier to bear for everyone; that includes measures that will likely push dirty energy prices back up a bit.
The following IMF charts show what might happen to fuel prices should a $75 carbon price be installed around the world.
Fossil-fuel prices stay below recent highs, except in the case of coal, where a $75 carbon price keeps pushing levels higher and higher through 2030.
Coal-focussed economies, especially, might be able to gradually increase their carbon price to soften this impact, the IMF has said. Other fossil-fuel producers will need to be respected in the transition to soften the impact of lower demand and prices.
Now is the time
Measures to protect vulnerable people are crucial, the fund said. The recognition of climate policy’s ability to protect the vulnerable is one of the reasons climate action might work this time. Carbon prices provide a government revenue where there wasn’t one before, from the sale of allowances and credits or from GHG taxes.
Low Carbon Coverage
CO2 costs drive up fuel prices because producers of the energy have to start to pay for the first time for the damage to the climate that they are causing. Only about a quarter of global emissions are covered by prices right now.
Carbon pricing systems are operating in nearly 50 countries. In the EU emissions trading system, prices exceeded 100 euros per ton in August last year and the system “is being extended to the building and transport sectors. Canada is ramping up its carbon price to CAN$170 by 2030. China has introduced a tradable emission rate standard, and New Zealand is introducing the first emissions pricing scheme for agriculture,” the IMF said in a summary.
IMF: “If carbon emissions were priced appropriately this would increase coal prices relative to natural gas and reinforce efforts to shift away from coal to gas and other cleaner fuels.” By the way, badly managed natural gas systems can produce as many emissions as coal.
2.
Climate disinformation is falling away, but it will still take time to transition tens of millions of influential people around the world to the point where they agree drastic action is needed.
The passage of the Inflation Reduction Act and debt ceiling law in the US shows political compromise is possible in the world’s biggest economy and largest polluter of GHG the world has ever seen . The G7 and G20 countries are also indicating that collaboration instead of zero-sum climate politics is possible — whereas previously some big countries felt that they win only when others lose.
Tribes
I spoke to a US-based industrialist. The US needs to be able to make money from the climate transition, too. Not just pay out support and compensation to others, he said: “We have two tribes in America. One tribe that knows we have a problem and the other tribe, led by [deleted expletive Mr Donald Trump] does not think there is a problem. We need to keep moving people from that tribe into our tribe.
“How can we do that? By showing them that we can create jobs and preserve jobs by putting carbon dioxide back into the ground in the places where they were making a living for 100 years taking hydrocarbons out of the ground.
“If we’re not going to [use the carbon storage we have], then we will not be able to convince those tribe members who are really not subscribing to the fact that we have a [climate] emergency. Al Gore (former vice president) and all of these people are preaching to the converted. We need to have a message for the non converted.”
Senior Chinese and US officials, and not so senior ones, are collaborating behind the scenes, as are UN envoys from almost 200 nations attending climate talks this week in Bonn.
3.
China probably now realises it’s not the only tough climate negotiator (plus it and other export nations rely on US consumer demand for their export revenue).
The EU is already on better track to tackle climate change than the US and China. China would say it’s leading the world. India is setting itself up to leapfrog other nations.
China also might have worked out that holding the US completely to account for its historic and current climate damage may end up meaning a brutal war over Taiwan, as well as Russia-like treatment via NATO-led sanctions and protectionist measures.
Hurting the US?
The evolved industrialist has an interesting and fairly compelling argument: Forcing the US down a very rapid emissions-cutting path “would hurt the rest of the world worse than the US economy,” he said. That’s because many important countries are export focussed, while the US economy is consumption focussed.
“If the US is forced to [transition] in a drastic way, it will destroy not [just?] the US economy but the rest of the world economy. The US consumers are helping to sustain 1.5 to 2 billion people outside the US,” the industrialist said, grabbing hold of the term “sustainable,” and attaching it to make a slightly different notion — that of financial sustainability of the US.
So dropping zero-sum thinking on energy needs to incorporate another idea, he reckons: the US does not only lose because of climate action … it’s also allowed to win, somewhat.
The U.S, the biggest oil producer by far, has expanded output for decades, despite promising to protect the climate 30 years ago via the UN.
This tension between the US and other nations remains on the table to resolve, and carbon pricing revenue could help do it.
See the IMF report linked above in the fifth paragraph and the International Emissions Trading Association report in the notes, below.
Also see these snips:
Compensation to cut GHG – About $1.3 trillion over 25 years at $50 billion per year
Lucrative climate action – $1.8 trillion in 2030 alone? (If 0.1% is $60 billion, 3% is 30 times $60 billion)
4.
Most of the world is now understanding the acute predicament the global population is in. And we are about to understand, even more fully. Everyone. Together.
Moment of Truth
The “global stocktake” at UN level will reveal later this year the tiny carbon budget left in the atmosphere for heat-trapping gas — and it will reinforce the world is in big trouble if it does not change direction urgently to reduce emissions and boost measures that remove GHG from the atmosphere.
The stocktake “provides that opportunity for the course correction that is needed. We already know that we are far off track,” Simon Stiell, UN Climate Change executive secretary, said June 6 in Bonn, Germany, at intersessional UN climate talks.
“What will be significant about the global stocktake is how parties [countries] respond to it.
In terms of that realignment that is required, it will be a moment of truth and an opportunity for very clear guidance as to how we change course. And of course, there needs to be progress in every area whether that’s mitigation, adaptation, loss and damage, finance,” Stiell said.
CarrZee Question & Answer with IMF
Edited transcript:
CarrZee: I’ve noticed a few economists support the idea of supplanting carbon pricing for lower fuel prices, but what about national leaders or ministers? Granted that it would demonstrate real political leadership to introduce carbon prices during a cost-of-living crisis (and we don’t seem to have many brave leaders at the moment). The real answer seems to be there is zero public political support for the idea, right? Is that fair to say?
IMF: “Pricing [systems] are now operating in nearly 50 countries. In the EU emissions trading system, prices recently exceeded 100 euros per ton and the system is being extended to the building and transport sectors. Canada is ramping up its carbon price to CAN $170 by 2030. China has introduced a tradable emission-rate standard, and New Zealand is introducing the first emissions pricing scheme for agriculture.”
“The IMF encourages the largest emitters to discuss their contributions to the global mitigation efforts through our regular Article IV surveillance. See guidance note here: Guidance Note for Surveillance Under Article IV Consultations (imf.org)
“Regarding public support for climate polices, see IMF blog on this from February: Support for Climate Action Hinges on Public Understanding of Policy (imf.org)
CarrZee: Also, I note that carbon pricing does not need to be overt. It can be embedded into other climate policy (eg like the Inflation Reduction Act of the US). All climate policy has a cost, which can be measured by the total cost of the policy divided by the volume of emissions reduced per year by the same policy = $ per ton of co2-equivalent.
IMF: “See joint IMF/OECD paper for the G7 (link). See IMF research on this here: Carbon Taxes or Emissions Trading Systems?: Instrument Choice and Design (imf.org)
CarrZee: “If you take a very optimistic stance and treat the [US] Inflation Reduction Act as climate policy …then there is progress being made on installing climate policy, if not carbon pricing. Does the IMF believe the IRA is an example of a country raising climate action as fossil fuel prices recede from their current elevated levels? Why/ why not?”
IMF: “Policies in the Inflation Reduction Act are a big step forward and have the potential to help decarbonize the U.S. economy. We believe they will lower greenhouse gas emissions by around 36 percent by 2030 (relative to 2005 levels). Nonetheless, more remains to be done to ensure emission reductions reach the U.S. objective of a 50–52 percent reduction by 2030. Moreover, more efficient instruments, and that avoid fiscal costs, would include feebates, tradable emission rate standards and carbon pricing.”
CarrZee: “Are you measuring this [progress] on a global basis? It [insertion of carbon pricing or other climate policy] does not seem to be happening anywhere near fast enough.”
IMF: “See our update of global climate ambition and policies, and measures to close the gap: Getting on Track to Net Zero: Accelerating a Global Just Transition in This Decade (imf.org)
CarrZee: “Isn’t it the IMF’s global leadership role to point out things like this …ie when country economies collectively are failing to push things in the right direction quickly enough?”
IMF: “See blog by the IMF MD here: Getting Back on Track to Net Zero: Three Critical Priorities for COP27 (imf.org) Remarks at COP27 here: Remarks by the Managing Director at COP27’s Finance Day Opening Ceremony (imf.org) See interview here: EXCLUSIVE COP27: IMF chief says $75/ton carbon price needed by 2030 | Reuters
CarrZee: “Because if the climate crisis causes multiple financial/insurance systems to fail, then the call on IMF funds could very quickly get out of hand, could it not? This could become an existential crisis for the IMF, could it not? If you don’t think this is true, do you mind saying why not?
Opening 2 paragraphs as follows: “Climate change has emerged as one the most critical macroeconomic and financial policy challenges that the IMF’s membership will face in the coming years and decades. By contributing to a higher frequency and intensity of natural disasters, climate change is already imposing large economic and social cost on many economies. In the period ahead, climate change is bound to affect macroeconomic and financial stability through numerous other transmission mechanisms, including fiscal positions, asset prices, trade flows, and real interest and exchange rates. While the mechanisms’ relative importance will differ between individual countries, no country can expect to be spared entirely. Many of the ensuing policy challenges fall firmly within the realm of the IMF’s expertise, and for the Fund to live up to its mandate, it needs to assist its members in addressing these challenges. Moreover, climate change mitigation is a global public good and requires an unprecedented level of cross-country policy cooperation and coordination. As a multilateral institution with global reach, the IMF can assist with coordinating the macroeconomic and financial policy response.”
CarrZee: Now natgas is one 12th of its peak price and near its lowest in two years. Does that not make now the perfect time to insert a $75 carbon price globally (for any country that wants to, obviously)?
IMF: “As natural gas prices fall from their peak levels, this provides an opportunity to phase in a carbon price without increasing gas prices above recently experienced levels. So a background of falling international energy prices may help to reduce political opposition in countries that are considering scaling up carbon pricing.”
(More to come.)
NOTES
CarrZee has written a few times before in the past 20 years that the stage is now set for climate action. Will it be true this time?
IMF note:
Getting on Track to Net Zero: Accelerating a Global Just Transition in This Decade
IMF Staff Climate Note 2022/010; Simon Black, Jean Chateau, Florence Jaumotte, Ian Parry, Gregor Schwerhoff, Sneha Thube, and Karlygash Zhunussova
[…] The Surprising Reason Why Lower Fossil-Fuel Prices May Save the Climate Photo by Vlado Paunovic on Pexels.com […]
[…] The Surprising Reason Why Lower Fossil-Fuel Prices May Save the Climate (2) […]
[…] change the market structure, will you, so-called leaders? Do it at the G20 level and call it a “test,” if you must. […]