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Falling Fossil Fuel Prices Create a Climate Change Opportunity

29 Jan 2015
Andrew Elek
Image Credit: Flickr (Lee Jordan) Creative Commons.

The recent and sharp fall in fossil fuel prices, thanks to new extractive techniques, will not last forever. It is high time to think about its threats and the opportunities.

In the short term, lower fossil fuel prices are terrible news for autocrats and kleptocrats whose survival depends on the resource rents created by higher prices. On the other hand, they are great news for the world’s users of energy. At the same time, as Martin Wolf has explained, the lower cost of fossil fuel threatens to reduce significantly the incentive to switch to energy sources with lower greenhouse gas emissions. That danger can be averted if the governments of major economies use the opportunity of a lull in fossil fuel prices to put a price on carbon with no short-term pain to users.

The opportunity for a bold move towards containing global warming was spotted some time ago. Prominent economists, including Kemal DervişJeffrey Sachs and Larry Summers, are now making the case for shifting from a world of high net subsidies to producers and consumers of fossil fuels to one in which they pay for some of the damage their greenhouse gas emissions cause. Martin Wolf states the policy challenge succinctly: ‘Falling oil prices threaten to make economies more carbon intensive and less energy efficient. But they also give an opportunity to raise taxes on oil or at least cut wasteful subsidies to consumption permanently.’

Then he warns that while ‘any sensible government would seize’ this opportunity, ‘the supply of such governments is rather small’.

The prospects for good decisions can be improved if some governments set positive examples. Asia is most likely to show leadership in taking advantage of the opportunity created by lower fossil fuel prices. Indonesia has already taken a welcome lead. President Joko Widodo (Jokowi) promised to contain spending on a petrol subsidy before he was elected and has moved decisively to get rid of it — as soon as that could be done without raising prices at petrol pumps.

All governments can implement policies to achieve a combination of discouraging emissions, raising net revenue and still allowing some net gains to fossil fuel users. India and Malaysia have already acted to reduce fuel subsidies.

Encouraged by Indonesia’s bold decision, China and Korea may implement their planned national emissions trading systems promptly — launching them with a carbon price that provides a substantial incentive to move away from reliance on energy generated from fossil fuels.

Their leadership would help the EU to overcome political resistance to repairing their emissions trading system. The EU has so far failed to impose more than a token cost on polluters. In the foreseeable future, the US Congress will refuse to accept the excellent advice of Larry Summers. But individual US states now have an opportunity to step up their initiatives to curb emissions and their individual initiatives to set a carbon price.

Since the Cancun UNFCCC meeting on climate change, there has been a welcome trend of many economies setting worthwhile commitments to cut their own emissions and being willing to accept peer pressure to take these commitments seriously. Current unilateral commitments, however, fall well short of what is needed to contain global warming to no more than two degrees Celsius.

Right now global leaders have an opportunity to do more, at a potentially low political cost. Accelerating concerted unilateral decision-making to limit greenhouse gas emissions to meet the two-degree target has become a realistic ambition for 2015. The next meeting of G20 finance ministers could focus all major emitters of greenhouse gases on this opportunity.

If a critical mass of major emitters can set the necessary positive examples then world leaders should be able to announce a shared commitment to strong market signals at the Paris summit on climate change. Setting appropriate carbon prices on the way to a global emissions trading system is a far more realistic objective than another futile attempt to negotiate a binding international treaty.

It is a pity that the current Australian government and the US Congress will oppose a market-oriented strategy to contain climate change. But if the governments of some American states are willing to lead by example, President Obama could support presidents Xi Jinping and Jokowi to help create a consensus that leads to a successful Paris conference.

Andrew Elek is Research Associate at the Crawford School of Public Policy, the Australian National University.This article was originally published on East Asia Forum on 27 January 2015. It is republished with permission.