5 reasons why low oil prices are good for the environment

This is a chance to throw out fossil fuel subsidies, and bring in a robust carbon price

Assaad W. Razzouk
Wednesday 14 January 2015 17:39 GMT
Oil covers the hands of a worker at the site of a spill in Cyprus
Oil covers the hands of a worker at the site of a spill in Cyprus

Low oil prices are to be cheered: may they stay low for a long time and decrease even further. Here are five reasons why they are great for our health and that of the planet.

1. The end of fossil fuel subsidies

Our binge on fossil fuels is partly driven by gigantic subsidies. Low oil prices allow these to be tackled without a material impact on consumer (read voter) pockets. According to the IMF, we subsidise fossil fuels by £1.3tn each year, with US subsidies alone amounting to £333 bn.

Leadership in tackling these subsidies has recently come from very unlikely places: Indonesia’s President Joko Widodo slashed fossil fuel subsidies by 30 per cent in November 2014. India, Egypt, Malaysia and Morocco took similar measures.

Flush with new-found cash, politicians are spending money on infrastructure and housing instead of paying off oil companies, and vastly accelerating their clean energy programs in order to deliver energy security to their people - fast. It’s these measures that make a material impact on climate change: IMF research concludes that removing fossil fuel subsidies can decrease global carbon emissions by 13 per cent.

2. No more investment in extreme oil

Historically high oil prices over the past five years have allowed oil and gas companies to enjoy unparalleled levels of investment and vast profits, a disaster for the climate: global carbon emissions kept rising to such an extent that our existence on this planet is now threatened.

Low oil prices will result in the death – and not a moment too soon – of most unconventional oil projects, because these cost too much to produce (£41 to £52 per barrel versus less than £17 for conventional oil).

In addition to looking like environmental crime scenes, unconventional oil projects are a global catastrophe: tar sands for example create around three times more emissions than the same barrel of conventional oil. Recent research in the journal Nature concludes that we need all unconventional oil sources to stay in the ground if we are to have any chance of combating climate change.

The signs are encouraging that we will leave them permanently in the ground if low oil prices become the norm: Chevron already put its Arctic drilling plans on hold indefinitely in December. Shell is likely to be forced to follow suit this year. In the US shale industry, 550 drilling rigs are being idled already, a massive 25 per cent of the total, and new permits are down 40 per cent.

3. A chance to bring in robust carbon prices

From the Canadian Province of British Columbia to the US states of California and Washington, to the European Union, China, Korea and New Zealand, almost 4 billion people will be covered by a carbon price by 2016. However, cheap oil could lead to an increase in fossil fuel consumption, making a mockery of carbon pricing policies.

Low oil is therefore an opportunity to make sure carbon prices are tightened while consumers are enjoying lower fuel prices, thus limiting the income of oil companies and shifting investments towards a greener economy.

Larry Summers recently gave an example of how this would work in the US: in the current environment of low oil prices, a $25 per tonne tax on carbon would raise over $1 trillion over the next 10 years while only lifting US gas prices by a mere 25 cents for the consumer.

4. Renewables offer more security

Extreme volatility in oil prices (and to a lesser extent, gas prices) shows why renewable energy has become synonymous with energy security in most countries: It’s tough to cut you off from the sun and the wind, or to charge you a price to use them.

Renewables have also become synonymous with local prosperity: paying farmers and industry for waste (to generate bio-energy) is much better politically than paying Qatar.

5. Now clean energy is competitive, or the only option

The conversation has shifted decisively compared to the 1980s, when oil prices fell and killed off renewable energy.

In India and Africa, hundreds of millions living in energy poverty don’t care about the price of oil, gas or coal: they don’t have access to energy and aren’t getting new coal- or gas-fired power plants.

Instead, clean, decentralised energy is their only option. In Bangladesh for example, some 20 million people (an incredible 13 per cent of the population) have already received home solar systems and monthly solar installations are approaching 100,000.

In rich economies, renewable energy has pretty much achieved grid parity with fossil fuelled electricity. For example, according to Deutsche Bank, in 2016, solar energy will be as cheap as average electricity bill prices in 47 U.S. states.

No longer as reliant on subsidies (humble though these are compared to the amount of money thrown at fossil fuels) the renewable energy industry is today preoccupied instead by the need to push for sensible policies to be implemented, including predictable regulations, upgraded grid infrastructures and measures to force utilities to respect their obligations.

Low oil prices are great news for the climate, crowding out the most damaging sources of oil and gas operating today. They provide governments with a golden opportunity to remove fossil fuel subsidies while introducing more robust carbon prices. Low oil shows why renewables have become synonymous with energy security and local prosperity.

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