The time is right to end fossil fuel subsidies

Originally posted on the Sussex Energy Group blog, February 3rd 2015

When the price of the world’s most widely-traded commodity halves within a 6-month period, it has a tendency to draw attention from governments, industry and the media alike.  North Sea oil has recently been selling at around $45 per barrel, a 6-year low following a fairly steady average of around $110 since mid-2011 (fig. 1).  This is not the first time we have seen dramatic changes in the oil price, either; in the months and years preceding the 2008 crash, economists and policy makers were getting used to the idea of impending $150+ oil.  In the month of August that year alone, it plunged by 70%.  For now, the price is potentially beginning to level off, but the volatility of the oil markets is sure to remain an important part of the economic sphere far into the future.

Brent Crude Price

Fig. 1: Brent Crude was trading at $48.50/bbl on January 28th 2015.  A year earlier it was nearly $110/bbl. (FT markets)

What does the recent price fall mean for the nascent sustainable energy transition?  Some see it as bad news; falling oil prices mean higher demand, more carbon emissions and less interest in sustainable alternatives.  We’ve already begun to hear tales of increased SUV sales in the US, and as the price of natural gas is linked to that of oil (in Europe at least) it might be the case that gas-fired electricity generation could become more attractive, offsetting renewables.

On the other hand, in many regions like Europe, renewable generation is mandated by national and regional policy – utilities have to derive a certain amount of electricity from these sources – and many governments have put in place price incentives to do so, with Germany (and others’) Feed-in Tarriffs a prime example.  Renewables are thus sheltered to some degree from the kind of market activity we have recently seen.  In fact, the whole point of these subsidies is to provide an incentive for their use, and the more we deploy these technologies the cheaper they become; a phenomenon which has been borne out in recent years.  ‘Grid parity’, whereby the levelised costs of renewable energy becomes competitive with coal and gas, is now a reality in many places, particularly for solar PV, and is soon to become so elsewhere.  Meanwhile, it’s becoming ever more apparent that the volatility of oil and gas isn’t going to stop any time soon, leaving this kind of energy use (be it in electricity generation or petrol) vulnerable to short- and long-term fluctuations.

But instead of just waiting for cheaper sustainable energy, why not level the playing field?  Fossil fuels enjoy enormous subsidies from governments every year – far more so than renewables.  The IEA estimates that in 2010 subsidies to the fossil fuel industry amounted to $409 billion worldwide, with those to oil companies representing almost half of the total.  These are generally in the form of tax allowances for exploration and production companies, by governments who are keen to see investment in their economy.  But, as unconventional oil and gas (such as that from shale or tar sands) is increasingly relied upon, the costs of production are growing which in turn drives up the cost of subsidies.  What’s more, many of the highest subsidy rates are in emerging nations such as Venezuela, Algeria and Egypt, which ties up a significant amount of potential government revenue which is much needed elsewhere within their economies.

If governments were to begin phasing out these subsidies, companies would pass these extra costs through to consumers.  Hence, energy prices would inevitably be driven up – a politically-challenging issue for any policy maker.  However, with recent market events we find ourselves in the very unique situation of falling prices of clean energy alongside the low price of oil, gas and coal; removing handouts to industry now would cause the least amount of pain for consumers worldwide, whilst bolstering the growth of sustainable alternatives.  We could go further, too.  Effective carbon pricing – much discussed but long unattainble – is unlikely to be much easier to implement in the future than it is now.  Though it would drive up (currently low) costs in the short term, it would do wonders in spurring the development of sustainable energy forms, as investors are provided a clear indication of the direction of government policy and an incentive to act.

As The Economist recently put it, policy makers should act boldly and “Seize the Day”, scrapping “nonsense” energy policy and replacing it with more prudent alternatives.  Though it would require significant co-ordination and political will (perhaps bravery), the imperative to act has never been greater; this year’s UN climate talks in Paris are regarded by some as the last chance to make a meaningful and effective global agreement, and recent research on unburnable carbon highlights the need to leave the majority of proven reserves in the ground.  It seems obvious, then, that governments should begin a concerted effort to reign in an industry whose business model is incompatible with a sustainable future.

A response to Harry Saunders’ “Divestment will not keep carbon in the ground”

– Originally posted on the Sussex Energy Group blog, January 29th 2015. Co-authored with Emily Cox

This blog post is a response to a recent article on the divestment of shares in fossil fuels by Harry Saunders.

Jack and Emily are part of the ‘Fossil Free Sussex’ campaign, which aims to encourage the University to move its investments away from the oil, gas and coal industries.  In his well-written and thought-provoking article, Harry argues that ‘divestment will not keep carbon in the ground’, by pointing out that shares in a company represent a stake in the ownership of that company, but do not affect the fundamental production economics, even if widespread divestment does occur.

These kinds of arguments against divestment seem to be based upon the view that the campaign is trying to bankrupt the industry. Whilst campaigning at Sussex, we have said from the beginning that the damage we are attempting to do is not financial; UK universities have a combined endowment wealth of around £10bn (People & Planet estimation, 2013), of which around 5% can reasonably be thought to be represented by fossil fuel stocks.  We are aware that £500m is never going to financially harm the industry (and after reading the article, it is apparent that were this figure to be much larger, it still wouldn’t).

What we are instead trying to do is inflict reputational impact. The oft-made analogy between divestment in fossil fuels and Apartheid South Africa highlights where this has been successful in the past (though there are of course distinct differences between the two – this analogy is slightly challenging but the basic principles are the same). Our universities do not invest in tobacco, arms manufacture, pornography or gambling industries. The arguments Harry has made apply equally to these companies, yet they have a reputational tarnish and thus have seen their shares sold by certain institutions. We believe this industry should be added to that list, because of issues like unburnable carbon; we are not saying that we should divest to stop carbon emissions (directly), but that because of carbon emissions we should divest.

The divestment campaign is not attempting to halt – or even particularly to slow – fossil fuel extraction. In fact, it is precisely this absence of grand ambition which is appealing, since it thereby avoids the problems of intractability which tend to plague public attempts to tackle climate change. Instead, the campaign seeks to redefine what we mean by an ‘ethical investment’. Most universities (and churches, and other institutions who are considering divesting) already have an ethical investment portfolio, which avoids arms, tobacco etc. What is needed is a redefinition of ‘ethical’ to include concern for the climate. An investment in fossil fuels should not be considered an ethical investment, assuming that protecting the environment and mitigating climate change is an ethic we hold dear.

In this sense, perhaps better parallels can be drawn with other types of ethical investment, such as switching to an ethical bank account or buying fair trade. No-one claims that ethical bank accounts such as Triodos are going to put a stop to the arms trade; it is more a case of feeling that our own money should not be used in ways we feel uncomfortable about. It should not always have to be a choice between changing the world or doing nothing at all; sometimes small actions are correct for moral, rather than pragmatic, reasons.

This campaign is empowering people – in Sussex and worldwide – who otherwise feel they can do nothing about climate change, save ride their bike more and listen whilst policymakers squabble. Even if Sussex doesn’t divest but we cause a few more people to become interested in climate, then we will feel that the campaign has been a success.