Use Drop in Oil Prices to Put a Price on Carbon, Says IEA Director

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.

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