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Carbon emissions in a low oil price world Simon Harrison

We are now clearly in a $30 oil world, and forecasters talking about a $50 floor a year ago are now talking about $20 or even $10. There seems no clear reason why prices would climb steeply in the short and medium term given the glut of oil and gas in the world. What might this mean for carbon?

For countries that consume oil and don’t produce much of it, cheap oil is a short term boost. People have more money and can spend it as they choose. It’s like a tax cut.

There are short term downsides: economic volatility caused as markets react to cheap oil; the impacts on oil companies; energy industry uncertainty; and potential for increased consumption that may ultimately halt or even reverse oil price reductions. In the longer term, though, we should anticipate government policy decisions or corporate strategies underpinned by long term assumptions about cheap oil, in the same way that we are still seeing the impact of past expectations of expensive oil.

And in the context of climate change that’s pretty worrying.

The renewable energy, battery, low carbon automotive and many other industries have matured and scaled on the back of high oil prices. Development programmes get committed and show results years later; that’s particularly obvious in the rate of progress currently evident in electric vehicles. Meanwhile, despite the automotive industry’s emissions rigging scandal, the fuel efficiency of internal combustion engines has advanced markedly, and continues to do so.

The key question is whether the development to date is sufficient to lock-in change, or whether there will be a creeping comeback of oil-driven solutions on the basis of lower monetary cost.

The answer is complex and uncertain. In key places such as certain states of the USA, Europe and China we should expect consistency in greenhouse gas policies – although they may be tested in times of economic stress.

Will technology suppliers be willing to write off low carbon investment to date, or will they lobby for policy protections to sustain business models developed to meet the needs of an emerging low carbon market? Is the cost reduction trajectory of low carbon consumables and infratructure now embedded to the extent that they will prevail over fossil fuel technologies and chase the price of oil downwards?

It’s hard to tell. But there is one thing that is more certain.

Cheap oil and gas will be bad news for the highest carbon fuel of all – coal. As has been demonstrated thanks to the US fracking boom, switching from coal to gas gives a significant and rapid carbon emissions reduction, although it does of course lock-in an undesirable level of emissions for the longer term.

The upside of plunging oil and gas prices is that we ‘s see the realisation of a scenario described by economist Dieter Helm in his excellent 2012 book ‘Carbon crunch’, where a short term shift to gas drives low-cost carbon emissions reduction.

But Helm’s scenario also relies on intensive research and development of next generation renewables with much greater resource conversion efficiency, lower cost and wide applicability. They will be needed rapidly and scalably to make the climate sums work.

Is that the way, globally, that rich countries should be spending the economic dividend they’re gaining from cheap oil?

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