Lower oil prices provide temporary relief for consumers, but rising volatility around oil prices will be a much bigger challenge to long-term energy market stability and could undermine a transition to clean energy, according to a new analysis prepared by the Global Commission on the Economy and Climate.
In a 20-page report from the multinational group’s New Climate Economy project, economists warn that the recent drop in oil and natural gas prices, while providing short-term economic relief, may compel governments to authorize expensive fossil energy projects that ultimately prove much more costly under national and international carbon reduction systems.
Such priorities "would not only perpetuate our fossil fuel addiction which is fuelling dangerous climate change, but also make us even more exposed to oil price fluctuations in the future," the report states.
The analysis, led by Lord Nicholas Stern, the commission’s co-chairman and professor at the London School of Economics and Political Science, finds that governments should take advantage of current low oil prices to initiate market reforms with long-term benefits, including the establishment of carbon pricing and reforming fossil fuel subsidies.
In a statement, Stern said, "Governments must peg their policies to long-term energy trends rather than betting on oil prices staying low. These prices have never been stable, and price shocks are becoming more drastic and frequent than ever before."
Rather than embrace that risk, "governments should boost investment in renewable energy sources that are increasingly competitive, moving away once and for all from the current outdated carbon-intensive and unsustainable economic model," Stern added. "Missing this chance would be devastating for the future health of our economy and our planet."
The new findings extend from a 2014 report from the same project describing how countries can achieve economic growth in the face of climate change risk. That report, titled "Better Growth, Better Climate," highlighted how reforms in urban development, land use and energy policy would lead to sustained growth in a low-carbon economy.
Long-term target is ending price volatility
However, the group now argues, near-term low oil prices could distract policymakers from the implementation of some of those objectives, especially goals that involve transitioning away from carbon-intensive fuels in favor of wind, solar, biomass, geothermal and other renewable resources.
Per Klevnäs, senior project manager at the Stockholm Environment Institute and co-author of the report, said in a telephone interview that while low oil prices do provide clear economic benefit, policymakers have a responsibility to look beyond current conditions and craft policies that provide the best long-term strategy for consumers and even nations.
"What we’re trying to disentangle here is what are the short-term lessons [of oil price volatility], and what are the long-term lessons?" Klevnäs said. "Also, what are the other things that ought to influence decisions about the structure of the economy and our commitments for decades ahead?"
The authors argue that low oil prices, rather than being a hindrance to clean energy development, should incentivize governments to test new policies such as carbon pricing, because a consumers market is less susceptible to distortions caused by subsidies and other policies that artificially affect energy prices.
"Just a year or two ago, consumers were paying double the price for gasoline as they are now, meaning they are less likely to notice a few extra cents on each gallon of gas due to a carbon price or reduced energy subsidies," Klevnäs said. "The increased revenues could be used to offset impacts on low-income households and to finance reductions in other, distortionary taxes."
As many as 27 countries are already reforming fossil fuel subsidies, including Egypt, Indonesia, Ghana and India, according to the commission. Meanwhile, 40 countries and more than 20 sub-national jurisdictions now apply or have scheduled the introduction of a carbon price, while 26 others are actively considering them.
Over the long run, the authors conclude, renewables like wind and solar have distinct advantages over fossil fuels — in part, they have little or no operating costs once installed and therefore no price volatility.
"This means renewable projects can effectively lock in the cost of energy for 20 years or more. And the price of installing wind power and solar photovoltaic projects continues to fall dramatically, making renewables already cost-competitive even with cheap natural gas in many places," the report said.