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Thursday, December 03, 2015

'The Price of Oil and the Price of Carbon'

Obstfeld and Arezki:

The price of oil and the price of carbon, Vox EU: ... Fossil fuel prices are likely to stay ‘low for long’. Notwithstanding important recent progress in developing renewable fuel sources, low fossil fuel prices could discourage further innovation in and adoption of cleaner energy technologies. The result would be higher emissions of carbon dioxide and other greenhouse gases
Policymakers should not allow low energy prices to derail the clean energy transition. Action to restore appropriate price incentives, notably through corrective carbon pricing, is urgently needed to lower the risk of irreversible and potentially devastating effects of climate change (Stern 2015). That approach also offers fiscal benefits.
Oil prices have dropped by over 60% since June 2014. ...
Natural gas and coal – also fossil fuels – have similarly seen price declines that look to be long-lived. Coal and natural gas are mainly inputs to electricity generation, whereas oil is used mostly to power transportation, yet the prices of all these energy sources are linked, including through oil-indexed contract prices. The North American shale gas boom has resulted in record low prices there. ...
Technological innovations have unleashed the power of renewables such as wind, hydro, solar, and geothermal. ...
Progress in the development of renewables could be fragile, however, if fossil fuel prices remain low for long. ...
The current low fossil-fuel price environment will thus certainly delay the energy transition. That transition – from fossil fuel to clean energy sources – is not the first one. Earlier transitions were those from wood/biomass to coal in the 18th and 19th centuries and from coal to petroleum in the 19th and 20th centuries. One important lesson is that these transitions take a long time to complete. But this time we cannot wait.
We owe to electric lighting the fact that there are still whales in the sea. Unless renewables become cheap enough that substantial carbon deposits are left underground for a very long time, if not forever, the planet will likely be exposed to potentially catastrophic climate risks. ...
Direct subsidies to R&D have been adopted by some governments but are a poor substitute for a carbon price: they do only part of the job, leaving in place market incentives to over-use fossil fuels and thereby add to the stock of atmospheric greenhouse gases without regard to the collateral costs.
Politically, low oil prices may provide an opportune moment to eliminate subsidies and introduce carbon prices that could gradually rise over time toward efficient levels. However, it is probably unrealistic to aim for the full optimal price in one go. Global carbon pricing will have important redistributive implications, both across and within countries, and these call for gradual implementation, complemented by mitigating and adaptive measures that shield the most vulnerable. 
The hope is that the success of the Paris conference opens the door to future international agreement on carbon prices. Agreement on an international carbon-price floor would be a good starting point in that process. Failure to address comprehensively the problem of greenhouse gas emissions, however, exposes all generations, present and future, to incalculable risks. ...

    Posted by on Thursday, December 3, 2015 at 09:27 AM in Economics, Environment, Market Failure | Permalink  Comments (9)


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