The Challenges Posed to Climate by Low Energy Prices
- Khalil Zahr
- Jul 24, 2018
- 6 min read
At first glance, the review of energy statistics for 2017[i] seems to be positive for the world climate agenda. Renewable energy consumption grew by 16.6 percent, almost nine times the 1.9 percent rate of growth of total primary energy consumption.
Furthermore, natural gas consumption, a less intensive source of carbon emissions, grew at 2.7 percent, thus increasing its market share in total energy. On the other hand, the consumption of coal, a heavy pollutant and an intensive source of carbon emissions, continued to lose market share. Figure (1).
Notwithstanding the fact that nuclear and hydroelectric energy-two green sources of energy- continued to lose market share, the 2017 picture could be misleading if judged in isolation of recent trends in the energy market. Specifically, the period stretching from 2012-2017, over which, oil prices declined from historically high levels.
Over the 2012-2017 period, renewables (other than hydroelectricity) grew at an average annual rate of 15.3 percent, noticeably below the 17.0 percent rate of the previous six years; 2006-2012. Surprisingly, the decline in the growth of renewable energy was more pronounced in the OECD group, from an average annual growth of 15.8 percent during 2006-2012 to 11.8 percent during 2012-2017.
Most concerning are developments in the European Union (EU) where growth declined from 16.8 to 9.3 percent respectively. In comparison, the Non-OECD group also witnessed a decline, albeit small, of 1.2 percent; from 24.3 to 23.1 percent respectively. The negative influence of low oil prices seems all too obvious, especially, when increased traction of renewable energy is to be expected considering its decreasing costs on the one hand, and rising concerns about climate change on the other. Figure (2).
The rebound in world consumption of natural gas- a relatively less polluting energy source than coal and fuel oil- should not hide the slowdown witnessed over the past five years. The average annual growth rate for the period 2012-2017 was 2.0 percent which is appreciably below the growth rate for the previous six years period 2006-2012 of 2.7 percent per annum. This came despite declining prices over the former period, which were supposed to enhance demand. The rebound in consumption in 2017 is thought to be due to the medium-term response to the price decline, and stronger total energy demand, which offset the impact of higher natural gas prices in that year. Figure (3).
For those energy experts and observers who thought that coal consumption is in a permanent structural decline, 2017 performance must have come as a surprise. World coal consumption reversed recent declines and rose 0.7 percent during the year compared to an average annual decline of -0.3 percent over the period 2012-2017. Non-OECD consumption rose 1.1 percent, double the rate for the above period, while OECD consumption, which was declining at an average annual rate of -4.5 over the 2012-2017, experienced a much slower decline of -0.5 percent in 2017. Figure (4).
Of significance in this regard are the lately improving fortunes of coal in major markets such as the US and China. Although US coal consumption declined at -2.5 percent in 2017, this came well below the average annual decline rate of -4.4 percent over the period 2012-2017. While in China, coal consumption reversed its declining trend to register a growth rate of 0.2 percent. Figure (5).
Obviously, a single year's data does not establish a trend, and we must wait for future developments in the coal market to determine whether the relative change of fortune in 2017 is the beginning of a new trend. However, considering the recent reversals and backsliding on the climate change agenda in the USA and other jurisdictions around the world, 2017 may indeed be a point of inflexion.
The withdrawal of the US from the Paris Climate Accord, and the lack of an effective response by the world community to this withdrawal will likely cause irreparable damage to the climate compact. This is because the US's endorsement of the Accord was essential for achieving global consensus in Paris. It was particularly instrumental in bringing the major developing countries such as China, India, Brazil and others into the fold. With a broken global climate compact, many countries will more likely prioritize their narrow national short-term economic interests at the expense of the global common good.
The decline in energy prices over the past five years have also negatively impacted the pursuit of energy conservation, as low prices weaken the economic viability of efficiency raising measures. While the energy efficiency of the world economy has continued to improve over the past five years, almost all this improvement has come from the Non-OECD countries. The growing share of services in the developing economies along with rationalization of energy subsidies have been behind this reduction in energy intensity. In the advanced economies however, the growth in energy efficiency observed over the period 2006-2012, has reversed direction over the subsequent period 2012-2017, when energy prices were in decline.
As can be observed from Figure (6) below, the average Economic to Energy Growth Ratio (this ratio is equal to the rate of growth in energy demand required for a one percent growth in economic output (GDP)), which averaged -0.59 for the 2006-2012 period, rose to 0.14 for the period 2012-2017, and to 0.43 in 2017 (a negative value indicate that positive economic growth was achieved while energy consumption declined due to improved energy efficiency). The OECD trends were all due to a marked slowdown in efficiency growth in the European Union countries.
While a gradual decline in efficiency and conservation growth can be expected as opportunities for further gains decrease in time and become harder to realize, the large magnitude in this Ratio for the EU clearly reflects the impact of the low energy price environment of the past five years.
The developments on the efficiency and energy conservation front do not bode well for the climate agenda. Reduction of fossil energy consumption through conservation and efficiency measures are considered the least controversial among the possible climate change mitigation measures. They are considered the low hanging fruits that can be first picked in the fight against global warming. This is because these measures do not negatively affect economic growth but on the contrary, they do usually contribute to it.
But for these measures to be economically viable, they require high enough energy prices to be able to recoup investment within a reasonable period time. Under a low energy price environment however, the pay back of investments in conservation and efficiency measures will require a longer time or may not be forthcoming without sufficient government incentives.
Consequently, slower growth in renewable energy and natural gas, revival in coal consumption, continued modest growth in other green energy sources such as hydroelectricity and nuclear, climate policy reversals in the USA and other jurisdictions, all combined with a slowdown in energy conservation and efficiency gains, resulted in a marked increase in global emissions of carbon. At the world level, carbon emissions grew by 1.3 percent, almost double the average annual rate of 2012-2017 period. These trends were similar for all the country groupings, but much more pronounced in the OECD group, particularly the EU. Figure(7).
The 2017 results could still be an outlier in a historical trend of decreasing growth of global GHG (Global Heating Gases) emissions. It does reflect however, the fragility of the foundation upon which the global climate agenda presently stands. Strengthening this foundation would require a high degree of decoupling between energy prices on the one hand and the climate agenda on the other.
The answer to this dilemma lies in continued reduction in the cost of alternative energy sources, increasing the safety and security of nuclear energy, and incorporating the environmental cost of carbon into fossil energy prices.
Furthermore, since climate change is a global challenge, associated mitigation policies must be global rather than national. Nationally-based policies, whether in the form of carbon tax levies or carbon cap and trade systems, can be politically divisive, since they result in higher energy prices and reduce national economic competitiveness. Consequently, a successful response to the climate change challenge rests on the ability of the international community achieving binding consensus on an effective climate change mitigation and adaptation strategy by rising above short-sighted and narrow national interests.
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[i] Note: All raw data for this Article are sourced from the British Petroleum Statistical database-2018 , while all calculated variables are those of the author.
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