The Paris Climate Agreement, approved in principle last December by 195 nations, is now open for signature. As soon as the leaders of 55 nations sign it, it comes into force. It is a voluntary commitment by signatory countries to take specific, pledged actions to keep average global atmospheric temperatures from warming more than two degrees Celsius over historic levels.
While voluntary, there are several overriding reasons for the global community to undertake this effort with utmost urgency. At the top of the list, we have a moral imperative to keep the world safely within climate warming limits to avoid the disease, environmental destruction, species extinction, and economic havoc that extreme weather and rising sea levels will impose on all inhabitants of this planet for the indefinite future. There is also the risk of losing $1.7 trillion to $13.2 trillion of the world’s financial assets, in current dollars, by the year 2100 if global temperatures do not stay within the Paris target. Conflicts among nations will also rise with the temperature—with drought, typhoons, and other forms of extreme weather amplifying conflicts in the Middle East and elsewhere and creating a new generation of environmental refugees.
Keeping below the two-degree cap will require a rapid reduction in global combustion of fossil fuels—coal, oil, and natural gas. Oil is a particular problem, representing fully 31.4 percent of global primary energy demand and 36 percent of U.S. energy demand. In the United States, oil now outstrips both coal and natural gas as the largest source of primary energy. Fully 70 percent of U.S. oil (58 percent globally) is consumed by the transportation sector, which is 95 percent powered by oil. No transportation fuel can compete with oil in energy density, low volatility, portability, and ubiquity. Yet, absent radical declines in transportation oil consumption, globally embraced, the Paris commitments cannot be met.
This will be no easy task. Under a “current policies scenario” the International Energy Agency (IEA) projects that global oil consumption will grow inexorably—from 94 barrels per day (mbd) today to 151 mbd (“business as usual”) by 2050—as China, India, and other developing economies rapidly motorize. This will cause global oil prices to rise to an estimated $130 per barrel (2014 dollars). Meeting such demand will also require drilling in extreme environments such as the Arctic and deep-offshore, even as oil extraction and processing technologies become increasingly efficient. Despite this projection, the IEA calculates that global oil demand must actually declinefrom 94 mbd today to 74 mbd by 2050 to meet the Paris climate targets. Current policies certainly won’t work. There has to be a “Plan B,” and squeezing oil out of transportation fuel must be its focus.
A new economic analysis outlines just such a plan at, surprisingly, no net cost to the economy or consumers, at least in net oil importing economies such as the EU and the United States. The study, conducted by Cambridge Econometrics, outlines a more aggressive set of policies (beyond the IEA current policies scenario) that rapidly increase the fuel efficiency of internal combustion engines within the transportation sectors (land, air, and marine) while also adopting and enforcing global policy instruments that result in rapid market penetration of electric vehicles, primarily light duty vehicles and heavy duty trucks. The result is a modeled scenario that achieves an 80 percent EV market share for new LDVs by 2050 in major economies (U.S., EU, Japan, China, and South Korea) and a 60 percent EV penetration rate for the rest of the World. Such measures would save a cumulative 250 billion barrels of oil over the 2015 to 2050 time-frame compared to the “current policies” scenario. This translates into a reduction in global oil consumption from 151 mbd to 91 mbd—a 60 mbd savings each year by 2050, while improving economic performance of oil importing nations.
National co-benefits from implementation of these technology-based policies are substantial. Under the modeled technology-focused scenario, global oil prices will rise slowly in the short-term as present surplus inventories are drawn down, then stabilize between $83 to $87 per barrel after 2025 as total oil demand declines, avoiding the $130 per barrel in the 2050 BAU scenario (in 2014 dollars). Oil subsidies, now amounting to $520 billion annually according to the IMF in both producer and consumer support, will become less necessary. A lower, more stable oil price will also facilitate more transparent public budgeting and revenue-allocation in oil-producing countries, thus reducing social unrest while also discouraging rent-seeking practices that are common in repetitive boom-bust oil price cycles. A lower, stable oil pricing structure also reduces the need to explore for oil in expensive and environmentally sensitive environments such as the Arctic and deep off-shore areas.
However, the greatest co-benefit of aggressive efforts to implement this modeled scenario lies in its ability to dramatically accelerate the global transition to a clean-fuel global economy. Three reasons:
First, electric vehicles require large amounts of on-demand electric power, just as the internal combustion engine requires a lot of gas stations. Such electric power will come in the form of either more powerful, on-board batteries or from widely distributed public and private charging stations. In either case, the electric power generation and transmission grid must become much more decentralized to service a global vehicle fleet approaching two billion vehicles—cars, trucks, ships, trains, and even aircraft. The electric power must also be clean—nuclear, wind, solar, hydro, etc. The demand-pull from such a technological commitment to green EV fleets must both (1) radically move the global electric power grid toward more distributed, community-based power generation facilities as well as (2) vastly advance electric power storage capacity for both mobile and stationary uses. In short, the knock-on impact of such a global transition to EV-dominated transportation fleet will be an accelerated transition away from fossil fuels for the entire global economy.
Second, such a massive move to vehicle efficiency, fuel efficiency, and electric power chains will spark a global technological competition to provide the products and services needed to support such a global transportation network. This goes far beyond fuels to industrial, materials, and even information technology. Nations that get on board will thrive. Those that don’t will have to buy these products and services from others. The United States, China, and the EU are already the global leaders in this competition—others will need to step up their game. This is good for all nations—doing well by doing good things to save the planet. It is what a “building climate wealth” strategy looks like in action.
Third, and more nativistic, is the observation that the United States will benefit greatly from the race to a low-carbon and, in particular, low-oil world. Oil will not go away—even under the Cambridge Econometrics model, oil demand in 2050 will be 91 mbd, still well above the 74 mbd needed to meet the Paris targets. In such a world, oil supply will still be plentiful, even if market economics make drilling for oil in dangerous and extreme environments unprofitable. In such a world the Unites States becomes a major player in the global political economy of oil for a simple reason: it is a both a large oil importer (gross, not net) and large oil exporter, mostly of refined oil products. In addition, the United States does not depend on oil revenues to underwrite its national budget, and it has a large, developed strategic petroleum reserve of well over 700 million barrels of oil.
This makes the United States a “swing producer” as well as a “swing consumer” on global oil markets, with its role determined by market forces and, occasionally, national policy. While the United States owns no sovereign oil companies, and is not a swing producer in the sense of Saudi Arabia and the Kingdom’s deliberate management of the market through its spare capacity, Washington certainly has the power to influence outcomes though control of both policy (e.g. what oils it allows to be imported and exported, and under what conditions) and taxes (royalty rates on public lands, carbon taxes, subsidies, etc.). The United States has a large, diversified economy that is supported by large oil reserves but in no way suffers from the “resource curse.” This is a huge geo-political advantage in a world where national oil companies are often found to play the role of foreign ministries.
For all these reasons it makes perfect sense to “put the pedal to the metal” on pushing the technological transition to fuel efficiency and low-carbon fuels, especially electric vehicles. Such initiatives can be further supported through policy measures that focus on reducing the overall need to travel. The global population is rapidly urbanizing—by 2050 over 66% of the global population will live in cities, up from about 53% now. Mayors in over 450 global cities are already working with their transportation agencies, supported by their national, regional, and local governments, to rapidly embrace new ways to meet growing travel demand by reducing the need, and the incentives, to travel by single occupancy vehicle. Carbon pricing, especially when accounting for the full life-cycle carbon emissions from producing, transporting, refining and distributing fossil fuels, can also play a role. Such measures are completely complementary to the technological strategies outlined in the Cambridge Econometrics model.
In conclusion, the IEA target of reducing global oil consumption to 74 mbd by 2050, and meeting the Paris targets, is not so wild a dream. It can be our grandchildren’s reality, and one that advances overall human happiness as well. However, our strategy must be nimble and reflect the needs of oil producer and consumer nations alike. It must be mindful of the prospect of “lower for longer” oil prices, which would both render oil alternatives less attractive and introduce new deflationary and geopolitical themes into the oil policy discourse. It must be both “top-down” in the form of broad public policies that squeeze oil out of transportation fuels and vehicles, and “bottom-up” in the form of sub-national and local actions to create dense, multi-modal, and integrated transportation networks that build resilient, low-carbon communities. It must work with oil companies to promote their evolution, rather than extinction. This is the sort of “all-in” approach embodied in the Paris Agreement where all actors play an active role in keeping the planet cool, and in turn create a higher-quality, more pro-growth economy than that of the present trajectory. Our grandchildren will thank us.