It is clear to me that low carbon technologies such as solar and storage will become so cheap that they will enable a shift away from fossil fuels. In the coming years, we will see renewables increasingly powering our homes and businesses and eventually over the next 30 years we will see automobiles fully electrify and maybe over the next 50 years heat as well. But this begs the question whether this is fast enough to save our planet from the impacts of carbon related climate change. The answer to that is probably no which then leads to the question what needs to be done. My view is very simple, and that is tax carbon. There is no way around it.

Over the next 50 years low carbon technologies such as solar and wind as well as energy efficiency technologies such as LEDs will reduce fossil fuel consumption and reduce carbon emissions significantly.  In fact, if renewables could be ramped up to replace coal and if EVs could replace internal combustion engines then global emissions could fall by circa 13.5 Gt of CO2 per annum which is 40% of global energy related emissions. That would have big impact but let’s be clear that is likely to take 50 years under current investment scenarios and this is not fast enough to put the world on a path to a “2⁰C” pathway.

What we need to do is increase investments in clean energy sources as well as reduce investments in fossil fuels. But in places like Europe annual renewable installations are actually going down. Part of the reason for this is how renewables have been financed. The costs of building out renewables and any related grid infrastructure have been put on the electricity bill of the end customer which in turn reduces any incentives for those customers to electrify their heating systems or their automobiles.  Would it not, for instance, make more sense to put those costs onto the fossil fuels instead? And the timing could not be better given the low prices of coal, oil and gas. Whatsmore, the taxing of carbon could also lead to new business models particularly in the underserved building efficiency segment.

On the other side, there are huge investments still taking place in fossil fuels across the world. India, for instance, plans to open 50GW of new coal generation in the next years and there are massive investments taking place every day into oil and gas noting that the oil and gas Majors are some of the biggest and best financed companies in the world. Think Gazprom, Exxon, BP, Shell, and Saudi Aramco to name but five. Their annual investment budgets are ginormous.  And they are investing 100s of billions of dollars every year into oil and gas and they are doing so because they are making money doing it. And yes some oil companies such as Statoil and Total are starting to invest in renewables but their capital expenditures in this area are a fraction of their yearly investments into oil and gas.

Part of the issue is that it is not easy for oil and gas companies to invest in renewables. For a start renewables is mostly about electricity generation, which is not the core competence of an oil or gas company which means they don’t have the culture, knowhow or systems needed to make the necessary investments let alone manage those assets. But the bigger issue is that these companies generate higher returns in oil and gas than they do in renewables. And until that changes they and the investors behind the oil companies will not systematically deploy their extensive balance sheets into renewables. And let’s be clear, we need their capital. Someone like Exxon invests in oil and gas circa $30bn per year which would be enough for them to take 50% market share in global solar!

The key going forward is to incentivise fossil fuel companies to move their capital elsewhere and if we are really serious about tackling climate change then we have no choice but to bring in carbon taxes. But my concern is that there are very governments out there brave enough to do this.

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Comments

  1. Dear Gerard,
    I agree that external costs of CO2 emissions should be internalized. I am not so convinced that a carbon tax is the very best tool.
    The old discussion about quantitative vs price instruments.
    I would argue that a carbon tax is a means to an end to reduce CO2 output. A more efficient way to reduce output is to limit the number of CO2 permits in the economy via a cap-and-trade system.
    Taxes can be paid via cost pass-through while emissions can continue to increase. A cap on emissions, however, will never be exceeded (if compliance is enforced) while prices might indeed fall, as we have seen in Europe.

    I would argue there are two targets to be met:
    a) quantitative reduction/cap
    b) knock-on effect of driving low carbon investment.

    In the interest of time (ie 2 or 1.5 degree budget) I would always prioritize the cap. In the end, as long as the cap is not exceeded, who cares is CO2 prices were “low” all the time?
    Conversely, however, if emissions increase regardless of the CO2 tax the objective is clearly not met despite a carbon tax.

    Ideally you want both.

    The European emissions market is often seen as a failure, although I would argue that
    a) the cap has never been exceeded, ie the system delivered (although – in hindsight – political ambitions were too weak), and
    b) that a low carbon price is actually good news: A low carbon price means there is oversupply in the system, meaning there are plenty of permits that haven’t been used. From an environmental perspective it is better to have unused emission permits than a system where all permits have been converted into CO2 and the budget is “maxed out”, ie comparatively more Co2 has been emitted.
    A low CO2 price is – under a given cap – a success indicator of decarbonization. Besides, I don’t think Europe could be as ambitious as it currently is with regard to its 2030 target, if carbon prices in Europe would be 40 Euros already…

    All that said – a low carbon price does of course send out the wrong message, provides a false sense of security and it is prudent to adjust when necessary. This is why periodic review periods adjust the cap. A predictable long-term minimum cap that allows financial analysts to model the long term demand and supply balance in the system will ultimately steer investment. In the oil and gas sector companies are used to take risks and take long term views. Once banks and investors develop the skills to model and factor long-term carbon prices into their financing models we’ll see an impact on investment decisions. To date – in Europe – it was easy to ignore carbon as a risk.
    The CO2 price, however, is a function of a multitude of interactive factors such as environmental policies, new technology, weather, energy commodities, industrial production etc so the skillset to model CO2 prices is a tricky one. But it can and must be done, CO2 must grow up to become an equally important decision-influencing factor as are gas, coal and oil prices.
    Back to CO2 pricing.
    Decarbonization will – under a fixed cap – lead to lower CO2 prices. Simple demand and supply dynamic.
    To call for higher CO2 prices to drive low carbon transition is another way of saying “we want high CO2 prices to get lower CO2 prices”. A conundrum, without doubt.
    Again: in the end CO2 prices are a means to end, which is a quantitative restriction on CO2. Why not tackle it with a quantitative instrument to start with: a cap rather than a price.

    If under a “correct” cap the CO2 price turns out to be high – there you go, if the Co2 price doesn’t rise, well, then it wasn’t necessary.

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