Thursday, July 18, 2024

The world will never agree to phase out petroleum and that’s ok

Originally posted in The Business Standard  on 21 November 2022

There’s a new divide in climate talks. It’s no longer the gap between rich and poor that matters, but the one between fossil fuel importers and exporters.
The world has failed to come to an agreement to stop burning fossil fuels. After two weeks of negotiations, a draft decision at the United Nations COP27 climate conference in Sharm El Sheikh, Egypt, promised a compensation fund for climate change damages but fell short of a push from the US and Europe for a “phase-down” of oil, gas and coal.

In fact, it’s worse than that. Although a phase-down of coal was agreed at last year’s Glasgow conference, other fossil fuels are going to remain immune. Twenty years from now, we are still likely to see global climate meetings failing to agree to a phase-down (let alone phase-out) of fossil fuels. And that’s OK — because what matters is not the words in an international agreement, but whether our carbon emissions are falling fast enough. On that front, the prospects are far better.

There’s a simple reason why getting consensus at UN climate meetings is so hard. The verbiage released at the end of COP meetings isn’t just words, but a quasi-legal text that serves to flesh out the binding commitments of the 2015 Paris Agreement. If just one of the 193 parties to that treaty objects to the conference decision, there will be no deal to announce. That’s why campaigners, fossil-fuel lobbyists and diplomats fight so hard over every emphasis. The COP decision isn’t exactly law, but it still influences the actions of governments and companies in the real world.

Dirty money

The value of oil exports from major petro-states makes it hard for them to commit to a phase-out

As we lumber along the road to net zero, a significant number of UN members are getting uncomfortable about the destination. The Organization of Petroleum Exporting Countries numbers 13 states, with 11 more in the OPEC+ grouping. Throw in non-OPEC+ countries highly dependent on oil and gas — like Guyana, Qatar, and Turkmenistan — and you have as many as 50 delegations, depending on how you draw the line. For that group, equivalent to a quarter of UN member states, a commitment to phase out petroleum is a vow to shrink their own economies.

The situation with oil and gas is different from the one with coal. Heavy, messy, and expensive to transport, the solid fuel is far harder to trade than petroleum. Only half-a-dozen countries are major exporters. Hardly any count it as central to their economies, the way oil is to scores of nations. That makes it far easier to negotiate reductions.

Some 46 countries count on oil rents for at least 1% of their GDP. Just three nations are as dependent on coal

For decades, the major cleavage in environmental talks has been between rich and poor nations. That division remained stable for so long because on one level economic development is simply a process of using more energy. At a time when fossil fuels were the only viable low-cost energy source around, a promise to reduce emissions was a pledge for poor countries to stay poor.

What’s changed is the remarkable rise of renewable technologies that can compete with conventional energy on cost as well as environmental grounds. That’s shifted the split in climate talks away from the old rich-poor divide, to a new one between exporters and importers of fossil fuels. The move is best exemplified by last year’s net-zero promise from India, for many years the standard-bearer of emerging economies resistant to making such commitments until they could grow rich. Wealthy nations’ agreement this year to a loss and damage facility to compensate small and poor countries for climatic disasters is another sign of the new diplomatic alliances emerging. So was the ebullience of oil exporters in resisting any phase-down language.

In working out who will win in this fight between importers and exporters, it’s worth considering the options available to each group. If you’re a major petroleum exporter, there’s no viable alternative business out there. Oil has made your country rich. (For the likes of Saudi Arabia, it’s arguably made your country a country.) It’s such a dominant trade that rival industries have withered in its shadow — the phenomenon of Dutch Disease familiar to many commodity exporters.

Attempts to diversify Gulf economies away from petroleum haven’t been particularly successful

The situation for importers is very different. What your population wants is affordable energy and food, along with the fruits of development it brings. For a century or so, fossil fuels have been the only way to provide that — but consumers don’t much care if their scooter is powered with oil or their air conditioner with gas, as long as it works and doesn’t cost too much.

The events of 2022 have accelerated that trend. The last time the world faced an energy crisis like this — in the early 1980s, when the Iranian revolution and Iran-Iraq war choked off oil supplies while the US Federal Reserve’s war on inflation stamped out demand — oil consumption fell by 10% over the three years through 1982, still the sharpest such decline in history.

The decline in oil output after the 1979 Iranian revolution is still the most savage in history

What’s different now is that there are viable, affordable alternative energy sources out there. Renewables, rather than coal or gas, are the cheapest way of generating new power for two-thirds of the world’s population. In major car markets, new electric vehicles already cost less to own and run than their combustion-powered equivalents. Even the gas that provides feedstock for the chemicals industry faces being undercut by green hydrogen before the decade is out.

The future that is crystallizing will be profoundly disruptive to the countries that are most dependent upon fossil-fuel exports — but it’s ultimately the consumers and importers who will decide which energy sources to lean on. Economics were already driving them relentlessly toward low-carbon alternatives. The war in Ukraine, and Russia’s attempt to wield energy exports as a weapon, have added a potent dash of national security to the mix.

What the world needs isn’t strongly worded international agreements, but a decline in emissions of carbon dioxide. Initiatives like this year’s loss and damage facility can certainly tighten the alliance between rich fossil-fuel importers and poor ones. The change needed is already happening far from the conference halls of Sharm El Sheikh — and it’s going to continue, regardless of the state of diplomacy.