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OIL AND GAS
28 September 2016 12:22

In-depth: How can fossil fuel supplies be constrained?

Sophie Yeo

Sophie Yeo

09.28.16
Sophie Yeo

Sophie Yeo

28.09.2016 | 12:22pm
Oil and gasIn-depth: How can fossil fuel supplies be constrained?

Academics gathered in Oxford this week to discuss how to constrain fossil fuel supply as part of efforts to tackle climate change.

Carbon Brief attended the two days of talks at the “Fossil Fuel Supply and Climate Policy” conference, organised by the Stockholm Environment Institute (SEI), to speak to delegates about what kind of future lay in the pipeline for fossil fuels.

Climate change policy to date has focused heavily on reducing emissions through reducing demand. This includes familiar approaches, such as pricing carbon, increasing renewable energy and boosting energy efficiency.

Discussion on constraining fossil fuel supply has been more subdued. While the Paris Agreement adopted in December 2015 invited countries to say how they would reduce their emissions, it did not broach the subject of how to tackle the central cause of emissions: fossil fuels.

Tactics to constrain fossil fuel supply include removing subsidies, placing moratoria on new coal mines, placing a fee on fossil fuel production, creating funds to prevent fossil fuel development in developing countries, and persuading countries to hold back on approving fossil fuel infrastructure.

A working paper by SEI, released in 2015, outlined three reasons why curtailing fossil fuel supply has been slow to catch on.

First, it is less politically attractive. While politicians are able to sell the idea of demand reduction as enabling new industries to develop, attempts to shrink fossil fuel supplies can be expected to meet resistance from the coal, oil and gas industries.

Second, countries who cut their exports as a result of constraining supply cannot count the emissions reductions as their own. Since emissions are counted on a territorial basis, these reductions will be assigned to the nation that actually cuts their use of fossil fuels.

Third, there is the assumption that the market rules supreme and that only demand can be reduced. As long as there is a large appetite for fossil fuels, someone somewhere will produce the fossil fuels to feed it.

In the video below, Carbon Brief talks to:

Franz Matzner, director of the Beyond Oil Initiative at the Natural Resources Defense Council, challenges the idea that supply-side restrictions are more politically challenging. He tells Carbon Brief:

“I think that is a misnomer, a misperception. It all depends on the context you’re operating within and what barrier you’re trying to overcome. I think there’s an increasingly clear body of evidence, both from a socio-political perspective and from an economics perspective, that we’re not going to get to the climate goals we need to fast enough if we keep trying to find the path of least resistance, and find only one path, and the most palatable path.”

Here are some ways that people at the SEI conference have proposed constraining fossil fuel supply.

Moratorium on coal

Placing a moratorium on coal mines is one possibility that offers an unlikely opportunity to big coal companies: it raises the price of coal. Richard Denniss, chief economist at The Australia Institute, tells Carbon Brief:

“As Australia increases its coal production and coal exports, we’re actually pushing the world price of coal down. If you want to discourage people from using coal, you need the price of coal to be higher. So a moratorium on coal not only restricts supply, it increases price. The higher price can’t in turn induce anyone to build a new mine because by definition a moratorium prevents them doing that. So if we need high coal prices to discourage consumption of coal, but high coal prices encourage investment in new coal mines, the solution is to have a moratorium.”

The world has yet to answer the call of Anote Tong, the president of the small island nation of Kiribati, who called for a global moratorium on new coal mines in August 2015. Globally, 357 gigawatts of new coal power capacity was completed in 2014.

However, the idea is not beyond the realms of possibility. In December 2015, China announced that it would stop approving new coal mines for the next three years. The US followed a month later, announcing that it would halt new coal mining on public land for the next three years, while it undertakes a review of the impacts of coal production.

Protecting biodiversity hotspots

Maria Murmis, a research associate at the Universidad Andina Simón Bolívar, has been working on a proposal that would see countries being paid to keep fossil fuels in the ground in areas of high biodiversity, similar to the Yasuni ITT Initiative in Ecuador.

The Yasuni scheme ultimately failed. But with the Paris Agreement now sealed, Murmis believes it could be time to revive the idea on a global scale. She explains to Carbon Brief how this would work, and how revenues could be raised:

“Our proposal involves keeping fossil fuels in the ground in areas of high biodiversity value. Now, to do this, since it would be a large amount of foregone income, what we propose is a global fund – a fund under the United Nations Framework Convention on Climate Change — that would finance projects that are presented to keep certain deposits of fossil fuels in the ground. The funds would have to go to a low emissions development strategy. That means not only low emissions, but sustainable local development, with local participation, social equity and an equitable transition towards a new economy that drives away from fossil fuels and incorporates renewable energy.
This is about some people extracting oil and some people not extracting oil. So the people that are allowed to extract will have extra rent. The price will go up, because there’s less oil in the market, and they will have extra rent. We think of taxing that rent and having that money going into the fund, financing that fund.”

Coal tax

Frank Jotzo, an associate professor at the Australian National University, has another idea for constraining fossil fuel supply: imposing a fee on production.

This would raise coal prices and also provide a new stream of revenue to governments, says Jotzo. He explains to Carbon Brief how it might work:

“The idea is that a levy, or tax, on coal that is harmonised between the major producing and exporting countries could provide a significant source of revenue to coal-producing countries, which in turn could be used to ease the transition in the inevitable decline of coal, as the world moves to a lower carbon economy. It would be a harmonised approach, or collaborative approach, between the major producers, because if it’s just one producer implementing such an instrument then the effects of it will be quickly dissipated through increased production at lower prices in other countries.
“The fee would be levied at the production or export level, and so it would be the governments of fuel producing countries that receive the revenue from that fiscal policy instrument. In turn, you would see higher prices in world markets for coal, commensurately lower use of coal…It would leave those countries better off than the alternative, where it’s just the importers of coal that are putting their own taxes on, and all that money is staying in the countries that use coal rather than the countries that produce coal.”

Equity

Simon Caney is an academic at the University of Oxford who has started to grapple with questions of equity. “We need an ethics for the supply side,” he says.

“I think the values that people often invoke on the demand side apply here in a different format. Any just transition [away from fossil fuels] must honour human rights. So if we’re going to have an outcome where some people’s assets are stranded and they cannot use them, we need to find a way of stranding them so their human rights are honoured.”

This could mean giving the right to extract to the poorest, says Caney. However, it’s harder to make this argument than it may first appear, he adds. “This argument only goes if you don’t have access to other sources of energy.” That means, as soon as you take into account a country’s access to sources, such as hydroelectric or solar, the argument becomes less clear-cut.

Historical responsibility could also steer the debate, says Caney — the logical idea that those who have not benefited from the resources in the past should be the ones to benefit in the future. But what this could mean is that countries are due some kind of benefit in the future, but not necessarily the benefits that arise from directly burning fossil fuels.

Greg Muttitt, a senior advisor at Oil Change International, points out further complications in the equity argument. “There’s no right to extract, per se, any more than there are rights to pollute,” he says.

Some countries have simply won the geological lottery, by having large resources of fossil fuels beneath their land. “If we’re talking about equity, why should countries that have resources deserve any benefits from that?” he says.

In addition, fossil fuel extraction doesn’t necessarily lead to a better life for the benefitting country’s citizens. He uses the example of Iraq, which nationalised its oil industry in the 1970s, around the same time as oil prices went up. Saddam Hussein went on to use the revenue for ill. “I wouldn’t look at the Iraqi people as having benefitted from those rents,” he says.

Conclusion

In most cases, the ideas proposed are far from becoming a political reality, as their advocates willingly admit.

“In my country, this is stuff that’s well over the horizon. It doesn’t even cause a stir, because it’s way out there,” says Jotzo, of his idea for a fossil fuel fee.

“Like all of climate mitigation policy, it will be difficult, but I think it’s a fight worth fighting,” echoes Murmis, of her biodiversity hotspots proposal.

In Oxford, the overriding opinion was that the discussion of supply-side constraints on fossil fuels was still at an early stage, but worth having in addition to the more developed ideas on demand reduction.

Christophe McGlade, an oil and gas analyst at the International Energy Agency, tells Carbon Brief that the two discussions have to take place in tandem. He says:

“Clearly, both are very important, because if you have demand-side policies and completely ignore anything on the supply side, you’re going to get some quite large consequences coming through. It’s still a debate as to which side needs to lead. I would probably argue that the demand side has to take the first step. We need to start decarbonising things; consumers need to start demanding fossil fuels less before you’ll get some reactions from the supply side.
“But all demand-side policies should be designed with the supply-side reactions taken into account. For example, if you completely ignore how fossil fuel suppliers are going to react whenever you take away their main markets, you’re going to get some pretty strange things happening in the market. You can get some quite big carbon leakage from one fuel to another, from one country to another.”

 

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