Will Surging Oil Prices Prevent Environmental Doom?

In the 21st century, burning hydrocarbons is critical to achieving the economic expansion that is needed to support the billions of new people who are projected to inhabit the planet. Yet chasing that growth could throw so much carbon into the atmosphere that it may undermine humanity’s very survival.

Thankfully, there is another way to look at this dilemma. If the abundance of hydrocarbons has brought us to the brink of catastrophic climate change, then the scarcity of those same resources could be what saves us from disaster. The future of our planet’s climate may soon be out of our hands — and that may not be such a bad thing.

As the United Nations’ Intergovernmental Panel on Climate Change points out, our current rate of carbon emissions combined with the atmospheric buildup since the Industrial Revolution puts us on track to reach dangerous concentrations of greenhouse gases. An increase of 4 degrees Celsius in the next 100 years, the IPCC says, would have devastating consequences: Droughts will cause global food production to fall; low-lying coastal areas will be flooded as glaciers melt and sea levels rise.

Carbon Emissions

Yet the flaw in these dire predictions is that they assume our hydrocarbon consumption will continue to increase at the same rate over the next few decades as it has in the past. Economic growth drives carbon emissions. When growth slows, emissions come down, too, removing the need for stringent climate-change policies.

Environmental advocates need to recognize that the global economy has downshifted into a much lower gear. And gearing down economic growth is the most direct way to reduce carbon emissions.

Climate-change scientists should ask where we would get all the fuel needed to raise global temperatures to forecasted levels. Today’s soaring fuel prices indicate scarcity. And if carbon-emitting fuels are getting scarce, how does that change the outlook for growth in carbon emissions and the nature of the climate-change debate?

Those are the questions policy makers need to answer before charging ahead with financially punitive plans for carbon abatement. If they don’t, governments could squander billions carrying out measures that will ultimately prove unnecessary.

To date, attempts to regulate emissions have been driven by a belief that we need to decarbonize our economies. Therefore, governments try to reduce fossil-fuel consumption by putting a price on carbon emissions. Some countries do this through taxes, others try to control pollution using elaborate cap-and-trade systems. The rationale behind these policies is straightforward: Make emitters pay for emissions and they will emit less.

It hasn’t worked. International climate-change treaties have failed to gain universal acceptance or institute significant penalties for noncompliance. And without a globally agreed-upon price for emissions, they will simply migrate to jurisdictions where they cost less.

The fundamental flaw in the Kyoto Protocol is that by seeking to cap emissions in the richer half of the world, it merely diverted emissions to the poorer half. The developing world is responsible for 90 percent of the increase in global emissions since 2000. During that time span, China’s levels have doubled, pushing it past the U.S. as the largest emitter. Redistributing carbon emissions is not the same as reducing total global emissions, which are now 50 percent higher than in 1990.

Who Pays

China and other developing countries argue that cumulative emissions are what counts when it comes to climate change, and insist that countries such as the U.S. should foot more of the bill. Since the Industrial Revolution, the U.S. has produced an estimated 27 percent of global carbon emissions, compared with only 9.5 percent for China. As long as the big two won’t pay for carbon, it is tough to persuade any other country to charge domestic industries and consumers for emissions.

One notable exception is the European Union, which is taking the environmental high road and making emitters pay. But the system is far from perfect. It has put a low cost on emissions and offers a plethora of carbon credits, which give the agreement little financial bite. And even the EU is beginning to doubt whether its efforts are worthwhile in the absence of a global agreement and as the euro zone struggles with a financial crisis.

The prospects for establishing a global framework for carbon pricing are as remote today as ever. As plans to expand the capacity of nuclear-power generation are canceled or delayed around the world after the accident at Japan’s Fukushima plant, the prominence of hydrocarbons in tomorrow’s economy only increases.

Japan, for example, has acknowledged that in 2012 its greenhouse-gas emissions will rise to as much as 16 percent above 1990 levels, in sharp contrast to its commitment under the Kyoto Protocol to reduce emissions to 6 percent below that benchmark. In addition, it is replacing lost generation from nuclear power by dusting off retired oil-fueled plants.

The story is similar in Germany, which is also moving away from nuclear power and plans to build more coal-fired plants, in addition to importing more natural gas from Russia.

In the U.S., President Barack Obama recently directed the Environmental Protection Agency to withdraw an air-quality proposal that would have tightened pollution standards for industry after opponents complained the new regulations would kill thousands of future jobs and cost the economy billions.

Kyoto Backslide

Canada is backing out of the Kyoto Protocol just in time to avoid paying a huge bill for falling short of its commitments. Canadian carbon emissions are 30 percent higher than they were in 1990, and it would have had to pay $14 billion to buy credits from the rest of the world to comply with its obligations under the treaty.

None of this has to spell doom, however. The simple unspoken truth is that a recession will stop the growth of emissions dead in its tracks. And the deeper the recession, the better it is for the atmosphere.

In fact, recessions reduce emissions levels. And they don’t take three or four decades to do the job. According to the International Energy Agency, in 2009, global carbon dioxide emissions fell for the first time since 1990.

Economic slowdowns have all sorts of environmentally friendly results. Consider, for example, the number of resource megaprojects that were canceled after commodity prices plunged during the last recession. In Alberta’s tar sands alone, the oil industry canceled or delayed $50 billion of planned capital spending.

In a zero-growth world, governments don’t need to step in with punitive carbon taxes or ineffectual cap-and-trade programs, nor will we need to depend on the whims of environmentally conscious consumers or ecologically progressive companies. When our economies shrink, our carbon emissions will tumble without any legislative effort.

Just look at what happened when the Soviet Union collapsed. Russia’s economy went into a tailspin and lowered carbon emissions by a staggering 30 percent almost overnight. The latest recession had a similar effect. In the U.S., energy- related carbon-dioxide emissions fell 3 percent in 2008 and an additional 7 percent in 2009.

Governments around the world have long thought that the path to a greener atmosphere begins with decarbonizing our energy systems — electricity generation, in particular. Despite efforts to usher in more renewable power generation, however, the amount of carbon emitted per unit of electricity produced has actually increased by 6 percent globally in the last two decades. Even environmentally unfriendly coal still commands a 41 percent share of global power generation.

Alternative Energy

When it comes to reducing emissions, altering the energy mix by adding more renewable sources is a red herring. What the world really needs to do is use less power. And that’s exactly what is about to happen.

Higher oil and coal prices are already putting the squeeze on economic growth and fuel consumption. In the last few years, power shortages have become commonplace in China, India and the rest of Asia. Price and availability are stopping these countries from burning more coal, not costly environmental regulations. As prices keep rising, it will only become more apparent how unnecessary international treaties and carbon taxes are for lowering emissions.

Few climate-change experts take such economic considerations into account when making forecasts. The IPCC, for example, released a series of models for the future of global carbon emissions in its 2007 report, presenting no fewer than 40 different scenarios. The bottom line of the exercise was to conclude that unless immediate action on carbon abatement is taken, emissions would soon exceed critical levels and induce catastrophic climate change.

The amount of hydrocarbons that would need to be burned to fulfill the IPCC forecasts is staggering. The panel projects that oil consumption, for instance, will be greater in 100 years than it is today. And the majority of the IPCC scenarios see world coal consumption doubling over the next two decades. About 80 percent of the projected global increase is expected to come from China and India. But those forecasts are an extrapolation of current economic-growth rates. The IPCC scenarios don’t ask where all that extra coal will come from — or, more importantly, what it will cost.

The world won’t burn anywhere close to all the fossil fuels needed to realize the IPCC’s dire predictions. Yet many environmental policies are based on an assumption that future resource supply will be abundant, and they won’t make any sense in the coming world of fuel scarcity.

I don’t expect environmentalists to simply accept the proposition that high fuel prices will save us. Instead, they can just observe what is happening now. The onset of triple- digit fuel prices has already led to the deepest postwar recession on record, and their quick return is now threatening us with a double-dip slowdown from which there is no obvious path to recovery. Once we tip over that brink, just watch what happens to carbon emissions.

And we won’t have to wait several decades. The time frame for the next global recession isn’t decades away — it could be mere quarters from now. By historical standards, even the deepest downturns rarely last more than four or five quarters. The next recession, however, will be different. We are about to face a permanent slowdown.

Our seemingly inexorable march toward environmental self- destruction is about to run out of fuel. Triple-digit oil prices may just give us all a new lease on life.

(Jeff Rubin, a former chief economist and chief strategist at CIBC World Markets Inc., is the author of “Why Your World Is About to Get a Whole Lot Smaller.” This is the last of four excerpts from his new book, “The Big Flatline: Oil and the No- Growth Economy,” which will be published Oct. 16 by Palgrave Macmillan. The opinions expressed are his own. Read Part 1, Part 2 and Part 3.)

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