A paper by a team from the University of Chicago and MIT suggests that technology-driven cost reductions in fossil fuels will lead to the continued use of fossil fuels—oil, gas, and coal—unless governments pass new taxes on carbon emissions. Their analysis is published in the Journal of Economic Perspectives.
While renewable energy has made promising gains in just the last few years—the cost of solar dropped by about two-thirds from 2009 to 2014—new drilling and extraction techniques have made fossil fuels cheaper and markedly increased the amount of oil and gas available. In the US alone, oil reserves have expanded 59% between 2000 and 2014, and natural gas reserves have expanded 94% in the same time.
The authors of the paper are Christopher Knittel, MIT’s William Barton Rogers Professor in Energy; Michael Greenstone, the Milton Friedman Professor in Economics and the College at the University of Chicago; and Thomas Covert, an assistant professor at the Booth School of Business at the University of Chicago.
The team examined costs over a time frame of five to 10 years, stating that further forecasts would be quite speculative, although the trend of cheaper fossil fuels could continue longer.
At least two technological advances have helped lower fossil fuel prices and expanded reserves: hydraulic fracturing, or fracking, which has unlocked abundant natural gas supplies, and production from oilsands. While some energy analysts once thought the apparently limited amount of oil reserves would make the price of oil unfeasibly high at some point, that dynamic seems less likely now.
The probability of an exploratory oil well being successful was 20% in 1949 and just 16% in the late 1960s, but by 2007 that figure had risen to 69%; today it’s around 50%, according to the US Energy Information Administration.
As a result of these improved oil and gas extraction techniques, the world has consistently had about 50 years’ worth of accessible oil and natural gas reserves in the ground over the last 30 years, the authors noted.
All told, global consumption of fossil fuels rose significantly from 2005 through 2014: about 7.5% for oil, 24% for coal, and 20% for natural gas. About 65% of global greenhouse gas emissions are derived from fossil fuels, according to the US Environmental Protection Agency. Of those emissions, coal generates about 45%, oil around 35%, and natural gas about 20%.
You often hear, when fossil fuel prices are going up, that if we just leave the market alone we’ll wean ourselves off fossil fuels. But the message from the data is clear: That’s not going to happen any time soon.
If we don’t adopt new policies, we’re not going to be leaving fossil fuels in the ground. We need both a policy like a carbon tax and to put more R&D money into renewables.—Christopher Knittel
Although renewable energy has seen an impressive decline in its prices within the last decade, looking at the “levelized” cost of energy (which accounts for its long-term production and costs), solar is still about twice as expensive as natural gas. The need to handle sharp evening increases in power consumption—what energy analysts call the “duck curve” of demand—also means power suppliers, already wary of solar power’s potential to reduce their revenues, may continue to invest in fossil fuel-based power plants.
The development of better battery technology for storing electricity, is vital for increased use of renewables in both electricity and transportation, where electric vehicles can be plugged into the grid for charging. But the example of electric vehicles also shows how far battery technology must progress to make a large environmental impact. Currently only 12% of fossil fuel-based power plants are sufficiently green that electric vehicles powered by them are responsible for fewer emissions than a Toyota Prius.
Currently battery costs for an electric vehicle are about $325 per kWh. At that cost, the authors calculated, the price of oil would need to exceed $350 per barrel to make an electric vehicle cheaper to operate. But in 2015, the average price of oil was about $49 per barrel.
New solar techniques such as thin-film layers that integrate solar arrays into windows may lead to even steeper reductions in the price of renewables, especially as they could help reduce installation costs, a significant part of the solar price tag. Still, the immediate problem of accumulating carbon emissions means some form of carbon tax is necessary, Knittel says—especially given what we now know about declining fossil fuel costs.
What are the consequences of a continued reliance on fossil fuels? We conducted some back-of-the-envelope calculations of the potential warming associated with using all available fossil fuels. This requires estimates of total reserves and resources of each fossil fuel, carbon conversion factors, estimates of historical emissions, and a model to convert carbon dioxide emissions into temperature changes. It is important to note that this exercise is based on high levels of green- house gas emissions for many decades beyond 2100. For example, our calculations are based on total carbon emissions ranging from 12,744 to 17,407 gigatons of CO2. For comparison, the business-as-usual scenario from IPCC (2013) has cumulative emissions of 6,180 gigatons of CO2 between 2012 and 2100. … Our headline finding is that the combustion of currently known fossil fuels would increase global average temperatures by 10°F to 15°F, depending on the choice of carbon conversion factors and model. … Further, these estimates do not account for advances in fossil fuel extraction techniques that could make other deposits economically accessible; for example, the use of oil shale and methane hydrate deposits would add another 1.5°F to 6.2°F of warming.
What are the prospects for avoiding this dystopian future? At a high level, there are two market failures—greenhouse gas emissions are not priced adequately, and basic or appropriable research and development is too often underfunded— and the corresponding solutions of pricing emissions and subsidizing basic research and development are easy to identify. However, the politics of implementing such policies are complex, particularly because energy consumption is projected to grow the most in low- and middle-income countries during the coming decades, and thus the majority of emissions cuts would need to take place in those countries. Without direct compensation, global emissions cuts will require the poorer countries to use and pay for more expensive energy sources. The last several decades have seen limited global progress in tackling these policy problems.
The Conference of Parties (COP21) climate conference in Paris in December 2015 has set out the broad outlines of what could constitute a dramatic change in global climate policy. Whether this high-level voluntary agreement leads to the climate policies necessary to correct the market failures related to greenhouse gases around the globe will be determined in the coming years and decades. Ultimately, their enactment would greatly reduce the probability that the world will have to contend with disruptive climate change. The alternative is to hope that the fickle finger of fate will point the way to low-carbon energy sources that rapidly become cheaper than the abundant fossil fuels on their own. But hope is too infrequently a successful strategy.—Covert et al.
Covert, Thomas, Michael Greenstone, and Christopher R. Knittel. (2016) “Will We Ever Stop Using Fossil Fuels?” Journal of Economic Perspectives, 30(1): 117-38 doi: 10.1257/jep.30.1.117