London/Washington, DC, May 8, 2015: Historically unpredictable and changing oil prices are hurting the economy, but today’s cheap oil offers a unique opportunity to reduce our fossil fuel addiction and invest in more sustainable and predictable renewable energy sources – says a new report by Lord Nicholas Stern and colleagues in the New Climate Economy project.
The report, Oil Prices and the New Climate Economy, warns that oil prices are impossible to predict, and their price volatility is costly to the economy. It will delay business investment and lead to job losses which can hurt the global economy.
Making matters worse, the report warns that current low prices – which have reduced by half in a matter of months from highs of around $100 a barrel – may lead governments to conclude that low-carbon solutions, including investing in renewable energy and improving energy efficiency, are less of a priority. This would not only perpetuate our fossil fuel addition which is fuelling dangerous climate change, but also make us even more exposed to oil price fluctuations in the future.
Nicholas Stern, Co-Chair of the Global Commission on the Economy and Climate, said: “Governments must peg their policies to long-term energy trends rather than betting on oil prices staying low. These prices have never been stable, and price shocks are becoming more drastic and frequent than ever before.
“Instead, governments should boost investment in renewable energy sources that are increasingly competitive, moving away once and for all from the current outdated carbon-intensive and unsustainable economic model. Missing this chance would be devastating for the future health of our economy and our planet.”
The report recommends that governments take advantage of current low oil prices to undertake reforms with long-term benefits, including establishing carbon pricing and reforming fossil fuel subsidies. This can reduce inefficiencies and help insulate countries against future oil price volatility, while also taking the pressure off fossil fuel markets. Subsidies for fossil fuel consumption alone reached an astonishing US$550 billion in 2013, encouraging waste, straining public finances, and weakening growth by depressing investment in the energy sector.
“Reducing our fossil fuel dependency is easier now than ever before,” according to Per Klevnäs, Senior Project Manager at the Stockholm Environment Institute and co-author of the report. “Just a year or two ago, consumers were paying double the price for gasoline as they are now, meaning they are less likely to notice a few extra cents on each gallon of gas due to a carbon price or reduced energy subsidies. The increased revenues could be used to offset impacts on low-income households and to finance reductions in other, distortionary taxes.”
In the long run, renewables are a safer bet than fossil fuels, concludes the report. They have little or no operating cost after being installed, and therefore no price volatility. This means renewable projects can effectively lock in the cost of energy for 20 years or more. And the price of installing wind power and solar photovoltaic projects continues to fall dramatically making renewables already cost-competitive even with cheap natural gas in many places.
As many as 27 countries are already reforming fossil fuel subsidies, including Egypt, Indonesia, Ghana, and India. 40 countries and over 20 sub-national jurisdictions now apply or have scheduled the introduction of a carbon price, while another 26 are actively considering them.
Oil Prices and the New Climate Economy comes as a follow up to Better Growth, Better Climate: The New Climate Economy Report, which was released in 2014 by the Global Commission on the Economy and Climate.
The original report demonstrated how countries can achieve economic growth while dealing with the risks posed by climate change, and highlighted how reforms in urban development, land use and energy policy would lead to sustained growth in a low-carbon economy. This new report concludes that low oil prices are no reason for delaying the low-carbon transition, but in fact are an opportunity to get started on positive structural transformation.