Short Markets and Long Transitions

Today’s fossil energy shortages preview tomorrow’s climate policy challenges. Political leaders who are unwilling to abide current cyclical shortfalls seem unlikely to stand their ground during future, structural ones. But crisis responses—fallbacks to fossil fuels or, perhaps, future recourse to geoengineering—could weaken the business case for massive green buildouts.

Energy crises have complex plotlines and many actors, and the current one weaves together several narratives. One is that petroleum-exporting nations have been constraining production, first to counter the shale boom and more recently to offset the Covid-19 demand collapse. Another is that investors have been encouraging Western oil and gas firms to invest less in drilling . . . and they are.

Market imbalances usually have familiar endings: profits draw investment into supply—too much of it—setting up the next bust. Today, however, climate activists are trying to stop the cycle by pushing banks not to underwrite fossil fuels and urging financial regulators to make capital itself more expensive for emissions-intensive projects. If they succeed, prices could rise higher and stay elevated for longer.

Quantitatively speaking, the gap between the present-day installed base and future climate goals looks enormous. This year’s International Energy Agency World Energy Outlook implied that replacing hundreds of quadrillions of British thermal units of fossil energy could require incremental spending in the double-digit trillions of dollars. It could take many decades.

Conceptually speaking, the gap may be even wider. At least for now, governments may need to make up the difference between green investments that are profitable anyway and those undertaken primarily because they reduce emissions. The premiums associated with attempting a transition at faster-than-anyway speeds could test the tolerances of even wealthy economies willing to run colossal deficits.

Notably, prices have focused minds in the run-up to global climate talks in Glasgow. Transitioning away from a world that currently relies on fossil fuels for roughly four-fifths of its energy was probably going to be expensive even if it happened slowly. How, then, could an accelerated transition without significant price pressure have seemed feasible?

To coin a term, one answer may be “coincidentalism”: spurious correlations between policy and reality drawn from a rosy, recent past. As the wind and solar share of U.S. power quadrupled over the 2010s, average retail rates barely budged. Of course, falling natural gas prices and burgeoning government incentives likely contributed to that price stability.

Likewise, President Joe Biden’s ability to campaign—and win—on a green agenda may reflect U.S. gasoline spending falling to record lows as a share of personal consumption expenditures as much as—or more than—popular support for climate action.

In both examples, fossil fuel production seems to have at least partially enabled climate ambition. U.S. wells supplied nearly 80 percent of global oil demand growth over the 2010s, ending an era of scarcity and politically de-risking climate debate. That the process may be working in reverse raises a question: If 18 months of tepid investment in a depletable resource can weaken public buy-in for transition, what might three, five, or ten years do?

In theory, price spikes should hasten clean energy investment. In practice, they tend to usher out incumbent politicians faster than they usher in new technologies. Social and climate programs styled after a Green New Deal may offer political shelter by conjoining warming—an otherwise abstruse, multi-decadal phenomenon—with measures that address quotidian non-climate concerns, like jobs and justice.

But European leaders who cite energy shortage as a reason to lean into transition may be testing whether voters truly think a Green Deal is a good deal. Recent examples here in the United States suggest that even popular officials with green leanings must tread carefully. In September 2020, California governor Gavin Newsom cited destructive fires as reason to “move faster” toward a “greener future.” In July 2021, ahead of his recall election, Newsom reacted to power shortages by recruiting fossil-fueled ships and portable generators, and more challenges lie ahead as state officials prepare for the closing of the nuclear generators at Diablo Canyon.

Indeed, balloting at short intervals can make multi-decadal commitments hard to keep. If price pressures persist, political leaders may be tempted to unravel long-term policies that voters blame for short-run costs, especially ahead of elections. Whatever the economic case for sticking with energy transition over the long term, in politics, there is no long term.

And what if public patience expires before government-backed acceleration delivers scale economies, learning effects, and lower costs? Like energy itself, humanity tends toward a path of least resistance. If unprecedented clean energy spending fails to appreciably stem storms and ameliorate drought, leaders may be tempted to rapidly treat the symptoms of a feverish planet via geoengineering. The mainstreaming of direct air capture may already be a sign of public impatience with mitigation only, even if it is not a substitute.

To be sure, carbon sponges are a long way from stratospheric aerosol injection. But one risk to transition is that forcibly cooling the planet with particulates could have an annual price tag that is two to three orders of magnitude lower than rapidly greening the energy system and immediate results. Even if governments balk at aerosols, today’s private space cruise lines to the Kármán line make the notion of rogue-billionaire climate engineers a little less laughable than it seemed five years ago.

Ultimately, today’s short markets may be sending a warning to Scotland-bound negotiators. Exigent circumstances can lead to temporary interventions that blunt the impetus for enduring change. In other words, the transition may not merely be challenged by technology moving too slowly but also by elected officials reacting too quickly.

Kevin Book is a non-resident senior associate with the Energy Security and Climate Change Program and a managing director at ClearView Energy Partners, LLC.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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