More Oil and Gas Now Will Mean Less Coal Later
(Bloomberg Opinion) -- U.S. President Joe Biden is pushing for a temporary increase in oil and gas production at the COP26 climate summit in Glasgow, Scotland. While Biden himself has acknowledged that his effort might seem ironic, to some climate activists, it is more than that: It’s hypocritical, especially coming from a president who has pledged to rapidly shift the U.S. economy away from fossil fuels.
These criticisms are misguided. An increase in oil and gas production, even over the medium term, is not inconsistent with action to curb climate change — in fact, it is instrumental to its success.
It is generally agreed that the most important step in combating climate change is to phase out the use of coal. For the first time in 15 years, however, in part because of soaring natural gas prices, coal use is expected to rise in the U.S. this year. Coal-fired power plants release more than 2.5 times as much carbon dioxide per kilowatt-hour as modern gas plants.
That means any policy that substitutes gas for coal will help reduce emissions. It would also come with another benefit: By helping industry ensure a steady supply of electricity, it would assure U.S. consumers that they will not have the type of crisis that Europe is now facing. Public enthusiasm for climate policy drops off rapidly if it results in even modestly higher electricity bills.
This is just one example of what the political scientist Roger Pielke Jr. calls “the iron law of climate policy”: When climate policy conflicts with economic growth, economic growth will win every time. Under this theory, efforts to forestall oil production are equally foolhardy.
Increased oil production would also have the effect of blunting the rise in gasoline prices, which is politically toxic. Increasing the gasoline tax would have been a natural way to pay for the bipartisan infrastructure bill. Gasoline taxes have been used to fund roads for more than a century in the U.S., but they were taken off the table early in the legislative process.
Biden made that choice not only because gas taxes are regressive and unpopular, but also because an increase in the gas tax would inevitably have caused a backlash against his whole climate agenda. Similarly, insisting that aggressive action on climate be paired with a cap on oil production would risk turning the public against all climate action.
There is a third reason why encouraging unconventional oil production, such as fracking, may be smart climate policy. Such practices can serve as a fail-safe against the worst-case climate scenarios.
The great hope for climate policy is that advances in battery technology will allow electric vehicles to gain widespread acceptance over the next few decades. If that trend is interrupted, however, then oil prices become pivotal: If they’re too high, they could result in increased demand for coal, which would be disastrous from a climate standpoint.
In fact, if battery technology falters and oil production stalls, coal could make an obscure and expensive technology called coal-to-liquids economically viable. The technique was used in South Africa when it faced a global oil embargo and now is mature enough to be implemented on a global scale. The IPCC's worst-case scenario, released in August, assumes the use of coal-to-liquid technology.
Crucially, in this type of peak-oil scenario it doesn’t matter much what type of transportation policy the U.S. adopts. The global demand for gasoline will drive the increase in the use of coal-to-liquid technology, especially from Africa and India, as they continue to develop.
If, on the other hand, improvements in battery technology make electric engines competitive with internal combustion engines, then the falling cost of solar power will make oil uncompetitive as a power source. The only scenario in which oil production is economically viable over the long term is one where it is competing with coal-to-liquids technology, not solar power.
A temporary increase in oil and gas production is a crucial part of an overall U.S. climate policy that aims to reduce (and eventually eliminate) the need for oil and gas production. As Biden says, it seems ironic. But the alternative is to face the short-term risk of turning consumers in the developed world against climate policy, and the medium- and long-term risk of turning the developed world toward alternative coal technology. Neither of those risks is worth taking, and Biden should feel confident in rejecting them.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.
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