Climate change and peak oil

Beliefs come in clusters. If someone believes in action on climate change, they are more likely to support unions, gay marriage and progressive taxation. To me, one strange pair of beliefs is that on peak oil and climate change.

Take this quote by the Australia Institute in Running on Empty? The Peak Oil Debate: As a result of peak oil, “skyrocketing oil prices are likely to result in severe disruption to economies, with central banks raising interest rates to slow runaway inflation, people out of work, famine, hunger and serious civil unrest.” This is a common perspective held by those concerned by peak oil. Yet many of the same people will advocate strong carbon emission cuts and suggest we can do it in a way that creates jobs and is good for the economy. Why can we make a huge reduction in fossil fuel use by choice, yet not navigate an externally imposed constraint?

There are some ways to reconcile these beliefs. Peak oil may result in a shift to coal, with a higher emissions profile (although, peak coal is now on the agenda). Others consider it a matter of planning – we can deal with each if we plan. But for a 40 per cent per cent emissions cut by 2020, supporters of such cuts tell us that the solutions are largely on the table. Why are they not available for when we reach peak oil?

Having said that, the converse combination of beliefs is more difficult to reconcile. Many people who believe in the power of  markets will argue that when the oil supply peaks, prices will adjust, substitutes will emerge and like the end of the stone age or the bronze age, we will not stop using oil because we run out. Yet many of these same people will decry the potential carnage to the economy if government takes measures to reduce emissions. Why cannot the market adapt to these regulatory responses in the same way as a natural shortfall or absence? If government restricts offshore exploration (without implying that this is the best policy response), is the long-term effect any different to there being no new offshore oilfields to discover?

Again there is some possible reconciliation. The current price could be argued to already contain all relevant information about supply. Government may be clumsy and overly restrictive in its response to climate change. But would an alternative policy response be to advocate a climate change policy that creates the right incentives in the least restrictive way? There are few who take that position (as I blogged before).

As for my perspective, with the right price on carbon and room to innovate within that price, a shift to a low-carbon economy will not be painful, particularly if revenue from carbon replaced other taxes. With peak oil, a high oil price is no different from a tax on carbon. There is some unpredictability in the price of oil (in the same way that price would vary under a cap-and-trade regime), but within the constraint, there will be innovation and a move to whatever form the new energy regime will take.

I will add a final proviso, however, that my perspective relates to the effect of these issues in the developed world. Short term oil price shocks and constraints on carbon intensive energy use may play out very differently in a developing country. The right response in that case is a much more difficult question.

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