Last week, leaders of the world agreed on transitioning away from fossil fuels, tripling the global capacity for renewable-energy , and doubling the annual rate of energy-efficiency improvements.
Intense debate took place around the language used to express the transition away from fossil-fuels, with green activists and interests demanding the “phasing down” or even “phasing out” of fossil fuels by mid-century. This view is supported by mounting scientific evidence showing that a scenario limiting global warming to 1.5C necessarily implies leaving 90% of current coal and about 60% of current oil reserves unextracted by 2050. Today, fossil-fuels still account for 80% of world energy demand, and Europe is still struggling to move away from Russian gas.
Yet, climate policies announcing a phasing-out of fossil-fuels by mid-century could have unexpected consequences and could even backfire due to a phenomenon coined by economists as the “Green Paradox”: if oil producers expect the end of fossil-fuels by 2050, they will have incentives to accelerate extraction today. This immediate increase in oil production would lead to lower oil prices, which would tend to further increase oil consumption. This forward shift in extraction could therefore lead to a boost in emissions in the short-run and an increase in long-run, cumulative climate damages.
A better and more reliable approach is to intensify our efforts to reduce demand for fossil-fuels. Accelerating the clean energy transition is key to making our economies less dependent on those fuels. The good news is that a report from the International Energy Agency shows that the demand for fossil energy may peak by 2030, thanks to decarbonisation policies implemented in developed countries. Reducing demand will also imply feedbacks onto fossil-fuel markets: less demand for oil leads to lower world oil prices and potential increases in consumption in other parts of the world. Yet, reducing demand provides both opportunities to foster the market for low-carbon technologies and to lower fossil-fuel subsidies.
The focus on fossil-fuels at COP28 – to be expected when the summit takes place in a petro-state – has overshadowed important aspects that received too little attention, in particular the financing for adaptation. The financial commitments to the Loss and Damage fund are disappointing with only $700 million in actual pledges. At the start of COP28, a group of students at the Institute played the World Climate Game, a simulation game of the UNFCC international negotiations. The game clearly showed that it is essential to keep developing countries around the negotiation table if we want to keep global warming below 2C. In the words of one of the participants from the developing country group: “If we’re going under, you’re coming with us.”