High oil price a good way to reduce global warming

Anthony Rowley, Business Times 13 Jun 08;

COMING from a former diplomat, the call last weekend by Australian prime minister Kevin Rudd to G-8 energy ministers meeting in Japan to 'hold a blow-torch' to Opec and force the cartel to increase production could not have been less diplomatic, if not to say less egregious. A return to cheaper oil might boost economic growth in the short term but it would also set our already sick planet on a course towards destruction.

A high oil price is the most effective form of 'carbon tax' and the only one likely to bring about what Japanese Prime Minister Yasuo Fukuda described this week as a needed 'carbon revolution'. It is the ultimate market solution and, as advocates of economic liberalism are so fond of telling us, markets operate more efficiently than governments in allocating resources.

Consider what is happening already as a result of the de-facto tax imposed on energy consumption by the sharp rise in oil prices. Airlines are being forced to cut flight schedules, gas-guzzling SUVs are being abandoned in favour of smaller vehicles and, most importantly, the search for non-carbon or minimum carbon forms of power generation and transport has moved into high gear.

Painful and costly though such a transition may be in the short to medium term, it is surely better that it be enforced through the price mechanism than through more complex forms of bureaucratically administered carbon taxes, through carbon trading mechanisms by which industrial firms can 'buy' the right to emit carbon in return for offsetting actions elsewhere, or through 'cap and trade systems' etc.

Thanks to the efforts of environmental champions from Al Gore downwards, a great many people now take the problem of global warming very seriously. Many, indeed, are already suffering from its effects. But they are confused about how to respond to it, and many fail to understand the complexities of proposed official solutions.

Take, for example, the fat (640-page) report issued last week by the International Energy Agency (IEA) in Paris. Bursting though this was with data on global warming, energy conservation, alternative energy sources and so on, it was hardly the kind of document that will have popular appeal. It is based largely on the premise that a high 'price' must be put on carbon, so that the cost of emitting carbon dioxide or CO2 becomes prohibitive.

But pricing carbon via specially created markets is a complex exercise and one which, if the recent past is any guide, could take a long time - too long - to be accepted, let alone implemented.

For the moment, the market is pricing carbon through the cost of oil, and Mr Rudd's simplistic suggestions could only damage this process, if indeed they had any affect at all. As the G-8 energy ministers acknowledged, a host of factors including the lack of investment in new refinery capacity is limiting the supply of oil.

Other factors such as commodity speculation and the weak American dollar are contributing to the high cost of oil but none of these could have caused the dramatic surge in prices that we have seen over the past year had not the demand side been conducive to this rise. It is not so much extraordinary that the price of oil should have catapulted to current levels as that this was not foreseen, in the light of industrial revolutions in the BRIC (Brazil, Russia, India and China) countries and in other parts of the developing world.

The market is intermediating between the new balance of supply and demand via the price mechanism and it is no more possible to mask this effect for any length of time than it was possible for governments in Asia and elsewhere to try to shield their populations from market reality by subsidising the cost of energy in various ways. The high oil prices focus our minds on the need to conserve energy and to find alternative sources in a way that no end of official reports and contrived carbon pricing mechanisms can.

Yes, the oil price represents a 'regressive' tax in the sense that high energy costs weigh most heavily on the poor in terms of cooking and heating costs. But the impact on petrol prices strikes also at the more wealthy, especially those whose consumption is profligate by virtue of using gas-guzzling vehicles, or jet-setting around the world leaving a trail of pollution in their wake.

Some may argue that the world can better afford the cost of energy conservation (US$45 trillion if CO2 emissions are to be reduced to half their current levels by the year 2050, according to the IEA) if the global economy is growing strongly, and that high oil prices prevent this. But against this, one can argue that nothing focuses the mind like the threat of execution (effective destruction of the planet) and that the greatest innovations come in time of war (against global warming).

If we seek to 'kill the messenger' (high oil prices), we will fail to see the enemy at our gates until it is too late.