Renewable energy could pay the price for fuel crisis
Current rising energy costs caused by Covid-19 could potentially stop the burgeoning renewable energy movement in its tracks and revert its progress.
The Covid-19 pandemic has led to many unforeseen consequences, and right now we may be approaching one of the biggest: the possible neutering of the green energy movement. Prices of fossil fuels are rising sharply, and most of the world is responding by trying to get those prices back down again.
Voters might end up bitterly opposed to ever seeing more expensive energy again. That poses a problem for the adoption of renewable energy because, during the transition away from fossil fuels, many forms of energy are likely to cost more.
To rewind just a bit, three events have come along at the same time. As part of a long-term structural trend due to political pressures and investment risks, the West has been cutting back its investments in fossil-fuel energy before truly significant quantities of renewables have come online.
Next, the earlier stages of the pandemic blunted energy demand, leading to much lower prices and discouraging further spending on energy capacity, including in the natural gas sector.
Finally, due to vaccines and activist fiscal policy, the economic recovery came more rapidly than had been expected, pushing up energy costs. In the UK, for instance, natural gas prices have shot up 700 percent as of late.
American elites like to argue for a carbon tax and other means of raising the price of carbon emissions, and I fall into that camp myself. Yet higher energy prices are extremely unpopular with many voters. A recent study found that most Americans would vote against a mere $24 annual climate tax on their energy bills. Many countries now have to ask themselves if they really are ready to start paying the bills for a transition away from carbon.
The renewable energy movement has continued to grow in good and useful ways, but low prices, until recently, for energy of all types might have left consumers with too-rosy a picture of how much they will pay for fuel as refineries and coal mines are phased out before alternatives including solar and wind power become widely available.
It is not helping matters that the Biden administration has been playing a two-sided game. Policies strongly discourage domestic producers from adding fossil-fuel capacity, and indeed those investments remain depressed. Perhaps that is how it should be. Yet when it comes to global capacity, America is talking and playing a very different hand.
For instance, the Biden administration has criticised OPEC for the insufficient production of crude oil. National security adviser Jake Sullivan said bluntly: "At a critical moment in the global recovery, this is simply not enough." That kind of policy talk is hard to square, coming from the same government that has revoked permits for the Keystone XL pipeline, limited oil and gas leases on federal land and in Alaska, and used the Endangered Species Act to limit energy development on private lands in the West.
The federal government's strategy seems clear. It is discouraging fossil-fuel capacity in the US and Canada, but to keep energy prices low it will tolerate and indeed encourage high fossil-fuel spending in other, more distant nations. That would give the US some domestic 'trophies' in the fight to limit fossil fuels, yet without higher energy prices for the world at large.
The problem is that the same mix of policies will not do much to limit overall carbon emissions. It will hurt American industry, by penalising domestic energy production and also damage US energy independence.
The optimistic take is that the political desire for lower oil prices is temporary and will vanish in a year or two. But I am worried that the opposite scenario is unfolding. If there is any time to introduce higher energy prices, it is during the chaos of a pandemic, when there is an easy scapegoat.
If America flinches from accepting higher fossil-fuel prices now, politicians might learn the lesson that such prices will never be popular. That, in turn, will encourage continuing investments in fossil fuels around the world. It could be that we end up with both more renewable energy and more fossil-fuel energy, which hardly will solve climate change problems.
Europe's natural gas supply crunch has spurred a scramble for coal to have enough on hand for home heating this winter. Maybe voters will protest such environmentally unfriendly developments, but I would bet against that. And that is for a region at least superficially more 'green-friendly' than the US. Germany even has an entire Green party, one that is likely to join the governing coalition.
I am reminded of St. Augustine's statement: "Lord give me chastity and self-control – but not yet."
The true toll from the pandemic continues to rise and to come in ways that surprise us. But in this case, maybe the pandemic is teaching us how things really were all along.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.