Climate change is not the only rationale for investing in clean energy. In recent years, a fairly prominent debate has emerged on the possibility that oil production may peak soon, so that oil prices could increase rapidly, as growing demand meets decreasing supply. Given the importance of oil in the world economy, this peak oil would wreak havoc across the globe, and especially in countries with inefficient transportation systems, such as the United States.
This debate is no longer of mere academic interest. In February 2005, the United States Department of Energy published the Hirsch Report, warning that peak oil could have severe implications for the United States unless the government implements decisive public policies to cushion the possible price shocks. The head economist of the International Energy Agency, Dr. Faith Bitol, also warned in August 2009 that peak oil may harm the world economy sooner rather than later.
I am not an energy economist, so I am not going to weigh in on the timing of peak oil. Since oil is a fossil fuel, I am going to discuss the relationship between climate policy and peak oil.
On surface, one might conjecture that peak oil will boost clean energy policies that are needed to protect the climate. Even if governments are unable to mitigate global warming, they must do something to avoid a total economic collapse in case oil prices increase rapidly. As a result, they should have powerful incentives to increase spending on renewable energies and conservation, especially in such sectors as transportation and chemicals that are fundamentally dependent on oil. If oil production peaks in times of rapid demand growth, the impacts will be immediate and dramatic, so the politically expedient course of action — burying your head in the sand — is not available.
Unfortunately, peak oil is also a threat if some countries decide to replace oil with synthetic fuels from coal. Since coal is much more carbon-intensive than oil, and coal supplies are plentiful in many countries (especially the United States), this myopic strategy could trigger a disastrous climate crisis. So if oil prices increase rapidly, climate campaigners might find themselves fighting against certain public policies instead of promoting new ones. The same goes for unconventional oil sources, such as oil sands that are plentiful in Canada.
There is an additional complication. Of all economic sectors, transportation is by far the most challenging for clean energy policy. It is not too hard to produce electricity from wind or solar with appropriate public policies, and industrial processes can be engineered to produce fewer greenhouse gases. But transportation is a challenge because developing substitutes for oil is difficult. If peak oil hits the world economy, politicians may unfortunately have powerful incentives to ignore climate considerations. Were we to face peak coal instead, solutions would be readily available.
These thoughts leave us with two key considerations. First, although reduce carbon emissions from transportation is hard, it is important to develop feasible solutions to reducing oil consumption, if only to avoid deeply harmful energy security policies. These solutions should not be evaluated under the assumption that oil prices average $50, as the solutions might be most relevant if oil prices average $250. Second, climate campaigners must prepare to fight myopic solutions to peak oil. Given the abundance of coal reserves, and the immense damage that burning coal causes, it is particularly important to be prepared for defense.