LOW OIL PRICES and THE NEW CLIMATE ECONOMYOpportunity or constraint?Luca De LorenzoStockholm Environment Institute

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Context: Our energy system is built on fossil fuels

Where do lower oil prices leave us in a transition to a low carbon economy?

• Fossil fuels provide ~86% of global energy

• Stable carbon intensity over the last 3 decades

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Firstly cheaper oil helps the global economyAlthough with uneven effects between consumer and producer countries

0,0

0,2

0,4

0,6

0,8

1,0

2016

0,8%

2015

0,7%

Global GDP points increaseThe world uses approx. 90 million bbl per day...

...so an oil price of $50, rather than $100 per bbl...

...would save consumers $1,6 trillion

0,3%0,2%

However, there are still many drivers that justify a move beyond fossil fuels...

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Volatility hurts the economy

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• Increase decision uncertainty

• Delay business investment

• Costly reallocation of resources

Cost of oil as % of GDP

Reducing exposure to energy price volatility has economic value

7,6%

0,8%

Source: BP Statistical Review

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We should not bank on low oil prices

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• Predictions have hystorically proven wrong

• OPEC could change sentiment

• Global economic activity could pick up again

• CAPEX spending slashed by majors

• Varied outlooks already out there

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We should not deny fossil fuel subsidies

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Source: Koplow, 2014

Accoding to the International Energy Agency, fossil fuel subsidies:

Reached $550 billion value, 2013

Impose a heavy burden on state budgets

By 2020, can represent 0,7% of global GDP

Extremely inefficient way to support the worse off

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Recognise that renewable costs are decreasing fast

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100

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2020 20352030

2015 H1

x2.7

x3.6

x2.6

20120

1,000

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203520302020

-32%

-53%

2015H11

-56%

2012

2009F

2014F 2014F2009F

Global forecast of CAPEX for utility scale solar PV installations, USD/kW

Global forecast of cumulative installed solar power capacity, GW

“The greatest shortcoming of the human race is our inability to understand the exponential function.” Albert A. Bartlett

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Co-benefits have high value and are not priced inParticularly relevant in the oil dominated transport sector

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How air pollution has economic costsEach year of life cut short in turn reduces the GDP of that country. Productivity is further reduced by lost work days due to sickness

Chronic lung and heart diseases are caused by PM2.5 inhalation, these in turn cost countries millions in health care

Wheat crops in India were 36% lower in 2010, of which 90% is attributable to air pollution

Cost of paying for damages associated with extreme weather events has risen by 60% over the past 30 years in Europe

Extreme weather damage

Agricultural yield loss

Health-care costs

Labour costs

3.7%UK

Germany

USA

4.5%

India 6.0%

1.5%

5.8%China

Estimated costs (% GDP)

Source: WHO 2014 , New Climate Economy, 2014, OECD, 2007

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We should reflect on signals from long-term investors

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• Reallocation of capital, both within companies and at market level

• Potential for fossil fuel assets to become ”stranded”

• Institutional investors becoming more active shareholders

• Long term players (pension funds, insurances, central banks) increasingly considering climate risks

“The exposure of UK investors, including insurance companies, to climate shifts is potentially huge”

Mark Carney, Governor Bank of England

In order to fulfil long-term liabilities, insurers like Allianz need stable investments and long-term yields – and this is exactly what wind and solar farms have to offer”

David Jones, Head of Renewables at Allianz

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So are low oil prices an opportunity to correct course?

Fuel price volatilityRenewables getting cheaper

Fossil fuel subsidies

Investors concernsCo-benefits drivers

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Take advantage of low price to reform energy markets

Remove fossil fuel subsidies Introduce a price on carbon

• As many as 27 countries are now undertaking reforms

• 40 countries + over 20 jurisdictions have carbon pricing• Another 26 countries/jurisdictions considering

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Play it safe and take a long-term view despite low price

Keep the investment momentum in renewable energy

Source: McCrone et al., 2015

Global renewable energy investment (US$billion)

• $270 billion in 2014

• 35% more capacity than 2011

• Cross over, more RE capacity addition than fossil fuel in 2013

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Realize that a low carbon transition can help reduce pressure on fossil prices in the future

• There are plenty of reserves already, oil, gas and coal – not all might be developed (stranded assets)

• Current lower prices are scaling back investments in further developments and exploration

• Opportunity to recalibrate investment strategies and maintain steps to a low-carbon economy

• Lower future demand vs. BAU – outlook for lower prices (IEA models as much as 35% lower in a 2C scenario)

• Abundance of fossil fuels, questioning development of high-cost oil resources

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Concluding remarks

• Oil (and fossil fuels) still dominate the energy mix and lower prices are a welcome help to the global economy

• However, we should not allow this to derail our transition towards a better, more sustainable energy system as the long term economic benefits of structural changes to economies and energy systems remain valid

• In fact we should see this as an opportunity to reform our energy markets

– True costs of fossil fuels and reduce their subsidies– Introduce a price for carbon– Target some of the long lasting co-benefits

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Thoughts?