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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Energy Prices And Climate Concerns Clash At COP26

  • COP26 has already caused plenty of confusion, with countries pledging to limit the rise of global temperatures while also calling for more oil and gas production
  • The recent energy crunch could not have come at a worse time for COP26, with governments determined to fight climate change and lower energy prices
  • Businesses are becoming frustrated by mixed messages and the lack of clarity, struggling to set long term strategies when the policies change so rapidly

This weekend, the leaders of the 20 largest economies in the world pledged to limit the rise of average global temperatures to 1.5 degrees Celsius from pre-industrial times. Also this weekend, U.S. President Joe Biden urged the oil and gas producing members of the group to increase output amid soaring prices. 

And he wasn't the only one.

The 1.5-degree commitment and the call for more fossil fuel production are so at odds that they would confuse anyone, especially since the climate crisis is routinely referred to as existential. And the action needed on this crisis, repeatedly emphasized by all reputable agencies and governments, is being hailed as urgent. So how does a pledge to limit global temperature changes square with calls for more oil production?

"We commit to tackle the existential challenge of climate change," G20 said in a draft communiqué, as cited by Reuters on Friday. "We recognise that the impacts of climate change at 1.5 degrees are much lower than at 2 degrees and that immediate action must be taken to keep 1.5 degrees within reach."

Indeed, the 1.5-degree scenario is the more ambitious one. As such, it is this scenario that has been seen by some scientists as already impossible to achieve. After all, this scenario would require a reduction of global greenhouse gas emissions by as much as 50 percent over the next nine years and to net zero by 2050. The G20 leaders, however, made no firm commitments as to deadlines, only saying, per news reports, that it would aim for net-zero "by or around mid century".

If emissions must be slashed so much and so quickly, then the call for more oil and gas now begins to sound even stranger as it goes against the G20 pledge. 

The reason for such a confusing call, of course, is that energy bills begin to weigh heavily on households.

In France, some are struggling to pay their bills even though France gets more than two-thirds of its electricity from its nuclear power plants. In Germany, inflation surged to the highest level in 28 years because energy prices rose by 18.6 percent last month, making everything more expensive. During that month, the German government decided to scrap a renewable power fee that was designed to trigger more wind and solar capacity that would alleviate the utility bill burdens on households.

Unhappy households contain unhappy voters, so the call for more oil and gas production - and accusations towards OPEC+ that the energy price surge is its fault - are understandable, coming from elected officials. Yet environmentalist organizations such as Greenpeace are already unhappy with the G20 commitment, and they are made up of voters, too.

One argument that the politicians could use in this situation is that the calls for more oil and gas are only a short-term solution to the energy crunch problem and once prices settle, governments could double down on efforts to wean their countries off coal, oil, and gas. This, judging by climate activists' recent protests, will not go down well. Meanwhile, there's pressure from the business sector, too, as companies struggle to understand what specific steps the net-zero commitment of governments would entail.

The challenge for businesses, according to a Financial Times report, is meeting shareholder expectations, which are changing faster than many companies can adjust to, it seems. The report gives an example with BHP's rapid adoption of several rounds of increasingly ambitious climate commitments, only to see 17 percent of its shareholders vote against them last month.

"Expectations are changing really, really fast," the miner's vice-president of sustainability and climate change told the FT. "No matter what we do, the minute we put it out, it's out of date."

Yet the same seems to be happening with energy prices, even in the United States, which is relatively self-sufficient when it comes to oil and gas. Yet even there, fuel prices have climbed up so high they are becoming an increasingly thorny issue for Washington, prompting not one but several calls to OPEC to increase oil production.

By this weekend, the problem escalated so much that Energy Secretary Jennifer Granholm directly accused OPEC of being responsible for higher U.S. prices at the pump.

"Gas prices, of course, are based on a global oil market. That oil market is controlled by a cartel. That cartel is Opec," Granholm said on NBC's Meet the Press. "So that cartel has more say about what is going on."

The Financial Times notes that gasoline prices have increased by 40 percent since Joe Biden entered into office, adding to an already sizeable inflation burden for households amid disruptions in supply chains and labor shortages, making for even more unhappy voters.

It seems that at this point, even without direct calls for more oil and gas supply, not only the G20 but no government with climate commitment plans has a useful move. On the one hand, there are the voters with their energy bills to think about. On the other, it's the climate activists and their followers who are deeply worried about the immediate future of the planet to try and keep happy.

Throw in ESG investors and major asset managers who are also very concerned about the planet but wouldn't mind making a profit out of net-zero commitments. By chasing that profit, they affect oil and gas investment plans, contributing to tight supply: this is exactly what happened to coal and led to the current price surge. The end result is perfect chaos that neither solves environmental problems nor makes the supply of fossil fuels more secure. 

With this chaotic approach, it looks like COP26 may have failed before it even started.

By Irina Slav for Oilprice.com

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Leave a comment
  • Daniel Kinsley on November 01 2021 said:
    "The reason for such a confusing call, of course, is that energy bills begin to weigh heavily on households." Correction, Energy policies begin to weigh heavily on households. Governments are to blame & thus cannot supply the solutions. They have to get out of the way of free enterprise & stop playing god. They cannot & will not EVER control global weather conditions.

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