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Cheap Oil's Make-Or-Break Moment for Clean Energy

12/11/2014 09:43 am ET | Updated Feb 10, 2015
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The plunge in oil prices may be good for consumers and the global economy, but it could also encourage greater use of fossil fuels and thereby hurt efforts to make our planet's energy system more sustainable. Policy makers from around the world -- many of whom are meeting this week at UN climate talks in Lima -- can prevent this by taking advantage of cheaper oil to make meaningful changes in the way we price energy. But this moment will not last forever: the time to act is now.

Today's bear market in oil is merely reflecting the changes in supply and demand that were set loose by the bull market of the last several years. The more than 50 percent increase in U.S. oil production in recent years resulted at least in part from high prices. Similarly, prices played a key role in efforts to make cars and trucks consume less fuel, which has translated into lower oil demand growth worldwide.

As supply has outpaced demand, oil prices have fallen nearly 40 percent from their June peaks. Some observers are likening this era to the bear market in oil that began in the mid-1980s. Back then, policy makers in certain countries could have taken advantage of the plunge in oil prices to tighten vehicle fuel-efficiency standards, which would have protected motorists from the inevitable run-up in prices. But instead they generally took a laissez-faire approach, and consumers flocked to larger, thirstier vehicles. When oil prices began rising, owners of those vehicles paid dearly at the pump.

What a difference a protracted spell of high prices makes. Formerly a laggard, the United States raised fuel efficiency standards for new light-duty vehicles by more than 14 percent between 2008 and 2013; standards will be tightened further in the years to come, reducing U.S. dependence on oil by 2 million barrels a day by 2025, according to the U.S. government. This will improve U.S. energy security and curb emissions of the greenhouse gases that are causing the planet to warm. And if past experience offers any lessons, now is not the time to ease up -- especially given the pressing need to transform our planet's energy system.

With its heavy reliance on fossil fuels, the current system is on course to deliver at least a 4-degree Celsius increase in global temperatures if no changes are made. It is no secret that we need radical action, but efforts thus far have been sluggish at best. In the International Energy Agency's annual assessment of efforts to transform the energy system, renewables represent the only bright spot in an otherwise-bleak picture of clean-energy progress.

But now there is a ray of hope: with the drop in oil prices delivering a shot of economic stimulus to consumers around the world, policy makers have leeway to take actions that even a year ago would have been unthinkable. It all depends on national circumstances, of course, but two areas spring to mind. The first is eliminating subsidies to fossil-fuel consumption. In 2013, governments around the world spent $550 billion on these subsidies, which encourage waste. Reforming such subsidy schemes is difficult, as the short-term costs imposed on certain groups of society can be burdensome and induce political opposition. But such opposition may well be muted now, in the current climate of lower oil prices, than it would have been a year ago.

By the same token, policy makers in major energy consuming countries should take advantage of the oil market's collapse to introduce carbon pricing, taxes or low-carbon mandates, or to strengthen existing schemes. Such actions would encourage more efficient use of energy, would boost the economic case for carbon capture and storage, and would promote low-carbon energy sources such as renewables and nuclear power. Moreover, higher taxes on transport fuels would help finance clean energy research, development and deployment. If such schemes are designed properly, and put in place in an environment of lower energy prices, economic discomfort can be minimized. Indeed, many studies suggest they can yield a net economic benefit.

The worst course of action would be complacency in the face of low oil prices. We saw this 30 years ago, but back then the prospect of climate change barely registered as a policy concern. Today we know otherwise: policy makers must keep a long-term perspective. They have a once-in-a-generation chance to get us back on track. Let's hope they seize this moment.

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Maria van der Hoeven is executive director of the International Energy Agency (IEA), an autonomous organisation which works to ensure reliable, affordable and clean energy for its 29 member countries and beyond.