The Economic Crisis and the Environment

11/17/2008 05:12 am ET | Updated May 25, 2011

Given the magnitude and scope of the current economic crisis, the world will no doubt experience a significant economic downturn — of what degree and duration, no one can say — profoundly affecting all aspects of U.S. and international society. Of the many areas that will be impacted by the downturn, the environment stands out in particular. It's closely tied to the tempo of resource consumption, and significant efforts to ameliorate environmental decline will prove very expensive and out of reach for already-stretched budgets. The question thus arises: Will the crisis be good or bad for the environment, especially with respect to global warming?

To put this question in perspective, it is necessary to first look at the environmental situation prior to the crisis.

Gathering Crisis

By all accounts, the steady growth in the world economy — much of it driven by phenomenal economic expansion in China, India, and other nations — was producing a corresponding increase in demand for energy of all forms, especially greenhouse-gas emitting fossil fuels. According to the latest pre-crisis projections by the U.S. Department of Energy (DOE), combined energy consumption by all nations of the world was expected to grow by 22% between 2005 and 2015, from 462 to 563 quadrillion British thermal units (BTUs). Most of this increase, almost 90%, was expected to come from fossil fuels — oil, coal, and natural gas.

The result, not very surprisingly, was a dramatic projected increase in the emission of carbon dioxide (CO2), the leading source of climate-changing greenhouse gases. Again using DOE projections, total world emissions of CO2 were expected to increase by a frightening 22% between 2005 and 2015, from 28.1 to 34.3 billion metric tons. This increased rate of greenhouse-gas emissions would precipitate global climate change, resulting in persistent droughts, increased storm activity, and a significant rise in the sea level.

At the same time, however, the rising price of oil — itself caused by the sharp increase in demand — combined with growing awareness of the risks of global warming to create an unprecedented spurt in investment in alternative energy ventures. Many governments, energy firms, and venture capitalists have announced plans to spend vast sums on the development of climate-friendly alternative fuels and improved methods for obtaining energy from wind and solar power. In November 2007, for example, Google announced that it would invest hundreds of millions of dollars in the development of advanced renewable energy sources. These efforts, and others like them, wouldn't reverse the trend toward higher CO2 emissions between 2005 and 2015 but could set the stage for a dramatic turnaround in the years that follow.

How will the current economic crisis affect this picture? As in so many things, there's both good news and bad news.

The Upside

The good news is that economic hard times will cause people to drive less, fly less, and otherwise consume less energy, thus lowering expectations for greenhouse-gas emissions. According to the most recent projections from the International Energy Agency (IEA) in Paris, global oil demand in 2008 will be 240,000 barrels per day less than in its earlier predictions, and 440,000 barrels per day less than in its predictions for 2009. Many experts believe, moreover, that demand will drop even further in the weeks and months ahead as the economic crisis deepens and consumers around the world cut back on their travel and energy use — and the less oil consumed, the less CO2 emitted.

As petroleum consumption declines, the price of oil is also likely to drop — thereby discouraging investment in many costly and environmental hazardous energy projects.

Already, the price of oil has plunged by nearly half over the past three months, from $140 to $70 a barrel, and some experts see prices going even lower. Fifty dollars a barrel "is now within the realm of possibilities," according to oil analyst Stephen Schork. At these prices, it may no longer be profitable to advance some of the more technologically challenging energy projects with a significant environmental risk, such as the development of Canadian tar sands or Rocky Mountain shale oil. These projects might make economic sense when oil is $80 per barrel or more — despite strong objections from environmentalists — but won't attract support from investors when the price of oil slips much below this level.

The current economic crisis is closely linked with housing, and this too has a silver lining. Many dwellings built in the heyday of subprime lending were oversized homes in distant suburbs far removed from public transit, or second homes in Sunbelt vacation sites far from owners' primary residences. These houses consumed a lot of energy and necessitated long commutes. Now, many of these exurban/vacation homes are up for sale and it is doubtful that many of them will be occupied for a long time to come. People are staying where they are, moving closer to public transit, and flying less to second homes. This will also produce a substantial decrease in energy use and CO2 emissions.

The Downside

But there is a downside to all this as well. Most serious is the risk that venture capitalists will refrain from pouring big bucks into innovative energy projects. At an energy forum organized by professional services firm Ernst & Young on October 9, experts warned of a sharp drop-off in alternative energy funding. "The concept of alternative energy has a lot of momentum," says Dan Pickering, head of research for Tudor, Pickering, Holt & Co. Securities in Houston. "But lower oil prices make it harder to justify investment. At $50 a barrel, a lot of that investment will die."

Governments could also have a hard time coming up with the funds to finance alternative energy projects. Moderators at the presidential debates repeatedly asked both John McCain and Barack Obama what programs they would cut in order to finance the massive financial-rescue packages the Bush administration has engineered in order to avert further economic distress. Both insisted that their respective energy initiatives would be spared any such belt-tightening. It is highly likely, however, that costly endeavors of this sort will be scaled back or postponed once the magnitude of the financial rescue effort becomes apparent. The same is true for Europe and Japan, who have also pledged to undertake ambitious energy initiatives in their drive to reduce greenhouse-gas emissions.

Indeed, leaders of some European Union countries are calling for a slowdown in efforts to curb emissions of greenhouse gases due to the burgeoning economic crisis. Under a plan adopted by the EU in 2007, member countries pledged to reduce such emissions by 20% below 1990 levels by 2020, which is far more ambitious than the Kyoto Protocol. European leaders are scheduled to implement a detailed plan to achieve this goal by December of this year. But at a rancorous summit meeting of the EU heads of state in mid-October, Prime Minister Silvio Berlusconi of Italy and the leaders of some Eastern European countries indicated that due to the current crisis, they were no longer able to finance the high costs of attaining the 2020 goal and so weren’t prepared to adopt a detailed plan. "We don't think this is the moment to push forward on our own like Don Quixote," Berlusconi declared at the summit. "We have time."

At some point, the price of gasoline will fall so low that many drivers will once again engage in the wasteful driving habits they may have given up when the price of gas soared over $3 per gallon. This may not occur right away. But with crude oil at $70 per barrel, half of what it was in August, a corresponding drop in the price of refined products will eventually follow. And that could lead people to see cheap gasoline as the one bright spot on an otherwise dismal horizon.

It’s unclear at this point whether the crisis will do more good or more harm for the environment. In the short term, it will certainly slow the increase in carbon dioxide emissions. It will also cause a delay in developing environmentally hazardous projects like Canadian tar sands. But if the crisis also sets back the development of energy alternatives for any significant length of time, it will cancel out any of these positive developments. Many people are waiting and watching what happens in the global financial markets. Likewise, the verdict is still out on the ultimate impact of the crisis on the environment.