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Keeping It In the Ground

in Analysis/Opinion by

Is targeting the NL oil industry the most effective way to fight climate change?

On September 27, I took part in the climate strike march, the largest protest I have ever seen in Newfoundland. The crowd made one resounding demand: concrete action to reduce carbon emissions and fight climate change.

One proposal gaining traction is to scale back the NL offshore oil industry. The Provincial Government plan to double oil production has been widely criticized as being incompatible with progress on climate change and calls to “keep the oil in the ground” are growing.

The counter argument, made by NOIA and others, runs as follows. 

  1. The oil industry is important to the NL economy.
  2. If we don’t produce the oil here, it will just be produced elsewhere instead.  
  3. NL oil production requires less carbon emissions per barrel than alternative sources.

I think we can all agree that 1 is true. 3 is also true, though we are only a bit better than average. 

Less certain is point 2. If we choose to keep NL oil in the ground, will this actually reduce global oil production? Or will it merely be replaced by oil production somewhere else?

Sympathy for the Devil

Using a simple supply-demand model for the global oil market (see here for example) the answer boils down to how responsive consumers and producers are to changes in oil prices, what economists call “long run price elasticity.” There is a wide range of estimates of these elasticities in the economics literature, but a mid-range estimate is that producers are about twice as responsive as consumers to price changes. This means that if we were to unilaterally reduce production here, about 65 percent of that production will end up occurring somewhere else instead.

Overall we might expect that each barrel we choose to leave in the ground would reduce global emissions by about 150 kg of CO2. If we assume each barrel is worth about $50 to our economy, that works out to $300 per ton of CO2. Using different elasticity estimates (here, here), we get a range of estimates from $150 per ton to $1300 per ton.  

That is a lot more than the $20 per ton carbon tax we currently have (set to rise to $50 in 2022 unless the Conservatives win the upcoming federal election). It is even more expensive than carbon capture technologies, which are currently estimated to cost around $150 per ton. So it is pretty clear that keeping NL oil in the ground is a rather expensive way to cut carbon emissions. 

Incidentally, the math works out differently if we consider the dirtiest developments in the Alberta tar sands. Shutting them down would reduce global emissions by about 400 kg of CO2 per barrel, which works out to about $125 a ton.

There are good reasons to criticize the NL oil industry. It has shown appalling recklessness causing oil spills, death, and damage to marine life. The CNLOPB regulator can be too deferential to industry, and government officials often behave more like industry lobbyists than defenders of the public interest. But on the specific issue of climate change, I do not think the local industry deserves the opprobrium it sometimes receives.

Lower Consumption to Diminish Supply

Climate action at the provincial level is better focused on reducing local consumption. We can do this by pushing to “electrify everything” by converting the economy from fossil fuels to electricity. This can be encouraged through taxes, regulations, research, public investment, public awareness, and political pressure. 

The provincial government is belatedly realizing that electrification might help with fallout from the Muskrat Falls disaster, so have started taking it more seriously. We are the only province without a level 3 electric vehicle charge network, but one from St. John’s to Port-aux-Basques should be completed next year. We should be doing more to encourage conversion to electric vehicles and to improve fuel efficiency of gas vehicles. 

The takeCharge energy efficiency rebate program was recently extended to apply to homes that rely on oil heat. Electric heat pumps are very popular, but cheap financing for heat pumps is currently limited to houses that already rely on electric heat and should be extended.

Our current carbon pricing regime is reasonably good (home heating oil is exempt, which is a mistake). I would feel a lot better about it if the provincial government were committed to sticking with the regime, including planned price increases, whatever happens in the upcoming federal election. This is an area where I think political pressure could be effective.

To summarize: “keep it in the ground” is an excellent goal at the global level. The best way to contribute to that goal locally is by consuming less oil, thereby reducing demand, driving down global oil prices, and making further production unprofitable.

Photo by Graham Kennedy.

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