Low fossil fuel prices tend to hurt the economic viability of low-carbon energy alternatives, and thus are generally regarded as a negative development in the fight against climate change. When it comes to the emerging class of carbon dioxide removal (“CDR”) climate change solutions, however, falling fossil fuel prices could prove quite positive, offering new opportunities for development. Here’s a few reasons why:
1) Low oil prices increase the imperative for OPEC and other countries with large oil reserves to invest in developing CDR solutions. Recently analyses, such as this one in the journal Nature, suggest that many fossil reserves will be “un-burnable” in the name of avoiding climate change. Increasing expectations that fossil reserves are “un-burnable” changes the nature of the collective action problem in which OPEC finds itself regarding its oil reserves. The greater the threat of climate regulations that prohibit oil use, the smaller the incentives become for OPEC to wield its cartel power to drop production to prop up long-run oil prices. In the language of game theory, the repeated nature of the oil extraction “game” that encourages OPEC to collude to prop up oil prices simply evaporates in a world that bans oil in order to fight climate change. This shift in incentives can help explain OPEC’s new position focused on maintaining market share instead of high prices, as oil producers race to extract hydrocarbon molecules even in the face of declining prices — and short-term revenues.
Cost-effective, scalable CDR, however, would moderate pressures to extract fossil reserves as quickly as possible. CDR potentially enables the global economy to overshoot its carbon budget, where a greater fraction of “un-burnable” fossil resources could be consumed so long as the associated emissions from those fuels are accompanied by the installation of CDR projects. Today, it seems highly unlikely that CDR will ever be inexpensive enough to enable business-as-usual use of fossil fuels, but CDR could extend expectations about viability of fossil fuel extraction enough for OPEC to return to its focus on maintaining price levels, and thus increasing their wealth considerably in the process. The enormous upside to a price-maintenance strategy compared to a market-share strategy creates a large financial incentive for oil-rich states to invest in developing CDR solutions, and the specter of indefinitely low oil prices increases the chance of large investments in R&D funding for CDR solutions by these actors.
2) Low oil prices mean difficult-to-decarbonize sectors of the economy — like long-haul trucking and aviation — get even more difficult to decarbonize on a relative basis, increasing the demand for indirect GHG abatement options (such as CDR). As oil prices drop, biofuels and transport electrification businesses become less economically attractive compared to using fossil fuels on an unsubsidized basis. As a result, direct decarbonization of these sectors would require increased government support, making the development of indirect methods of reducing emissions that might require less support in the long-run increasingly attractive.
3) Low fossil fuel prices make comprehensive carbon regulation more politically feasible (as Larry Summers argues in this recent op-ed), which could increase funding opportunities for the development of CDR solutions. For example, if gasoline prices have dropped by $2/gal in the past six months, a carbon tax that increases gasoline prices by even as much as $0.50 will still feel “inexpensive” compared to consumers’ expectations. Such a carbon tax could provide a huge boon to the CDR field if even a small fraction of the revenue it raised was used to incentivize and fund R&D for CDR projects. Without dedicated revenues from carbon regulations, the CDR field is left to fight an uphill battle against other GHG abatement approaches for the limited public funding available for energy/environment technology R&D.
It’s worth noting that low oil prices aren’t a unanimously good sign for the CDR field. Companies that rely on producing biofuels and/or synthetic hydrocarbon fuels as a pathway to carbon removal will face increasing economic challenges with low oil prices. But overall, the CDR field could see a number of opportunities from continued low oil prices, and can take advantage of this new economic climate to push forward initiatives that help catalyze development of the field.