CAMBRIDGE – Russia’s invasion of Ukraine has amplified the importance of national-security considerations in Western countries’ energy policies. At the same time, governments must continue to focus on reducing environmental damage – in particular, on cutting greenhouse-gas emissions. Both goals, geopolitical and environmental, are urgent and should be evaluated together.
These two objectives are not necessarily in conflict, as some believe. There are plenty of energy measures the West can adopt that would benefit the environment and further its geopolitical aims. The most obvious steps, especially for the European Union, are sanctions that reduce demand for imports of fossil fuels from Russia.
A review of different areas of energy policy reveals further options. Here, I emphasize the dos and don’ts that seem to be clear win-win choices, as opposed to policy decisions where tradeoffs are acute and reasonable observers may disagree.
The first policy choice is a blunt one: Governments should not prolong the life of coal and should withdraw coal subsidies. The International Monetary Fund has estimated that global energy subsidies (including for oil and natural gas, as well as coal), at either the producer or consumer end, exceed $5 trillion per year. Direct US fossil-fuel subsidies alone have been conservatively estimated at $20 billion annually.
Next, policymakers should regulate natural gas. Continental Europe has made itself dependent on Russian gas, and US shipments of liquefied natural gas can help substitute for it. But if there is to be a renewal of the fracking boom, which actually reduced total US carbon dioxide emissions from 2007 to 2012, careful regulation should drastically reduce the amount of methane released into the atmosphere as part of the process. Fortunately, this regulation need not be expensive.
Not subsidizing oil also is key. Global petroleum subsidies amount to an estimated $1.5 trillion per year. If the United States must open more federal lands to drilling, it should no longer offer leases to drillers at below-market rates.
Western governments should also tap existing stockpiles, as US President Joe Biden did recently by announcing an unprecedented release of 180 million barrels of oil from the country’s Strategic Petroleum Reserve. While presidents have in the past sometimes used the SPR for political purposes, Biden’s decision has a genuine national-security justification, because the release can help to offset some of the current temporary supply shortfall.
Some argue that the SPR is not big enough to put a dent in global oil prices. But the US move has been accompanied by releases of similar emergency reserves by the United Kingdom, Germany, and many other countries, totaling 240 million barrels over the next six months. Some economists also argue that the US does not need an SPR, now that the country is no longer a net importer of oil. Even if one agrees, this would not be an argument against releasing reserves now, but rather against restocking the SPR when the crisis has passed.
In addition, governments should raise, not lower, taxes on retail petroleum products. Several US states have recently declared “gas tax holidays” to cushion consumers from the effects of high global oil prices. Other countries also are trying to shield their citizens from energy-price increases. But these measures, while understandable politically, are terrible economics: They undermine drivers’ incentive to economize on their fuel consumption, thus benefiting Russia and hurting the environment.
As they stop promoting coal and oil, governments must keep up the momentum behind renewables. Continuing the recent trend toward wind and solar power is important for both geopolitical and environmental reasons. Government subsidies for renewables, including to support research into storage technology, can play a role. But the US and the EU should also take the less popular step of lowering, not raising, their tariffs and other protectionist barriers affecting imports of solar panels and wind turbines – imports that have helped bring down renewable-energy costs.
At the same time, governments need to steel themselves to extend the life of nuclear power plants. One of the most misguided current energy policies is Germany’s surprising choice to proceed with plans to close its three remaining nuclear plants later this year, rather than trying to reopen the three that it closed in December. The country’s decision in 2011, in response to the Fukushima disaster, to shut down all of its nuclear power over the course of the subsequent decade has led to increased dependence on coal and Russian fossil-fuel imports, and to higher CO2 emissions.
Other countries assess the pros and cons of nuclear power differently. Fewer deaths resulted from the Japanese nuclear accident than occur every day from mining or burning coal. The UK now plans to build eight new nuclear reactors this decade, partly to reduce its dependence on oil imports in the wake of Russia’s invasion of Ukraine.
The best way to reduce demand for fossil fuels is through a carbon tax or auctions of tradeable permits (with the revenue used to reduce distortionary taxes, for example). For now, introducing such price mechanisms in the US is politically impossible. But, 20 years ago, we said the same about the EU, and today it has the Emissions Trading System.
Cutting demand for hydrocarbons hurts the earnings of all oil exporters, not just Russia. But while some of these producers are innocent bystanders, some are petrostates that are not entirely worthy of support from the US and its allies. It is not coincidental that so many oil-exporting countries are autocracies. Many studies of the natural-resource curse have concluded that societies built on the wealth of commodities in general, and oil in particular, are prone to authoritarianism.
In the long run, it might be better all around if the fossil-fuel sector were to shrink worldwide. As Western governments seek to devise energy policies that are both environmentally and geopolitically robust, that thought should help to concentrate minds.
Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University.
Copyright: Project Syndicate, 2022.