Victoria Ekstrom High

On the heels of a historic climate agreement in Paris, a new study published in the Journal of Economic Perspectives sheds light on the world’s ability to stop using fossil fuels. Its conclusion: fossil fuel consumption is likely to continue growing without clear and decisive global action to introduce an adequate price on greenhouse gas emissions and increase research and development spending toward clean energy technologies. The study was co-authored by Thomas Covert and Michael Greenstone at the University of Chicago, and Christopher R. Knittel at the Massachusetts Institute of Technology.

As Greenstone, the Milton Friedman Professor in Economics at the University of Chicago and Director of the Energy Policy Institute at the University of Chicago (EPIC), explains, “counting on the fickle finger of fate to point the way to cheaper low-carbon energy sources without market and policy forces pushing us there mistakes hope for a strategy.” In measuring their impacts on warming, the study finds that burning the fossil fuel reserves known to us today would increase global temperatures by 10°F to 15°F. What is more, those numbers do not account for advances in fossil fuel extraction techniques that could make resources we cannot even extract today economically accessible, such as oil shale and methane hydrates, potentially adding another 1.5°F to 6.2°F of warming.

The economists explored whether market forces alone would cause a reduction in fossil fuel supply or demand. By studying the history of fossil fuel exploration and technological progress for both clean and dirty technologies, they reached the conclusion that it is unlikely that the world will stop primarily relying on fossil fuels any time soon. As one piece of evidence, the economists studied the amount of reserves in the ground over the last three decades compared to world consumption. For the last 30 years, known reserves of oil and natural gas have grown at least as fast as consumption.  As a result, the world has always had 50 years of future oil and natural gas consumption stored as reserves in the ground.  This was equally true in boom years (when prices were high) and bust years.  

Technological progress, such as the development of hydraulic fracturing and the ability to extract oil from tar sands, is at least partially responsible for a long-term pattern of consistent worldwide growth in fossil fuel reserves. Looking at the average growth rate of these reserves, the study shows that both oil and natural gas grew at a steady rate of 2.7 percent. While coal reserves fell consistently through the late 1990s to 2008, they too have since taken a fairly consistent turn upward; there are roughly more than 100 years of coal reserves currently. 

 “As long as markets fail to account for the environmental damages from using fossil fuels, there always will be incentives to develop new techniques to more efficiently access these resources,” says Thomas Covert.  “It seems unlikely that our technological abilities to recover fossil fuels should stop improving any time soon. With continually improving technology, the world will likely be awash in fossil fuels for decades and perhaps even centuries to come.”

The study’s authors also found that technology improved significantly in cleaner energy sources.  This is encouraging, because cheaper clean technologies would reduce demand for fossil fuels. Unfortunately, the trends in clean technology progress are not yet strong enough. For example, the levelized cost of solar power fell from nearly $450/MWh in 2009 to $150/MWh in 2014.  Though the downward trend continues today, the cost of natural gas fired power is still cheaper, even when accounting for the cost of climate-related damages.

The story is similar when looking at alternatives to fossil fuels in the transportation sector: namely, battery-powered electric vehicles. At the current battery cost of $325 per kWh, the authors find that the price of oil would need to exceed $350 per barrel before an electric vehicle would have a lower cost of ownership than an equivalent gasoline powered vehicle. Unfortunately, oil traded at an average of $49 per barrel during 2015 and is currently trading below $30 per barrel.  Thus, batteries need to be much cheaper before electric vehicles could cause reductions in demand for fossil fuels.

“While alternative sources of energy and energy storage technologies have vastly improved, lowering costs, they still have a long way to go before they are cost competitive with fossil fuels,” says Chris Knittel, the William Barton Rogers Professor of Energy Economics at the MIT Sloan School of Management and Director of the MIT Center for Energy and Environmental Policy Research. “To change this, governments should put a price on carbon emissions and start injecting more money towards the basic R&D that is critical to making these technologies more cost competitive.”