In the months following Russia’s invasion of Ukraine, the interdependence of global economies became increasingly apparent. As the West continues to wean off of Russia’s oil and gas supply, many countries have struggled to meet energy demand and have been looking for quick fixes. Germany, a country with a large reliance on Russian energy supply, has announced plans to reopen previously decommissioned coal plants, despite its goal to phase out coal entirely by 2030.
This illustrates a challenging task for countries at the present moment—that of quickly meeting short-term energy needs without further exacerbating the climate crisis. Confronted with this dilemma, it’s natural to wonder: Will countries use this as an opportunity to double-down on renewable energy investment? Or will they revert back to fossil fuel dependency?
Looking to History
In 1973, governments faced similar strains when OPEC (Organization of the Petroleum Exporting Countries) enacted its first oil embargo, cutting off exports to several countries, including the United States. In response, President Jimmy Carter’s administration made clean energy a top priority, rapidly channeling resources into research and development projects. In the years that followed, the first rechargeable lithium batteries were prototyped and major companies were scrambling to design an electric car.
Although the OPEC crisis gave rise to progress in green energy, government research funding dried up under the Reagan administration when oil grew cheaper through the 1980s. While reverting back to oil appeared to make financial sense in the short term, the resulting ecological damage and energy dependency in the decades that followed ultimately worsened the crises we face today.
History tells us that government intervention can be a powerful tool for adjusting the incentives that drive sustainable innovation. If, however, financial incentives fall out of sync with natural realities, we run into serious problems.
Castles in the Sky
According to BloombergNEF’s 2021 report entitled “Climate Policy Factbook: Three priority areas for climate action,” 20 of the world’s biggest economies directed $3.3 trillion to fossil fuels from 2015 to 2019—enough to fund a solar-powered electricity system three-and-a-half times larger than the entire U.S. electrical grid (Wall Street Journal). In many cases, government subsidies like these can indirectly lower prices for consumers, just as taxes can raise prices for consumers. This is why prices can be misleading. If a product appears inexpensive at the point of sale, it does not necessarily mean that it’s available in surplus or that it’s any less resource-intensive to produce. It could just mean that the price is artificially kept low via subsidies and does not reflect the true costs of resource extraction from the environment.
For example, by heavily subsidizing the fossil fuel industry, the government has lowered the financial cost of resources like oil and gas, while the true costs (tax dollars, resources used, pollution, environmental degradation, climate change, etc.) remain high. When financial incentives fall out of sync with reality, it is only a matter of time before we must face the facts. Fossil fuels have looked inexpensive historically, but only because we have ignored their true cost through excessive subsidization.
Aligning with Nature
In the pursuit of a more realistic fiscal and monetary policy, the physicist and economist Robert Ayres argues that principles from thermodynamics should be integrated with economics. What would a world look like where money was valued by energy expenditure as well as supply and demand? This is one way society could move towards aligning financial incentives with natural principles in the future.
In the meantime, when charting a path for the global energy transition, subsidies and taxes are helpful tools governments can use, but they must be grounded in reality. It makes sense, for example, to subsidize the price of renewables that show promise of efficiently tapping virtually unlimited sources of energy. Our oil supply, in contrast, is finite and environmentally destructive to use. Therefore, its price should reflect these true costs through the implementation of taxes (or at least the discontinuation of subsidies). By aligning with natural principals and environmental constraints, governments can recover from current energy-supply shocks and ultimately emerge more resilient to them in the future.