Don’t forget market forces

by: Hans van Cleef

Trump digs coal

Rewind to May 2016. Donald Trump is on the campaign trail addressing a rally in Charleston, West-Virginia. “Get ready to work your asses off in the reopened mines if I am elected,” Trump tells the coal miners. His promise is greeted with cheers and the crowd wave flags with the inscription ‘Trump digs coal’. After Trump became president, he immediately signed a decree ending Barack Obama’s ‘Surface Mining’s Stream Protection Rule’. The regulation was designed to protect waterways against coal mining waste and, indirectly, make coal production more difficult. But has Trump’s election as President of the United States really led to a revival of the US coal sector?

Well, not really, and that is just as well. Looking at the graph, we see that coal consumption and production peaked in the US in 2007, and has been in free fall ever since. Consumption has plummeted by 60%, output by some 20%. The promised extra jobs never materialised. In fact, due to COVID-19 unemployment is now at its highest level since WWII. The most important driver behind the dramatic drop in consumption was neither Obama’s climate policy, nor Trump’s attempt to breathe new life into the coal industry. The decline was mainly price-driven. In recent years, gas has been cheaper than coal and, as a result, has been steadily supplanting coal as the preferred fuel for power generation. Moreover, the relentless rise of renewable energy is putting extra pressure on coal consumption. So much so that in 2019 the US consumed more renewables than coal for the first time since 1885 (!). However, as coal exports still held up reasonably well, production fell less quickly than local consumption. If Trump is re-elected, the current policy will be continued.

Biden has made energy and climate policy his top priority

While Trump continues to champion traditional energy sources such as coal, oil and gas, Biden has embraced a tough stance on climate change. His choice of Kamala Harris as Vice-President and Alexandria Ocasio-Cortez as co-chair of his climate policy council paves the way for four years of heavy investments in renewable energy and robust resistance to the oil and gas sector.

The former attorney general is known for her passionate opposition to the fossil industry in court and, as recently as last year, reaffirmed her support for a ban on hydraulic shale fracking for the extraction of oil and gas. During the primaries, Representative Ocasio-Cortez came up with a ‘Green New Deal’ that was widely perceived as a radical and ambitious plan to curb carbon emissions before climate change becomes irreversible in 2030, while simultaneously tackling economic inequality and racial injustice.

External market factors have greater short-term consequences

Usually, the political rhetoric is toned down after the elections to make way for a more pragmatic policy. Which is why it is so important to continue looking at what is actually happening in the market. Not only has the share of coal in the energy mix decreased remarkably quickly in the past years, but the production of oil and gas in the US is also under strong pressure. The low oil price has forced many shale oil producers to shut down their operations, in some cases permanently. And though the share of natural gas in the energy mix has increased, the production of this fuel is also under threat from low prices. The low prices for both oil and gas can be traced to declining demand (direct consequence of COVID-19) and the existence of large inventories. These inventories are partly related to COVID-19, partly to OPEC policy and partly to the fact that the rise of LNG has turned gas from a local into a global market. Clearly external, non-political, market factors can cause major shifts in the energy mix, leading to substantial increases or reductions in carbon emissions.

Aim consistently for the long-term objectives

In view of the required energy transition to counter climate change, this is an important lesson for politicians at home and abroad. Governments do not build wind farms, sell electric cars or insulate houses. These are the tasks of energy, automotive and construction companies. But government can offer subsidies in order to tempt these companies to invest in sustainability. Likewise, it can encourage consumers to think and act green. For instance, by discouraging polluting technologies through carbon emission pricing. But above all the government has the responsibility, or rather the duty, to set and pursue long-term climate objectives. And it must do so in a clear, consistent and focused manner. That is crucial. Because unpredictable government policy with a horizon of a mere four years makes companies fearful of committing to large investments for the longer term. It also creates uncertainty among consumers who, as a result, decide to put off buying an electric car or greening their home. And it keeps financiers from taking a chance on new technologies that involve more risk.

The energy transition is an ongoing process

The energy transition is an ongoing process in which most of the changes should, in general, lead to benefits in the form of cost reductions or more comfort. New, third and fourth, dimensions consist of the contributions towards a better living environment and the reduction of global carbon emissions. To get everyone pulling in the same direction, the government must set out a clear direction. Next, it must create space for businesses and financial markets to promote the pursuit of the set objectives through finance, investment and innovation. The US, with its divided political landscape and energy mix that is mainly driven by global market prices, is hardly a shining example for our own energy transition.

With the Dutch elections now in sight, our politicians should learn lessons from this and prevent a similar situation here. The Dutch Climate Agreement has put a coherent plan on the table until 2030. The challenge now is to keep evolving this plan as we move towards 2050. Above all, businesses, consumers and the financial markets must be given ample opportunity and space to take this energy transition forward in the coming decades. Constructive interaction between government and the market is crucial to make the current paper commitment to ‘a carbon-neutral economy’ a feasible and affordable reality.