Dan Farber suggests that there may be an upcoming war of attrition between fossil producing companies and those trying to curb climate change. In fact, I argue below that we are already in a war of attrition, not with the industry but with fossil fuel exporting countries.
Dan Farber notes that
“…the war involves fighting a series of battles, the outcomes of which are not wholly predictable. Each player may find it rational to put forth more effort as victory comes closer, because the odds of winning rise, but also to make a last-ditch effort at defense when about to lose because defeat is so costly. No one, in short, is likely to surrender gracefully even when the odds are against them, and the war will only get bloodier as it seems to get closer to the end.”
He suggests that, due to potential Carbon Capture and Storage, the oil and gas industry may be in a better position than the coal industry, so that the strongest war of attrition will likely be fought with the coal industry.
“Coal interests also know that almost any mitigation efforts will reduce the economic significance of the industry and hence its political influence. Thus the coal industry’s best strategy is to fight with everything it has right now.”
He obviously does have a point, though I believe that Carbon Capture and Storage for oil should play a minor role since much of the oil goes into transport for which Carbon Capture and Storage does not play a role.
However, I’d like to take this thought a step further. For mostly oil and gas, a significant share of national power utilities have to import these fossil fuels and thus face a market price for the fossils which they use as input to producing their electricity or fuels. Hence, if they want to make at least some amount of profit, they have to add a mark-up on this price for their inputs and also for their transportation costs, for the grid costs, etc. Thus, given the current price evolution of the renewables, the fossil-using industry may easily be priced out of the market (due to e.g. renewables) and they are likely to have little potential left for fighting a war of attrition.
Similarly, since industries have to adher to national regulations, national governments are always going to have the upper hand or last word (that is, unless the fossil industries’ lobbies are part of the government). Hence, once governments take mitigation actions serious, they can quite easily deal with their (national) fossil industries.
So in a war of attrition, industries are likely to have trouble in putting up a reasonable fight. In fact, one can already see that: many national electricity companies that so clearly relied on fossil fuels for their electricity production are already now shifting away from these non-renewables into greener technologies.
However, now think about oil and gas exporting countries, instead of simply industries. Countries like Saudi-Arabia have different incentives here. For them, the fossil fuels come at close to zero marginal extraction costs. For them, all their wealth is based on these non-renewables.
In addition, major countries like Russia (currently) require e.g. a sufficiently high oil price in order to service their government debt. They have huge incentives to export fossil fuels as it provides a significant source of income.
Hence, in my opinion, one should not fear a war of attrition from the fossil industry, but from fossil-exporting countries. And in this respect I have previously noted that fossil fuel exporting countries are already giving out most of the world’s subsidies to fossil fuels. Without these subsidies the fossil fuel exporting countries are unlikely to be able to service the demand at the current price.
In fact, I noted that
So, one very often finds the claim that renewables need to be cheaper than fossil fuels in order for the world to shift towards renewables. In the light of these findings this is not enough. Indeed, allowing for these extensive subsidies from the fossil fuel exporting countries, we find that renewables must be roughly half the price of fossil fuels in order to stop the demand for fossil fuels.
Conclusively, don’t be fooled, we are already very much fighting a war of attrition, but with the fossil exporting countries. And the cheaper the green, renewable electricity production gets the more will fossil fuel exporting countries subsidize their main source of income. We are only at the beginning of this fight, and let’s hope that subsidize to their fossil fuels is the only means which the fossil exporting countries will use in this war of attrition.