Better Not Ban, but Find a Climate-Friendly Use for Fossil Fuels

The global community wants to reduce the use of fossil resources such as oil and natural gas with bans and taxation measures and thus significantly reduce CO2 emissions. But these efforts could trigger a run on the world’s remaining fossil fuel reserves. A study by Kai A. Konrad and Kjell Erik Lommerud envisions a solution to slow down or reverse such a “rush to burn”: It is crucial for the success of global climate policy that alternative climate-neutral uses for the fossil resources of our world are promoted and further developed.

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The global community faces a dilemma in its climate efforts. While politicians are trying to phase out the use of fossil fuels, oil states fear being stuck with some of their natural resources in the future. If the demand for oil and gas should indeed decrease drastically in the coming decades or if even a phase out of fossil fuel combustion should be internationally agreed on, these two energy sources will become largely worthless. In economics, stranded assets are goods that experience a permanent and significant decrease or even total loss in value. This dire economic prospect provides the owners of large oil and gas deposits with an incentive to produce and sell as quickly as possible in order to avoid being stuck with stranded assets. Consequently, the market value decreases drastically and burning oil and gas becomes much cheaper and more attractive again, which accelerates the emission of harmful CO2. But this so-called ‘rush to burn’ would have fatal consequences and would counteract efforts to combat climate change.

It is true that in recent weeks, due to war and sanctions, the price of gas and oil have not followed the pattern predicted here. Compensating for supply shortages takes time, but it does not change the total quantities of oil and gas that are available for production in total and over time. In this wider context, the recently capricious market does not contradict the outlined supply decisions that can be expected in the coming years and decades if a binding and effective global climate agreement is reached.
Kai A. Konrad, Director at the Max Planck Institute for Fiscal Law and Public Finance, and Kjell Erik Lommerud, Professor of Economics at the University of Bergen, illustrate this relationship using a formal equilibrium model in their paper ‘Effective climate policy needs non-combustion uses for hydrocarbons’, published in Energy Policy. They show that the higher the expected future profit with fossil fuels, the more likely it is that their consumption through CO2-intensive combustion will be stopped. But how can the demand for fossil fuels be maintained without continuing to release large amounts of CO2? As Kai A. Konrad and Kjell Erik Lommerud argue, the way out of the dilemma is to promote or further develop products from oil and gas that make a small or even negative contribution to the CO2 balance.

Ideally, oil and gas become too valuable and too expensive to burn

Such climate-friendly or climate-neutral fossil fuel products would radically change the market. Oil and gas would be more valuable as raw materials for future products than they are at present. The “rush to burn” would fail to materialise. No country rich in natural resources would feel the need to extract its reserves as quickly as possible and sell them at dumping prices; instead, it could take decades to extract and sell them. As a result, oil and gas would immediately become scarcer and prices would rise. Higher prices, in turn, would spur the energy transition, because alternative climate-friendly energy concepts would be more competitive on the market and their innovation more economically interesting. Ideally, oil and gas would become too valuable and too expensive to burn at all. An international climate agreement, CO2 taxes or bans on the use of oil and gas for combustion purposes would become superfluous.

Offering prospects is enough to stop the sell-out

Even if some of the economically attractive climate-neutral products from oil and gas are not marketable for years or decades to come, considerations of economic equilibrium theory show that the effect on the market will be immediate. This has to do with a special feature of commodity markets. The supply of oil and gas is given and finite. If you squander your supply today, you will have nothing left to sell tomorrow. Just as the threat of oil and gas becoming worthless spurs faster extraction, the prospect of an economically more attractive future use leads resource owners to hold back on supply. Model-theoretical findings support what intuition already holds true: It pays to retain reserves and wait to sell.
But without clear directions for alternative uses, these considerations would only be abstract adventures of words and ideas. So what could be a climate-neutral utilisation of oil and gas?

Promote and innovate alternative climate-friendly uses

According to Konrad and Lommerud, perhaps one of the most interesting ideas is the production of hydrogen from methane, which is the main component of natural gas, accounting for about 75 to 99 percent. This is also being researched at the Max Planck Society. With the process of catalytic pyrolysis, natural gas is broken down, largely without emitting CO2, into two useful substances: Hydrogen, for which there could be great demand in a future hydrogen economy, and solid carbon. A flurry of recent publications points to progress in the production of this “turquoise hydrogen”. It is true, the catalytic decomposition requires energy input, but only about one-eighth of the energy input needed to produce “green hydrogen”, which is currently all the rage.

The remaining carbon, in turn, can be processed in the form of graphite or carbon nanotubes (CNTs) and used, for example, in steel and carbon fibre production, in the cement industry or in the manufacture of lithium-ion batteries. There, even further emissions can be reduced in this way. Such carbon materials are not only quite light they also have other, highly interesting material properties in terms of conductivity, elasticity and strength. If they replace traditional construction materials, natural gas/methane in this way this would make a further contribution to climate policy.

According to the authors, the prospects for an alternative use of petroleum are not yet so enticing. Plastic used for synthetic fibres, insulation or various other plastic products is already an alternative use for fossil fuels instead of combustion – especially if it is possible to give these products a long life. The recyclability of synthetics is not a law of nature, but it is in our hands. It could be adapted without having to give up oil as a raw material. If, for example, such plastic products, at the end of a long and high-quality use, were buried deep below the earth’s surface and thus ultimately brought back to where the crude oil for their production was once taken from, the carbon would be permanently bound without negative consequences for the climate or for the health of animals and humans.

No government subsidies for substitute products

As far as climate-neutral uses of oil and gas are concerned, there are no limits to imagination or the will to innovate, Konrad and Lommerud argue. In the current social and political climate, however, there would be much more incentive to look for materials that can replace plastic and are not made from petroleum. Such substitutes, however, force fossil oil and gas out of the market or reduce future demand significantly. Their development and cheap availability exacerbate the “rush to burn” and tend to increase CO2 emissions even now. Instead of banning plastics and promoting the development of substitutes, it would therefore be advisable to expand the sustainable use of climate-neutral, oil-based plastics.

Using market forces to achieve a successful climate turnaround

According to the authors, the “rush to burn” is a real obstacle to a successful climate policy, especially if an international climate agreement were to be concluded. Climate-neutral or climate-friendly alternatives for the use of oil and gas would be the solution to this “rush to burn”, and one that brings many advantages: one does not have to wait for collective agreements, the solution is cost-effective and it uses the forces of the market for a successful climate change instead of high subsidies and state bans.

Konrad, K. A. and Lommerud, K. E., 2021. Effective climate policy needs non-combustion uses for hydrocarbons, Energy Policy. RePEc

August 2022