As long as fossil fuels remain profitable, governments are in an awkward position, say business lecturers.
CARDIFF, Wales: The climate crisis was a hot topic at the G7 summit in Cornwall.
Yet while the leaders of the world’s richest countries agree in theory on the need to reach net zero emissions by 2050 at the latest, they remain faithful to a fossil fuel industry reluctant to substantively change its business model.
A recent report by the International Energy Agency, a typically conservative advisory body, argued for an immediate ban on new fossil fuel projects. But investments by oil, gas and coal companies into finding new sources continue, as does industry lobbying to undermine regulation.
The environment ministers of the G7 countries committed to end funding for new overseas coal projects by the end of 2021. But 51 per cent of their COVID-19 economic recovery funds – a total of US$189 billion – paid between January 2020 and March 2021 were earmarked as financial aid for the fossil fuel industry.
Worse, US$8 of every US$10 dedicated to non-renewable energy was paid with no conditions on these companies to reduce their emissions.
Why does it seem so hard for G7 leaders to match their words with action when it comes to the fossil fuel industry?
BETTING ON THE LONG-TERM BUSINESS CASE
Despite setbacks in volatile markets and oversupply risks, there is still a lot of money to be made from extracting, producing and selling hydrocarbons.
Demand for coal has plateaued, but oil and gas demand is predicted to rise at least for the next 15 to 20 years, particularly in emerging economies such as China and India.
This puts G7 leaders in an awkward position. On the one hand, governments need to reboot economic growth after the pandemic slowdown – a profitable energy sector nourished by rising demand abroad is welcome, even though hydrocarbon extraction can be especially polluting in developing countries.
A pump jack operates in front of a drilling rig at sunset in an oil field in Midland, Texas U.S. August 22, 2018. (Photo: REUTERS/Nick Oxford)
Governmental support for the industry in the form of subsidies or tax breaks artificially inflates the profitability of fossil fuels, in turn making renewables a less attractive investment. Put simply, it is less risky and more profitable to – at least for now – invest in oil and gas.
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CARBON LOCK-IN
The fossil fuel industry continues to shed public support, but it can rely on the fact that it’s embedded within a complex system of consumers, suppliers and contractors, politicians and the media. The cause-and-effect relations that define such an intricate system often produce unintended outcomes.
This interdependency is referred to as carbon lock-in. Economies have evolved in such a way that they perpetuate an energy landscape dominated by fossil fuels and plagued by an inability to radically change.
Not only does carbon lock-in result in inertia, it causes a tragedy of the commons-type problem. Big oil companies such as BP, Exxon Mobil and Shell are unlikely to make meaningful changes until the rest of the system acts in unison.
National oil companies and smaller privately owned fossil fuel companies comprise the bulk of known fossil fuel reserves. But they often evade the spotlight and so can operate with more freedom.
For a big oil company to make high-risk changes to its business model while others enjoy a free ride would be seen as a bad business decision.
Lock-in, as the name suggests, is very difficult to break. That said, G7 members are powerful nodes within this complex network. Strong leadership – such as divestment from fossil fuels and strong support for renewables – would cause reverberations throughout the whole system.
But strong commitments coupled with counter-intuitive policies only send a signal that meaningful changes aren’t coming.
(As climate change intensifies, will we see more activists and communities seeking legal recourse globally? Find out on The Climate Conversations.)
IDENTITY CRISIS
People working in the fossil fuel industry often stay in the sector for their entire career – starting off as students of engineering or geoscience in departments funded by the industry, working all over the world and then heading into management positions.
The industry’s identity is predicated on certain values that have existed since the early days of hydrocarbon exploration, including, as one study found, a deep trust in the potential of science and technology to further humanity’s control over nature and to drive progress and economic development.
The ideological commitments of leaders in the fossil fuel industry will take a firm challenge from governments to overcome.
It’s clear from financial decisions in the lead up to the summit that G7 leaders aren’t quite up to that test yet. But the meeting in Cornwall is their opportunity to signal that that cosy relationship is finally coming to an end.
George Ferns is Lecturer in Management, Employment and Organisation at Cardiff Business School. Marcus Gomes is Lecturer in Organisation Studies and Sustainability at Cardiff University. This commentary first appeared on The Conversation.