Record high energy prices and fears of a supply crunch are threatening to slow global climate ambitions, just one month away from a major United Nations climate summit in Glasgow.
On Tuesday, Brent crude hit a near three-year high topping $80 per barrel, while natural gas futures jumped by 10%, notching a level not seen in 7.5 years. Overseas, Benchmark European gas prices have soared by more than 300% this year.
Amid fears of a looming energy crisis in the U.S., Republican lawmakers seized on the opportunity to criticize the Biden administration’s move away from fossil fuel use in a Senate Banking Committee hearing, in which Treasury Secretary Janet Yellen, alongside Federal Reserve Chairman Jerome Powell, testified.
“I’m deeply concerned with the Biden administration’s policies to curtail reliable, base load power that comes from coal, oil, and gas,” said Sen. Steve Daines (R, Mont.). “It would send us back to where we were in the 70s, and where Europe appears to be headed today.”
A 'transition premium'
Pent-up demand from the COVID-19 pandemic, weather, low-storage levels, and limited supply out of Russia have all contributed to the price spikes. In Britain, where fears of an energy crisis have led to panic buying at gas stations, supply has been limited by a shortage of truck drivers who deliver the fuel. But, oil and gas producers have publicly placed the blame on climate policies advocating a move away from their industries. OPEC Secretary General Mohammed Barkindo went as far as to call the current price hikes a new “transition premium,” referring to the transition to renewable energy and easing fossil fuel usage, in an interview with CNBC.
The public debate has brought to the forefront a delicate balancing act policymakers have grappled with behind the scenes: how to accelerate the low-carbon transition, while ensuring that tighter fossil fuel supply doesn’t squeeze consumers, particularly in low-income communities.
“As companies move out of a pure dependence on fossil fuels because they see what's coming, whether they want to admit it in the press or not, that does produce a reduction in the supply, and their ability to ramp up the added production of gas and oil,” said Daniel Kammen, professor of Energy at UC Berkeley. “Those are real and those do affect the amount in the system.”
Data from Global Energy Monitor, which documents fossil fuel projects around the world, show that the push to meet goals laid out in the Paris Climate Agreement have not had a significant impact on capacity yet. In fact, import capacity for natural gas has actually increased in Europe over the past decade. Current projects in development signal 35% capacity growth by 2030, according to Global Energy Monitor.
'The risk and reward have to be balanced'
But fears of the energy supply crunch worsening in the cold winter months, and the prospect of soaring energy bills for consumers already struggling from the pandemic, have led some countries to slow its move away from fossil fuels. In Spain, where wholesale electricity prices have climbed 250%, the coalition government introduced a temporary windfall tax on energy companies to drive down prices, while placing a limit on profits firms can make from gas alternatives like renewables. In the Netherlands, the Dutch government faces calls to reverse a decision to halt one of Europe’s largest producing gas fields by 2022 to address winter supply concerns, although leaders have resisted the move so far.
Even those in support of the green transition admit the optics of the energy crisis may turn voters away from more ambitious climate goals. Bob Iaccino, co-founder of Path Trading Partners, says the transition to renewable energy isn’t likely to accelerate, even if recent energy price spikes in the U.S. largely stem from pent-up demand during the pandemic, and extreme weather events including Hurricane Ida.
“Like any other equation in investing, the risk and reward have to be balanced. In this particular case, the risk of climate change is not necessarily balanced with the cost of what it's going to take, at least in the individual consumer’s mind,” said Iaccino. “If they can’t heat their homes this winter, they're going to vote against climate mitigation policies, and that I think is where the problem lies, because it's a supply side issue.”
That presents a big headwind going into the UN Climate Change Conference (COP26) in Glasgow, an international gathering that has been deemed "the last best chance" to shape humanity’s climate future. The U.K. government, which is hosting the two-week gathering, has set the world’s most ambitious emissions reduction target to slash 78% — 1990 levels — by 2035, while President Biden has called for a 50% reduction of 2005 levels. Any sign of wavering, could potentially diminish credibility, as Western leaders look to get developing countries most impacted by climate change, to set more ambitious targets.
U.S. Energy Secretary Jennifer Granholm said the Biden administration remains undeterred. In a recent interview with Yahoo Finance, she said energy prices are likely to moderate to pre-pandemic levels pointing to data from the Energy Information Agency. Biden "has been adamant" that "he doesn’t want this to hit everyday people’s pocketbooks," she said.
“Right now, there is a constriction because of what happened with Hurricane Ida and a number of refineries being offline. But once that gets back up, and that supply is opened up...we haven't seen a diminution in supply,” Granholm said. “So, we don't see that that is going to cause a significant increase [in prices].”
Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita