On oil imports and climate leadership: new thoughts on California oil

Earlier this year, we published a paper on why California should consider limiting oil production.  It has since generated some discussion, including thoughtful responses from Governor Brown and Severin Borenstein.

Below, we comment on the issues raised by these and other commentators. Our main point is simple: Limiting fossil fuel supply is an inevitable part of solving the climate crisis. The longer we continue to enable investment in new production – without regard to whether doing so is consistent with a safe climate – the more we lock-in a higher carbon future.

With the California Air Resources Board convening a workshop on oil on August 20 in Sacramento, and the Global Climate Action Summit coming up in September in San Francisco, this topic deserves continued debate. [Editor’s note: Peter Erickson and Severin Borenstein will appear as experts at the August 20 workshop, which will be webcast.]

Wealth transfer is only a major concern if you are betting on climate failure

In his blog (and related op-ed), Severin Borenstein argues against limiting California oil production solely on the grounds that, due to the slight increase in global oil prices, it could lead to a transfer of wealth from oil consumers to oil producers of dubious provenance and intent. We agree that further enrichment of oil producers – not merely those in foreign regimes but also here in the U.S. – can be antithetical to democracy and income equality, as well as to achieving climate goals. However, we would also argue that this wealth transfer is only a significant problem if the world fails to move swiftly to constrain climate change.

Governor Brown and the State of California are part of an international effort that is actively working to inspire a global, low-carbon transition. If successful, oil markets will contract and investments in new oil production will slow. Both demand and supply of oil will reduce rapidly and in step. Fewer producers will be able to make profit on new oil investments, as they face the lower oil demand of a low-carbon future.

In fact, those who restrict investment now – especially in higher-cost, higher-emissions oil, such as that found in much of California – could come out on top. They would be limiting their exposure to assets that could be stranded by lower than expected prices in the future.

There are signs of movement in this direction. Oil majors are under increasing pressure to align their investment strategies with the goals of the Paris Agreement, following the recommendations of the G20 Financial Stability Board’s Task Force for Climate-Related Financial Disclosures. Several development banks and investor groups are slowing or ceasing new lending for upstream oil production. Feeling the pressure from advances in competing technologies – electric vehicles, batteries, and renewable energy – major producers in the Middle East are moving to diversify their economies. Furthermore, several other jurisdictions around the world are beginning to limit oil production, including France, New Zealand, Belize, Costa Rica, Denmark, and Ireland (even Canada, given Prime Minister Trudeau’s pledge, made with former US President Obama, to limit Arctic oil drilling).

The world must work together to solve climate change, but that starts with a few leaders

The most-concerning aspect of Borenstein’s argument is that he suggests we should not act on oil supply because other countries may benefit. This is dangerously close to previous, well-worn arguments about why the U.S. should not implement climate policy.

Climate change is the ultimate collective action problem. Success at avoiding dangerous levels of warming requires widespread cooperation in efforts to reduce global emissions. It also requires the type of policy innovation and leadership that California has shown – from cap-and-trade to vehicle economy standards – to build momentum and inspire others to join.

The risk that others may not follow is an enduring feature of all climate policy innovation. As noted by Governor Brown and Borenstein, this could mean a “free ride” for fossil-fuel-producing nations that sit on the sidelines and benefit from increased fuel prices.

But it is always the case that countries that sit on the sidelines can still benefit economically as “free riders”, whether we are talking about decreasing oil demand or limiting oil production. Indeed, the concern that other large economies, namely China and India, would gain undue benefit has been long used to stymie climate action, even to support the Trump administration’s rejection of the Paris Agreement.

The alternative is catastrophic climate damage. But if the international community succeeds in decreasing oil demand and supply, then a free ride for a few, hold-out countries is less of a concern given the massive benefits (shared by all) of a stable climate. Those acting first also may accrue the benefits of economic diversification and avoided stranded assets.

The path to international cooperation on tackling climate change begins with a few willing leaders marking new, creative, and ambitious ways to reduce emissions, which is indeed the very goal of Governor Brown’s climate summit. Actions by California to limit oil production could join a growing “club” of countries willing to limit oil, a concept which has a strong theoretical basis in resource economics and political theory.

Reduced oil production leads to reduced consumption

This is an important point to emphasize: contrary to common misconceptions, measures that leave fossil fuels in the ground can indeed be effective at reducing consumption and emissions. Our paper showed how reduced oil production in California would affect the world oil price, leading to reduced global oil consumption. As Borenstein points out in his blog, current understanding of world oil markets and energy economics mean “the replacement ratio is almost certainly less than one-for-one, because price would have to rise at least a little to elicit additional supply and that price increase would lead to at least some reduction in demand from consumers.” For a more in-depth discussion, we encourage readers to explore our recent, peer-reviewed article on the emissions benefits of reducing fossil fuel production across the US.

California can start to phase out oil production without increasing imports

Governor Brown, as well as economist Robert Stavins, have expressed concern that limiting oil production in California would increase oil imports to California (currently, about 70% of oil consumed in California comes from outside the state.) But if California is successful at meeting its goals for oil consumption, then the state can begin phasing out production without increasing oil imports. As Governor Brown has noted, “when you reduce consumption, that opens the way to reduc[ing] production”.

As laid out in its recent 2030 Climate Change Scoping Plan, the California Air Resources Board estimates that California will use about 150 million fewer barrels of oil in 2030 than it does today. This strong reduction in oil demand leaves ample room for California to gradually phase down oil production, currently about 170 million barrels annually, with no net increase in oil imports. (See figure above).

The bottom line

In the bigger picture, the question of where California and the rest of the world gets its oil – even the smaller amount of oil needed in a 2-degree-consistent pathway – is a salient one, with large geopolitical and equity implications.  Much of that choice will be outside of California’s control.

But California does have direct authority over the highly GHG-intensive, higher-cost oil within its own borders.  Leaving California oil in the ground would have tangible CO₂ reduction benefits for a manageable cost, and it could model a new way of enhancing ambition on global climate action.  It deserves continued consideration, in California and beyond.