The United Nations climate change conference (known as COP26) in Glasgow, Scotland, was billed as historic. By that measure, the conference didn’t deliver. But it nevertheless marks a moment of transition. Glasgow completed the process begun at the 2015 Paris conference, under which nations progressively raised their national commitments to decarbonization. All the major economies of the world are now notionally committed to reaching net-zero emissions between 2050 and 2070. As a result, Glasgow also marked the moment when climate politics began to focus on the energy transition as a matter of industrial policy. It was symptomatic that a prominent commitment to reduce coal burning was included in the final resolution. It was not enough, but it was a significant first. It was also symptomatic that Britain’s conservative government put the emphasis on businesses. That dismayed many activists, but it was a prompt eagerly seized on by U.S. climate envoy John Kerry.
Kerry finished the conference hailing an impending transformation. Firms that were willing to innovate and gamble on the energy transition would be opening up the “greatest economic opportunity since the Industrial Revolution,” he said. In a Financial Times op-ed published in November, Kerry added: “Like the proverbial cavalry, the first movers [in business] are coming. … Companies should seize this opportunity by propelling the shift—rather than being buffeted in its wake.” Meanwhile, in the New York Times, columnist Thomas Friedman chimed in to declare if we are looking to save the world, “we will get there only when Father Profit and risk-taking entrepreneurs produce transformative technologies that enable ordinary people to have extraordinary impacts on our climate without sacrificing much—by just being good consumers of these new technologies. In short: we need a few more Greta Thunbergs and a lot more Elon Musks.”
One can see this vision’s attraction for the likes of Kerry and Friedman. Rather than the subject of contentious politics, climate policy has become a business opportunity. But is this realistic? There is certainly compelling evidence to believe powerful economic and technological imperatives are beginning to drive the energy transition. But it would be naive to imagine this means the politics is settled. Precisely in the United States, the energy transition threatens to trigger a dysfunctional backlash that could leave the champion of the hydrocarbon age stranded in the 20th century.
Since the beginning of global climate policy in the 1990s, the United States has been marked by a conflicted position. To explain this, it is easy to point the finger at the Republican Party or former U.S. President Donald Trump’s crude climate denials. But it goes far deeper than that. From the beginning, America’s huge energy consumption made it a target for those demanding immediate action to halt the climate crisis.
It was little wonder Congress resisted any climate agreement that did not enroll the rest of the world on equal footing—and thus rejected the 1997 Kyoto Protocol. Whatever the merits of climate justice arguments, they cut little ice with defenders of the American way of life. Meanwhile, the United States’ energy producers stand firm as a recalcitrant defensive lobby. U.S. oil interests were among the leading sponsors of denial. Since the 1980 Carter Doctrine, U.S. geopolitical power has focused on securing control of the Persian Gulf. It was not for nothing that in the early days of climate policy, the United States featured as the great Satan.
Given this underlying balance of interests, the GOP’s position of denial at least has the merit of consistency. Given the United States’ existential entanglement with fossil fuels, it is easier to strike a patriotic pose if you assume away the climate crisis or trust that technology will deliver the solution by itself. It is Democrats who find themselves in a conflicted position, seeking to square the realities of America’s political economy with the climate threat’s urgency.
The Obama administration midwifed the Paris Agreement while, at the same time, permitting the increased export of U.S. oil and gas. Trump was the first U.S. president to actively deny the reality of the climate problem. For him, all that counted was the country’s “energy dominance” be secured by the export of U.S. liquified natural gas—or “molecules of U.S. freedom.” With U.S. President Joe Biden’s administration, cognitive dissonance returned. Biden supports climate leadership and made a constructive contribution to the Glasgow negotiations while licensing oil and gas development and goading OPEC into increasing its production.
One could simply denounce the hypocrisy, but that misses the point. The root of the incoherence lies in political economy: the United States’ dual role as a huge consumer and producer of fossil fuels as well as the policeman of the world’s oil and gas supplies. It is this that gives real significance to Kerry’s vision of change sketched in Glasgow’s wake. If we take Kerry at face value, we may be about to witness the curtain coming down on America’s fossil fuel century, less as a result of political choice than simply the result of technological and industrial transformation.
But it will take more than billionaire Elon Musk and his ilk to concertedly decarbonize the United States. The question of politics cannot be wished away.
A sketch map of the forces shaping the new energy landscape was provided in the weeks prior to COP26 by an ambitious paper in Nature Energy. The multi-author team, led by Jean-Francois Mercure, explored how the development of a variety of technologies and underlying cost conditions in the energy sector might change output, investment, and employment in 43 sectors and 61 regions of economic activity around the globe.
To predict key renewable technologies’ development path, the authors assume they will follow the same pattern of diffusion and adoption exhibited by other major technologies over the last century. This traces an S curve. Technologies begin small before hitting a period of rapid and comprehensive adoption followed by saturation. This is the trajectory followed, for instance, by smart phones since 2008. If we make that assumption, then as far as renewable energy technologies are concerned, we are currently at the slower end of the curve and about to experience takeoff.
“Through a positive feedback of learning-by-doing and diffusion dynamics, solar photovoltaics becomes the lowest-cost energy generation technology by 2025-2030,” the study says. “[Electric vehicles] display a similar type of winner-takes-all phenomenon, although at a later period. Heating technologies evolve as the carbon intensity of households gradually declines.”
For energy consumers, this promises huge windfalls. Given the cost curves and existing policies in place, the Nature Energy authors, like Kerry, see an energy transition as something close to an irresistible force. Their work was completed well before COP26. But, as if to confirm their predictions, one of the more dramatic pieces of news from Glasgow was India’s declaration that it would aim for net-zero by 2070. India did this reluctantly. It has long held the position that due to historic responsibility, rich countries should shoulder the burden. But this climate justice position has been increasingly overshadowed by the force of global economic growth. India itself is now the world’s third largest emitter of carbon dioxide. Although India is heavily dependent on coal for power generation—and though as many as 20 million workers depend on coal for their livelihoods—it is foreseeable that renewables’ plunging costs will create a powerful incentive for India to shift. Furthermore, as in China, the threat of pollution adds powerful impetus. To avoid the worst effects of life-threatening smog, hundreds of millions of people in the Ganges Delta are currently under a form of lockdown.
India follows the European Union, China, Japan, South Korea, and Indonesia, which have all committed to net-zero emissions, to be achieved somewhere between 2050 and 2060. That Eurasian shift creates huge economic and technological momentum. In the early 2000s, interaction between Germany’s renewable energy subsidies and the growth of China’s solar industry demonstrated the potential for unintended synergies. In the decades ahead, similar dynamics could unfold on a far vaster scale.
The transition is not a done deal, of course. Along with its commitment to net-zero at COP26, India also demanded $1 trillion in foreign funding over the next decade. That is only reasonable. India is still poor. Its per capita emissions are a fraction of those in the West. A trillion dollars is a lot of money, but it is well within the range that experts assess would be necessary to fund the country’s energy transition. To supercharge the development of renewable energy infrastructure worldwide, between $2.7 trillion and almost $5 trillion per year are needed. The required amount of net new investment is 2 to 3 percent of India’s global GDP per year. By the standards of historic structural change, that is modest. At least for middle- and higher-income countries, which account for 95 percent of world economic activity and emissions, finance should not be a major obstacle. The giant flow of spending is precisely the honey pot Kerry held out to investors. Where profits are to be made, credit will flow. The idea of climate policy as a price paid for virtue is obsolete. The question is who moves first.
This is good news for the Nature Energy researchers and others. Full consumption of all expected fossil fuels on the planet is now a very unlikely scenario. The demand simply will not be there. From the climate point of view, that means plausible business-as-usual scenarios are now in the range of 2.7 to 3 degrees Celsius of warming.
Those numbers are based on assuming current policies, rather than promises made at COP26, continue. If Asia and Europe make good on their net-zero commitments, as the technology and economics lead one to expect, expected warming is in the order of 2 degrees Celsius. And in calculating that outcome, simulations run by the Nature Energy authors even assume the United States will simply follow its current technological path rather than an ambitious net-zero trajectory of its own.
But if a large part of known oil, gas, and coal reserves are now destined to stay in the ground, this has daunting implications for the energy industry. Europe and Asia are the world’s major energy importers. It is their demand that decides the balance in global oil and gas markets. If they decarbonize rapidly over the next few decades, that will dramatically shrink demand and unleash a fight to the finish among producers. And that puts the United States’ oil and gas sectors in the crosshairs.
Driven by the explosion in shale, the United States has seen a huge surge in fossil fuel production since 2010. That has challenged OPEC and Russia’s grip on the global energy industry. Reflecting this precarious balance, the industry has come to be characterized by violent price cycles. Periods of rising global demand and high oil prices draw in high-cost producers that cut into incumbents’ market share. At some point, OPEC and Russia ran out of patience, unleashing a price war to drive peripheral producers out of the market. So far, this oscillation has resulted in two price shocks: in 2014 and in 2020.
Contrary to Trump’s talk of “energy dominance,” the United States’ newly born oil and gas industry thus lives on borrowed time. Shale’s huge expansion after 2010 is an effect of low interest rates and Wall Street indulgence. Investment in shale ran to well over $500 billion. But regardless of investments, U.S. producers were never going to be able to compete with the Persian Gulf on costs. Geology is simply too favorable to Middle East producers. The Nature Energy article’s game theory analysis concluded that those investments are now at serious risk.
Realizing decarbonization is a one-way bet for Europe and Asia changes the oil and gas industry’s competitive game. So long as they could plan for the long term, OPEC and Russia could afford to contemplate a modus vivendi with shale. Once Eurasian decarbonization begins to accelerate in earnest, it will no longer makes sense for OPEC and Russia to continue the game. Faced with the fossil fuel endgame, a final price war is their best strategy. The result will be a massive shock to oil and gas prices. And this time, as demand for fossil fuels progressively shrinks, low prices will be permanent.
The losers in that ferocious competition will be high-cost producers around the world. But the largest loser will be North American oil and gas producers: the United States and Canada.
Of course, any prediction is hedged with uncertainty. But this scenario, emerging from the Nature Energy modeling exercise, as by far the most likely. On the consumer side, cost incentives are increasingly unambiguous. Within five to 10 years, the case for fossil fuel consumption will be harder and harder to make. Once decarbonization takes hold, what will dominate the remaining oil and gas markets is leading OPEC members’ ultra-low cost base.
In short, as Kerry declares, the world is undoubtedly facing an industrial revolution, but for the United States, the consequences are highly ambiguous. This is not a question that can be separated from politics.
When the United States celebrated and encouraged the shale sector’s expansion, it gave fortune a hostage. A proactive, foresighted policy would have sought, if not to bar the industry’s expansion, then at least to warn against its risks and remove any incentive to the misallocation of capital. Instead, first the Obama and then the Trump administration cheered the expansion on. At its peak, the industry added a full percentage point to U.S. growth. Now, according to Nature Energy paper, it is not a question of whether but only of when those assets become stranded.
How will the United States react?
On the side of the fossil fuel lobby, the inclination is clearly to dig in. Insofar as there is a strategic vision, it seems to be one of protectionist defense. It would not be the first time. The history of the United States’ energy industry in the 20th century is not one of free market capitalism. Between 1959 and 1973, America’s domestic oil market was comprehensively insulated against competition from low-cost Middle East oil. Imports were banned and domestic production regulated under arrangements first put in place during the glut of the 1930s. As a result, by the late 1960s, oil prices in U.S. domestic markets were 60 to 70 percent above those for Middle East crude oil. Only in 1973, as demand ran ahead of domestic production, were imports decontrolled. Something similar is apparently what Sen. Joe Manchin has in mind for West Virginia’s coal: Apply huge subsidies to keep coal-fired power generation in business for the foreseeable future. This will be ruinous for the environment and expensive for consumers and taxpayers. If climate policies had nothing more than scientific advocacy and green activism to back them up, it would surely be the outcome we would expect.
This, however, is about to change. The kernel of truth in Kerry’s boosterism is the renewable revolution is coming to the United States too. Fossil fuel interests in the United States may dig in, but what they now face is not just science and activist commitment but a substantial economic current running against them. Consumers are shifting and so are business groups. Tesla—which, after all, is a harbinger of the energy transition—is valued more highly than all the other car-makers of the world put together, despite the fact that Ford Motor, General Motors, and Volkswagen also envision the end of internal combustion engine vehicles by the 2040s at the latest. Big parts of Wall Street; advocates of environmental, social, and corporate governance investments (notably including billionaire Mike Bloomberg’s empire); and the tech industry applaud the transition. Even electricity utilities can no longer be counted on as loyal allies of fossil fuel producers. Some will go along with Manchin, but others see their future in clean power. After decades of stagnation, electricity demand is about to surge.
This is what gives business optimists hope. Indeed, they can even turn fossil fuel holdouts into an opportunity. A recalcitrant polluter is an opportunity for the creation of carbon markets. So-called carbon offsets will give high emitters the chance to reverse the damage done by funding remediation and large-scale carbon capture. Business, the optimists promise, will lead the United States out of its climate policy impasse.
But is this likely? To imagine that economics leads to political de-escalation would be, to say the least, historically naive. As U.S. history teaches, socioeconomic clashes can play out violently. The South fought a civil war in defense of slavery, a mode of production based on forced labor. Nor do producers, outrun by technology, necessarily surrender quietly to the force of technological logic. Think about the protracted rearguard actions mounted in defense of agrarian interests that distorts global food markets all the way to the present day. The most gothic visions see the United States plunged into something akin to a civil war between fossil fuels and anti-fossil fuel factions. That may be fanciful, but what is harder to deny is the United States, whether governed by Democrats or Republicans, has a lamentable track record of managing and mitigating the job losses and social dislocation that follows deep economic change.
In 2012, economist David Autor and his co-authors published a famous paper on what they called the “China syndrome.” They showed how China’s integration into the world economy and a surge of imports to the United States raised incomes overall but, at the same time, irreparably damaged many manufacturing communities across the United States. Ahead of COP26, Autor and his co-authors released an updated paper, which compared the China shock with the impact of coal’s rundown. Damage to local economies from the coal industry’s decline was even worse. If the China shock is widely blamed for unhinging the blue-collar coalition that once supported Democrats, the effect of the coal industry’s collapse was even more unambiguous: 2016 saw a heavy pro-Trump swing across America’s coal regions.
The answer from the Democratic Party’s left wing, after they won control of the House of Representatives in 2018, was the Green New Deal. It sought to address this challenge by combining gigantic investment in renewables with an alliance with organized labor and marginalized groups to create a “just transition.” It was a head-on effort to win the argument for an energy transition, not just as an opportunity for green growth but as a moment of social reconstruction as well. It was a grand vision adequate to the scale of the climate crisis. When Sen. Bernie Sanders folded his presidential bid in 2020, many of his key advisors were incorporated into Biden’s policy team—and with good reason. Given the dislocation an energy transition is likely to cause, the industrial revolution Kerry advocates would be political poison were it not backed by a Green New Deal vision.
But Biden was not carried to victory in 2020 on the back of enthusiasm for green policies. In Texas, there is reason to believe an anti-climate, pro-oil vote helped yield a better-than-expected result for Trump. On Capitol Hill, Biden’s infrastructure plans have been cut to ribbons by a Congress with a nominal Democratic majority. The outlook for the 2022 midterms is grim. Decarbonization may be a promising business proposition in some sectors, but it is not an issue that will help Democrats win the majority they would need to give comprehensive climate policy a robust political platform.
We are thus back at the impasse. The idea that economic logic by itself will deliver an unambiguous case for ambitious climate policy in the United States is naive. But so too is the idea that a Green New Deal-style program will carry a progressive Democratic Party to triumphant victory. The possibility of a deepening sociopolitical divide around the climate issue and inconsistent and incoherent policy cannot be denied. While individual eco-entrepreneurs like Musk may get rich, the fear must be that the United States never develops a coherent social response to the energy transition.
But is this vision of deadlock too conservative, too rooted in the zero-sum logic of fossil fuels’ rearguard action? If we give credence to the revolutionary economic logic of decarbonization, how long will it be before it takes on such momentum in the United States that it crosses the aisle and converts substantial parts of the Republican coalition to active climate politics? This conversion of conservatives to the cause of renewables has happened already in the United Kingdom, Germany, and India. For the United States, it is not as implausible as it seems. Already the economic logic is beginning to make itself felt.
At the end of 2020, the top five states for installed wind power capacity were not all blue-state bastions of the Green New Deal—some of which have seen dogged resistance to offshore wind farms—but Texas, Iowa, Oklahoma, Kansas, and Illinois. In 2020, Iowa already generated 58 percent of its power from wind. In Kansas, the share was 43 percent. Both are also large-scale producers of ethanol. California leads in solar, but the next five states are Texas, North Carolina, Florida, Arizona, and Nevada. Every plausible road map for America to reach net zero by 2050 envisions a clutch of solidly Republican states becoming huge exporters of renewable energy. Whereas competing with Saudi Arabia and Qatar in dwindling global markets for oil and gas is a fool’s errand, electricity markets are protected by the cost of long-distance transmission.
Potentially, this is a transformative shift in the United States’ political economy. Renewable energy gives new value to agrarian regions with plenty of land, sun, and wind. That is true everywhere, but in the United States, it has a particularly political significance because the United States’ 18th-century Constitution gives disproportionate weight in Congress to sparsely populated rural states. Generally, that is a roadblock to progressive politics. But when it comes to the energy transition, the United States may, before too long, reach a tipping point where the preponderance of the Senate backs a climate-friendly national electrification drive. Iowa has any many senators as Texas; why should their commitment to renewable energy be any less resolute than Texas’s to oil or West Virginia’s to coal and gas?
Ahead of the 2020 election, a coalition of seven Republican senators lobbied then-majority leader Sen. Mitch McConnell for continued federal support of clean energy—without mentioning the climate issue. It was simply a matter of jobs. In 2021, what had formerly been the United States’ leading wind trade group was re-founded as the American Clean Power Association, a corporate technology lobby. Among its members are renewables giant NextEra Energy and a no-nonsense Florida utility that has vied with ExxonMobil for the title of America’s most highly valued energy company. American Clean Power Association’s message is clear: “As a trilliondollar industry, we need to make the economic argument for ourselves, not only the environmental one.”
When Kerry as Biden’s climate tsar evokes a green industrial revolution, one thinks of breakthroughs in battery technology and green steel, answering the U.N. climate conference’s global challenge. But if the energy transition is actually to take root in the United States’ unique political economy, it may be better to envision it in rather different terms divorced from the climate issue. It could be an agro-industrial transformation, offering ultra-cheap electricity from wind and solar as a new common denominator of rural and urban America.