Keeping the Oil in the Soil

By James Boyce, Professor of Economics, University of Massachusetts Amherst. Originally published at the Institute for New Economic Thinking website

Efforts to reduce demand for fossil fuels by promoting energy efficiency and clean energy can do a lot. But to meet the Paris Agreement target of holding the rise in average surface temperatures to 1.5-2 °C, we need to curtail the supply of fossil fuels, too. This means capping the total quantity of fossil carbon that we allow into the economy each year, and tightening the cap over time on an emission-reduction trajectory anchored to the Paris target.

Curbing the supply of fossil fuels means raising their price – effectively putting a price on carbon emissions. This is a feature of the policy, not a bug: higher fossil fuel prices spur greater energy efficiency in the short run and more investment in clean energy in the longer run.

Yet some climate activists who embrace the slogan “keep the oil in the soil” have been deeply skeptical about carbon pricing.

One sensible basis for this skepticism is the reality that where carbon pricing has been implemented to date, the price typically has been too low to make much of a difference. But this points to the need for more robust prices, not a price of zero. It’s not a reason to oppose carbon pricing across the board, any more than having tasted weak coffee is a reason never to drink coffee again.

Sometimes the skepticism is also a result of muddled thinking. Rather than charging a price, the argument goes, wouldn’t it be fairer and more effective simply to keep the oil in the soil and the coal in the hole, to “just say no” to fossil fuels? Why should anyone be able to pay to pollute?

In thinking through this objection, it is useful to consider what would happen if one were to succeed in keeping fossil fuels in the ground in a place big enough to make a difference. Imagine, for example, that the people of Nigeria somehow manage to shut down that country’s oil production, compelling their government and its multinational partners to keep its oil in the soil. Imagine, for good measure, that the people of Angola do the same. These two nations are the top oil producers in sub-Saharan Africa, together accounting for about 4% of world supply. What would happen to oil prices if they stopped production? The answer, of course, is that they would go up.

We saw something like this happen in October 1973, when the newly formed Organization of Arab Petroleum Exporting Countries announced an embargo on oil exports to nations that supported Israel in the Arab-Israeli war. By January 1974, the world oil price quadrupled to almost $12/barrel, an episode remembered as the world’s first oil shock. Five years later a second shock was precipitated by the Iranian revolution and the Iran-Iraq war, and the world oil price rose to about $40/barrel.

On both occasions, the increase in prices far exceeded the decrease in oil supplies. World crude oil production was basically flat in 1973-74, and declined by only 4% in 1979-80. Yet prices soared. This was passed along to consumers in higher prices for transportation fuels and everything else that uses oil in its production and distribution.

The lesson was clear: when fossil fuel supplies are cut, their prices go up. A lot.

If some major producing countries managed to keep their oil in the soil, pushing up prices to consumers around the world, where would the extra money go?

The answer, of course, is that the money would flow to producers who do not keep their oil in the soil. The biggest beneficiaries would be oil companies in Saudi Arabia, Russia, and the United States, the world’s top three producer countries. As the price of oil goes up, their profit margins would rise accordingly.

The net result would be a transfer of money – lots of it – from consumers to some of the richest and most powerful corporations in the world, including some of the most stubborn opponents of effective climate policies. Oops.

The just-say-no strategy would reduce emissions, at least until other producers step up output in response to the higher prices. But in terms of who pockets the money, few would call this outcome fair.

The price effect occurs regardless of the cause for the reduction in supplies or its motivation. If oil producers cut supply to punish adversaries or fatten their profit margins, the end result is higher prices for consumers. If some oil-producers were to “just say no” to further extraction, the outcome would be the same. If carbon pricing is implemented by means of a cap or a tax, again we get the same result.

The crucial difference is where the money goes. In the case of the just-say-no strategy, as in the case of a producer cartel, the extra money paid by consumers goes to fossil fuel producers in proportion to the amount they continue to produce. In the case of carbon pricing, there are more attractive options. One policy, recently adopted in Canada and increasingly discussed in the United States, is to return the money directly to the public as carbon dividends: equal annual or quarterly payments to every person.

The case for carbon dividends rests on three pillars.

The first is political. Carbon dividends would protect the purchasing power of the majority of households in the face of rising fuel prices, bolstering public support for effective climate policy. The importance of this feature is underscored by the “yellow vest” movement that broke out in France in November when the government announced increased fuel taxes. The rationale for the tax hikes – about 12 US cents on a gallon of gasoline and 35 US cents on a gallon of diesel – was to combat climate change by promoting fuel efficiency. The government “talks about the end of the world,” the protesters declared, “while we are talking about the end of the month.”

The second pillar is economic. Dividends turn what would otherwise be a regressive tax, hitting the poor harder than the rich as a percentage of their incomes, into a progressive one. Everyone receives the same dividend regardless of their personal carbon footprint. But in absolute dollar terms (rather than as a percentage of income) the rich have outsized carbon footprints as a result of lifestyles that include bigger houses and more jet travel. With dividends most low-income households come out ahead, the middle class breaks even, and the rich pay more into the carbon revenue pot than they get back. The net result is a modest dent in income inequality, the other crisis of our time.

The final pillar of the case for carbon dividends is ethical. Dividends give concrete expression to the principle that the gifts of nature – in this case, the limited capacity of the biosphere to absorb carbon emissions safely – belong in equal and common measure to all.

All in all, not a bad way to keep the oil in the soil.

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33 comments

  1. Louis Fyne

    the elephant in the room is Saudi Arabia and other gulf states. They’ll keep pumping as much as the market can bear until the wells run dry…..because they need the revenue to fund the lavish lifestyle of the elites and as social welfare to keep their bottom 99% from revolting.

    Like cocaine or meth, you can’t cut the hydra’s heads at the supply. It has to be on the demand end.

    Reply
      1. drumlin woodchuckles

        If America surrounded itself with a Teflon Kevlar Wall of Protection, we could ban imports from any country which failed to adopt in-every-exact-detail whatever carbon fee America adopted. If they retaliated by banning American exports from their countries in return, this would be a GOOD thing because it would reduce Global Trade by just-that-much-more. And Global Trade is a major cause of Global Warming. So anything which can reduce Global Trade can also reduce Global Warming.

        If America surrounded itself with the Great Carbon Wall of Protection and if Saudi Arabia insisted on trying to sell oil here, such a ” do what we do or No Sale” rule would keep that Saudi Oil out of America.

        That can’t happen in the current Forcey-Free-Trade context. NOTHing can happen in the current Forcey-Free-Trade context. America is helpless to control its OWN carbon emissions until America has completely dissolved the Bonds of Servitude enchaining it to a hostile and evil Free Trade World.

        Reply
      2. BlakeFelix

        A tax on the product is pretty much a tariff, if you tax domestic production the same it should be allowed and discourage both.

        Reply
  2. Denis Drew

    Even if we could produce 50% of today’s world power needs with renewables (sun, wind, water power) — IOW even if we could produce as much renewable power as we are ever likely to produce — that would only make 5% of the power the world will need 100 years from now when we will need 10X as much power (all rich countries, population growth).

    Nuclear is the only way to go — and thermonuclear when we get around to it. Thermonuclear going to be a long time — similar to the first steam power for transportation and manufacturing. It took a lot of very able people 200 years to bring steam along from pumping water out of coal mines to riding the tracks. Maybe 50 years for equivalent progress in thermo.

    Meantime there may realistically be 1000 times the proven reserves in uranium out there. Doesn’t take much — a pound of nuclear fuel provides the equivalent power of 200,000 pounds of coal. Ditto may even be extracted from the oceans (just like thermo deuterium).

    The Japanese reactor disaster was easily avoided. They just had to keep their back up power supply high enough not to be swamped by a tsunami which they were warned could happeb. Nobody died in Three Mile Island. The Russian melt down doesn’t count for us. The Earth is going to self-incinerate if we don’t go nuclear — totally.

    That’s the physics of it — can’t imagine how we will handle the politics and economics of it — 95% nuclear or bust.

    The book you want to read (I could only read about half — too technical in parts) is:
    The Future of Fusion Energy – January 2, 2019
    by Jason Parisi and Justin Ball

    https://www.amazon.com/Future-Fusion-Energy-Jason-Parisi/dp/1786347490/ref=sr_1_1_sspa?crid=1UWD76XV5PGSD&keywords=the+future+of+fusion+energy&qid=1563896178&s=books&sprefix=the+future+of+fus%2Caps%2C212&sr=1-1-spons&psc=1&spLa=ZW5jcnlwdGVkUXVhbGlmaWVyPUEyVUs4NEVROFpKSkJEJmVuY3J5cHRlZElkPUEwMjU1ODg2M0Q5TTNQTTVDMlZWRyZlbmNyeXB0ZWRBZElkPUEwNzk5NTUyMjdDWkFBRDFYQkdBSCZ3aWRnZXROYW1lPXNwX2F0ZiZhY3Rpb249Y2xpY2tSZWRpcmVjdCZkb05vdExvZ0NsaWNrPXRydWU=

    Reply
    1. Synoia

      What does one do with the radioactive waste?

      Not just the spent fuel, but the reactors, containment and medium and low level radioactive waste produced by a nuclear power station?

      The San Onofre Nuclear Plant (aka SONGS) in SoCal, now shut down, has yet to find a place to store its spent fuel, which I believe is now stored close to sea level on the site.

      Reply
      1. Denis Drew

        There is I believe a half mile deep, multihundred long salt mine somewhere along Kansas through Missouri for just one example (read it last few days — can’t remember where naturally). We’ve spent centuries boring holes deep in the earth to extract coal and metals. Given the density of nuclear fuel — hundreds of thousands times its weight in coal — shouldn’t really be insurmountable, think?

        Reply
    2. TroyIA

      I’ll try to use some fuzzy math to give an estimate of the number of nuclear power plants that will be needed to keep warming at 1.5c by 2050. According to the latest IPCC report all scenarios will require an increase in nuclear power generation. I will use the P3 middle of the road scenario which says nuclear energy production needs to increase by 98% by 2030 from the 2010 level.
      The U. S. has 59 nuclear power plants currently so we will need to build ~60 next decade or 1 every 2 months. The P3 scenario also says that we will then need to have nuclear power generation at 501% of 2010 level by 2050 so around an additional 240 nuclear power plants will need to be built between 2030 and 2050 or 1 every month for 20 years.
      And once all of those plants have been built we will then have to begin removing carbon from the atmosphere. Definitely going to be a tall order but not impossible.

      Reply
    3. Tyronius

      There’s a lot of very fuzzy math here and even fuzzier assumptions underlying your assertions here, not to mention a complete lack of any discussion of the cost of nuclear relative to other energy sources.

      First, cost; nuclear isn’t cheap, even when it works as intended. Renewables are already cheaper than nuclear as well as fossil fuels. I propose we use at least some of the revenues generated from carbon taxes to subsidise the installation of renewables and supporting infrastructure such as batteries.

      Second, nuclear still requires a lot of infrastructure for distribution. Renewables are inherently more distributed and thus need less of a transportation network, reducing costs further.

      Third, the notion that Chernobyl, Fukushima and Three Mile Island are not affecting Americans is a joke in poor taste. Multiplying there number of nuclear plants will multiply the number of accidents. The only benefit of nuclear power I’ve ever seen is their ability to use reprocessed fuel from nuclear weapons and turn it into useful energy. Keep enough of them around to do that and then shut them down!

      Finally, fusion power is a COMPLETELY different animal and should not be lumped into any conversation about fission based nuclear power. In all for it- when and if it becomes a viable option. Meanwhile, humanity needs to stop burning hydrocarbons NOW and the best way to do that is to bring more solar and wind power on line, post haste, and use it at home, in industry and convert our transportation network to use it as well. All this is not just possible, it’s feasible and attractive economically- even more so with subsidies generated by carbon taxes.

      NO MORE NUKES!

      Reply
      1. TroyIA

        NO MORE NUKES!

        Then say hello to 2+ degrees of warming. In the last IPCC report 85 different scenarios were considered in order to keep warming to 1.5 degrees and EVERY scenario included the use of nuclear power generation.

        If you don’t like nuclear power take it up with the world’s leading climate scientists because at this point the brightest minds can’t figure out a way to become carbon neutral by 2050 without it.

        Reply
  3. MarkMark

    Nice article. My understanding is that these revenue neutral proposals have been opposed by some environmental groups, because these groups would prefer that the revenue raised from a carbon tax be diverted to other programs they favor, rather than being refunded to citizens. See the article below regarding such a proposal in Washington State.

    https://www.sciencelawenvironment.com/2019/02/defeat-of-the-carbon-tax-as-washington-increasingly-mimics-the-partisan-gridlock-of-the-other-washington-it-risks-losing-progressive-action-in-the-name-of-progressive-principles/

    Perhaps those more familiar with the environmental movement could tell me whether or not a proposal for a revenue neutral carbon tax as described in this article would be generally supported.

    Reply
    1. BlakeFelix

      It does seem to get less support than it ought to IMO. Most everyone wants to be a benevolent dictator, and thinks they can do better than just pricing emissions and letting the market sort it out. Some people because they think they are wise, and some people because they have an angle where they profit…

      Reply
  4. inode_buddha

    People need to remember that oil is used for lots of things besides fuel. You need to come up with a substitute for plastic and asphalt. People also should realize that we’ve had the technology to triple your gas mileage while reducing emissions below measurable levels since the 1980’s. The automakers have never implemented it due to interlocking directorships with oil companies.

    Reply
    1. Synoia

      People also should realize that we’ve had the technology to triple your gas mileage while reducing emissions below measurable levels since the 1980’s.

      Please name that technology.

      Reply
    2. Jeremy Grimm

      What is the technology that will triple my gas mileage while reducing emissions below measurable levels? Do you have a source for that claim? Is there any way to affordably add the technology as an after-market item?

      Reply
      1. Monty

        Yes, go to a car customizer and ask them to give you “The Flintstones” upgrade, and some sturdy tennis shoes!

        Reply
    3. praxis

      The magic carburetor mythology prevails…

      The idea that oil companies embargo some secret technology that will unlock efficiencies in internal combustion engines is absurd. Any engine manufacture/engineer would jump such opportunity to essentially disrupt and subsequently own the market.

      There are things we can do to improve the efficiency of vehicles with gas ICE.

      Use a leaner air fuel mixture and thereby produces more NOX emissions (significant green house gas + health pollutant, hence emissions controls).

      Drive smaller and lighter vehicles with a 0 to 60 km acceleration of 20+ seconds.

      Reply
    4. drumlin woodchuckles

      90% of the oil used is burned for fuel. Only 10% of the oil used is used for “everything else”. So if we could delete oil from the energy portfolio of the world, we would reduce our oil use to 10% of what it now is, just by making that simple-but-not-easy change.

      Reply
      1. BlakeFelix

        Also the plastic and asphalt carbon doesn’t necessarily end up in the atmosphere. They each have their own problems, but they are very different from oil. I sometimes suspect throwing stable plastic or asphalt in a landfill is the cheapest long term carbon sequestration we have going…

        Reply
  5. Susan the other`

    This sounds like 6s. And so slow as to be ineffective. Convincing the oil producers to leave it in the ground will make it scarce and the price will go up. A consumption tax favoring the poor will keep them from slipping under subsistence levels. But I don’t see how it helps the atmosphere. A better use of money would be to spend the money, any money, on alternate transportation; retooling factories for things besides automobiles; improving smokestack scrubbers; etc. If there are fewer cars built there will be fewer drivers; if there are fewer drivers there will be less asphalt; fewer refineries; a whole chain of events. Perhaps we could also do this with plastic manufacturing. We desperately need to stop producing so much plastic. But it would be absurd to ask some plastic chemical producers to voluntarily cause a scarcity of plastic ingredients. Much better to take positive action to replace much of it with wood, paper, etc.

    Reply
    1. Joe Well

      But the anti-fracking movement is already having some success. Would it be that unthinkable to get the US to a moratorium on new fossil fuel exploration and then shut down the existing drilling, starting with the least popular ones?

      Around the world, extractive industries often are much less popular in the towns surrounding where the extraction actually takes place.

      This is one place where NIMBYism could be put to good use.

      Reply
      1. Susan the other`

        I’m all for it. But one thing the Yellow Vests showed us is that we need to provide the alternative before we turn off the spigot or impose higher prices/taxes.

        Reply
    2. BlakeFelix

      A carbon tax funding a UBI helps the atmosphere by making it expensive to pollute, so the effort that goes into tax minimization now would go into emissions minimization. It convinces the producers to leave it in the ground because demand is lower at the higher price, and the tax revenue can replace other, less useful taxes.

      Reply
  6. heresy101

    The easy solution is to tax fracking and oil extraction at 90% without a lot of phony write-offs.

    Then the tax money could only be used for:
    a) Paying off all student debt. Think of the support for the tax.
    b) Purchase cost reductions for plug-ins and EVs.

    Reply
  7. Adam Eran

    The organization promoting carbon tax + dividend: Citizen’s Climate Lobby. No position on prosecuting the oil companies for their malfeasance in concealing their climate research. Still, CCL is a pretty sophisticated operation, engaged in full-court lobbying. Google (or duckduckgo) them yourself and see.

    As for the price increase of the ’70s… Daniel Yergin said at no time did the supply restriction amount to more than 3% of the oil market. The price in 1971: $1.75/bbl. In 1982: $42/bbl (about, inflation adjusted, what it is now). Alaska’s North Slope came online shortly thereafter, reducing the shortfall, and the price of oil to around $10/bbl. Lucky for Reagan! (Warren Mosler says the real solution to the inflation-producing oil shortage was Carter deregulating the price of natural gas…but who knows, really?)

    Incidentally, arranging instability around Iran, and especially the straits of Hormuz, is a way to increase the price of oil too. Greg Palast says the Iraq war was not to get their oil, but to keep it in the ground.

    Reply
  8. Anthony G Stegman

    There is no politically viable solution here. The capitalist system that provides the framework for most of the world’s societies only functions when external costs ( a warming climate, depleted resources, degraded ecosystems, etc…) are ignored. If the external costs are included in the cost of everything we produce and consume the prices will skyrocket beyond the ability to pay. As a result, global economies would shrink, debt couldn’t be repaid, living standards (as currently measured) would decline sharply, and the oligarchs who run the world would see their wealth (and power) decline precipitously. In a very real sense, we are all trapped. A hellscape is far more likely in the future than is a rosy utopia.

    Reply
    1. human

      “prices will skyrocket”

      Absolute monetary cost is a red herring. As MMT shows, the number of currency units available is immaterial as long as finite resources are properly managed, and therein lies the rub. Resource extraction by the top percentiles negates the ability of the bottom percentiles to live a modest existence.

      Reply
  9. Norb

    Energy conservation must be the driving factor moving forward. Energy independence is a much larger issue than just supply side thinking- it is about doing more with less. Individuals- one way or another have great control over the process. It would be great to get political leaders who understood that point and have the ability to separate social needs from the needs of industry or profit makers. Social needs must come first.

    An efficient society, wisely using its energy for social reproduction seems like a promising call for action.

    Remove the obscene striving for ever growing profits and humanity just might have a chance for survival. Without that, only despair and hardship await.

    Whatever happened to the conservation movement?

    Using less energy because you are jobless and poor is NOT a solution- but that is the unstated goal of our elites.
    If you have enough gumption and aggressiveness to pull yourself up into the gluttonous heights of the elite ranks, great, if not, wallow in your misery seems like the plan.

    The energy utopians, think humanity can have it all. Well, we can’t. That is coming more obvious by the day.

    How about tax credits for individuals who live by using less energy. If I can live a simple life, why should I pay for someones gluttony? In America, it seems the plan is to let everyone pay for gluttony until they can’t, and then pretend they don’t exist anymore.

    Finding a need to arrange an economy where people work near their homes would make a huge difference in energy usage also, but no effort is being put into that direction either.

    Reply
    1. Tyronius

      No one aspires to live like hermits. With renewable energy there’s no need to. I happen to agree that we need to price the environmental and downstream costs into our goods and services; that would incentivise waste reduction, reuse, recycling, etc. The obstacles to this approach are not technological, they are political and as such must be solved politically.

      Reply
    2. BlakeFelix

      A carbon tax funding a UBI basically accomplishes that, except you get a check instead of a tax credit, which is better IMO. If you don’t pollute, you get a check and pay no taxes. Easier said than done, but it’s what we should be encouraging.

      Reply
      1. drumlin woodchuckles

        Interesting possible re-statement of the Hansen Carbon FeeTax-and-Dividend plan. The rich and the super-rich won’t care how much the carbon FeeTax at first point of fossil fuel sale raises the downstream price of everything they buy. They’ll be able to buy just as much regardless. Their paid-in Carbon FeeTaxes will go into the same pot as everyone else’s Carbon FeeTaxes. The money will be divided up into exactly equal shares to be sent as dividends to every single Legal Resident of the US.

        The Carbon FeeTax Dividend going to the rich and the super-rich would probably be a fraction of the amount of higher-price-embodied Carbon FeeTaxes they paid on their vast luxury consumption.
        If they think that’s unfair, they can reduce their fossil-based consumption. They can direct their vast consumption-money to fossil-free goods and services.

        The exactly-same-size Carbon FeeTax Dividend coming back to the Middles would be fairly large in comparison to the money they make. Their Dividend money would “go farther” if spent on no-fossil goods and services which would not be up-priced in step with the Fossil Carbon FeeTax.

        The exactly same-size Carbon FeeTax Dividend coming back to the Poors would be very important to the Poors. It might even be more actual money than what they spend or even make.
        They too might stretch it further on no-fossil goods and services as those goods and services come into existence.

        For those who don’t like the term Universal Basic Income, we could call that dividend the Universal Basic Dividend. It would shrink as the Fossil Carbon FeeTax rises to punitive and then torturous and then exterminative levels. And then the poverty problem would come back in full force.

        But the Hansen Plan is not meant to subsidize the Poors in the long run. It is meant to exterminate the Fossil Carbon Energy Industry from the face of America to stop the Carbon SkyDumping.

        Reply
        1. BlakeFelix

          Ya, that sounds about right. If carbon emissions get too low to fund it we can always tax other forms of pollution until they go away as well. Personally I think that if some kind of long term carbon sequestration is incentivized, charcoal in soil being my favorite, or plastic in landfills, or whatever, then the fossil fuel industry could survive in a highly taxed, much smaller form. I see no reason to tax things that aren’t harmful, while there are harmful things to tax, and there not being harmful pollution to tax is so far away from where we are I’m not worrying about it. Let the troubles of the day be sufficient for the day.

          Reply
  10. Scott1

    The easy thing about hydrocarbons is the standardization of how it
    is produced & distributed.
    We are in the “Bottleneck”. That’s what Jared Diamond called it.
    There are people who will do what is evil.
    We have the technology to merge & integrate energy sourcing.
    Those with power to monopolize the system as if it is stable
    & fully understood have let us get to the point where it is not
    irrational to see Mars as an escape destination.
    Methane releases from melting permafrost were never factored in
    & as they are factored in now, only systems engineering offers
    a less than dystopian way through the bottleneck.

    Reply

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