Who’s next for disruption? Oil

May 2, 2018

When we talk about transport’s climate problem, we usually talk about cars, trucks, planes and ships as the big issues. But, of course, they’re only part of the story. The heart of the problem is not the vehicles or the mobility they provide, but the pollution they cause by burning oil.

For Europe oil isn’t just an environmental problem. It’s also an economic problem. The recent increase in oil prices will reduce consumer spending and direct money out of the European economy, into oil exporting nations’ and oil companies’ coffers. As a recent report by Cambridge Econometrics has shown, reducing oil consumption has major economic benefits for the EU economy.

In their quest to tackle the oil and greenhouse gas problem, European and national regulators have focused mostly on reducing demand for it both through standards and taxation. This is the right approach: improved fuel economy, a phase-out of the combustion engine and improved transport efficiency are our best chance to decarbonise (land) transport and end our dependence on costly imports.

But if oil is the problem, shouldn’t the oil industry be part of the solution? If the mighty and incredibly rich oil industry would get behind the low-carbon transition, surely things could go a lot faster? Could this be done? And how?

We were expecting to find some answers in the European oil industry’ vision on 2050 decarbonisation. Unfortunately that vision is somewhat underwhelming. Its punchline is that “Europe’s citizens and businesses will be supplied with liquid fuels and products that are progressively lower in carbon intensity, being used in progressively more efficient vehicles.” The vision mentions “sustainable biofuels, CCS/CCU1, renewable hydrogen and power-to-liquids” but says nothing about how these are going to come to the market at the scale required to decarbonise the transport sector over the next 30 years.

That’s a shame because we’re going to be needing things like renewable hydrogen and power-to-liquids – not just for transportation (think aviation) but also for other parts of the economy. In theory this could also offer opportunities for the oil and gas states. For example, cheap solar would enable Arab states to become suppliers of synthetic fuels in a decarbonised world. The question is whether oil companies are going to be the ones delivering this future for us. They have the money and the technical know-how so in theory they could. But why would they? Their business model depends on the world burning its product.

The question is not just whether we should trust in the oil industry’s good faith – we shouldn’t. Rather, it is whether large incumbents – be it oil or car producing – can really drive the change and innovation that we need to halt climate change. In the power sector, the renewables revolution has been driven mostly by new players. Smaller, more agile and much more innovative than the old utilities they have disrupted in places like Germany. Companies that were slow to embrace renewables have paid a big price and have sometimes disappeared completely. Smarter companies reacted to the competition from the upstarts and invested in the future early on and they will be around for the future.

Something similar is happening in the automotive sector. New entrants, epitomised by Tesla but including a host of Chinese companies, are gearing up to disrupt the automotive industry. Some companies like Nissan-Renault, Volkswagen and Volvo appear to be embracing that future. Others – most notoriously Fiat-Chrysler but also companies like PSA and Bosch, a supplier of diesel technology – are doing their utmost to slow things down.

This is not just a philosophical reflection but one that has very practical impacts on policy choices. We should stop designing EU policies with the sole aim of transforming incumbent mammoths. Take the CO2 standards: they are a great and important policy instrument, but they offer no incentive or reward for the new companies that are actually driving innovation. That’s wrong and counterproductive if only because it means the next Tesla will never be ‘made in Europe’.

Circling back to oil, it is clear the EU needs to have another go at making the oil industry contribute to the decarbonisation challenge. The key here will be to design a regulatory and fiscal framework that disrupts oil companies’ immensely profitable dig-and-burn business model and opens the door for players.

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