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COP28: A Cop-out?

By January 15, 2024January 17th, 2024featured articles

The COP28 climate change conference concluded in late December, and for the first time ever, the world has committed to transitioning away from fossil fuels.

Good news, right? We’re ending our addiction to fossil fuels, right? Let’s just say I’m sceptical, and anyone concerned about the climate, among whose numbers I count myself, should be too.

There is a telling line in the text of the so-called “UAE Consensus”, which notes that the Paris Agreement should be implemented “in the light of different national circumstances” – a tacit nod to developing countries’ desire to exploit their national resources for economic development. As it should be – far should it be from rich countries to impede the economic progress of others. So, full steam ahead for developing countries.

What of the developed nations? An optimist might note that, in the US, total energy consumption has risen from 98 quadrillion British thermal units (BTUs) in 2003 to 100 quadrillion in 2022 – a 3% increase. Over that same period, economic activity has increased 124%, so that Americans have more than doubled their energy efficiency. The outcome is likely even better in terms of carbon output when we consider the increased proportion of renewables and natural gas in energy production.

A pessimist might note that Mother Earth cares more about absolute emission levels than efficiency gains.

Why is it that we consume as much energy as ever despite increasing efficiency? William Jevons, a 19th-century British economist, observed that enhanced steam engine efficiency led to greater demand for coal, not lower. This “Jevons Paradox” is resolved by noting that increased efficiency: (a) promotes higher adoption of a technology; and (b) accelerates economic growth, thus increasing consumption.

Examples of Jevon’s Paradox abound in our modern world, too. The average fuel economy of cars has increased substantially, but demand for petrol hasn’t faltered – SUVs have become very popular. The energy needed to heat and cool a home has been slashed as a result of better windows and HVAC technology – but we now live in bigger homes.

My point is that the demand for fossil fuels is unlikely to abate even as we become more efficient with their use. When you mix this in with developing economies’ need for fossil fuels as a tool of economic enrichment, it’s hard to see a credible path to fossil fuels being phased out by 2050.

It is true, however, that consumers are indifferent to the way in which energy is produced, and care simply about enough energy being available to sustain consumption. We might, thus, be able to phase out fossil fuels, if we can scale up renewable energy production at a rapid enough clip.

We rely here on the concept of energy return on energy invested (EROI), which calculates how much energy is generated for each one unit of energy input. For example, it takes energy to mine coal and transport it, so in order to justify its use as an energy source, it needs to deliver more in output than it absorbs.

The history of humanity has been one of increasingly high energy returns: going from biomass to fossil fuels to nuclear energy. An increasingly productive energy system allows for surplus energy, which can do things like foster economic growth, encourage innovation and experimentation, and permit flourishing arts. All of these are highly beneficial for humanity.

Renewables, arguably, are a step backwards as they generate less energy per unit of input. Where a nuclear reactor has an EROI of 75-100, solar and wind have EROIs of anywhere between 2-10. The reason for this is the material intensity of solar and wind (lots of minerals and metals) and their latency – the wind must blow, and the sun must shine.

Overall, it’s difficult to be optimistic about humanity’s ability to phase out fossil fuels and implement a renewables-based energy system. Clearly, we must stop adding carbon to the atmosphere. The question is how. Nuclear power and carbon sequestration appear, to me, more feasible options and should be a much larger part of the solution.

As ever, a matter this important is going to have large effects on stock markets and capital allocation. For example, we have seen almost a blanket ‘no’ from investors when it comes to any company associated with fossil fuel production or even distribution. Some investors are afraid that these businesses are in terminal decline, others reject them outright on environmental grounds. The evidence, however, suggests otherwise – peak oil consumption is likely a long way off (and who knows how these companies will transform over time). There must be a high probability that the now very lowly valued oil and gas majors provide outsized returns from here. We can even see evidence of this shift in market sentiment with Irish-based DCC, a distributor of oil and gas energy solutions. It has also been significantly derated, yet it is successfully leading the charge in enabling energy transition to renewables for its vast customer base (and its highly profitable LNG distribution business will likely exist far into the future!).