Zero-Sum Game

In my recent Sidecar piece, I developed the argument that economic disruptions unleashed by surging energy prices – especially in the gas market – can be connected to state climate policies. Adam Tooze, responding in his Chartbook #51, challenges this so-called ‘energy dilemma’ thesis. What Tooze rejects unambiguously is the theory that Western fossil fuel corporations have priced the prospect of climate related policy changes into their investment behaviour, and that this has contributed to the tensions on the supply-side that came to the fore this autumn. While I agree that stronger evidence is needed to reach a definitive conclusion, I nonetheless have several reservations about Tooze’s essay.

In the context of the current crisis, the term ‘energy dilemma’ was coined by Lara Dong, an analyst for the consulting firm IHS Markit, who explained how Chinese authorities have struggled to balance environmental concerns over coal with the need for energy security. Yet this is not a new idea. It can be traced back to the 1970s, when experts became increasingly aware of the tension between achieving affordable and reliable energy provision and limiting the detrimental impact of growing fossil fuel consumption. In 2010, the geographer Michael J. Bradshaw produced a systematic formulation of the dilemma in ‘Global Energy Dilemmas: A Geographical Perspective’, asking: ‘can we have the energy necessary for economic development and, at the same time, manage the transition to a low-carbon energy system necessary to avoid catastrophic climate change?’

Tooze, in his piece, presents the ‘energy dilemma’ thesis as follows:

The canard that continues to circulate is that the supply shortfall is directly connected to climate policy. Too much talk about net zero has discouraged fossil fuel investors, resulting in lower investment, restricted supply and vulnerability to demand shocks.

His creditable aim is to prevent this narrative being used to postpone the green transition. However, it is worth noting from the outset that the definition he presents is a narrow one, limited to the supply constraints that arise from waning private investment in fossil fuels precipitated by climate policies and related discourses. For Tooze, there is an energy dilemma only when climate policies exert an ‘indirect effect’ on private investment that results in limited supply and translates into systemic fragilities.

By contrast, building on Bradshaw’s perspective, ‘energy dilemma’ can be used to refer more broadly to the crisis tendency of capitalism driven by climate policymaking. That is, a dilemma occurs whenever climate policies hamper economic growth. This includes the direct effects of public regulation on economic actors’ operations (in particular, the impact of climate legislation on production, funding activities and consumption patterns) as well as the indirect effects of policy changes – or anticipated ones – on private investment. These elements are closely intertwined. Since both direct and indirect effects place constraints on the supply-side in terms of rising costs or reduced investment opportunities, their outcomes are similar: a cascading effect on volumes, prices and profitability that impacts growth patterns, either directly or via the financial system.

With this broader interpretation of the energy dilemma – in which both direct and indirect factors contribute to a crisis dynamic unleashed by climate policymaking – much of the evidence cited by Tooze does not contradict my thesis but rather confirms it. Take the case of China’s energy crisis. Tooze writes that ‘There is no doubt that deliberate decisions by Beijing to regulate coal-fired electricity generation played a key part.’ Although other details must also be considered, in the context of booming demand a straightforward energy dilemma causality is discernible: binding targets for energy consumption and coal use = energy shortages = manufacturing disruptions and blackouts. This process ‘plays out transnationally and by way of the spillover of Chinese supply constraints both from coal and low-carbon sources, to global LNG markets’ – an observation which appears to give the energy dilemma framework a global dimension, showing how tentative steps in the direction of carbon transition in China fuel tensions on international markets that reverberate in the rising cost of gas, particularly in Europe.

Tooze correctly points out that the attempt of EU authorities to limit their reliance on Russian gas has backfired. The building of oversized LNG storage capacities subsidized by public money in Europe was intended to set up a credible alternative to Russian supply in order to extract cheaper prices from Gazprom. But this integration into global LNG markets has ended up increasing the vulnerability of the region to gas price surges. The internal difficulty of the energy transition is thus compounded by direct exposure to the repercussions of China’s energy metamorphosis. Moreover, Tooze writes that in 2021 ‘the green factor finally does enter the European story’ since ‘a surge in the price of emissions permits in the EU-ETS’, in addition to rising coal prices, prevented European operators from switching back to generating electricity from coal. Here, climate policy directly restricts the possibilities to mobilize cheaper options which would defuse cost pressure – another iteration of the energy dilemma that Tooze purportedly rejects.

However, although many of Tooze’s examples fit within a more broadly conceived energy dilemma framework, the overall thrust of his argument is distinct. He asserts that the dramatic fall in fossil fuel investment since 2015 is not a consequence of climate policies and campaigns but of falling energy prices, themselves related to the American shale-gas revolution of the early 2010s. It is worth interrogating this point further. Focusing on the coal-gas-renewable conundrum in Western countries, we must understand the extent to which the current misalignment between supply and demand is due to decreasing investment in coal, insufficient increase of renewable supplies and/or insufficient investment in gas to bridge the gap – and how climate policies have influenced these interlocking issues.

On this very complex question, Tooze makes two claims. The first is that divestment from coal was mostly driven by a loss of competitiveness vis-à-vis alternative sources of power generation, especially gas. This was clearly a decisive factor in the short-term, but it would be reckless to dismiss the significance of longer-term financial assessments informed by government climate pledges and civil society pressure on investors. For instance, Magnus Hall, CEO of Vattenfal, explained that his company decided in 2016 to divest from coal-fired power generation in Germany for both short-term economic reasons and longer-term prospects related to climate policy:

society is becoming less and less accepting of coal-fired power generation. And there is an economic truth: it is becoming increasingly difficult to make money from coal in Europe. For our part, we sold our mines and power plants because we knew that these assets had become too risky financially.

Tooze’s second claim concerns the ambiguous position of gas supplies. While the use of gas has grown as a substitute for coal – in part because it is a more flexible complement to renewables – investment has increased in the development of LNG infrastructure for imports. However, production has also decreased in Europe and investment in US shale-gas has slackened. Tooze tries to explain the rationale for this slowdown:  

If there is a force holding back new investment in America’s shale industry today, it is not government climate policy, but the insistence by Wall Street that the shale industry actually pay out dividends rather than plowing back its earnings into new drilling.

There are good reasons to doubt this argument. In fact, from the point of view of capital, not investing – or divesting and distributing profits to shareholders – is a logical way to hollow-out a business without a future. In that sense, the financialization mantra, ‘downsize and distribute’, becomes one way to retreat from fossil fuels and reallocate capital to other sectors. Consistent with this, we observe a marked relative devaluation of the Oil & Gas firms’ market capitalization relative to other sectors in the course of the last decade (Figure 1), reflecting investors’ move away from carbon stranded assets and anticipation of deteriorating prospects. The Wall Street Journal likewise acknowledges that ‘Concerns about long-term demand are exacerbating the oversupply of fossil fuels, and companies say they have become more selective about where they invest’, contributing to one the worst-ever write-downs in 2020. All this can be read as evincing a clear – if dramatically insufficient and untimely – shift away from fossil fuel which, in specific segments of the market and amid booming demand, contributed to the recent shortages in coal, gas and electricity generation.

Figure 1. All-World index versus Dow Jones Global Oil & Gas index: last 10 years ( market data)

Tooze states that ‘What 2021 exposes is that the green push since 2015 has been enacted against the backdrop of a regime of low energy prices set by the price collapse in 2014.’ By green push, he means the fact that the replacement of some coal supplies with relatively cleaner gas was supported by a favourable evolution of their relative prices. The big picture is that this is not a viable pathway for green energy, due to methane emissions and underreporting of leakages which suggest that natural gas could be more environmentally destructive that previously thought. However, as far as the energy dilemma debate is concerned, the dividends of a price environment favourable to a shift away from coal simply adds more weight to the idea that the costs of the adjustment are real. Although they were postponed for a couple of years, they are now abruptly manifest.

In this sense, it would be unreasonable to exclude the energy dilemma from our analysis of the present conjuncture. There are straightforward and precise connections between energy market turbulence and climate policies in China and in Europe. The temporary increase in coal supply in China to defuse economic tensions testifies to at least a short-term trade-off between emissions and economic growth. It may be difficult to disentangle the role of low prices from the longer-term decline in private fossil fuel investment since 2015; but we should not dismiss the idea that the latter was partly driven by gloomy forecasts for the sector based on anticipated climate policies. High payouts to shareholders and declining market capitalization can, indeed, be read as symptoms of such forecasts.

Tooze rightly suggests that energy companies are responsible for the myopia concerning the evolution of demand patterns that resulted in insufficient investment in energy. The fact that global investment in renewables and energy efficiency has actually declined since 2015 is indicative of the sector’s lacklustre engagement with decarbonation efforts. Yet although these companies bear collective responsibility, the issue is also systemic. It reveals a deeper coordination problem that enterprises cannot handle via market mechanisms alone. The energy dilemma thesis is in this sense consistent with the IEA’s repeated warnings about the coordination challenges related to the transition, and their exacerbation by slow and inconsistent policymaking:

As the world makes its much-needed way towards net zero emissions, there is an ever-present risk of mismatches between energy supply and demand as a result of a lack of appropriate investment signals, insufficient technological progress, poorly designed policies or bottlenecks arising from a lack of infrastructure.

At present, shortages of coal and gas coincide with booming demand, but if renewable production rapidly expands, electrification accelerates and/or energy consumption significantly slows, a collapse of fossil fuel prices is possible. In spring 2020, oversupply of oil resulting from the pandemic lockdown pushed US prices into negative territory. Further decreases may occur when fossil fuel producers compete to valorize the last sellable resources in a world shifting beyond carbon. However, even if such price slumps take place amid an energy transition, their wider context will be rising costs driven by expensive investment efforts and the deadweight of carbon-asset legacies.

Tooze and I agree on the limits of the price mechanism to guide the green transition and the necessity of macroeconomic planning. When it comes to the energy dilemma question, I sympathize with his reluctance to give fossil-interests any argument that could be used to postpone further greenhouse gas reduction. Yet we must also resist the delusion that crisis tendencies related to climate policy are not at stake. A smooth transition beyond carbon is no longer an option. There is no Pareto-efficient way of eradicating fossil fuel use in a timeframe compatible with the prevention of climate disorders. A zero-sum or even negative-sum game is in play, which means that some parts of the population will bear the cost of the adjustment more than others.

This looming distributive conflict puts drastic constraints on class compromises. At this stage, I do not see what should prevent a large progressive front from rallying in favour of restrictions on the avoidable emissions related to the consumption patterns of the ultra-rich. A class-biased punitive ecology could become an effective means to stop ecologically perverse expenditure from rebounding onto the poorest. It could also be a stepping-stone to broader social mobilizations. Crucially, the primary implication of the crisis tendency is not the impossibility of humanity to handle the challenges of the energy transition, but the additional barriers to collective agency erected by the imperative of capital valorization. Subordinating profit-making to rapid decarbonation is, in my view, a price worth paying for the cause of climate justice.

Read on: Cédric Durand, ‘In the Crisis Cockpit’, NLR 116/117.