Striking a balance

The argument that transitioning to renewable energy is too expensive and will hurt the economy is not new in the US. But the loud objections originating from certain quarters when 195 countries signed an agreement in Paris last December that aims to reduce global greenhouse emissions prompted Infrastructure Investor to search for the reasons behind this stance.

With an increasing number of studies concluding that climate change is the result of human activity and an increasing number of political and business leaders, as well as the public, acknowledging these findings worldwide, it seems perplexing that so many in the US do not. When comparing the US to Europe for example, the latter has been significantly more proactive in adding renewables to its energy mix.

“Europe has had to import its oil and gas,” Madeleine Tan, a partner at Sutherland, Asbill & Brennan, argues. “The US on the other hand has been fortunate in having abundant supplies of both,” she adds.

Her point is well taken and leads to further explanation of the US perspective.

“If you look at what’s driven this economy over the past 10 years, it has been the energy market,” Tan’s colleague David McCullough, also a partner at Sutherland, remarks. “If we didn’t have what has gone on not only in the natural gas market, but particularly in the oil market, our GDP would be significantly lower.”

While this explains the fossil fuel industry’s resistance to a shifting away from conventional fuels, it does not address the cost argument. Are renewables really more expensive than fossil fuels?

“When somebody says that fossil fuels are cheaper than renewables, they’re ignoring the health effects of fossil fuels and the effects on the climate because those are borne by other people,” Dr Peter Victor, a professor of environmental studies at Toronto’s York University, argues. “So the buyer and seller of fossil fuels can regard them as cheap, but to society at large they can be very expensive.”

On the flip side of that, when calculating the cost of renewables one also needs to factor in the cost of energy storage, which is necessary given renewables’ intermittency issues. “But even if renewables are more costly in terms of the normal way of counting, they are still a better option than destabilising the climate and causing urban air pollution, like you see in China,” Victor asserts.

Sutherland’s Tan touches on another aspect of cost – that of tax credits. “Saying the renewable energy industry benefits from tax credits ignores the fact that other industries do as well,” she argues, citing the research and development tax credits as well as the Master Limited Partnership (MLP) structures that are not available to the renewables industry. “To really level the playing field, someone needs to look at the cost to taxpayers on a kilowatt per hour basis or just remove all the subsidies and see where we come out.”

Legislation recently passed by Congress to extend tax credits for solar and wind does indeed level the playing field to an extent. On the other hand, the legislation removes a 40-year ban on the export of crude oil, neatly illustrating the balancing act the Obama administration has had to perform while in office: how to fight climate change while growing the economy at the same time? “I think this Paris deal is the reflection of this balance,” McCullough comments.

Perhaps this balance will translate into the fossil fuel industry being able to protect its ground while those interested in the renewables sector will find the opportunities they are looking for. The US may not transition to clean energy as quickly as some of its international peers but it will get there – even if it ends up diversifying its energy sources one step at a time.