Obama and Shell: Betting on Climate Policy Failure

Bill McKibben nails the main point in his op-ed in today’s New York Times: a sane response to the climate crisis will require that most existing oil, coal and gas now under the ground, stay there.  So what’s the sense in expediting more fossil fuel development projects in vulnerable environments?

But there’s a specifically economic aspect to this madness.  Shell is proposing to spend billions of dollars to bring additional arctic oil to global markets.  If there’s a spill, and happy talk from the company doesn't make that prospect any less likely, it will cost them billions more.  As a financial proposition, this makes sense only in a world that goes on, year after year, failing to act on climate change.  If the policy paralysis were to end, and if tough limits were placed on the amount of oil and other fossil fuel resources that can be extracted, the high-cost operations, like those in deep water or extreme locations like off Alaska’s north coast, would have to be abandoned and the investments in them written off.  (The same argument applies to the Alberta oil sands and the Keystone pipeline.)

In other words, Shell is betting billions that we will fry ourselves before we take effective action to limit greenhouse gases.  Obama is saying, based on our record, it looks like a good bet.  Go for it.

One of the arguments I've been trying to make is that the single most valuable thing economists can contribute to the climate debate is careful analysis of how we can reduce the interim disruption serious policy will have on our living standards.  The most obvious observation is that we will suffer less loss of wealth if we don’t sink costly investments into long term projects that will be valueless when policy finally kicks in.