Cheaper oil complicates war on climate change

Dry cracked earth is visible on the banks of Shasta Lake at Bailey Cove in Lakehead, Calif.
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The drastic fall in global crude oil prices over the past six months could reduce the chance of a universal agreement on climate change policy this year, according to HSBC.

Environmentalists hope the widely-anticipated Paris Climate Summit in December will bring about two key outcomes: a universal accord that enables the world to transition to a low-carbon future as well as concrete measures to limit global warming to 2 degrees Celsius above pre-industrial times. Discussions in Peru last month saw all participating countries commit to lowering greenhouse gas emissions for the first time ever.

However, falling oil prices will challenge countries' ability to implement climate policy, HSBC said in a recent report. Oil benchmarks Nymex and Brent are trading below $50 a barrel, levels not seen in over five years.

Lower oil prices suggest a deflationary pattern, which means the world economy remains in relatively poor shape, the bank said. Its economists forecast 2.6 percent global gross domestic product growth for 2015, well below the International Monetary Fund's 3.8 percent forecast.

Sluggish economic growth translates to lower public sector funding for low-carbon energy, HSBC said. Major oil exporting countries like Venezuela and Canada are expected to see the biggest funding declines given their reliance on crude oil revenues.

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"Lower economic growth means lower national income generation. This leads to difficult choices on capital resource allocation, which in turn could mean high carbon lock-in over the long run as a result of the less immediate focus on low-carbon infrastructure scale-up," the bank said.

Furthermore, tepid growth could also see poor deployment of energy efficient technologies, the bank added.

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"We think this could potentially lower the ambition levels of Intended Nationally Determined Contributions (INDCs)," HSBC said, referring to documentation detailing what countries propose to do to tackle climate change. These commitments are due within the first three months of the year.

Oil's most profound impact on climate change deals with increased energy consumption. Falling prices typically see consumers increase usage of oil products and fossil fuels, especially in the transportation sector. U.S. auto sales data for December showed General Motors and Fiat Chrysler posting sharp spikes in sales of pickup trucks and sports utility vehicles (SUVs) as gas prices fell to near-five-year lows.

"The plunge in oil prices encourages greater use of fossil fuels and thereby hurts efforts to make our planet's energy system more sustainable," Maria van der Hoeven, executive director of the International Energy Agency (IEA) said in an op-ed for Energy Post last month.

Hoeven sounded a note of optimism however, urging nations to take advantage of savings from cheaper oil to implement carbon pricing taxes.

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"Such actions would encourage more efficient use of energy, boost the economic case for carbon capture and storage, and promote low-carbon energy sources such as renewables and nuclear power," she said.

France's representative for the 2015 climate conference also echoed that sentiment. In an interview with the Associated Press last week, Laurence Tubiana said that the money saved on oil and gas could be used towards the introduction of a tax to cut greenhouse gas emissions levels.