What needs to be done Policy measures to reduce reliance on fossil fuels and to encourage diversification of energy supply

At present, the trajectory of global consumption of oil is still rising from year to year, now principally driven by the rapid expansion of demand in the emerging economies. Although demand in some developed countries is now nearer to stabilizing, no country has yet established the steadily declining trajectory that will be needed.

The market cannot be expected to deliver the changes that are needed without active intervention by governments and a sustained effort to engage the public and organizations of all kinds. Many of the measures necessary to encourage and promote the transformations are already well known, in principle. But everywhere in the world, the range of measures needs to be extended and to be applied more vigorously and urgently. Three types of measures are needed:

1 fiscal and budgetary measures to encourage the development of low-carbon goods and services, and to discourage high carbon consumption;

2 regulatory measures to the same end;

3 promotional measures to encourage active engagement by the public and organizations of all kinds in bringing about the changes needed.

Fiscal measures to put a proper price on carbon emissions

Fossil fuels should bear the full cost of the burden that the emission of carbon dioxide is imposing on the world. This requires either taxation of carbon products (such as gasoline), or a system for rationing and trading permits to release carbon dioxide, or both.

The European Union (EU) already has comparatively high levels of taxation of oil and oil products, but may still need to go further in this direction. It has also pioneered a system for rationing and trading permits to release carbon; but this system still contains a number of anomalies and loopholes and has not yet established a clear and stable market signal in favour of reducing fossil-fuel consumption and diversifying to other fuels. Anomalies need to be fixed, and exemptions reduced. Above all the system needs to be extended to the rest of the developed world, and as soon as practicable to the emerging economies as well. This should be a key objective in the context of the international climate change negotiations.

Some commentators have suggested that carbon trading systems might be developed in such a way that a floor price for carbon is established to give greater certainty to the market. The floor price might then be driven steadily upwards over the next three decades in order to provide a steadily increasing market pressure on operators of all kinds to diversify away from fossil fuels.

Some of the new technologies necessary are still at the development stage and will need significant support and encouragement from the public sector to secure their early introduction and wide deployment. Carbon capture and storage, further development of renewables, third- and forth-generation renewables, electric- or hydrogen-powered vehicles and the infrastructure they will need are all in this category and require major public support to get them deployed throughout the world as soon as possible.

Major investment in the rail sector is needed to spread electrification and make rail travel the preferred alternative to air flight for most short-haul routes in Europe and in other parts of the world.

Regulatory measures

Fiscal measures are not sufficient by themselves to drive the necessary transition away from oil. Demand is too inelastic, and there are political constraints on driving up the prices of oil products too rapidly. There needs to be a comprehensive programme of regulatory measures to drive up standards and drive out inefficient processes and products. There also needs to be support for the research, development and introduction of new technologies.

In particular, there should be a comprehensive and urgent programme to drive up the energy-efficiency standards of all energy-consuming products and services. Europe has made some progress on this, but still has further to go, both in setting the standards and in ensuring that they are complied with. The heating and cooling of buildings, for example, is still massively inefficient and requires a vigorous programme of action to secure rapid improvement.

Standards for improving the carbon emissions from vehicles are particularly important. New tighter standards have recently been agreed in Europe; but even more stringent standards for future years will soon be needed in order to establish a firm planning framework for the motor industry to adjust to. The next step now urgently called for is to establish a similar tight programme for the progressive improvement of emissions from vans and from heavier goods vehicles. Again action within Europe needs to keep pace with and be matched by comparable efforts in other parts of the world.

Involving civil society

Much more must be done to bring the general public, business, trade unions and other civil society organizations into partnership and participation in the common effort.

Citizens need to be encouraged and incentivized to play their part through such means as improving the efficiency of their homes and cars, using greener forms of energy for lighting and heating, purchasing more energy-efficient goods and services, and reducing the carbon impact of their regular travel and holidays. In many countries there is already a growing proportion of the public and of civil society organizations (CSOs) who would be ready and willing to take action if only they could be given a strong and effective political lead as to what is expected of them, along with appropriate incentives for action.

Many local and regional government bodies have already shown vision and courageous political leadership on this issue. They need to be encouraged and incentivized to go further. Businesses similarly need to be incentivized to make further progress. They should be urged to continuously improve the energy efficiency of their operations and to obtain their energy from low-carbon sources. Regulation should be used more systematically and vigorously to drive up the energy performance of all types of products and services. Industry must devote more effort to help in the transition to a world of lower demand for oil in the future, and less to developing more marginal sources of oil, particularly where these are going to cause severe environmental damage.

The oil industry of the world has a particular responsibility for assisting the transition to a lower carbon economy. It needs to:

• recognize the necessity of the transition of the global economy to a declining usage of fossil oil over the decades ahead, and think, plan and behave accordingly;

• continue to improve the oil industry's own carbon performance in its operations;

• substitute biomass or other carbon-neutral resources for the use of fossil fuels in its products where feasible and sustainable;

• use the oil industry's massive resources of skills and financial power to help other aspects of the transition, and the earliest possible development and deployment of carbon capture and storage; and

• work closely with the automobile industry to help accelerate the transition to low- or zero-carbon vehicles.

Governments should initiate an intensive dialogue with the global oil industry to try to develop a common understanding of the trajectory for declining oil usage that needs to be established, and to provide appropriate incentives to encourage (or, if necessary, compel) the industry to move in these key directions.

There is some scope for biofuels development (and particularly for greater use of biomass); but sustainability criteria must be applied and may limit the scope for expanding this technology. Use of biomass as a heat source for pyrolisis, coupled with production of biochar (or charcoal) that can be applied to soil as a soil improvement and carbon retention agent, looks promising. In the transport sector, electricity or hydrogen appears to be more promising as long-term solutions. Intensive discussions with the relevant industry sectors should continue to try to establish optimum pathways for these transitions.

Taxation of oil products already produces major income for governments, and this may increase further when carbon permits are auctioned more extensively. Part of these proceeds should be directed to supporting the development of the new energy technologies that are required. Incentivizing the oil industry itself to play a larger part in the transition to the low-carbon economy by offering them tax concessions or capital allowances with respect to the necessary investments might also be considered.

Trade unions have an important part to play as well. Many of their members are in the front line in delivering energy-efficiency improvements and disseminating practical information and their potential contribution needs to be recognized and encouraged. Properly managed, the new forms of production should provide just as many employment opportunities as the older carbonintensive modes of production, while maintaining good working conditions.

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