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11 December 2014December 11, 2014

Can We Get Rid of Oil? The Costs of an Accelerated Energy Transition

Research Paper evaluating the costs of an accelerated transition toward green energies and the willingness of Canadians to pay these costs

Can We Get Rid of Oil? The Costs of an Accelerated Energy Transition

Policies designed to accelerate the transition to green energy sources are usually presented in terms of their benefits, whereas costs are rarely discussed. This Research Paper proposes to fill this gap in the public debate. It examines the costs of proposals made by the Quebec environmentalist groups Équiterre and Vivre en ville for rapidly reducing oil consumption, as well as the willingness of Quebecers and other Canadians to pay those costs.

Media release: Barely 12% of Canadians willing to make the sacrifices required to “liberate ourselves from oil”

Léger Opinion Poll: A Study of Canadian Support for Measures to Reduce Oil Consumption

Technical Annex

Infographics: Reducing our "dependence" on oil?

 

Related Content

Se libérer du pétrole? Ça coûte cher! (La Presse, December 11, 2014)

Les Québécois doivent-ils se sevrer de leur dépendance au pétrole? (The MEI's Journal de Montréal blog, December 16, 2014)
  Interview with Germain Belzile (The Source, Sun TV, December 11, 2014)

Debate (in French) with Youri Chassin (À la une, ARGENT business news network, December 11, 2014)

Research Paper prepared by Youri Chassin and Germain Belzile in collaboration with Alexandre Moreau, respectively Economist and Research Director, Senior Fellow and Public Policy Analyst of the Montreal Economic Institute.

Executive Summary

Policies designed to accelerate the transition to green energy sources are usually presented in terms of their benefits, whereas costs are rarely discussed. This Research Paper proposes to fill this gap in the public debate. It examines the costs of proposals made by the Quebec environmentalist groups Équiterre and Vivre en ville for rapidly reducing oil consumption, as well as the willingness of Quebecers and other Canadians to pay those costs.

First, an overview of oil production and consumption shows that this energy source will not be in short supply for many decades to come. Since 1980, proven reserves of oil have increased by 147% despite steadily increasing consumption. Whereas they were sufficient to cover 30 years of consumption in 1980, current proven reserves of oil are sufficient for the next 53 years. Morever, because oil fills numerous needs, replacing it is neither easy nor practical given the current state of technology.

The proposals of Équiterre and Vivre en ville for reducing oil consumption are examined in detail. Their declared objective is to reduce the consumption of gasoline for personal transportation by 60%, which would however only entail a 20% reduction in total oil consumption and a 12% reduction in GHG emissions.

According to our calculations, based on prudent hypotheses, the annual cost of these proposals is estimated at $6.4 billion for Quebec as a whole, or $1,875 per household. The two environmentalist groups seriously underestimate certain costs. For example, the idea of implementing a bicycle sharing service like BIXI in several municipalities would cost not $40 million, but rather $101 million. Likewise, interregional train projects and high-speed rail service for the Quebec-Windsor corridor are onerous projects that have to be accounted for, and which amount to the equivalent of nearly $1.9 billion per year.

Arguments about economic spillover, the reduction of imports and the creation of green jobs, often raised to illustrate other advantages of these proposals, contradict basic premises of economic analysis. Subsidizing a job clearly requires levying taxes elsewhere in the economy that in turn destroy unsubsidized jobs. In Ontario, each green energy job costs over $179,000. In Italy, it is estimated that the subsidy provided for the creation of a “green” job leads to the destruction of 4.8 jobs elsewhere in the economy.

An exclusive pan-Canadian poll reveals that only 13% of Canadians and 12% of Quebecers are willing to spend $1,500 or more each year to reduce oil consumption by 25%. Moreover, there is no guarantee that the means proposed by Équiterre and Vivre en ville would actually achieve this objective. The most concrete and plausible way of achieving it would be to double the price of gasoline. This solution also hardly seems possible since only 8% of Canadians would be willing to pay $2.80 per litre of gasoline.

In sum, the projects proposed by Équiterre and Vivre en ville would probably not achieve their stated objectives, and Canadians do not want to pay for them. Technological progress will certainly allow us to reduce our oil consumption in the medium term and move to cleaner energy sources. In the meantime, we should do a better job in the public debate of taking into account the costs of the proposals of environmentalist groups for accelerating this transition to greener energy sources.

Introduction

Oil is an energy source that is indispensable to the proper functioning of a modern economy. In Canada, it is the main source of energy used, meeting 40.5% of total energy needs.(1) Its characteristics, including its energy density, make it a preferred source of energy in the transportation sector. Its molecular composition also makes petroleum by-products very useful for the petrochemical industry. On the other hand, the combustion of oil releases pollutants and greenhouse gases (GHGs) into the atmosphere. Among the countries of the world, Canada was the 15th largest emitter of GHGs per capita in 2010.(2)

Some people think that oil has more drawbacks than advantages, and they call for governments to intervene vigorously to reduce oil consumption in Canada. According to them, the extensive role that oil plays in our lives and our economy means that we are “dependent on oil.”

The notion of dependence is misleading, however. While the use of oil as an energy source has some disadvantages and generates pollution, it also has significant advantages, especially when it comes to the transportation of people and goods. As with many other products and services, the consumption of oil entails both costs and benefits.

The decision to use or not to use oil as an energy source depends on the existence of alternatives. Especially in the transportation sector, the growing presence of electric vehicles and of trucks that run on natural gas are some good examples. Cars that use hydrogen fuel cells could be another option.

However, these other choices have drawbacks as well as advantages, and can be expensive. In time, so-called clean technologies will probably improve and become more competitive economically. The relative price of oil could also rise, since it is after all a finite resource, though an abundant one. As has happened many times in the history of humanity, scientific and technological progress could then lead to an energy transition, which is to say a significant change in the most widely used forms of energy.

Reducing global consumption of oil and other fossil fuels is desirable, if only to reduce the atmospheric pollution and GHG emissions that these forms of energy generate, which would have positive effects in terms of people’s health and safety. However, replacing an energy source like oil with other energy sources will be a very gradual process.

This Research Paper explores the following question: Can this energy transition be accelerated, as many groups suggest insistently, in a way that is both effective and affordable? Everyone agrees that we will in all likelihood have to rely on fossil fuels for many more years, even decades. Even if consumption were drastically reduced in 40 or 50 years, it is highly improbable that oil would disappear completely from our lives. After all, when oil replaced coal as our main energy source, the latter did not completely disappear from the picture and is still used today in appreciable quantities.(3) In addition to this example from the past, this Research Paper analyzes our current use of oil and the outlook for the coming decades.

The first chapter sketches a picture of how oil is currently used in Canada and discusses its relative scarcity or abundance. The second chapter focuses more specifically on a proposal from two Quebec environmentalist groups, Équiterre and Vivre en ville, whose goal is to “liberate” Quebec from oil by 2030, barely fifteen years from now. The cost of the proposed means for doing so, and their effectiveness, provides a better idea of what we are talking about when it comes to reducing oil consumption through government measures.

After this overview, the second chapter also reminds us that Canada already has measures in place aimed at reducing oil consumption. It deals with the possibility that the costs of an accelerated energy transition could be offset by decreasing oil imports or by the creation of “green” jobs.

The third and final chapter discusses the efforts that Canadians are prepared to make to reduce their oil consumption, an important aspect in any economic decision. Thanks to a pan-Canadian survey, public opinion on this matter is examined in detail.

Read the Research Paper at iedm.org

Notes

1. Statistics Canada, Report on Energy Supply and Demand in Canada: 2011 Revision, January 2014.
2. The data for 2010 are the most recent available for nearly 200 countries. The World Bank, CO2 emissions (metric tons per capita).
3. Pierre Desrochers and Hiroko Shimizu, “Innovation and the Greening of Alberta’s Oil Sands,” Research Paper, Montreal Economic Institute, October 2012, p. 10.


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