The link alone turns case. Lower prices lead to increased emissions and carbon intensity.

2.2.1. Theoretical analysis: Why and how falling oil prices impact climate change?

A huge body of literature exists on the correlation between oil price and climate change [11], [13], [14], [36], [37], [38], [39], [40], [41], [42], [43].

The movement of oil prices mainly impacts carbon emissions through three channels: total carbon emissions, carbon intensity (carbon emission per unit GDP), and carbon reduction costs.

First, falling oil prices directly increase total carbon emissions. As mentioned above, lower oil prices promote economic growth. However, a large body of literature has demonstrated that the carbon dioxide emission trajectory is closely related to the GDP time path [36], [37], [38], [39]. In some sense, economic growth cannot occur without a commensurate increase in carbon emissions, and only economic recessions decrease carbon emissions (see Fig. 3).

Fig. 3

Fig. 3. The trajectory of global fossil fuel CO2 emission responding to the economic recession [11], [40].

Second, falling oil prices would increase carbon intensity. A strong inverse relationship exists between oil price and carbon intensity. Fig. 4 illustrates a strong inverse relationship between the oil price per ton of carbon emission and carbon intensity. For example, in the US, the oil price per ton of emissions is low on average, and the carbon intensity is high relative to other OECD countries. In Japan, with its relatively high prices, carbon intensity is much lower [44].

Fig. 4

[Image Omitted]

Fig. 4. Correlation between oil prices per ton of emission and emission intensities [44].

Third, falling oil prices would increase carbon reduction costs. Oil prices are a key input for calculating abatement costs of mitigation options [45], [46]. For example, the IPCC fourth assessment report [47] uses a range of sources for abatement cost. For new light-duty vehicles with higher efficiency, for example, the abatement cost will change from −$14/tCO2 to −$88/tCO2 when the oil price changes from $30 to $60 per barrel in 2030. Thus, in terms of CO2 abatement costs, many mitigation options become significantly more expensive with lower oil prices. In particular, more expensive transport options, which are at the margin of the cost curves, become substantially more expensive at lower oil prices.

In a word, a fall in oil prices means a short run aggregate supply (SRAS) curve shift from SRAS1 to SRAS2, increasing the quantity of oil sold from D1 to D2. This increases carbon emissions from C1 to C2 [48] (see Fig. 5). Theoretically, the falling oil prices also usually lead to more oil consumption and a concomitant rise in total carbon emissions.

Fig. 5

[Image Omitted]

Fig. 5. The change in carbon emissions and fuel consumption in response to change in oil price based on short run aggregate supply curve [48].

2.2.2. Empirical analysis

Given that high oil prices have been a key determinant for renewable energy and the improvement of energy efficiency [49], [50], [51], falling oil prices would imply a fall in renewable energy growth, although the relationship between oil and renewable energy is very complicated [52], [53].

The impact of falling oil prices varies significantly as follows:

(1)

Lower oil price promotes car sales, but discourages fuel-efficient vehicles. Low oil prices do not only aid vehicle sales in the US, but are also leading Americans to restore favor to sport utility vehicles (SUV) and trucks. Data indicate that total vehicle sales in the US in November 2014 were up from 4.6% to 1.30 million over the preceding year, the highest November sales rate since 2003, according to figures from Autodata Corp [54]. In October 2014, auto sales rose by 6.1%, whereas sales of trucks and SUV, less fuel-efficient models, increased to 9.1% [55]. Data from the Kelley Blue Book also indicate that SUV and trucks constituted 52% of all auto sales in October 2014, up from 49% in 2013 and 44% in October 2008. However, sales of plug-in cars are flagging [56]. There are early signs of a return to old habits among consumers, many of whom had ditched larger cars and trucks when gasoline prices increased in 2008 [56]. The changes in American consumer behavior demonstrates that high oil prices encourage energy conservation and efficiency, whereas low oil prices encourage more oil consumption. Fig. 5 illustrates that increased oil consumption will mean increased carbon emissions.

(2)

Electric cars are the most affected by lower oil prices because they are less competitive with gasoline-powered cars when oil is cheaper [57]. A report from Bloomberg New Energy Finance suggests that electric cars as a percentage of total light-duty vehicles will decrease from 9% to 6% by 2020 if US gasoline prices decline from $3.34 per gallon to $2.09 [58]. Indeed, the overall sales of American electric cars in November 2014 declined by 3.7%, compared to November 2013, partly due to sharply falling oil prices, according to the Electric Drive Transportation Association [56].

(3)

Falling oil prices will also significantly impact biofuel, which directly competes with oil as a transport fuel. In the US, ethanol prices have not been competitive without large subsidies [59]. Falling oil prices would trigger new controversy over biofuel. In Brazil, ethanol prices have been competitive without large subsidies [60], [61]. However, falling oil prices will negatively impact Brazilian ethanol׳s competitiveness.

(4)

The impact of lower oil prices on wind and solar may be limited. An average of $266 billion per year has been invested in clean energy worldwide over the past five years [58]. The majority of this has gone into wind and solar electricity generating capacity, which does not directly compete with oil. Solar and wind electricity are supported by feed-in-tariffs or by a renewable portfolio standard (a regulation that requires a certain amount of electricity to be from renewable sources) policies [62], [63]. Once set, such contracts cannot be easily revised, which means wind and solar plants in operation now will probably continue for years to come.

The first trial of large-scale renewable electricity worldwide—the solar, wind, and geothermal boom in California during 1980s and early 1990s—was defeated by cheap oil. California progressively implemented the Public Utilities Regulatory Policies Act (PURPA)—the first feed-in-tariff (fixed prices for power fed into the grid) worldwide, and installed 10,000 MW of renewable energy during 1980s and early 1990s. The renewable boom ended suddenly starting in the late 1990s due to falling oil prices [64], [65], [66]. However, given that renewable energy in the 21st century fundamentally differs with that of the 1980s and 1990s, it would not seem that lower fossil fuel prices would impact California׳s renewable energy in a manner akin to the kryptonite of lower fossil fuel prices in the 1980s and 1990s. Instead, in the short term, falling oil prices will not stop renewable growth, but it will have some dampening effect. However, a prolonged period of low oil prices would reverse renewable growth.