Evidence mounts on the massive economic risks of fossil fuels

With global demand for fossil fuels set to peak before the end of the decade, a new report identifies the growing financial risks for fossil fuel producing nations as the energy transition accelerates and climate policy tightens. Published by the financial think tank Carbon Tracker, the report Petrostates of Decline found that up to 2040, 40 nations could see oil and gas revenues almost halve from an expected USD 17 trillion to just USD 9 trillion. High-cost producers may lose up to 70 per cent of revenue, including 6 African countries; but even low-cost producers are not safe.

The report also highlighted that renewables are a powerful solution to buffer this risk. Even a moderately paced energy transition could dramatically impact their finances.

Guy Prince, senior oil & gas analyst report author, explains that the falling costs of wind, solar and batteries mean electricity is expanding to become the basis of our entire energy system. “This is a profound threat to oil and gas exporting nations, because falling demand for oil and gas is likely to lead to a significant fall in future revenues. Governments should waste no time in reducing their dependence on fossil fuel revenues and take steps to make their economies more resilient and better equipped for a low-carbon future,” said Prince.

Balancing the energy playing field

One fundamental way to accelerate renewable energy deployment is to phase out the trillions of dollars spent annually on fossil fuel subsidies. Stanford Lecturer Tony Seba highlights that removing the “government lifeline” from these dying industries, while ensuring individual clean energy trading rights, would create a level playing field to allow clean energy to scale up in the fastest time frame. Freeing up these trillions to spend on renewable and job-creating energy systems instead would have a profound impact on the global clean energy economy. 

In South Africa, for example, the government disproportionately channels energy subsidies toward dirty generation, hindering progress to renewables. In the financial year 2020-21, the government spent nearly ZAR 67 billion on bailouts for carbon-intensive companies, namely Eskom, and another ZAR 43 billion to support the oil and gas industry. This same amount directed towards renewables, battery storage, electric vehicles and a green hydrogen economy would more than pay for the government’s plans to grow these industries through to 2030 while creating quality jobs. 

Climate impact risks and opportunities

Fossil fuels pose a further economic risk, with climate change already making life more expensive. Higher temperatures are driving up the cost of food and other goods and services. This could increase global inflation by as much as 1 per cent annually until 2035 — equivalent to USD 1 trillion per year using today’s metrics. 

On the other hand, transitioning to a decarbonised energy system is expected to save the world at least USD 12 trillion by 2050, compared to continuing our current levels of fossil fuel use, according to a peer-reviewed study by Oxford University researchers. The result shows that net zero energy is not only possible, but also profitable, with the right climate plans in place. 

The compounding risks highlighted in these reports show the many economic dangers of fossil fuels. The results of these respective reports echo UN Chief António Guterres’s words from early 2022 that new fossil fuel projects amount to “economic madness“. Given the vast and mounting evidence of the dangers to national, economic and human security, a just transition from fossil fuels is a win-win-win when wind, water and solar generation are unequivocally safer, cheaper and available in abundance.