How the Free Market Is Providing the Solution to Global Warming
While governments continue bickering over a climate solution, the private sector is working to mitigate the impacts of climate change.
September 25, 2020

Climate change is undoubtedly one of the biggest challenges facing humanity today. Unsustainable use of our planet’s natural resources threatens to reverse the fortunes of people across the globe. This makes it all the more frustrating to watch governments argue about ineffective climate targets, rather than working on solving the root problem.

As often happens, the free market is beginning to find solutions where politicians can’t. Fossil fuel companies and large commodity trading firms that specialize in oil and energy trading are slowly shifting their investments towards renewable technologies. The question is whether the private sector can do enough. Will governments turn away from short-term policies that harm the environment?

Oil Company Investment in Renewables Is Increasing

Change is difficult at the best of times but we’ve come a long way from the days when oil companies actively suppressed climate science. Now, these behemoths have been forced to confront the writing on the wall: renewable technology is rapidly becoming not just viable, but profitable.

Solar energy, in particular, has become significantly cheaper, with an unsubsidized cost of less than $50 per megawatt-hour. In contrast, fossil fuels are now more expensive, with coal costing $102 per megawatt-hour and normally affordable gasoline costing roughly $60 per megawatt-hour. So what has changed?

Most of it is just a matter of technology. Solar panels are cheaper to produce and install. And most important: they are more efficient and becoming more so. Each time solar capacity has doubled, the total price of solar energy has fallen by around 30%. The problem is that a number of governments are doing their best to intervene and correct the free-market-driven solar boom in favor of the old guard.

Governments Are Standing in the Way of a Greener Future

Despite proclaiming support for various climate initiatives, mostly in the form of carbon targets, many of the world’s governments are standing in the way of real change. This problem is particularly acute when we look at coal. There is no better example than India.

Despite the country’s attempts to phase out other forms of fossil fuels, the government’s subsidies for coal-fired power plants remain in place. Indian government subsidies for coal actually increased 2% to the equivalent of $2.23 billion in December 2018.

It’s not just India, either. For example, this problem is evident in Poland. It is also common in African countries where governments defy free market logic and prop up decaying and damaging industries in a misguided effort to protect their national interests.

Fossil Fuel Companies Could Become Unlikely Heroes

European oil giants are currently leading the charge and make up 70% of the sector’s investments in renewables. One area where oil companies have had an outsized impact is in solving the base-load problem — being able to supply enough energy for a basic level of operation. The key challenge of renewable energy is ensuring that there is always enough energy — even when renewable sources are unable to provide that load, for example at night with solar panels.

The best way to surmount this problem is with better energy storage. The oil and gas company, Total SA, recently bought a majority stake in SunPower. It also acquired battery company Saft, which is building some of the biggest energy storage projects on the planet.

Total SA is betting big on renewables and is planning to increase its gross global renewable energy capacity to 6 gigawatts, from about 3 gigawatts in 2019.

It’s not just European companies, however. In Canada, oil and gas giants like Husky Energy are beginning to take decisive action. They are concerned about investors and pension funds whoavoid adding fossil fuels to their portfolios.

So Husky Energy recently moved to tie executive pay to climate targets. This was matched by an ambitious goal to reduce carbon emissions by 25% over the next five years.

In general, energy companies, particularly those reliant on fossil fuels, appear to be changing tack. This change is largely just an acknowledgement of economic reality. A growing number of funds are focusing on ESG (Environmental, Social, and Governance) investing, where a company’s green and ethical credentials are placed ahead of its profit margins.

This approach appears to have weathered the COVID-19 challenge, and looks set to stay. As more investors, particularly younger investors, look for ethical companies to target, this will put increasing pressure on oil and gas companies to diversify and become more sustainable.

Is There a Bright Future Ahead?

Despite this progress we still have a long way to go. Governments can certainly be part of the solution. But on the whole, they have not. The truth is that the only solution to the climate crisis is pressure and action from the free market.

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