A just compensation for leaving it in the ground: Climate easements and oil development

Highlights

• The Paris agreement implies that some fossil fuel resources must not be extracted.

• Foreclosed resources may be in developing nations and foreclosure may be unjust.

• A test is proposed to identify foreclosed resources and assign responsibility.

• A climate-easement approach is proposed to compensate for resource foreclosure.

Abstract

The Paris Climate agreement of 2015 implies that a large portion of the world’s coal, oil, and gas resources must be left non-combusted in order to meet the goal of limiting climate change to 2 °C. As a result of this commitment, some of the national and corporate owners of fossil fuel reserves will be required to leave their reserves in the ground. However, which reserves should be left in the ground, and when and how should reserve-owners be compensated? Using the oil reserves in Uganda’s Albertine Graben as a case study, we show that Ugandan oil development is likely to be cost-effective but unlikely to be consistent with the Paris Treaty commitments. We argue that Western nations should compensate Uganda for their foregone oil revenues and we propose a mechanism called “climate easements” for such compensation.

Introduction

In order to meet the goals of the Paris climate agreement, a significant portion of global fossil fuel reserves will need to remain in the ground (McGlade and Ekins, 2015). The idea of leaving fossil fuels un-exploited extends back at least to Herman Daly’s arguments for natural resource extraction limits in the 1970′s (Daly, 1991), but has reemerged in recent years under the framework of supply-side climate policy (Collier and Venables, 2014; Erickson et al., 2018; Lazarus and van Asselt, 2018). Supply side climate policies aim to identify policy approaches to limit the extraction of fossil fuels, rather than reducing fossil fuel demand. However, the spatial distribution of fossil fuel reserves is uneven and limiting extraction implies that some nations might be allowed to continue to extract while extraction in other countries is limited. Determining which of the world’s remaining fossil fuel reserves should be left in the ground, and which countries should bear the cost, has ethical, economic, and environmental implications that are difficult to weigh (Lenferna, 2018).

The carbon budget, the amount of CO₂ that can be emitted while keeping the earth below 1.5 or 2 °C above historical norms, is a commonly held resource. Because the carbon emissions budget is a commons, so is the hydrocarbon extraction budget. But if the hydrocarbon extraction budget is a commons, how should we manage it? One option is to use economic criteria alone so that the cheapest oil, gas, and coal sources produce greatest share of the remaining carbon budget. An alternative option is to use ethical principles to guide our decision-making so that the parts of the world that have not been responsible for or benefited from historic emissions and extraction receive preferential use of the carbon budget. Here, we aim to synthesize these two alternatives.

Several recent studies illustrate alternative approaches to the management of the hydrocarbon commons. Kartha et al. (2018) describe two ethical principles which, in their view, should form the basis of deciding which fossil fuel resources should be extracted. First, the principle of historic responsibility argues that nations that have extracted the most fossil fuels have the greatest responsibility to contributing to a transition away from fossil fuel extraction. Second, Kartha et al. argue that a nation’s capacity to bear the economic costs of transition away from extraction should be a factor in allocation of the remaining carbon budget. Kartha et al. then use these principles to argue that the remaining carbon budget should be allocated based on national need rather than marginal extraction costs; that is, developing nations should be allowed to exploit their fossil fuel resources to the extent allowed by the remaining global carbon budget while developed countries should not. Similarly, Le Billon and Kristoffersen (2019) articulated four criteria for ranking fossil reserves including their utility (extraction cost, life cycle emissions), affordability (degree to which a nation’s development is dependent on fossil fuel income), past production, and national willingness to participate in climate policy.

The Lofoten Declaration likewise argued that the task of limiting hydrocarbon extraction “should be first addressed by countries, regions, and corporate actors who are best positioned in terms of wealth and capacity to undergo” a transition away from fossil fuel production and that, “leadership must come from countries that are high-income, have benefitted from fossil fuel extraction, and that are historically responsible for significant emissions (The Lofoten Declaration, 2017).” Lenferna (2018) built on the ethical framework of the Lofoten declaration and added carbon and economic efficiency as additional decision parameters such that inefficient resources in wealthy countries would be the first to be unexploited (e.g. Canadian tar sands) and efficient resources in poor countries the last to be unexploited. Beyond these cases of “convergence” between ethical and efficiency considerations, Lenferna noted that choosing the resources to remain in the ground becomes more difficult.

Other authors have emphasized economic or geopolitical factors in deciding which fossil fuels should stay in the ground. Jaccard et al. (2018a) took an environmental economic approach, integrating a 2 °C carbon budget with carbon prices and an oil price model to determine if a fossil resource is likely to be economically viable under the 2 °C limit. Newell and Simms (2019) used the analogy of the nuclear non-proliferation treaty to propose a supply-side fossil fuel non-proliferation treaty which included a negotiated burden-sharing mechanism (Asheim et al., 2019).

We propose a decision-making system which is informed by Kartha et al.’s ethical assumptions, but which, like Jaccard et al. (2018) uses a coupled climate-financial decision-making test. In sum, we propose that a hydrocarbon resource should be exploited if it passes a coupled climate-financial test; if it fails, the resource is not extracted and has been excluded because of historic CO₂ emission. In this case, the resource owner (which we assume to be the state/nation) could be due financial compensation, particularly to the degree that it did not benefit from historic fossil fuel use. We propose that this financial compensation take the form of a climate easement. While the proposed system is applicable to all hydrocarbon reserves, we consider crude oil here.

The proposed system differs in its policy implications from the existing frameworks which it attempts to synthesize. Specifically, it differs from Kartha et al.’s approach because it would generally reverse the locations from which the remaining carbon budget would be extracted and uses a wealth transfer mechanism to compensate for this reversal. In Kartha et al.’s framework, hydrocarbon extraction generally moves from the developed to the developing world, while in our framework, hydrocarbon extraction remains where it is cheapest, and only the financial benefits transfer. We propose that this might reduce environmental costs associated with the development of new hydrocarbon extraction. The present proposal also differs from Jaccard et al.’s approach because it uses an ethical argument that developed world should monetize and compensate developing world nations for their resource foreclosure rather than allowing geologic and economic factors alone to determine the distribution of financial benefits of the extraction of the remaining carbon budget.

To test hydrocarbon reserves against the Paris agreement goals, we propose using oil demand estimates generated by the Shared Socioeconomic Pathways (SSPs). The SSPs are generated from integrated economic models and predict how energy use and CO₂ emissions will change over the 21st century. There are a number of SSPs, some of which are consistent with the Paris agreement and some of which are not. We propose to use the SSP sustainability (SSP1) 1.9 and 2.6 W m⁻² scenarios as proxies for future pathways that are most likely to be consistent with the Paris agreement. The publicly available output data from the SSPs include global oil demand which represents an independent, peer-reviewed estimate of Paris-compliant oil demand. Oil demand is then compared to a global marginal production cost curve to determine if a resource is foreclosed by climate concerns. We implement this test using Uganda’s Albertine Graben as a case study. Compared to previous supply-side decision-making proposals, the model is intended to be simple and understandable.

In 2006, commercially viable deposits of a waxy, medium-gravity, sweet oil were found in the Albertine Graben in Western Uganda. As exploration drilling has proceeded, estimates of technically recoverable reserves have increased to 6.5 billion bbls, and in August of 2016, Uganda gave production licenses to exploration and production (E&P) firms Total, Tullow, and China National Offshore Oil Corporation (CNOOC) to begin production in the first two exploration areas. However, as of late-2019, commercial production has yet to begin and a 2022 date for first production has been set.

We implement our decision-making framework using the Albertine Graben in Uganda as a case study. We show that under current economic conditions, oil extraction in Uganda is likely to provide a positive financial return; as long as Brent oil prices remain above about $40 bbl⁻¹, the Albertine Graben will likely provide a positive net present value (NPV). However, we show that development in the Albertine Graben of Uganda is inconsistent with the oil demand required to meet the goals of the Paris agreement. We argue that Uganda’s oil development is effectively foreclosed and that Uganda should be compensated for its lost economic value by the West. We propose that a “climate easement” may be an appropriate tool by which the West may compensate developing nations for their un-exploitable fossil fuel stocks.

We begin by presenting a simple economic analysis of Uganda’s oil in order to estimate its production cost. We then describe the proposed decision-making framework. We discuss how we might implement and fund climate easements and we compare to the similar Yasuni-ITT proposal. While we focus on oil, the proposal could be applied to any fossil fuel source that is traded on a global market and has variation in extraction costs. Because oil has especially large variation in extraction costs and is readily shipped across boundaries, it is especially suitable.