For as long as I can remember, people have complained about the cost of being green when it comes to sustainability and energy use. And then gas prices spike, and suddenly green gas (eg, biomethane) becomes worthwhile. There are countries in the world like Brazil, which took a very concerted effort to reduce the country’s reliance on fossil fuels by investing heavily into biofuels and developing a local ecosystem for it. Their energy costs becomes less correlated with what the world is going through. And during certain times, they can gain a competitive advantage.
At the same time, we might have heard that countries forced to adopt sustainability measures can end up less competitive. This is probably frequently referenced when discussing European giants subject to strict EU regulations. Other times, there are concerns about demand destruction and shrinkage of businesses when stricter environmental rules are being enforced.
Today, as we face rising energy prices due to developments in the Middle East, we are seeing countries ration fuel, express concern about fuel trade across markets, and tighten their belts to prepare for further cost increases. The question is, why are we waiting for these things to happen before responding this way? Why not tighten our belts to put more resources into renewables, focus on growing our economy through less energy-intensive approaches, and identify new areas to enable economic growth?
As an economist, I’m think it is fascinating that these price shocks are enabling us to see what will happen if regulations forces prices up in order to reduce carbon emissions. For example, we see jet fuel prices doubling and that is translating to about 20-30% rises in ticket prices on average (some routes right now are also increasing cost because of the need to make longer detours but this is not factored into our analysis); and that can lead to demand destruction of about 20-25%. So the international aviation market shrinks by almost a quarter if we were to force all international travel to use only Sustainable Aviation Fuel.
All that assumes the pricing is just 2x the traditional jet fuel cost, which is unlikely, as we try to use different feedstocks and more sophisticated tech pathways. But in reality, the SAF mandates in EU or other parts of the world isn’t quite as severe in the beginning so realistically, the demand destruction might be just a few percentage points even as we step up more blending. The question is whether the world can stomach that?
Probably without much of a hitch.
Yet we kick up a big fuss on such regulation and change. Meanwhile, we allow climate change risks to accumulate and manifest in more costly disasters down the line. Our short-termism is really killing us.