Globalization Transformation (Part 2): Which Impact in Terms of Cost?

Globalization is morphing, towards lower inter-dependency or towards decoupling, or both, depending on which countries are considered. Alliances come and go. Blame it on the climate change acceleration, on the pandemic, on the evolution of the geopolitical context, U.S. v. China, Russia v. Ukraine, the next zone of friction is not known yet, but who can doubt there will be another one? Whatever is causing this massive disruption, or even transformation, in global trade, the immediate consequence in 2022 is called inflation, of energy prices first and foremost.

This inflation of energy prices was a foregone conclusion of the climate change-triggered energy transition: of course, fossil energy used to be cheap to operate, it was one of the reasons for its success, therefore alternatives had to be more expensive, at least in their infancy; of course, reducing demand for fossil energy eventually implied reducing supply, closing down existing fields or not investing in new fields, whichever approach likely prone to create hick-ups when supply and demand trajectories get unbalanced.

But this transformation perspective came with a solace, albeit temporary, in the form of a slow pace, much to the displeasure of the most climate anxious, IPCC experts and UN Climate officials included. The pandemic and its consequences on global trade, brutal slow-downs and equally brutal recoveries, the war in Ukraine with its trains of sanctions against the aggressor, changed the pace and brought chaos to the energy markets in just a few months.

The impact on transport cost is ghastly.

To illustrate this, consider the situation in France, where taxes make up a solid two-thirds of the price of road fuels at the pump. The price of the benchmark crude oil, North Sea Brent, jumped 50% between the end of 2021 and the Spring of 2022. Despite price relief provided by the government and some road fuels marketers, but counteracted by the weakening of the €/$ parity, the price of one liter of diesel, after tax, jumped by close to a good third, around 50 €cents, with wild weekly variations.

Now, consider this: at the end of 2018, road fuel prices were similar to those at the end of 2021, but sure on the rise, though modest by 2022 standard, and it took the announcement of the planned increase of the infamous carbon tax by 6 €cents on January 1, 2019 to spark the Yellow Vests movement, not extinct yet. And biodiesel, incorporated around 7-8 %, added a further 5 €cents to the price at the pump, very slowly increasing every year with growing mandates. So, compared to a full fossil-based diesel, we were talking of 10 more €cents in 2018 to (modestly) help fight climate change, one quarter or one fifth of the sudden increase we have been supporting in the last quarter.

Is this an invitation card to a Yellow Vest second season? Not so sure, as the fuel price spike in 2018 was just the spark to a larger discontent brewing in the lower middle-classes, the “somewhere” for whom car is essential, to over-simplify. This resentment has not gone away, but has many other sources in 2022.

Then, is this the first act of what is to come with the energy transition? In my opinion, yes, definitely. And we should not be comforted by what we just observed for the price of electric vehicles, like Tesla Model 3 price jumping from 35 to 47 K€ on the EU markets, supposedly justified by the increase of the battery price (hint: Eastern Europe metals), or what we know about the future evolution of the electricity price, either based on the marginal natural gas price (LNG), or the amortization of the additional renewable electricity equipment to be installed at breakneck speed (again with metals that are not mined yet), or facing potential transport-specific taxes (the ones that fade away with the downfall of liquid fuels).  Solid, and enduring, increase of the cost of transport is with us, if not forever, at least for the time it will take to transition away from fossil fuels, a few decades.

Well, maybe we should follow the advice of the International Energy Agency: leave our car at home every Sunday, recommendation number 6 of their 10-point program to save energy, which also include working from home, slowing down on motorways, walking and biking, using public transport. Frugality first.

But there may be a complementary approach to keep transport cost in check and still enjoy and benefit from travel, which has to see with the concept of decoupling I mentioned in the first sentence: as the internal combustion engine vehicles are not to disappear in the foreseeable future, use locally produced fuels, sustainable and low-carbon, a.k.a. biofuels, either the so-called first-generation ethanol and FAME, produced out of our agriculture, or advanced biofuels, produced out of wastes and residues, helping circularity to come in play in our linear consumer way, or synthetic fuels, produced in the future out of renewable electricity, water and CO2.

As long as their lifecycle assessment, a technique we can consider mature today to measure the sustainability of production, shows reduction in greenhouse gas emissions, why refuse a readily available solution that also supports local jobs and improves energy independence? Before the dramatic events of the last two years, there was a cost premium attached to biofuels, compared to fossil fuels, but not necessarily today, especially when we consider advanced biofuels. Wastes and residues should not have the market exuberance than oil or gas, should they?

Philippe Marchand is a Bioenergy Steering Committee Member of the European Technology and Innovation Platform (ETIP).