[Choi Ji-woong's Energy War] Why Oil Was Excluded from Carbon Reduction Discussions

Last-Minute Struggles Over Coal at COP26
Agreement Softened from 'Phase-Out' to 'Reduction'
Oil Discussion Fails to Gain Public Attention


Coal Accounts for Half of Global Carbon Emissions
Priority on Reducing Largest Emission Source is Natural
Solar and Wind Alternatives Exist


Main Use of Oil is Transportation Fuel
Ships and Aircraft Cannot Operate Without Oil
Gasoline and Oil Impact Public Life Significantly
Strategic Solutions Needed, Not Phase-Out

Asia Economy Newspaper publishes a monthly series every Thursday titled 'Choi Ji-woong's Energy War,' which analyzes the energy industry undergoing a great transformation and examines the related changes in the international order. The author is an expert in the energy field who joined Korea National Oil Corporation in 2008, worked in the Europe and Africa Business Division and the Stockpile Business Division, and completed an MBA program in Oil and Gas at Coventry University in London in 2015. He authored the bestseller "How Oil Rules the World," which covers the modern history of oil. Last year, he gained readers' attention by serializing the column in this newspaper.

At the 26th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26) held last November in Glasgow, UK, South Korea announced its 2030 Nationally Determined Contribution (NDC) target to reduce greenhouse gas emissions by 40% compared to 2018 levels. However, the final stages of COP26 saw intense struggles among countries over coal usage in the agreement text. European major countries, where coal accounts for less than 10% of power generation, insisted on explicitly stating the phase-out of coal power in the agreement, but China and India, where coal accounts for more than 60%, opposed this. Ultimately, the term 'phase-out' of coal power was softened to 'reduction' in the final text.

Coal and oil are representative fossil fuels. But why has there been fierce discussion about reducing coal in international carbon reduction talks, while discussions on oil usage have not become a public issue? The first reason is that coal accounts for nearly half of global carbon emissions, making it the largest emitter. Naturally, efforts to reduce the largest carbon emitter take priority.

Another reason lies in the availability of substitutes. The primary use of coal is power generation. As of 2019, coal accounted for 36.7% of global electricity production. In the power sector, there are energy sources that can replace coal. Electricity can be generated from renewable energy such as solar and wind power, and although controversial, nuclear power can also serve as a substitute for coal. Natural gas emits about half the carbon of coal, so it can replace coal and reduce carbon emissions.

However, the story is different for oil. The main use of oil is as a transportation fuel. More than 60% of crude oil is processed into gasoline, jet fuel, and other fuels used for cars, ships, and aircraft. Currently, large ships and aircraft are almost impossible to operate on fuels other than oil and gas, and attempts to replace them with other energy sources are minimal. At least in road transportation, reducing oil demand requires replacing internal combustion engine vehicles with electric vehicles, which is not an easy task.

▲ Researcher at Korea National Oil Corporation Smart Data Center

Recently, crude oil prices have been hovering around $70 per barrel. When converted to a price per liter, $70 per barrel is about $0.4, roughly 500 Korean won. Despite the significant price increase compared to last year, oil remains cheaper than cola or bottled water. In short, oil is overwhelmingly cheap. It also has a high energy density. Additionally, being in liquid form makes transportation and storage easy, and long-term stockpiling is possible. In contrast, renewable energy without a physical form and hydrogen in gaseous form require cutting-edge technologies such as secondary batteries or fuel cells to be used in the transportation sector. This distinguishes them from oil, which only requires a simple fuel tank or container.

Optimistically, technological advances could allow electric vehicles to completely replace internal combustion engine vehicles. This expectation is reflected in Tesla's price-to-earnings ratio (PER) exceeding 300. Furthermore, the high expectations for the secondary battery industry also reflect hopes for the phasing out of internal combustion engine vehicles. Tesla's stock price is justified on the assumption that electric vehicles will significantly replace internal combustion engine vehicles. In 2020, electric vehicle sales were about 3 million units, while internal combustion engine vehicle sales were 63.8 million units (74.9 million units in 2019 before the COVID-19 outbreak). This figure shows that if all internal combustion engine vehicles were replaced by electric vehicles, the electric vehicle market size could grow more than 20 times.

However, two prerequisites must be met for the electric vehicle era to open. First, fossil energy sources such as coal must be phased out from electricity generation to achieve low-carbon power production. In other words, the share of low-carbon energy in power generation must increase to reduce carbon emissions from electricity production. Currently, major European countries have increased the share of renewable energy in power generation to 40-50%. In Europe, where the share of renewable energy is high and coal power accounts for less than 10%, electric vehicles are sufficiently eco-friendly. The European Union plans to ban the sale of internal combustion engine vehicles after 2035.

However, in Asian regions such as South Korea, China, India, and Japan, where coal-fired power accounts for 30-70%, the use of electric vehicles is debatable. Even if cars are powered by electricity generated from coal, the carbon reduction effect may exist but cannot be compared to the effect in Europe, where the share of low-carbon power generation is high.

Second, to cover the transportation energy currently supplied by petroleum products such as gasoline and diesel through the power sector, the total electricity production must increase. Additionally, the increase in power generation must be accompanied by a large-scale expansion and system overhaul of the transmission and distribution network.

In conclusion, the expansion of electric vehicles requires an increase in the share of renewable energy in power generation, along with securing sufficient electricity supply to lower electricity costs. If these conditions are not met, the use of internal combustion engines may continue for a considerable time. Therefore, carbon reduction efforts in the transportation sector should include not only the expansion of electric vehicles but also improving the fuel efficiency of existing internal combustion engine vehicles and reducing exhaust emissions.

Oil is not only difficult to replace but also has a significant impact on people's daily lives through gasoline and diesel. Moreover, the refining and petrochemical industries hold a large share in the South Korean economy. Therefore, it is necessary to distinguish between coal and oil in carbon reduction efforts. While coal should be phased out, oil requires a more strategic approach.