The International Monetary Fund has issued a warning before a meeting of the Opec oil cartel that permanently low fossil fuels are choking off investment in renewable sources of energy and hindering the fight against climate change.

Oil prices rallied slightly amid reports – later denied – that Saudi Arabia plans to announce a 1m barrels a day production cut at the talks in Vienna on Friday. The price of Brent crude was up more than 2% at just under $43.50 in early trading on Thursday.

But an assesment of the energy market from the IMF, co-authored by its chief economist Maurice Obstfeld, said a global carbon price was needed to reflect the true cost of burning fossil fuels and to provide resources for investment in green technologies.

In an attempt to prompt action at the Paris climate change conference, Obstfeld and Rabah Arezki said: “Fossil fuel prices are likely to stay low for long. Nothwithstanding important recent progress in developing renewable fuel sources, low fossil fuel prices could discourage further innovation in, and adoption of, cleaner energy technologies. The result would be higher emissions of carbon dioxide and other greenhouse gases.”



Oil prices have fallen by more than 60% in the past 18 months, while gas prices have halved and coal prices have continued to decline. The IMF economists said in the past low oil prices were self-correcting, because they resulted in a lack of investment in new production capacity which led to supply failing to meet demand.

Oil gas and coal are cheaper Photograph: IMF

But it said there were a number of reasons why oil prices were unlikely to bounce back: new shale production; Opec’s reluctance to cut production; the projected increase in Iranian exports; and the easing of global demand.

“Policymakers should not allow low energy prices to derail the clean energy transition. Action to restore appropriate price incentives, notably through corrective carbon pricing, is urgently needed to lower the risk of irreversible and potentially devastating effects of climate change.”



Fossil fuels continue to dominate global energy consumption. Oil accounted for 33% of the total in 2014, gas 30% and natural gas 24%. Nuclear accounted for 4% of primary energy consumption, and renewables 9%.

The IMF analysis chimed with studies showing that renewable energy will have to displace fossil fuels to a much greater extent in the future to avoid unacceptable climate risks. “Unfortunately, the current low prices for oil, gas, and coal may provide scant incentive for research to find even cheaper substitutes for those fuels.”



Expressing the hope that the Paris meeting would “open the door” to a future international agreement on carbon prices, the IMF has said such a deal would generate substantial fiscal revenues by eliminating fossil fuels subsidies and by charging for the damage caused by emissions.

“A tax on upstream carbon sources is one easy way to put a price on carbon emissions, although some countries may wish to use other methods, such as emissions trading schemes,” it said.



It added that without global coordination on carbon prices, “the cost to the world economy of whatever aggregate emissions reduction is achieved will be unnecessarily high”.