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Phasing out fossil fuels calls for the regulation of the supply side of energy

Updated: Nov 5, 2021

Fossil fuels have always been perceived as a global necessity, but in reality, they have only been a global indulgence, the costs of which are hefty and left to be borne by the world's weakest. Reliance on energy derived from fossil fuels is undoubtedly damaging for the environment, and if any change for the better is to happen in time, then up to 80% of fossil fuels cannot be extracted from the ground. Continuous scientific research is proving these points; however, it is remarkable how humanity refuses to give fossil fuels up. There is a good reason for the status quo - fossil fuels are energy-dense, rendering them the most useful resource on earth, and perhaps the most critical bargaining chip in international politics.

Despite decades’ worth of efforts to reduce GHG emissions, progress is still not in line with what the 198 state leaders agreed in the Paris Agreement – to keep global warming at a level ‘well below 2 °C’. Efforts on the demand side of energy, which focus on curbing the end-user’s need for energy sourced from fossils, are sabotaged by the continuous introduction of new fossil fuel developments in the energy supply chain, perpetuating the market's reliance on it.[1] If fossil fuels are to be phased out, regulating the supply side of energy is becoming the prominent solution.

A perpetual cycle of fossil fuel reliance

Fossil fuel energy consumption has been exponentially increasing since the industrial revolution, and the world’s inability to quit it is based on a perpetual cycle of demand and supply. Many argue that it is the increasing demand that leads to the need for energy supply and extraction of fossil fuels, despite the environmental ramifications. However, consumption of fossil fuels on a global level has not fallen despite the decades of consistent efforts to curb demand and in fact, the reduction of CO2 emissions in some (wealthy) parts of the world.

Several thought-leaders argue that in the case of fossil fuel consumption, market demand is not the figure we should focus on. It could be the increasing supply that fires demand, not the other way around. ‘The political and economic interests and institutions that underpin fossil fuel production help perpetuate fossil fuel use and even to increase it.’ [2] Accordingly, extracting fossil fuels feeds into the global energy market, which generates significant revenue and attracts investment, develops better technology and extracting techniques, only to extract more, and repeat. Year by year, the cycle has created a ‘carbon lock-in,’ otherwise put, a dependency on fossil fuel energy.

The history of energy markets validates the above. When the first oil was extracted, which had the potential to replace the then go-to fossil, coal – a more energy dense, flexible, valuable and in abundant amounts resource, it did not. Instead, both coal and oil were extracted, producing an ever increasing amount of energy (and GHG emissions) available for consumption.

Global energy consumption is increasing since the 19th century.

Even if fossil fuel energy is not utilised by advanced states, which can afford the less energy-dense and more expensive, renewable energy, it is still consumed by states that have traditionally struggled to meet their energy needs. Accordingly, while Europe, North America and other developed states have reduced GHG emissions in the past years, global consumption of fossil fuels has not dropped.

A shifting focus to the supply side of energy?

There is evidence that international practice is moving towards a more stringent approach in relation to accountability for climate change, which could lead to states being more readily held accountable for their actions regarding climate change, such as the authorisation of new fossil fuel developments. Many argue in favour of shifting focus from calculating the localised, downstream GHG emissions to produce a national metric, to collectively considering the impact of extracted fossils with national emissions. While the latter is disproportionally smaller than the former in fossil-extracting states such as Norway, Australia, Russia and Saudi Arabia, it is thought that their collective calculation will mobilise these states to diversify their economy (if necessary) and ensure swift social transition of the reliant communities.[3]

Regulation of the supply side has gained prominent supporters. The OECD Secretary-General, noted the ‘climate challenge’ – the contrast between fossil fuel state revenues and the resulting reliance on them for energy. More recently, the OECD has urged governments to utilise the major drop in energy demand to phase out fossil fuels by divesting the relevant funds to different economic stimuli. The former US President, Barack Obama, had commented in favour of the approach when contemplating and eventually rejecting the XL Keystone Pipeline. While the following President was not as proactive with regards to climate change, it is expected that President-elect Joe Biden will align US policy with climatic needs.

The focus on the supply chain of energy ties well with the equity principles presented by Muttitt and Kartha; it is more equitable for a managed phase-out of fossil fuel extraction (not simply combustion) to happen first to leading exporters with diversified economies such as Australia, Norway and the United Kingdom, because ‘the social costs of doing so are the least,’ while transition costs are to be borne by the world’s leading economies, echoing the United Nations Framework Convention on Climate Change (UNFCC) principle of respective capabilities.[4]

Convenient but with dire consequences: the Market Substitution Argument

Regulating the supply side of energy has received opposition, especially in Australia, in the form of the ‘market substitution argument’ (‘MSA’).[5] According to the argument, the rejection of an individual fossil fuel development will make ‘no material difference to global GHG emissions resulting in climate change.’[6] Related strands of the same argument include assertions that fossil fuel extraction in a developed state can even lead to sub-zero GHG emissions, since it substitutes lesser quality fossil fuel stock in the global market.[7] The MSA is particularly effective for its proponents because it displaces accountability for GHG emissions resulting from the combustion, rather than extraction, leaving states that import the extracted fossils to bear the consequences. The argument was first introduced in the Wandoan Coal Mine case in Australia, and was consolidated in a series of latter cases, and significantly the Adani Carmichael Coal Mine case. Most instances where the argument is relied upon concern the approval of coal mine plants and in the latter, the court approved a coal mine plant with a life span of sixty years, despite global efforts to eliminate fossil fuel as a mainstream source of energy. The MSA is not unique to Australia. In People v. Arctic Oil, the court was adamant that Norway is not liable for the effects of the resources it extracts and exports.[8] Citing a different facet of the MSA on appeal, the court found that even if Norway ceased to export fossil fuel, that would arguably not satisfy global appetite for energy in a more environmentally-friendly way and accordingly, it would be pointless for Norway to do so.[9]

The Adani Carmichael coal mine. Image:

The MSA and surrounding arguments have been consistently debunked on deontological, economic, and legal grounds by thought-leaders in international environmental law.[10] The Australian judiciary appears to have grown closer to rejecting the argument. In 2019, Justice Preston found that ‘an environmental impact that is found to be unacceptable (…) does not become acceptable because a hypothetical and uncertain alternative development might also cause the same.’[11] Attention seems to be focusing on the oxymoron of developed states with substantial economies that have minimal GHG emissions and exemplar nationwide green initiatives, that are also the heaviest investors in extracting the largest amounts of fossil fuel resources, without paying real attention to the climatic impact of their combustion.

The longstanding defence that governments of producing states have relied on to authorise new developments, the ‘market substitution argument,’ has been consistently debunked. The above points demonstrate a future approach focused on the supply chain of energy. Developed states that are major producers of fossil fuel should think twice before authorising new fossil fuel developments - more thorough regulations on the supply side of energy will significantly burden their environmental position.


[1] Michael Lazarus, Harro van Asselt, ‘Fossil fuel supply and climate policy: exploring the road less taken’ Vol.150 Climate Change Journal, p. 1.


[3] Daria Shapovalova, ‘Arctic Petroleum and the 2°C Goal: A Case for Accountability for Fossil-Fuel Supply’ Vol. 10 Iss. 3-4 Climate Law Journal 2020, p.291; Greg Muttitt, Sivan Kartha, ‘Equity, climate justice and fossil fuel extraction: principles for a managed phase out’ Vol.20 Iss. 8 Climate Policy 2020, p. 1032.

[4] Muttitt and Kartha (n3), pp. 1032-1033.

[5] Justine Bell-James, Briana Collins, ‘If We Don’t Mine Coal, Someone Else Will”: Debunking the “Market Substitution Assumption” in Queensland Climate Change Litigation’ Vol.37 EPLJ 2020, p. 168.

[6] Ibid, p.169

[7] Ibid.

[8] Föreningen Greenpeace Norden, Natur og Ungdom v the Government of Norway (4 January 2018) Oslo District Court 16-166674TVI-OTIR/06 as reported in Shapovalova (n3), p. 286.

[9] Ibid.

[10] See Bell-James and Collins (n4), p.185; Shapovalova (n3), pp.291-293; Lazarus (n1).

[11] Gloucester Resources Limited v Minister for Planning [2019] NSWLEC 7, at paragraph 545 as reported in Shapovalova (n3), p.292 and Bell-James and Collins (n4), p.184.


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