Valdai Club

A more sustainable and secure future requires greater solidarity, and holistic solutions to energy and climate policy challenges, writes Christof Van Agt, Senior Energy Analyst at IEF International Energy Forum.

The “New” Normal

The coronavirus (COVID-19) pandemic holds sway over a fragile economy in a more divided world. Grand visions on what the recovery might bring disguise the fact that room for maneuver is limited. Financial balances and goodwill lost in earlier crises have yet to be restored. There is no normal to depart from or return to which creates a heightened sense of vulnerability. As a consequence, global challenges such as widening inequalities and climate change are placed in starker contrast. The crisis has not created new but accelerated existing trends. These dynamics raise two important questions. First, will economic recovery demands help bridge divisions and ease global tensions through greater international solidarity and collaboration? Second, can the world fast-forward towards universal energy access and climate neutral growth as envisioned by the UN Sustainable Development Goals and Paris Agreement and that green growth and net-zero-emission strategies aim to achieve? The answer to the latter question depends almost entirely on the outcome of the former.  

Preliminary assessments

The pandemic has claimed half a million lives and reduced global working hours by more than 10 percent equating to around 305 million full-time jobs lost worldwide. This has caused a loss of income which exceeds that of any previous recession over the last 100 years outside wartime. Generational, gender, income, and other divides may widen in a world where 1.3 billion people must do without access to modern energy services, 2.5 billion have no access to clean water, 800 million people live in extreme poverty; and one out of nine people starve. The informal economy, as well as younger and lower-skilled workers, are most affected and are at risk to remain unemployed for an extended period of time, while the people facing acute hunger may rise to 265 million by the end of this year according to the United Nations.

Beyond the loss of life and livelihoods, the negative impact of COVID-19 exceed that of the Great Financial Crisis. Global economic growth will decline to minus 4.9 percent in 2020 according to the International Monetary Fund; the second major downward revision from the January forecast for the year that projected global economic growth at 3.3 percent in 2020. Market volatility exceeds previous episodes by a multitude of standard deviations that reveal the extent of economic dislocation. Recent market retreats show that economic upturns remain fragile and have yet to find firmer footing. While the role of central banks and financial markets remain essential to maintain liquidity and enable the transfer of risks at a time of unusual dislocations.

As the crisis unfolds and new data emerges, swift and decisive action by governments and market stakeholders is vital to restore market balances and clear the way for a robust and sustainable global economic recovery that leaves nobody behind. Greater solidarity and collaboration are needed to address the different impacts and interest in mature and growth economies. Especially, since a slow recovery will have longer lasting impacts that are likely to widen divides and further entrench rather than resolve inequities and global tensions. 

Elevated uncertainty has a devastating effect on the trust and confidence that is required to mobilise the investment and trade that a sustainable recovery calls for. In the energy sector this has dropped by around 400 billion US dollars according to current estimates. Though hydrocarbon markets are particularly hard-hit, all energy sectors are affected and will take time to recover. With government support and the benefit of falling costs for both wind and solar technologies, clean energy - and renewable energy growth may prove more resilient but can still fall short of earlier held expectations. Investment had stabilised at around 360 and 260 billion US dollars for all zero-emission technologies and intermittent sources over the last two years. Steep cost reductions in solar and wind power technologies, combined with green growth strategies will continue to add capacity. But investment in infrastructure and smart networks to balance systems will need to increase to enhance connectivity and market stability. Hydrocarbon and nuclear power investments were at a low ebb even prior to the pandemic. This is where the heavy lifting needs to be shouldered collectively to both safeguard security of supply and ensure a sustainable and fair recovery.

Energy sources that do not emit greenhouse gas emissions including large hydro and nuclear provide an important share of global primary energy consumption. The stellar rise these sources made over the past decades stands at around 20 percent of world demand today and their share may reach around 40 percent by 2040. That is if substantial sweeping transformations follow, for instance in accordance with the latest Sustainable Development Scenario the International Energy Agency (IEA) published shortly before the novel coronavirus broke out in November 2019. Around 50 billion US dollars in renewables investment is delayed on health restrictions and supply chain constraints. Fiercer competition for budgets among rising public and private sector demands makes it difficult for investments to exceed past records without stepped up and more concerted efforts.

The COVID-19 related deep but incidental drop in energy demand gives us a preview of what a more sustainable world could look like. Carbon dioxide emissions dropped by 17 percent and nitrous oxide and sulfur levels fell by some 30 to 50 percent in some major cities improving air quality and greatly enhancing living conditions in April. Yet the social economic cost of this more sustainable future is prohibitively high and, of course, not acceptable. In fact, the crisis reveals just how hard it is to reduce emissions even when the world grinds to a temporary halt in the exceptional circumstances of a massive global health crisis. More connected and creative thinking is urgently needed to restore balances and reimagine how to achieve changes that support sustainable growth on the road to recovery. Enhanced dialogue that is focused on technology solutions and system integration rather than energy sources alone, as well as greater data transparency to benchmark fuel quality, carbon intensity, and emissions will be central to these efforts. Three facts drive the global conversation:

1. There is no doubt that the world will eventually return to healthy growth trajectories. Both the IEA and Organization of the Petroleum Exporting Countries short-term market reports project a relatively swift return of demand close to pre-outbreak levels reaching around 97 million barrels by 2021, and long-term demand trends remain largely unaffected. 
2. Meanwhile, a reduction of greenhouse gas emissions and other harmful pollutants including fugitive methane, and particle matter is needed to keep global warming within acceptable thresholds of 1.5 to 2 degrees Celsius and living conditions healthy and desirable in a rapidly urbanising world. 
3. Though hydrocarbon demand growth rates may decline over the next decade, a structural reduction in demand is unlikely to occur, due to the economic expansion that population growth will bring together with social demands for smart and just energy transitions.  

The only way to reconcile these three facts is to acknowledge that sustainable growth expressed in reduced hydrocarbon consumption and an increase in renewables or nuclear technologies prevents us from reaching our goals in accordance with the timetables that the Paris Agreement and 2030 Agenda for Sustainable Development set. Making energy supply and demand more efficient and sustainable through regulation, incentives, and innovation should prevail over technology choices for investment in green growth to move forward within global thresholds.  

Leveraging producer and consumer capabilities to integrate new and available technologies helps better manage greenhouse gas emissions and pollutants while achieving universal access to modern energy services. This includes, but is not limited to, the opportunities offered by energy efficiency and renewable sources, energy systems integration between molecules and electrons in the hydrogen economy and carbon capture use and storage. Generating value from emissions through their application in chemicals, use for enhanced oil recovery, or absorption from the atmosphere through mineralisation and direct air capture techniques also help.

Energy sector transformations are well underway but follow different pathways due to diverse economic conditions, competitive advantages, policy priorities, business strategies, and consumer preferences in dissimilar countries. Greater international collaboration is needed to avoid diluting efforts or limiting market opportunities. Whole system solutions and circular models that technology and innovation can offer through well-established open-market and multilateral governance mechanisms, create a more predictable environment for investment, trade, and technology transfer. This reduces market barriers and transition costs among developed and developing economies. When distinct transition pathways build on each other strengths, investment and trade follow at the scale and speed that rising standards for environmental and social stewardship require.

Takeaways 

The pandemic provides a chance to strengthen cooperation and seize new opportunities to harness markets, resources, and technologies that help us grow in a more sustainable manner. A swift and robust recovery towards a more sustainable and secure future relies on greater solidarity, connected, and creative thinking across geographies, economic sectors, and knowledge networks. 

Government-industry partnerships can build on available networks, and capitalise on abundant and more competitive supplies to place greater emphasis on clean air requirements and inclusive clean energy transitions that advance energy access in post-pandemic recovery strategies. 

Economic stimulus however should not result in protectionist measures to ring-fence policy and technology choices but must ensure that markets remain well-regulated in accordance with predictable market mechanisms and well-established energy and climate policy principles. 

This includes international cooperation on energy and climate policy aspects of recovery strategies and leveraging the capabilities of international energy companies, and energy intensive industries, some of which have announced ambitious net zero carbon strategies. 
Major market stakeholders working with governments of major economies will build greater momentum to accelerate the integration of renewables, green gas, hydrogen, and carbon dioxide solutions at an acceptable cost to societies. 

Growth economies and the global gas industry appear well-positioned to help facilitate a sustainable economic recovery. As emission reductions in North America show, gas technologies can accelerate fuel-switching that enable affordable and resilient energy systems integration on which sustainable growth depends. 

The impact of the pandemic also merits a broader collective evaluation of crisis prevention and emergency response mechanisms in a more dynamic and new risk environment. This must include a review of the resiliency of global economic supply chains and the cybersecurity implications of increasing electrification rates. 

Finally, the ‘apparent triumph’ of digitalisation keeps humanity afloat amidst the public health restrictions. The lock down shows that a world in retreat towards ‘splendid isolation’ does not build the trust, confidence, and wider understandings to move forward reliably at the speed required in practice. Clearing real and imagined borders by reaching out through face-to-face conversation or showing up in person provides enrichment. Ultimately this is what shapes secure, sustainable, and prosperous societies. International relations matter as much as do personal exchanges. Leaving this annus horribilis behind, exploring the world with an open mind beyond comfort zones and professional silos, will deliver the solutions we all desire.