Author: Miguel Schloss, President of Surinvest Ltda.; member of Bretton Woods (World Bank - IMF) Committee; Trustee of Global Legal Inte...
Author: Miguel Schloss, President of Surinvest Ltda.; member of Bretton Woods (World Bank - IMF) Committee; Trustee of Global Legal International Network (GLIN). Former Director of Corporate and Budget Planning of World Bank; Executive Director of Transparency International in its formative years.
1. OVERVIEW
It is now almost 30 years since the first UN Climate Change Conference of the Parties (COP) meeting took place. Since then, yearly meetings have beenarranged, targets to be achieved agreed, institutions established to advice, monitor and review progress.While all this is commendable, progress has been falling short of agreed goals, with potentiallong-term irreversible climatic implications.
For far too long, the decarbonization debate has been allowed to be overly ideologized, with the environmentalist movements taking an antagonistic posture, and the energy industry a defensive posture. All this produced more heat than light, so to speak, and slowed the investment process.
The world will need to dramatically scale up lower-emission solutions – beyond the current trajectory – and do so while making room for growing demands for economic development in emerging economies. This will require to do more, faster and at lower costs, and will need to be nurtured by enhanced public-private and cross-industry collaboration, and attendant human and financial resource mobilization across sectors.
Fortunately, the antagonistic “Greta Thunberg-Big Oil” divide is slowly opening up towards a more technocratic approach to the subject — which in the end is imperative, as human and technical skills and financial resources are heavily concentrated among private and petroleum industries, while policy and economic competencies are largely centered on public administrations, think tanks and civil society organizations. [i]
In all though, we still have a large gap to overcome and much work to undertake, before we can take comfort in the progress being made. This will require a more settled view of the overall policy and environmental framework underpinning investment efforts, and the capabilities governments and enterprises need to sharpen to carry out much needed investments.This Blog is an attempt to shed light on the broader underlying issues at stake and their implications for more effective decarbonization efforts.
2. THE FRAMEWORK, AND WHAT CAN BE SAID ABOUT IT
There are inevitably different ways of depicting the global environmental and climate change issue. Probably, deep down most formulations agree on the fundamentals. To ensure a solid basis for discussion it is essential to start frombasics to enable proper analysis and debate, and understand that energy use and economic development are inseparable. Where there is energy poverty, there is poverty. And where energy availability rises, living standards rise as well.
To
address our current conundrum requires us to understand the drivers
of the energy equation (particularly the Policy, Technology, and Consumer
preferences)). All three affect how the world uses energy. Each driver
influences the others and changes over time, with variances by region and
political circumstances. But to achieve tangible results, one cannot do it by
assuming away the need for energy, economic development and concentrating
instead on rhetorical or moralistic statements, conferences and the like, empty
of substance and understanding of the issue.
Countries and institutions that have made tangible progress have done so by mobilizing the human competencies and financial resources to address the aforementioned drivers of the issue. Some, mainly in Europe, have done so through top-downinstitutional mandates or regulatory actions, while others, like Chile have recognized their institutional weaknesses and have built their policies through “pricing” or taxation policies, letting the private sector decide how to invest to meet energy demand while reducing emissions, and in the process achieve among the highest share of renewables internationally in its energy matrix in only six years. [ii]
All
said, the world in 2050 will be different — as it is today from millennials
ago. We cannot divert attention towards every habitat around the world. The
key, however, is to tame the forces of the universe, which are far greater than
those of humans, in a manner that is consistent and reconcilable with our
progress, and sustainable survival. This involves making room
for billions more people, more prosperity, and more energy. Similarly,
emissions will have to decline as a variety of low-carbon solutions advance,
but achieving net-zero emissions will require the adoption of constructive
policies, the emergence of new technologies, and the establishment of
market-driven mechanisms.
The
world may be different then, but the need to provide the reliable, affordable
energy that drives economic prosperity and better living standards, while
reducing greenhouse gas emissions, will remain just as critical as it is today.
This will include oil and natural gas, which will still be required to drive
critically needed economic growth, particularly in the developing world.
Oil
and natural gas are projected to still make up more than half of the world’s
energy supply. The utility of oil and natural gas in meeting the world’s needs
remains unmatched. They are energy dense, portable, available, and affordable —
and serve as essential raw materials for many products we use today. Given that
oil and natural gas are projected to remain a critical component of a global
energy system through 2050, sustained investments are essential to offset
depletion as production naturally declines by 5-7% per year.
Oil
use is expected to decline significantly in personal transportation but will
remain essential for the industrial processes and heavy-duty transport like
shipping, long-haul trucking, and aviation that underpin economic growth, while
determined efforts could be invested in reducing energy-intensity or energy sourcing in mining. Consider: if every
new passenger car sold in the world in 2035 were an electric vehicle, oil
demand in 2050 would still be 85 million barrels per day, the same as it was
around 2010.
Natural
gas use is projected to increase by more than 20% by 2050 given its utility as
a reliable and lower-emissions (and transition) source of fuel for electricity
generation, hydrogen production, and heating for both industrial processes and
buildings.
An energy transition is underway, but it is not yet happening at the scale or on the timetable required to achieve society’s net-zero ambitions. Three key drivers are available, all involving broad collaboration among governments, companies, research institutions, and others:[iii]
First, continued public
policy support. Incentives like those in German with mandated energy
supply sources or the U.S. Inflation Reduction Act can provide the necessary
catalyst to begin scaling up low-carbon solutions — though at a cost, and
within time limits. Permitting reform is needed to accelerate the
deployment of these solutions, a factor recognized in the European Union’s Net-
Zero Industry Act. Other policy priorities include enhanced transparency so
that market participants have sufficient time to adapt to changes, and a
recognition of the importance of keeping supply matched with demand to help
minimize economic hardships on consumers.
Second, technology
advances. Currently, only two of the 55 technologies needed to reach
net-zero emissions by 2050 are “on track,” according to the International
Energy Agency. An all-of-the-above approach to technology, where governments
avoid picking winners and losers, is bound lead to the most cost-efficient
solutions produced in a timely manner.
And third, market-driven
solutions. Governments across the world can't afford to pay in perpetuity
to reduce the amount of emissions needed to be removed or avoided. Ultimately,
to achieve global emission-reduction goals, the world will need to move to
widespread adoption of markets where society as a whole incentivizes driving
emissions down.
The
world is starting to make meaningful progress. Even with ongoing economic
development and moderate growth, the emissions intensity of the world’s energy
supply has declined since the Paris Agreement was signed in 2016. On the policy
front, incentives for wind and solar catalyzed rapid deployment and cost
reductions. Technologically, breakthroughs in shale enabled natural gas to
disrupt and displace coal. And new markets for solar were created for both
residential and utility-scale. Given the need to do more and do it faster at a
lower cost, progress will need to occur in parallel, supported by policies that
are technology-agnostic and incentivize all approaches, equally. Multiple
approaches, nurtured by public-private partnerships and cross-industry
collaboration, may be needed, and allow the better and mor economic “win”.
Given
the need to do more and faster, at a lower cost, progress will need to occur in
parallel, supported by policies that are technology-agnostic and incentivize
all approaches, equally.
To
put the issue crudely, countries that have centered on pricing oil and gas
broadly reflecting the emissions they generate (like Chile) or have established
proactive policies favoring alternative sources of energy (like Germany)
have done rather well in changing their energy matrix (in favor of renewables).
However, given the global nature of the environmental issue, the benefits
accrue to the global rather than local economies. Moreover, the
continuing challenge is that while societies want to see emissions reduced, few
want to pay for it, as oil and gas are considerably cheaper when not taxed
adequately, which contributes to the still paltry share of renewables in global
supply.
Accordingly,
for the time being and foreseeable future, all indications are that we may
have to abandon the fantasy of phasing our oil and gas, and instead invest
in them adequately reflecting realistic demand assumption. At the same time, we
may need to focus more energetically in carbon capture investments and greater
research and development of lower emitting hydrocarbons is a viable option. T
Allhese involve research &development efforts and are inevitably bound to take time and remain rather uncertain. Such shift of emphasis would be highly desirable as companies operating in these fields have the financial and technical resources to be able to address such challenge at the scale and with the savoir-faire needed to face the challenge.
3. OUTCOMES
Results are seldom
the outcome of single actions, but in the main the upshot of policies being
implemented, the capacities of governments and enterprises carrying them out,
the economic context, and institutional framework that underpins them. The meteoric
decarbonization the Chilean electricity sector in recent years is in fact the
outgrowth of consistent liberalization policies. In fact, the country was the
first in Latin America and one of the first in the world to deregulate (1981)
and privatize (1986-88) its generation sector, forcing generators to compete
with each other. As such, the sector is efficient, transparent and
sophisticated, with tariffs equal to the marginal cost of production plus a
market rate of return. Similar actions were emulated over the decades
elsewhere, with different level and regulatory traditions.
This facilitated the
spread of electricity de-regulation and provided transparent, predictable and
rational means of delivering appropriate risk-adjusted returns, and delivered
reasonably priced electricity (including the introduction of different forms of
pricing or taxing to reflect the externalities and start generating capital
flows reflecting costs of carbon emission to society to generate incentives for
efficiency and resources to cover increased investment needs. have not been
impeded into the sector and energy efficiency is good by international
standards. The energy efficiency seems particularly good considering that
Chile's main export goods are energy intensive (mining) and the topography of
the country could have led to high costs. Variants of such measures have been
established in the European Union through import fees partly reflecting carbon
emission costs; in the US through industrial policies aimed at providing
preference for local production of inputs for carbon reducing products, and the
like. Such approaches are more difficult to manage, and could (if not properly
managed) produce distortions as has been occasionally the case. Thus, any
further developments should be set within the context of building upon what has
beensuccessfully carried out, and carefully vetted in light of a rather
extensive and increasingly clear strategy developed for over two decades.
All in all, what
should be by now increasingly clear is that the approach implemented in Chile
and other countries like it is that the market-driven approach tends to be more
manageable, particularly in countries with weak institutional frameworks. The
graphs below show how this approach tends to produce early results, and can
produce brisk and sustained results.
On the other hand, when the data is broken down, one can see with greater clarity the underlying weaknesses stemming from the location-specific and weather dependent nature of renewables, and thus the critical need to overcome in future the low load-factor of such technologies.
This is where increased attention will be required in decades to come to build-up of reserve and transmission capacities, carbon capture investments, and other technological improvements that still require major investments, research and development to produce the long-term sustainable results that are being sought from emerging technologies[iv]
[i] "Mapping Carbon Neutrality in Uncharted Territory: Governance & Policy Implications for the Mining Sector” M. Schloss (Genesis Publishing) — English Edition; 2022
"Changing the conversation on energy transition: Implications of
governance and sectoral policies for generating impact” M.
Schloss (Editorial Académica Española; Forbes Books) — English,
Spanish, Portuguese German, French Editions; 2022
[ii] “Energy
Transition in Unsettled Times” M. Schloss (Global Journal of Science Frontier
Research; 2023;Diario Financiero (Chile) Feb. 16 2024: “Descarbonizando la economía?”
[iii] “The Elephant in the Room; Preaching or Working on Climate Change” M. Schloss (Global Journal of Science Frontier Research) 2023
[iv] “Energías Renovables No Convencionales: crónica de una crisis anunciada” LTBoard La Tercera, Universidad Andrés Bello, 2024
Published by Global Journals
- https://globaljournals.org/GJMBR_Volume21/1-Recasting-Governance-for-Challenging.pdf- https://globaljournals.org/GJMBR_Volume21/1-Cop-26-The-Road-to-Where.pdf
- https://globaljournals.org/GJMBR_Volume22/4-Changing-the-Conversation-on-Energy-Transition.pdf
- https://globaljournals.org/GJSFR_Volume23/1-Aligning-Interests-or-Precipitating-Energy.pdf
- https://globaljournals.org/GJSFR_Volume23/2-The-Elephant-in-the-Room.pdf
- https://globaljournals.org/GJSFR_Volume23/2-Energy-Transition-in-Unsettled.pdf
- https://globaljournals.org/GJSFR_Volume24/2-Chasing-the-Unknown.pdf
