Imperatives for the energy transition
As the world becomes more interconnected, society becomes increasingly susceptible to compounded disruptions that reverberate globally. The beginning of 2020 has demonstrated the scale and impact of a global contagion and, subsequently, what these exogenous shocks can do to the systems in place. Viruses are spreading faster and wider, wildfires are intensifying, hurricanes are causing more damage, the global financial system is more leveraged and vulnerable. Even our infrastructure is sensitive to cyberattacks from abroad. How our climate and energy imperatives in this era of unprecedented shocks are managed remains to be seen, but it is critical not to lose sight of long‑term goals that could easily be overshadowed by short‑term priorities.
5.1 Regulations and political commitment
While governments around the world are scrambling to deal with the fallout from the COVID‑19 pandemic, the oil shock and financial market volatility, maintaining focus on the energy transition and climate change is essential. The effects of the COVID‑19 pandemic and climate change are similar in terms of their global scale, the exponential growth of their impacts, the need for decisive action, the importance of scientific evidence, the risks to all parts of the economy, and the existential threat to the less affluent sections of society. Moreover, as is the case with COVID‑19, it is only through concerted societal action that the primary objective of “bending the curve”,46 in this case of emissions, can be achieved. Furthermore, effective actions that withstand the test of time require a comprehensive approach to decision‑making that results in long‑term, stable and ambitious policy actions.
Current policies and countries’ pledges could lead to global warming of more than 3°C by 2100,47 well above the emissions pathways consistent with the Paris Agreement’s long‑term goal. According to the latest UNEP Emissions Gap Report, countries must increase their nationally determined contributions threefold to achieve the goal of below 2°C, and fivefold for 1.5°C.
The climate change policy landscape has been moving in the right direction, although the response requires additional pace and coordination across nations. In the past few years, many countries have declared, or are currently considering, ambitious net‑zero emissions goals. However, the world’s largest energy consumers or greenhouse gas emitters – including Australia, Brazil, China, India, the Russian Federation, Saudi Arabia and the United States – are yet to declare such targets (Figure 15). For many analysts, such recent developments as the rising coal plant capacity in China48 and the weakening of fuel economy standards in the United States49 raise concerns over the level of political commitment to the energy transition.
Figure 15: Status of net‑zero emissions targets across countries
Sources: Energy & Climate Intelligence Unit, “Net Zero Tracker, Net Zero Emissions Race”, February 2020, https://eciu.net/netzerotracker; Total energy supply: IEA, World Energy Balances 2019; Nominal GDP: World Bank, “GDP (current US$)”, 2019, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD; Global CO2 emissions from fuel: Global Carbon Atlas, 2020, http://www.globalcarbonatlas.org/en/content/welcome‑carbon‑atlas
The near‑term prospects of multilateral cooperation appear bleak, with the postponement of the COP26 UN climate change conference in Glasgow due to the COVID‑19 pandemic. In the current context, unilateral action by countries,50including those where simultaneous gains for the energy transition and the health emergency could be achieved, should be sought. For example, the bailout package of the American automotive sector in 2009 in the aftermath of the financial crisis required compliance with more stringent fuel economy standards.51 To encourage governments to raise the level of ambition for the energy transition and environmental goals, it is important to consider the following:
- Net‑zero emissions commitments need consistent definition, tangible roadmaps and milestones. Although the cumulative emissions and energy consumption of countries with net‑zero ambitions remain a small proportion of the total (Figure 15), the concept of “net zero” has different interpretations. Factors such as the choice of greenhouse gases, the treatment of offsets and negative emission alternatives, boundaries for accounting emissions, and target starting points and timelines can have different implications for establishing adaptation and mitigation roadmaps, including the speed and scale of the energy transition. Terms such as “carbon neutral”, “climate neutral”, “net zero”, “zero emissions” or “decarbonization” have been used interchangeably,52 leading to ambiguity in setting milestones and monitoring progress. As more and more countries step forward to declare their commitments, net‑zero targets need a consistent definition.
- A sector‑specific approach, gradual implementation and distributional considerations are critical for success where carbon pricing mechanisms are established. So far, implemented or scheduled carbon pricing instruments account for 20% of global greenhouse gas emissions.53 At COP25 in Madrid, parties failed to agree on regulations and frameworks for carbon markets. One of the reasons was the regressive nature of carbon taxes and the challenges to trade competitiveness that could arise from carbon leakage. Evidence suggests that leakage risks are restricted to sectors exposed to international trade and not to sectors with local boundaries, such as power generation, transportation and buildings.54 Carbon pricing, if accompanied by targeted fiscal support to sectors vulnerable to a loss of competitiveness from carbon leakage, could be more effective. Gradually increasing the carbon price floor to an optimal level, as implemented in Canada,55 can mitigate the economic consequences by allowing business more time to adjust smoothly. Finally, to avoid a disproportionate effect on the cost of living of households in the lower‑income bracket, carbon pricing should include revenue recycling mechanisms56 for progressive taxation.
- Incentives and regulations can increase the coverage of corporate commitments to climate action. Actions by corporations can make a significant difference, especially in countries where national targets are yet to be determined. An increasing number of companies have declared net‑zero emissions targets, doing so to respond to consumer preferences, gain a competitive edge and future proof their business. By and large, however, corporate commitments come from large global organizations, many with end‑consumer‑facing business models, operating in low abatement cost sectors (though not all). Organizations that are small or medium sized, in hard‑to‑abate sectors or with less end‑consumer interaction would benefit from more effective incentives and regulations to commit to transforming their businesses in line with Paris Agreement targets.
Raising the climate change ambition
By Christiana Figueres, Founding Partner, Global Optimism, United Kingdom
The COVID pandemic has coincided in 2020 with the necessary climate turning point, the point at which greenhouse gas (GHG) emissions must begin their steady decline in order to avoid the worst impacts of climate change. We know that greenhouse gases will drop this year due to the worldwide economic paralysis, but that is by no means good news due to the high humanitarian price we are paying. It is also not the approach anyone would take to addressing climate change.
To be effective, the decarbonization of the economy needs to be pursued in a planned and constructive manner, having overwhelmingly beneficial effects for society and the economy. That is precisely the potential silver lining in the health crisis. We now have no option but to rebuild our economy, and that rebuilding can be thoughtfully designed to both provide millions of jobs in the short term, as well as strengthen the resilience of the economy in the long term. But we have to take those decisions now.
The scientific evidence is clear about anthropogenic influences on climate change, and there is limited time for action. Over the next 10 years, we must halve our GHG emissions output by drawing down a staggering amount of carbon now concentrated in our atmosphere from coal, oil and gas combustion, deforestation and commercial agriculture.
This 10‑year transformation will put us on track to limit the temperature rise to 1.5ºC, enabling humanity to adapt as best we can to the challenges of our changing climate and to ultimately survive and prosper.
The impacts manifesting as a result of our inaction to date have been shocking: this year’s bushfires in Australia, the floods in Indonesia and the locust swarms in East Africa have been deeply painful. Leaders are waking up to what is at stake.
As we have learned from the health pandemic, to be effective in the face of risks, governments must be decisive. Once governments choose to pursue the necessary emissions cuts and restoration of nature, and their commitments are incorporated into improved pledges under Paris, the post‑2020 Biodiversity Framework and domestic policies, the door of resilience and possibility will be flung open.
Demands for governments to follow such a path are surging. Whether it’s protestors in the streets, legal action, or appeals from health professionals, investors, unions and non‑profits, the momentum behind the climate movement is unstoppable. Demands for leaders to act on the scientific imperative are driven by outrage and fear for the future, but they’re also inspired by the undeniably desirable outcomes of such action: the clean air imperative, the health imperative, the energy independence imperative, the economic imperative, the resilience imperative, the social and intergenerational justice imperative and the jobs imperative, all stacked up on each other, mutually reinforcing, and pointing in the same direction.
The fossil fuel and big agriculture industries were, in their nascency, driven by noble imperatives as well, but the unintended consequences, so damaging to our planet and our health, are now well documented. The time is over for justifying policies and subsidies that enable such damage to continue. We now have the understanding, the technology and the capital to forge a different path. A path full of opportunity, excitement and benefit, and the ways forward – already under pursuit by many – are laid out in this excellent report.
Technology alternatives to fossil fuels are rapidly maturing and ready to scale, and finance is already shifting in favour of the great decarbonization. At the time of writing, US$39 trillion of the world’s annual gross domestic product (GDP), or around 49%, is being generated in jurisdictions with an actual or proposed net‑zero target. That includes 121 nations which have either set or proposed or are currently discussing a goal to cut their carbon emissions down to net zero in or before 2050. Carbon pricing has been implemented or scheduled for over 20% of global GHG emissions across 40 national jurisdictions. The challenge now is less about the direction of travel and more about speed.
But if we are to unlock faster progress in the energy transition, which we must, we will have to put our minds to it. We have to intentionally choose it. We now have first‑hand experience of shattering impacts worldwide. As we also bear witness to the devastating impacts of climate change on our homes and communities across the globe, we can clearly see what a deteriorated future will mean for our children. Delaying any further is unconscionable. We must choose to increase our ambition, to increase our emissions cuts, and to increase our efforts to protect biodiversity.
As the world turns its attention to the recovery we must ignite, we must commit to rising to the increasing global risks in a timely fashion. It is a commitment to ourselves, to each other and, above all, to all those whose destiny depends on us.
5.2 Capital and investment
The global energy transition will require trillions of dollars in investment from private corporations and national governments in the coming decade, but enormous amounts of capital have already been flowing into the sector. As technology improvements result in greater efficiencies and reduced costs, investors can put money more reliably into emission‑reduction opportunities without relying on government programmes and subsidies for commercial viability. Capital inflows into renewable energy projects will likely slow in 2020, given financial market volatility and the COVID‑19 pandemic. Depending on how deep the financial uncertainty goes, corporations and individual investors may not be ready for investment. Additionally, with oil prices cratering and potential trade barriers or tariffs, some technologies may fall behind on cost competitiveness. That said, it is important for companies and investors to see government interest and stability in policies to advance the energy transition in light of the global turmoil. With this stability and vision, investors will be able to remain confident in their investments irrespective of short‑term shocks.
In developing countries, renewable energy projects continue to face headwinds, due to higher levels of financial risk and investment costs that can put strain on the competitiveness of projects. Bankability and financing are among the main issues for lagging progress in renewable development.57 In the years 2010 to 2019, $2.6 trillion was invested in renewable energy (excluding hydro) globally. Of this amount, $1.3 trillion was invested in solar, with wind close behind at $1 trillion, and biomass and waste‑to‑energy lagging at $115 billion. China overall was the biggest investor, with $758 billion invested in renewable energy throughout the decade.58 Despite the push and substantial investment from countries across the globe, several countries continue to ramp up coal plant construction to fuel growth, thereby diminishing their readiness for a comprehensive energy transition.
Globally, many financial vehicles are being used to encourage growth and development. Among them, ESG investments are rapidly growing, with $31 trillion invested in ESG worldwide. ESG criteria are a set of standards for a company’s operations that socially conscious investors can reliably use to screen investments. They are guidelines and imperatives around which companies shape their business practices, as increasingly more companies are recognizing the need to focus not just on bottom line economics but also on corporate processes and culture.
Figure 16: UN 2030 Agenda for Sustainable Development definitions59
Source: World Economic Forum, “Toward Common Metrics and Consistent Reporting of Sustainable Value Creation”, 2020
Despite these new guidelines for doing business and the consumer demand for companies to do better, there is a lack of clarity on exactly how companies and funds are fulfilling their social and environmental commitments. In the absence of consistent and robust reporting, consumers and investors are unable to reliably evaluate companies based upon their social or environmental impact. In conjunction with the leading accounting firms, the World Economic Forum proposed metrics (under consultation) that could help identify universal disclosures that encourage companies to demonstrate both viability and sustainable business practices (Figure 16). The goal is to establish a more formal, widely accepted international accounting standard for ESG. To date, funding for ESG has increased by 34% since 2016 and has also shown resilience amid the asset price collapse post COVID-19.
Another incentive for “green development” in the energy transition has been the green bond. First issued in 2008 by the World Bank, the green bond defined criteria that were eligible for its support, which helped to provide transparency and confidence for investors who wanted to put their money in a company that was contributing positively to society or reducing its impact on the environment. The issuance of green bonds grew by $255 billion in 2019, but it also has its setbacks.60 Namely, a major part of fulfilling climate goals by 2020 is the ability to finance decarbonization methods for carbon‑intensive industries, such as mining, utilities and transportation, industries that the green bond does not find compliant. By allowing these “brown” industries access to capital, many believe the gap between climate goals and actual progress can be reduced.
For projects that aren’t captured through these large funds, bankability continues to be a primary issue, particularly in emerging economies. Regulatory uncertainty, project delays and political or social instability can make it too risky for investors to put money into projects for fear of incompletion or lack of viability. Strong policy and trustworthy institutions can help alleviate these concerns, but robust contract enforcement and a positive investment climate are necessary. As investors develop more trust, both in the projects themselves and the funds that are supporting them, the energy transition will become increasingly more viable.
Capital and investment may be one of the biggest challenges in 2020/2021 given the global upheaval from the COVID‑19 pandemic and the financial markets. Facilitating capital into energy projects is critical and can be supported by:
- Providing defined criteria and transparency for ESG funds and qualifying corporations
- Ensuring political will and policy stability to improve investor confidence in renewable energy projects in developing countries
- Broadening financial vehicles to include industries that may not qualify for green bonds but need to offset their carbon emissions
Sharing the burden of decarbonization
By Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy and Professor of Economics, Harvard University, USA
It is hard to imagine any way forward on global warming that does not centrally feature placing a uniform global price on carbon emissions. Global, because today emerging markets account for the lion’s share of emissions growth. Uniform, because the cost of carbon emissions is roughly the same no matter what country the source, and having substantially different prices in different countries will lead to widespread distortions. Having a price on carbon is important to incentivize producers and consumers to conserve carbon‑intensive activities, and to incentivize innovation and investment. The challenges are many, from developing clear technical standards to persuading rich‑country citizens to change their lifestyles.
However, a major piece of any solution has to involve buy‑in from emerging markets and developing countries, where emissions growth is greatest (particularly out of Asia) and where energy needs in many quarters are often desperate. In Africa, only 43% of people have access to electricity, versus 87% worldwide. So far, most of the political discussion in advanced economies has focused on how to decarbonize at home without recognizing that this will do little good if pollution continues unabated elsewhere. Indeed, the debate has many parallels to discussions of inequality in most advanced economies, which reflect a legitimate need to achieve greater income equality within rich countries, but pay only cursory attention to the rest of the world, which is by and large vastly poorer. For the inequality debate, the disconnect sometimes seems hypocritical. For dealing with global warming, if rich countries continue to ignore the needs of the rest of the world, it could prove catastrophic.
It is high time to think about building global institutions to help facilitate the necessary transfer of resources and technologies from high‑income to low‑income countries, and to get serious about how to finance them. There are many possible approaches, but a practical one is to start a World Carbon Bank that will serve both to facilitate transfers, but also house technical expertise, and to provide a platform so that country governments can share experiences and best practices.
From an administrative point of view, I have in mind a framework parallel to the World Bank and International Monetary Fund, with their emphasis on having outstanding technocratic staff and the use of “mission technology”, both honed for providing policy advice. Importantly, however, the financing for the World Carbon Bank must come in the form of outright aid and not simply subsidized loans. At the same time, the likely scale of the aid will be far greater than the annual cost of the existing institutions. As for the early projects of a World Carbon Bank, probably none is higher priority than helping sharply scale back the use of coal in Asia.
Phasing out coal is far more challenging for Asia than for Europe and the US, in part because coal plants in advanced economies are already nearing the end of their life cycle and in part because coal is plentiful. Of course, for this reason, carbon capture technologies also have to be a leading option.
Admittedly, the political economy of a World Carbon Bank would be challenging. Rich countries, many in the midst of populist uprisings, need to be persuaded that dramatic changes are needed for future generations. COVID-19 has now forced a reallocation of resources and will likely continue to do so until normalcy is restored. Programmes for aid must be resistant to gaming because countries could exaggerate their plans to build new coal plants. And there is the question of how to transfer new technologies to emerging markets without simply bidding up prices for monopoly innovators, so that in effect most of the financial aid intended for emerging markets ends up in the pockets of wealthy private entrepreneurs. These are challenges but, with thoughtful design, it should be possible to overcome them.
To be clear, eligibility for World Carbon Bank aid would ultimately require that countries buy in to instituting a carbon tax at the global level. Alternative approaches to raising the price of carbon are possible, and it is true that various rationing schemes have proven more politically palatable in domestic politics. However, centuries of experience with international trade agreements underscore that price mechanisms are much more transparent and straightforward to monitor.
It should be mentioned that Europeans aim to incentivize emerging markets with the stick of a border adjustment tax, imposed on countries that do not institute a carbon tax/price at the European level. This is far from adequate, however, first because it may simply redirect trade and production, but perhaps more importantly because developing countries will likely see this as a trade war. The US and Europe have been responsible for most of the carbon build‑up to date and still have far higher carbon emissions per capita. For them to say they will stabilize or slightly reduce their high per capital emissions, but developing countries should just accept that they cannot follow the same energy‑intensive development path, is a recipe for unsustainable political frictions. Any plan, including a border tax plan, needs to support carbon‑reduction adaptation in emerging markets, and any plan needs a technocratic framework for implementing the politically agreed solution.
There is no single comprehensive solution to global warming, but a global carbon tax is the nearest thing. And it will be meaningless to try to enforce one without enthusiastic participation from major emerging markets such as India and China. A World Carbon Bank is a logical step forward.
5.3 Innovation and infrastructure
Innovation is a prerequisite for change and has been a critical catalyst for the world adopting less carbon‑intensive processes in energy, manufacturing and technology. The past three decades have seen significant advances in energy technology. Progress has been particularly strong in the costs and efficiency of solar photovoltaics (PV), onshore wind turbines and lithium‑ion batteries (Figure 17). In 2019, global solar capacity was 593 GW61 and onshore wind capacity reached 650 GW,62 while energy storage capacity climbed to 175 GW in 2018.63 While policies have enabled this progress, they are still lagging for hard‑to‑abate industrial sectors and negative emission technologies.
Figure 17: Levelized cost of energy for onshore wind, solar PV and lithium‑ion batteries, 2009‑2018
Sources: Lazard, “Levelized Cost of Energy and Levelized Cost of Storage 2018”, 8 November 2018, https://www.lazard.com/perspective/levelized‑cost‑of‑energy‑and‑levelized‑cost‑of‑storage‑2018; BloombergNEF, “A Behind the Scenes Take on Lithium‑ion Battery Prices”, 5 March 2019, https://about.bnef.com/blog/behind‑scenes‑take‑lithium‑ion‑battery‑prices
As an immediate response to the COVID‑19 pandemic, governments and businesses have sharply adjusted their near‑term priorities to mitigate the economic consequences. There could be immediate consequences for infrastructure development and R&D. Governments are focused on responding to the healthcare crisis through fiscal and monetary measures, ensuring access to essential goods and services, and supporting monetary policy. Similarly, as also seen in the aftermath of the global economic recession of 2008‑2009, corporations could either reduce their R&D investments or shift focus to short‑term low‑risk projects.64 While the shape of the subsequent economic recovery is being debated,65 investment in innovation and infrastructure will be an essential catalyst in emerging from the economic crisis. It can be an opportunity to accelerate structural shifts by integrating long‑term concerns in short‑term policy packages, orienting them towards sectors that offer higher economic and societal returns. This includes investing in green infrastructure, encouraging research and development, and upgrading the skills of workers.66
- Investing in long‑term infrastructure during economic crises can be a powerful vehicle to drive further economic development and generate employment. Inertia from legacy energy infrastructure and the prohibitive costs of modernization have been key barriers to accelerating the energy transition. The lack of sufficient grid capacity and interconnections have led to the curtailment of renewable energy sources in multiple countries, thereby affecting their competitiveness. Similarly, lacking infrastructure for production and distribution is a key constraint in realizing the potential of the hydrogen economy. At the same time, investment in LNG infrastructure can be a catalyst in decarbonizing the power sector, especially in countries where coal continues to be the primary fuel. While the selection of priority areas for energy infrastructure development might differ across countries, the development can help address the objectives of economic recovery, job creation and the energy transition, and help the economy recovery faster and more sustainably.
- The economic rationale is strong for continuing to invest in innovation in the current economic climate. Evidence from an analysis of public investment in R&D in Germany during the economic crisis of 2008‑2009 indicates spillover effects on production, value‑add and employment worth twice the initial investment.67 Moreover, foregone innovation investments have a cumulative effect on the future trajectory, by reducing the pool of future opportunities.68 While the progress on solar PV, onshore wind and energy storage have been remarkable over the past decade (Figure 17), a wide array of technologies will need to be matured at a faster rate. Deploying public R&D investments into ideas that appear to be moonshots given the current state of R&D, such as nuclear fusion, advanced energy storage chemistries and large‑scale economical solutions for hard‑to‑abate sectors (heating, aviation, shipping, heavy industries), can deliver high innovation dividends.
- Human capital development is necessary to reap the innovation dividend. The economic shock from the COVID‑19 pandemic and resulting energy market fluctuations have already led to large‑scale lay‑offs. The availability of trained workers is critical for energy transition, especially in areas requiring high‑skilled talent such as R&D in energy technology. Effects on R&D investment during times of economic crisis can weaken the availability of talent for future R&D activities, and exposure to long‑term unemployment can lead to the gradual depletion of skills due to low exposure to technology. This is also relevant for emerging economies, where technology transfer is a key component in the development and diffusion of new technologies. Countries with higher human capital have been able to maximize the spillover effects of technology transfer and foreign investment in clean energy R&D.
5.4 Economic structure
The energy intensity of countries, a measure of the ability of an economy to convert energy units used into GDP, depends on income levels, industrial structure, efficiency standards, urbanization, etc. In 2016, on average, a 1% increase in GDP per capita was accompanied by a 0.7% increase in per capita primary energy supply.69 Decoupling economic growth from energy consumption, and hence from carbon emissions from fuel combustion, has been an ambitious policy goal. Reducing energy intensity is key in a country’s decarbonization strategy as it means that economic growth is met through less energy‑intensive activities which, in turn, results in less emissions from the energy system (assuming a certain carbon intensity of energy consumption/production).
Figure 18: Average energy intensity (GJ/$GDP PPP, 2011) for regional clusters, 2007 and 2017
Source: IEA, World Energy Balances 2019
Figure 18 shows the average energy intensity for the 115 countries in the ETI, by regional classification. Some high‑income countries have managed to decouple the energy consumption and total carbon emissions from economic growth, by shifting the structure of their energy system and the economy as a whole. Transforming the structure of the energy system requires a mix of supply‑ and demand‑side interventions, to shift the installed base of technologies in energy production and final demand towards low‑carbon alternatives. On the other hand, shifts in the economic structure imply diversifying economic activities to reduce dependence on fossil fuels and changing the composition of a country’s productive output to higher value‑add and complex sectors. Complex economies generate a larger share of GDP from knowledge‑intensive products, characterized by sophistication and specialization. While an increase in economic complexity leads to a short‑term increase in emissions, evidence from multiple countries shows a decline in emissions in the long run.70 Moreover, a higher level of economic complexity is also associated with lower levels of unemployment.71 This is particularly relevant for emerging economies, where energy‑intensive sectors like agriculture and extractives employ significant portions of the workforce, and economic growth relies to a large extent on the demand for consumer goods in developed economies. Notwithstanding the importance of basic activities to produce essential items, substantial productivity and efficiency gains can help emerging economies transition to higher complexity activities.
- Countries with higher levels of economic complexity are better prepared for the energy transition. Figure 19 illustrates that a higher level of decoupling between emissions and economic growth72 is associated with both a higher degree of economic complexity73 and transition readiness (as measured in the ETI). The capabilities leading to increasing levels of economic complexity in countries are largely similar to the enablers for energy transition, indicating the synergies between structural economic transformation and effective energy transition. In addition to the traditional economic growth model with capital and labour inputs, structural transformation can be accelerated though capabilities such as human capital development, physical and digital infrastructure, and a robust institutional framework with rule of law, property rights, etc.74
- The Fourth Industrial Revolution offers countries an opportunity to leapfrog into economic growth while achieving productivity gains, but urgent measures must be taken. Emerging growth areas such as in artificial intelligence and the internet of things are not widespread, especially in developing countries. Considering the future economic growth potential and the necessary economic transformation in emerging economies to achieve energy transition and climate change mitigation, new international cooperation mechanisms are required (e.g. technology transfer, capacity building, etc.) to accelerate the progress of the Fourth Industrial Revolution.
Figure 19: Transition readiness and economic complexity index scores vs level of decoupling of emissions and GDP growth
Sources: Economic complexity from the Atlas of Economic Complexity, Harvard University, https://atlas.cid.harvard.edu/, and Transition Readiness from the World Economic Forum
5.5 Consumer engagement
Effectively engaging society on the energy transition requires careful consideration on two key aspects. First, energy transition can exacerbate existing socio‑economic inequalities, unless the costs and benefits of policies and regulations are distributed appropriately. The recent spike in protests in many countries against fuel price hikes or different forms of carbon taxes underscores the importance of consumer acceptance for these types of policies. The COVID‑19 pandemic is an example of the disproportionate risks from systemic shocks to vulnerable segments of society; people unable to work remotely, dependent on public transportation or living in high occupancy dwellings have been at higher risk of contagion. The relative economic cost is also higher for workers in the informal sectors. Second, given the ubiquity of energy consumption in products and services used in daily life, decisions made by end‑consumers are critical for the success of any country’s energy transition strategy. As with most habits, customs or lifestyles, a behavioural “lock‑in” can be hard to counteract when environments need to change. The COVID‑19 pandemic, despite being a human and economic tragedy, has resulted in sharp decreases in emissions from industrial activity and transportation. However, experience from previous systemic shocks, such as the financial crisis of 2008 and the oil embargo of the 1970s, indicates that emissions tend to spike in the aftermath, as industrial activity regains normalcy. Sustained behavioural transformation could offer a silver lining, as remote working arrangements might gain popularity, high‑emission long‑distance travelling could reduce drastically, and people may choose to prioritize responsible consumption in terms of both quality and quantity.
Figure 20: Selected survey responses from “Youth Perspectives on Energy Transition” (n = 150)
Source: World Economic Forum
- Youth perspectives on energy transition strongly favour faster and decisive action. A survey conducted among the World Economic Forum’s Global Shapers community, comprised primarily of students and young professionals from across the world between the ages of 18 and 30, revealed that most of the respondents favour the strong prioritization of energy and environmental issues in decision‑making. More than half reported prospective politicians’ positions on energy and environment as a top or strong priority in voting decisions (Figure 20). Other aspects of individual decision‑making such as career choices and purchasing decisions exhibit similar trends, though to a lesser degree. This is consistent with the rapid escalation of climate change activism worldwide among youths.
- Easy access to understandable information on carbon footprints can drive consumer participation. Energy efficiency labelling on appliances has been a key factor in accelerating innovation and the adoption of more efficient alternatives, especially in daily use appliances such as electric bulbs, refrigerators and air conditioners. Similarly, given the energy footprints across a wide range of consumer products, the uniform labelling of products based on their energy or environmental footprints can be instrumental in accelerating the adoption of sustainable and efficient alternatives, while creating growth opportunities for more sustainable products and brands. Although not an easy task given the challenges to adopt consistent carbon intensity measurement and reporting mechanisms, and the political components in international trade, research suggests that providing information on footprints that is easy to convey and understand is an effective tool. It serves as a reminder to consumers of their values and preferences when making purchasing decisions, prompting them to make choices more consistent with their values.75 Specifically, labelling with additional information on durability and reparability for consumer durables could be a key driver in promoting the circular economy.
- Consistent, transparent and fact‑based communication is necessary to engage all stakeholders in an effective energy transition. Keeping the members of the public well informed and educated about the energy transition is critical to secure their buy‑in and engagement. However, there are conflicting narratives on the progress of the energy transition76 depending on the choice of metrics, starting points, timelines, etc. As decision‑makers consider these narratives to determine the efficacy of current actions and prioritize next steps, the discourse can be self‑fulfilling. The experience of the COVID‑19 pandemic emphasizes the importance of heeding scientific evidence at the right time, to avoid the risks from delayed actions. Only through a fact‑based exchange can stakeholders identify the right destination, imperatives and enablers of the energy transition.
Political support for the energy transition
By David Victor, Professor, University of California, San Diego (UCSD), USA
Consumer acceptance is essential to sustainable energy transitions, especially in these hard economic times caused by the global pandemic. Consumers, of course, ultimately pay for whatever happens in the energy system. They are also constituents whose interests – reflected in many ways from voting to protest to other forms of political support and opposition — shape what is feasible. For too long, analysts have been imagining clever energy transitions that can solve many problems of environmental sustainability, such as climate change and water scarcity, without paying enough attention to political sustainability. Consumers sit at the centre of that political equation.
One thing that is clear about consumer behaviour is that people are often highly sensitive to visible changes in price. That’s particularly evident in the politics of fuel pricing, which can be treacherous. Even as political leaders have found multiple ways of adopting costly policies in many sectors of the economy, anything that conspicuously raises fuel prices must be treated with political caution. The “yellow vests” movement in France is but one example. Fuel riots in Iran and consumer pressure against climate policies in the United States are others.
In all these cases, consumer reactions are a blend of many different factors — the yellow vests movement, for example, isn’t simply about the cost of a carbon tax but also about the cost of living in rural areas and the peripheral feeling of being left behind while elites at the centre, in Paris, push the country in new directions. But the fact that fuel prices become the weapon for protest makes politicians skittish, and that makes politically sustainable energy transitions hard to organize.
This political wariness of creating visible costs from policy has been particularly evident to reformers of fossil fuel subsidies. For decades it has been known that subsidy reform is one of the most cost‑effective ways to reduce emissions and get market signals aligned in energy markets. For decades, politicians have learned that subsidy reform is hard – in part because special interests are tightly co‑mingled with consumer wariness about change. Working with a team of experts from the World Bank, leading economist Gabriela Inchauste and I published a study in 2017 that looked closely and systematically at the politics of subsidy reform and found that successful reform strategies require politically strategic choices. They must figure out which interest groups can be taken on and also how to keep broad public acceptance of reform. Reform, nearly always, is not across‑the‑board following elegant, simple principles of economic policy design, but a kind of sausage‑making that must navigate political obstacles and create political allies.
Lurking in all this are important matters of justice. Subsidies and other forms of price controls are often cloaked in the logic that they help the poor. (Gabriela and I found that, for the most part, these subsidies benefit richer consumers.)
Often those who pay the most have a hard time organizing and expressing their political voice, which is why careful attention to consumer impacts is so important. The political system, on its own, won’t ensure a just transition. Many elements of the energy transition that are most exciting and urgent, such as deep decarbonization and the creation of distributed prosumers around power grids, are unlikely to be free or even cheap. Policies that can make the energy transition align with the goals of social justice will have many dimensions, including worker retraining and re‑employment. At the centre, however, will be active policies to manage the cost impacts on consumers who are the least well off economically.
Technology will be pivotal. On the one hand, technological change has made it easier to segment markets and to tailor services exactly to the people who can pay. Those innovations have the potential to erode the social contract that has guided much of modern energy supplies — for example, the idea that every household should have access to a reliable power grid at reasonable cost. On the other hand, technologies such as smart cards and modern control systems have made it easier to target the benefits of subsidies and other energy policies to the households that need them most. Technology and markets, on their own, won’t ensure a just transition.
On every front, then, policy is essential to steering the energy transition. In a global economic crisis, with lots of potential for massive reform and restructuring, it is particularly important to focus on how policies affect consumers and what they are willing to support politically. It can help ensure that energy transitions are just and reasonable — and effective at delivering what society wants from its energy systems.