Economic development and growth: The global economy is entering its most uncertain phase in living memory, as COVID-19 has challenged the current economic order like never before. Additionally, the year 2019 saw an abnormal level of street protests across the world.1 Among the many reasons for the mass mobilization at this unprecedented scale, contributing factors included economic inequality and high costs of living. The adaptation costs of climate change and the energy transition can widen these rifts as they pose systemic risks to the financial system – both in terms of physical risks to capital and infrastructure, and transition risks from disorderly mitigation strategies.2 Stakeholders from across the world reiterated the importance of sustainable economic growth3 at the World Economic Forum Annual Meeting 2020 in Davos‑Klosters.
In early 2019, average oil prices were higher than the year before,4 contributing to increasing investments in capital projects and R&D for clean energy technologies. The beginning of 2020, however, was volatile for the energy sector, due to price and demand shocks from the COVID‑19 pandemic. The coming years could prove to be a very uncertain time for energy markets and, given that fuel exports are 19% of international trade and a large source of income for many countries, the situation could lead to further geopolitical shifts, as recently evidenced in the OPEC+ manoeuvres. The sharp decline in industrial activity, transportation services and household consumption has stoked fears of a recession, prompting governments to launch stimulus measures to support the economy and society. Ongoing and planned projects may experience capital constraints, leading to delays. As governments act to ensure economic growth through needed measures, the trade‑offs can affect the speed of the energy transition. Emerging economies are particularly at risk, as their export‑oriented growth model requires growing consumer demand in advanced economies. The lower oil price environment also hinders the competitiveness of energy efficient alternatives, electric vehicles and batteries. These developments confirm the mutually reinforcing links between energy transition and economic growth – as much as energy transition is a factor in economic growth, sustained economic growth is needed for the energy transition.
Energy access and security: The share of natural gas in the energy mix grew, due to demand from power generation and the continued increase in global trade in liquefied natural gas (LNG) for the fifth consecutive year. This raises new energy security constraints, as natural gas is geographically more concentrated than oil, and the supply chain infrastructure is insufficient. The geopolitical balances of energy were dynamic, as the United States established itself as an oil exporter to 31 countries in 2019, and the world’s largest energy consumers discussed forming an oil buyers’ alliance.5
The front lines of energy security are evolving. The year 2019 was marked by extreme weather events, as tropical storms and wildfires in various parts of the world exposed infrastructure vulnerabilities and caused widespread and frequent power outages. Incidences of cyberattacks on the electricity infrastructure are rising, with recent incidences in India6, the EU7 and the United States,8 which emphasize the urgent need to act quickly to avoid potential large‑scale disruptions. Additionally, the low‑carbon energy transition has prompted countries to lock in their competitive advantage by securing supplies to materials such as lithium, cobalt and rare earth metals, leading to a high degree of concentration in terms of the control, refining and export of these materials.9
Environmental sustainability: The year 2019 marked a step change on environmental sustainability. The emissions from the energy sector remained flat,10 even as global GDP grew by 2.3%.11 Global spending on renewable energy continued to increase,12 as the share of electricity from renewable sources increased substantially in multiple countries. The share of electricity produced by coal is expected to have declined by 3% in 201913 – the largest annual drop on record – primarily due to large‑scale thermal power plant shutdowns in the EU and United States. The trend in electrification continued, as investment in the power sector was higher than in oil and gas supply for the fourth consecutive year.14
The environmental sustainability agenda received a major boost from the financial sector, as an increasing number and different kinds of asset managers looked to reduce their carbon exposure, leading to divestments totalling more than $14 trillion to date.15 An increasing number of non‑finance private‑sector organizations, including international oil companies, are actively working towards their pledged carbon neutrality goals. Total green bonds and loans issued globally increased 49% year‑on‑year to an all‑time high of $255 billion.16 The U.S. Business Roundtable redefined the purpose of a corporation to include serving all stakeholders, reflecting a strong move towards environmental, social and governance (ESG) principles in the allocation of capital.17 At the same time, countries and subnational jurisdictions across the world have either declared or are working towards net‑zero emissions targets. The demand from civil society for faster responses to climate change and decarbonization has increased, as climate protests have intensified across the world.
The strong momentum and commitment from varied stakeholder groups are necessary, especially as the consequences of climate change become increasingly apparent. The last five years have been the warmest on record, and scientists warn some climate change tipping points might already have been passed.18 Countries need to significantly raise their level of commitment towards environmental sustainability, leveraging diverse policies, technologies and financing options.
The year 2020 marks the beginning of a “decade of delivery” on energy transition and climate change. However, given the massive mobilization of government and private‑sector resources to mitigate the spillover effects of the COVID‑19 pandemic, the energy transition momentum risks slowing down in the short term, unless the economic recovery supports the country-specific energy transition priorities. The domino effect triggered by the pandemic has affected every sector – including energy – leading to price and demand shocks, and potentially influencing the pipeline of projects, investment and R&D in the near future. This emphasizes the systemic dimensions of the energy transition, as it is not limited to linear shifts in fuel mix or production technology; rather, it both influences – and is influenced by – different parts of the economy and society.
The COVID‑19 pandemic serves as a sobering reminder of the need for increased robustness and resilience in policy‑making for the energy transition. This is the latest in a series of similar global disruptions over the past two decades, including extreme weather events and rising waves of populism, such that the volatilities define a new normal. Policies will need added robustness and resilience to maintain the course, pre‑empting risks from future disruptions.