Making Energy Policy Feasible

What better place to share thought leadership than here on LinkedIn? This is a brilliant article published by The Economist in The World Ahead in 2022, in which their Business Affairs Editor Patrick Foulis points to a 3 stage journey about climate change and the energy business, and opines bills and taxes must increase in order to wean the world off fossil fuels and fund clean energy implementation.

"The first stage, in the early 2010s, was characterized by indifference. The second phase, in the past few years, has involved setting idealistic emissions-cutting targets far in the future that cost little today. In 2022 the third stage of the journey will get under way, amid dangerously volatile energy prices, fears of "greenflation" and rising geopolitical risks. It will require realism about the task ahead.

In 2021 the world was awash in easy promises. Some 70 countries, accounting for two-thirds of global carbon emissions, had net-zero targets, to be met by mid-century. A majority of people in the rich world, including America, expressed concern about climate change. Companies were making ambitious carbon-neutral pledges, too—especially those that didn’t emit much in the first place. A boom in green-tech venture capital suggested that funds were being reallocated at scale. And sustainable investing became one of the biggest trends in finance since subprime debt.

When it came, the reality check was brutal. A surging economy in mid-2021 pushed up energy demand. By October the price of a basket of fossil fuels was up by 95% year on year. China and India faced blackouts and Europe a lack of gas (often piped from autocratic Russia). A shortage of fossil fuels, which account for 83% of primary energy use, threatened to push global inflation above 5%, hurt growth and spook the public. In response, politicians turned back the clock. China and India raised coal output, Britain turned its dirtiest power plants back on, and as the oil price hit $80 a barrel, the White House urged?opec?to boost exports.

Because energy investment needs to increase, bills and taxes must rise

In 2022 attention will turn to making the energy system less fragile. The easiest bit is fairly technical. Most grids struggle to handle the intermittent nature of renewable sources such as solar and wind energy, so more reliable base-load power is needed that is not coal-fired. Natural gas will come back in fashion and there will be a global rehabilitation of nuclear power, which produces no greenhouse-gas emissions. In the years since the Fukushima disaster of 2011 its share of primary energy use has faded to 4%, but more countries will seek to emulate France, where the figure is 36%. New battery, hydrogen and carbon-capture technologies may eventually help, but they are not ready for prime time.

Meanwhile a chaos of mixed signals—stigma, "virtue-signaling", subsidies, legal cases and regulations—means that investment in the energy industry is running at less than half the $5 trillion annual rate needed to get to net zero by mid-century. Sometimes the prevailing incentives are actively counterproductive: too little investment in new natural-gas projects is making it harder for Asia to use gas as a cleaner bridge fuel, as part of the transition from coal to renewables.

In response, governments will expand the use of carbon prices, which act as an economy-wide ratchet on emissions. They will experiment with setting prices far into the future to give investors more predictability over the 20- to 30-year life-cycle of energy projects. America will remain an outlier, with no federal carbon price, but more Republicans will realize that pricing is the capitalist way to reform the energy business.

It’s not easy being green

The hardest part of the coming year of realism will involve being honest with the public. Because energy investment needs to increase from 2% of world?GDP?to 5%, bills and taxes must rise. Politicians can try to pre-empt the inevitable backlash by using the proceeds of carbon taxes to help the poor. If energy prices continue to soar in 2022 there will be protests both on the streets and at the ballot box. But if the squeeze eases, then the year could end with energy policy on a more solid foundation. The chances of the world hitting its net-zero targets will still be remote, but grid designs, investment incentives and fiscal plans may be in better shape.

Huge problems will remain, though. Roughly a fifth of emissions come from industrial users, such as cement-makers. Often there is no immediate clean substitute. The dying fossil-fuel economy will amplify geopolitical risks, with?opec?and Russia’s combined share of oil output expected to reach 50% by 2030. And some new "electrostates" may prove to be more volatile than the old "petrostates": about 70% of the cobalt used in electric cars comes from the Democratic Republic of Congo, a country of 90m people, whose?GDP?is roughly the same as the revenue of Tesla, the leading electric-car maker.

The emerging world accounts for two-thirds of energy-related carbon emissions, yet lacks the cash and innovation base to invest or invent its way to a cleaner energy system. The realization that this is ultimately the rich world’s problem, too, will be at the heart of the fourth stage of the climate journey, beyond 2022."