Authors: Masa Njegovan and Anja Jevic
Addressing climate change is one of the greatest challenges of our time. It requires the urgent transformation of the global economy, private and public sectors, and sustainable development strategies. Links between climate change impact and sustainable development are strong and intertwined. What makes this equation even more complex in a world of increasing inequality is the steady growth of the world’s population and global GDP that put pressure on energy demand. With 70% of global energy demand growth being met by fossil fuels, economic growth translates into increased costs of climate change, which is directly causing global warming and harm to public health and the environment.
The costs of climate change create a “poverty multiplier”. Every year natural disasters drive 26 million people into poverty. According to a report released by the UN Office for Disaster Risk Reduction, in the period from 1998 to 2017, disaster-hit countries reported direct economic losses of $2.9 trillion, of which climate-related disasters accounted for $2.2 billion or 77% of the total cost. Numerous earthquakes and tsunamis have taken almost half a million lives. The cost of climate change is expected to continue to grow. By 2030, the loss of productivity caused by higher temperatures is estimated to cost the global economy $2 trillion.
On the other hand, climate change presents an opportunity for economic growth. A recent study that looked at a sample of 1,700 leading international firms found that investment in the reduction of greenhouse gas emissions saw an internal rate of return of 27% (Dimitris Tsitsiragos, World Bank). Particularly, renewables are a golden opportunity of our generation. They represent a powerful means of meeting the global target of universal access to affordable energy, and an indispensable tool for lowering emissions and combating climate change.
According to the latest IRENA report, more than half a million jobs were created in the renewable energy sector globally in 2017, bringing the total number of people employed in the sector to more than 10 million, with the solar photovoltaics industry being the largest employer. In Bangladesh, the installation of more than 4 million solar home systems has created over 115,000 jobs, saving rural households over $400 million in polluting fuels. Our future choice of electricity sources, means of transportation, building materials, and investment decisions will need to be rethought from the low-carbon perspective. That is the reason why achieving SDG 7 on energy with its targets is at the heart of the Paris Agreement and Agenda 2030.
Deep decarbonization pathways
This October, the panel of scientists convened by the United Nations prepared a new Special Report on Global Warming of 1.5 degrees Celsius. The message of the scientists could not be clearer: Countries will not just have to give up fossil fuels and stop emitting greenhouse gases—which calls for decarbonization—they will have to pull the carbon dioxide out of the air, relying on future technologies. By delaying significant reductions in carbon emissions today, we are only transferring the cost of “negative emissions” technologies to future generations, with an estimated bill of $535 trillion (Hansen, 2017).
Although G7 countries have recognized decarbonization as the ultimate goal for this century, the COP21 signatories have not yet negotiated decarbonization targets. Sixteen countries that represent 74% of the current global carbon emissions took the first step in this direction by forming the Deep Decarbonization Pathway Project. Their first report issued in the fall of 2015 by a team of scholars from leading research institution in their respective countries found that deep decarbonization of the highest emitting economies is technically achievable while accommodating expected economic and population growth.
An immediate solution for deep decarbonization might be sought in carbon pricing, deemed by experts as the most cost-effective tool for the reduction of greenhouse gas emissions (eg. Stieglitz et al., 2017). Although carbon pricing is an effective way to drive investments in clean technologies, it would only result in marginal reductions of carbon emissions, while its cost may be transferred onto final consumers and result in inflationary pressure. For instance, Sweden has one of the highest carbon prices in the world ($140/tCO2), yet emissions in targeted sectors such as road transportation have been reduced by only 4% from 1990 to 2015.
Reaching net-zero carbon emissions requires an implementation of a mix of long-term strategies defined under the deep decarbonization pathways (DDP). DDP strategies originally encompassed three pillars of energy system transformation. Namely, energy efficiency, decarbonization of electricity and fuels, and switching to renewable energy. We believe a fourth pillar should be added to this list—carbon capture and storage. Three of the biggest obstacles to the implementation of DDPs are economic growth, regulatory uncertainty and technology costs. In this essay, we demonstrate what these barriers are through examples in the renewable energy sector and propose measures needed to overcome them.
Obstacles for the diffusion of renewable energy
The new IPCC report examined a wide range of possible scenarios that could help us stay on the 1.5 degrees Celsius pathway with different degrees of certainty. Consistent pathways include increased share of primary energy from renewables accompanied by a decreased share of coal and a rapid decline in the carbon intensity of electricity (ie. increased energy efficiency). These scenarios rely on the assumption of “negative emissions” through carbon capture and storage technologies to be developed in the future. In the most aggressive forecast, share of renewables in electricity by 2050 should be as much as 97%.
Renewable energies have seen a strong growth over the past decade, primarily driven by the steep cost decline and improved efficiency. According to the International Energy Agency’s (EIA) first Global Energy and CO2 Status Report, renewables saw the highest growth rate of any energy source in 2017 (49% of total), and now account for 25% of global electricity generation.
The reality is that the growth of renewables has been neutralized by other factors, primarily economic and population growth. Back in 1987 when the first report on sustainable development was published (ie. the Brundtland Report), the share of fossil fuels in fuel energy consumption was 79% according to data published by the World Bank. Thirty-one years later, this figure lies flat at 81%. This stagnation painfully shows us that we are currently doing Sisyphean work. The growth of renewables, even though impressive in absolute terms, falls short of the growth target consistent with the climate change pathway.
Energy demand growth
Renewable energy deployments will continue to be outstripped by energy demand unless the speed of growth accelerates exponentially. The new climate pathway requires renewables to grow at a pace necessary to keep up with both population and electrification growth.
According to McKinsey’s research, ceteris paribus, global energy demand will continue to grow averaging around 0.7% through 2050, with population expected to reach 10 billion. Bloomberg New Energy Finance reports that increasing global population, GDP and electrification growth will lead to expected 57% increase in global electricity demand by 2050, with China and India accounting for 18% of total demand.
Rural electrification will put additional pressure on energy demand. The latest IEA report shows that the total number of people with no access to electricity has fallen below 1 billion. McKinsey reports that India is yet to build 70% of its new urban infrastructure, stressing the importance of sustainable development strategy. The reality is that more than 99% of people who have gained access to electricity in India since 2000 have done so as a result of grid extension, still predominantly supplied by coal (57%). Sustainable pathway would require a shift from brown-field to green-field investments in renewable energy to serve growing energy demand.
Uncertainty about renewable energy policies is putting a major constraint on faster growth of renewables, with government policies playing a growing role in driving private spending. IEA reports that more than 95% of investment across all power sectors in 2017 was based on regulation or contracts for remuneration. China, which has sought a solar energy policy U-turn throughout this year, serves as a good demonstration of this effect.
As signatory of the Paris Climate Accord, China pledged to limit its carbon emissions by switching to more sustainable energy sources—primarily solar PV energy. In order to facilitate this energy transition China introduced generous subsidies for solar industry. As a result, in 2017 China accounted for over 50% of the global PV market with 130GW of total installed solar capacity. China’s unexpected contractionary policy has caused a real shakeup in the global PV industry. Analysts have cut their 2018 capacity forecast for China by 40% percent, which is expected to result in a 7% decline of the global solar capacity this year (IHS Markit). Such dramatic changes in policy have had a negative impact on deployment of renewable energy and are contrary to the accomplishment of climate goals.
The cost of renewables has fallen drastically since 2010: around 23% for onshore wind and 73% for solar photovoltaic electricity (IRENA). Further price reductions are expected to make all renewables cost competitive with fossil fuels by 2020. Yet, there is still significant room for the improvement of price and efficiency of renewable energy technologies.
Energy storage remains one of the biggest obstacles—but also opportunities—in the world’s transition to a sustainable energy system. By its nature, solar and other renewable energies face huge fluctuations in availability, which needs to be balanced. The renewable energy electricity system will require long-duration storage, which the available lithium ion technology does not support. In the long-term, batteries need to be able to support high levels of variable renewable electricity, specifically by storing surplus energy and releasing it at peak-hours, helping reduce pressure on the grid.
Energy storage still faces the challenge of “crossing the chasm” in its diffusion trajectory between early adopters and early majority. In order to achieve this, storage products require developing a new technology that would offer better performance and at a lower cost than the existing solutions. Scarcity of raw materials poses another challenge, with demand outweighing supply of materials needed for the large-scale global production with prevailing technologies. Energy storage of the future will have to be built on the principles of circular economy, allowing its components to be recycled.
By 2030, IRENA expects the installed costs of battery storage systems to be reduced by 50-66%, with stationary applications set to grow from only 2 GW worldwide in 2017 to 235GW in 2030. Without a doubt, this will be a tremendous drive for renewables. Policy makers need to develop a coherent plan for a new model of infrastructure, production, distribution, and storage of renewable energy in order to be ready for the shift with anticipated pull of new technologies.
Shaping a clean energy future
Changing investment and financing patterns
The Transition of global energy supply to renewables requires investment in projects and a development of new technologies (R&D). According to the UN scientists, increasing diffusion of renewable energy under the recommended climate pathway will require $2.4 trillion of investments every year through 2035. The current level of investment, reported at $333.5 billion in 2017 (IEA), is not accelerating the new technologies needed for the clean energy transition.
Energy investment under deep decarbonization requires displacement, shifting investment away from fossil fuels towards clean energy. The required level of investments in renewables represents 3% of the 2017 global GDP, while subsidies in oil are estimated at 6-7%, showing that rebalancing is theoretically feasible. Public sector finance (governments and state-owned enterprises), which represents 40% of the existing global energy investments, should take a lead in this shift.
State investment banks can play a key role in closing the finance gap by mobilizing private capital. Green banks, with a mandate from a national or local government, are designed to act as intermediaries in funding renewable energy projects by providing low-interest loans and other innovative financing, resulting in reduced energy costs and reliance on taxpayer funding.
In 2008, the UK became the first country to set a legally binding carbon reduction target (80% reduction in emissions by 2050), with Green Investment Bank (GIB) founded in 2012 to help the country meet this ambitious goal. An analysis of the role of the UK GIB in low-carbon energy finance (Geddes et al., 2018) has been able to assess its impact as something that has gone well beyond the provision of capital, which includes reduced technical and commercial risks and the development of capabilities by project developers.
Governments are playing a growing role in driving private investment decisions, particularly in capital-intensive sectors such as renewables, through public policy, regulation, and standards. Investment risk and payback horizons result in increased financing costs, and just as importantly, deteriorating competitiveness of renewable against fossil fuel projects. In such an environment, policies are needed to assist financing and manage risks for publicly desirable projects (Fischer, 2009). In fact, more than 95% of investment value in 2017 across all power sectors was based on regulation or contracts for remuneration, driven by government policy.
Policies also have a strong impact on R&D activity at public and private institutions. Studies have shown that early-stage clean technology companies face heavier reliance on government policy than other technology sectors, primarily due to higher upfront capital requirements and longer payback periods for investors. As such, countries that aim to be competitive in clean energy technologies need to design appropriate policy mechanisms focused on entrepreneurship and business acceleration, innovation finance, market development, technology development, and regulatory framework; to be implemented through public-private partnerships.
Historical evidence shows that technology costs decrease with production due to economies of scale and technological learning. Similar effect is expected for clean energy technologies at the production scale required for decarbonization. Particularly, international cooperation in the development and deployment of clean energy technologies has the potential to dramatically reduce its costs. However, there is no “one size fits all” solution and each country will have to identify the optimal strategy on a local level.
There has been a range of policy strategies employed globally, since the turn of the millennium, with varying degrees of success in achieving the stated governmental targets for renewables. There is little evidence of a collation and analysis of the success of these policies in establishing a robust renewable industry which can grow organically after the removal of subsidies. Moreover, many energy policies have been designed with a myopic approach without future-proofing projects to adapt to changing technology and infrastructure. This has to change in order to enable a coherent shift to a low carbon economy.
Strong global leadership
Although it represents a victory of multilateral diplomacy, the Paris Agreement has shown a significant gap between what countries committed to doing versus what they delivered so far. Under the non-binding agreement, countries were expected to put forward their own “Nationally Determined Contributions“ (NDCs) and periodically report on their progress toward meeting them, leaving space for “free-riding“. The researchers from the London School of Economics and Political Science in the study entitled “Aligning national and international climate targets” identified that of 197 signatory states, 157 have set economy-wide emissions reductions targets in their NDCs. However, only 58 countries have translated their Paris Agreement commitments into national laws, while only 16 have managed to align national laws with the Paris Agreement pledges.
The Paris Agreement disregarded economic benefits and opportunities that climate change brings. A 2018 analysis of China’s NDCs (Cai et al, 2018) found that up to 62% of its implementation costs at the national level would be offset by the health benefits in 2030, with the possibility of health benefits increasing up to 9 times the implementation costs. Such a tangible cost-benefit example should encourage other countries to identify their own sets of national benefits that could be generated as a result of their efforts to curb climate change.
Successful implementation of the mitigation policy will depend above all on the ability of each state to identify the key costs of climate change and turn them into positive externalities of climate action strategies. This requires changing the existing approach from top-down to bottom-up, which would enable each country to maximize its benefits based on specific economic, social, and political predispositions. Such national strategies should come as a result of coordinated action between governments, businesses, and non-profits.
The Global Climate Agreement is a political agreement at the end of the day. As such, we suggest political enforceability in climate diplomacy. Sustainable development leaders must recognize their respective interests and trade with them in the context of political and financial benefits and national interests. The resulting agreements would have to be legally binding and monitored by strong multilateral institutions.
In order to facilitate an accelerated global transition to renewable energies, governments need to design regulation that fosters an environment of investment in renewable energy projects and the development of new technologies within a coherent framework of energy infrastructure, production, distribution, and storage. This framework could be enhanced and improved with shared insights and lessons on a transitional basis. As efforts to decarbonize succeed and expand beyond the energy sector, entire industries will have to transform—or else, disappear. The world needs to act now and countries need to finalize the rulebook to achieve the targets set in the Paris Agreement in order to preserve our “common future”.