8/2020

Responding to COVID-19 and the energy transition – Two sides of the same coin

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Anne Louise Koefoed (Principal Researcher, Energy Transition), Marie Jonette Rustad (Consultant, Energy Markets & Technology), Roel Jouke Zwart (Consultant, Energy Markets & Technology)

The largest-in-history economic recovery packages will be handed out...these should be funnelled to the climate-neutral economy and have the energy transition in focus

Anne Louise Koefoed, Marie Jonette Rustad & Roel Jouke Zwart

It may seem like asking too much when advocating potent energy transition and climate action in today’s COVID-19 crisis and economic recovery mode – but that is exactly what we argue.

Now is an opportune time for a rethink and reset of energy policies and enabling frameworks to advance the energy transition’s speed and scale. Recovery commitments and stimulus packages tailored to co-beneficial outcomes for climate, the environment and human health, can pre-empt future crises and create a more robust economy.

2020 had been dubbed the super year for action on climate, biodiversity and Sustainable Development Goals (SDGs), and for updating post-2020 global frameworks. Nationally Determined Contributions (NDCs) were up for revision with increasing ambition levels so as to safeguard Paris Agreement implementation and momentum in GHG-reduction plans. Along came the worldwide pandemic halting attention to other global challenges, there among the climate agenda.

National climate contributions need more ambition

In preparing for DNV GL’s Energy Transition Outlook 2020, launching September 9th, we incorporate policy factors, existing and planned, to present our best estimate of the world’s energy future and for ten world regions. As part of the analysis, we have taken stock of current NDCs, and submissions received until the COVID-19 lockdown since NDCs represent the stated intentions (conditional and unconditional) of sovereign nations. At the time of writing, 9 countries had submitted new and updated NDCs, while 7 countries had resubmitted old targets, including large emitters like USA, Australia, Russia, Japan and Indonesia.

It is well known that total emissions in line with current emission reduction pledges are insufficient to achieve the goal of the Paris Agreement in keeping global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C. Although there are some uncertainties in comparing targets and forecasts, as some countries are unclear about whether targets in NDCs also include non-energy related CO2 emissions, it is nevertheless interesting to compare DNV GL’s forecast energy-related emissions with aggregated regional targets. The result of this exercise is presented in the table below and illustrates how regions are progressing.

Table: Comparing DNV GL’s forecast energy-related emissions with aggregated regional targets

*Targets exclude non-energy related CO2 emissions, which is often referred to as Land Use, Land Use Change and Forestry (LULUCF). Note that there are uncertainties in comparing targets and forecasts; some countries are unclear about what is included in their targets.

**Greater China targets a 60% to 65% reduction in carbon intensity (below 2005 levels) by 2030 (measured as tonnes of carbon dioxide per terajoule of primary energy consumption). Our Outlook indicates a 66% reduction in carbon intensity by 2030.

Most NDC targets do not set the stage for climate-neutral economy efforts

Relying on the rear-view mirror in stimulating economies and supporting incumbent players, may only provide temporary console and is risky given the unfolding energy transition.

Anne Louise Koefoed, Marie Jonette Rustad & Roel Jouke Zwart

We find that most regions are on a development track to meet ‘old’ pledges, some with greater margins than others. However, our overall finding and takeaway is that most NDC targets are weak, lack ambition and are not forcing politicians to tighten policies nor energy-sector players to deepen emission reductions.

Bringing this finding back to today’s situation, where the largest-in-history economic recovery packages will be handed out, these should be funnelled to the climate-neutral economy and have the energy transition in focus. The fresh infusion of funds should be used as a catalyst for things to happen ─ things that needs to, and is likely to, happen regardless. Setting more ambitious NDC targets and increasing policy attention to curbing reliance on fossil fuels, are tools readily available to coordinate this transition.

While some decision makers may be climate and clean energy transition sceptics, it serves any economy well to keep an eye on the fundamentals of energy demand and supply, as well as on technology costs*. Clean energy and related technologies have reached cost-parity with fossil energy counterparts, notably renewables in power generation, and are progressively driving the energy transition and a market-driven global uptake. Already pre-pandemic, some sectors and companies were in a precarious situation of structural downturn due to cheaper renewable energy technologies.

Largest-in-history economic recovery must take long-term view on energy transition

Underlying economics, and hence market dynamics, will not change by throwing lifelines and injecting funds. Some sources of energy face displacement and decline regardless, for different reasons: decarbonization or efforts to control air pollution, electrification and decreasing demand, digitalization and higher efficiencies. The combination of trends means that some assets will have a high risk of stranding. And in the ongoing crisis, these ‘fundamentals’ need careful consideration in the effort to stimulate economies and protect jobs.

We truly acknowledge the toll on lives and livelihoods that needs tackling, and in so there is natural tendency to protect jobs. Yet, relying on the rear-view mirror in stimulating economies and supporting incumbent players, may only provide temporary console and is risky given the unfolding energy transition.

As such, public money needs wise spending with an eye to the transition. Energy assets are long-lived, meaning today’s energy investments have ramifications for future emissions ─ and hence future generations ─ that are costly and not easily reversed.

Global warming, degrading ecosystems and pollution adversely affecting human health, are related problems. Given the slack in current NDC targets shown above, there is ample room to heighten ambitions and actions, and attach strings to COVID-19 stimulus packages in the direction of industrial upgrading and a green transformation. In steering and shaping markets in this direction, policymakers can unlock innovation as well as private capital, both crucial for achieving societal goals and for positioning in the growing global clean-tech market.

These issues will be accounted for in full detail in DNV GL’s Energy Transition Outlook 2020 to launch September 9th, 2020.

For last year’s Outlook, please visit: eto.dnvgl.com/2019/index.html

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