Whatever else may be wrong with economics, its starting point is correct: people do indeed respond to incentives. Suppose renewables provided the dominant technologies for energy supply; suppose, in short, that it was more profitable to use solar, wind or other renewable sources of energy than fossil fuels. Market forces would then drive the transformation of economies in a climate-protecting direction on their own.
It might still be necessary to reduce the costs of capital in emerging and developing countries. It might still be necessary to accelerate the transfer of technology. But the wind of profit would be at their back. Is this the world we live in? If not, how might we create it?
Start with a simple proposition: if something is profitable, it will be done. Asset managers may dispose of shares in fossil-fuel businesses and banks may refuse to finance them. Some investors might refuse to own or fund companies that do things they consider wicked. But my fellow columnist, Stuart Kirk, is correct that someone else will then own and finance them, provided they are profitable.
Those actors might be foreign governments and businesses or domestic private entities. Regulation might curb some activities. But political resistance is likely to make such regulation difficult — consider the debate over production of fossil fuels in the US. Moreover, oil producers will defend their interests to the death, as they showed at COP27 in Egypt. If one doubts just how difficult it is to halt a profitable business, take a look at the history of drug prohibition.
How close then are we to making renewables the dominant technology for energy supply? The answer is that we have made remarkable progress. But it is not fast enough to be transformative within the relevant timescale, one that has become ever shorter as a result of the past decades of delays.
The good news is that, as the International Renewable Energy Agency shows, a dramatic fall in the so-called “levelised cost” of electricity from renewables has occurred since 2010. This is true for onshore and offshore wind and even more so for solar voltaics. Costs are now at the lower end of the range for generation by fossil fuels or even below it. This is potentially transformative. (See charts.)
The bad news is that this fall in costs has not been transformative enough, quickly enough. A rise in the share of renewables in electricity generation has indeed occurred. In the EU, it reached 25 per cent in 2021. But in the world as a whole it was still only 13 per cent. Meanwhile, total emissions from all sources have not fallen. Yet, if the 1.5C limit is to be kept alive, total emissions have to fall sharply by 2030, particularly in electricity generation. For this to happen, there must be a huge expansion in the use of what the International Energy Agency calls “low-emissions sources”, the bulk being from renewables, while use of unabated fossil fuels falls by a third. To remind ourselves, this is in the next eight years.
Nothing happened in Sharm el-Sheikh to suggest this is likely. The reasons for the relatively slow adjustment to renewables so far, even as they have become more competitive, are many: the overhang of low marginal cost installed capacity, not just in electricity generation but also in heating, transportation and industry; the costs of a fast transition to alternatives; resistance to loss of existing business and employment in production, refining and distribution; resistance to building solar and wind farms; resistance to undertaking needed investments in systems integration; and difficulties in arranging finance for emerging and developing countries, but also for households just about everywhere. Delaying everything is sheer inertia.
With market forces increasingly pushing in the right direction, the question is how to accelerate them. This is why, despite scepticism over attempts to make profit-seeking businesses pursue moral objectives, I am pleased that these desired changes are at least in line with what the markets are clearly saying: one can hope to do well by doing good. Furthermore, as the IEA’s World Energy Outlook argues, in addition to being increasingly cheap, renewable energy sources add security to energy supplies. Yes, wind and sun will vary over the day and the seasons. But Vladimir Putin cannot cut them off. For China, Europe and India, to name but three big players, the security case for renewables is overwhelming.
Broadly speaking, five policy changes do still need to be made, or strengthened: increase investment in scientific research; increase subsidisation of the application of new technologies, with a view to accelerating learning-by-doing in each, as well as speeding up investment in complementary technologies; cease subsidisation of fossil fuels, which amounted to $700bn in 2021, other than in carbon capture and storage; introduce carbon pricing in one of several possible ways, perhaps by preventing prospective declines in energy prices from working their way fully into the market; and de-risk finance especially in developing countries.
None of this is new. But the politics just might be. Yes, the world has talked far more than it has acted. Yes, it is far behind where it needs to be. And no, the market is not going to deliver the needed transition fast enough. But there is now a significant chance of delivering safe, secure, clean and cheap energy to all. Moreover, the possibility might, properly supported, generate a global investment boom that would absorb excess savings for an extended period. The energy transition should no longer mean hair shirts forever, but an opportunity that politicians can sell. They should try to do much harder.
