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The inevitable energy transition

COVID-19 has provided the most significant economic challenge of the past 75 years. Engineering a recovery that does not make the world safer for all by meeting the needs of all would be a historic abdication of our responsibilities.

by Rachel Kyte
17 November 2020
12 min read
by Rachel Kyte
17 November 2020
12 min read

At the beginning of 2020, the world's focus was on the ten years left to achieve the sustainable development goals (SDGs).  A decade of urgent climate action was necessary to put the world on track to reach net-zero emissions by 2050. When the SDGs were being crowd-sourced and negotiated, the then-UN Secretary General described sustainable energy as the golden thread that pulled all the other goals together or enabled them. The goal of reliable, affordable, and in the context of climate action, clean energy, lay then at the heart of realizing other SDGs.

But then, despite specific and stark warnings of the risk of a zoonotic disease pandemic, to which no country paid proper heed and adequately prepared, COVID-19 rocked the world.

The need for a new world

Now, we have only one challenge. We must recover from a global pandemic and the economic destruction in its wake by positioning ourselves for net-zero emissions by mid-century, which necessitates deep decarbonization this decade, and at the same time, beginning to reverse the drastic rise in inequality of the past decades. As Margrethe Vestager, Vice President of the European Commission, noted, "why rebuild the old world when we want a new one."

The energy transition is now not so much a golden thread to the SDGs, but a golden pathway through pandemic response and enabling use to change the trajectory to one in line with the Paris Agreement.

The immediate impact of COVID-19 was to shut down large parts of the industrialized world and, in so doing, disrupt global supply chains, investment flows and commodity prices. In the shutdown, energy demand collapsed. Within days images of clean skies above polluted cities and nature encroaching on urban life flooded our screens.

When governments lifted shutdowns, emissions rose again. COVID gave us a glimpse of the impact of simultaneous behavior change by millions of people. But it also illustrated the extent to which fossil fuels are the arterial system of our present-day economies. If there ever was any real argument of whether we needed system change or whether individual decisions at the consumer level should focus on climate action, COVID-19 clarified the urgency of system change.

In those early days of the pandemic, we also saw images of queues at foodbanks and disruptions of food supply from Texas to Tanzania. The pandemic brought home our lack of resilience. We are only safe if our neighbor is healthy, an important lesson in an era of expected intensifying climate impacts.

The search for balance between nature, economy and health

Now, countries are working through different stages of recovery. Of course, the first stage has focused on relief, on getting support to the most vulnerable, both as individuals and businesses. The second phase has been marked in many countries by an increasingly partisan, political struggle over how to re-emerge, precisely how to balance public health against the broader impacts of economic weakness.  To move too fast to reopen the economy risks dying from the pandemic; to move too slow risks dying from hunger. The third phase, rebalancing, is the most critical if we use the recovery to pivot to a more sustainable pathway. In this third phase, countries have the opportunity to rebalance between nature, the economy and health.

There has been an outbreak of violent agreement among economists, international organizations and think tanks that we can and must use the recovery from the pandemic for course correction towards decarbonization and greater inclusion. However, governments are struggling to put this in place. The EU has been heralded for cojoining recovery with plans to green the economy. While success will depend on member states' actions, it is a significant statement of intent and has impacted European institutions, from the European Investment Bank to the European Central Bank. Beyond the EU, some countries have indicated green elements of recovery, such as Chile's commitment to green hydrogen, while others, such as New Zealand, continue to pursue wellbeing budgets and other forms of more inclusive wealth measurement. In Canada, public funds to support companies through recovery include climate conditionality with a requirement to publish their business strategy in line with the Task Force on Climate-Related Disclosures. But in the main, countries have yet to turn this crisis into an opportunity.

At the heart of a green and inclusive recovery lies the energy transition. The collapse in oil prices, the comparative resilience of investment in renewable energy, and the growing investor exodus from fossil fuels have seen the transition gather pace through the pandemic. The transition gained impetus from commitments to net-zero from major economic powers in the fall of 2020. First came the EU's announcement that by 2030 it would reduce global warming emissions by 55 percent over 1990 levels. Then, in a deft diplomatic move, China announced at the UN that it would achieve carbon neutrality by 2060. The announcement exposed the US nudged Japan to announce a 2050 carbon neutrality commitment and the Republic of Korea to do the same. The majority of the world's economy has now joined a race to zero, the phrase used by the UK in its presidency of the critical climate talks postponed from November 2020 to 2021.

Transition and recovery, a virtuous relationship

How then can recovery speed the transition and transition support recovery? In the summer of 2020, the International Energy Agency (IEA) and the International Monetary Fund (IMF) published their Sustainable Recovery Plan. It demarcated a sweet spot where government support would meet short-term needs for job creation and income generation, with medium and long-term emissions reduction and growth objectives. Their plan singled out investments in buildings efficiency, clean transport infrastructure and smart energy infrastructure as three win-win-win measures.

In the US, for example, despite some of the rhetoric in a hard-fought election, clean energy accounted for three times as many jobs as the fossil fuel industry. Energy efficiency employs almost 2.5 million people. Both are growing faster than in other energy sectors. Clean energy jobs are higher waged and include blue-collar as well as white-collar jobs—the perfect component of any recovery package

An "energy efficiency first" approach works everywhere—from the most advanced to the lowest income economy. No country in the world has yet optimized its regulatory environment for energy productivity. Some were moving fast, some slower, but all countries had room for improvement to attain and maintain a 3 percent improvement in energy efficiency year on year, necessary to reach the energy sustainable development goal by the end of the decade. Setting standards, revising them, educating the financial sector to recognize and value savings, and gains, finding ways to reward performance, are some of the no-regrets measures available to spur progress.

Energy access is essential for resilience

Closing the energy access gap is also essential. Apart from the apparent drag on development without access to energy, health systems and safe vaccines depend on reliable, affordable energy. Energy access is a key to resilience not just for its role in supporting health systems but also for its role in access to food, water, internet connectivity and financial services. This resilience is within reach due to decentralized renewable energy.

International oil and gas companies have a potentially vital role to play in transition and recovery. However, as we enter a new post-fossil fuel era, the strategic conversation has shifted from operations' energy intensity to phase out. While some leading companies have pledged to become energy companies; in reality, companies have to become carbon molecule management companies. If companies wish to continue exploring and exploiting fossil fuels, they must use or capture and store any emissions. Meanwhile, financial regulators, investors and trade rules will increasingly treat carbon as "bad."

The transition for heavily carbonized growing economies is more complicated where public funds to support COVID recovery from the IMF and multilateral development banks flow into budget support and where budget support will flow to state-owned fossil fuel companies. These countries and their national oil companies may need assistance in making the transition. In the 1980s, states created the European Bank for Reconstruction and Development to ease the transition as the Iron Curtain fell. We need a similar response to secure the brown to green transition of carbon-intensive economies, either cut from the existing multilateral institutions or a new fund or special purpose vehicle.

For low-income countries, indebtedness was a growing problem before the need for recovery. And so, the challenge is to solve for indebtedness and a green recovery at the same time. Possible solutions include debt for climate swaps, a repurchase of African debt by European central banks in return for investment in green infrastructure, and sovereign performance bonds. What is clear is that we need guardrails for recovery to work for people and the planet.

An unprecedented challenge

We are at an inflection point. The world must come together initially within imperfect global coordination structures and governance to ensure that recovery packages needed now can steer investment into green and more inclusive growth. But we also need to take this moment to pause and hit the reset button—to build the cooperation we need for the unprecedented challenges of the next decades. Our flatter world means that we need to set the table for different actors than we did when we founded our current institutions more than seven decades ago. China and India are creditors now; we need private equity as well as banks around the table. And who represents nature at the table? Each one of the compound crises we face has, at its core, our disregard for nature and its laws. We will need new measures of success. GDP, always a blunt instrument with which to measure progress, fails us spectacularly when we need to invest more in health and education and social welfare and when we need to value nature and decarbonize rapidly. Alongside GDP (if not to replace it), we urgently need to use other forms of wealth and wellbeing accounting.

At the United Nations, more than 75 years ago, the nations represented agreed on its charter. The charter opens with the phrase "We the peoples…". Today we understand this to mean, not just a few, in the city, connected to the grid, with the means to buy their resilience with a generator and access to a safely cooled vaccine. But, through advances in technology and business models, we the peoples are a legitimate aspiration for all. COVID-19 has provoked the most significant economic challenge in the past 75 years. Engineering a recovery that does not make the world safer for all by meeting the needs of all would be a historic abdication of our responsibilities.

 

The author: Rachel Kyte

She is the 14th (and first woman) dean of The Fletcher School at Tufts University, the US’s oldest school of international affairs. Prior to joining Fletcher, Kyte served as special representative of the UN secretary-general and chief executive officer of Sustainable Energy for All (SEforALL), an international organization that works to drive faster action towards the achievement of Sustainable Development Goal 7. She previously was the World Bank Group vice president and special envoy for climate change.