Will Europe’s recovery boost the energy transition?

Related articles

As the world faces up to its deepest recession for nearly a century, can Europe maintain its commitment to a greener future? Or will it waver, deterred by the upfront costs and political will needed to drive the energy transition in a time of crisis?

On-shore windmillsWe are living through an economic crisis, but there is another crisis that is not going away: climate change. While the International Energy Agency (IEA) expects global CO2 emissions to drop by 8% in 2020 due to the pandemic-associated lockdown (1), achieving a maximum global temperature increase of 1.5% by mid-century would require emissions reductions of 7.6% every year for the next decade, according to the UN Environment Programme (2).

That means we cannot drop our pace – but 2020 has put a stumbling block in the way. “Economies have to grow again, and the challenge in the future is how they're going to grow,” says Stephen Hibbert, ING’s Global Lead Energy Transition. The risk is that, in their understandable desire to ensure that the recovery is as rapid as possible, governments and businesses will leave decarbonisation of the economy by the wayside.

“The reality is that there are commercial pressures,” says Hibbert. “Without strong steers, incentives, conditionality of support, or other policy instruments, the market left to its own devices may fall back on what is cheapest and most efficient in the short term, even if that risks missing long-term environmental targets.”

Lessons from the past and a promise for the future

The recovery from the 2008–2009 global financial crisis was carbon-intensive: there was the largest recorded increase in global emissions as countries rushed to rebuild their often fossil-fuelled economies. With the price of both gas and oil particularly low at the moment, and businesses and governments under considerable economic pressure, a repeat of that scenario is all too possible.

Complacency is not an option this time. Fatih Birol, Executive Director of the IEA, has said that the pandemic-driven drop in emissions is no reason to celebrate, and he urged governments to learn from the global financial crisis – “to make smart policy decisions that can put emissions into structural decline this decade." (3)

The uncertainty around any operational return to normal and the unknown shape of the economic recovery are daunting, but they don’t have to put the brakes on the energy transition. Judicious policy-making and partnerships with the private sector can ensure that instead of being sidelined, the energy transition is put at the centre of the recovery.

Off-shore windmills

Where are the quick wins?

The EU’s Green Deal has now been linked to the post-pandemic recovery with the intention of channelling resources towards decarbonising the economy and pivoting people and businesses towards greener jobs (4), (5).

It aims to increase the share of renewable energy in the bloc to at least 32% percent by 2030, and improve energy efficiency by at least 32.5% from 2007 levels (6). In addition to encouraging new renewable energy projects and providing infrastructure for cleaner transport options, the plan also includes retrofitting the built environment.

This kind of initiative does not have to be seen as just a cost. Stephen Hibbert points to ‘quick win’ opportunities in energy efficiency that will support both private sector recovery and energy transition. Investment in improving the insulation, heating, and ventilation of housing stock is labour-intensive and will create jobs, but it also brings fairly rapid economic benefits in the form of lower energy costs.

Private money complements the effort

The Green Deal also aims to facilitate investment by the private sector. Despite the crisis, the private sector funding climate still offers opportunities: private equity funds were sitting on $1.5 trillion of dry powder at the beginning of the year (7), and huge central bank and government intervention have also buoyed liquidity. Meanwhile, there is increasing appetite among investors for projects and businesses that focus on sustainability, and rock-bottom interest rates and lower bond yields are driving a hunt for stable long-term returns.

“There’s enough money out there to be invested on competitive terms,” says Gerben Hieminga, Senior Economist for energy markets and sustainability at ING. “With exceptionally low bond yields in most countries, there’s a need to deploy pension money, or other forms of investable capital into these funds – be it debt or equity. There's a clear and increasing institutional focus on sustainability solutions, and lots of funding available in the market.”

So keeping the energy transition on track throughout the unfolding recession will depend on a combination of willing policy-makers and motivated investors. They might have other pressing priorities at the moment, but if they can recognise that recovery and energy transition are not mutually exclusive – that the latter can assist with the former – then a greener future is still possible.

 

Enjoyed reading this article? There’s more! Explore our other sector and changemaker stories.

 

Sources: