A smarter carbon transition needs an energy evolution

When delegates descended on Glasgow for Cop26 in November, their arrival coincided with one of the worst energy crises in recent decades. As many called for a total end to coal-fired power, the UK itself began firing up old coal-fired power plants for the first time in years amid a region-wide natural gas and renewable energy crunch.

Power companies were caught on the back foot, infrastructure creaked, and natural gas came to the rescue to plug many of the holes, at a decidedly steeper price. Gas, oil and coal prices have risen dramatically, and many people braced for power cuts in Europe even as some factories in China literally went dark.

What can policymakers learn from this man-made crisis? The most important lesson is that the path to the carbon transition is just as important as the destination itself. Move too quickly to cut off traditional sources of power, and the supply shortfalls will have immediate and negative impacts.

This decade’s first major energy supply crisis highlighted the hidden problems in the current carbon-transition policy and put to test many of the assumptions about green energy. Well-intentioned policymakers, encouraged by activists, have sought to strangle investment in hydrocarbons and embrace renewables wholeheartedly. That embrace is politically convenient when the wind is blowing and the sun is shining, but when winds died down and droughts hampered hydropower, the effects proved how ill-suited some of the current strategies are.

In this case, the energy crises were the result of three simultaneous but predictable problems. Most significant is the collapse in investment in oil and gas over the past decade, further dampened by low energy prices last year as well as growing investor reluctance to invest in long-term projects, leaving shortfalls in oil and gas supplies just as demand spiked due to the global economic recovery.

As activists continue to push banks and institutions to halt oil and gas investment altogether, investors are growing wary of holding potentially stranded assets in a future low-carbon world. The limitations on capital investment can be felt today, years before renewables can catch up.

Oil and gas producers continue to find themselves unfairly framed as malevolent actors in the climate change discussion, when in fact they will inevitably be an important part of the transition. Even in the most aggressive scenario for carbon emissions cuts, hydrocarbons will continue to supply a majority of energy for decades to come. JP Morgan estimates that a $600 billion shortfall in upstream oil and gas investment will hamper future supply, leading to sustained pricing volatility and supply disruptions.

Secondly, investment in renewables has not made up for the lost energy supply, making matters worse. Renewables grew 3 per cent in 2020, accounting for nearly 29 per cent of the power demand. But two-thirds of that total actually came from hydropower. As droughts impacted hydropower in 2021, the impact of the water shortfall was magnified, presenting a harbinger of future supply volatility.

The third major challenge has been the shutdown of nuclear power plants in Europe and the commensurate reliance on coal in some countries, which has proved self-defeating, just as energy demand has risen during the post-Covid-19 recovery. As nuclear is phased out in Europe, the US and Japan, an important source of baseload power – the minimum amount of power needed by the grid – will be lost.

The answer to the crisis is a smarter transition policy, in which tailored solutions are applied in each region. There is a proven formula for cutting GHG emissions quickly that is easily applied today: reduce energy consumption by boosting efficiency, encourage reforestation and switch from high-carbon-emitting fuels to lower-emitting ones. These steps would bring rapid reductions in emissions and complement renewables in the transition to a more sustainable energy future.

The remarkable success of the auto industry and other sectors in boosting efficiency can easily be leveraged around the world to use energy supplies more wisely. Mass transit and other efficiency measures can further reinforce the gains.

Reforesting land in developing countries can create a sink for up to 750 billion tonnes of CO2, which is the equivalent of 100 years of current global carbon emissions from transportation. Cop26 commitments by Brazil and other rainforest nations to curtail deforestation are welcome developments that must be reinforced with reforestation efforts supported by carbon taxes. Subsidies now spent on renewables, supported by a global carbon tax, could fund the reinvigoration of the world’s forests and bring greater balance.

Switching to gas from coal-fired generation, particularly in India and China, where coal use is growing fastest, would yield considerable savings in CO2 emissions to help meet targets. Subsidies now spent spurring renewables adoption would be better spent on helping accelerate that switch.

And while solar and wind power are promising, their energy cannot be stored, so stable energy sources such as natural gas and nuclear power will be needed to complement them, as the UAE’s wise energy policy has demonstrated.

Countries that have embraced a combination of these policies, such as the US and UK, which have each seen gas substituting for coal in a major way – notwithstanding the recent coal forays – have enjoyed rapidly falling carbon emissions and energy costs. At the same time, Germany, which sought to exclude oil and gas from its energy mix while subsidising renewables, has instead increased its use of coal, resulting in higher emissions.

The oil and gas industry also has an important part to play by tackling methane leaks. The comparative investment is small compared to the immediate impact it would have: methane has more than 80 times the global warming impact as CO2 over its first 20 years in the atmosphere. Eliminating methane leaks would advance the world’s efforts to limit emissions considerably and in short order. The commitment at Cop26 to tackle methane leaks was important in this regard.

Ultimately these challenges require sound technical and economic solutions rather than politically expedient ones. They require policymakers to acknowledge the intermittency inherent in renewables and to take steps to dampen such volatility as the transition continues. For example, while battery storage is still not able to fill in the supply shortages from renewables, increased gas storage certainly would do so, with limited emissions.

Reasonable people now accept that climate change is a global challenge that needs to be tackled. But those calling for overnight change are neglecting to account for the very real risk of such energy shocks undermining political support for green policies, as citizens see their standards of living impacted and the shine of renewables and other low-carbon sources of energy is tarnished. That would be a bad outcome for everyone.

A version of this article appears in the Atlantic Council Global Energy Agenda 2022