The market can deliver the green transition, but not fast enough

Whatever else might be wrong with the economy, your starting point is correct: people do respond to incentives. Suppose that renewables provided the dominant technologies for power supply; Suppose, in short, that it would be 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 protection direction on their own.

It may still be necessary to reduce the costs of capital in emerging and developing countries. Technology transfer may still need to be accelerated. But the wind of profit would be at his back. Is this the world we live in? If not, how could we create it?

Start with a simple proposition: if something is profitable, it will be done. Asset managers can sell shares in fossil fuel deals and banks can refuse to finance them. Some investors may refuse to own or finance companies that do things they consider to be evil. But my fellow columnist, stuart kirkit is true that someone else will own and finance them, as long as they are profitable.

Those actors can be foreign governments and companies or domestic private entities. The regulation could curb some activities. But political resistance is likely to make such regulation more difficult: consider the debate over fossil fuel production in the US. In addition, oil producers He will defend his interests to the death, as demonstrated at COP27 in Egypt. If one doubts how difficult it is to stop a profitable business, take a look at the history of drug prohibition.

So how close are we to making renewables the dominant technology for power supply? The answer is that we have made remarkable progress. But it’s not fast enough to be transformative within the relevant time scale, which has gotten shorter and shorter as a result of the last few decades of delays.

Line chart of global weighted average levelized cost of electricity (constant 2021 dollars per kWh) showing that renewable energy costs have been declining rapidly, especially in PV

The good news is that, like the International Renewable Energy Agency shows, a dramatic drop in the so-called “levelized cost” of electricity from renewables has occurred since 2010. This is true for onshore and offshore wind power and even more so for solar voltaic power. Costs are now at the lower end of the range for fossil fuel generation or even below. This is potentially transformative. (See graphics.)

Line graph of the share of renewables in electricity generation (%) showing that the EU leads the share of renewables in electricity generation

The bad news is that this drop in costs has not been transformative enough, fast enough. In fact, there has been an increase in the participation of renewable energies in the generation of electricity. In the EU, it reached 25 percent in 2021. But in the world as a whole it was still only 13 percent. Meanwhile, total emissions from all sources have not decreased. However, if the 1.5°C limit is to be kept alive, total emissions must fall sharply by 2030, particularly in electricity generation. For this to happen, there must be a great expansion in the use of what the International Energy Agency calls “low emission sources”, being most of the renewable energy, while the use of fossil fuels is reduced by a third. To remind us, this is in the next eight years.

Renewable energy capacity additions have leveled off, not accelerated, in recent years.  Graph showing net renewable capacity (GW) additions and PV share (%).

Nothing happened in Sharm el-Sheikh to suggest that this is likely. The reasons for the relatively slow adjustment to renewables so far, even as they have become more competitive, are many: excess low-marginal-cost installed capacity, not only in electricity generation but also in heating, transport and the industry; the costs of a rapid transition to alternatives; resistance to the loss of existing businesses and jobs in production, refining and distribution; resistance to the construction of solar and wind farms; resistance to making the necessary investments in systems integration; and the difficulties in obtaining financing for emerging and developing countries, but also for households in almost the entire world. Delaying everything is pure inertia.

China has been making the biggest additions to renewable capacity, by far.  Graph showing annual average capacity (GW) additions.  China adds almost as much capacity as the rest of the world combined

With market forces pushing more and more in the right direction, the question is how to accelerate them. So despite the skepticism about attempts to make for-profit companies pursue moral goals, I am pleased that these desired changes are at least in line with what the markets are clearly saying: one can expect to do well by doing good. . Furthermore, as the IEA World Energy Outlook he argues, in addition to being increasingly cheaper, renewable energy sources add security to energy supplies. Yes, the wind and sun will vary throughout the day and the seasons. But Vladimir Putin cannot cut them. For China, Europe and India, to name just three big players, the safety case for renewables is overwhelming.

Solar PV has increasingly become the most important new technology, followed by wind.  Chart showing renewable capacity additions by category (GW)

Broadly speaking, five policy changes still need to be made or strengthened: increase investment in scientific research; increase the subsidy for the application of new technologies, with a view to accelerating practical learning in each one, as well as accelerating investment in complementary technologies; stop subsidies for fossil fuels, which amounted to $700 billion in 2021, other than carbon capture and storage; introducing carbon pricing in one of several possible ways, perhaps by preventing potential declines in energy prices from making their way into the market; and de-risking finances, especially in developing countries.

A huge increase in renewable energy is needed if the world is to meet climate goals.  Graph showing total energy supply in the net-zero scenario (exajoules)

None of this is new. But politics could be. Yes, the world has spoken much more than it has acted. Yeah, it’s way behind where it needs to be. And no, the market is not going to offer the necessary transition fast enough. But now there is a significant possibility of delivering safe, clean and cheap energy for all. Furthermore, the possibility could, properly supported, lead to a global investment boom that would soak up 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 make it much more difficult.

martin.wolf@ft.com

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