Abstract:
This piece aims to articulate the need for future-proofed economic systemsin nations around the world rooted in theprospects of an inevitable net-zero future. To describe these, I would like to use the analogy of a river to represent the global economy. For this river to be of use to the industries, homes, and lives of those who live around it and depend on it for their sustenance, it would have to have sufficient volume, not too full and not too low;reasonably easy, non-turbulentflow; and it should be easy to access. Suppose,in the grand scheme of our economic landscape, energy sources represent the speed of flow and ease of useof this mighty river. These sources would be the driving force behind a thriving ecosystem and would ensure our economic river remains dynamic and vital. Using our analogy,as the economic river flows,suppose some troubles arise—murky waters of pollution, unforeseen obstacles of resource scarcity, and potential turbulences of climate change.In order to keep our economic river flowing smoothly and to protect the users from these turbulent waters,some action must be taken, and the users of the river must embark on a great clean-up: a journey of energy transitions.
The murky waters: Pollution and resource scarcity
Our economic river faces two significant challenges: the murky waters of pollution and the unforeseen hidden obstacles of resource scarcity, botheventually leading to severe potential turbulence in the global economy if uncorrected. Pollution, primarily driven by the combustion of fossil fuels, has been the primary source of environmental degradation in the last 150 years (Perera, 2017). The rise in carbon emissions pollutes the waters of our economic river and exacerbates climate change, leading to turbulent times ahead.Severe weather events like hurricanes, floods, droughts, rising temperatures, food shortages and wildfires can wreak havoc on infrastructure and supply chains, leading to significant economic disruptions. Research has shown that a 1% increase in global temperatures could lead to a 3-6% decrease in crop production (Zhou et al., 2017) and a 9.7% decrease in livestock production (Emediegwu & Ubabukoh, 2023).
Climate change presents new challenges, including increased demand for cooling (powered byincreased energy requirements) and the need for pure water sources (desalinated water). Although some might see cooling as a luxury, sustainable cooling is essential for survival in many developing countries. It ensures food security, supports economic growth and improves resilience by underpinning the ability of hundreds of millions of people to realise the Sustainable Development Goals. This highlights the need for sustainable energy sources that can efficiently cater to these growing demands while mitigating the environmental impact.We must ensure our sustainable energy sources are water-efficient and eco-friendly to meet these needs. These changes would be vital to maintaining a vibrant and resilient economic river landscape.
On the other hand, many developing countries do not yet have sufficient energy supplies. This energy starvationadds another layer of complexity. As fossil fuel reserves dwindle, nations relying on these finite resources risk running dry. This is akin to our economic river starting to run shallow, opening up previously submerged obstacles and making navigation hazardous, potentially leading to stalled economic activities.According to the 2022 “Tracking SDG7: The Energy Progress Report”, 759 million people still lack access to electricity, with around 90% of those living in sub-Saharan Africa. The implication of this is that any policy that seeks to stop new oil exploration or limit the supply of fossil fuels may also have the consequential effect of exacerbating energy inequality and starvation since many of these countries do not have the resources to upgrade all production and consumption infrastructure to be suitable for green power.From the foregoing, a key challenge in the green transition lies in the balance between energy transition and energy starvation because a sudden, radical shift from the production of fossil fuels to the production of green energy may cause immediate spikes in oil prices due to the supply shock, making energy unaffordable for many. This price volatility, driven by sudden changes in supply and demand, is a risk that must be carefully managed.
Particularly for oil-producing countries with large populations and low financial reserves, the possibility of global energy transitions emerges as more relevant than ever because they must consider whether to prioritiseexpanding their share in a future shrinking oil market or embrace a structural shift in their economic base to bolster financial resource resilience.
A Pledge to Net-Zero: The Great Clean-up
Approximately 70% of the global community has pledged to embark on an environmental expedition, aiming for a “net-zero” economic river by 2050. While transitioning, the journey may experience turbulence, but the long-term goal must be a structural shift toward a resilient and cleaner economic river.The net-zero pledge is not without its challenges. It requires a fundamental shift in how we produce and consume energy, demanding innovation, investment, and behavioural change. However, the long-term benefits are undeniable – a healthier planet, a more resilient economy, and a sustainable future for future generations.
Several countries are already taking substantial steps towards fulfilling their net-zero pledges. The United Kingdom, for instance, has set a legally binding target to achieve net-zero greenhouse gas emissions by 2050. This commitment has led to comprehensive policy changes, including investments in renewable energy sources, the promotion of electric vehicles, and stricter emissions standards. Another example of effective government policy is Norway’s approach to electric vehicles, which, by offering substantial incentives and a robust charging infrastructure, has become a global leader in electric vehicle adoption. As of the end of 2022, 20% of all vehicles in Norway were BEV (battery electric), and the parliament has set a target of 100% zero-emission (electric or hydrogen) vehicles by 2025. These policies havereduced emissions and stimulated economic growth and job creation in the electric vehicle industry.The result is a roadmap for a more sustainable energy future, aligning with global net-zero objectives.These discrete efforts notwithstanding, the reality of the global challenge means thatthe actions of a single country, no matter how ambitious, cannot single-handedly reverse the environmental damage inflicted over decades. Borders do not confine climate change, and its effects are felt worldwide because the greenhouse gas emissions of one nation affect the entire planet.
An Oar in Every Hand: International Dialogue
Assuming the users of the great global economic river intend to embark upon“the Great Clean-up”with net-zero ambitions. It would immediately be obvious that this would not be a solo endeavour; it would require a massive, coordinated team effort. Everyone must be on board in this enterprise, including oil producers, fossil fuel consumers, countries from the global north and south, developed and developing alike, and key intergovernmentalorganisations.Picture a massive raft navigating the rapids of the energy transitions, with every nation and stakeholder holding an oar, working in unison towards this shared goal. A key element of the energy transition is the imperative for dialogue. These inclusive conversations would ensure the global energy transition is fair, equitable, and well-coordinated. It acknowledges that energy transitions impact economies globally and thus necessitate international cooperation to facilitate a smoother and more balanced process.Nations must work together, sharing best practices and supporting less economically privileged nations in their transition efforts.
The Paris Agreement, signed by 196 countries, is a testament to this collective commitment. It underscores nations’ shared responsibility to reduce greenhouse gas emissions and protect our planet regardless of economic status or development stage.While emphasizing a shared responsibility for climate action, the agreement does recognise that nations have varying capacities and circumstances. This principle of “common but differentiated responsibilities” ensures that all countries contribute to climate action in a way that aligns with their unique national contexts.This flexible approach allows countries to set ambitious yet achievable goals. Some nations have pledged to achieve net-zero emissions by 2050, while others have set different targets based on their development stage and capabilities.
Further, international organisations like the International Energy Agency (IEA) and the Conference of the Parties (COP), organised annually by the United Nations Framework Convention on Climate Change (UNFCCC), provide crucial platforms for international cooperation. Governments, businesses, and civil society are brought together to negotiate climate action plans, share knowledge, and mobiliseresources. Regional initiatives, such as the African Climate Agreement, can complement global efforts by addressing specific regional challenges and opportunities. These agreements can tailor climate action plans to different regions’ unique needs and contexts.
One further significant platform for global dialogue on this issue is the G20.
The G20 and energy transitions
The Group of 20 (G20) is an association of the world’s largest economies, and its members account for over 80% of global GDP and 75% of global energy consumption. Thus, the G20 is critical in advancing the global energy transition.In recent years, significant progress has been made on that front. In 2017, G20 leaders agreed to phase out inefficient fossil fuel subsidies and support developing and deploying renewable energy technologies. In 2021, G20 leaders committed to achieving net-zero greenhouse gas emissions by mid-century, and in 2023, under India’s historic leadership, the importance of a just, sustainable transition was emphasised.
However, more work is needed to translate these commitments into concrete actions. G20 countries must implement ambitious policies to support energy transitions and economic resilience.Some key policy measures that could be taken includescaling up investments in renewable energy and energy efficiency, phasing out inefficient fossil fuel subsidies, putting a price on carbon, thereby sending clear price signals to businesses and consumers to reduce their carbon emissions, supporting research and development of new energy technologies and ensuring a just transition by providing support to workers and communities that are affected by the transition away from fossil fuels and ensuring that they are treated fairly and equitably.
Policies from both governments and private industries are expected to play a pivotal role in driving the decline in the demand for oil and gas in the coming years. This decline would open doors for alternative energy sources such as hydrogen and solar. Solar energy has emerged as a promising contender with its cost-effectiveness and scalability. Reports by the International Energy Agency (IEA) indicate that around 90% of new energy plants are solar energy plants, solidifying solar’s status as the ‘new king’ in the energy landscape.Moreover, identifying and addressing bottlenecks in the renewable energy sector is imperative. Removing obstacles to the growth of sustainable energy sources ensures a smoother and more efficient transition, benefitting economic resilience. On the side of governments, policy decisions, incentives, and regulations must align with the goal of a sustainable and resilient economic river.Policies promoting clean energy adoption, tax incentives for renewable energy investments, and stringent emission standards are essential components. Governments can also encourage research and development in green technologies and fund infrastructure projects that support the transition.
India’s leading role in ensuring just energy transitions.
India, with its vibrant and dynamic economy, is like a mighty tributary flowing into the global economic river. However, India’s energy landscape is also facing the challenges of rapid urbanisation, growing energy demand, and the need for sustainable development.As one of the world’s fastest-growing economies, India’s energy consumption is expected to double by 2040(Bilgen et al., 2004). It is also a major emitter of greenhouse gases and is particularly vulnerable to the impacts of climate change.India has also made significant progress on energy transitions in recent years. It aims to achieve 40% of its energy capacity from non-fossil fuel sources by 2030. It has set ambitious targets to deploy renewable energy and reduce its reliance on fossil fuels. From the twelfth five-year plan, it aimed to have 60GW of installed capacity of wind power by 2022 and a 20GW (revised to 100GW) target for installed solar capacity by 2022. The COVID-19 pandemic put a roadblock to achieving these targets, but the country has gone a long way in achieving its goals. Several policy initiatives to support these energy transitions have begunto be implemented, such as the National Solar Mission and the National Wind Mission.
India’s strong economic growth, technological advancements, and growing focus on sustainability provide a solid foundation for navigating the turbulent waters of climate change.However, India’s energy transition journey is not without its challenges. More work is needed to accelerate its energy transition. The country must address grid integration, energy storage, and financing for renewable energy projects. It must also scale up investments in renewable energy and energy efficiency, phase out inefficient fossil fuel subsidies and price carbon appropriately. India also needs to ensure that the energy transition is fair and equitable and that workers and communities affected by the transition are supported.
As the leader of the G20 in 2023, India has taken a leadership role in a world increasingly focused on sustainable energy transition and it can continue to play a leadership role in this area going forward by implementing ambitious policies to support its own energy transition and by working with the other G20 members to push for a just green transition. It is notable that the 2023 presidency was tagged “One earth, one family, one future”, expressing the importance of the environmental agenda. When the energy ministers of the G20 met in Goa in the summer of 2023, the emphasis was on the need for technology sharing and low-cost financing, especially for developing countries. Since the transition from fossil fuels to clean energy sources will depend on critical minerals, such as copper, lithium, nickel and cobalt, and the consumption of these minerals could increase six-fold by 2050, according to the International Energy Agency (IEA), it was deemed necessary to highlight that these resources would have to be maintained responsibly. Furthermore,sustainable supply chains for those mineralsmustbe ensured as they represent our collective future. Therefore, the just transition would need to include ensuring the welfare and livelihoods of the miners of these resources. It is not surprising that India, once again, was the catalyst of these very progressive ideas.
Two Essential Tributaries of Financial Support: Financing “The Great Clean-up”
Much like a great river relies on various tributaries to sustain its flow and maintain freshness, the clean-up of the murky waters of the global economic river would require two fundamental forms of financial flow: significant capital investments and concessional transfers or grants. These two financial tributaries, while distinct, would work in tandem to facilitate the smooth energy transition and, thus,the clean-up of theeconomic river.
Capital investments serve as robust financial currents flowing from private financial institutions and markets. This powerful current can drive the energy transition if supported by well-designed real economy policies that encourage investments.Effective policies could encompass ambitious targets for renewable energy generation by 2030 andimplementing carbon pricing mechanisms. The energy transition would need an annual average investment of approximately $3.5 trillion until 2050, a significant increase from the current $1 trillion annually.
A portion of these investments could be offset by the diminishing investments in fossil fuels, reducing the annual requirement from $3.5 trillion to around a net of $3 trillion. In the grand scheme of global economics, this turns out to be approximately 1.3% of the projected average annual global GDP over the next three decades. Therefore, the true incremental cost of the required investment is lower than the gross investment needed. Nonetheless, large-scale mobilisation and reallocation of capital will only occur with the firm support of the effective real economy worldwide. Government mandates may be ineffective in mustering the needed finance, but assuming sound policies are in place; greencapital investments guaranteefavourable returns to investors.
More international assistance would be required for developing nations, particularly those in sub-Saharan Africa, since they make up only a fraction of global greenhouse gas emissions, contributing merely about 3% to the world’s carbon footprint. However, paradoxically, these nations bear the brunt of the most severe consequences of climate change. The stark reality is that the impacts of climate changeare disproportionately felt in regions with the least historical responsibility for emissions. Sub-Saharan Africa is particularly vulnerable due to its heavy reliance on agriculture, limited access to advanced technologies for climate adaptation, and often fragile socio-economic systems. As the world grapples with the repercussions of climate change, it is essential to recognise the glaring inequality in how the burdens of a warming planet are distributed, emphasising the urgent need for global cooperation and assistance to support the more vulnerable nations in their quest for climate resilience and sustainable development.
In these cases, because the economic costs involved in a green transition, especially in phasing out coal, halting deforestation, and scaling up carbon dioxide removals, would be enormous, concessional loans and grants couldbe the key. This financial support would help counteract the economic costs incurred in middle- and low-income countries striving to meet the world’s climate objectives.By 2030, the need for these payments could amount to approximately $0.3 trillion annually. The sources for this financial assistance could theoretically come from international climate funds, corporations participating in voluntary carbon markets, philanthropic contributions, contributions from high-income countries, and different fora for south-south cooperation, with India taking the lead. Green bonds, specifically earmarked for environmentally friendly projects, can attract investors seeking sustainable investment opportunities.
Just as tributaries nourish a river, these concessional transfers would provide financial sustenance to nations navigating the challenges of the energy transition, ensuring that no one is left behind on the path to a sustainable future.
The importance of economic resilience
Economic resilience is the ability of an economy to withstand and recover from shocks, disruptions, and long-term stresses, such as natural disasters, financial crises, and pandemics. A resilient economy is less vulnerable to disruptions and can quickly bounce back from setbacks.It encompasses the capacity to anticipate, prepare for, respond to, and recover from economic challenges while maintaining stable growth and employment opportunities.Using our river analogy, economic resilience is akin to reinforcing the riverbanks to withstand sudden surges and unexpected obstructions while ensuring a consistent flow to serve the needs of the communities along its banks.
In the face of ever-increasing global challenges, economic resilience is no longer simply a desirable attributebut a vital necessity. As the economic landscape evolves rapidly, driven by a shift towards sustainable and environmentally responsible practices, the push towards a net-zero futureis becoming unavoidable. Like a river adapting to changing terrain, our global economy must adapt to a rapidly changing energy landscape.The COVID-19 pandemic is an illustrative example of what could happen when the demand for oil swiftly collapses, highlighting the vulnerability of economies heavily reliant on the murky old watersof traditional energy sources, and exposing our economic river’s vulnerability.
Energy transitions can significantly strengthen economic resilience because diversifying energy sources and reducing reliance on fossil fuels can make economies less vulnerable to energy price volatility and supply disruptions. Additionally, energy transitions can create new jobs and industries, boost economic growth, and reduce poverty.
Here are a few final thoughts summarising policy possibilities to ensure economic resilience. I group them into two categories:domestic and external factors.
The policy frameworks of countries regarding energy transition can be expanded and strengthened. This is akin to the economic riverbanks being broadened. It will enable the river’s flow to accommodate external energy transition shocks. This would involve adopting fiscal and monetarymeasures that allow the economy to swiftly respond to such shocks, much like adjusting its width and depth. There should also be improved coordination among countries, without neglecting the global south.
Domestically, countries must invest in renewable energy sources, energy efficiency, and green technologies. These domestic investments are like nourishing the river’s feeder streams, contributing to a resilient economic recovery from energy transition shocks, as they add to the overall volume and vitality of the river.Price stability should be maintained as much as possible to avoid sending confusing signals to investors. Also, at the corporate and individual citizen level, ownership must be taken of the net-zero agenda for there to be reasonable progress. It will spark innovation and home-grown mitigating strategies.
Finally, on the external side, countries must diversify their economies wherever possible. From the production side, countries heavily dependent on fossil fuel exports need to start thinking about how they can diversify their revenue streams before the demand and supply shocks actually arrive. Also, from the consumer side, countries heavily dependent on the import of fossil fuels need to watch out. If many oil-producing countries stop exploring new oil, it may be challenging to keep oil prices down,and if adequate preparation is not made, it could result in severe energy starvation. This is like diversifying the economic river’s pathways and creating multiple channels to avoid disruptions when one path is obstructed.Like a dam or anaquifer, some form of water reserve will always help when there is low water flow. Similarly, a positive trade balance and foreign exchange reserves also serve as buffers when things get tough economically.
Author Brief Bio: Dr. Chisom Ubabukoh is Assistant Professor (Economics), Jindal Global Law School (JGLS) and Associate Fellow of the Higher Education Academy (AFHEA), O.P Jindal Global University
References
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