An oil rig used in drilling at the Zubair oilfield in Basra, Iraq, July 5, 2022. Western governments are coalescing around the agenda of transforming their economies, but they need the ambition to create a global plan to decarbonize the world economy.ESSAM AL-SUDANI
John Rapley is a political economist at the University of Cambridge and managing director of Seaford Macro.
Ottawa’s decision to follow Washington and crowd into the energy transition is a step in the right direction, but only a step. Because while building an economy that is suited to the 21st century is one thing, tackling climate change will require even more ambition – little short of a new Marshall Plan.
Some free-marketeers criticize any kind of government program to stimulate an industrial transformation, saying innovation is best left to the private sector. And of late, the market has been sending signals that the energy transition is yesterday’s fashion. Whereas last year, money was crowding into ESG (environment, social and governance) investments, that tide seems now to have gone out.
Coincidentally, British Petroleum recently reported record-breaking profits. BP, which had been a pioneer among oil companies for its ambitious plans to cut oil and gas production and shift toward renewable energy, said it would reorient back toward the former again. In the U.S. especially, many now actively campaign against the industry, saying the big money will always be in carbon-based energy.
But as usual, it’s a bit more complicated than that. One of the reasons oil and gas prices are so high is that the industry majors, persuaded the energy transition is real, don’t want to pour money into developing what could become “stranded assets.” The other factor is that Russia invaded Ukraine. The consequent Western sanctions against Russia withdrew a large supply from the global market, causing price spikes on spot markets.
But if anything, this has hastened the energy transition in Western Europe, as countries raced to end their dependence on Russian fuel. Meanwhile in the car-loving U.S., gasoline consumption has actually been dropping, owing to electric-vehicle adoption and the work-from-home trend. Such trends look irreversible: the Trump presidency’s efforts to reverse the decline of coal failed because it was cheaper for utilities to buy solar energy, so there’s no going back.
The fall in prices of ESG products may just indicate a healthy market that is growing up. The supply of critical minerals is catching up to prices, as output ramps up to take advantage of the new opportunities. There’s also been a regulatory clampdown on greenwashing, which has hit valuations of some funds. But this is a sign of progress. The ESG bubble sucked in opportunists, who slapped on a green label while doing little to change their ways – something that remains a concern in Canada. Any regulations that knock down the values of charlatans are thus constructive.
So no, the energy transition has not ended. Indeed, the future for green energy companies looks as bright as ever, and Western countries may now have crossed the threshold at which the energy transition becomes self-sustaining.
However, zoom out to the world scale and the picture looks different. As developing countries continue catching up to the rich world, global oil consumption keeps rising. The infrastructure in place is mostly geared toward carbon-based energies, and the cost of shifting over to a green economy currently lies beyond most countries.
ESG investing has become profitable in Western countries because governments are making it so, using a mix of carrot and stick. Subsidies have been the carrot, while taxes and regulation to raise the cost of carbon-based energy have been the stick. But few developing countries have the deep pools of capital available to build a whole new infrastructure. And their consumers, billions of whom struggle just to put food on the table, scarcely have the deep pockets to absorb the costs of policies that will raise the cost of energy.
So globally, yes, we’re still losing the battle against climate change. If we with the means are really to do good, we’ll have to stump up the cash for the global energy revolution. Now that Western governments are coalescing around the agenda of transforming their economies, they need to look to the future, with a plan to decarbonize the world economy. That will take ambition on a scale we haven’t seen in decades.