While news headlines in 2020 have been dominated by the progress of the Covid-19 pandemic, from a future vantage point, 2020 may very well be viewed differently. It looks to be the watershed year when the shift of the global energy system towards clean low-carbon sources of energy away from the present fossil fuel-dominated system became inevitable.

Up to now, global efforts to reduce greenhouse gas emissions, particularly carbon dioxide, have been led by the processes under the United Nations Framework Convention on Climate Change (UNFCCC).

Under this treaty, signatories meet on an annual basis referred to as Conferences of the Parties (COP). Probably the most significant of these were the 1997 Kyoto Protocol (COP3) which established a baseline and legally binding obligations for developed countries to reduce their greenhouse gas emissions; and the Paris Agreement (COP21) in 2015 which introduced Nationally Determined Contributions (NDCs), whereby all countries would commit to reducing greenhouse gas emissions within a fixed period in a way appropriate to their needs. The idea would be to ratchet these commitments upwards so that global warming would be held to 1.5°C above pre-industrial levels.

In June 2020 the European Union, which has been the driving force behind these global efforts, announced its Green Deal which commits its member countries to become “carbon neutral” by 2050.

In a surprise move in September, the Chinese government announced its own pledge to reach its peak carbon emissions by 2030 and then to become carbon neutral by 2060. Today, China is by far the largest emitter of greenhouse gases and consumes half of the world’s coal.

The US has long stood aloof from these developments and is in the process of extracting itself from the Kyoto Protocol. However, the Democratic Party’s presidential nominee, Joe Biden, who has a clear lead in the polls in the run-up to November’s presidential election, has made tackling climate change a centerpiece of his presidential campaign (also see here) as part of an economic recovery plan using the slightly clumsy slogan “Build Back Better”.

Even an emerging global power such as India which has taken the not-unreasonable view that since the developed world became rich by burning fossil fuels, it could not be prevented from doing the same, has had a change of heart and combating climate change is now a key national policy.

We should not underestimate the scale of the task. Achieving climate change objectives to a net-zero carbon-energy system will involve a complete transition of the global energy system to technologies such as renewables, batteries, carbon capture and storage (CSS) or even some future version of nuclear power, and to deploy all these at unprecedented rates. This means that even within two decades, our energy systems would need to be transformed beyond recognition.

Policies to combat greenhouse gas emissions are a response to work done by climatologists in modelling the impact of these emissions. To support the work of the UNFCCC, climatologists developed different Representative Concentration Pathway (RCP) scenarios. Due to the huge complexity of these climate models, a decision was taken to model just four scenarios, namely RCP8.5, the so-called baseline, and three others which are scenarios under different climate policy interventions or policy adjusted scenarios, namely RCP6.0, RCP4.5 and RCP2.6. The baseline, RCP8.5, supposedly models a scenario where there are no policy interventions and it projects a future characterised by high population growth, little technological advancement, growing carbon dioxide emissions and therefore apocalyptic levels of climate change.

While climate change under even the policy adjusted scenarios remains a serious threat, it is also a measure of how much progress has been made that there is a lively debate as to whether the initial baseline, RCP8.5, should even be considered any more. The planet has long departed the RCP8.5 scenario and it was never a likely scenario anyway. Retaining it is a diversion and undermines the important work that needs to be done around addressing climate change.

The fact is that the global economy has become much less carbon-intensive than it once was and this trend is set to continue. Carbon emissions are set to plateau within the near future and already in 2017, 49 countries, representing 36% of global emissions already passed peak emissions.

Various factors account for this development. One is the emergence of very cheap renewable energy, especially solar PV and onshore wind. Prices for solar PV have fallen by 82% in just the past decade. Solar PV has an analogy to the microchip’s Moore’s Law called Swanson’s Law. It forecasts that as manufacturing capacity for solar panels doubles, the average price of producing them drops by about 20%.

The IEA document reflects that solar energy is now the ‘cheapest electricity in history’.

One outcome of Swanson’s Law is that only environmental activist groups like Greenpeace have succeeded in getting the predictions of the price of solar PV and the capacity deployed remotely right. On the other hand, the supposed more serious International Energy Agency (IEA), an organisation representing OECD countries (initially as a counter-party to Opec) previous predictions on solar energy have been hopelessly incorrect.

It appears that the IEA has learnt some lessons. Last week, it published its much-anticipated World Energy Outlook 2020. An initial analysis of the document has been done by Carbon Brief. The IEA document reflects that solar energy is now the “cheapest electricity in history”. To deal with considerable uncertainty, the IEA presented four future pathways, all of which see a huge increase in the amount of renewable energy — mostly at the cost of coal. The main scenario modelled sees 43% more solar output by 2040 than it had expected in 2018. This is partly due to a review of the price of solar power which is between 20% and 50% cheaper than it had previously pegged them.

Of interest is that the document does not present a “current policies scenario” which provides a baseline (or a future in which no new policies are added to those already in place) because a “business-as-usual” approach is no longer a credible scenario. Instead, it includes a pathway that reaches global net-zero CO2 emissions by 2050. This shows what would need to happen for CO2 emissions to fall to 45% below 2010 levels by 2030 on the way to net-zero by 2050. This is considered necessary to have a 50% probability of avoiding a more than 1.5°C rise in global temperatures. 

In many respects, this net-zero by 2050 scenario is similar to an earlier report by the IPCC on what would be required to avoid global warming of less than 1.5°C (discussed here). The 2020 IEA report does note that the increase in variable renewable sources means that there is an increased need for electricity grid flexibility. This means robust electricity networks, dispatchable power plants, storage technologies and demand response measures.

All this means that we have an enormously complex and dynamic environment which makes planning very difficult. Planning has to facilitate the rapid transformation needed and not be a brake. We are going about our planning in the wrong way. Traditionally, governments undertake energy planning through the development of integrated assessment models (IAMs) which then feed into Integrated Resource Plans (IRPs). These models attempt to assess costs of future energy pathways and economic effects of energy/climate policies.

As these modelling techniques become more widespread in guiding policy and planning, they are seen to be opaque, reliant on incorrect assumptions and therefore produce arbitrary outcomes. One problem is that pursuing policies that meet climate change obligations is seen as a cost. One starts with a baseline model then adds the additional costs required to meet a particular climate mitigation objective. However, “costs” are quite often merely a modelling construct.

A recent IMF discussion document turns this basic assumption on its head. What if pursuing climate change policies does not have a cost and instead provides economic benefits?

In the IMF’s latest World Economic Outlook, the case is made that economic policy tools which can help pave a road toward net zero emissions by 2050 can be pursued in a manner that supports economic growth, employment and income equality.

The recommendation is that countries should opt for a green investment stimulus (such as investments in clean public transportation, smart electricity grids to incorporate renewables into power generation and retrofitting buildings to make them more energy efficient).

The IMF discussion paper suggests that while measures such as carbon taxes on their own may stifle economic growth by making energy as a whole more expensive, if these are coupled with policies such as subsidies for green energy, these could stimulate total energy demand (or at least not reduce it). The recommendation is that countries should opt for a green investment stimulus (such as investments in clean public transportation, smart electricity grids to incorporate renewables into power generation and retrofitting buildings to make them more energy efficient).

Doing this would achieve two goals. First, it would boost global GDP and employment and second, increase productivity in low-carbon sectors. The IMF’s modelling suggests that policies to mitigate climate change could boost global GDP by about 0.7% and create new jobs in low-carbon sectors that are often relatively labour intensive.

Emil Dimanchev, a US-based academic specialising in electrification and energy transitions explains why we may be getting it wrong. He argues that the traditional way to see climate change is as an isolated problem: climate change is an externality in an otherwise optimally functioning system.

From this perspective, pursuing climate policy is costly since it takes the economy out of the previous “perfect equilibrium” which is also called “Business as Usual”. Climate policy is then seen as a constraint or a departure from this initial equilibrium state. This framing then engenders a debate over how much climate policy will cost and who will pay for it.

Dimachev then goes on to show that the existing situation is not optimal. The fossil-fuel-dominated energy systems we have inherited owe their prominence to a large degree to something he calls “path dependence”. He argues that the way we frame climate change policies is important. Seeing it as an expensive problem can encourage delays. Seeing it as an opportunity can spur on actions that are beneficial beyond reaching climate change goals.

All this suggests that our energy system models which help us generate future energy scenarios ought to be revisited. Primarily, there ought to be new methods for representing technological development of emerging technologies. An effort to do just this was partly the subject of a doctoral thesis done by Swedish based Niclas Mattsson of Chalmers University of Technology. Mattsson uses “experience curves” and by linking empirical relationships, one can describe how costs tend to fall for new technologies as a function of their market growth. As such, the investment in solar and wind at a global scale can drive down costs to a point where they compete with conventional fossil energy sources.

The way technology and innovation should be understood and modelled has been the subject of fierce debate within economics. A recent paper, titled “Modelling innovation and the macroeconomics of low-carbon transitions: theory, perspectives and practical use” brings the debate back into the energy transition modelling.

Conventional neoclassical economics rests on the assumption that prices perform a coordinating function for the whole economy, being the factors of production, capital, labour and knowledge. Given resource constraints or market imperfections, all remaining factors of production tend to be employed in the most efficient way. In this way, an economy achieves a state of equilibrium. Banks and the finance sector operate principally as agents and play a facilitative role. As the paper puts it, “the basic view of the equilibrium school is one of optimal allocation of scarce economic resources given technology at each point in time, and of optimal capital accumulation over time.”

The Austrian school, or Schumpeterians, and to some extent other schools, such as the Keynesians, proceed from the position of the economy being in perpetual dynamic change and therefore there is no equilibrium. This approach focuses on the role of the entrepreneur and the enabling nature of financial institutions in an economy. Banks create money through lending to entrepreneurs. The paper puts it thus: “The non-equilibrium school contends that economic development takes place through entrepreneurial activity and the creation of purchasing power by banks.”

For the most part, energy planners use the equilibrium models. While the equilibrium school can accommodate new technologies, new technologies or innovations tend to be represented as being incremental which results in improving productivity or lower prices and the impact of technology is based on different sets of assumptions outside these models. The problem, as the paper points out, is that the adoption and diffusion of innovations are processes that are not modelled very well in the equilibrium community. The result is that energy models are found to produce typically pessimistic outcomes in comparison to what is actually observed in the real world. Essentially, if energy transition modelling is to be useful, there needs to be a far better representation of the role of technology change, innovation and the role of finance.

For Tom Brown, an energy system modeller at the Karlsruher Institut für Technologie in Germany, the world remains stuck in a crappy fossil-fuelled equilibrium which isn’t optimal on several counts beyond just greenhouse gas emissions. It is about pollution, protecting biodiversity and our limited water resources. We should not consider ourselves to be stuck where we are or be path-dependent on the technologies we have.

We are not dealing with a linear system. Instead, within certain physical and economic limits, we can choose the energy system we want. If we do that, unit costs will come down thanks to learning, new technologies and innovation. Just because a technology is foundering or “non-commercial” now, it doesn’t mean that it should not be supported from the perspective of pushing us on to a pathway of our choice. As Brown points out, we have an energy supply from the sun that exceeds demand many times over. Already we have the technology which can turn that energy into hydrogen, which can reach the parts of the economy that efficiency and electrification cannot and is of universal utility. Using water — and with zero emissions.

The scale of what needs to happen for a complete energy transition within the next few decades is simply immense, but already in 2020, there is a growing consensus beyond environmental activists on what targets must be achieved, and the old worst-case business-as-usual scenarios are off the table.

Achieving ambitious targets is not just about technology and learning curves, but also a different, more optimistic mindset, a new way of planning for change. DM/BM/OBP

Dirk De Vos is a director with strategic consultancy QED Solutions.