Global energy demand drastically fell over the last year, with a report from the Institute for Advanced Sustainability Studies finding that CO2 emissions experienced the largest decline in history – dropping by 6.4% in 2020.
With the world already in a period of transition as nations shift towards decarbonisation, how policymakers choose to recover from the ripple effects of the pandemic will shape their energy landscapes, with existing financial disparities widening the gulf between the clean energy frontrunners and laggards.
We speak to Rainer Quitzow, a research director at the Institute and co-author of the report, to learn more.
Scarlett Evans (SE): Tell me about your report. What motivated the research?
Rainer Quitzow (RQ): We did this as a fairly rapid response to the onset of Covid-19. In the initial phase of the pandemic, the obvious impact was that there was a major reduction in energy demand.
It was very visible in something like the transport sector – which then had a direct impact on oil demand and oil price, which collapsed – but we also saw it in the electricity sector. This was the immediate impact, but we started wondering what are the medium to long-term effects that Covid-19 is going to have – specifically on energy supply?
SE: What did your findings show?
RQ: It was very apparent, quite immediately, that one of the major influences would be how the governance of various countries would respond in terms of the economic stimulus spending, and where they would allocate that spending.
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This would have a very important impact on whether or not we would have a climate-friendly economic recovery, or one that just basically replicates what was there before. The study was, in a way, a preliminary assessment of where this was going: where was the stimulus response taking us in the aftermath of this first phase of the pandemic?
I think the first thing that became obvious was that the scale of stimulus spending is larger in the developed or industrialised economies, compared to low-income countries. In industrialised economies, we’re looking at around 15% of GDP, while low-income countries are only spending 1%-2%.
And right now, the expenditures of low-income countries are focused on health sector issues. Even before the pandemic, these countries were not in a financial position to make investments into things such as new infrastructure for cleaner technology, and now, this has become even more restrictive.
SE: What does this mean for these countries?
RQ: One of the questions our study was actually seeking to address is to what extent the pandemic, and the economic crisis it caused, would either perpetuate or overcome what we call the locking-in of high carbon infrastructure or high carbon assets. This means that, when you invest in a large-scale infrastructure project that has high capital investment, your motivation is not to invest in this today and then discontinue it after a few years.
You create a lock-in when you create an investment where it’s in your interest to reap the benefits for as long as possible. So when you channel your spending into carbon-intensive projects, you’re committing yourself to these projects until their end of life. If you use the stimulus spending for these assets, you’re locking yourself into a carbon-intensive future.
We’ve seen this in jurisdictions such as Indonesia, which exports a lot of coal. Some of their plans to actually invest in renewables have been delayed and instead, a lot of the stimulus is going back into coal. Why?
Because there’s the thinking that they need to do this to ensure employment, to ensure the viability of the sector. First and foremost, it’s an economic stimulus for them. While it’s being used as a tool to stimulate the economy, it actually perpetuates these lock-ins, because you’re funnelling government money into fossil fuel sectors.
SE: So who were the ‘laggards’ in the energy industry?
RQ: We were looking at places that have a continued dependence on fossil fuels, and the potential to be locked into this state. This isn’t just seen on a country level, it also comes down to local governments. For example, in China, we see a lot of local governments placing their bets on fossil fuels in terms of their economic development.
Meanwhile, at the central government level, they’re very aware of the problems this could cause and what it could mean for achieving China’s climate targets. So there’s a tension between essential government, and these local governments in shaping the post-Covid-19 landscape.
Another example is the province of Alberta in Canada. They have a significant fossil fuel industry that is very much dependent on the tar sands in Alberta. So there’s been a lot of stimulus spending going into that sector there.
SE: Where should the stimulus spending go?
RQ: The alternative is when you see governments using the money to actually accelerate the transition to a low-carbon, or climate-friendly, future. We’ve seen this from bodies like the EU, which is making an effort to use this opportunity to influence the spending, with a mandate to include 37% of the money for climate friendly investments – directly benefiting the fight against climate change.
It’s important to note however, that the EU has an existing target industry it can support. This is more complex for low income countries, which don’t have the same industry strength behind them.
It’s more challenging if you don’t have a large track record, because you need to set up certain systems and legal institutional frameworks. The major problem is not necessarily the governments, it’s that a lot of these places don’t have money to spend at all.
SE: What will happen if they don’t change?
RQ: It’s like kicking the can down the road. If they don’t do it now, it’s going to create problems for the future. Either we don’t meet our climate targets, or these assets become ‘stranded assets’ – they become assets that can no longer be used to generate economic profits.
And the EU is already talking about a so-called ‘carbon border adjustment mechanism’, which is a mechanism to ensure that the products that enter the US market are not more carbon intensive than the ones produced in the EU. If so, they have to pay this border adjustment to compensate for the difference in CO2, which in turn increases the price for those products coming in.
SE: So what needs to happen?
RQ: Higher-income countries need to rethink their role in financing the transition in low-income countries. If we don’t make a major commitment to increase the volume of funding to these lower-income countries, it’s going to create a negative long-term economic consequence.
There are some debates about whether the International Monetary Fund could use its financial mechanisms to channel money into green investment and climate-friendly development, but now is the time for OECD countries to renew their commitment to providing financial support for clean energy.
Now is the time to increase the disbursement of those commitments, because there’s a global economic crisis as a result of the pandemic. And if it’s not done, then it might lead to developments or lock-in effects that will be harder to deal with further down the line.