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

Whatever else may be wrong with economics, his starting point is correct: people do indeed respond to incentives. Suppose renewable energies provide the dominant energy supply technologies; suppose, in short, that it was more profitable to use solar, wind or other renewable energy sources than fossil fuels. Market forces would then single-handedly drive the transformation of economies in a climate-protective direction.

There may still be a need to reduce capital costs in emerging and developing countries. There may still be a need to accelerate technology transfer. But the wind of profit would be behind them. 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 get done. Wealth managers can hold shares in fossil fuel assets and banks can refuse to finance them. Some investors may refuse to own or finance companies that do things they consider evil. But my fellow columnist, Stuart Kirk, is right that someone else will own and finance them, provided they are profitable.

Such actors could be foreign governments and companies or domestic private entities. Regulation could curb some businesses. But political resistance is likely to make such regulation difficult – consider the debate over fossil fuel production in the United States. Furthermore, oil producers will defend their interests to the death, as they demonstrated at COP27 in Egypt. If you wonder 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 energy supply? The answer is that we have made considerable progress. But it’s not fast enough to be transformative within the projected timelines, which have become increasingly shorter due to the last few decades of delays.

The good news is that, as the International Renewable Energy Agency shows, since 2010 there has been a dramatic decline in the so-called “levelized cost” of electricity from renewable sources. This is true for onshore and offshore wind and even more so for solar PV. Costs are now at the lower end of the range for fossil fuel generation or even below. This is potentially transformative. (See graphs.)

Line graph of share of renewable energy in electricity generation (%) showing EU leads in share of renewable energy in electricity generation

The bad news is that this drop in costs hasn’t been transformative enough, fast enough. There has actually been an increase in the share of renewables in electricity generation. In the EU it reached 25% in 2021. But in the world as a whole it was still only 13%. Meanwhile, total emissions from all sources have not declined. However, if the 1.5°C limit is to be kept alive, total emissions must fall dramatically by 2030, particularly in electricity generation. For that to happen, there must be a huge expansion in the use of what the International Energy Agency calls “low-emission sources”, most of which come from renewable sources, while the use of fossil fuels without stop decreases by a third. To remind us, this is in the next eight years.

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

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

China has made by far the largest additions to renewable capacity.  Graph showing average annual (GW) capacity additions.  China adds nearly 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. For this reason, despite the skepticism about attempts to make profit-making companies pursue moral objectives, I am pleased that these desired changes are at least in line with what the markets clearly say: one can hope to do well by doing good. Also, like the IEA World energy prospects argues that, in addition to being increasingly cheaper, renewable energy sources add security to the energy supply. Yes, the wind and sun vary throughout the day and the seasons. But Vladimir Putin cannot interrupt them. For China, Europe and India, to name just three big players, the security of renewable energy is overwhelming.

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

Overall, five policy changes still need to be made or strengthened: increase investment in scientific research; increase grants to the application of new technologies, in order to accelerate learning by doing in each of them, as well as accelerate investment in complementary technologies; end subsidies to fossil fuels, which totaled $700 billion in 2021, as well as carbon capture and storage; introduce the price of carbon in one of several possible ways, perhaps by preventing potential reductions in energy prices from fully insinuating themselves into the market; and the reduction of financial risk 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 under net-zero emissions scenario (exajoules)

None of this is new. But politics could be. Yes, the world has spoken far more than it has acted. Yes, it’s way behind where it needs to be. And no, the market won’t deliver the needed transition fast enough. But now there is a significant opportunity to provide safe, secure, clean and affordable energy for all. Furthermore, the possibility could, properly supported, generate a global investment boom that would absorb excess savings over an extended period. The energy transition should no longer mean hair shirt forever, but an opportunity that politicians can sell. They should try to do much more.

martin.wolf@ft.com

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