Glasgow, we have a problem
The COP26 event in Glasgow was heavy on big statements and grand commitments to achieve net zero or zero carbon emissions, with shipping strongly represented. This was followed by the disappointment of IMO failing to agree to a similar ambition to go beyond its target of cutting carbon by 50% by 2050 and instead achieve net zero by that date.
This was never likely, given the difference between events such as COP and an IMO committee. But there is a bigger problem. Even before Glasgow, supply chains were sagging under the weight of demand while energy prices were rising and tensions simmering in eastern Europe.
Fast forward to February 2022 and it seems that the reality of geopolitics and energy supply have drawn ahead of ‘environmental imperative’.
That’s the view of a team of analysts assembled by IHS Markit for a webinar discussing what happens next. As Carlos Pascual, Senior Vice President, Global Energy, Economics & Country Risk pointed out, high energy prices have the potential to impact electoral politics and push action on climate change off the agenda.
Higher consumer prices at a time when the plan is to swap cheap fossil fuels for expensive alternatives make little sense to the average consumer, especially when OPEC apparently has the capacity to meet its commitments to deliver enough oil and gas.
Pascual’s colleague Roger Diwan put it bluntly. “Multiple energy crises cannot be solved quickly. Some of the effect is temporary, but fear of disruption creates havoc. Energy markets have to adjust to short and long term issues; this is a crisis of generational proportions similar to the 1970s.”
We won’t dwell on how many readers remember the 1970s but rather that very tight markets are causing problems at a time when geopolitics are unstable. “It’s easy to invest for 2030, much harder for the next five years,” he added.
Will prices go higher? Diwan sees no consensus on the outlook so expects more volatility and added “the risk is definitely to the upside”.
So faced with an energy crunch and risks to stability, are countries wobbling on their COP26 commitments? The outcomes of COP26 were mixed at best and largely inconclusive according to Paul McConnell. Some commitments were made but few from emerging markets where most of the work needs to happen and money needs to be spent.
“Politics is getting in the way of delivery and there is a scaling back of commitments,” he said. The argument that a faster transition equals greater energy security won’t help, as such commitments always take a back seat to politics.
A bright spot is that the climate agenda can transcend politics. Where action taken (or at least a commitment is made) it is a corporate objective rather than a government policy and the drivers to change are disconnected from macro picture.
Not unlike the response to COVID, action varies by region. Africa analyst Natznet Tesfay noted that despite the focus on providing international climate finance, much pledge funding hasn’t materialised. High debt loads mean African nations need vast sums – as much as $250bn per anum – to achieve a clean energy transition.
In China, there are contradictory signals but the overarching message is that the country wants to meet its goals on emissions with the caveat that economic and energy stability come first. China is acutely aware of the risk climate goals have on the recovery, according to analyst David Li.
“China’s policy has been to secure energy supply whatever the cost and they are facing the reality of these commitments. It’s short term and they will deal with it because the economy has to look good,” he added.
But he argued that the direction is set. The domestic agenda is to reduce air pollution, modernise infrastructure, restructure economically and improve governance, none of which will go away because of a short term crunch.
There are big issues in Europe too where the EU last year unveiled its ‘Fit for 55’ package which analyst Laurence Allan called “the most important policy position in 10 years”. Energy security issues are in sharp focus and the Commission is pushing forward, trying to make the transition quickly despite evident hurdles.
Its ambitions stand against invest the continuing investment in gas infrastructure in central and eastern Europe and that coal remains a major source of employment. Any big moves to restrict production of either are likely to cause problems.
As Allan pointed out, negative impacts on consumers mean they could be less likely to accept the longer term plan. Local initiatives may fall foul of global dynamics and it is increasingly clear that the clean energy transition is going to be hard and inseparable from politics.
Or as Pascual concluded, “Climate change doesn’t go away, the challenge remains how to deal with it.”