Expert Speak Terra Nova
Published on Apr 30, 2020
COVID, oil collapse and economic contraction: Can the low carbon transition be salvaged?

Half a decade after the historic Paris Agreement of 2015, the year 2020 was primed to be of crucial importance for the global battle against climate change. However, four months into the year, the idea of ramping up momentum to achieve a low-carbon future seems far removed from reality. The ramifications of three epochal events — the outbreak of the COVID-19 pandemic, the resulting global economic contagion and the collapse in oil prices —

pose a grave threat to the world’s clean energy transition.

The pandemic has disrupted critical supply chains

The pandemic-induced disruptions in global supply chains have struck a hard blow on the renewables industry. BloombergNEF (BNEF) has downgraded its forecasts for global solar capacity demand in 2020 from 121-152GW to 108-143GW, marking the first annual fall in solar capacity additions in at least three decades. In a similar vein, the escalating pandemic has also created significant downside risk for the global wind sector, battery and electric vehicle markets. Meanwhile, as policymakers scramble to tackle massive health and economic challenges, there is a burgeoning fear that countries might dial down their renewable energy goals and shift focus away from climate action. With COP26 being postponed and the European Green Deal taking a backseat, the momentum towards attaining global clean energy goals has already been stymied.

The oil price crash has made matters worse

The unprecedented carnage in the oil markets is likely to derail the clean energy revolution even further. Sustained decline in the price of oil (and hence gasoline) will lower the competiveness of electric vehicles, encouraging buyers to stick to conventional internal combustion engine (ICE) vehicles. Unsurprisingly, global EV sales have been anticipated to plunge by more than 40 percent this year. The repercussions of this unfavourable trend are likely to be compounded in a post-COVID world. In an era of social-distancing individuals are likely to reject public transportation in favour of their personal gas-guzzling vehicles.

Fortunately, the price crash is not likely to have a direct impact on renewable power generation since little (less than 5% globally) oil is used in power generation. The installation of both wind and solar continued to increase through the last oil price downturn. However, the primary impact oil prices will have on the competitiveness of different electricity fuels is through its impact on natural gas, which is used to generate 22 percent of electricity globally.

In the long-term, cheap oil might tilt the balance between natural gas and renewables in favour of natural gas, driving oil majors to shift focus on natural gas production, sending prices down and making solar and wind less competitive as sources of electricity. That would be a strong blow on renewable power generation. As the shockwaves of the pandemic and the oil price collapse ripple through the global economy, the clean energy transition must be salvaged at all costs. The challenges are unprecedented, but they also offer opportunities that must be seized.

A good time to cut fossil fuel subsidies

According to the IEA, global subsidies on fossil fuels amounted to a whopping $400 billion in 2018. Many of the fossil fuel subsidies are inefficiently targeted, disproportionately benefiting wealthier segments of the population that use much more of the subsidised fuel; often encouraging consumers to waste energy and add to emissions. The fall in oil prices provides a good opportunity to eliminate these subsidies and relieve pressure off fiscally strained governments.

In India, petroleum subsidy for 2020-21 was budgeted at ₹ 40,915.21 crore ($5.3 billion) with bulk of this going to subsidise kerosene and LPG. With oil prices hitting an all-time low, a reduction in these subsidies can substantially boost government revenue which in turn can be deployed for injecting a fiscal stimulus for a post-COVID economic recovery. It can also be leveraged for financing renewable and e-mobility options, thereby ensuring that the clean energy transition is not hijacked by low oil prices.

Big oil should go greener

The combined impact of the COVID-19 and oil crises provides overwhelming evidence for Big Oil companies to rebalance their portfolios by increasing investment in renewables. As per the IEA, investments by oil and gas companies outside their core business areas are less than 1% of total capital spend. In the past, Big Oil companies have refrained from making large investments in renewables since such projects offered much lower returns as compared to oil and gas projects.

With oil prices plummeting, the returns on oil and gas projects and renewable are almost at par, thereby eliminating the profitability gap. Moreover, investing in diversified energy assets such as renewables could provide a hedge against oil price volatility. European oil majors such as BP and Shell have already made announcements to this end, indicating a fundamental shift over the coming decades to renewables and carbon abatement. While a more significant change in overall capital allocation would be required for oil majors to expand their green investment footprint, the decision to pivot to renewables bodes well for the clean energy transition.

Renewable energy push

The energy landscape today is completely different from the way it was during previous crises (such as the 2008 financial crisis). Solar PV module prices have fallen by around 80% since the end of 2009, while wind turbine prices have fallen by 30–40%. Moreover, the technology for both solar and wind is in a much better shape than in the past. This could be helped by current interest rate levels, which were already low and are declining further, making the financing of big renewable projects more affordable. This is therefore a good time for governments to push clean energy projects forward and tap into a virtuous cycle of falling costs, increasing deployment and accelerated technological progress in the renewable sector.

Stimulus should not be brown

Countries all over the world have started introducing stimulus packages to resuscitate their bruised economies. However, calls for earmarking funds for clean energy investment have largely been ignored. Despite a strong push by progressive climate advocates, the $2 trillion stimulus introduced in the US on March 27 did not incorporate ‘green’ elements. Fuelling the wave of disappointment even further was President Trump’s tweet last week where he announced that he would “never let the great U.S. Oil & Gas Industry down.” The tweet indicated the administration’s clear intentions to include some sort of bailout for the oil and gas industry, despite the fact that the overleveraged, debt-ridden sector has been long overdue for a shakeout.

Along similar lines, Canada has approved billions in loans and loan guarantees to the oil corporation constructing the Keystone XL Pipeline, which will transport some of the most climate-polluting oil on the planet. Even China, the largest carbon emitter, has approved a US$7 trillion stimulus package that included significant financing for new coal power plants.

At the same time, there are certain governments that are exercising prudence by embedding green policies in their recovery plans. To fend off resurgence in car traffic and pollution after reopening the economy, Milan has announced an ambitious plan to reallocate 35 kms of street space from cars to cycling and walking. Similar announcements have also been made in Berlin and more recently, New Zealand. Meanwhile, political leaders in Northern England have indicated that they might consider introducing a national programme to retrofit homes across the country with renewable energy technology to reboot the economy and create jobs.

The need of the hour is for governments all over the world to facilitate a recovery along all parts of the economy by creating new jobs and addressing critical infrastructure needs such as roads, bridges and transportation. However, it is equally important to ensure that the provisions for assisting an economic recovery are not carbon intensive. For the low-carbon transition to be salvaged, stimulus packages must not be allowed to become conduits for funding fossil fuels.

The pandemic and its aftershocks have provided us with an opportunity to rebuild our economies; we must make sure that we choose the recovery path that leads us to a more sustainable and resilient future.

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Tanushree Chandra

Tanushree Chandra

Tanushree Chandra was a Junior Fellow with ORFs Economy and Growth Programme. She works at the intersection of economic research project management and policy implementation. ...

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