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What is the timeframe for the Global Energy Transition (GET)?

According to a report from global consultancy Wood Mackenzie, “Thinking global energy transitions: The what, if, how and when”,  the “sustainability tipping point – when the world shifts from the age of oil and gas to the age of renewables – will arrive by 2035, less than 18 years away.”

The report notes “the emergence of two drivers underpinning the pace of the global energy transition: renewables and the use of electric-based technologies in transportation. By 2035, the convergence of the two will usher in the age of renewables. ‘Sustainability friendly’ technologies – such as autonomous driving and the wider application of advanced grid-edge and machine learning applications – will effectively become the norm.”

You may think – so what, here is another report predicting a speedy energy transition. However, what is significant about this report is the source: Wood Mackenzie has for decades been known as perhaps the most prestigious oil industry consultancy in the world. You can say that when Wood Mackenzie speaks, the oil and gas industry listens.

And they have only fairly recently decided to start studying alternative energies – in effect, when they took over Greentech Media and Make two years ago. A month ago, in late September, they combined their “clean power research” into one unit called Wood Mackenzie Power & Renewables, which now employs 115 solar, energy storage, wind, power market and grid experts spread across 15 countries. The company says it has invested strongly in “integrating datasets, technology platforms and teams.”

The conclusions Wood Mackenzie now draws from its research must be quite alarming to its clients in the oil sector (and they undoubtedly include all major oil companies). Although it notes that lots of things could either speed up the energy transition (e.g. a breakthrough in battery technologies or more policy-led curbs on the internal combustion engine) or slow it down (e.g. as a result of affordability or reliability issues), nevertheless “the global energy transition (GET) is happening, and the implications for commodity markets are profound. We expect oil demand to peak by 2036, and for EVs to displace around 6 million b/d of oil demand by 2040. The decline will likely accelerate thereafter with the pace of change heightened post-singularity.”

According to the report, the “point of singularity” – when the GET is over and a new era in energy begins – will be reached when the renewables revolution and the EV revolution meet:

Although solar and wind currently account for only 7% of the global power market, “the breakthrough success of these technologies is better revealed by looking locally”, notes the report. “Solar and wind (shown as green circles in the chart) already provide 20% to 50% of generation in many complex regional power systems, some quite large. The state of South Australia, ERCOT (Texas, US), CAISO (California, US), the Iberian Peninsula power grid (Spain and Portugal), and the German grids are leaders. Other power

systems such as Elia (Belgium), SPP (across 13 central US states), TenneT (Netherlands), and WECC (Western US) are in the 15% to 20% range.”

“Electric vehicles, by contrast, have captured just 1% of the total car market by stock”, Wood Mackenzie observes. “Yet EVs are beginning to exhibit similar trends to those seen in renewables markets a few years back (blue circles in the chart). Norway, supported by monumental investment initiatives, is approaching double-digit market share for electric vehicles (stock), with upwards of 35% of annual new

car sales electric. Other markets will surely follow Norway’s lead. With rapid technology growth, supportive policy frameworks and large numbers of new models expected to enter the market within the next few years, electric vehicles are preparing for the mainstream.”

According to Wood Mackenzie, “These different early trajectories of renewables and EV adoption reflect the natural pace and order of how the GET will unfold. Renewables growth is a necessary precursor to any future transport electrification. Success in the former will inevitably boost the rationale for the latter. The convergence of the two trends is likely to accelerate the progress of the GET. It is at this point, in 2035, that we expect the singularity to occur…. By then, close to 20% of global power needs will be met by solar or wind, enough to displace the equivalent of roughly 100 bcfd of gas demand [this is about 27% of current global gas demand, KB]. Similarly, upwards of 20% of all miles travelled globally by cars, trucks, buses and bikes will use electric motors rather than gasoline or diesel.”

What will happen beyond this point? “After the singularity, adoption rates for renewable generation and electrified transport increase rapidly as they become the default choice across many energy systems around the world. So much so that half of all new power plants constructed globally are either solar or wind, or a hybrid combination with storage. Plus, half of all additional miles travelled by road will use an electric vehicle. The convergence of other nascent technologies embedded within grid-edge applications – autonomous and shared driving, for instance – facilitates this rapid uptick.”

The chart below shows “a visual schematic of renewables and electric vehicles as a percentage of the annual ‘new’ market for power and transport sectors by 2040. Compared with the previous chart, this shows the rate of growth of these technologies rather than total market share. This is how we anticipate the world will look like five years from singularity (based on Wood Mackenzie’s interim integrated H1 2018 long-term outlook). Each bubble represents a country, and the bubble size, the size of the market.”

Needless to say, “The GET is influencing all aspects of the energy industry and related sectors: state and national policy, the corporate value chain and capital markets. The implications for commodity markets are profound. Peak oil demand is acknowledged as a potential reality, even if it is a decade or two away. Oil demand could be 5 to 6 million b/d lower under our base case forecasts by 2040, compared with a scenario where EVs and autonomous driving make no impact at all. Once we reach the point of singularity, demand could fall away at an accelerating rate. Gas, too, will be affected.”

The report warns that “Energy market disruption is a probability, likely inevitable. There will be winners – and no doubt high-profile losers. There will be geopolitical upsets, too.”

Wood Mackenzie does add that, although the GET is unstoppable, “it can only go so fast. Too fast and it may be counter-productive. Power outages, political turmoil, freak accidents, regulatory lags and other unintended consequences are likely.”

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This last warning from Wood Mackenzie is one that policymakers and climate NGO’s should take to hear. Power outages, political turmoil, freak accidents, regulatory lags and other unintended consequences are likely.

That means: backlash is likely, which could derail the entire GET. This is after all not a simple policy measure. It is a fundamental transformation of the economy.

What is important to realize the GET, is the story that is told about it. The framing. Emma Pinchbeck, executive director of Renewable UK, wrote an interesting opinion article about this in the British newspaper the Telegraph, entitled: Sceptical about climate change? You might still like a green economy.

She writes: “There is a well-known cartoon of a climate summit with a speaker showing a list of benefits including ‘liveable cities, clean air, green jobs, preserved rainforests’ while someone in the audience asks: “What if it’s a big hoax and we create a better world for nothing?”

She adds: “I think about this cartoon a lot, as in the last 10 years we’ve managed to mangle an issue about what we value as a society and turned it into a false dichotomy: ‘Higher energy bills today, for more polar bears tomorrow.’ This framing of how we avoid widespread destruction to habitats and our economy by limiting warming to 1.5C is one that politicians have been maddeningly slow to move on from. And it is a framing that misses out on the economic opportunities and those things that cannot be valued in a spreadsheet.”

In my own country, the Netherlands, I see this happening too, with opposition politicians arguing that climate policy will mean spending hundreds of millions on heat pumps and other expensive alternatives to natural gas and oil with only very small effects on total greenhouse gas emissions.

The fact that Dutch emissions will only have a very small effect on total emissions is true of course, but misleading, since we can hardly expect the rest of the world to move if we as rich countries don’t do so in the first place.

But the part about costs is misleading too. To be sure, politicians and NGO’s should be honest that there will be costs and risks, winners and losers. Climate policy is not a simple win-win story, as it’s sometimes made out to be.

But neither is it a simple story about costs. There will be huge benefits too, as the cartoon shows. Benefits which, I am convinced, can never be caught in statistics or economic analysis. They are as much about value judgements as anything.

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Who will make the big decisions in the end and how will they be made? Here I feel that some climate advocates are completely missing the mark. Often they will issue calls for some form of centralized decision-making, on the Chinese model, with the idea that a few political leaders should get together and decide how the economy must be structured.

Of course leadership is needed, including bold visions and decisions. But it’s a dangerous illusion to think that a transformation of the economy can be realized top-down.

First, if power is concentrated, it can be used in the wrong way too. Those Chinese leaders can just as well decide to call off their renewables revolution and plunge for coal again if they feel that is more in their interest.

Secondly, the world is just too complex for a few people to know what are the best options. Should we build 500 nuclear power stations or a thousand concentrated solar power plants or a hundred battery gigafactories? Such decisions are best left to “the market” (i.e. individual people and companies).

Personally, I believe the best thing to do is what the new Nobel prize winning economist William Nordhaus has been advocating: put a price on carbon.

How exactly? In an interview in the New York Times, Nordhaus discusses how this could best be done. It should be framed, he says, not as a cost, but as a “financial windfall for taxpayers”.

In other words, carbon should be taxed and the taxes spent so that all citizens benefit. He mentions the EU ETS as an example of how NOT to do it, and British Columbia (Canada) and South Korea as good models.

“We learned with the European Union that once you go beyond the simple, idealized version of carbon prices and into implementation, it’s a very different thing”, says Nordhaus. “One of the things we found out: One of the problems with cap and trade [a system in which governments place a cap on countries’ carbon-dioxide pollution and companies then pay for, and trade, credits that permit them to pollute] is that it is dependent on predicting what future emissions will be. But if those projections are wrong, the system fails.”

“With the E.U., their projected carbon emissions were high, but the actual carbon emissions were low, and the carbon price fell drastically, from $30 to $40 per ton down to single digits. So the price was so low it did not have an effect in lowering emissions. It was flawed design. If the models had predicted too few emissions, and the price had gone to $1,000 per ton. we would have had a different problem.

The carbon tax has different problems, but not this one. The price of carbon is independent of the amount of emissions.”

The best model Nordhaus has encountered so far is British Columbia. “You raise electricity prices by $100 a year, but then the government gives back a dividend that lowers internet prices by $100 year. In real terms, you’re raising the price of carbon goods but lowering the prices of non-carbon-intensive goods. That’s the model of how something like this might work. It would have the right economic effects but politically not be so toxic. The one in British Columbia is not only well designed but has been politically successful.”

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Note that even ExxonMobil is lobbying for a carbon tax nowadays, although that might not necessarily be a recommendation.

The US oil giant, known for its lobbying efforts against climate change policies, announced recently that it will spend $1 million over two years to lobby for a carbon tax. The company has long favored carbon taxes, but it’s the first time it will put real money behind the idea.

But website Vox reports that there is a catch: in exchange for a tax, Exxon apparently wants immunity from all climate lawsuits in the future.

With its announcement to lobby for a carbon tax, Exxon is backing a broader effort for carbon pricing from an extremely high-powered initiative called the Climate Leadership Council. This Council is backed by major companies such as ExxonMobil, Shell, BP, Total, GM, Unilever, and Pepsico, and has among its founding members such luminaries as Stephen Hawking, Steven Chu, Ben Bernanke, Janet Yellen and Klaus Schwab.

It has a plan consisting of four pillars:

I.    A GRADUALLY INCREASING CARBON FEE

The first pillar of a carbon dividends plan is a gradually rising fee on carbon dioxide emissions, to be implemented at the refinery or the first point where fossil fuels enter the economy, meaning the mine, well or port. Economists are nearly unanimous in their belief that a carbon fee is the most efficient and effective way to reduce carbon emissions. A sensible carbon fee should begin at $40 a ton and increase steadily over time, sending a powerful signal to businesses and consumers, while generating revenue to reward Americans for decreasing their carbon footprint.

II.    CARBON DIVIDENDS FOR ALL AMERICANS

All the proceeds from this carbon fee would be returned to the American people on an equal and monthly basis via dividend checks, direct deposits or contributions to their individual retirement accounts. In the example above of a $40/ton carbon fee, a family of four would receive nearly $2,000 in carbon dividend payments in the first year. This amount would grow over time as the carbon fee rate increases, creating a positive feedback loop: the more the climate is protected, the greater the individual dividend payments to all Americans. The Social Security Administration should administer this program, with eligibility for dividends based on a valid social security number.

III.    BORDER CARBON ADJUSTMENTS

Border adjustments for the carbon content of both imports and exports would protect American competitiveness and punish free-riding by other nations, encouraging them to adopt carbon pricing of their own. Exports to countries without comparable carbon pricing systems would receive rebates for carbon fees paid, while imports from such countries would face fees on the carbon content of their products. Proceeds from such fees would benefit the American people in the form of larger carbon dividends or could be used for transitional assistance for industries or regions hurt by the carbon fee. Other trade remedies could also be used to encourage our trading partners to adopt comparable carbon pricing.

IV.   REGULATORY SIMPLIFICATION

The final pillar is the elimination of regulations that are no longer necessary upon the enactment of a rising carbon fee whose longevity is secured by the popularity of dividends. Many, though not all, of the Obama-era carbon dioxide regulations could be safely phased out, including an outright repeal of the Clean Power Plan. Robust carbon fees would also make possible liability rationalization for emitters. To build and sustain a bipartisan consensus for a regulatory rollback of this magnitude, however, the initial carbon fee rate should be set to significantly exceed the emissions reductions of all Obama-era climate regulations, and the carbon fee should increase from year to year.

The idea is for the plan to be first implemented in the U.S. and then to apply it to other countries.

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Dare I say that I find this plan much more appealing than such initiatives as the Green Climate Fund or The Global Commission on Adaptation, both UN-backed schemes that seem to be mainly the stuff of high-profile climate conferences with a lot of talk and in the end very little action.

The website Climate Change News, not exactly a hotbed of climate skepticism, has been reporting how the Green Climate Fund, set up under the Paris Agreement, has been bogged down by bureaucratic bickering. The idea is that developed nations will put billions into this fund to help developing countries implement climate policies, but it doesn’t take a Ph.D to figure out that this money will mostly end up in the pockets of government bureaucracies, as Climate Change News shows.

As to the Global Commission on Adaptation, this is led by Ban Ki-Moon, Bill Gates and Kristalina Georgieva, CEO of the World Bank, and consists of 28 commissioners, including two national presidents as well as the mayor of Miami. Somehow I am convinced that a carbon tax will be much more useful than whatever is going to come out of this commission.

What about EU-led and subsidized efforts?

On 17 October, the European Commission announced that it had signed a Memorandum of Understanding with the Bill Gates-led initiative Breakthrough Energy to “establish a Breakthrough Energy Europe (BEE) – a joint investment fund to help innovative European companies develop and bring radically new clean energy technologies to the market.”

“With this initiative, the Commission takes action to continue leading in the fight against climate change and to deliver on the Paris Agreement – giving a strong signal to capital markets and investors that the global transition to a modern and clean economy is here to stay”, the Commission said in a press release.

According to the press release, Breakthrough Energy Europe “links public funding with long-term risk capital so that clean energy research and innovation can be brought to market faster and more efficiently. With a capitalisation of €100 million, the fund will focus on reducing greenhouse gas emissions and promoting energy efficiency in the areas of electricity, transport, agriculture, manufacturing, and buildings. It is a pilot project that can serve as a model for similar initiatives in other thematic areas.”

Breakthrough Energy Europe is expected to be operational in 2019. Half of the equity will come from Breakthrough Energy and the other half from InnovFin – risk-sharing financial instruments funded through Horizon 2020, the EU’s current research and innovation programme.

Forgive me my skepticism: I have been around too long. I am prepared to take a bet with anyone that very little useful will come out of this initiative. A real, biting carbon tax, by contrast, will work miracles.

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On a final note about what markets can do, guided by prices, compared to what policymakers can NOT do, consider this bit of news from the Hill: Greenhouse gas emissions dropped nearly 3 percent in Trump’s first year!

“Harmful greenhouses gases that largely contribute to climate change decreased during President Trump’s first year in office, according to new Environmental Protection Agency (EPA) report released Wednesday”, notes The Hill. “U.S. emissions dropped by 2.7 percent from 2016 to 2017, continuing a downward trend that’s been apparent since 2007, according to data collected through the agency’s Greenhouse Gas Reporting Program.”

Doesn’t this supremely ironic piece of news say it all?

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