21 April 2020

Can Investing in an Energy Transition Help the World Recover post-Covid-19?

“The Great Lockdown”, as the International Monetary Fund (IMF) calls it, records the COVID-19 pandemic as a historic case of enigmas and crossroads. On one hand, the global economy has plummeted, and policymakers are juggling between healthcare and developmental spending. On the other, global CO2 emissions have fallen by five per cent for the first time since the Second World War.

This represents a mixed opportunity for policymakers as they prioritise whether to bailout existing carbon intensive industries or push for more climate-friendly solutions in their economic stimulus packages. 

Every country today needs a fiscal stimulus to get back on its feet, with healthcare relief and household recovery being the highest priorities.

In the short term, the stimulus measures fiscal multipliers, sectoral development and job growth for interventions. Longer-term factors, however, should include climate risk, equitability in human capital, providing universal quality-infrastructure and furthering decarbonisation.

To address each goal, we need a non-linear approach; having a diversified energy-mix is a starting point.

The world after COVID-19 will exhibit greater electricity dependence.

The global electricity demand may have fallen by 15 per cent following industrial shutdowns, but the domestic and commercial use of electricity has pivoted.

This high volatility in usage triggers a concern for grid flexibility when commercial activities restart. It also emphasises that investments in energy infrastructure will drive the global economic recovery and its transition to cleaner technologies.

Depending on each country, this transition can absorb the carbon-intensive sector’s unemployment, primarily in retrofits.

We are witnessing this in real-time.

A curbed oil-gas demand and a fall in oil price has generated an “income effect”, which is projected to drive the incomes of oil producing countries down by 85 per cent in 2020. This has prompted many companies to diversify renewable energy portfolios.

Oil exporting countries with fixed exchange rates, such as Oman, are following suit.

Importantly, costs and timeliness are key to this transition.

Nationally Determined Contributions (NDCs), which are measures each country intends to deploy to meet the 2015 Paris Agreement, come to the rescue. By investing in existing scalable and quick-return projects, we can tackle multifaceted goals (generating jobs quickly, economic recovery, decarbonisation).

Building on stimuli used in the 2008 crisis, infrastructural developments need to accommodate electric vehicle (EV) charging and smart grids, and construction projects should have cost-saving efficiency retrofits. These developments would, in turn, generate mass-jobs at NDC determined skill levels.

In addition, “cash for clunkers” (offering EV rebates and utility schemes to upgrade to efficient appliances) can improve energy efficiency and could rescue the automobile and manufacturing sectors.

However, costs also include layoffs and capital erosion in the oil and gas industry.

We still need performance-based bailouts, but the purpose behind a balanced stimulus is to avoid further losses, expand grid flexibility for renewables, so that an electricity-dependent world meets reliable supply. For example, having a mix of micro-energy platforms (rooftop solar, biomass) that feed into the grid should still be backed up by gas/oil.

A fiscal stimulus is the need of the hour, but deploying it to avoid marginal short-term risks, and accentuating long-term goals will determine the tone for sustainability in the coming decade.  

This article is part of “Student Works”, a news series highlighting the best student papers from the Graduate Institute. 

Rhythm Banerjee is pursuing a Master in Development Studies, with a focus on environment and sustainability, and international trade-finance.

He is currently based out of Geneva, where he works with the UNDP on sustainable finance and will be heading to the University of St. Gallen to study alternative investments.

In addition to his work in Switzerland, as a BGIF Scholar, he continues to serve in India on issues of energy and agricultural policy.

Rhythm’s research interests focus on building sustainable financing systems for public and private institutions.