Mohamed T. El-Ashry, a senior fellow with the UN Foundation and former CEO and chairman of the Global Environment Facility, provides this post from the New Security Beat website. It is adapted from a speech he gave recently.
The Renewable Energy Era Has Already Started
The world has entered a new energy era. Last year, for the first time in four decades, the global economy grew without an increase in CO2 emissions, according to the Renewable Energy Policy Network for the 21st Century.
A decade ago, the future of renewable energy looked very different. No one imagined that 70 percent of new power capacity added in Europe would be renewable, as happened in 2011. Nor that China would go from a minor player to global leader in just six years, or that developing countries would become home to more than one-third of global wind power capacity.
Renewable energy investment in developing countries in 2014 was up 36 percent from 2013 and came the closest ever to surpassing the investment total for developed countries ($131 vs. $139 billion). As usual, China accounted for the biggest share of developing country investment, or about 63 percent, but markets, manufacturing, and investment expanded across the developing world, clearly illustrating that renewables are no longer dependent upon a few rich countries.
The presumption that economic growth inevitably leads to a rapid increase in CO2 emissions is fading fast. What’s driving this transformation? Three key factors: energy security, climate change, and universal access.
The Energy Independence Dream Come True?
There has long been an argument that to safeguard national security, governments should reduce dependence on imported fuels by reducing demand through conservation and by developing domestic sources of energy. What once seemed like a dream is becoming a reality. With renewable energy, we can now glimpse the prospect of economies largely dependent on abundant, domestic, and affordable clean energy.
In developing countries, just like mobile phones leapfrogged land lines, photovoltaic electricity generation is leapfrogging fossil fuels. According to The Economist, in a number of sunny countries, the cost of electricity supplied to the grid from solar photovoltaic is now competitive with coal and natural gas.
The transition to a low-carbon economy is already occurring. Counties, states, cities, and companies are taking action, partly out of concern about climate change, but also in their own economic and security interest.
An Environmental Imperative
The fifth synthesis report of the Inter-Governmental Panel on Climate Change (IPCC) shows more clearly than ever how climate change is unfolding around the world, affecting every continent and ocean, posing immediate and growing risks, particularly to developing countries.
“The risks of climate change are so profound that they could stall or even reverse generations of progress against poverty and hunger if greenhouse gas emissions continue at a runaway pace,” write the authors. Climate change, once considered an issue for a distant future, has now moved firmly into the present.
The evidence presented by the IPCC is clear: Sticking to business as usual will lead to temperature rises of three to five degrees Celsius above pre-industrial levels, leading to catastrophic effects on water resources and agricultural productivity, and accelerating ocean acidity and sea-level rise. The poorest people in the world, who have had virtually no responsibility in causing climate change, will be the biggest victims.
Last year, the Asian Development Bank issued a comprehensive report on the economic costs of climate change. The report predicts that the impacts of climate change are likely to result in huge economic, social, and environmental damage in six South Asian countries with 1.46 billion people, a third of them living in poverty. Reductions in GDP across Bangladesh, Bhutan, India, the Maldives, Nepal, and Sri Lanka may be so deep they will have ripple effects around the world.
Keeping global temperature increases below the “safe” threshold of two degrees Celsius, according to the IPCC, will require new patterns of investment and transformation into a low-carbon economy, including tripling the share of global energy generated by low-carbon energy sources. Electricity generation will need to go from the current 30 percent use of low-carbon sources to 80 percent by 2050. With today’s main low-carbon sources – nuclear and hydro – unlikely to grow much, fulfilling this version will require vastly more wind and solar.
Clearly, based on what national pledges have been received already, an agreement at the next UN climate conference in Paris will not solve the problem completely or put us on track for the two degrees Celsius target. But it will be a key step for collective action and will provide impetus for long-term investment in clean energy.
Restructuring the Energy Market to Reduce Inequality
Sustainable Development Goal 7 calls for ensuring access to affordable, reliable, sustainable, and modern energy for all. This is in recognition that energy, especially clean energy, is key to achieving progress in many other development goals, from health and education to economic growth and climate change mitigation. Renewable energy is in fact the cheapest alternative for providing such access.
The global transition to a low-carbon economy, which I believe is underway, is not without its challenges, however. In particular, fossil fuels are reaping $550 billion a year in subsidies and are holding back bigger investment in clean energy, according to the International Energy Agency. Oil, coal, and natural gas are receiving more than four times the $120 billion provided in incentives for renewables.
Apart from environmental concerns, phasing out fossil fuel subsidies would also reduce inequality. The International Monetary Fund reports that only seven percent of fuel subsidies in poor countries go to the bottom 20 percent of households while 43 percent end up in the hands of the richest 20 percent.
Besides policy changes, which have driven most of the accomplishments in the renewable energy sector to date, large-scale private investment is crucial to the acceleration of renewable energy deployment.
The leading providers of capital for clean energy projects today are commercial banks, national and multilateral development banks, and electric utilities. These sources alone will not be sufficient to double clean energy investment by 2020, the pace needed to keep warming under two degrees. Utilities are under strain and commercial banks, because of Basel III regulations, are less able to provide long-term project financing. It is generally agreed that the largest potential sources of additional finance are institutional investors, such as pension funds, insurance companies, foundations, endowments, and sovereign wealth funds.
Private capital is more likely to flow towards clean energy investment when public policies and incentives make it commercially attractive by shifting the risk-return ratio and supporting the liquidity and transparency of the clean energy markets. Limited but valuable public funds must be used for leveraging, for building a strong enabling environment in emerging markets, and for risk mitigation.
There is also good news on the private finance front. The market for “green bonds” is booming and while Multilateral Development Banks were the first movers, private sector companies have recently started to tap the market in a big way. Bloomberg New Energy Finance estimates the clean energy bond market may be as large as $142 billion by 2020. The rapid growth of the market for green bonds is being helped by the Green Bonds Principles that were issued in New York last year by a number of leading commercial banks.
As global population grows from 7 billion to almost 9 billion by 2040, and as the number of middle class consumers increases by 3 billion over the next 20 years, demand for resources will rise exponentially. Critical to securing a sustainable, affordable, and climate-friendly future for this generation and many to come is the ability of individuals and institutions to affect change in the way we generate and use energy. It is only by significantly scaling-up renewable energy that we will enter a virtuous cycle of cost reductions followed by even more significant expansion.