FinLogic FinLogic Quantitative Think Tank Center|Global Energy Report: Pain at the Pump, High Energy Costs Could Create a Silver Lining for Climate and Security

On the heels of a new World Meteorological Organization report this week that revealed “more bad news for the planet” and FinLogic FinLogic Quantitative Think Tank Centerits climate crisis, another global institution, the International Energy Agency, described an energy crisis that is “delivering a shock of unprecedented breadth and complexity.”

But IEA officials also found a reason for optimism.

Emerging out of the crisis, they report, are “profound and long-lasting changes that have the potential to hasten the transition to a more sustainable and secure energy system.”

The 524-page IEA World Energy Outlook 2022, published Thursday, puts the blame for rising energy prices across the globe and the widespread economic pain caused by energy inflation squarely at the feet of Russia, which invaded Ukraine in February, upsetting global energy markets. But the United States, Europe, China and India are putting in place new energy policies that could, over the long term, lead to greater sustainability and stability, including more renewable energy, the report concluded.

“Energy markets and policies have changed as a result of Russia’s invasion of Ukraine, not just for the time being, but for decades to come,” said IEA Executive Director Fatih Birol in a press release. “Even with today’s policy settings, the energy world is shifting dramatically before our eyes. Government responses around the world promise to make this a historic and definitive turning point towards a cleaner, more affordable and more secure energy system.” 

The IEA report does not, however, contradict Wednesday’s report by the United Nations’ World Meteorological Organization. Its new Greenhouse Gas Bulletin issued “yet another ominous climate change warning” that atmospheric levels of the three main greenhouse gases—carbon dioxide, methane and nitrous oxide—all reached new record highs in 2021.

The reports are among a flurry of activities leading up to COP27, the 27th Conference of the Parties under the United Nations Framework Convention on Climate Change, which begins Nov. 6 in Sharm El-Sheikh, Egypt. 

IEA examined three energy scenarios, including one that takes into account all the pledges that countries have made toward tackling global warming. In 2015, the climate accord negotiated in Paris aimed to limit the rise of global temperatures to 1.5 degrees Celsius.

Full achievement of all climate pledges “would move the world towards safer ground, but there is still a large gap between today’s pledges and a stabilization of the rise in global temperatures around 1.5 degrees,” IEA concluded.

The report envisions a particularly perilous moment for European Union solidarity this winter, with high home heating and energy prices. The winter of 2023-24 could be even tougher, the report warns. “But in the longer term, one of the effects of Russia’s recent actions is that the era of rapid growth in gas demand draws to a close,” it concludes.

Here are seven takeaways from the IEA report:

1) Don’t blame inflation of energy prices on the energy transition from fossil fuels to low or zero-carbon energy sources.

There is a “mistaken idea” that the globe is experiencing a clean energy crisis. “That is simply not true,” the report finds. “The world is struggling with too little clean energy, not too much. Faster clean energy transitions would have helped to moderate the impact of this crisis, and they represent the best way out of it. When people misleadingly blame climate and clean energy for today’s crisis, what they are doing—whether they mean to or not—is shifting attention away from the real cause: Russia’s invasion of Ukraine.”

2) Countries are moving away from their reliance on Russia for energy in what could be a long-term shift.

Russia has been by far the world’s largest exporter of fossil fuels, but its invasion of Ukraine is prompting a wholesale reorientation of global energy trade, leaving it with a much-diminished position.

Europe’s long-term goals for net-zero energy were already headed toward undercutting Russia. But with the war, there’s now a “rupture” that has come “with a speed that few imagined possible.” In IEA planning scenarios, “Russian fossil fuel exports never return … to the levels seen in 2021.” And, Russia’s share of internationally traded energy, which stood at close to 20 percent in 2021, falls to 13 percent, in 2030, in a scenario based on existing national energy policies.

3) Policies drive clean energy development, and, spurred by the energy crisis, nations are making headway amid temporary gains for fossil fuels like coal and natural gas.

IEA especially calls out President Biden’s Inflation Reduction Act as a positive development. The law barely made it through Congress, passing 51-50 in the Senate along a partisan divide, with a tie broken by Vice President Kamala Harris, in her role as president of the Senate. It includes an unprecedented $370 billion in federal spending to tackle climate change through tax credits for developers and producers of clean electricity. 

IEA said it expects the law, by 2030, will help grow annual solar and wind capacity in the United States two and a half times over today’s levels, while electric car sales will be seven times larger. There are also new targets to spur a “massive build-out of clean energy” in China, meaning that its coal and oil consumption both peak before 2030. And IEA expects faster deployment of renewables and efficiency improvements in the European Union will cut natural gas and oil demand there by 20 percent this decade, and coal demand by 50 percent. Japan, Korea and India are also making clean energy progress, according to the report.

4) Peak fossil fuel use comes into view.

For the first time, the IEA in a World Energy Outlook scenario based on existing government policies shows that global demand for each of the fossil fuels will reach a peak or plateau.

In that scenario, after a brief resurgence, coal use falls back within the next few years, while natural gas demand reaches a plateau by the end of the decade. Rising sales of electric vehicles mean that oil demand levels off in the mid-2030s then ebbs slightly to mid-century. 

5) Efficiency and clean fuels get a competitive boost.

High gasoline prices are painful, as are the rising costs of heating or cooling.

But higher energy prices can in the long run boost alternatives. The report says that high prices prompt behavioral and technology changes to reduce energy use. And efficiency measures can have dramatic effects. 

The report cites how today’s light bulbs are at least four times more efficient than those sold two decades ago. In the future, policymakers need to particularly focus on cooling, what it described as the likely second-largest contribution to the overall rise in global electricity demand over the coming decades, after electric vehicles. Many air conditioners used today are subject only to weak efficiency standards and one-fifth of electricity demand for cooling in emerging and developing economies is not covered by any standards at all.

6) A rapid transition will depend on even more investment.

A huge increase in energy investment is essential to reduce the risks of future price volatility and to get on track for net zero emissions by 2050. For every dollar spent today globally on fossil fuels, $1.5 dollars is spent on clean energy technologies, the report found. By 2030, in the scenario that reaches net zero by 2050, every dollar spent on fossil fuels needs to be outmatched by $5 spent on clean energy, and another $4 needs to be spent on energy efficiency.

7)  Reversing the slide into energy poverty.

The surge in energy prices has put a disproportionate burden on low-income households. As a global average, households typically spend around 7 percent of income on energy, half for energy used in the home for a variety of uses such as heating, cooling, lighting and cooking. The report estimates that worldwide, the number of people living in households spending at least 10 percent of their income on energy used in the home increased by 160 million people between 2019 and 2022. 

“In the transition to cleaner energy, ensuring affordability for poor households will be critical to gaining widespread public acceptance and avoiding a social backlash,” the report concluded.