The current energy crisis caused by Russia’s invasion of Ukraine has revealed the vulnerability of global supply chains and their interdependence, and especially Europe’s dependence on authoritarian states such as Russia for its energy provision. This crisis has had numerous consequences that have been extensively covered in the press: rise in the price of fossil-fuel energy, inflated costs of raw materials and increase in interest rates by central banks to maintain inflation under control; to name a few. Resulting energy shortages have prompted calls for sobriety all around Europe forcing companies and individuals to adapt their energy consumption habits. This begs the question as to whether the Energy Crisis constitutes an opportunity to “Go Green” for Real. This article will seek to investigate this question, highlighting the pros and cons as well the actions required for this to happen.
Why the Energy Crisis constitutes a driver for investments enabling the energy transition
The first reason why the energy crisis may fuel green investments is that Europe may want (and need) to shift its energy mix to cleaner (renewable) sources of energy to earn back control over its energy supply. In fact, the energy crisis has casted light on European dependency on other countries for its provision in fossil-fuel energy sources. For example, around 38% of EU gas comes from Russia. As a consequence, Europe’s energy supply is uncertain and extremely vulnerable especially in the event of an unforeseen energy shock. This is exacerbated by the fact that Europe’s trade partners for energy are countries under authoritarian regimes and/or facing major political instability (e.g. top exporters to EU include Russia, Kazakhstan or Nigeria). Transitioning its energy mix to cleaner sources of energy will allow Europe to have greater control over its energy supply and thus stronger political sovereignty and bargaining power in international relations.
There are also profit and market-driven reasons for the “Go Green” investment opportunity stemming from the Energy crisis. On the one hand, investments in the Green transition constitute opportunities for growth and extra-revenues. Indeed, $50 trillion of incremental global investment are required to attain the net zero objective by 2050, according to the World Economic Forum’s estimates. Morgan Stanley’s analysts contend that wholesale banks could earn additional revenues between $15 to $20 billion in the next three to five years thanks to the energy transition. On the other hand, the rise in the price of energy and its corresponding consequences could work as a “price signal” on the financial markets, incentivizing investors to shift their attention away from fossil fuels to invest instead in renewable energy.
Why the Energy crisis might not constitute an opportunity for growth in clean energy investments after all
Placing a higher emphasis on renewables in the European energy mix will not necessarily secure European independence in the energy arena. Indeed, the Chinese dominate by an overwhelming majority the market of solar panels and batteries for electric vehicles (EVs), controlling respectively around 70% and 60% of the global markets for these products. Therefore, if Europe wants to engage in an accelerated energy transition, it will have to give up on its “industrial rebirth” in those sectors. Europe will again relinquish part of its state sovereignty to authoritarian regimes as the access to key renewable energy sources will require trading with the latter.
Another point which is often overlooked is the fact that renewables sources of energy are not so “carbon-free” after all. This is evident in the example of bioenergy (i.e. renewable energy which derives from living organic materials such as biomass and agrofuels), which Europe has placed a strong bet on. Europe’s plan “Fit-for-55” which targets a 55% reduction of EU’s GHG emissions by 2030 incorporates various sub targets regarding bioenergy. However, a study by five American and European researchers warns that if these EU measures were to materialize, they would require the exploitation of 20% of European arable lands and to multiply by four the amount of wood that is imported in the EU for energy use. Half of the semi-natural grasslands would also have to be converted. Hence, extensive recourse to bioenergy to reach the objectives of the plan “Fit-for-55” would sacrifice the biodiversity of those grasslands as well as their carbon storage potential. More broadly, it seems that the urge to exit from fossil fuels to align with the 1,5°C or well-below 2°C scenarios of the Paris Agreement is becoming more and more questionable. State actors need to carefully factor in the potential negative externalities that could result from massive deployment of alternative, purportedly less, carbon-intensive sources of energy.
Next, financial services companies, especially banks, may not necessarily seize the opportunity for growth in clean energy investments. The first reason for this is that European banks face enhanced “sustainability trade-offs” due to the energy crisis. Oil and gas projects in the North Sea or Africa may be licensed more easily and receive stronger political support due to their ability to quickly reduce dependency on Russia. The second reason is that fossil fuels’ investments are extremely profitable for banks, which may not be willing to let go so easily of “brown business” that provides high returns on investment. Lastly, shifting European banks’ business mix to refocus it on greener sources of energy may mean losses in revenues, at least in the short run. A report by Oliver Wyman and Morgan Stanley estimates that the climate transition puts at risk roughly $90 annual revenues that wholesale banks generate from oil and gas and other legacy businesses (including transport, cement and real estate development as well as mining).
What are the necessary conditions for this opportunity to translate into tangible action
The first (and absolutely necessary) condition for a sustainable shift towards cleaner energy sources to occur is for coordinated and synchronized efforts at the global level. Real transition towards clean energy will not happen so long as country policy measures are inconsistent and work against one another. The US Inflation Reduction Act provides for public subsidies worth $400 bn for the fight against global warming. However, the subsidies under the Act only favor American companies at the expense of European ones (granting purchase bonuses only for EVs that have been produced in the US). Therefore, the law will be harmful to European industries as it makes it less attractive for companies to invest in Europe, leading French president Macron to warn that the Act might end up “fragmenting the west”. All in all, states need to avoid protectionist measures that serve their own self-interests and instead coordinate to decide on a framework of action at global scale.
Furthermore, investment in clean energy will only have prolonged impact if all stakeholders are involved in the process. Assigning responsibility to other actors does not trigger action (e.g. saying that it is up to end consumers to react as they are the ones setting the demand is inconclusive). All stakeholders (governments, politicians, large corporations, lobbies, citizens etc) need to engage in the process, otherwise the “triangle of inaction” will remain intact. Stakeholders need to mobilize themselves in a way which incites action from the others. For example, Denmark covers close to 80% of its electricity needs with renewable energy. This large share of renewable energy within the country’s energy mix is facilitated by the fact that solar and wind infrastructure are mostly owned by individuals and local communities. This contrasts with France, where people experience large timing delays to obtain an authorization to install solar panels. As such, greater efficiency of administrative processes could enable better energy consumption by citizens.
Finally, there must be a balance between supply and demand for investment in clean energy to thrive in the long run. Demand for green investment is huge at present but is unmatched by a corresponding supply. Indeed, financial markets lack green projects to fund. This may be because some green financial instruments such as green bonds offer funding only under stringent conditions and finding suitable projects to qualify may be challenging. However, greater scrutiny over banks’ green investments could help ensure that investors’ money is properly allocated and stimulate the growth of green projects (both in number and size) on financial markets.
As this article sought to demonstrate, the Energy Crisis constitutes an opportunity to “Go Green” for Real, but only a potential one. Indeed, it is important to consider the factors that might turn it into a lost opportunity such as those mentioned in the second part of the article. These counter forces include (i) European dependence on other countries despite stronger emphasis on renewables within the energy mix, (ii) negative externalities that might result from massive exploitation of “cleaner” sources of energy and (iii) loss of revenues that banks might experience if they abide to their climate commitments. For this opportunity to translate into sustained growth of clean energy investments, various necessary conditions must be met; (i) coordinated, synchronized and global effort with consistent policy measures adopted by countries, (ii) the mobilization of all relevant stakeholders and (iii) balance between demand and supply with enough green projects being funded to meet investor demand in financial markets.
Author Charlotte Mimran