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Like a bat out of hell part five: Climate policy post-Covid

The fifth in a five-part series from the BRG energy and climate practice looks at how the pandemic will accelerate the energy transition, not derail it

Rumours of the death of energy transition and climate change policies at the hands of the pandemic have been greatly exaggerated, as will become increasingly clear over the coming years. In fact, the fundamentals point to exactly the opposite conclusion: the economic effects of the crisis will accelerate—not derail—the climate-change imperative for energy transition. These economic developments are likely under current climate-change policies, even without additional stimulus from intensified national and international policies.

However, lockdowns and social distancing policies will also create urgent fiscal and employment imperatives for energy transition and green energy policies such as carbon taxes and carbon border tariffs (CBT). Implementation of these policies would further intensify the speed and magnitude of the energy transition.

Implementation of an escalating carbon tax would stimulate market decisions as to which technologies are most economically efficient to decarbonise the power, industry and transport sectors. A corresponding CBT would prevent the potential for ‘carbon leakage’ via the import of carbon-intensive products the manufacture and pricing of which was not subject to comparable carbon taxes in the country of origin.

In the post-pandemic environment, climate change and energy transition policies may prove to be necessary and urgent

Such policies would also provide a powerful burst of economic stimulus at a critical time. After the global financial stabilisation and fiscal support measures of $9tn already committed to mitigate the economic effects of Covid-19, government budgets will be on the back heel by 2021. Long-term federal borrowing may be effectively free now, but when interest rates recover, the fiscal pain of the US deficit could become very real. Tax revenue and jobs will be in short supply, and both will need a shot of adrenaline.

Ending fossil subsidies

In the post-pandemic environment, climate change and energy transition policies may prove to be necessary and urgent, rather than expensive and luxurious. Governments will need to cut unneeded spending and find new revenue sources that stimulate growth and create jobs rather than impede growth or promote recession.

Subsidies for oil and gas production cost the US government $649bn in 2015, according to the International Monetary Fund (IMF). The Environmental and Energy Study Institute, a Washington-based NGO, estimates the US also provides direct subsidies to the fossil fuel industry to the value of $20bn/yr. With massive government deficits on the pandemic recovery horizon, subsidies such as these will be too expensive to continue. And in an environment of sustained low oil demand and prices, they will not be effective at stimulating investments and saving jobs.

Carbon taxes and CBTs, on the other hand, would boost government revenues, accelerate energy transition investments and create new jobs. In the post-pandemic fiscal and economic environment, such energy transition policies will be preferable to policies such as investment tax credits (ITCs) for renewable energy investments, which have the effect of  reducing potential government revenues from these projects.

The Energy Innovation and Carbon Dividend Act (EICDA) has gained the most traction in the US. This initiative would implement a fee on each ton of greenhouse gas (GHG), starting at $15/t and increasing by $10/t or $15/t each year, reaching up to $115/t in 2030. This has been projected to generate gross federal revenue of $72-75bn in 2020 and $403-422bn in 2030. This might prove an important, albeit partial, solution to the runaway US federal deficit. The EU is already considering a carbon tax and CBT mechanism to be implemented for selected sectors by 2021. Decarbonisation is embedded as a key pillar of the EU’s economic recovery package, which aligns Europe’s short-term economic needs with its long-term goal of reaching net-zero carbon emissions by 2050 as proposed in the European Green Deal Investment Plan and Just Transition Mechanism.

Accelerating the transition

The broad result of Covid-19 has been to enhance the extent to which economic and fiscal trends, energy market economics, energy capital allocation and social preferences increasingly favour energy transition goals. They also provide support for the replacement of expensive oil and gas subsidies, and perhaps renewable energy ITCs, with carbon taxes and CBTs.

$20bn/yr – US direct fossil fuel subsidies

By accelerating the energy transition and stimulating massive new investments in economically efficient clean energy solutions, carbon taxes and CBTs are likely to stimulate growth and create jobs. By recent estimates, global green investments should equal $320-480 bn of additional investment each year to respect the Paris Agreement. In the US, green investment has led to 450,000 jobs in solar and wind. When combined with the 380,000 jobs in the US natural gas sector (71pc of which relate to upstream production), it is apparent that clean energy employment already dwarfs the coal sector (c.161,000 jobs in 2018, 46pc of which relate to mining).

Research by the University of Massachusetts amid the 2008 recession revealed that, for $1mn in stimulus spending in the US, wind and solar technologies created approximately double the number of jobs compared with fossil fuel technologies, with solar creating 13.7 jobs versus only 6.9 jobs from coal. If the past is prologue, lessons from the 2008 crisis indicate that aligning policy with the economic current leads to swifter recovery than swimming against the current to rescue investments in outmoded and inefficient forms of generation.

National, state and provincial governments will probably need to pursue such energy transition policies for both climate and economic growth reasons. The US is moving forward with such policies at state level, such as in New York, where the state leadership has decided to double down on energy transition policies as a source of economic stimulus, job creation and social hope. Similarly, the European Commission is staying the course to embed sustainable policies at the heart of its long-term plan to fight the pandemic-induced recession, such as by investing in renewable energy and clean hydrogen as well as enhancing the energy efficiency of buildings and infrastructure with greener technology.

In the aftermath of the pandemic, the energy supply destruction and low prices will put a premium on the economic efficiency of energy production and generation. This will add a near-term economic efficiency requirement to redouble the longer-term climate change imperative for energy transition. Additionally, the economic crisis induced by Covid-19 will add urgent fiscal and labour policy priorities that will quadruple the imperatives for energy transition in the near-term.

Stimulating growth

Climate change, economic efficiency, and fiscal and labour policy form a powerful constellation of imperatives for the implementation of carbon tax and CBT policies. These policies will help repair government budget deficits and also are likely to have substantial political appeal because they will provide an inspiring recovery project that stimulates investment and creates jobs. This is in contrast to existing policies—such as solar and wind tax credits that will cost the US government an estimated $19.3bn in forgone revenue between 2019 and 2023, and renewable portfolio standards, which are piecemeal and negative or neutral in terms of government revenue.

For leading energy companies, investors and lenders, this pandemic is a time for neither unfounded optimism nor pessimism and denial. The pandemic response undoubtedly creates many short-term, tactical issues to assure health, safety and liquidity, but this moment also calls for clear strategic vision to see through the fog, focus on realistic outcomes and summon the fortitude needed to master a rapidly changing industry.

This moment requires exiting and/or restructuring investments and operations that are failing and not likely to recover as well as realigning investments, operations and organisations with the mostly likely and promising sources of growth and profit in the coming years and beyond.

This article is the fifth of a five-part series from the BRG energy & climate practice that analyses the near- and long-term effects of the Covid-19 pandemic on global energy markets, the energy transition, and the climate-change imperative.

Part one, which analyses the impact of Covid-19 on the global economy and the demand for and supply of energy, is available here.

Part two, which looks at the impact of Covid-19 on the global oil market and the trajectory of its recovery, is available here.

Part three, which evaluates the knock-on effects of the oil market crash on the natural gas and LNG sectors, is available here.

Part four, which assesses the effect of the pandemic on power market prices, the long-term implications for power generation and the outlook for renewables, is available here.

Chris Goncalves is chair and a managing director of the energy and climate practice at Berkeley Research Group, LLC (BRG). He has 30 years of experience in the LNG, natural gas, thermal generation and renewable energy industries, with expertise in energy markets, economics and finance. He provides both expert witness and business advisory services.

Robert Stoddard is a managing director in BRG’s energy and climate practice. He has over 30 years of experience as an energy economist in the US and European electric power industry, both as an expert witness and business advisor. He is also CEO of an ocean wave energy technology company and a member of the Energy Working Group of the State of Maine Climate Council.

Alayna Tria is an associate director in BRG’s energy and climate practice. She specialises in financial, market and economic analysis for business advisory and dispute resolution in the areas of oil, natural gas, LNG and renewables.

Tristan Van Kote is a senior associate in BRG’s energy and climate practice. He provides analysis in the areas of power and natural gas markets, climate change policy and project finance.

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