Global Energy Realism

MADRID – Energy has become a focal point of global policymaking. As falling oil prices grab headlines worldwide, US President Barack Obama and Chinese President Xi Jinping have signed a major climate-change deal, and October’s European Council decisions could signal real progress toward a serious European Union energy policy. This momentum should be maintained in the coming year, culminating in December’s United Nations Climate Change Conference (COP21) in Paris.

But, in order to establish a global energy system that meets growing demand within the constraints of carbon neutrality, we must avoid the pitfalls that have plagued past responses. In particular, we must strike the proper balance between ideology and realism, the public and private sectors, and long- and short-term considerations. And, critically, we must follow through on our commitments.

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When it comes to ideology and realism, the European Union is perhaps the best example of an imbalanced approach, as Europeans’ tendency to lead with their hearts, rather than their heads, has undermined effective action. The knee-jerk rejection of nuclear power by some EU member countries has led to sharp increases in coal usage. Renewables have been pursued with a sort of missionary zeal, regardless of their effectiveness or feasibility. And the EU’s “20/20/20 targets” – a 20% reduction in greenhouse-gas emissions, a 20% share for renewables, and a 20% increase in energy efficiency, all by 2020 – was more of a mantra than a policy.

Bridging the gap between the public and private sectors is vital to finance the construction of an efficient global energy system. The International Energy Agency estimates that by 2040, the annual investment required in energy-supply infrastructure alone will total $2 trillion, up 20% from current levels. Over the next 26 years, some $51 trillion will be needed.

This is just part of the overall infrastructure investment shortfall, which stands at $1 trillion annually – far more than what governments can afford. That is why governments must build innovative partnerships with private-sector actors, while recognizing that energy, as a public good, must be subject to appropriate regulation and oversight.

There have been some notable moves in this direction, though it remains to be seen whether they will translate into real action. China has spearheaded the establishment of the Asian Infrastructure Investment Bank. More important, the World Bank, the G-20, and the EU recently launched initiatives aimed at directing the financing power of business toward infrastructure development.

The World Bank’s Global Infrastructure Facility is an open platform that brings together multilateral development banks, national governments, and private finance to shepherd infrastructure projects to completion and to fill in gaps that have hampered investment. Pivotal to sparking this investment is the mitigation of associated political risks, especially through an enhanced role for the Bank’s Multilateral Investment Guarantee Agency.

Similarly, at last month’s summit in Brisbane, the G-20 created a new Global Infrastructure Hub to facilitate information-sharing, thereby streamlining infrastructure projects. And, the EU’s Connecting Europe Facility has allocated €5.85 billion ($7.2 billion) from now until 2020 to help kick-start private investment in infrastructure projects linking member countries’ energy systems.

Of course, the need for private-sector involvement extends beyond investment. The private sector is also better situated to research and develop new production methods that limit demand for fossil fuels. To spur such action, the public sector should offer funds or guarantees, which, though risky, could offer huge benefits. US government funding of research into hydraulic fracturing – the technology now driving the surge in America’s oil and gas production – dates back to the 1970s.

This brings us to the need to balance short-term imperatives with long-term vision. Energy projects and policies today must account for the projected increase in emerging-market demand, while ensuring sufficient investment in future generating capacity.

For example, over the next 25 years, 60% of the EU’s generating capacity is due to retire – contributing to demand for $2.2 trillion of energy investment. Furthermore, with US tight-oil production expected to peak in the early 2020s, new sources must be developed, such as in Iraq. Given the long lead time for bringing new projects onstream, efforts to address the coming shortfall must begin today.

In all of these efforts, there is one common imperative: matching words with deeds. The world does not need more commitments and pledges; it needs action. Yet many countries continue to issue weak declarations that fail to produce genuine progress.

Once again, this problem is particularly pervasive in Europe. The maxims of today – the need for diverse suppliers, enhanced interconnection, greater efficiency, and a sensible energy mix – have been discussed for at least a decade.

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In fact, despite the seemingly unending stream of new energy initiatives and projects, Europe has made little progress; its energy situation may even be worse. Repackaging the same old strategies – here one need look no further than European Commission President Jean Claude Juncker’s much-hyped €300 billion investment package – simply will not work.

With attention focused on COP21 next December, the coming year will be an exceptional opportunity to build a sound global energy system. Europe, which has prided itself on its energy leadership, should set an example by developing – and then implementing – a realistic long-term strategy that involves the private sector.