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Session 3-4 Geopolitics and Income Impact Along A Decarbonized Pathway
Session 3-4 Geopolitics and Income Impact Along A Decarbonized Pathway
Session 3-4 Geopolitics and Income Impact Along A Decarbonized Pathway
Sambit Basu
Professor - Energy Economics & Policy
NTPC School of Business, Noida
Transition to a Decarbonized Pathway
Shift towards a Decarbonized Pathway
Since 195 countries pledged in the 2015 Paris climate agreement about restricting global temperatures to 2
degrees Celsius above preindustrial temperatures and to also efforts to cap the rise at closer to 1.5 degrees.
“Energy transition” has become the key for discussions about the future of energy
Enormous efforts are now being made to shift towards a decarbonized pathway, but it will take very long, it is
expensive and require much more technological innovation than one may anticipate
• The COVID pandemic adds to the dimension that government budgets promoting the transition will be constrained by
the heavy debt burden accumulated in coping with Covid-19
The target for getting to this path is net zero carbon by 2050, to which many countries have already pledged
and many more countries and companies are joining the bandwagon
Climate change and political pressures will move the world toward low-carbon energy sources, and this shift is
likely to affect the global balance of power
Transition will have an enormous global economic impact, but it will also bring about major changes in the
map of global power
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Geopolitics of Transition – Regional Insights
Geopolitics of Energy Transition
China is poised to be the big winner, Russia and Middle East oil exporters the big losers, and the U.S. is likely
to fall somewhere in between
• China has a robust oil industry (world’s fifth largest oil producer), but its output falls far short of what it needs and
imports about 75% of its oil requirement thereby becoming by far the world’s largest oil importer
• After the Korean War, Beijing has seen dependence on petroleum imports as a major strategic weakness, and more
recently that danger has been dubbed the “Malacca Dilemma”, referring to the narrow strait leading past Singapore and
into the South China Sea
• Beijing’s views the risk that, in the event of a confrontation with the U.S. over Taiwan or the South China Sea, the U.S.
Navy would shut the strait to tankers carrying China’s oil imports from the Mideast and Africa, immobilizing large
parts of China’s economy and military
• Reducing the country’s dependence on imported oil will be a big strategic win for China
China will gain still more from an energy transition, having carved out a leading global position in what it
calls “new energies”
• More new cars are sold every year in China than U.S., and if they run on gasoline, both oil imports and pollution will rise
• To counter this, thus, with aggressive government promotion, China now possesses half the world’s electric cars
• It is not just a matter of reducing oil imports and urban pollution, but Beijing realised that it was too late to catch up with
global auto companies selling cars with ICE and so used electric cars to leapfrog and gain global leadership
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Geopolitics of Energy Transition
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Geopolitics of Energy Transition
America is also currently advantaged in terms of its existing resource base, and the “shale revolution” of the
past decade, otherwise known as fracking
• Shale has turned the U.S. into the world’s largest oil producer & exporter, ahead of Saudi Arabia and Russia, and the
largest producer of natural gas, and will be one of the major exporters of LNG
• Shale revolution has stimulated over $200 billion of investment in new factories, reduced the trade deficit by several
hundred billion dollars, generated millions of jobs and contributed significantly to federal and state revenues
• This rapid rise in oil and gas production has given the U.S. a new dimension of influence and flexibility in the world; for
example US oil & gas exports are one of the foundations of the expanding relationship between the U.S. and India
• The shale revolution also provides a solid foundation for energy security as the energy transition unfolds over the next
several decades
Dynamics of all countries, particularly US, Russia and Middle East, would once again change if the campaign
‘ban fracking’ were to gain traction
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Transition – Global to regional Shift
Geopolitics of Transition to Green Technology – Global to Regional Shift
During the fossil fuel era, the geographical distribution of energy resources, concentrated in regions such as
the Persian Gulf, Caspian Basin and Gulf of Mexico profoundly shaped patterns of international trade
Green technologies such as wind, solar and hydropower are projected to constitute 49% of global energy
consumption by 2050, up from 26.2% in 2019, likely resulting in immense shifts in the global energy trade
Most profound shift to occur will be an increasingly regionalised pattern of energy distribution replacing the
global marketplace
• Green energy sources universally available may provide the states with the capacity to attain self sufficiency, as opposed
to the deep division between fossil fuel-rich nations such as Saudi Arabia and Russia, and less fortunate nations, which
depend on heavy imports
• Countries with abundant renewable energy potential become green electricity exporters via regional grids, such as Chile,
Morocco, and Australia – long distance energy transmission may be expensive and difficult in a divided world, but a
possibility
• Natural variation in weather conditions may foster increased energy interdependence between neighbours, i.e. countries
with significant hydropower potential such as Nepal may export surplus electricity generation to India during the
monsoon season, whilst India could rectify this trade imbalance via the export of solar power to Nepal during the dry
season
Conflicts over hydrocarbon reserves have served as a backdrop for some of geopolitical strife, from the 1973 oil
crisis to more recent events such as the ongoing U.S-Iran standoff in the Persian Gulf
As fossil fuels are gradually replaced, resource-driven conflicts are set to decline, but complexities are there
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Geopolitics of Energy Transition – Global to Regional Shift
Many fragile, resource-rich states may see violence recede as oil rents dry up, offering an opportunity to break
the cycle of conflict and create an environment amenable for investment in post-conflict reconstruction
Strategic choke-points at the epicentre of great power tensions such as the Persian Gulf and Malacca Straits
may see their geopolitical relevance diminish, easing regional tensions between the U.S and its regional allies
and strategic adversaries such as Iran and China
Europe’s shift towards a carbon neutral economy by 2050 would reduce Russia’s stranglehold over European
energy markets and reduce Moscow’s ability to threaten Central and Eastern European states by threatening to
cut oil and gas supplies to the continent
Energy transition may give rise to new strategic rivalries and geopolitical vulnerabilities as competition over
resources critical for a sustainable transition to a low-carbon economy intensify
Resources such as copper, graphite, lithium, cobalt and other rare earth metals which are critical for
renewable technologies are often concentrated in countries lacking effective governance
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Newly Emerging Rivalry
Geopolitics of Energy Transition – Newly Emerging Rivalry
Energy transition may give rise to new strategic rivalries and geopolitical vulnerabilities as competition over
resources critical for a sustainable transition to a low-carbon economy intensify
Resources such as copper, graphite, lithium, cobalt and other rare earth metals which are critical for
renewable technologies are often concentrated in countries lacking effective governance
These resource rich states like Bolivia, Colombia, Chile, Mongolia and the Democratic Republic of the Congo
may be condemned to the ‘resource curse’, ushering in widespread political instability as rival parties seek
access to resources, echoing the present-day petroleum-based conflicts
In a bid to attain low-carbon energy self-sufficiency, as governments commission ambitious hydroelectric
projects new conflicts are set to arise over the usage of key water sources
• Recent diplomatic spats between Egypt and Ethiopia over the Grand Ethiopian Dam in the Nile Basin
• Concerns around the 3 Gorges Dam in China
• These crises exacerbates when combined with exiting conflicts
Other conflicts may arise from shift from fossil fuels to renewables
• Renewable industries are projected to generate over 11 million new jobs worldwide by 2050, but declining demand for
coal and fossil fuel extraction may exacerbate economic dislocation in marginalised communities
Most disruptive consequences of energy transition stem from the projected collapse in oil and natural gas
revenues for fossil fuel-dependent regimes across the Middle East, Africa, Central Asia and Latin America
• Undermine peace dividend for the fragile, oil and gas-rich states in Africa (Angola, Nigeria and Gabon), the Middle East
(Libya, Iran and Iraq) and Central Asia (Turkmenistan and Kazakhstan) – result in widespread domestic violence
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Geopolitics of Energy Transition – Newly Emerging Rivalry
Raises the following common questions, despite a new new direction of geopolitics:
• Will it risk geopolitical competition over critical materials?
• Will ‘resource curse’ as observed for petroleum sector reappear in many countries in connection with renewables?
• Are there political risks of chokepoints and cut-offs in transboundary trade of electricity from renewable sources?
• Will growing importance of renewable energy exacerbate cyber-security risk?
Will it risk geopolitical competition over critical materials?
• Critical materials for renewables is focused on the 17 rare earth elements, and China dominates global production
• In 2010 when China imposed a rare earths embargo on Japan over a territorial dispute
• Most rare earth materials are light (not heavy) and not scarce, and that they are mostly found in dilute concentrations—
making it expensive to mine them
• China with low costs, lax environmental standards, and an eye for profit have cornered most of the market
• One of the most relevant rare earth elements for renewable energy is neodymium, followed by praseodymium and
dysprosium, all of which are used in permanent magnets for direct-drive wind turbines, but the vast majority of wind
turbines are constructed with geared-turbine technology that does not require permanent magnets
• Also, lithium and cobalt are essential for lithium ion battery technology, and copper is used for electric turbines and
electricity distribution, but none of these belong to the group of rare earth elements
• Energy transition is above all about technology and innovation. It is impossible to predict with certainty which
renewable energy technologies will be developed in the future
• The 2010 China–Japan rare-earth-elements spat triggered technological innovation over the years, weakening China's
grip on the market; also most critical materials for renewable energy technologies can be recycled
• It is still not certain that geopolitical race to take control over critical materials is inevitable, but a plausibility
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Geopolitics of Energy Transition – Newly Emerging Rivalry
Resource Curse
• Renewable energy for export could potentially require more long-term maintenance of infrastructure, generate more
local jobs, and produce more stable revenues than oil and gas have done
• As an energy form in electricity it may not see the resource curse, but materials that goes into manufacturing the
technology may see the resource curse reappearing
• Exporting renewable energy may have more in common with piped natural gas than with oil
Electricity disruption as a geopolitical weapon
• Increased use of renewable energy may see higher levels of electricity trade across borders; and is being proposed by
many countries including India
• Besides massive investment issues, another worry is that interstate electricity cut-offs could become an important
foreign policy tool
• Studies have found that although historically there are many cases of energy sanctions, but few are related to supply
disruptions; a specific case of disruption is Russia–Ukraine natural gas conflicts of 2006 and 2009, in which Russia halted
the flow of piped gas across its border
• In case of Renewable it will likely involve more symmetrical relationships between different prosumer (producer-
consumer) countries than does the unidirectional gas trade (and much past electricity trade)
• Most countries will produce domestically much of the renewable energy they consume, but trade with neighbouring
countries to balance their grids against the intermittency of solar and wind power – so mutually dependent
• Risks are of course high if such trade and unidirectional and right of way is through countries with strained relation
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Economic Impact
Impact of Transition on Economic Performance
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Measure of Economic Impact – 3 GDP Identities
Economic impact of the energy transition can be organized around the definition of gross domestic product,
which can be viewed in three different perspectives:
Production Generation: GDP = (Sum of Value Added) + (Taxes – Subsidies) on products
• (Value added is the difference between realized value of the final product and all costs of production, except remuneration of
factors of production)
Production Utilization: GDP = Consumption + Investment + (Exports – Imports)
• Gross capital formation (investment) in turn is composed of substitution of obsolete production tools to maintain existing
production capacity, plus addition of new tools to expand production capacity
Distribution of Income: GDP = Wages + Profits (and Interests) + (Taxes – Subsidies)
Energy transition has implications for
• Value added (including internalising costs from emission pricing or carbon tax)
• Allocation of income to investment than consumption
• Distribution of income between wages and profits
• taxes and subsidies
• foreign trade
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Pricing Emissions & Carbon Tax
Price can be imposed on carbon or emission by the acts of government introducing an emission trading
system or a carbon tax (or a combination of the two)
Imposition of a price for carbon emissions may translate into revenue for the government
Pricing emissions is widely accepted as the as cost of emitting CO2 and other greenhouse gases (GHGs) into
the atmosphere is not borne by the emitter – a market failure; No one pays for using the atmosphere
Rules for preventing corporations and individuals from emitting pollutants are mostly concerned with local
or, at most, national atmospheric conditions
In the absence of ways to internalize cost of emission carbon intensive technologies will be more attractive
than clean alternatives
• It is often mentioned that non-dispatchable cleaner alternatives are becoming cheaper and becoming absolutely
preferable to carbon intensive technologies, but these cleaner alternative entail systemic costs that cannot be ignored
• But of course if cleaner technologies become cheaper then policies to promote clean technologies would not be needed
Pricing emissions impact the cost associated with the production of goods and reduces the value added
which the economy generates
• As energy enters in the production of all goods, all productive activities will be faced with an increase in production costs
• Also the cost of utilization of a given good may increase
• Net Result will be reduction of value added as either producer accepts lower price (unlikely) or consumer has to pay
more and demand will decrease
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Pricing Emissions & Carbon Tax
GDP is the sum total of all value added generated in an economy, hence introducing a cost for carbon must
reduce it
Economic Impact will depend on the level of carbon intensive production & consumption and level of the
price/cost imposed
Theoretically imposition of a price on carbon emissions may be justified by adverse impacts of emissions on
future generations, the proceeds do not accrue to some fund set aside for future generations, but to the
government of today – Implications Net Impact on GDP is Neutral:
• Price on carbon translates into higher tax revenue for Government
• Compensates for higher costs imposed on enterprises and/or consumers
The challenge of imposing the price on carbon, amongst others, arises from the time lag damage to the
environment and the emergence of the economic cost of such damage
• Present generation suffer today from emissions released by past generations over longer than a century; and future
generations will suffer because of our emissions
• Economic damage that emitting a ton of CO2 today will only be visible in the future, and depends on how much CO2 has
been emitted in the past
• Thus it is complex to compute and impute the damage cost, and also a major reason for Governments reluctant to
introduce Carbon Pricing, particularly in developing countries
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Consumption, Investment & Export-Import
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Consumption, Investment & Export-Import
The shift from consumption to investment may under certain conditions justify the assertion that
decarbonization will enhance growth rather than the opposite
• But this would depend on whether the economy is out of equilibrium (of full employment of resources), in which case
investment opportunities may shift towards utilization of resources – but this may not always be the case as
uncertainties may prevail upon consumption and thereby utilization of resources not picking up
• Increasing investment, even when consumption does not pick up may lead to utilization or resources, a situation that
largely depend on strong institutions and policies as well as established returns on investment
Task of achieving zero or negative CO2 emissions requires a massive shift from consumption to investment
• But energy transition entails investment that is predominantly in substitution of existing productive capacity, and
might even decrease rather than expand existing capacity
Speed of the transition plays an important role in determining whether growth will be supported or
undermined
• Fast transition requires a larger shift from consumption to investment, and faster obsolescence of the existing capital
stock, and therefore less conducive to faster GDP Growth
Export-Import Situation – energy transition is depicted as potentially improving the trade position of a
country, and in this way contributing to its economic prosperity
Exports are useful as driver of economic growth when domestic aggregate demand is not sufficient to justify
the existing pace of investment
Decreased import demand for fossil fuels can benefit growth as it frees resources
• Not always decarbonization decreases imports: China or India to shift from coal to natural gas may increase imports
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Income Distribution
Decarbonization may affect the share of income accruing to labour (wages) and capital (profit)
Distribution of income between labour and capital is determined by the capital/output ratio
Energy transition entails increase in capital/output ratio, because of shift to capital-intensive technologies &
little net benefit of required additional investment (i.e. more capital needed for the same output)
• Increasing capital/output ratio automatically results in an increasing share of income accruing to capital
• It is also associated with a shift of income from labour to capital — i.e., a widening of inequality in income and wealth
Effect on income distribution is compounded by the effect of rising energy cost on different income groups
• Increasing cost of energy has a regressive impact on income distribution because energy expenditure is a larger share of
the budget of poorer households
• While richer households can contain the added cost by engaging in investment, but poorer citizens simply must bear the
brunt of the decarbonization agenda
Availability of investment finance is certainly critical for all emerging economies and chronically insufficient to
meet all investment needs
• It is therefore not surprising that the energy transition agenda has been accompanied by demands for financial transfers
from rich to poor countries
• Proposal for redistribution of collection from carbon tax in developed countries amongst the needy citizens
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Employment
Normally asserted that the energy transition will generate millions of new jobs globally
• It is expected that the investment surge linked to the transition will generate jobs
• Jobs will also be destroyed in some industries — for domestically produced coal sector or the sale of IC vehicles
Consumption demand has been progressively shifting from goods to services
• Some categories of services are indeed labour-intensive, and normally associated with the growing number of poor-
quality low-paying jobs
• Other services have witnessed a huge improvement in productivity thanks to the introduction of information technology,
and the threat to employment arising from artificial intelligence is a major preoccupation
Jobs created by investment expenditure are on balance likely to require higher skills and be better paid than
jobs in services
Transition must be expected to lead to an increase in the capital/output ratio, which also means a decrease
in the productivity of capital (output per unit of capital is the inverse of capital/output)
Employment will also grow for a given output is tantamount to saying that the productivity of labour (which
is the ratio of output to employment, or output per worker) will also decrease
Decrease in productivity would be adversely impacting GDP and economy
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References
Select Reference
Hafner, M. and Tagliapietra, S. (edited), The Geopolitics of the Global Energy Transition, Springer, 2020,
https://library.oapen.org/handle/20.500.12657/39553
Hubner, C.; Geopolitics of Energy Transition; Konrad Adenauer Stiftung, REGIONAL PROGRAMME ENERGY SECURITY AND CLIMATE CHANGE IN
LATIN AMERICA, 2015 https://www.kas.de/c/document_library/get_file?uuid=7a7248bb-35a4-9ce8-44b0-7fd9b0c69233&groupId=252038
International Renewable Energy Agency, A New World: The Geopolitics of the Energy Transformation, January 2019,
https://irena.org/publications/2019/Jan/A-New-World-The-Geopolitics-of-the-Energy-Transformation
World Economic Forum, The Speed of the Energy Transition: Gradual or Rapid Change, 2019,
http://www3.weforum.org/docs/WEF_the_speed_of_the_energy_transition.pdf
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Thank You!