After the beginning of the war, we published two articles, the first explaining why we expect wartime to be transition time, and the second describing the financial sector's role in such a transition. Did the price shocks of fossil fuels, caused by the Russian invasion of Ukaraine in 2022, play out to be the catalyst that accelerated the transition? The picture is mixed; there is backlash for sure, but also signs of the transition taking off.
Backlash of the system
At first sight, from a transition perspective, the picture does not seem too rosy. Having to switch from Russian oil and gas meant for many European countries soaring energy prices and tight energy supply. This caused the share of coal in the global energy mix to rise again, leading to higher carbon emissions. In addition, substitution from fossil to renewable energy was limited, with Russian fossil fuel being replaced by, for instance, American, Saudi Arabian or Norwegian oil and gas. Partly because of this, 2022 became a year of record greenhouse gas emissions, with a rise of 1% globally, while carbon emissions should decline by 7% to get on track with the Paris agreement. Also, it was a banner year for the oil and gas majors: record profits and plenty of money to (continue to) invest in fossil energy exploration. And to top this off, government subsidies on fossil energy consumption doubled.
Let's kickstart the global energy transition in three steps
However damaging to the energy transition, these reactions are very understandable: the usual first reaction when shocks hit a society is to preserve the status quo and not to forget to save lower incomes from energy poverty.
Let nature play its role
First transition signs
Is there no reason for optimism, then? We should not let the foggy reality of a transition blind us. Because, less visible, the global economy declined some 2% in energy intensity last year. In Europe, the decline was particularly steep at almost 10% (with natural gas use even falling 12%).
This short-term ‘success’ was a combination of policies directed at reducing energy demand and behaviour by energy consumers. Even though supported by an array of measures, differing per country - such as mandatory limits on air conditioning in office buildings and mandatory turning off lights at night in shops and offices), the higher prices generally led to a more conscious use of energy. There is, therefore, no relation between measures taken (voluntary, obligatory and per sector) and resulting energy use reductions1. Apart from the relatively mild Fall, behavioural effects induced by higher prices seem to be the best explanation for the decline in energy intensity.
Further proof of the crucial role of price incentives in the energy transition are the increased price of emission allowances in Europe (EU-ETS). In February 2023, they rose for the first time to above EUR 100. Since 2021, the price has been structurally higher than in the years before, driven by changes in the setup (fewer carbon allowances). New rules agreed in December 2022 and in the process of being ratified, which will effectively see emissions allowed under the scheme fall to zero by 2039, are the long-term structural bullish driver of this market.