According to our last article, thinking about the transition between the current economy based on intensive use of fossil fuels and a future economy relying on renewable energy as a defined process with a single trajectory, a single timing and unique content, is a simplification that does not help in understanding the nature of this transition, its possibilities and hindrances.
Indeed, the transition is an undefined and open process with multiple paths, content and possible times.
In other words, there is no a single transition, but various transitions.
In this sense, analyzing nowadays the possible evolution of the energy sector in the world involves the analysis of these various transitions.
To identify these different possibilities of transition it is essential to map the different ways of noting the trade-off energy security versus climate change and the various forms of facing it.
Thus, we can consider generally the reduction in the intensity of the climate change process as the main objective and, thereafter, to evaluate the type of negative impact (cost) the reduction of CO2 emissions has on energy security, according to several hypotheses to achieve this reduction.
Hypothesis 1: The radical restriction
The first hypothesis is that the reduction of emissions to address the seriousness of climate change can only be achieved by reducing energy consumption.
The recognition of the seriousness of the climate change process supports this hypothesis of radical reduction of the margin of maneuver before the threat posed by global warming.
In this context, to control and mitigate the global warming it is important to reduce immediately and radically the fossil fuel consumption, where in the current economic and technological context, means sacrificing part of economic development and social welfare associated with such consumption.
In this case, mechanisms and policy instruments to support this radical reduction of fossil fuel consumption regards penalty by the high taxation, in its various forms, or even simple legal restriction of using these fuels.
Here, it is clear that the cost of reducing emissions is significant, whether considered or not the possibility of an energy issue different to economic development and welfare. That is, upon considering another type of economic development and other social welfare, less intense in energy consumption, the technological, economic and institutional cost of this reduction keeps high.
Key issues of hypothesis 1
By keeping the economic development and welfare standard, that is, a relationship with energy consumption, two key issues arise:
The first one: how much in terms of economic development and welfare society is willing to sacrifice on behalf of climate change?
The second one: how will these sacrifices be distributed within each society and between countries?
The first issue relates to the perception that each society has about the threat posed by climate change.
The higher this perception, the greater the willingness to sacrifice.
Clearly, this perception is not uniform in society or countries.
This implies immediately that the willingness to sacrifice is not uniform in society, or between countries.
The second issue is not simpler than the first one and relates to a thorny issue, which is the distribution of sacrifices.
Such thorny distribution involves a situation, in which the benefit is general indeed, and the cost is not; while the benefit is indiscriminate, the cost is not. This discussion is referred to evaluations of public good, but in a very significant dimension of complexity.
The challenge now is to build a convergence of environmental and energy policies that will enable a coordinated intervention to address a problem of global scope.
The regional and global institutions today are far away from the real possibility of building this convergence and coordination.
In this context, the distribution of high energy/environmental costs faces difficulties to be overcome only by dissemination of a very clear perception about the worsening situation.
In this case, only the fear of impending disaster could force the acceptance of the relevant sacrifices to stop the climate change process.
The association between climate change mitigation and reduction of energy consumption is the most radical hypothesis of coping with trade-off between energy security and climate change, because it embeds simply another hypothesis which is the inability to reduce such trade-off.
When we contemplate the possibility of reducing, the sacrifices become smaller and penalties are replaced by incentives.
Hypothesis 2: Reducing the trade-off
Two hypotheses can be addressed in this case.
Hypothesis 2.1: Energy efficiency
The first one associates the reduction of trade-off to the dissemination of more efficient technologies.
In this case, reducing the emission would occur from a reduction in the fossil fuel consumption which would not correspond to a reduction in energy service provided by these fuels. In other words, it would do the same with less, or, in energy terms, it would reduce the final energy consumption (energy available to final consumer – gasoline, diesel, gas, etc.) without corresponding reduction of useful energy (energy that meets effectively the consumer’s needs – heat, work, lighting, etc.).
Thus, the energy needs essential to economic development and welfare of society continue to be met by a smaller amount of energy, due to more efficient technologies.
Key issues of hypothesis 2.1
Two main issues arise in relation to increasing energy efficiency associated with the introduction and dissemination of more efficient technologies.
The first one concerns the extent of the increased efficiency needed to challenge global warming.
In fact, the question is whether the reduction in fossil fuel consumption made possible by energy efficiency would be sufficient for generating a significant impact on CO2 emissions and increasing global temperature.
The answer to this question depends, firstly, upon the reduction of emission considered necessary and, secondly, the pace and scope of the introduction process and dissemination of efficient technologies.
Depending on this size and pace and in terms of energy security, the role of energy efficiency in reducing costs of facing global warming may be more or less decisive or irrelevant.
The second issue concerning the effectiveness of energy efficiency in reducing the trade-off energy security and climate change is related to the costs of introducing efficient technologies.
In general, whereas the introduction of these technologies involves the replacement of equipment and less efficient energy devices by more efficient ones, and that the latter generally are more expensive – initially more expensive – the resource to energy efficiency to face climate change demands public policies incentives for its widespread dissemination.
Thus, the higher the desired reduction of emission and lower the capacity of new efficient technologies, the greater the need for incentives for the dissemination and greater public spending to reduce the sacrifices in terms of energy security to mitigate climate change.
Hypothesis 2.2: Renewable Energy
The other major hypothesis for the reduction of trade-off is the replacement of fossil fuels by renewable energy sources.
In this case, the sacrifices, in terms of economic development and welfare, associated with reduction of fossil fuels consumption would be reduced due to the replacement of these fuels by renewable energy, which would provide the same energy services of such fuels without their environmental obstacles.
Key issues of hypothesis 2.2
Upon analyzing this hypothesis, the issue is just the fossil fuel substitutability by renewable sources.
This substitutability is related to the attributes found in fossils that must be present on renewable ones, in order to reduce the cost of transition between them.
Among these attributes we have density, capacity of storage, availability and control to be mentioned.
This set of attributes allowed the exploitation of significant economies of scale, which ensured lower costs for fossil fuels, which were essential for their dissemination. Moreover, the possibility of having access to a significant amount of energy at the time and place where it was needed has given fossil fuels major energy liquidity for its dissemination.
If the replacement of fossil fuels does not involve changing the consumption pattern, the substitutability of these fuels will depend directly on how the attributes of the substitute sources are close to the attributes of the replaced sources in its ability to provide low cost and high autonomy.
Given the low density and capacity of storage for renewable energy, in addition to the temporary interval that is typical of these sources we have, initially, the low fossil substitutability in relation to them.
Thus, it is necessary to increase the density, capacity of storage and control (reducing temporary interval) of energy flow generated by renewable sources in order to be able to reduce the trade-off between energy security and climate change by using these sources.
In fact, the lower the fossil / renewable substitutability, the greater the negative impacts on energy availability, in terms of quantity and prices, and the greater the sacrifice, in terms of economic development and social welfare, for this replacement.
The current low fossil / renewable substitutability results, at first, an institutional solution based on incentives to renewable and / or penalties to fossils, in order to enable replacement in the short term and, afterwards, a technology solution, which increases the substitutability through innovation, to facilitate this replacement in the long term.
If solution in the short term indicates the increased spending of taxpayers (incentives) or consumers (penalties), the long-term solution (technological) requires institutional incentives, and therefore spending and incentives of the State, through the classical guideline mechanisms and technological effort.
Thus, the construction of the current substitutability (institutional) and future substitutability (technological) requires a strong presence of institutions, States, and political will.
Given the difficulties to reduce the trade-off in the short term – either through energy efficiency or renewables – in order to avoid the sacrifices of the transition from a carbon intensive economy to a low carbon economy, it is necessary to resort to an energy source acting as transition source.
In this case, the range of options is wide and varied, ranging from the use of coal – using the carbon capture and storage (CCS) technologies – to the nuclear energy through the massive use of natural gas.
The discussion here is about which one is the best option.
Initially, nuclear energy was the major candidate for this role. However, the Fukushima accident in Japan has questioned this solution. Although this weakness can be seen clearly in the case of European countries – Germany and Switzerland later – when we observe other countries like China and India, we conclude that this weakening can be relative.
Regarding the nuclear issue, natural gas has strengthened in the transition scenario, boosted by the shale-gas phenomenon, especially in the American case.
However, this is a pending solution, waiting for the U.S. regulation on the exploitation of unconventional natural gas. Depending on this regulation and the subsequent definition of a technological – organizational – institutional standard for this new gas industry, this can be a great bridge between the low and high carbon economies.
But the key issue is to recognize that there is a transition, no direct bridge from fossils to renewables will happen, this transition cost will be high.
In this context, three issues are crucial:
The first one concerns the definition of the costs of this transition and closely linked to the definition of reduction of CO2 emissions considered necessary. The greater the volume and the shorter the duration of this transition higher will be costs in terms of energy security.
The second one concerns the distribution of costs for society and countries and regions worldwide.
The third critical one is related to the fact that the practical possibilities of reduction of costs lie in the long term and refer to technological change and change energy consumption pattern.
This latter finding directs policies to reduce CO2 emissions in the short term to the institutional level and mechanisms for penalizing the use of fossil fuels and incentives to renewables.
In this case, the answers to the first and second issues become fundamental to define the levels of these penalties and incentives, and therefore expenditures made by consumer and States in this transition, and above all, consumers, countries and regions that will bear these costs / sacrifices.