The transition to green energy risks stalling. Despite government and corporate commitments, only 20% of total investment in 2015 was allocated to renewable energy. A major obstacle is the tightening of government finances around the world. Julia Fantini and Nader Virk It writes that the transition to green energy generation, transmission and distribution depends primarily on investment by oil and gas companies and financing from the financial services sector.
Geopolitical instability often impedes the flow of funds to green technologies, jeopardizing progress in renewable energy and forcing oil and gas companies to ramp up investments in fossil fuels to fill the gap. It's gone. Relying on fossil fuels may be a convenient solution in times of supply shocks, but it remains an interim measure that alleviates pressing challenges in energy security, affordability, and industrial competitiveness. This is an expedient attempt.
The Paris Agreement limited global temperature rise to a maximum of 1.5°C above pre-industrial levels. To comply, ratifying countries and the European Union will need to find ways to accelerate global energy investment, which should increase by 2-4% annually in line with global GDP growth. In numerical terms, energy investment should be between $2 trillion and $3.2 trillion by 2040. To achieve these goals and avoid the most severe impacts on climate change, we need to limit carbon dioxide emissions.
The global economy's dependence on fossil fuels to meet energy demands and growth expectations is likely to continue for the next 25 years. Ensuring energy security and stability globally, and especially for European economies, requires significantly increased investment in renewable energy and decarbonization technologies. However, despite pledges from governments and businesses, only 20% of total investment in 2015 was allocated to renewable and alternative solutions. To achieve a green transformation, this proportion needs to increase to 40-50% by 2040.
Governments have fiscal constraints. The continued fight against inflation, marked by rising interest rates, is placing further strain on sovereign balance sheets and fiscal constraints. The transition to green energy generation, transmission and distribution therefore depends primarily on business investment and green/transition financing from the financial services sector backed by an encouraging policy framework.
Despite its significant vulnerability to energy shocks, the European economy devotes only about 20 percent of the EU's total energy investment to renewable energy and low-carbon solutions. This is the world's largest non-fossil fuel contribution, but highlights the major gaps preventing the world from achieving a green energy transition.
With limited alternative solutions scalable to lead the energy transition, the “green war” between major players poses an urgent threat to global energy security. The US Inflation Control Act is seen as an attractive maneuver to attract clean energy technologies. Market and competition issues add complexity to the emerging green competition, with China's long-term subsidies and the European Union's coordination of state aid regulations.
Oil and gas companies must be proactive in funding green and transition finance initiatives, recognizing that transformative action is essential, alongside financial services and regulatory frameworks. Major oil and gas companies are increasing investments in low-carbon and renewable energy sources. However, this investment has been scrutinized and remains minimal compared to fossil fuel projects.
Corporate investment by 7,148 of the world's largest listed global companies would increase to $1.07 trillion in a scenario aligned with the United Nations' Sustainable Development Goals (SDGs), compared to a business-as-usual scenario, according to a report by BNP Paribas. That should reach $611 billion. Nearly a third of these SDG-aligned investments are expected to come from the global oil and gas sector, with investments expected to grow from just $4 billion in 2017 to $302 billion by 2020. It is expected.
There is an urgent need to transition away from non-renewable resources. Centering organizational strategies on non-renewable energy raises both the micro- and macro-level challenges of climate change risk. First, increased investment in oil and gas companies highlights the industry's important role in promoting green transition finance in the energy sector. Second, fractional investment perpetuates energy consumption from traditional sources, undermining the net zero and investment commitments made by the industry.
Despite important plans for the energy transition, implementation is inadequate. Despite exorbitant price hikes, Europe's four largest oil and gas companies allocated just 5% of their reported profits in 2022 to renewable energy and low-carbon solutions. In stark contrast to the SDG-aligned scenario, current investment in oil and gas projects significantly exceeds investment in renewable energy. This disconnect between expectations and reality highlights regulatory shortcomings in attracting private investment to renewable energy.
As a vital economic driver, the financial services sector presents unique challenges. In 2022 alone, the world's biggest banks lent a staggering $673 billion of his funds to fossil fuel projects. While the world's banks may be relatively safe from financial system-wide shocks, they continue to invest in fossil fuel projects, amplifying other micro- and macro-level risks related to climate change. ing. Furthermore, the financing structures and investments of global asset managers, particularly in developing countries, are inconsistent with public statements on climate change and are tainting ESG investments through greenwashing, further delaying the transition.
Government policies play a key role in driving the energy transition, particularly in the oil and gas and financial sectors. Lower prices associated with emerging renewable energy technologies highlight the need for financing and regulatory oversight of industry giants. However, the lack of a coordinated incentive plan through a comprehensive policy framework, coupled with banking regulations such as Basel III, inadvertently discourages long-term debt financing for renewable energy, making it difficult for global policymakers to This has become an issue.
In conclusion, the long-term solution remains the same. It is the provision of financial support for alternative energy aimed at reducing regional energy dependence. In particular, anticipating potential conflicts risks stalling the green energy transition and requires concerted, proactive and collaborative efforts.
- This blog post represents the views of the authors and does not represent the position of LSE Business Review or the London School of Economics and Political Science.
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