Building Back Better: Covid-19 and Climate Change

 

Christopher Segar spent 32 years in the Diplomatic Service with postings mainly in the Arab world but also in China, Angola and at the OECD. From 2008 to 2015 he was Middle East analyst at the International Energy Agency in Paris.

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As we go in to 2021, one topic likely to rival Brexit and the pandemic for attention both from governments and business will be Climate Change. This is, of course, a global issue par excellence. But it will be particularly relevant in the UK and Europe because we have reached the fifth anniversary of the Paris Climate Accords of 2015, which govern global strategy on Climate Change; and in November the UK will be hosting the 26th ‘Conference of the Parties’ (COP26, held over from 2020) whose task will be to review progress to date.

 

The British government has been busy setting out its own stall: in November came a Ten Point road-map showing how the UK could reach ‘net zero’ emissions of Green House Gases by 2050. This has now been enshrined in the new energy White Paper; and on 12 December Boris Johnson held a Virtual Summit with key world leaders as a curtain raiser for COP26. More than 25 countries are aiming for net zero by 2050 as part of their ‘Nationally Determined Contributions’ (NDCs) under the Paris Accords. The British government has said that it will ban the sale of new petrol and diesel cars from 2030. It also aims to replace gas central heating in homes and public buildings with more climate sensitive options such as heat pumps: installing 800,000 a year by 2028.

 

The topic is not without a certain urgency. Latest estimates from WMO are that 2020 will prove to be one of the three hottest years on record – and ominously at a time when the cyclical ‘La Nina’ effect in the Pacific would normally hold global temperatures down. At the same time, the UK’s record on renewable energy has been burnished: on 18 December wind power generation totalled a staggering 17Gw – 40% of total electricity demand. This has been achieved over the past twenty years with the usual combination of government targets and financial incentives. The news suggests that the target of 40Gw by 2030 set out in the government’s road-map may indeed be achievable.

 

Meanwhile in Washington President-elect Biden has said he intends to get the US to re-join the Paris Accords. He has appointed John Kerry as his envoy on Climate Change and chosen committed environmentalists for the Departments of Energy and Transport. Dr Mark Carney (ex-Governor of the Bank of England) is to be the UN’s ambassador for Climate Change.

 

Business has already been sensitised to this issue. Soon after the conclusion of the Paris Accords, it was Mark Carney at the Bank who warned that if public policy bore down on the consumption of coal, oil and gas, listed companies risked sitting on ‘stranded assets’ which they would not be able to use. Stock markets would need to be informed. Tellingly, in December a group of Japanese investors has just written down to nothing the value of a coal-fired power station they acquired in Western Australia seven years ago for $900m.

 

Corporations are also sensitive to public opinion. In February 2020, BP committed to achieving net zero CO2 emissions by 2050. The tech giants are also conscious of the huge carbon footprint of their data processing servers, many of which in the US use coal-fired electricity because it is cheaper. Google estimates it emitted 4.9m tons of CO2 in 2018, but says it wants to reach net zero by 2030. Amazon has just launched a series of TV ads highlighting its aim to use 100% renewable energy by 2025, to buy 100,000 electric vehicles, and to open a $2bn Climate Change fund.

 

Over the last year, the impact of government measures to cope with Coronavirus has had a significant knock-on effect on world energy markets. The IEA has estimated that energy demand will have fallen by 5%. Prices have fallen dramatically, oil and gas corporations have written down their assets by around 50%, and between 3 and 6 million jobs may be lost in the energy sector. In June, together with the IMF, the IEA drew up a ‘Sustainable Recovery Plan’ aiming to rebuild the economy in line with Climate Change targets. This would require investment of around $1trn per year for the next three years, focussing on energy efficiency, low-carbon power systems and modifications to power grids. Many of these changes will be labour-intensive; and the IEA estimates the plan might save or create 9 million jobs. As the British government has pointed out, such plans will also involve significant ‘re-skilling’ of the labour force.

 

This approach is gaining more political traction precisely because it makes climate sensitive policies look like a solution and not another problem: witness the UK government’s White Paper, or the ‘Green New Deal’ most recently promoted by the Democrat candidate in the US, Rep. Alexandria Ocasio-Cortez of New York. The idea has already, for example, been picked up by the Italian energy utility ENEL which now plans to spend €160bn by 2030 on a range of low-carbon energy systems.

 

It may be possible for the whole world to achieve net zero by 2050. But the IEA makes it clear how ambitious this accelerated programme will be: emissions from the power sector and industry will have to fall by 40% as early as 2030, by which time renewables (especially wind and solar) will need to be 60% of power generation, coal use must fall by 60% while nuclear power generation has to increase. Electric vehicles (EVs) will also have to be 50% of new car sales. And at COP26, China might need to agree to cap its CO2 emissions by 2025 and not 2030 as currently set out in their ‘Nationally Determined Contribution’ (NDC). This would probably mean early retirement of some coal-fired stations.

 

Some of the technologies involved require further development. For example, small modular nuclear plant, Carbon Capture and Storage (to make remaining coal plant carbon-neutral), and producing and distributing hydrogen for cars and domestic heating all need more attention. And there are environmental costs which must be managed: currently the cheapest way of producing hydrogen releases 11 tons of CO2 for every ton of hydrogen. Electrolysis is much more climate friendly, and with enough cheap wind energy such hydrogen production could be developed into an efficient way of ‘storing’ the surplus energy from wind farms at off-peak periods.

 

The batteries for electric vehicles can also have huge environmental costs: on current designs each car will need more than ten kilos each of lithium, nickel and cobalt, and much of this comes from unregulated mining in developing countries. According to the US energy economist Daniel Yergin, each EV entails the processing of 200 tons of material (overburden (soil), metal ores, steel, aluminium). These are processes which are themselves energy intensive.

 

Overall, these challenges will require strong government interventions in both regulation and financial incentives. The private sector – not only energy corporations but equity investors like BlackRock – is today far more disposed to take action. Governments too, having seen the need to deploy such huge fiscal resources to cope with the Coronavirus pandemic, should be more disposed to invest in the ‘energy transition’. The EU, for example, has not only a €100bn ‘transition mechanism’ to encourage the move away from coal, but will be targeting much of its €750 ‘Covid recovery package’ on the energy sector.

 

Lastly, the general public is today far more ‘climate sensitive’. Gallup recently polled 10,000 people in the UK: 2/3 favoured action on climate change. Worldwide, the public have accepted strong government interventions to deal with the threat of Covid-19. They may be more prepared than hitherto to support strong action to avert catastrophic climate change. In some countries they have also seen only too clearly the dangers of prevarication.

 

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 Christopher Segar

 

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