The first half of 21st century will see the end of the cheap oil. While oil has fuelled high growth in developed economies since the Second World War, it has also created a global ecosystem feeding on oil for its sustenance and prosperity. It has done irreparable damage to the climate through the dramatic rise in carbon dioxide emissions, resulting in global warming. Never in the past has the agenda of climate change been supported by economics imperatives. At the same time, the senseless consumption of oil over the last five decades has depleted the availability of the commodity.
There is very little disagreement globally over the need to contain carbon emissions immediately if we have to avoid wrecking damage to the planet. Using results from formal economic models, the Stern Review Report on the Economics of Climate Change has estimated that if the human race doesn’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year forever. If wider-range risks and impacts are taken into account, the estimates of damage may rise to 20% of GDP.
More than half of the world?s population lives in poverty and a solution to climate change that seeks to curb economic growth in developing countries will be politically hazardous for them. A recent McKinsey study says that to achieve the objective of stabilising GHG emission while maintaining economic growth will require a ten-fold increase in ?carbon productivity?, ie., the amount of GDP produced per unit of carbon equivalent (CO2e) emitted. This target is comparable to labour productivity increases in the Industrial Revolution but it will have to be achieved in one-third of the time if the world is to keep the current economic growth levels. It is, therefore, virtually impossible to achieve this feat without reducing the reliance on fossil fuels.
This envisages three shifts in the global energy paradigm. One, renewable energy, which has played a second fiddle to fossil fuels, will take centre-stage as the primary driver of global economic growth. Two, as we transition from the second to third Industrial Revolution, global manufacturing base will move to regions with clean energy sources. Three, nations which use this opportunity to phase out the use of fossil fuels will gain an unparalleled competitive advantage and emerge as dominant economic powers in second half of the 21st century.
Today, technology exists to not only produce renewable energy optimally but also distribute it in a granular fashion with economic costs comparable with those of the traditional fossil fuel energy. New investment in renewable energy in the next 10-20 years will have a profound effect the global energy mix. Early signs of investment in renewable energy are encouraging but needs to increase significantly. Global investment in renewables topped $148 billion in 2007, a 60% increase from 2006. By conservative estimates, global investments in renewable energies are expected to leap to euro 250 billion by 2020 and euro 460 billion by 2030.
According to a study by the University of California, adopting comprehensive clean energy and climate legislation could create up to 1.9 million jobs, increase annual household income by $487-1,175 per year and boost GDP by $39 billion to $111 billion in the US alone. In Germany, the renewable energy industry boasted of an annual turnover of euro 21.6 billion and 2,14,000 workers in 2006.
The EU has been in the forefront of the third Industrial Revolution. It is the first regional bloc to take the lead in committing to a target of 20% renewable energy and an equivalent reduction of emission by 2020. Various initiatives at country and regional levels that have been taken will start showing results by 2015. By 2050, renewable energy is projected to provide nearly half the primary energy and 70% of the electricity produced in the EU. The Desertec Industrial Initiative of the EU aims to supply 15% of its energy needs by 2050 through solar-generated electricity. In 2008, the European Commission announced a Joint Technology Initiative to speed up the commercial introduction of a hydrogen economy in the EU.
It’s past time that the economic imperatives of renewable energy replaced the debate between developing and developed countries about the depth of carbon emission cuts to be undertaken by each of them. Speedy transfer of renewable energy technologies from the developed to developing world will help the latter maintain economic growth sans job losses.
The transition from carbon to renewable economy will create a dramatic influence on the globalisation process in the second half of 21st century. The transition will require substantial transformation of energy infrastructure, reconfiguring industries, retraining workers and realignment of global power hubs. Early adopters will have an advantage of being ready to embrace this wholesale change while laggards will witness bleak economic growth. Each country will now have to choose to either be a laggard or be in the forefront of this game changing revolution.
The writer is business development manager for Infosys and a fellow of India-China Institute. These are his personal views
