Is the energy sector too big to fail?

November 21, 2013 | By Barbara Vergetis Lundin

The lack of a globally agreed upon framework for carbon pricing will impede investments in clean energy and low-carbon projects, according to the World Energy Council (WEC). The WEC has set forth an action plan for leaders to create an energy policy framework that addresses the triple challenge of environmental sustainability, energy equity (access and pricing), and energy security -- the energy trilemma.

Credit: Geg Agency/Wikimedia Commons

"The current lack of a global carbon pricing framework is having a chilling effect on investment for clean energy and low-carbon infrastructure. Setting long-term, stable policies is crucial to unlocking the needed investments, and business must be part of the solution. Policymakers and industry must work together to reduce uncertainty and manage risk more effectively," said Joan MacNaughton, executive chair of the WEC's World Energy Trilemma study. "Without a coherent and long-term carbon pricing framework, we could be creating the next 'too big to fail' sector with current investments being stranded and an energy system locked into a high-carbon future. This is not what we want but delay will prolong uncertainty, leading to systemic risk for the sustainability of the world's energy systems."

The WEC report finds that capital is extremely sensitive to perceived political and regulatory risks, and the growing pressures on public finances in many countries mean that public funds will not be available to augment the private financing of energy initiatives. In a separate study, the WEC estimates that the world will need to invest from $19 trillion to more than $25 trillion for electricity generation alone between now and 2050.

These recommendations are supported by Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change (UNFCCC).

"The UN Intergovernmental Panel on Climate Change clearly sounded the alarm that greenhouse gas emissions will cause tremendous and irreversible harm to the economies of the world if not quickly curbed. The good news is that the money, technology and policy tools to shift the current emissions trajectory and steer humanity out of the danger zone are available," Figueres said in a statement. "The Trilemma report demonstrates that a sustainable energy future is possible if all of these tools are deployed quickly and at scale. It also shows a strong willingness to act by the energy sector. I recommend that governments look closely at the report and act on its conclusions, which will strengthen the outcome of the 2015 global climate agreement and raise immediate ambition to curb greenhouse gases."

The single best mechanism to drive investment is a stable, predictable policy framework. In order to unlock energy investments, WEC is calling for concerted efforts from policymakers and industry to minimize policy and regulatory risk, as well as the adoption of market-based approaches to carbon pricing to drive investments. WEC has found that market-based instruments are most effective in driving changes in the energy system, and that a carbon price or tax on CO₂ emissions from energy can be an important tool to support the transition to low-carbon energy systems.

WEC is also calling for transparent, flexible and dynamic pricing frameworks because energy systems that do not cover their costs over the medium to long term are not sustainable. Long periods of low prices may also jeopardize future energy availability. Transparent, flexible and dynamic energy pricing frameworks are critical for attracting investment, increasing energy efficiency, changing energy consumption patterns, developing renewable energy, improving access to new supply options, and driving innovation, WEC concludes.

"Without immediate concerted action between the public and private sectors, the prospect of sustainable energy systems will hang in the balance as we approach the 2015 negotiations deadline," MacNaughton said. "For energy systems to be sustainable, countries must continue to work hard at identifying and implementing balanced and forward-looking policies. It is also necessary for the public and private sectors to proactively engage the finance community to drive the higher level of energy investments now required."

For more:
- see this report

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