Investors are starting to divest from fossil fuels, citing ethical and business reasons. A cap has been set on global greenhouse gas emissions, known as the carbon budget, with the aim of limiting global warming to 2 degC by the end of this century. But how can these changes impact companies and consumers? In this article, we look at the impact on the industry, the Global regulatory frameworks, and the distributional consequences. In addition, we explore some potential solutions to the problem.
Impacts of climate change
While governments and investors are driving the global energy transition, businesses and communities need to do their part too. While it is inevitable that the government must play a large role in implementing climate change policies, companies should not wait for government involvement to make a difference. Companies should commit to ethical and social responsibilities, including addressing climate-related issues and supporting communities in their efforts to meet their own energy needs. The following are a few ideas for businesses to take action to address climate change and support the energy transition.
When asked if a major energy transition would help combat climate change, more Americans say that it will not. More than half of Democrats and 44% of Republicans believe that it would be insufficient to prevent the worst effects of climate change. Meanwhile, one-in-five Republicans do not see the issue as a pressing issue. And, while Democrats think countries will not do enough to curb climate change, moderate and conservative Democrats are more optimistic.
As the world’s largest energy consumer, the United States must reduce its consumption of fossil fuels and reduce its GHG emissions across the entire economy. Different policies are needed for different sectors. One such proposal is to increase the export capacity of LNG. This would help reduce U.S. natural gas waste. And because fossil fuels are so widely used worldwide, different policies are necessary for each sector. My Vote Vital summarizes several possible climate change policies, such as carbon taxes, alternative fuels, and direct regulation of energy.
Accelerating the transition to clean, renewable energy sources will help the world avoid the worst climate change impacts. This transition will not happen overnight. However, it is already in progress, driven in part by governments worldwide. In Europe, for instance, the European Union has instructed its member countries to reduce greenhouse gas emissions by 40 percent below 1990 levels and use renewable sources for 32 percent of their energy needs by 2030. This represents a major step forward.
Global regulatory frameworks
The European Union (EU) has its own set of regulatory frameworks for climate change and energy transition, including specific standards, directives, and regulations. The goal of these frameworks is to ensure an integrated energy market for all European countries, ensuring the security of supply, sustainability of the sector, and a fair transition to a low-carbon and energy-efficient economy. The European Union has committed itself to a leading role in the fight against climate change at the global level. In 2007, the EU presented its first energy and climate goals, including a reduction in greenhouse gas emissions, increased use of renewable energy, and increased energy efficiency.
Better regulatory frameworks for energy and climate change will unlock the full potential of the private sector in accelerating the transition. The IEA predicts that by the late 2020s, domestic and international private capital will account for 75% of the global low-carbon energy sector. In 2016, private capital made up about 60% of the low-carbon power sector, but at much lower levels in other sectors. The role of private capital in funding future energy investment in the Southeast Asia region will be greater than it is today, and a more favorable regulatory environment for decarbonization projects will make these investments more sustainable.
As climate change and energy transition take center stage in decision-making across governments and private sectors, the question of balancing international environmental law obligations with investment treaty protections grows. Developing countries, which are not a party to the Paris Agreement, are in the best position to negotiate the most advantageous international agreements on these issues. As a result, they are better positioned to meet their climate change and energy transition targets.
The transition from fossil fuels to clean energy will not be an easy process and will require many trade-offs and challenges. With the Russian invasion of Ukraine, the energy security of many countries has become even more challenging. The need for decarbonization must be met urgently. Renewable energy efficiency can achieve 90% of the carbon reduction required. IRENA will provide Member countries with the necessary tools and support to help make this transition a success.
Impacts on industry
The impacts of climate change and energy transition on the industry are not just on the environment. Currently, the fossil fuel industry provides more than two-thirds of Canada’s primary energy needs. Despite this, the industry is not yet net zero carbon. As a result, the country’s dependence on fossil fuels is unlikely to go away, and some estimates suggest that the sector could create up to thirty million new jobs by 2030. But the transition must be equitable and just so that no one is left behind.
Changing climate patterns and extreme weather events will affect production. Crops may fail to meet demand due to severe drought, or because of crop shortages. Meanwhile, rising energy costs and regulatory restrictions will make it more expensive to move goods. Additionally, resource scarcity will force companies to use alternative materials and recycle more waste. In addition, climate change will cause demand for goods to shift. As global temperatures drop, there will be a decline in demand for winter goods. As a result, companies will have to invest significant money into upgrading their facilities.
The costs of transition will not be evenly spread across the country. Smaller communities with carbon-intensive industries will bear a greater burden. While the industry represents only a small proportion of the country’s labor force, it accounts for twenty to thirty percent of the labor force in some areas. Fortunately, a large proportion of the displaced workers will find new work in clean energy sectors. Hence, policymakers should be mindful of the potential economic impacts of climate change and energy transition on industries.
Oil companies may be the first to feel the effects of the energy transition. Some major oil companies are beginning to reposition themselves as integrated energy companies, incorporating renewable sources into their business models. Some are even striving to be carbon-neutral by 2050. This repositioning may be a key factor for retaining top talent. Governments are driving the transition, setting targets and regulations to reduce carbon dioxide emissions.
Distributional consequences
The Distributional consequences of climate change and energy transition include lower global oil prices and lower demand for fossil fuels in the advanced economies. Lower oil prices are likely to reduce the global consumption of fossil fuels, as well as increase demand for energy in countries with lower carbon taxes. This will result in a higher global GDP, but it will be more expensive for low-income households. In addition, these policies may cause industries to move to countries with lower taxes to avoid a decrease in their income.
In many cases, carbon pricing and other mitigation strategies will hurt low-income households and workers. Building fairness into mitigation strategies is essential to their political acceptability. In British Columbia, for example, carbon pricing includes compensatory transfers to households. This rebalances of economic power in the province is intended to help people who are affected by the increased prices. Yet, the negative impacts are not yet fully felt, and policymakers should ensure that these policies are balanced and that they do not create new social problems.
While the effects on aggregate employment are small, they do vary across sectors and skill levels. The employment effects of tighter climate change mitigation policies are larger for high-skilled workers in high-emission industries than for low-skilled workers. These effects depend on the extent of substitution between high-carbon activities and low-carbon ones. However, there is little evidence that climate mitigation policies will increase employment across the board.
While some sectors will benefit from the transition to renewable and cleaner sources of energy, low-carbon industries will be more labor-intensive and generate more jobs. Those affected by these changes will be most affected by the transition, and they may require government support to make the transition. But this doesn’t mean the transition will be seamless. In fact, the transition may be more difficult for the poorest groups. This is why a just transition is so important.
Carbon taxes and subsidies have negative effects on lower-income groups. By enforcing lower-carbon prices, carbon-intensive energy sources could be decarbonized by the mid-century. Carbon prices could be reduced and technological innovations can be developed. This would also allow governments to protect the poorest populations from adverse effects. The carbon revenues from carbon taxes would help finance targeted cash transfers to low-income families. There are many other ways to mitigate the negative impacts of climate change and energy transition.
