The economic imperative: Recession and social injustice imperil the energy transition

The pandemic revealed the human cost of chaotic decarbonisation achieved by tanking the economy. To keep its social licence, the energy transition must decouple GDP growth from CO2 emissions

When the economy booms, so do anthropogenic emissions of climate-warming gases. This year, the inverse happened.

The pandemic plunged the global economy into its most severe contraction since the Great Depression. Energy-related emissions, which were on a hockey-stick trajectory until 2019, were slammed into reverse and are on track to be 7% lower in 2020 than last year. The IMF last week forecast the global economy will shrink by 4.4% this year.

Energy-related CO2 emissions were 33 gigatonnes in 2019, so a 7% reduction would equate to carbon savings of 2.31 gigatonnes (where a gigatonne is a billion tonnes). Global GDP was worth USD 135.7 trillion last year, as per the World Bank, so a 4.4% contraction equates to USD 5.6 trillion. Therefore, the implicit economic cost of that 7% carbon saving equates to USD 2,424 per tonne of CO2, according to my rough calculations.

That is a very expensive way to cut emissions: almost two orders of magnitude greater than the prevailing European carbon price. To achieve the same emissions savings, it might have been cheaper to carpet the entire North Atlantic with wind turbines, the Sahara with solar PV panels and link them all up with millions of kilometres of high voltage transmission cables dotted with thousands of batteries and electrolysers. Sure, it would have taken longer, but the point is that the cost of decarbonisation is much higher when it happens in an unplanned way.

If we don’t kick-start the economy quickly, then recession-induced CO2 savings could get even more expensive. The International Energy Agency said in its World Energy Outlook 2020, published last week, that a recession that drags on for years would see emissions come down at a cost of USD 6,000 per tonne.

While there have been some silver linings, it is probably safe to say that most people are sick of lockdowns, travel restrictions, social distancing and the utter human misery that all this has heaped upon society, aside from the incomprehensible tragedy of more than a million deaths related to Covid-19.

This could be read as meaning that society is not prepared to pay USD 2,424 for each tonne of energy-related CO2 emissions that is avoided or captured. In which case, the world certainly won’t settle for USD 6,000 per tonne either, regardless of the cause.

The pandemic has affected people in vastly different ways and responses to it were driven by public health rather than climate concerns. But in an abstract sense, Covid-19 has exposed the limits to our collective appetite for economic sacrifice. Recent history tells us that that reluctance will stand firm even if the alternative is to slowly sacrifice the climate—and all the ecosystems that depend upon it.

All of this speaks to the importance of designing and implementing a carefully controlled and socially equitable transition to a climate neutral energy sector. But the recession itself is jeopardising that mission.

The IEA’s figure of USD 6,000 per tonne of CO2 came out of its modelling for a ‘delayed recovery scenario’ (DRS), which reveals the risks posed to the energy transition, and to improving global access to energy, from a prolonged recession. The picture it paints is pretty grim.

In this scenario, more prolonged outbreaks of Covid-19 prompt continued periodic confinements and other restrictions, leading to a deeper near-term recession and stunted longer-term growth prospects. GDP is 10% lower in 2030 than in the IEA’s central reference case, known as Stated Policies (STEPS). The outlook states:

“This scenario [DRS] puts many aspects of global energy into slow motion, holding back energy demand and CO2 emissions compared with the STEPS but also slowing many of the structural changes in the energy sector that are essential for clean energy transitions. There is systematic underinvestment in new, cleaner energy technologies and over reliance on existing capital stock. Inequalities in the global economy and in the energy sector worsen, and recent progress towards universal access to energy is slowed or goes into reverse as the incomes of the poorest are hit and funding for access programmes is squeezed.”

Oil demand in DRS barely recovers to pre-pandemic levels by the end of the decade, then plateaus, keeping a firm lid on prices. This hurts the finances of oil exporting countries even more, undermining their economic diversification efforts. In the power sector, grid operators’ revenues fall 6% compared to STEPS, crippling their investments in grid upgrades required to increase the penetration of variable-output renewable sources.

Fossil fuels investment is 10% lower in 2030 in the DRS, but this is not compensated for by a reallocation of capital towards low-carbon technologies, which also experience a slowdown in investment activity. CO2 emissions fall faster than in other scenarios but still fall well short of what is needed to achieve climate objectives.

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Philosophical reset

The outlook also attempts for the first time to describe what it would take for the world to achieve ‘net zero’ GHG emissions by 2050, as some countries have pledged to do. Its conclusions amount to nothing short of a green industrial revolution.

Energy and industry-related CO2 emissions would have to stay in reverse and fall by 6.6 gigatonnes (22%) this decade to get on track for ‘net zero’ by mid-century.

Not only does this call for a radical rewiring of the energy system, global economy, trade, industry and investment; we also need to see a fundamental change in how people think, behave, work and relax. This will require an entirely new mindset towards our relationship with ecosystems and natural resources, and how we assign value to natural carbon sinks.

The energy sector can and must play a leading role in that mission, but the size of the challenge is greater than the scope of one industry’s ability to address it. The International Labour Organization (ILO) neatly captured the crux of the issue in a recent paper, entitled How Nature-based Solutions Can Power a Green Jobs Recovery:

“Too often, nature and the economy are placed in opposition – where there is believed to be a trade-off between human well-being and a healthy planet. But while this trade-off may seem real in the short term, it is also obvious that, over the long term, it is false; there will be no decent jobs on a dead planet. Instead of a trade-off, the interdependence of economic well-being and nature can present an enormous opportunity. A range of Nature-based Solutions exist that can help address the crises of nature and climate on the one hand whilst creating jobs and prosperity on the other.”

Every aspect of achieving net zero emissions will require societal buy-in. The elusive decoupling of GHGs and GDP needs to happen immediately. Otherwise, that 6.6 gigatonne reduction in CO2 emissions by 2030 might cost the global economy USD 16 trillion or even USD 39.6 trillion this decade, depending on which of the exorbitant carbon prices above applies. And these sums reflect only the cost in terms of economic purchasing power, which fails to capture the full impact on human wellbeing (such as mental health, relationship breakdowns, cultural decline etc.).

In theory, reimagining the purpose of modernity around a common cause should unite us all. In reality, it will demand a supreme marshalling of political will unlike anything humanity has achieved prior. Sadly, in an era characterised by creeping polarisation and waning multilateralism, this is hard to imagine. Anyone who watched The Social Dilemma on Netflix might harbour doubts about western society’s ongoing ability to agree on simple verifiable facts, let alone reach consensus on a painful but entirely necessary set of coordinated measures that will, over time, render many aspects of modern life redundant or unrecognisable.

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Short-termism prevails, again

Aside from revealing the human cost of a chaotic and unplanned reduction in energy-related CO2 emissions, the pandemic has also exposed how energy incumbents adapt to adversity: mass layoffs and an investment hiatus.

Among the oil supermajors, confirmed job losses are startling. BP is losing 10,000 positions this year and next (15% of its global workforce), most which will be compulsory. Chevron is losing 6,750 people (15% of workforce), Shell is losing 9,000 (11%) and ExxonMobil has so far confirmed 1,600 losses in Europe—only 2.3% of its global workforce, but many more are expected. Scores of smaller oil companies also slashed jobs to stay afloat.

When faced with the hard choice of either cutting back to survive today or retaining personnel for speculative future growth, management will for obvious reasons rarely choose the latter. Coming amid long-term structural decline of the oil industry, some companies have cited long-term reasons for the Covid-19 layoffs.

BP cast its redundancies in the context of its transformation into a “leaner, faster-moving” company that is drastically lowering its carbon emissions. Shell took a similar line. There is some logic to this: if decarbonisation means gently ramping down oil production, as BP has committed to do, then fewer people will be needed to design wells, operate rigs and so forth.

But the depth of job-cutting will indelibly mark the industry’s reputation as a stable and reliable employer. It also reinforces the view that these companies are in terminal decline and on the wrong side of history, as all credible forecasts point to strong long-term growth in global energy demand being met by a meteoric rise in renewable energy. If an energy company is cutting to the bone ahead of an anticipated renewables boom, it has already missed the boat.

As Deloitte stated in a recent report entitled The Future of Work in Oil, Gas and Chemicals:

“Although attracting new talent may not be an immediate priority […] retaining top employees and tackling the challenge of an aging workforce […] are of utmost concern for the industry. Existing OG&C employees having fungible digital skills are at the risk of migrating to other industries … where the prospects of career growth seem to be brighter.”

Oil and gas workers are desperate to break into the renewables space. More than 80% of 1,383 UK North Sea offshore workers recently surveyed by Greenpeace said they would consider quitting the oil and gas industry, with 58% citing job security as their main motivation for wanting to do so.

More than half said they would like to work in renewables, particularly offshore wind where there are greatest skills overlaps with offshore drilling. But many are finding the transition difficult due to a lack of coordinated support for retraining. This is borne out by a new Aldersgate Group report last week, which called for “urgent action” to plug the deficit in skills undermining the growth of low carbon supply chains across the UK economy.

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No justice = no transition

There is a preponderance of evidence supporting the view that the transition to a low-carbon economy could be a huge jobs winner, if only governments would seize the opportunity presented by Covid-19 stimulus recovery packages.

The International Labour Organization (ILO) estimated in 2018 that changes in energy use to meet the 2°C goal of the Paris climate agreement would create some 24 million jobs by 2030, more than offsetting the loss of 6 million jobs as carbon- and resource-intensive industries are scaled down.

More recently, the ILO estimated that the transition to a net zero economy would result in 15 million more jobs by 2030 in Latin America and the Caribbean alone. The creation of 22.5 million jobs in agriculture, renewable electricity, forestry, construction and manufacturing would more than offset the destruction of 7.5 million jobs in fossil fuel extraction and consumption, and animal-based food production.

These calculations over-simplify the situation, of course. Relocation, retooling and demographics pose major challenges to ensuring workers in dying industries are not abandoned. Targeted training and careful regional industrial planning are vital to ensuring the energy transition is as socially just as it can be.

A just transition, as it is known, is not merely a ‘nice to have’ benefit from the renewables shift. Rather, the shift itself is at stake. As DNV GL said in its recent Energy Transitions Outlook:

“Enabling a ‘just transition’ is a prerequisite for achieving [energy and climate] policy targets; transition initiatives will fail in the absence of sustained support from a majority of voters.”

This is hardest to achieve in remote or frontier regions where alternative employment options are limited. One example is the world’s oldest and most carbon-intensive fossil fuel: peat. As recently as 2007, peat bogs still provided 5% of Ireland’s primary energy and harvesting of the highly organic carbon-rich soil employed thousands of people in the emerald isle’s rural midlands.

The US shale oil sector is another example. The shale-rich Permian basin that stretches across Texas and New Mexico is prone to boom-bust employment megacycles, with exuberant hiring, over-capacity and excessive layoffs lagging the prevailing oil price. About 107,000 workers in the US fracking patch were laid off between March and August 2020, on top of widespread furloughs and pay cuts, according to Deloitte, and it could get much worse.

The US shale sector’s aggregate indebtedness spiked from less than USD 20 billion in 2015 to almost USD 180 billion this year, according to Haynes and Boone LLP. As many as 40 fracking companies filed for bankruptcy protection in the courts this year, and many more are expected to join them in 2021 unless they manage to renegotiate an imminent wall of debt maturities. The US social security bill is about to get bigger.

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Show me the jobs

Can the energy transition really offer gainful employment to those fleeing carbon-intensive industries—or will it instead entrench the centralisation of labour, to the benefit of faraway industrialised Asian economies? Will coal miners in Germany, Poland or Canada find gainful employment in solar PV, net zero industrial clusters or electric vehicle manufacturing?

The fact that renewable energy manufacturing jobs are highly concentrated in a handful of countries does not bode well.

Of the 3.8 million people working in the global solar PV sector in 2019, nearly 60% were employed in Chinese factories, according to the International Renewable Energy Agency (IRENA).

Global job distribution is only slightly less concentrated in the wind energy sector, which employed 1.17 million people worldwide in 2019. China alone accounts for 44% of the global total.

There is an expectation that wind jobs will follow the solar trend. “Parallel to increasing deployment, PV manufacturing has also shifted to China and other Asian countries, while decreasing in Europe. A similar shift may occur in the wind industry,” a European Commission report concluded this year.

And anecdotal evidence suggests China is poised to capture the lion’s share of electrolyser manufacturing jobs from a European boom in demand for hydrogen produced from renewable electricity.

Yet the trend in manufacturing jobs overlooks the labour-intensive construction, installation, operations and maintenance phases of renewable energy projects, which by their very nature must occur at or near the project location.

Solar is by far the most labour-intensive power generation technology. In utility-scale solar PV, the IEA estimates that for every one million dollars of investment, about three local construction jobs and six manufacturing jobs are created. Rooftop solar PV creates around 10 construction jobs for the same investment.

Wind power is less labour intensive. Onshore wind projects create about one job in construction and one-half in manufacturing per million dollars invested. Offshore wind creates about one-fifth as many construction jobs but twice the number of manufacturing jobs per unit of investment.

Investment in energy efficiency outdoes both in terms of job creation. Retrofitting buildings with better insulation and energy management systems creates almost 15 full time equivalent positions per million dollars invested, second only to erecting brand new energy-efficient buildings, according to the IEA.

Considering that around 90% of today’s buildings will still be standing in 2050, and so many of those across the northern hemisphere are cold and drafty, this could and should be an easy win for Covid-19 stimulus funding. Moreover, the up-front capital investment and long payback timeframes for retrofits mean very few would occur without government assistance of some description.

It was therefore encouraging to see the European Commission last week unveil a new strategy to renovate 35 million buildings by 2030, creating 160,000 new green jobs and contributing towards the EU’s binding 2050 net zero emissions target. The strategy explicitly seeks to leverage the labour intensity of energy efficiency investments and calls for policies that spur demand for low carbon materials for “deep renovations”, increasing new specialist job opportunities.

This is the exception rather than the rule, however. Globally, more than half of Covid-19 stimulus funds have been committed to fossil fuel subsidies rather than clean energy, as the immediate socio-economic benefits tend to be greatest from subsidising energy-intensive industries such as aviation—which has been particularly hard-hit by the pandemic.

The political expediency of quick fixes seems to have overridden the moral duty upon decision-makers—in government and the private sector—to future generations. So that leaves society at large facing the uncomfortable question: what are we prepared to sacrifice, individually and collectively, to get emissions down to safer levels?

Seeing as the answer is probably ‘not enough’, how can we forge a stronger link between the energy transition and human prosperity in every country, and in the shortest possible timeframe? Because it seems like no meaningful progress will be made without it.

Seb Kennedy | Energy Flux | 19th October 2020

I’ve covered a lot of ground, now it’s your turn! Will GDP ever decouple from energy emissions? Are we heading for a just transition, or one that disenfranchises blue collar energy workers? Are those calling for a green economic recovery visionary leaders, or utopian fantasists? Leave a comment below, and if you enjoyed this article, please spread the word!