This paper from the Network for Greening the Financial System (NGFS) argues that fossil energy insecurity and price increases following Russia’s invasion of Ukraine represent a “narrow but unique opportunity” to accelerate the transition to net zero.
Released as an update to the third iteration of NGFS scenarios, it outlines the growing odds of a late and disorderly transition, examines the long term effects of the current ”fossilflation”, and explores how the odds of an orderly transition can be increased.
“The ongoing global spike in energy prices represents a crossroads in the world’s journey towards net zero,” the paper begins. One path leads to an increased carbon intensity of energy systems and raises the odds of a delayed and disorderly transition, while the other path doubles down on the move away from fossil fuels and leads us towards net zero – perhaps sooner than expected.
“The war in Ukraine, in addition to being a tragedy, is a wake-up call to the costs and risks of fossil fuel dependence,” the NGFS says. While higher oil and gas prices incentivise energy efficiency and make renewables more economically attractive, new investments to increase and diversify the supply of fossil fuels increase the probability of a “too little, too late” scenario.
However, a successful net-zero transition is still within reach, it adds, and comes with substantial benefits for both energy security and price stability.
“If fossil fuel prices are simply maintained at current level, there is no further inflationary impact,” the paper says. “Therefore, turning to price stability, central banks are well placed to secure the return of inflation to low and stable levels even without such windfall deflationary effects of future decreases in fossil fuel prices.”
The paper then compares current fossil energy price developments with price trajectories outlined in the NGFS scenarios. The scale of the oil price increase between 2020 and June 2022 is as large as the increase required by 2040 in the NGFS 1.5°C orderly scenario, it points out, although the sudden nature of the price rise makes it more disruptive in the short run. However, in the medium to long term higher fossil fuel prices will increase the use of renewable alternatives, just as the 1970s oil crisis prompted efficiency gains and an increase in nuclear energy.
To make this happen, governments must “reaffirm their collective and individual commitment to tackling climate change” and make carbon pricing a pivotal instrument for the energy transition, the paper concludes. At the same time, central banks and financial supervisors must take action to encourage “a major reallocation of capital” to fund energy efficiency, storage technologies and renewable production.
This page was last updated September 14, 2022
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