I just returned from the annual meeting of the World Economic Forum in Davos, and, as in years past, wanted to offer a few reflections on my time there. Over the course of the week, I noticed five broad themes emerging from the discussions in which I participated.
First, climate change remained at the top of the agenda in Davos, reflecting the growing urgency to reduce emissions. Among those sounding the alarm was United Nations Secretary-General, Guterres who declared, “We are flirting with climate disaster.” Remarks from Fatih Birol, Greta Thunberg, John Kerry, and Sherry Rehman reinforced this message, with the speakers warning attendees that the long-held goal of limiting warming to 1.5˚C was slipping out of reach.
It should come as no surprise, then, that the role of the oil and gas industry in the energy transition was a topic of much debate this year. But beyond the public headlines, I participated in conversations where energy and environmental leaders engaged in real debate over calibrating fossil fuel and clean energy resources to meet future demand. For example, in one such conversation, an NGO leader noted the discrepancy between the IEA’s net-zero scenario, which has oil consumption falling 80% by 2050, and many oil companies’ expectations of robust sales through 2050. In response, some in the oil sector argued that it would be folly to base their projections on this net-zero scenario, which is far from assured, and risk falling short of meeting the world’s energy needs.
While there is a great degree of uncertainty about whether or not the world is able to reach net-zero by 2050, the reality is that we cannot continue to use 100 million barrels of oil a day and expect to make progress on climate. So far, emissions have continued to rise each and every year except in cases of pandemic or recession. Yet the past year has proven that reducing supply without reducing demand can cause politically and economically painful price spikes and strengthen the geopolitical hand of traditional petrostate producers. As I wrote for Foreign Policy in 2021, sustained emissions reductions will only occur through policies that reduce demand for fossil fuels.
Second, energy security was top of delegates’ minds in a way not seen in a long time, as Europe and other parts of the world cope with an historic energy crisis. After years of relative complacency, it is clear that the world is now failing at achieving energy security even as it also fails to achieve climate security. Europe likely faces a multi-year energy crisis, which has already spilled over its borders to become a truly global energy crisis. A key determinant of the severity, however, depends on whether Russian natural gas returns to the global market, a topic that CGEP examined in a new paper last Thursday.
Before leaving for Davos, I penned an article for the World Economic Forum in which Meghan O’Sullivan and I pointed out that emerging security risks associated with the transition to clean energy – from vulnerable critical mineral supply chains to protectionist clean energy policies – will coexist with the traditional geopolitics of energy. This warrants a new approach to energy security, we argued—one that proactively addresses these emerging risks while accelerating the transition to net-zero.
A question on the minds of many at Davos was whether this crisis could be an opportunity to accelerate climate action, a topic I discussed with Axios’ Dave Lawler. When energy security is at risk, governments can overcome seemingly insurmountable obstacles, and many of the actions necessary to decarbonize energy can also enhance energy security by reducing exposure to global hydrocarbon markets.
One thing is clear: the policy toolkit to address energy security challenges – created half a century ago in response to the Arab Oil Embargo – is not fit to address the emerging energy security risks associated with the transition to net-zero. In a roundtable we hosted at Davos with national security and energy leaders, it became clear that more work on this toolkit is needed. This will be a priority for us here at the Center on Global Energy Policy in 2023.
Third, attendees at Davos were concerned about energy investment. There was broad agreement that the world is underinvesting in energy relative to current and projected needs, but no clear consensus on the solution to address this pressing challenge.
Currently, the world is underinvesting in oil and gas relative to demand projections while also underinvesting in clean energy resources at the rate needed to shift this outlook. Current levels of oil and gas investment are roughly consistent with countries meeting their Paris Agreement targets, but with most of those pledges going unfulfilled, oil and gas demand has continued to rise—and is likely to continue doing so for some time. At Davos, Fatih Birol warned against increasing fossil fuel investment, advocating instead a dramatic scale-up of clean energy finance so that it outnumbers fossil fuel investments 9 to 1, rather than today’s 1.5 to 1. Despite the progress of new policies like the Inflation Reduction Act, it remains unclear whether such rapid growth is possible, leading some energy sector leaders to argue that some new oil and gas field investments remain necessary to meet the world’s growing energy needs affordably and reliably. In the meantime, underinvestment risks exposing the global community to price spikes, volatility, and greater geopolitical leverage for those countries looking to weaponize their energy exports.
Fourth, there was more discussion this year about the how intersecting crises of climate change, energy security, and underinvestment were affecting developing economies. Pakistan is just one example of the plight developing countries are facing, with historic flooding, rolling power outages, and food price spikes hitting the country in rapid succession. It was clear in many of the conversations at Davos that there is growing resentment against wealthy countries over the hypocrisy they are perceived to have shown in the face of these crises. Even as 75 million people lost access to electricity last year, for example, European leaders raced to buy up the world’s gas supplies, all while many objected to African nations’ plans to develop their own energy resources
Anger over this situation forced more – though not enough – conversations at Davos about expanding clean energy investment and energy access in emerging markets. For my part, I was pleased to present CGEP’s new proposal for dealing with currency exchange risk, a key barrier to such investment. The proposal would insulate project developers and investors from currency depreciation using a blended finance facility, including an innovative carbon credit mechanism. This proposal was one of several specific and actionable ideas we explored in the WEF’s initiative on Mobilizing Investment for Clean Energy in Emerging Economies, on whose Steering Committee I serve. And it is just one of the ways in which CGEP is helping accelerate a just transition in lower income countries. Last year at COP27, we announced the launch of the Energy Opportunity Lab, which will work with communities around the world to improve opportunities for sustainable energy inclusion, innovation, and growth.
Finally, the geopolitics of energy were a key concern for the world’s leaders. Among the geopolitical risks highlighted were fears of deglobalization and protectionism, increased competition with China, increasingly assertive industrial policies, clean energy supply chain vulnerabilities, rising trade conflicts, and how the war in Ukraine might affect energy security and the energy transition. I addressed some of these challenges in my interview with CNBC.
Navigating the geopolitics of the energy transition is a key priority for the Center on Global Energy Policy. Building on the arguments Meghan O’Sullivan and I set out in our Foreign Affairs articles Green Upheaval and The New Energy Order, CGEP hosted a roundtable discussion on the interplay of geopolitics and the energy transition, with remarks from Meghan, along with CGEP Advisory Board members Tom Donilon and Daniel Yergin. Identifying and mitigating geopolitical risks is a key research priority for CGEP in 2023 because overcoming these risks will be vital for maintaining momentum in the energy transition. Doing so, however, requires a more expansive toolkit to ensure energy security, affordability and reliability in the years to come.
In every conversation, I felt privileged to be able to share the insights from my extraordinary colleagues at CGEP. This week confirmed that the work our team is doing is of central relevance to energy and environmental leaders in government, business and civil society, and I’m excited to return home and continue it. As we kick off the year of our tenth anniversary – capped off by our Global Energy Summit on April 12 – I am more excited than ever for what lies ahead.