Climate mitigation is possible and the total benefits are gigantic 16 November 2018

By Professor Peter Hennicke 

The World Climate Conference in Paris (2015) marked a turning point in multilateral climate policy towards a complete decarbonization of the world energy system. The recently published IPCC Special Report (2018) on the urgency and challenges of achieving a 1.5 degree global warming target was again a dramatic wake-up call. Even if lobbyists coming from the fossil fuels industry try to deny it: A growing number of far-sighted companies, banks, politicians and NGOs have long been heading for urgent and precautionary actions to protect the climate and develop sustainable business fields. Now it's about scaling up, speeding up and tightening up policies and strategies to close the still worrying implementation gap. The resistance of incumbents and specific interest groups against this forced economic structural change – unique in industrial history – is undoubtedly great. Yet, the societal opportunities of a strategy, envisaging ecological modernization as well as a complete decarbonization and risk minimization of the energy system, are gigantic. This includes a pro-active industrial regional policy and a governance of “just transition” to create new business fields and jobs for possible losers.

Against this background there are megatrends that offer a chance to reach the seemingly impossible: the achievement of the "well below 2 C0 target", along with huge benefits through a global green innovation and investment initiative.

A few years ago a comparably strong statement would have been questionable. Today, not only scenarios (such as e.g. Stanford University) are proving that an optimistic view of the future is justified, despite current multiple crises. Today, smart technological trends and millions of socio-economic innovations (such as demand response, sector coupling, smart grids, virtual power plants, decentralization, participation, prosumers) can be identified, on the basis of which forward-looking governments and enhanced international cooperation can accelerate the energy transition.

The megatrends driving the energy transition

The energy transition (“Energiewende”) is embedded in two global megatrends that are about to become strategic game changers: 1. the huge potentials and the paradigm shift to “Efficiency First” (IEA/Paris) and 2. the spectacular decreasing costs of electricity from wind power plants and PV. Both trends must be speeded up by ambitious targets and courageous policies, recognizing that they imply radical deviations from business as usual. In order to make ambitious mitigation strategies successful, a new polycentric governance,  integrating ecological modernization and decarbonization, is needed: It is the combination of energy and resource efficiency, green electricity, electrification of transport and the heat sector as well as sustainable lifestyles that make the energy transition technically feasible and beneficial for society. According to many studies (see for example the Deep Decarbonization Demonstration Project, these are common key elements of the energy transition at least in OECD countries.

In studies by the IEA and the OECD it has rightly been pointed out that enormous additional investment expenditures are needed for a decarbonization strategy. But this is only half of the story. If the saved energy costs are subtracted and if the remaining expenditures are connected with the exorbitant amount of financial capital, desperately seeking for profitable investments, then the way for financing a decarbonization and risk minimization strategy (including the abandonment of nuclear energy) is paved. And even more than this: Comparisons of monetary costs and benefits typically exclude the drastically reduced number of millions of refugees and casualties caused by climate change and the trillions of monetary damages avoided by climate protection.

Against this background, the IEA speaks of "non-climate drivers", meaning the huge "co-benefits" resulting from a reduced use of fossil fuels. The country-specific costs of mortality from outdoor exposure at PM 2.5 as a percentage of GDP have been estimated for the year 2014. The calculated cost share is 11% (China), 8% (Russia), 5% for Germany and almost 4% for the US: "Between 350,000 and 500,000 Chinese die prematurely each year because of the catastrophic air pollution in the country," reported China's former Minister of Health in 2015. The burning of fossil fuels is the major cause of this disaster.

Forced climate protection, through increased efficiency and the use of renewables, does therefore, not only represent a future-oriented ecological and economic policy, but a preventive health and social policy at the same time. The European project (COMBI) has quantified and monetarized the co-benefits (e.g. avoided air pollution, additional job creation, reduced resource consumption, positive growth and budget effects) for the EU 28. It demonstrates that a more ambitious EU savings target, to be achieved by 2030 (35% instead of 30%), would, for example, create 270,000 new jobs and avoid 17,000 premature deaths.

Renewables versus efficiency?

In some countries the strategic interlinkages between the deployment of renewables and energy efficiency is debated. Why invest in avoiding energy, through laborious strategies for efficiency and energy conservation, when abundant renewable alternatives are available? Based on empirical evidence and long-term system analyses the answer is straightforward: Integration of both pillars is a condition sine qua non! We need an efficiency revolution to make a 100% renewable system technically feasible, cheaper, resource efficient and attractive to the public. 

The consumption of natural resources and land for a priority strategy envisaging the use of renewable energy would be enormous and unnecessary for climate protection reasons. Landscape spoiling, land use and resource consumption (e.g. critical metals or biomass) would increase to an unacceptable extent. And the costs of transition would be far higher than necessary. This has a simple reason: The avoided kilowatt-hour of, for example, electricity, through highly efficient technologies ("NEGAWatt"), is today - even without taking into account the external costs of energy supply - significantly cheaper and generally more advantageous in terms of environmental impact. Evaluated power-saving programs in the US show that the costs of the NEGAWatt - avoiding power consumption by efficiency technology – are on average 2.8 cts/ kWh, making them about a factor of 2 - 4 cheaper than the system costs of new power supply.

This is why, the EU calls for a reframing of energy efficiency as an energy resource. The IEA (Paris) spoke as early as 2014 of "Energy efficiency our first fuel" and shows, in scenarios and special reports, that increasing final energy efficiency will lead to about 50% of the GHG reduction needed by 2030/2050. At the same time, IEA projections show that around 2/3 of the world's economic energy-saving potential remains untapped, if energy policy does not change and barriers are not removed systematically. The ACEEE, for example, has ranked Germany as the most efficient economy of the world. Nevertheless, about 40% of its current energy consumption can be avoided up to 2030. Investing 9 bn euros in highly efficient equipment in German industry, can reduce the energy costs by  65 bn euros. Removing barriers and developing an innovative energy efficiency governance is thus, of paramount interest in Germany. Otherwise, the extremely ambitious energy conservation targets (up to 50% by 2050) and the necessary increase of energy productivity to at least 2 to 2.5 % per year cannot be reached.

Net employment tends to increase significantly, as energy is effectively replaced by efficiency. If, on the other hand, fossil energy supply is replaced by renewable energy, the net effect is less clear. Nevertheless, efficiency and renewables are inseparable twins for a successful energy turnaround!

Today, electricity from wind and PV in many regions is already cheaper than the building of new nuclear or coal power plants. This also holds true if the costs of system integration of fluctuating power supply and security of supply are considered. Worldwide, electricity from PV costs between 1.8 and 6 eurocents/ kWh, while onshore wind costs between 1.6 and 6 eurocents/ kWh. By 2030, a further reduction in PV electricity costs, down to 1.5 eurocents/ kWh, is expected, especially in sunny regions.

The cost-cutting boom in renewable power generation is followed by a battery boom: Experts expect the prices of lithium-ion batteries to plummet. Large batteries cost 1,000 euros per kilowatt-hour of storage in 2010, and in 2020 their price should decrease to about 200 euros. From 2020 onwards, experts expect storage costs per kilowatt hour (kWh) of ten eurocents. In the foreseeable future, electricity from its own PV system and batteries will be cheaper for households and other decentralized actors and as reliable as electricity from the grid. For example in Germany, these developments have created 1.5 million of new market players on green electricity markets, so-called prosumers (households, SMEs, public buildings, etc.).

And efficiency makes it even more attractive. The price for buying electricity by a typical German household is high (about 30 eurocents/kWh). But due to more efficient appliances  the average consumption per year is only about 3300 kWh. In comparison: a typical Japanese household consumes about 5400 kWh/a. Though the price is very cheap compared to Germany (18 eurocents/kWh) the average household bill in both countries is the same.

The IEA’s latest Energy Efficiency Market report said that energy efficiency improvements between 2000-2017 are already saving the average German household 30% on their energy bills (transport and house) – around AUD (Australian dollars) $520 every year.

But this efficiency status of a German household today is not the end of the story. An average household can reduce its electricity consumption by 2/3 by buying the best home appliances that are available on the market. To the extent that additional costs are incurred when new high-efficiency appliances are purchased, they can be covered by the saved electricity costs in a few years.

Global momentum

There are many “good practice” – examples showing that the energy transition is already underway: For example, long term very ambitious policy targets, the nuclear phase out, technological decentralization and citizen participation as well as macro-economic benefits and regional resilience are driving forces of the “Energiewende” in Germany,  but also in other countries, such as Denmark or Switzerland. Countries in Asia too, like Korea and Taiwan and – in the near future – probably also Japan, will become driving forces of the energy transition.  Intensified international cooperation and a well-organized knowledge exchange on innovations and strategies can foster decarbonization and risk minimization.

In Germany, the implementation of the “Energiewende” is perceived as a “Gemeinschaftswerk” (“Community work”). Though there are relatively high electricity costs for households and SMEs, all public opinion polls confirm that about 90% of the German citizens still support the “Energiewende”.  This might be due to the positive narrative of this “Gemeinschaftswerk”:  The “Energiewende” can be perceived as a “contract between generations”. Today's generation designs and (pre-) finances an ecological transformation in order to protect their children and grandchildren from grave energy related life risks: the costs of a fossil-nuclear energy system, the risks of nuclear disasters and climate change, dangerous energy import dependencies, air pollution damages, price shocks and – last not least - global resource wars. If the German “Energiewende” demonstrates the economic success and social acceptance of this challenging transformation process, then - mediated through global competition - this could become the launch pad for a global drive towards sustainable energy and more ambitious climate and resource protection - undoubtedly a fascinating narrative!

One decisive factor of a successful “Energiewende” is the active support by the business community. Many current industrial processes are part of the problem, but without industry there will be no solution. In this respect, German industry has made a remarkable change of perspectives. For a long time, large parts of the industry were skeptical with regard to the “Energiewende”. But in a recent study, the Association of the German Industry (BDI) states, after a broad participative dialogue with numerous member companies: “80% of GHG-reduction is technically feasible and macro-economically viable” (2018) and: “The global market volume of key climate technologies will grow to 1$ trillion to 2$ trillion per year. German companies can solidify their technological position in this global market.”

Today, a majority of German industries perceive an ambitious climate protection strategy and the energy transition as a beneficial ecological modernization strategy to protect competitiveness on global GreenTech markets. In so far, German industry plays a pioneering role. For example, Japan's industrial association Keidanren, is much more skeptical, although more and more companies in Japan (for example, in the transport, hydrogen and ICT sector) are moving in the direction of an energy transition.

In general, the still existing skepticism in Germany, in Japan and in other countries, is fed by the fact that the forced structural change – politically promoted by a decarbonization strategy – can cause problems for certain sectors, companies and regions. Especially, industries that are not developing new and diversified business fields as a precautionary strategy will be affected, if they stick to the old fossil fuel-based business model for too long.

In Germany, fierce conflicts are currently affecting the coal sector and two regions, where lignite is mined and converted into electricity, in particular. This year, a government commission ("Commission on growth, structural change and employment") will not only set an end date for the complete withdrawal from coal (lignite), but will submit a developed and funded industrial development concept for the affected regions.

The encouraging signal is thus, that a “Just Transition” must be the key of a successful energy transition. If climate mitigation policies foster structural change and push regions, jobs and companies out of their traditional positions, politics and business, all stakeholders must feel responsible to create new development opportunities; meaning a transformative governance based on reasonable large funds, participative developed roadmaps and concrete investment initiatives for sustainable regional development patterns (e.g. infrastructure, business fields, jobs, labs, universities).

The German master plan for phasing out lignite might become an interesting pilot, because this new type of proactive ecological and regional industrial policy is needed everywhere, if climate mitigation and energy transition are taken seriously.

This holds especially true for coal exporting countries and for the coal sector in Asia. Dr. Fatih Birol (Executive Director of the IEA) made clear that globally, the growth of renewables has to be “accompanied by coal plant closures in Asia. If there are no early (coal power station) retirements, more than two-thirds of the emissions (in 2040) are already determined today” (The Guardian, 8.10.2018).

If governments do not dare to act proactively the finance market might force them. The risk of non-action increases each year. Today, a growing divestment movement is leaving the fossil era. The financial withdrawal from coal jumped from 50 billion $ (2014) to 3400 billion $ (2015). The Norwegian oil fund will pull $ 900 billion out of coal, based on a parliamentary decision. The Rockefeller Brothers Fund, made big by Big Oil, announced in 2014 that it would be completely out of fossil fuels by 2017 ("No more oil, gas, coal or tar sands assets in its $ 850 million portfolio"). The concern about a possible bursting of the "carbon bubble", the mismatch of the excessively inflated stock market value of oil and coal companies in relation to the necessary CO2 reduction, does not only worry scientists (see Carbon Tracker Initiative), but also the Bank of England and the Financial Stability Board.

Australia's future as an energy superpower

In the past, Australia has been able to build its successful development, its energy system and a large part of its export earnings on its enormous fossil energy resources (coal, gas). This resource blessing can turn into a curse, if the switch from the fossil age to the solar age (e.g. energy from the sun, wind, geothermal, water) is not planned in time. According to the Paris Agreement (2015), the entire world has to be nearly decarbonized in the middle of this century. Governments seeking to green the economy, sustain the country's prosperity, still have a chance to steer the "Great Transformation" (Polany) in a controlled manner, in order to stay competitive at the global GreenTech markets. This includes to prepare for the “global post coal age” making the export revenues more independent from coal and reindustrialize the economy by using the exorbitant renewable energy resources of Australia.

Australia has been named an “Energy Superpower”. That's true. But the future strength of this power can no longer be based on fossil fuels but on the abundant potentials of renewables and efficiency.   

What is the essence of the narrative: By combining the rapid deployment of renewables with a massive increase in energy efficiency ("efficiency revolution"), the necessary contribution to climate and resource protection can be achieved and a huge amount of co-benefits can be realized simultaneously.

The technologies are available, but they must also be embedded in more sustainable consumption and production patterns. Otherwise, the gains are eaten up by rebound effects, overconsumption and wasteful lifestyles. In the context of a new polycentric governance of efficiency and renewables policies, efforts should be made to reduce undesired rebound effects as far as possible through integrated energy and sufficiency policies.  Encouraging individual behavioral changes towards frugality are necessary, honorable and can encourage imitation. But in view of a general transformation to more sustainable production and consumption patterns, they are not sufficient for structural reasons. This is especially true for industrialized, but increasingly also for the new consumer classes in emerging and developing countries. The right balance of more sustainable consumption and production and its encouragement through an integrated efficiency and sufficiency policy is a longer-term socio-political task. We should start it now, because this might be the biggest threat against the vision “prosperity for all”.

By Professor Peter Hennicke

Full Member of the Club of Rome

Former President of the Wuppertal Institute

Professor Peter Hennicke is one of the key architects of the German energy transformation and keynote speaker at the 2018 National Energy Efficiency Conference.