Transform to React: Climate Policy in the New World Order
Climate Action, Resilience and Sovereignty: Governments and companies need to align climate strategies with newly emerged geopolitical paradigms
The Russian invasion of Ukraine has introduced new challenges for the energy sector along the entire value chain in Europe and around the globe. Against this dramatic backdrop, it is nevertheless paramount not to let go of decarbonization ambitions. Accelerating the clean energy transition is an obvious path towards more geopolitical resilience as it decreases fossil fuel energy dependencies, while also contributing to the overarching aim of mitigating climate change according to the IPCC. In a new report, Deloitte assesses the global situation, discusses valuable synergy potentials and points out the most pressing topics for both governments and corporations. The aim should be to reconcile climate policy and new imperatives around the reinforcement of resilience and sovereignty.
Climate change represents a global challenge of unprecedented severity. In order to address this existential threat for our planet, measures that reduce global warming to 1.5°C are extremely urgent and require additional efforts. Achieving that goal is still feasible, provided that climate ambitions are not thrown off course by recent geopolitical events. While the invasion of Ukraine and the related sanctions on Russia and its allies force European countries to identify new gas and oil suppliers, they should also spur them to increase clean energy transition efforts and introduce associated policies. As the new Deloitte report Transform to React: Climate Policy in the New World Order makes clear in its policy recommendations, both governments and companies have a critical role to play. The task is now to achieve synergies between the two strategic imperatives: security of supply and resilience needs on the one hand and climate transformation efforts on the other.
Climate policy and economic trends
Existing climate policies may not be sufficient yet, but they already contain many important pledges and measures. The fundamental technical and political conditions for achieving the goals are in place. 125 countries worldwide have set the goal of climate neutrality by 2050 or before, which also is the climate-neutrality target of the EU, in line with IPCC conclusions.1 Many countries have implemented policies that promote electricity generation from renewable energy, as well as transport and heating related renewable energy policies. At the same time, technology has advanced considerably, reducing energy generation costs dramatically (solar, onshore and offshore wind) as well as the cost of battery storage. Further technology innovation is to be expected in low-carbon hydrogen and digitalization. While the use of coal is declining, this is partly offset by increasing gas consumption. As to the very large investments required to accelerate the green transition, increasing foreign direct investments and other capital trends create a favourable situation. Accordingly, between 2005 to 2020, global investment in low-carbon technology increased from USD 60 billion to USD 524 billion. While the existing spending plans seem highly ambitious, additional investments are needed to stay in-line with 1.5°C of global warming target. However, by 2050, it is estimated that an additional USD 33 trillion on top of existing spending plans (USD 98 trillion) is needed to achieve the 1.5°C goal.2
The geopolitical impact
The war in Ukraine has changed the geopolitical landscape fundamentally. The future of a rule-based international system appears threatened and commodity prices are skyrocketing. Both aspects increase economic pressure on companies, governments and consumers, and they also complicate the global climate effort. This pertains not only to energy prices per se but also to commodity markets, including raw materials such as graphite or cobalt that are important for the energy transition as well. Europe’s energy-intensive sectors are expected to suffer most from the projected shift away from Russian gas. The importance of energy savings in households and industries increases exponentially under these circumstances. Rising energy prices, sanctions and supply chain disruption may also increase the cost of financing, thereby posing additional challenges for the transition.
Energy supply diversification and back-up strategies such as n-1 principle can help to bolster resilience. The role of natural gas and blue/turquoise hydrogen as transition energy sources must be re-assessed with the new constraints in mind; trade-offs appear inevitable. While high energy prices now incentivize fossil fuel exploration and production in a short-term view., such strategies can produce stranded assets and corrupt the climate goals.
"The energy transition is one of the most pressing issues for the international community. However, the war in Ukraine has introduced new complexity to this issue, namely the fundamental importance of resilience and sovereignty in energy policy and their spillovers to other policy fields. In this challenging situation, European actors – governments and businesses alike – need to shift priorities towards an even faster transition towards renewables, energy efficiency and a diversification of energy supplies."
Prof. Dr. Bernhard Lorentz, Managing Partner, Global Leader Climate Strategy
What governments should do
How can societies tackle the substantial challenges associated with the concurrence of climate action imperatives and the changed geopolitical situation? The report's policy recommendations include the following suggestions:
- Setting clear and binding targets to fulfil the commitments of the Paris climate agreement.
- Climate action and resilience policies should be aligned and linked, unlocking valuable synergies in areas such as electrification, diversification of energy sources, energy efficiency improvements and circular economy for strategic materials.
- The investment risks for clean technologies caused by cost uncertainties and recent price volatility should be minimized, seeking to limit the burden on the population.
- International cooperation for the implementation of climate and resilience policies needs to be strengthened.
What companies should do
While corporations are bound by existing policy frameworks, they are also in a position to speed up the energy transition and build resilience through proactive measures.
- Companies should pursue comprehensive restructuring and diversification processes beyond energy sources (i.e., strategic raw materials and goods) while analyzing potential vulnerabilities and identifying alternative supply structures.
- They should also diversify investment portfolios, not only in terms of fossil fuels, but also in terms of low-carbon energy technologies.
- Make greening the value chain a key part of their analysis and restructuring process to unlock major synergies.
- High fossil fuel prices should not be seen as a reason to increase carbon related investments, as they might create stranded assets and delay the energy transition.
- Additional profits resulting from rising commodity prices should be invested in areas such as clean energy technologies and projects that bolster social welfare. Public-private cooperation (or joint ventures) can pave the way of such processes.
The Deloitte report 'Transform to React: Climate Policy in the New World Order' was presented by Prof. Dr. Bernhard Lorentz, Managing Partner and Global Leader Climate Strategy at Deloitte who is also the founding chair of the Deloitte Center for Sustainable Progress, at the 2022 World Economic Forum (WEF) Annual Meeting in Davos. Download the report for more information.
1 Deloitte analysis based on Net-Zero Tracker and announced policies and pledges.
2 IRENA (2021).