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Monica_55905 Oct 23

Build Back Better

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A growing number of countries and regions are working towards net zero carbon economies by 2050. The bulk of that will come from the energy sector with an important role for renewable electricity, mostly solar and wind, which should grow to cover half of all final energy demand - A Keynote by Frank Wouters, Dii Desert Energy, 
In addition, there is growing recognition for the potential role of hydrogen and its derivatives to cover the bulk of the remaining demand, also creating new vectors for international energy trade.

The current economic crisis, caused by the COVID-19 pandemic, calls for massive economic stimulus packages by governments globally. According to the IMF, governments have already pledged up to $10 trillion.

The urgency associated with catastrophic climate change in combination with economic recovery has made #Buildbackbetter trending. An important question is how ambitious should governments be at this time? It is important to step back and consider the bigger picture of energy subsidies.

According to IRENA, in 2017 the world’s total, direct energy sector subsidies – including those to fossil fuels, renewables and nuclear power – are estimated to have been at least $634 billion. However, adding externalities that are currently unpriced, especially the cost associated with air pollution and climate change, the real number for direct subsidies and externalities associated with fossil fuels is approximately $3.1 trillion per year, exceeding renewable energy subsidies by a staggering factor of 19.

So, there is a strong case to make for targeted subsidies for low-carbon energy, especially if they accelerate the reduction of the cost gap with polluting alternatives. According to the IMF’s Fiscal Monitor, in advanced and emerging market economies, where interest rates are near their effective lower bound, scaling up of quality public investment can have a powerful impact on employment and activity, crowd in private investment, and absorb excess private savings without causing a rise in borrowing costs.

Indeed, many European countries can currently borrow money against negative interest rates, enabling support packages without borrowing heavily from future generations. According to the IMF, public investment can have a powerful impact on GDP growth and employment during periods of high uncertainty—which is a defining feature of the current crisis. For advanced and emerging market economies, the fiscal multiplier peaks at over 2 in two years. Increasing public investment by 1 percent of GDP in these economies would create 7 million jobs directly, and between 20 million and 33 million jobs overall when considering the indirect macroeconomic effects. Every $1 million spent on green electricity generates between 5 and 14 jobs, compared to 2-8 jobs in traditional infrastructure investments.

So, the simple answer is that governments should not hold back and invest in the energy transition. The time is now.

Frank Wouters
Chairman of the Advisory Board
Dii Desert Energy