COP27 and the case for optimism

While COP27 deals with the challenges of climate change, there is room for optimism: the technology has reached a tipping point.

As with this year’s COP27, the annual climate conference consistently provides a water level report on our climate future. Most of the time, there is a certain level of disappointment. Year after year, the world still isn’t saved. There’s always more work to do. But is there a case for optimism?

I think there is.

Causes for Climate Optimism

First, renewable energy has reached a tipping point. It’s now the cheapest, most secure, and most sustainable option. In increasing numbers of countries, the experience curve kicks in. Over time, deploying renewables will only get cheaper and better. This will lead to more investment, kicking off exponential growth. Rising prices for fossil fuels contribute to this, but also have a dampening effect by drying up the available capital.

Second, there are realistic scenarios for a clean energy future. The combination of renewables like wind and solar with green hydrogen, and possibly green ammonia, looks promising for the electrification and decarbonisation of our energy systems. Electrification of transport (battery electric vehicles) and heating (heat pumps) promises efficiency gains.

Third, this combination of technology and use cases now makes government policies and regulations the bottleneck. For a variety of reasons, energy markets are heavily regulated. Energy networks as natural monopolies, combined with the need for energy security at acceptable costs, led to a high degree of government involvement. In many countries, energy is a public service, or used to be in the past.

A new order for the energy markets

The rising awareness of sustainability added more pressure, leading to the famous trilemma between

  • energy security
  • costs
  • and sustainability.

For a while, the only solution seemed to be in line with other trilemmas: pick any two. Starting from an energy system with high security and acceptable prices, but low sustainability, obviously bold compromises had to be made.

Do we need to sacrifice either energy security or good prices to obtain sustainability? Today, the answer seems to be no, but the way towards a secure, cheap and sustainable energy system isn’t straightforward. Adapting policies and regulations from the fossil age to the renewable age is necessary to pave the way.

We need a new order for the energy markets.

After four decades during which they generally sought to curb their activity in energy markets, Western governments are now recognizing the need to play a more expansive role in everything from building (and retiring) fossil fuel infrastructure to influencing where private companies buy and sell energy to limiting emissions through carbon pricing, subsidies, mandates, and standards.

Russia’s aggression against Ukraine has only sped this up. For the upcoming winter, Germany has prepared measures to ration natural gas if demand exceeds supply. Thankfully, this scenario doesn’t look too likely anymore. Governments are back on the energy playing fields in a big way. And this brings us back to COP27.

COP27 and the need for implementation

This year’s climate conference was supposed to be about implementing the Paris Agreement targets, rather than further pledges. Indeed, implementation seems to be the major issue of climate action today. Foreign Affairs describes three market failures requiring a greater role of governments:

First, the private sector lacks sufficient incentives to build the infrastructure and other assets that most countries need to ensure their energy security. Second, market forces alone cannot encourage the building of the infrastructure required for a more orderly energy transition—infrastructure that by definition may be obsolete before private companies have achieved a full return on investment. And third, private firms and individuals lack strong enough incentives to curb emissions whose costs society bears.

So much for the workload of the governments. It’s about removing roadblocks, creating incentives, and using direct state investments. By doing this, governments can spur exponential change – exactly what we need, according to climate expert Johan Rockström:

“We’re still allowing ourselves to believe that this can be handled incrementally, when in fact, we need to have exponential changes and take some big decisions.

“We need to recognize the need for more ‘radical politics’ or ‘radical governance’.

“We have to see that now is the time to take some big decisions to regulate ourselves away from the damaging processes we have today. It’s a bit too easy for us to talk about consumer behaviour and choices and awareness and behavioural change.

“We need some big system shifts, which requires finance, politics and governance to shift.”

Making bold climate decisions

I’m optimistic, because I think these big system shifts and exponential changes are possible, and perhaps even likely to happen. Regulation is the name of the game. Bold decisions must be made. Azeem Azhar makes the case for the clean energy transition:

That isn’t to say there aren’t huge hurdles on the way. There is the battle of beliefs and narratives and the vested commercial and academic interests in arguing that the scale is not possible. There is an institutional gap: of century-old mining, permitting and licensing laws and regulations that urgently need reforming in hundreds of jurisdictions. 

But… it does mean this. When we consider the question “can we scale the clean transition given the huge mineral and other physical resources it requires?”, it isn’t obvious the answer is “no way.” History has shown we can do exactly that.

Egypt at least has so far used COP27 to announce a couple of green hydrogen deals, including one with the European Union. Experts predict green hydrogen to grow significantly over the next decades.

The recent Bloomberg Electric Vehicle Outlook contains nice examples of exponentially rising curves, which is encouraging. Ford’s CEO warned that electric vehicles require 40% less labour, forcing carmakers to insource to avoid mass layoffs. Combining this number with exponentially falling battery prices could even lead to cars becoming much cheaper in the future.

Of course, past performance does not guarantee future results. But there is room for reasonable optimism – if governments get their act together.