The Energy Crisis and Climate Change

The future global economy is likely to consume ever more energy, especially due to the rising energy demand of developing countries such as China and India. At the same time, the tremendous risk of climate change associated with the use of fossil fuels makes supplying this energy increasingly difficult.

According to IEA projections, a larger size of the world population and the world economy would result in an increase of the world’s primary energy demand by 45% by 2030 without any climate policy (Here and in the following, data are based on the IEA World Energy Outlook 2008). However, significant welfare consequences of climate change require us to take strong policy on carbon dioxide emissions, possibly to stabilize the atmospheric carbon dioxide concentrations as low as at 450ppm in the long-run. This necessitates us to limit the total use of energy to some degree. (In IEA’s projection, the world primary energy use is 15% less with a 450ppm stabilization target in the year 2030 than in the case without climate policy).

Still, we need to dramatically expand the use of clean, renewable energy sources, while continuing the exploitation of conventional energy sources to a substantial degree. Regionally, the challenge will be more acute in the developing world. The IEA estimates that China and India alone will account for half the energy demand increase in the next quarter century. As for other regions, the population in Africa will increase by more than 60% from now to 2030 and could become an important factor for the global energy demand. The remaining large income gaps between the developing and developed economies would justify the former’s increasing energy use to achieve better standards of living.

The problem can hardly be solved by single local solutions; rather, it requires an interconnected global portfolio of energy sources that matches regional characteristics and that can satisfy the global energy demand as efficient and carbon-free as possible. While many developing regions are abundant in potential energy sources such as coal, solar power, wind and water, state-of-the-art energy technologies are mainly developed in the industrialized countries, at least so far.

As the development of these technologies moves forward, it is important to know what future energy markets will look like. What are the future business strategies for international investment in the energy sector? In how far does the current financial crisis prevent or enhance domestic and international investment in energy saving technologies? What will be the dominant energy sources in different regions? In which fields of technology and locations will political action be necessary? Will action be taken by a global institution or on a regional level? In which form and time frame? Herein, an important step is the introduction of a CO2 emission price (tax or cap and trade system). In addition, the development, diffusion and application of new energy solutions may be fostered through all channels of international cooperation. The main actors would be multinational companies and investors. For example, they might invest in large-scale solar energy projects in African deserts, in large-scale offshore wind parks in Europe, or in CCS-equipped power plants in China. Policy makers should set a sound legal framework to give the right incentives to business initiatives, possibly via specifying energy efficiency standards on products. Where an efficient allocation fails, scientific advisors should identify policy strategies to promote international private investment and (international) technology diffusion, for example via sorting out institutional barriers in implementing energy saving technologies. They should also provide guidance on effective public investment in R&D and foreign aid. Given the increasing demand for energy in developing countries, a particular focus should fall on efforts to transfer technologies to these countries.