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Energy in the post-COVID transition between geopolitics and growth

Digital format, 15/07/2021, Aspenia

The world economy has started down the right path to achieving the environmental goals set by the EU and those underwritten in Paris in 2015, but still lags behind in terms of deadlines. European efforts must, in any case, be viewed within the broader global context, since all the data point to Asia – headed up by China, but not exclusively – as the worst offender in terms of harmful emissions. This is especially due to the use of carbon in this phase of post-pandemic economic recovery. Asia remains the principal problem even considering the combined American and European contribution. The trends are cause for deep concern and have a very marked geopolitical dimension.

A second geopolitical aspect is associated with the imbalance between advanced and developing economies; here the challenge is to create and cultivate sufficient consensus on what measures to adopt, including financial interventions to compensate and support those poorer countries that contribute less to environmental problems but suffer their negative impact more directly.

The Biden administration has revived Washington’s active commitment within the framework of the G7 and G20 to facilitate pursuit of the Paris objectives. This involves not only post-pandemic structural adjustment but also a different vision of the future. The international community’s sense of urgency surrounding climate change has intensified rapidly, yet the various stages of the green transition cannot be separated from geopolitics and from the need for the consensus of democratic countries. In particular, global supply chains need to be adapted to a radically new situation in which trade and technology issues are interwoven, creating novel forms of international interdependence. Transatlantic cooperation is decisive as a basis for building further international consensus, and Europe’s ambition to pave the way as a standard setter depends largely on that.

The overall geopolitical challenge will be for all nations to ensure efficient means of production and energy distribution; from this standpoint, Europe is not currently in an advantageous position. In the near future, on the other hand, China will be well placed to control essential technologies and related raw materials. For its part, the United States continues to show greater flexibility than the EU, thus will probably be able to adapt more rapidly to the challenges and opportunities of the coming years. This geopolitical scenario will inevitably have implications in terms of energy costs and thus affect economies, with considerable peril to European interests as a result.

Given such a scenario, Italy is among the relatively more virtuous countries with regard to the use of renewable energy, but the urgency to accelerate the installation of wind turbines and solar panels calls for regulation, along with significantly increased investments in the electrical grid and its digitization.

There is nearly unanimous agreement that the priority over the coming decade will be the de-carbonization of electricity, not least because of the knock-on effect it could have on other sectors such as transportation and the predictable shift toward electric vehicles. The energy efficiency of buildings is another fundamental concern. The overall costs of this transition are going to be massive, but aggregate prospects for additional GDP growth for more advanced nations is positive. There will inevitably be losers and winners in this process, which raises political and redistribution issues. Citizens/consumers will play a significant role in terms both of garnering the necessary political consensus and of actively contributing to the transition. It is important to encourage citizens to base their purchasing choices on the environmental footprint of goods and services because their behavior will have a direct impact on manufacturers and service providers.

Meanwhile, investment in emerging economies must increase more rapidly in order to allow for the establishment of truly sustainable models that extend well beyond the tight circle of the wealthiest countries: the finance sector has not yet fully acknowledged the need to build an integrated global system.

At the level of technology, it would be a good idea to keep as many energy mix options open as possible; and infrastructures must strive for interconnectivity to achieve the greatest efficiency in the use and distribution of energy. Yet, the unexpected is always waiting just around the corner: consider the shale gas & oil revolution in the US, which in a single decade became one of three leading global energy actors, along with Saudi-led OPEC and Russia. The role of natural gas, in particular, is crucial to the increased sustainability plans of advanced economies; the transition should be viewed as a process in need of intermediate stages, and timeframes for some steps could even be revised along the way.

Some observers had reservations about the reliability of some governments’ commitments when faced with eventual unforeseen priorities or emergencies; this not least due to the organized opposition that will almost certainly form in reaction to the costs and economic/social displacement associated with the transformation. The recent experience – controversial and now under the scrutiny of the COP26 – with the financial resources promised by more advanced countries to developing ones confirms the difficulty following up on pledges.

Europe’s strategic choice on behalf of the transition, now embodied in the Commission’s hefty legislative proposal “Fit for 55”, is linked with the goal of increased autonomy and capacity for action as a global actor. As such, the effort underway must be combined with strong ambition and pragmatic flexibility, aware of the difficulties and adjustments that will have to be made. According to supporters of the approach, the costs are financeable if taxation instruments currently being drafted are implemented, especially in coordination with the United States and then gradually with others of Europe’s partners.

The Mediterranean region and the African continent are of the utmost importance to the European energy outlook of the future. The Mediterranean basin must prepare for a demographic increase over the coming decades, with a massive uptick in the production of electrical power and installation of related distribution infrastructure. The entire energy infrastructure needs to be amplified and made more capillary; renewable sources that offer the Mediterranean major potential for the production of solar and wind power can play a fundamental role in sustaining green, equitable growth – a counterpoint to the well-documented sociopolitical problems of many countries along the southern shores. Important also will be the contribution (especially financial) of the Gulf countries, which are undergoing a profound transformation of their economic model. The African continent as a whole must be regarded as a natural counterpart to Europe for reasons of proximity and complementarity – particularly thanks to the availability of ample physical space for solar and turbine installations. Accords should be forged with countries endowed with an abundance of precious natural resources, along with a series of major infrastructure projects.