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Energy and Regeneration: Context for Climate Investment, Finance

By Luis Manuel Leon - CasAgua
Director of Operations and Public Relations

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By Luis Manuel León | Director - Thu, 01/26/2023 - 13:00

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Being passionate about sustainable economic development, I identified two themes that were at the epicenter of the discussion around finance and global climate policy in 2022. In keeping with this personal perspective, I’m returning to the effects on the energy market from the Russian invasion of Ukraine and how we arrived at the 27th Climate Summit held in Sharm El-Sheikh, Egypt, and its outcome. By way of introduction, let me first develop the cases to be analyzed.

First, the increase in gas prices because of the Russian-Ukrainian war in Europe established a global urgency to deepen the discussion on the diversification of energy sources in the sense of betting on the energy transition to consolidate energy security.  The above is based on the dependence of European economies on the supply of Russian gas. The following table shows the percentage of Russian gas in the energy matrix of each country. 

1

In this regard, the International Energy Agency (IEA) estimated that total gas demand in the EU would fall by around 10% in 2022[1] because of the measures imposed by Russia on countries allied to Ukraine. Likewise, it is worth considering that the International Monetary Fund (IMF) estimates that since 2021 the wholesale prices of electricity and gas have multiplied by up to 15 times[2] and after the invasion of Russia,reached record figures that exceed €300 (US$323 ) per MW/h in an environment of volatility throughout 2022[3]. In other words, gas is scarce and is extremely expensive.

These implications can have a serious effect on European economies, individuals and businesses in terms of economic development, having to pay higher prices to face gas shortages and a recession interrelated with other global factors. The shared policy of European economies in response to this has been to reduce gas consumption by 15%, imposing supply cuts and seeking other sources of energy[4]. 

The aforementioned exposes the need to invest in an energy transition process so as not to be dependent on fossil fuels. The IEA has proposed four key points to be taken to reduce dependence on gas in the context of the conflict between Europe and Russia: a) increase and hasten improvements in energy efficiency, b) enable faster deployment of renewable energy, c) accelerate the electrification of heat, and d) encourage behavioral changes among consumers[5].

According to the same organization, it is estimated that a total investment of around €100 billion  (US$107 billion) is required. About half of this is for efficiency improvements, mainly building retrofits, and 40% is for renewables[6]. Given this, we can observe that the energy transition is a key point in terms of climate efforts and that it constitutes two vital long-term objectives for economies: 1) the reduction of greenhouse gas emissions by fossil fuels, and 2) the diversification of energy sources to obtain energy security.

In the sense of reducing emissions, in the following graph it is possible to observe the global percentage of emissions, where the EU is the third-leading producer. Accordingly European economies are responsible for approximately 10% of global emissions, a point to be denoted in the following analysis, which was discussed at COP27.

2

Within the framework of the dialogue held in Egypt, one of the centers of the discussion was the repeated demand by developing and underdeveloped countries for the constitution of a global fund to deal with the losses and damages derived from climate change, a position that argues that developed countries have a greater responsibility regarding the negative impacts of the climate crisis, but that those who pay the bills are this group of vulnerable countries.

Given this, the countries of the G77 coalition of the United Nations, supported by China, promoted integration around climate change in the decision-making of international financial institutions, central banks, commercial banks, and institutional investors[7]. Their position is that developed countries must compensate for climate impacts as well as support the development of climate adaptation projects through investment. For example, we can recall the 2022 floods in Pakistan due to melting glaciers as a result of  the increase in global temperature. The floods resulted in 1,100 deaths, half a million displaced people and US$10 billion in damages.[8]

The creation of the fund is  an achievement among  the agreements at COP27, also considering the change of position on the part of the US and the EU in favor of it. It is interesting to see  the following data  compiled by Chloé Farad and Joe Lo, in which we can observe a high financing gap for climate adaptation and what really flows from that.

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We can also acknowledge that it is developed countries that have collectively committed US$40 billion in adaptation financing by 2025, but more is needed.[9] On the other hand, in a scenario of corporate social and environmental responsibility, a small part of the profits of companies in the fossil fuel industry could pay for the economic losses of the V20 countries, territories that are considered vulnerable to climate impacts, such as some Pacific islands, such as Kiribati, that have to combat the rise in sea level due to the melting of the poles.

4

Finally, at COP27 the energy transition was considered an example of a cooperation mechanism for climate action, so it is interesting to look at this last graph to understand the investment around energy.

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The global context considers the need for an urgent paradigm shift that promotes the regeneration of a renewable and more efficient energy matrix, this being a window of opportunity for the development of technological innovation according to a sustainable economic development approach, which contemplates the social and environmental, but also makes economies more resilient around geopolitical altercations, energy security and climate change. In conclusion, climate finance and investment in 2023 must start walking toward  the energy transition and adaptation.

References:

Tgreenbook

Mena, Mónica (2022). “Los países que más contaminan el mundo”. Statista. On: aire https://es.statista.com/grafico/23395/paises-regiones-con-mayor-volumen-de-emisiones-de-dioxido-de-carbono/ 

[1] IAE (2022). “How to Avoid Gas Shortages in the European Union in 2023”. International Agency of Energy.  December of 2022. Page: 3. On: https://www.iea.org/reports/how-to-avoid-gas-shortages-in-the-european-union-in-2023

[2] Zettelmeyer, Jeremy (2022). “Defeat the European energy crisis”. International Monetary Fund. December of 2022. Page: On: https://www.imf.org/es/Publications/fandd/issues/2022/12/beating-the-european-energy-crisis-Zettelmeyer 

[3] Trading Economics. “EU Natural Gas”. Trading Economics. On: https://tradingeconomics.com/commodity/eu-natural-gas 

[4] Zettelmeyer, Jeremy (2022).

[5] IAE (2022). Page: 5.

[6] IAE (2022). Page 13:

[7] Lázaro, Lara (2022). “Gobernanza climática tras la COP27 de Sharm el-Sheikh”. Real Instituto Elcano. On: https://www.realinstitutoelcano.org/analisis/gobernanza-climatica-tras-la-cop27-de-sharm-el-sheikh/

[8] Marques Da Silva, Isabel (2022). “Pakistán alerta que la situación tras las inundaciones aún puede empeorar”. Euronews. On: https://es.euronews.com/my-europe/2022/08/31/pakistan-alerta-que-la-situacion-tras-las-inundaciones-aun-puede-empeorar#:~:text=1.100%20personas%20muertas%2C%20medio%20mill%C3%B3n,sincero%22%20a%20la%20comunidad%20internacional

[9] Farad & Jo Lo, Chloé (2022). “In numbers: The state of the climate ahead of Cop27”. Climate Change News. October 2022. On:  https://www.climatechangenews.com/2022/10/28/in-numbers-the-state-of-the-climate-ahead-of-cop27/

Photo by:   Luis Manuel Leon

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