The Demise of the “Energy Transition”
The demise of the “energy transition” does not mitigate the fact that there is a strong need to develop adaptions to the reality of a warming planet.
It has been building for a long time, but in the last few months since President Trump was elected for a second term, there has been a growing sense in the political and media zeitgeist that we have moved beyond the “energy transition” in the sense that there is a pre-ordained path leading to the near-elimination of fossil fuels and net-zero carbon emissions.
While not necessarily related, this has come alongside a sharp rollback in commitments by big business to ESG (Environment, Sustainability, Governance) goals and DEI (Diversity, Equity, Inclusion) programs. Both of these saw a surge in support from corporate America right after Trump’s first term ended, but we now have CEOs and institutional investors running for the exits.
For the “energy transition,” though, while the American culture wars have played a role, the primary problem was the growing disconnect between the stated goals and time frames and the tools available. Even in Europe, where there has been a near-consensus on the need to reach net zero by 2050, some major politicians are starting to backtrack. Needless to say, all of this has generated cheers on the right, and much hand-wringing on the left. The latter may still talk about limiting climate change to 1.5 degrees Celsius if we make a herculean effort to get back on track, but even they know deep down that the reality is well beyond that.
As the zeitgeist has shifted, the major global oil and gas companies have been rolling back their commitments. U.S. major companies generally have had higher expectations for global oil and gas demand in the future, and have focused their efforts more on decarbonizing their production than investing in renewables. European major oil companies had tacked toward investments into solar and wind generation, and both Shell and BP have announced major rollbacks of their foray into renewables, shifting back toward their core hydrocarbon businesses. Much of this shift is a response to the reality of continuing demand growth, albeit modest, at a time when many believers in the “energy transition” thesis, including the International Energy Agency, had thought oil consumption might not even recover to pre-pandemic levels.
The reality of this new era is that energy consumption is growing globally in an “all of the above” manner. Renewable energy is seeing explosive growth, but there is still some growth in oil demand and even coal, and strong demand growth for natural gas and LNG. Part of this stems from the alleviation of energy poverty around the world. Even as renewables grow as a share of generation in developed markets like Europe and the United States, the rapid expansion of generation in poorer countries like India has seen coal use continue to grow even as renewables use also accelerates.
Renewables also have not eliminated energy security concerns, even as they localize a lot of energy production. In Europe, a period of overcast weather with low wind have recently caused price spikes on the grid. For the United States and others, it is difficult to see solar and wind generation as an unalloyed boon to energy security when the supply chains for this hardware lead overwhelmingly back to China.
This reality is far from validating the positions of climate deniers, however, despite the crowing on the political right. Man-made climate change is real, and the presence of a rapidly-growing renewables sector has mitigated a great deal of carbon emissions which would have taken place if generation had expanded this far. Also, energy poverty solely based on fossil fuels has been thereby reduced. Great progress has been made on decarbonizing road and rail transportation, which may lead to a plateau in oil demand in the next decade or even modest declines. How that will play out will depend in part on the environmental and industrial policies of major consumer countries, in light of the dominance Chinese automakers have achieved in the relevant technologies and in cutting manufacturing costs. It will clearly vary widely across major consuming markets.
Given the clarity we now have on reaching more than the Paris Agreement’s target of two degrees Celsius warming – with three degrees quite plausible a century out from now – we really need to focus more on adaptation. We have had a debate where one side tried to bury the issue, and the other pretended it could be mitigated by a set of policy solutions.
What we need to acknowledge now is that we are not going to avoid severe consequences from climate change, and we need to incentivize adaptation, whether that is not rebuilding after disasters in areas which will be wiped out repeatedly by hurricanes or floods, or funding research on drought-resistant crops and sharing the technology with poorer countries for their benefit. And yes, businesses and investors who are forward-thinking enough to adapt will reap the financial rewards of doing so.
Greg Priddy is a Senior Fellow at the Center for the National Interest and does consulting work related to political risk for the energy sector and financial clients. Previously, he was director of global oil at Eurasia Group and worked at the U.S. Department of Energy.
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