## New Energy Imperative

## Source details

**Canonical URL:** [New Energy Imperative](https://www.imf.org/-/media/files/publications/fandd/article/2022/june/wagner.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/fandd/article/2022/june/wagner.pdf.md)
- [Structured JSON version](/-/media/files/publications/fandd/article/2022/june/wagner.pdf.json)

---

### Crisis and opportunity
- Russia’s invasion of Ukraine is a crisis with potential long-lasting economic and political consequences, but it also highlights moments of opportunity.
- Vested interests can benefit from swift political action and may cement the status quo; for example, attempts to lower high energy prices can dampen incentives to cut fossil fuel use.
- The war “highlights the crisis and opportunity of the energy transition.”

### Affordable energy
- The International Energy Agency declared in 2020 that “for projects with low-cost financing that tap high-quality resources, solar [photovoltaic (PV)] is now the cheapest source of electricity in history.”
- Solar PV prices have risen in the past two years, contributing to “greenflation,” but “fossilflation” dominates as fossil-based power source prices have risen by more than solar PV increases.
- System prices have come down dramatically over the years, “declining by a factor of two within a decade, three within four.”
- Global market shares:
  - Global PV market share stands at about 3 percent.
  - EVs account for not yet 2 percent.
- EV adoption has accelerated: BP Energy Outlook (2016) projected surpassing 70 million plug-in vehicles globally by 2035; that number now looks achievable for 2025, 10 years earlier than expected on a 20-year time horizon.
- Context for scale:
  - Even 70 million EVs would be less than 6 percent of today’s global vehicle fleet of some 1.2 billion cars.

### Short-term energy security measures
- Neither PV nor EVs will make much of a difference in addressing the immediate challenges posed by the current fossil-fueled war.
- Short-term measures to disentangle EU dependence on Russian oil and gas should focus on decreasing demand and finding alternatives to Russian supplies, implying increasing oil and gas production elsewhere.
- Examples of short-term trade-offs:
  - Avoiding the German nuclear exit scheduled for December 2022.
  - A short-term increase in European coal power production (noting that a good portion of EU coal also comes from Russia).

### Assessing risk and limits of prior analysis
- Prior stress tests and economic models underestimated the possibility of Russia cutting off gas deliveries to the European Union entirely; no serious analysis published before the invasion considered a complete cutoff.
- Example: ENTSOG’s stress tests did not include a scenario of no Russian gas at all.
- A widely cited analysis titled “Natural Gas Dependence and Risks to Euro Area Activity” concluded that a 10 percent gas supply shock would cut euro area GDP by 0.7 percent; the electricity, gas, steam, and air-conditioning supply sector would fall by almost 10 percent for a 10 percent gas supply shock.
- The limitation: such analyses are static and exhibit status quo bias, failing to capture substitution dynamics (for example, increased demand for heat pumps).

### Benefits and costs of transition
- Heat pumps are highly efficient: even if all electricity comes from natural gas, resulting emissions are still lower than burning natural gas directly in a home’s gas furnace.
- Reduced gas availability would increase demand for heat pumps, causing supply-chain constraints and contributing to inflation pressure.
- Transition cost estimate: McKinsey’s report on the net-zero transition shows costs of about $25 trillion over 30 years to convert the world economy from its current path to one that achieves net-zero carbon emissions by midcentury.
- Distributional and political implications:
  - Establishing who should pay for the $25 trillion investments will engender difficult political fights.
  - From a societal perspective, these investments “pay for themselves many times over,” because fossil energy use costs more in external damages than it adds value to GDP.
- Policy implication: a true net-zero transition requires both rapid deployment of low-carbon technologies and more significant systemic changes.

### Policy recommendations and political considerations
- Actively pursue policies that enable the rapid deployment of new low-carbon technologies and systemic change.
- Be wary of political incentives that favor the status quo; as Niccolò Machiavelli observed: “The innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.”
- Short-term energy security decisions should balance immediate supply needs with transition pathways (for example, temporary measures like delaying nuclear exits or increasing coal use carry trade-offs).

*Gernot Wagner, “New Energy Imperative,” Finance & Development, June 2022.*

---


_Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/june/wagner.pdf_