## New Energy Imperative

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**Canonical URL:** [New Energy Imperative](https://www.imf.org/en/publications/fandd/issues/2022/06/new-energy-imperative-wagner)

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## Bibliographic details
- Authors: Gernot Wagner
- Published: June 2, 2022

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### Crisis and opportunity of the Ukraine war
- Russia’s invasion of Ukraine is presented as both a crisis with potential long-lasting economic and political consequences and a moment of opportunity for the energy transition.
- Political dynamics can entrench the status quo: lawmakers’ attempts to lower high energy prices directly can dampen incentives to cut fossil fuel use.
- Establishing who should pay for the energy transition’s investments will generate difficult political fights, but measured from a societal perspective, these investments “pay for themselves many times over,” because fossil energy use imposes external damages exceeding its value added to GDP.
- True net-zero transition requires both:
  - rapid deployment of new low-carbon technologies, and
  - more significant systemic changes.
- Quotation on political resistance: “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.”

### Affordable energy: technology cost trends and deployment
- Solar PV:
  - International Energy Agency (2020): “for projects with low-cost financing that tap high-quality resources, solar [photovoltaic (PV)] is now the cheapest source of electricity in history.”
  - Systems prices have come down dramatically: declining by a factor of two within a decade, three within four.
  - Global PV market share stands at about 3 percent.
- Batteries and electric vehicles (EVs):
  - Prices have declined fast, spurring rapid adoption.
  - BP Energy Outlook (2016) projected the world would surpass 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.
  - EV market penetration remains low: EVs are “not yet 2 percent.”
  - Even 70 million EVs would be less than 6 percent of today’s global vehicle fleet of some 1.2 billion cars.
- Inflationary dynamics:
  - Solar PV prices rose in the past two years, contributing to “greenflation.”
  - However, “fossilflation” dominates, with fossil-based power source prices rising by more than the relatively small increases in solar PV, further lowering relative solar prices per kilowatt of capacity and actual electricity produced.

### Short-term energy policy trade-offs in response to the shock
- Immediate priorities to disentangle EU dependence on Russian oil and gas:
  - Decrease demand.
  - Find alternatives to Russian supplies, which implies increasing oil and gas production elsewhere.
  - Accept some short-term trade-offs, for example:
    - Avoid 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 limitations of prior analyses
- Pre-invasion analyses underestimated the possibility that Russia would cut off gas deliveries to the European Union altogether.
- Example: ENTSOG’s stress test considered scenarios such as no Russian gas through Belarus or none through Ukraine, but did not model a scenario with no Russian gas at all.
- A widely cited European Central Bank 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, and
  - the electricity, gas, steam, and air-conditioning supply sector would see output fall by almost 10 percent due to a 10 percent gas supply shock.
- Such analyses suffer from status quo bias and static methodologies that understate dynamic adjustments (for example, rapidly increased demand for alternatives such as heat pumps).

### Benefits, costs, and economic implications of low-carbon technologies
- Heat pumps:
  - Replace oil and gas furnaces and operate much more efficiently.
  - Even if all electricity came from natural gas, emissions from heat pumps would still be lower than direct natural gas combustion in home furnaces.
  - Heat pumps are essentially air-conditioners run in reverse; demand for heat pumps would “skyrocket” under gas disruptions, straining supply chains and adding to inflation pressure.
- Net-zero transition cost estimate:
  - McKinsey’s analysis: 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.
- Net assessment: Transition entails real costs and hard changes, but those costs also present economic opportunities and benefits when viewed from a societal perspective.

*Source: New Energy Imperative, F&D Magazine, Gernot Wagner, June 2022.*

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_Source: https://www.imf.org/en/publications/fandd/issues/2022/06/new-energy-imperative-wagner_