Global investment in energy is rebounding sharply in 2021, but not enough is going into clean energy, according to a new report.
Despite intense pressure from investors on the oil industry to restrict new development, and despite rising support for national investment in the energy transition, the shift in capital flows from fossil fuels into clean energy is happening too slowly. That is especially true in emerging economies.
Rebound in spending
Global energy investment is set to rebound by almost 10 percent in 2021 to $1.9 trillion, according to the International Energy Agency (IEA), recovering from the pandemic-induced downturn last year.
Investment flows continue to edge towards cleaner forms of energy.
Investment flows continue to edge towards cleaner forms of energy. For instance, the global power sector is expected to see investments hit $820 billion, up 5 percent from a year earlier and a new record high. Renewables capture the lions share at 70 percent of that total. “The rebound in energy investment is a welcome sign, and I’m encouraged to see more of it flowing towards renewables,” said Fatih Birol, the IEA’s Executive Director.
However, the transformation is too slow. In 2021, global spending on clean energy is expected to reach $750 billion. But in order to limit temperature increases to 2-degrees Celsius, the IEA said that spending would need to double in the 2020s.
Meanwhile, upstream investment in oil and gas development is expected to jump by roughly 10 percent this year, owing to a rebound for the industry and higher oil prices. That represents a step backwards in the effort to accelerate the transition. In contrast, the IEA said in a separate report from a few weeks ago that if the world successfully got on a pathway to reach net-zero emissions by 2050, the world would not need any new oil and gas projects beyond the ones already under construction.
The oil industry itself is under rising pressure from shareholders to adapt and lean into the energy transition.
The oil industry itself is under rising pressure from shareholders to adapt and lean into the energy transition. ExxonMobil lost a high-profile board fight, which could signal change even among the most stubborn oil companies. Royal Dutch Shell lost a landmark court case, and was ordered to cut emissions by 45 percent by 2030. Shell will appeal the ruling, but said that it would accelerate its emissions reductions.
But these changes are still modest. Only about 1 percent of the oil industry’s capex went to clean energy investments in 2020, with preliminary data showing that share rising to 4 percent in 2021. There is a long way to go but the accelerating climate crisis does not leave the luxury of time.
Clean energy needed in the developing world
If rich countries are not moving fast enough, the challenge is even more daunting for the developing world. In a related report, the IEA in conjunction with the World Bank and the World Economic Forum, said that global investment in clean energy in developing countries requires a “step change” to meet climate targets.
Less than $150 billion was funneled into clean energy in 2020, but that needs to rise to $1 trillion annually by 2030.
For instance, less than $150 billion was funneled into clean energy in 2020, but that needs to rise to $1 trillion annually by 2030 to put emerging economies on track to reach net-zero emissions by mid-century.
“In many emerging and developing economies, emissions are heading upwards while clean energy investments are faltering, creating a dangerous fault line in global efforts to reach climate and sustainable energy goals,’’ said Fatih Birol, the IEA Executive Director. “Countries are not starting on this journey from the same place – many do not have access to the funds they need to rapidly transition to a healthier and more prosperous energy future – and the damaging effects of the Covid-19 crisis are lasting longer in many parts of the developing world.”
Birol added that there is “no shortage of money worldwide, but it is not finding its way to the countries, sectors and projects where it is most needed.”
Just like the Covid-19 pandemic, where a two-tiered vaccination campaign is leaving the developing world still struggling with a spreading virus, the response to the climate crisis and the energy transition also threatens to open up a chasm between which countries are responding and which will be left behind.
Unless action is taken to change course, emerging economies are expected to account for the bulk of emissions growth going forward.
Slashing emissions in developing countries can be far cheaper than in richer countries.
Notably, however, slashing emissions in developing countries can be far cheaper than in richer countries, the IEA said. And not just by a little bit, but by as much as half. Many countries can leap frog to clean technologies without having to decommission existing fossil fuel infrastructure.
“Where clean technologies are available and affordable – and financing options available – integrating sustainable, smart choices into new buildings, factories and vehicles from the outset is much easier than adapting or retrofitting at a later stage,” the IEA said.
But there are, of course, formidable obstacles blocking the necessary investment, such as the lack of financial arrangements to offer predictable returns, the creditworthiness of governments in question, currency stability, debt, and the availability of infrastructure.
The report said that the current global financial architecture “offers some support” for sustainable development around the world, but “capabilities and funding levels do not yet answer the call for a fundamental transformation of the energy sector in emerging and developing economies.”