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2014-10-28 23:25:00

WORLD TOP CHALLENGE

WORLD TOP CHALLENGE

On the 40th anniversary of the IEA, former President Felipe Calderón, chair of the Global Commission on the Economy and Climate, describes the energy sector's past and future, and why that future must involve decarbonisation.

Q: What has changed the most in the energy sector since 1974?

The world has changed dramatically since the 1970s, and the energy sector is no exception. In fact, it has been one of the engines of change. International trade has multiplied 22 times from the 1970s to the beginning of this decade and the world economy has expanded 12 times in nominal terms. Maintaining this pace has posed a challenge to the energy sector which, to keep up with global energy demand, has based its production, resources and innovation capabilities on fossil fuels, particularly oil.

This energy model is reaching its limits. On the one hand, it is under tremendous pressure not only because of the rising demand but also due to the increase in energy costs as well as high price volatility and uncertainty in energy supply. On the other hand, the model creates greenhouse gas emissions that have accelerated global warming. Temperatures in the last four decades have been the highest in hundreds of years. The dire consequences of this situation are seen in climate change around the globe. The long-term implications remain to be seen, but there is no doubt that climate change will have very high costs in every social, economic and political aspect of human activity.

With regard to the rising demand, the technological response has given a higher viability to the fossil fuel model in the short and medium term. A clear example is the technological development in both hydraulic fracturing, or fracking, and horizontal perforation. This has given place to a technological revolution for the extraction of shale oil and shale gas. This change is so important that it is already creating a new perspective in terms of global energy, economy and even probably the geopolitical order. In the case of North America, the United States, Canada and Mexico have technically recoverable reserves of about 2 quadrillion cubic feet [57 trillion cubic metres] of shale gas. With such reserves, North America can strengthen its energy security: the United States alone will go from net importer to net exporter of hydrocarbons.

With regard to climate risk, current trends put us on a path of global warming that can reach up to 4 degrees Celsius, which poses a serious problem. If the technological transformation in fossil fuels has some benefit, it will be in terms of the increased ability to extract and use shale gas, which is cleaner than coal and oil. This might imply that natural gas can substitute in the mid-run for the fuel that creates most of the greenhouse gas emissions: coal. But this would not be enough. The world needs a full transition towards a low-carbon economy based on renewable fuels. The good news is that policies that have put restrictions and taxes on emissions, particularly in Europe, have encouraged new, unprecedented developments in renewable energies, which have made solar and wind energies as – or even more – competitive than fossil fuels in some countries. This is not the rule yet, but we are witnessing a hopeful evolution.

Q. What will change most in the next 40 years?

Climate change is a reality. As long as global warming as a result of carbon emissions continues, in the following years we will witness extreme meteorological events in higher number and intensity.

The energy matrix that supports global economic growth must change. To meet this transition is a challenge that needs an effort from many fronts. On the supply side, new energy projects must be based on cleaner energies such as hydro, wind and solar. This implies strong commitments for financing and technological progress to keep abating energy generation, transmission and storage costs. On the demand side, it is key to create conditions to reduce per capita consumption and, at the same time, have energy at competitive prices.

The role of governments is to generate the right incentives for society and the private sector to promote the transition to a low-carbon economy. The goal must be a new model of sustainable development that leaves behind the false dilemma between economic growth and the fight against climate change. The most important policy tool will be a clear pricing system that includes negative externalities related to the use of fossil fuels, tax burdens linked to the use of coal and, of course, the full elimination of public subsidies to fossil fuels.

Q. What is the top challenge to energy security?

The transition towards a sustainable economy entails several challenges. Perhaps the most important is to take the cost of generating, transmitting and delivering renewable energy to a turning point for it to be as cheap – or cheaper – than fossil energy. Market mechanisms are needed to encourage technological innovation. Global elimination of fossil fuel subsidies and the creation and regulation of carbon taxes are key, even in substitution of other taxes on labour or income, in a way that the effects on global economic growth are positive or neutral.

Some key costs must be cut, such as for energy storage. Also, there is clear need for substantial advances in carbon capture and storage technologies, which are still in a very early stage of development. This will require an increase in public research and development budgets, in a way that governments create market incentives for private investment in these and other technological developments in the energy model.

Q: In 40 years, what will be said of our policies?

If in 40 years we were to look back to the policies and decisions made today, I think we would wonder: "Why did we not start before?" Among the decisions that the policy makers of the future would have liked us to start earlier and more boldly:

• A global commitment to the drastic reduction of greenhouse gases.

• Innovation-oriented policies to reduce the carbon footprint of every person on the planet.

• Elimination of subsidies to fossil fuels to channel resources to clean energies.

• Relevant increases in public budgets for research and development in areas such as production of clean energies, carbon capture and storage, and in general a reduction in the costs of renewables. Another area is the provision of clean energy to millions of people who still lack access to it.

• A new global policy that changes the current urban development model and starts developing compact and efficient cities. This is crucial, as in the next two decades, more than 1 billion people will join the global urban population.

• Sustainable use of forests and jungles, and the end of deforestation and desertification.

• Innovation in the agricultural sector to increase productivity while decreasing the impact on the environment.

• Further internalisation of environmental costs on energy projects.

In general, we are talking about public policies with a human approach; policies that will create paths towards a sustainable energy sector and at the same time create opportunities for economic development in every nation.

Q. What role do you see for the IEA in this?

Both IEA member and non-member countries have their share of responsibility in the planet's energy future. It is very important to create a permanent dialogue among all nations whether they are member countries of the IEA or not and whether they are net energy consumers or producers.

The challenges ahead are significant and demand that all stakeholders add their efforts towards a common goal: sustainable development. Actions from the private sector, civil society, governments and international organisations must create incentives to promote investments and agreements to attain this common goal.

One of the key international institutions in this context will be the IEA, which has among its challenges to increase its membership, particularly among those countries that have a greater impact in the international energy map as big consumers or producers. I am talking of countries such as China, India, Russia, Saudi Arabia, Iran, the United Arab Emirates, Venezuela and Mexico.

The IEA will also have to look for a deeper collaboration with other organisations and the creation of spaces to share experiences and technological improvements. In this way, the IEA will mark the path of energy sustainability in the 21st century.

The IEA must contribute in order to balance the energy matrix: it is central that private firms, consumers, governments and producers understand that the current model based on fossil fuels has reached its limits. We need to accelerate the transition towards a new energy model, and we have to do it while promoting economic growth.

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Tags: IEA, OIL, GAS, PRICES,