Controlled transition not a foregone conclusion
Economic activity and energy consumption are inextricably linked. Needless to say, changes in energy systems potentially have a major impact on the economy. The Paris climate agreement is one of these changes, with its ambitions implying that the transition to a carbon-neutral economy must be completed well before the turn of the century, i.e. within the expected service life of the homes and offices we are building today.
As yet, the world is far removed from that objective. The Netherlands generates only a fraction of its energy sustainably. Its carbon emissions recently rose again after several years of decline. As the Dutch economy specialises in carbon-intensive processes, it is sensitive to climate policies, for instance by hurting its competitiveness.
The more rapid the transition is to be made, the greater the likelihood of abrupt adjustments. A sudden changeover may impair economic growth. Large parts of our country’s production and infrastructure rely on fossil fuels. Depreciation of assets may also affect financial stability. Conversely, a transition that lacks sufficient decisiveness may result in a failure to achieve the climate targets, which will eventually have a much greater impact on the economy.
Starting now, with a long-term view
This calls for timely pursuing a plausible and practicable path towards a carbon-neutral economy, which requires a long-term view on the intended transition, specifying clear goals and transition paths for the various sectors and paying attention to infrastructural issues, such as power grid modifications. A long-term view enables households and businesses to gradually adjust their investments, preventing excessive loss in value.
Ideally, such a vision also encompasses an innovation agenda shaping the future of the most energy-intensive sectors (chemical, agricultural and metal) in a carbon-neutral economy. It is not a matter of removing such activities from the Netherlands or Europe; the question is, rather, how industries can make the transition without loss of value or employment. Starting in good time may even create opportunities for businesses, with those being the first to complete the transition ending as the winners of the future.
A long-term view may also guide the public debate about power generation. Wind farms, carbon storage and nuclear power meet with public opposition. Ruling out or limiting these options in advance may mean that the climate objectives can be realised only through energy savings with a significant impact on economic activity. It remains to be seen whether the population is prepared to make such a sacrifice.
Unambiguous policy to reduce carbon output
To avoid making the task for society even greater than it already is, it is important to minimise climate policy costs. To achieve this, greater emphasis must be placed on emission reduction as the fundamental aim. So far, the Netherlands and Europe have focused in particular on derived aims, including energy conservation and increasing the share of renewable energy. These options should by no means be ruled out but should rather be incorporated into a more comprehensive strategy in which the emissions target is put first.
Adequate carbon pricing is essential to shift this focus onto emission reduction, which requires a reform of the European emissions trading system (ETS). Industry sectors that currently fall outside the scope of the ETS should either be made subject to the ETS or be taxed directly for their emissions. As a first step, the exemption from energy tax for large energy users could be revoked. This will require European agreements to create a level playing field.
Climate risk transparency
To conclude, climate risks should be made more transparent. Although a controlled transition would appear to be feasible provided that the first steps are taken soon and all available technologies are used, the uncertainties are quite substantial. Moreover, who can say whether the ambitions of the climate agreement reached in Paris will effectively be transformed into global action in time? The transition may well be abrupt or – worse – may not happen at all.
Clarity about the exposure to this risk requires unambiguous and generally applied standards. Detailed carbon footprint reports and energy transition plans will make it easier for financial institutions to factor in climate risks and will help put a realistic carbon price on climate risks.