Europe's energy crisis and surging global inflation made for a turbulent year
This year was a tumultuous one in the fight against climate change. These were the biggest stories that made for an unsettling 2022:
- Tale of two COPs: Global climate cooperation took one step forward and two steps back this year. The COP27 summit in Egypt looked like it was going to be a bust until countries came together at the last minute on a compensation scheme for developing nations harmed by climate change. Still, details remain fuzzy and it’s unclear if the money will ever really flow. But countries at COP15 focused on biodiversity in Montreal could pat themselves on the back. They agreed to a landmark deal to protect one-third of the world’s land and waters..
- Surging energy costs: Russia’s invasion of Ukraine exacerbated already-high gas prices due to inflation. The global price of energy index hit a peak in August as Western nations scrambled to curb Moscow’s oil revenue while preserving adequate global supplies.
- Extreme weather: The drought that has plagued the southwestern part of the United States was the worst in 1,200 years, according to researchers. Similar dry conditions in the Horn of Africa threatened millions living there, while Pakistan experienced monsoon flooding. People were also buffeted by wildfires in Europe and a typhoon in Japan.
- Inflation Reduction Act: President Biden’s major climate initiative was a bright spot and one of the most transformative pieces of legislation in decades. Companies from Siemens to Toyota immediately announced billions in new investments in the United States, ensuring the effects of the IRA will be felt for years to come.
- Nuclear fusion: A major breakthrough in producing limitless clean energy may not have been on prediction lists for 2022. But that’s what U.S. government scientists achieved earlier this month through a nuclear fusion reaction that resulted in a net energy gain, a holy grail that has remained elusive since the 1950s.
Next year could be a more promising year, with inflation expected to ease and the world adjusting to the shocks caused by the war in Ukraine. Here’s what we are keeping an eye on:
- Air travel: Virgin Atlantic will embark on what it says is the world’s first net zero transatlantic flight next year, using sustainable fuel made from waste oils and fats. Meanwhile, France banned short, domestic flights to force people to travel by train for certain routes. Aviation accounts for about 2.4% of total global carbon emissions, but there are innovations and policy changes taking place to mitigate that.
- COP28: After a disappointing climate summit this year, U.N. Secretary-General Antonio Guterres said the body will host a “no-nonsense” gathering in 2023. As countries failed to make progress on commitments in 2022, the message for the next conference in Dubai is go big, or go home.
- Climate tech: Investing in new technologies to help the environment could buck the overall trend of subdued venture funding. That would follow what’s expected to be a slightly up year for investing in climate startups in 2022 at $40 billion compared to last year, according to HolonIQ.
- Carbon credits: The market for buying and selling credits to offset emissions could have a make or break year in 2023. The system has proponents such as U.S. Climate Envoy John Kerry and is quickly growing into a multi-billion dollar market. But the unpoliced trades could just be a way for companies to make their dirty habits more palatable.
- Circular economy: Reusing, recycling and sharing products and materials have become the buzz words in climate-conscious construction, fashion, furniture, and more. Next year may reveal whether this is a passing trend or the new reality.
Global underinvestment in energy, combined with a lack of regulatory clarity on decarbonization, is creating an inflationary and disjointed transition to a low-carbon future, according to Goldman Sachs Research. In Europe, the most carbon-intensive fuels (coal) are growing alongside the least (renewables), pushing energy costs higher without a meaningful reduction in net carbon emissions. Our analysts estimate $1 trillion in additional annual energy spending is required over the next five years to provide reliable, affordable, and cleaner energy in line with the UN Sustainable Development Goals.
Innovation in renewable power typically reduces the cost of reaching net zero. But in 2022, most of the improvement in the economics of decarbonization was driven by higher fossil fuel prices, which make greener substitutes more affordable. Our analysts estimate the cost per year to remove 75% of the easiest-to-abate carbon from the global economy is $3.1 trillion in 2022, compared with $4.1 trillion last year.
Clearer regulation of carbon pricing could bring down the cost of capital for energy projects and unlock investment in both traditional hydrocarbons and renewables. And targeted incentives for low-carbon investments, like the Inflation Reduction Act in the U.S., can close the funding gap further.