COVID-19-Inspired Longer-Term Changes to the Energy Transition

I started to write this blog on Thursday, June 11^th. On that day, Treasury Secretary Steven Mnuchin announced that, “we can’t shut down the economy again.” The Federal Reserve and others had already made grim predictions about the long-term economic impacts of the pandemic. Meanwhile, many countries and some major US states were reporting the virus’ acceleration. It was crystal clear that the coronavirus is still with us and will be for some time. By Thursday, even in the face of this continued threat, the US (and many other countries worldwide) had begun to reopen the economy and ease lockdown protocols.

Secretary Mnuchin’s announcement implied that if the feared second wave materializes (as it almost certainly will), the shutdown steps that proved to be effective in “flattening the curve” in the first wave will not be repeated. He did not specify what would replace them. When the stock market closed a few hours later, stocks had dropped by nearly 6% (S&P 500).

As I have mentioned, the first wave, which, by all accounts is still not over in many places, ravaged the world, with more than 7.5 million confirmed cases and more than 400,000 deaths. The US itself has had 2 million confirmed cases and more than 100,000 deaths. The 1918-1919 Spanish flu marks the only valid global precedent for what we are experiencing now. In that event, the second wave was more damaging than the first.

So how should we interpret Secretary Mnuchin’s pronouncement? The most straightforward interpretation is that a direct threat of 2 million additional cases and at least 100,000 additional deaths will not be enough to convince him to apply the tools that proved to be effective in the beginning of the pandemic. I prefer to be a bit more generous to the Secretary and assume that he is simply discounting the future, hoping that a second wave will not materialize. The stock market’s immediate reaction, however, indicates that the market doesn’t share his blind optimism. It seems that regardless of what the federal government does, the economy will follow the health and safety of the people. Likewise, the real pace of the economy’s reopening will follow the virus and not the government’s official pronouncements.

This discounting of the future has expanded into the private sector with a familiar, “heads I win, tails you lose” twist: management is requiring employees to sign a waiver to go back to work:

Whether companies are liable if their workers and customers catch the coronavirus has become a key question as businesses seek to reopen around the country. Companies and universities — and the groups that represent them — say they are vulnerable to a wave of lawsuits if they reopen while the coronavirus continues to circulate widely, and they are pushing Congress for temporary legal protections they say will help get the economy running again.

In other words, policymakers want to discount our futures, not their own. No wonder there is no mass consensus on the issue.

Now, there is no question that if the lockdowns last much longer, the global economy will freeze and many people will die as a result. Much of the death will take place because of a shortage of necessities such as food, healthcare, and shelter. So, if Secretary Mnuchin had been completely honest, he would have presented the issue as a choice of who will live and who will die. Once the healthcare systems are overwhelmed, this is the kind of choice they face. Politicians never want to present choices in these terms; discounting a possible bad future is much easier because nobody can hold them accountable until the future becomes the present—often after they leave office.

Here is Dr. Anthony Fauci’s take on reopening:

Reopening requires caution, he says. Over the past decades, we have never experienced a shutdown on such a global scale.

“That certainly contained what would have been a much more massive global outbreak, but you can’t stay locked down forever,” he says. “That’s the reason why we’re trying to carefully and prudently, with guidelines, get back to a degree of normality, and we’ve never ever had that situation before.”

During the interview, Fauci digs further into the country’s reopening. He looks ahead at what we may face in the future and shares advice on how we can best prepare. Read the highlights below.

My interpretation: we should open slowly—in stages following the guidelines that make workplaces conform to social distancing protocols—and we should engage extensively in testing and contact tracing. If a serious local outbreak erupts, we close again. The practical implications of this kind of opening are very complicated. Since I am teaching at a university that is trying to follow similar guidelines, I will be able to report on its successes and failures as we go along.

When will all of this be over?  We will be on our way to pre-pandemic conditions, with some pandemic-learned improvements, when vaccines are universally available globally. We need to approach global herd immunity with infection rates (R0) significantly smaller than 1. Even at that point, the virus will still be with us but we will be able to live with it.

Energy Intensity

The condition of an economy obviously drives energy use. The parameter that quantifies this connection is called energy intensity. It ties into the amount of energy we use and how that reflects economic activity, usually measured by the GDP. I have discussed energy intensity on many occasions here; just put it in the search box for more background. The global energy intensity for 2018 was 0.11koe/$2015. To clarify, the units are as follows: 1koe (kg of oil equivalent) = 40,000 Btu or 10,000 Cal; $2015 is the US $ value in 2015. With constant energy intensity, the decline in energy use follows the decline in GDP. However, as we have seen in more recent blogs, the coronavirus drives changes in the kind of energy used in addition to lessening total energy use. Domestic electricity rises but business electricity decreases, resulting in a decrease of total electricity use. In addition, as public transportation is one of the most dangerous virus transmission mechanisms, many people are shifting to bicycles for short distance travel. This shift is positive in terms of a transition to more sustainable energy mix but is likely temporary. We can expect that as the economy starts to reopen, the use of private cars will exceed pre-pandemic use, which is bad for sustainable energy use.

Almost every major transition starts with the destruction of business as usual habits, followed by trial-and-error-established alternatives (have a look at the September 17, 2019 blog about polar bears). Throughout history, we have been better at the destructive part of the process, while the constructive part requires more pain and effort. But eventually we learn how to benefit from the transition.

We are currently facing the virus-driven destructive phase. Many of us are now thinking about the transition and how we could shape it to help mitigate the coming climate change disaster.

The International Energy Agency (IEA), one of the most influential international organizations in the energy field, has taken some flak for its approach:

(Bloomberg) — The International Energy Agency marginalizes key climate goals in its research, according to an open letter from dozens of investors, business leaders, researchers and climate policy advocates.

The Paris-based organization is largely funded by rich countries and advises nations on energy policy. It publishes an annual report called the World Energy Outlook, which projects how the global energy system is likely to look in years to come. The scenarios it uses have become the bedrock of energy policy for governments around the world and provide key insights for global investors to check whether they are putting money in the right places.

The letter sent to Birol this week, which was coordinated by campaign group Mission 2020, asks the agency to make central an energy-use scenario that shows how quickly emissions must fall to see the Paris Agreement’s more aggressive target of limiting global heating to 1.5°C. The signatories include Laurence Tubiana, chief executive officer of the European Climate Foundation; Nigel Topping, climate action champion for the COP26 climate meeting; Christiana Figueres, former chief climate negotiator at the United Nations; Oliver Bate, chairman of the board at Allianz SE; Jesper Brodin, chief executive officer of Ikea Group, among others.

If the world were to warm just a few tenths of a degree further, the economic damage wrought would be in the hundreds of billions of dollars. It would bring the forced migration of millions, and the extinction of thousands of more species, according to an influential 2018 report from the United Nations.

The world has warmed 1°C since 1880, and the pace of warming has accelerated in the last three decades.

The same article cites the IEA’s response to the letter:

The IEA’s Sustainable Development Scenario does show which energy pathways are consistent with a 50% chance of keeping global temperatures from rising beyond 1.5°C, an IEA spokesperson said. The critical lever that would help achieve it is called “negative emissions,” or removing CO₂ from the air by natural means or technology.

Under the most ambitious climate target, scientists warn that global emissions must reach net-zero around 2050. The most aggressive scenario in the WEO sees carbon emissions fall to about 10 billion metric tons globally by 2050—a quarter of 2019 emissions.

Next week we will see how we are doing in adopting, or expressing intentions to adopt, some of the IEA’s recommendations.