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Energy Transition in a Fragmented World - Barış Sanlı

There are several scenarios about having a “green takeoff” after the depression. So more investments in green and renewable investments will increase jobs and stimulate growth. The rationale is simple. But this scenario was not necessitated by the crisis, but it was a well-known narrative before the crises. Change is the motto for everything nowadays.

Everything has to change, and the change is imminent, etc. For the covid19 crisis, we are pretty sure that there will be changes in our lives. Despite all this change literature, there is one thing that doesn’t change, and it is the expert’s ideas. If this change has not changed your ideas in any way and if you are still singing the old lullabies, it may be a possibility that you are getting it wrong.

The wave of green deals is not new. Just during the 2008 crisis, UNEP Executive Director proposed the “Global Green New Deal” to foster green development and to stop climate change. There are numerous green deals in between. Then came the US senator Alexandria Ocasio Cortez’s Green New Deal. Then Europe revealed a “European Green Deal.” All these ideas are the product of Keynesian templates with technology pulls. But naming all these “deals” in the same way shows us the shallowness of the options we have so far.

European Green Deal, in this sense, is aiming for a Carbon-based Border Adjustment Tax. So when you put artificial limits on your trade with other partners, it is for sure that your costs will increase. But at what cost? Europe thinks local industry and job creation worths this economically inefficient choice.

Then we have the growing disarray between the US and China. The question, of course, is the speed of energy transition where China is no longer the favorite production and supply hub. The solar technology owes its cost decreases to scale. If the markets get fragmented, the global scale will be divided into several parts. India is an alternative to balance China, sure. But alternative can be fractured as well, including several mid-sized countries.

Assume that, EU has pushed for more renewables and battery storage. That means it will also apply border taxes(“green deal” is implemented). Therefore, they will have an internal green industrial engine. So when they want to sell their products abroad, the border tax will be a problem because of reciprocity. Since the EU industry is protected by border taxes, China may gain a better share of the world’s renewable industry. As the discrepancy increases, the companies will make a choice.

A Chinese-American dispute is no different in terms of results. The US has no intention to have a “green” energy transition, but maybe a natural gas substitution is more likely. China also needs natural gas, and US production is important. For green industries, if there will be border taxes, then China has to produce more cheaply. Cheaper renewable production will kill more innovation in the pipeline. The car industry, battery storage, you name it. Anything seen strategically by the Chinese will be subsidized until they run out of money.

So the innovation engine will be broken, global scaling of new technologies will be damaged. Fragmented markets, more taxes, the urgency to bring back growth at all costs will create a more chaotic world. Along the lines, LNG is the only product that will not get affected by this new age of “border-trade barriers,” yet. In the world of scared global companies, it will take time to have the courage to change completely before the eye of risk-aware investors.

In conclusion, a leap to renewables -globally- is harder than before. Gas(with hydrogen) and renewables are much more likely to accompany each other. Border taxes, other green deals, and asset purchase programs are not new. What is new is our blindfolded march to a new reality by singing “change” rhymes. Welcome to the more fragmented, less innovative, and more adventurous world.


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