Energy across borders

Is it possible to raise living standards and alleviate poverty without increasing energy consumption? That’s the burning question.

The International Energy Agency argues that without a significant change in our energy use the world will experience global warming of up to 5°C within this century – temperatures the world has not seen in several million years and that will condemn future generations to a profoundly less liveable world.

But Gross Domestic Product (GDP) growth has always gone hand-in-hand with increased energy consumption, with all its attendant environmental impacts. Leaders aim for economic growth that delivers a higher quality of life for their citizens. Energy is not consumed for its own sake, but to enable prosperity.

But we need to decouple the two.

First we need to change investment structures and incentives. At the moment the global energy bill stands at US$ 5 trillion per year, with an additional US$ 6 trillion spent on infrastructure – factories, power plants, buildings and highways. These investment choices lock in energy use patterns for decades to come.

Meanwhile, subsidies continue to distort prices. In 2010, over US$ 400 billion was spent on subsidies to fossil fuel consumption, with roughly a further US$ 100 billion spent on subsidies to fossil fuel production. We need to remove these, or reduce them, so that pricing is as close to market-based as feasible.

But even if we removed fossil fuel subsidies to create a free market level playing field, would the private sector deliver a solution by itself? It would seem not. Private investment is still way too low because the long-term risks are just too high. We will need to spend a massive US$ 38 trillion on energy supply infrastructure between 2011 and 2035. Returns on that size of investment are far from certain.

So we need government and the private sector to work together. There are lots of country-specific projects going on, from China’s target of a 16% reduction in energy intensity by 2015, to Bangladesh’s electrification project funded by innovative microfinance. Still, we need cross-border solutions and free-trade agreements, as not every country can afford its own self-contained system.

We need investment in energy infrastructure and technology, including smart grids and other transportation assets, and we need policy frameworks that enable supply-side and demand-side investments to be evaluated together. This means regional energy investments and freer trade in energy-related goods and services.

This is a global problem calling for international solutions.

Author: Mark Halle, Executive Director, IISD, with support from Bob G. Elton, Adjunct Professor, University of British Columbia; Member and Chair of the World Economic Forum Global Agenda Council on Sustainable Consumption and New Energy Architecture, respectively.

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