The energy crisis triggered by the war in Ukraine has further exposed the risk posed by dependence on fossil fuels and an undiversified energy mix. While a number of OECD countries use renewable energy to meet around a third of their power demand, the overall role of fossil fuels in the total energy supply remains elevated at around 80% on average. This leaves many OECD countries highly exposed to geopolitical and market volatility.
Following the invasion of Ukraine, the shock to oil and gas prices has been remarkable in countries that are particularly dependent on Russian oil and gas. In Europe, gas prices reached levels 10 times higher than a year ago, and the price of oil has almost doubled.
Staying on track towards net-zero in the face of war
While governments rightfully aim to address urgent public concerns about the energy price increases, they need to be careful not to scale back the green ambitions of their recovery plans. In fact, increased adoption of renewable energy and higher energy efficiency would help to reduce dependence on fossil fuels and, at the same time, decrease emissions of greenhouse gases. This is well underlined in the International Energy Agency’s 10-point Plans to reduce oil demand and the European Union’s reliance on Russian gas, which highlight that adoption of electric vehicles, renewable power technologies and energy efficiency measures can help lower demand for fossil fuel imports and emissions.
How green are countries’ recovery plans?
The latest update of the OECD Green Recovery Database shows that green spending allocated to energy and transport sectors, which play a key role in determining the national energy mix, has increased from around USD 380 billion to more than USD 610 billion. This growth is part of a wider increase in recovery budget allocated to environmentally positive measures, which moved from USD 677 billion to USD 1 090 billion (or 33% of total recovery spending). However, money allocated to measures with mixed and negative environmental impacts has also increased in tandem, from USD 163 billion to USD 290 billion and from USD 156 billion to USD 178 billion respectively.
These green recovery measures may need to be accompanied by targeted and temporary support to help vulnerable households to go through this period of high-energy prices. Providing rebates on fuels at pump stations is not a pro-poor way of addressing the prices spike since they may benefit more high-income households that own large energy-hungry vehicles. Measures designed to include households’ income among the criteria used to allocate support are more effective in ensuring that support reaches the most vulnerable groups. As highlighted by the latest OECD Economic Outlook, taxing windfall profits of energy companies could help to finance such measures.
Governments must step up support for innovation to accelerate the green energy transition
Most of recovery funding is focused on promoting the adoption of green technologies already at commercial stage. Support to green R&D amounts to less than 1% of total recovery spending but around half of the CO2 emissions reductions by 2050 need to be delivered by technologies are not yet commercially available. Accelerating basic R&D is needed to develop key technologies, such as advanced batteries and hydrogen electrolysers, on time to the meet the Paris objectives.
Fast-tracking green innovation could build on the lessons learnt from the COVID-19 pandemic. For instance, governments could distil best practices from the measures that dramatically accelerated the development and deployment of COVID-19 vaccines to promote innovation for a low-carbon and energy secure future.
Looking ahead…
These and other imperatives for green innovation will be discussed at the 2022 OECD Green Growth and Sustainable Development Forum on 23-24 November on “Green innovation and the impact of economic shocks “.
