Transition To Green Energy: Dual Challenges Of A Changing Economy And Economic Loss Due To Climate Change

The 2015 Paris Agreement changed the way world thought about its interaction with the environment. Nations made commitments to reduce emissions and to limit the average global temperature to 1.5℃ from pre-industrial levels.

Policies and regulation targeting behavioural change of people were introduced by governments. Industry sectors also had their regulatory landscape undergo a shift to align with Paris climate goals.

Energy is a prominent industrial sector that underwent a massive transformation. There is a continued emphasis to reduce energy consumption from conventional fossil fuels to cleaner and greener sources. Solar and wind energy are the leading sources of renewables driving the shift to green energy.

Is this shift necessary? It is imperative we act swiftly to limit the adverse impact of climate change. A delayed response will make it harder to limit the average global temperature and make climate disasters more potent. And delaying affirmative action to combat climate change would significantly raise monetary costs. Nations would face stronger cyclones/typhoons, harsher droughts harming the lives and livelihoods of people.

To put a number on it, the Potsdam Institute for Climate Impact Research estimates a loss of $38 trillion per year in damages. Even if CO₂ emissions were to be drastically cut down starting now, the world economy is committed to an income reduction of 19% until 2050. In such a scenario, falling incomes do not make costly green lifestyle choices attractive to people.

Until green alternatives can be built or manufactured at scale while securing livelihoods, climate change resilience is not an attractive proposition to the average citizen. To honour their differentiated natural commitments, nations on the planet are trying to shift to a renewables-led green energy to power themselves and their economy.

This transition to a green energy system is happening along the rise of a digital economy using artificial intelligence (AI), blockchain, IoT and automation. It requires working with large amounts of data stored on a huge server farms or server clusters. These server farms require gigawatts of energy to function efficiently and keep the systems running. An estimate by Deloitte indicates a five-fold increase in data centre energy demand reaching 175 gigawatts (GW) by 2035.

The consumption of 175 GW of energy over the next decade to provide seamless digital and AI services will increase carbon emissions. The rapid growth and adoption of artificial intelligence saw a 150% rise in operational emissions of leading tech companies since 2020.

With greater technological diffusion of AI, the energy demand is expected to rise. To build the AI and digital hardware and power the data centres, a stable energy source is required. Neither solar nor wind are a stable energy source. These renewable energy sources are dependent on climate, geography, and access to technology.

To cite an instance, the energy demand to keep the Google GPUs and data servers running impacted energy supply to the town/county they operate in. In an effort not to drain the local residential energy supply, tech companies such as Microsoft, Google are exploring nuclear energy to power their data centres.

With all the developed and major developing economies competing for the resources to build this new energy intensive industry with the chips at its base and trying to meet their net zero goals, sustainability takes a back seat.     

The International Energy Association posits this rise in energy demand as a ‘New Age of Electricity’ from 2025-2027. It expects the energy demand to rise exponentially through 2027. The report predicts the demand is fuelled by growing industrial production, rise in use of air conditioning, growing electrification and expansion of data centres across the globe.

These commercial activities are estimated to generate a 3500 TWh (tera watt hours) of energy demand. This significant rise is attributed to the rise in energy demand in advanced economies. While a rise in energy consumption is expected in emerging economies like India, Brazil, Indonesia – it is a major shift in the advanced economies. Since 2009, the energy demand, in total and per capita terms, has been relatively flat in advanced economies. Bucking a 15 year trend, countries such as Australia, the USA, the EU, Japan and Korea are expected to account for 15% percent of rise in global energy demand.

To ensure the energy demand and national climate goals are met, the world needs a $3.1 trillion investment. It is estimated that more than $2 trillion dollars of this investment is earmarked for renewable energy.

Dependent on geography, climate, dust, pollution, and ideal topography, renewables are not a stable energy source. For a steady energy supply, renewables need adequate storage and effective power grid networks. With suitable locations in remote places, having efficient power grids is essential for transmission of electricity.

The current investment trends are not making it easy either. Though there are rising investments in renewable energy, the allocation for grid connectivity is becoming smaller part of the energy pie. With outdated power grid networks, the transition to green energy will stall leading to lower uptake of renewables and higher fossil fuel use. To overcome the hurdle and meet climate goals, countries need to add or refurbish a total of 80 million km of grid network, an equivalent to the existing global grid network, by 2040.

An unstable grid and lack of reliability as an energy source give rise to intermittency. Intermittency causes fluctuations in power supply resulting a demand and supply mismatch. This causes problems for grid operators. It also creates immense price fluctuations. Sometimes, the price for renewables goes down to negative prices. In such cases, powder distributions companies pay the consumers for using electricity. These negative prices add to company expenditure and can lead to potential economic losses.

While storage and distribution issues persist, there are geopolitical headwinds that can slow down green energy transition. As a source, renewables are free and abundant. This allows the 193 nations on the planet to compete for this naturally available resource.

However, the hardware and semiconductor supply chains required to harness and store this energy are not abundant. These competing nations are looking secure their energy security by controlling the supply chains.

Weaponization of these supply chains amidst a slowing global economy and the economic shocks due to the pandemic, the Ukraine – Russia war, and the manic Trump tariffs have disrupted supply chains. Deprived of climate finance aid and the technology, as all nation scramble for the same limited resource of minerals, the transition to green energy does not seem like a smooth ride. The decision, the global community makes today will determine what kind of a plant do we leave behind for our future generations.