Driving Energy Transitions: The Role of Institutions and Economics



This article appeared in The Telegraph on October 6, 2021.


It is indicated in most academic studies that the causes of climate change are majorly human activities. The 2021 IPCC report stresses the fact that many of the damages done are already irreversible. But there’s still hope. The gist of the report is clear: we must increase our ambition level of mitigation.


This means drastic steps need to be taken to alleviate environmental degradation. These are going to be the pillars that accelerate the fight against climate change. And by now it is apparent, that time is not on our side.


Energy transition refers to the shift from fossil fuels to cleaner energy alternatives, with minimum negative consequences for society and the economy. Usually, when world leaders and policymakers discuss and promote ‘Just Energy Transition’, they do so within each country’s institutional framework. Economies that have a better quality of institutions do better in managing this transition. Among other things, this is in large part because these institutions can encourage innovation and efficiently allocate necessary resources.


Way to a Cleaner Future

Measuring the development and growth of clean energy transition, however, is not an easy task. The complexities of the phenomenon are considerable. The choice of a renewable energy indicator might alter the results when examining the impact on carbon emissions. In turn, this might impact policy suggestions.


A World Economic Forum report shows that 92 out of 115 countries increased their energy transition index over the last decade. But only 13 showed consistent improvement over the period. Countries such as China, India, and some African nations, with increasing energy demand, registered the largest gains. But their energy transition index scores remain low in absolute terms.


What Matters

There are a plethora of determinants of renewable energy adoption, and while there is no consensus on the factors, there is agreement on the following:

1) Support policies and programs, as well as international commitments and agreements such as the Kyoto Protocol, have a positive effect. 2) Lobbying pressure from traditional and pre-existing energy sources has a negative effect. 3) The development and expansion of the financial sector, and the quality of institutions, have a mostly positive influence.


In addition to the above, it is important to note that the energy transition to renewable energies will be facilitated by information technology, smart technology, policy frameworks, and market instruments.


And then there is the quality of our institutions. Institutional quality can be determined by the following factors: Political Stability and Absence of Violence, Government Effectiveness in capturing the quality of public services and the degree of its independence from political pressures, Regulatory Framework to formulate and implement sound policies and regulations that permit and promote private sector development, Rule of Law, Control of Corruption and finally the Ease of Doing Business wherein a multitude of aspects that determine the extent to which the regulatory environment is conducive to business operations.


Leaders, policymakers, and businesses globally are in pursuit of sustainable solutions for combatting the environmental crisis we collectively face. Good governance should be the first and primary tool for achieving climate change mitigation and energy transitions. Renewable energy projects, like any other investment, benefit from general political stability, sound regulatory frameworks, effective governance, and secure intellectual property rights. Investments in renewable energy space can be seriously held back by complex and lengthy bureaucratic procedures and corruption.


Creating an appropriate regulatory and market structure for a country is critical to the performance of the nation’s energy sector. It has a direct impact on decisions and policy implementation on prices, efficiency, supply, and innovation. Governance mechanisms have a direct impact on market structures, influencing investment decisions. Poor market structure designs and policy decisions may result in losses for the sector unnecessarily. The citizens of the country too are negatively impacted as a result. Our Indian economy is no exception. We too face the challenge of balancing economic growth, meeting the increasing energy demands, while minimizing environmental degradation.


Conclusion

Energy transitions usually have focused on energy technologies and innovation, in particular their use in tandem to minimize costs. The social fabric and human interactions are also important factors for the future sustainability of the planet. Within this, the rules of the game and subsequent policies and decisions can set our current and future generations up for success or failure.

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