Opinion: The energy transition happens in two ways: first slowly, then suddenly

John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include: Why empires fall (Yale University Press, 2023) i Twilight of the money gods (Simon and Schuster, 2017).

Europe’s Green New Deal plan, competing with that of US President Joe Biden, was undone last weekend when radical right-wing parties that oppose climate policy made big gains in the EU elections.

This is a current trend in Western countries. ESG investing, which was all the rage a few years ago, has gone out of fashion as politicians demand a halt to the renewable energy transition, arguing that struggling consumers can’t afford it. Donald Trump says he would completely change that if he won the November election. Seemingly anticipating this new reality, Toyota recently announced that it will shift its plans back to internal combustion engine (ICE) cars instead of electric vehicles, sales of which it believes will plateau soon.

This may be a mistake. While a pause in the energy transition may provide short-term relief, any country that pursues it may soon regret its decision. This is because outside the West, the energy transformation is currently gaining momentum, which may have serious consequences for the global economy.

Until recently, developed countries, led by several Northern European countries, dominated the energy transition. However, while developing countries have so far used cheaper coal-based energy for industrial purposes, the falling costs of new energy technologies are changing rapidly. Last year alone, China built as much solar capacity as exists in all of Europe. In March this year, India installed over 10 times more renewable capacity than the year before. After years of chronic power outages, South Africa largely resolved the problem after the government created tax breaks for households for installing solar panels on their roofs, sparking a boom in solar panel installations.

Developing countries are now accelerating their energy transition for the same prosaic reason: to save money and secure supplies. When is the Russian president Vladimir Putin traveled to Beijing hoping to strike a pipeline deal to replace Russia’s lost sales to Europe, but he returned home empty-handed. China wants to reduce its dependence on imports, and renewable energy ends its dependence on anyone. Plus, unlike coal-based energy, the marginal utility of green energy is zero: once installed, you no longer have to pay fuel bills.

Given that future growth in global demand will increasingly come from the developing world, whose economies are growing faster than ours, what’s happening there should interest us. Ethiopia’s recent decision to ban the import of ICE cars may be a sign of changes to come. After increasing electricity generation from renewable sources, the country wants to switch to a fleet of electric vehicles, thereby reducing its heavy dependence on imported fuel to free up money for other purposes.

However, it is not only on the demand side that decarbonization in developing countries will pose a new challenge. As developing countries switch to cheaper renewable energy sources, their competitive advantage in labor costs will grow even further thanks to cheaper energy, hurting Western laggards. Let’s take Germany. Not only will demand for ICE cars fall, as has already happened in the key Chinese market, but other products produced by the country’s production-intensive economy may become comparably expensive, resulting in further loss of global market share.

So if we jump off the decarbonization train, it will continue without us. Driving is the basis of economy. While further increases in the efficiency of coal-fired power generation are incremental, the cost of producing renewable energy has fallen. The same goes for battery technology, which is improving so rapidly that the problem of intermittency in renewable energy may soon be solved: we will be able to store energy for a long time and drive all day on a single charge.

Just as happened when Western economies originally transitioned from animal energy to the coal age, there will eventually come a point where network effects kick in, making old technologies more costly. For example, as the number of ICE vehicles and the demand for gasoline decline, gas stations will close and ICE drivers will have to drive further to refuel.

Moreover, political interests invested in old technology will lose their power. While Trump claims he is rolling back Biden’s Green New Deal, he will run into the interests of major corporations, including the oil industry itself, that have benefited from Biden’s subsidies and will now defend them during Trump’s presidency. Significantly, during his term, Trump’s pro-coal energy policies failed to stem the tide toward renewable energy sources in electricity generation for the simple reason that they became more profitable than coal. Just look at Texas. It may be the heart of oil country, but it’s also the epicenter of America’s green transition.

The same changing balance of political power will then apply to countries. As more of the world decarbonizes, carbon-intensive countries will become increasingly weaker in international negotiations. Therefore, above a certain threshold, the energy conversion will reach escape velocity, leaving the snails behind.

This means that, as with Hemingway’s bankruptcy thesis, an energy transition that started slowly will happen quickly.