A just transition: balancing trade-offs en route to an equitable energy system

One of the greatest challenges of the energy transition will be managing the unavoidable cost. How do we strike a fair deal for all in trying to reach net zero?

An energy pylon silhouette with a setting sun backdrop

Limiting impacts on the most vulnerable

Transforming our global energy system will be a costly but necessary investment in the future. This investment will impact energy prices and drive inflation in the short term – costs that will inevitably be passed on to energy consumers everywhere. It’s a substantial price that will be felt by all. However, it will not be felt equally, with those who can least afford it – particularly the most vulnerable members of our society from a climate risk or socio-economic perspective – having the most to lose. To address this, decision-makers need to consider an intricate web of human, economic and environmental trade-offs in charting a more accessible, equitable path forward.

Inflated energy bills are already acutely impacting the most vulnerable. SHOCKED, one of the largest studies of its kind ever conducted among the global energy sector C-Suite, found that 78 percent of respondents believe that increases in energy prices are having the biggest impact on the poorest members of our society.

Discerning the most appropriate intervention to ease societal impacts is complex and varies by geography. SHOCKED found that the top three mechanisms supported by respondents included a mix of government interventions. The first, most-supported approach was low-interest loans to energy companies to help smooth wholesale price increases, a strategy backed by leaders in Canada, New Zealand and the USA. The second most supported intervention was energy bill reduction funded through general taxation – already applied extensively by leaders in Australia and Singapore. The third was levies on energy bills to subsidise the poorest in society, an approach backed predominantly by leaders in the Philippines.

Encouragingly, the findings also show that the energy sector is already beginning to respond to societal imbalances: 66 percent of global energy leaders indicated that they are investing in the provision of support for consumers struggling to pay energy bills. Clearly, effective levers to ease the financial impact of the transition on society are within reach. The challenge moving forward will be to implement different, long-term levers that support the most vulnerable as costs continue to manifest, while also addressing a complex and changing energy landscape.

Compensating countries that can least afford it

Of course, rising inflation and energy costs for consumers is just one part of the inequity challenge; the huge economic divide between developed and developing nations is also of global concern. Emerging markets are predicted to become the largest consumers of energy as the standard of living in these countries continues to rise. If these economies aren’t able to curtail emissions in the context of their continued growth, achieving global net zero goals simply won’t be possible. It is therefore incumbent on leading economies to ensure they bring the rest of the world with them. This is a time for global collaboration, not competition.

Fossil fuels have enabled the growth of many of the world’s largest economies. Today, emerging economies are facing a different trajectory, one that must balance competing priorities such as addressing poverty, lifting education attainment rates and providing basic health care, with the need to electrify and decarbonise energy systems. Despite contributing proportionately less to climate change, developing nations are being asked to forego potential economic gains through the extraction of fossil fuels – a trade-off that risks worsening the current disparity.

But it does raise a crucial question: how we can decouple future prosperity from a reliance on fossil fuels? Supporting the switch to renewables for emerging economies can unlock new opportunities for partnership and innovation. It is a chance to level the global economic playing field, with those countries with the resources to do so, sharing wealth, technology and talent across borders with their developing neighbours to enable a fairer and more equitable transition.

In the past, we have seen developing countries leapfrog developed countries because they are not reliant on existing infrastructure. The opportunity here lies in the possibility that developing countries may be able to more easily redefine their energy systems, as they do not need to contend to the same level with incumbent energy grids. This opens the door to a potentially faster pathway to innovative new solutions.

Managing the consequences of increased global competition

The ambition to achieve a just transition is also being impacted by domestic policies disrupting global dynamics. Policies that work out of sync with the rest of the world risk creating additional uncertainty and imbalance in the energy system.

The landmark Inflation Reduction Act (IRA) in the US for example, offers a substantial stimulus for green industries and promises to catalyse decarbonisation efforts. To benefit from this legislation, however, producers of clean energy and storage must meet ‘made in America’ criteria. In prioritising national industry, the legislation has encouraged aggressive competition across borders. However, an influential bill of this nature enacted by an economic powerhouse has consequences for the rest of the world, particularly trading partners.

For instance, equipment manufacturers for products such as solar panels and battery storage in Europe are not currently subsidised by the European Union. The IRA risks incentivising these companies to leave the region in favour of the US. It’s a challenge that Europe must carefully navigate – how can the EU encourage manufacturers to stay while also maintaining a mutually beneficial relationship with the US? Ultimately, a more collaborative, co-ordinated approach will help us rise to the global challenge of carefully balancing global competition, geopolitics and energy transition goals in a globally equitable way.

Keeping the lights on – the environmental trade-off

With so many factors at play, interventions to ease impacts of the energy crisis on citizens must not be considered in isolation from decarbonisation or sustainability goals. For example, some measures to strengthen the security of supply and ease economic pressure have potentially damaging environmental impacts. To mitigate the current security crisis for instance, some governments have reinstated or prolonged the life of fossil fuel production, while other countries continue to accelerate their investment in renewable generation and storage. These conflicting energy strategies underscore the importance of a more balanced, resilient energy system that can withstand shocks and better respond to the bumpy, potentially ‘stop, start’ transition ahead.

Outside of energy security, climate adaptation efforts can have unexpected consequences that risk undermining efforts to reduce carbon emissions. An example of this is the minerals required to manufacture clean tech. Lithium, copper and rare earths are all critical for transmission wires, conductors in turbines and batteries; however, the extraction process can be intensive and negatively impact local communities and ecosystems. If not properly regulated, the increasing demand for these materials poses serious implications such as the displacement of local people, pollution and the depletion of local water sources.

In the current context, weighing-up security, social disruption and environmental imperatives will mean making some decisions that seem counter-intuitive to a fast-tracked energy transition. While the rollout of renewable energy generation and storage continues, a reasonable and rational approach is necessary to stay the course to net zero while balancing access and equity.

Charting an equitable course

Smart policy frameworks and targeted government intervention are important levers to bolster the resilience of energy systems around the world. According to 76 percent of energy sector leaders surveyed by SHOCKED, the role of government in the current energy crisis is more important than ever. The switch to a resilient, robust and low-carbon energy system will undoubtedly have societal implications, requiring governments and industry to work together.

Only through radical collaboration across actors, sectors and authorities can we support all kinds of communities, and particularly those who can least afford it, on the road to a fair and equitable future. Ultimately, a just transition will mean a sustainable one.

Only through radical collaboration… can we support all kinds of communities and particularly those who can least afford it, on the road to a fair and equitable future. Ultimately, a just transition will mean a sustainable one.