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Many studies indicate that the root causes of climate change are primarily human activities. The 2021 report of the Intergovernmental Panel on Climate Change (IPCC) warns that many of these climate changes are already irreversible. But there is still hope. The message of the IPCC report is clear: we need to raise the level of ambition for mitigation.
This means that drastic changes are needed to mitigate environmental degradation. These are radical structural changes that will accelerate the fight against climate change. It is clear from the IPCC report that time is not on humanity’s side.
When policy makers discuss and promote the just energy transition, they do so within the framework of the institutional characteristics of each country. The just energy transition refers to the shift from fossil fuels to cleaner alternatives with minimal negative consequences for society and the economy.
Economies with better institutions are more successful in managing the transition. Indeed, these institutions can, among other things, encourage innovation and an efficient allocation of resources.
The question I ask here is how institutional quality and market structures influence energy transitions, within all interactions in economic and ecological systems.
Path to a clean future
The International Renewable Energy Agency defines energy transition as:
a path towards transforming the global energy sector from fossil fuels to zero carbon by the second half of this century.
Measuring the progress of the clean energy transition is no easy task. The complexity of the phenomenon is considerable.
Our research paper shows that choosing a renewable energy indicator could alter the results when examining the impact on carbon emissions. In turn, this could have an impact on policy suggestions.
The Fostering Effective Energy Transition 2021 report shows that 92 out of 115 countries have increased their energy transition index over the past decade. But only 13 showed consistent improvement over the period. This was defined as consistently above average performance improvements on the index. These include Denmark, Finland and the United Kingdom, which owe their improvements to:
a stable regulatory environment, a diversified energy mix and energy pricing that reflects costs.
Countries with increasing energy demand recorded the largest gains. These include China, India and countries in sub-Saharan Africa. But their scores on the energy transition index remain low in absolute terms.
What matters
A recent review of the literature shows that there is a plethora of determinants of renewable energy adoption around the world. There is no consensus on the quantitative factors and their magnitude. But there is agreement on the following points:
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Support policies and programs as well as international commitments and agreements have a positive effect. An example is the Kyoto Protocol.
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The pressure exerted by traditional and pre-existing energy sources has a negative effect.
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The development and expansion of a local financial sector and the quality of institutions have a mainly positive influence.
In addition, the International Renewable Energy Agency notes that the energy transition to renewable energies will be made possible by information technologies, smart technologies, policy frameworks and market instruments.
Therefore, it is the technology and the institutional and market conditions that stand out. Some of my research has already contributed to understanding how innovation and technology in their various aspects and outcomes interact with the natural environment and energy.
The concept of institution is widely used in the literature. But it is a multi-faceted one. It is less understood because it lacks tangibility. However, economist Douglas North gave a complete but still simple definition:
… The formal and informal rules of the game and their application characteristics.
Then there is the quality of the institutions. Economist Allard Bruinshoofd asserts that institutional quality includes the following dimensions:
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Voice and responsibility. This captures the extent to which the citizens of a country can select and challenge its government, thereby limiting executive power.
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Political stability and absence of violence. The lower the likelihood of political instability or politically motivated violence, the more incentive a country’s citizens have to invest in their own prosperous future.
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Government effectiveness. It is a question of grasping the quality of public services and the degree of their independence vis-à-vis political pressures. In turn, this fosters a favorable environment for private investment.
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Regulatory quality. It is the government’s ability to formulate and implement sound policies and regulations that enable and promote private sector development. This establishes uniform rules of economic engagement.
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Rule of law. This particularly captures the quality of contract enforcement, property rights, police and courts (i.e. enforcement of company rules).
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Control of corruption. The stronger the corruption controls, the more economic success depends on effort and skill, rather than relationships and bribes.
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The ease of doing business. This captures a multitude of aspects that determine the extent to which the regulatory environment is conducive to business operations.
Policymakers around the world are looking for lasting solutions to the environmental crisis. The value of good governance should be seen as the first and foremost tool to achieve climate change mitigation. Part of the literature considers the regulatory context of the energy transition, emphasizing the need for public intervention to promote the use of renewable energies.
Research has shown that renewable energy projects, like any other investment, benefit from general political stability, strong regulatory frameworks, effective governance and secure property rights.
In addition, investment in renewable energy projects can be hampered by long and complex bureaucratic procedures and corruption.
Designing an appropriate market structure for a country plays a major role in the performance of the energy sector. It affects decisions and the implementation of policies on prices, efficiency, supply and innovation. Governance mechanisms play a direct role in market structures, influencing investment decisions. Poor conceptions of market structure and policy decisions can unnecessarily increase the costs of the sector. They can also have a negative impact on the well-being of consumers.
The South African economy is no exception. It also faces the challenge of balancing economic growth and minimizing environmental degradation.
Conclusion
In general, energy transitions have focused on energy technologies, especially their use in combination to minimize costs. Social foundations and human behavior are also important elements for the future sustainability of the planet. Within this framework, the rules of the game (institutions) can prepare generations – and future ones – for success or failure.
This article is taken from the author’s inaugural lesson, International Energy Transitions and the Role of Institutions and Market Structures, at the University of Pretoria on August 31, 2021.
Roula Inglesi-Lotz receives funding from the National Research Foundation (NRF). She is affiliated with the South African Association for Energy Economics (SAAEE), the International Association for Energy Economics (IAEE), the South African Young Academy of Science (SAYAS) and the Global Young Academy (GYA).
By Roula Inglesi-Lotz, Professor of Economics, University of Pretoria
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