In September, the G20 nations agreed on the role of multilateral development banks and the push of private capital towards achieving an energy transition, although such a move comes with concerns about costs and economic trade-offs.
Developing countries need affordable and reliable energy for economic growth, which in turn is necessary for an energy transition, said V. Anantha Nageswaran at the Center for Social and Economic Progress in New Delhi on Thursday.
He was speaking in a personal capacity and not as the Chief Economic Adviser, as he presented a paper on Leveraging Private Capital for Global Public Goods, along with co-author Gulzar Natarajan.
“To some extent, if you look at the energy transition, paradoxically, you have to provide fossil fuels in the short term,” he said, before adding that globally, there really hasn’t been a significant retreat in terms of. consumption of fossil fuels.
Referring to data on coal plants from July 2023, he said that most of them are still less than 20 years old, and removing them would mean removing billions of dollars in investment and labor movement.
“Countries are already struggling with the twin challenges of poverty alleviation and economic growth. And on top of them, climate change and energy transition or additional burdens, especially in the post-Covid context, where we are talking about stalled recovery and high debt burdens,” said Nageswaran.
“The cost of capital in hard currencies has risen by 400–500 basis points over the course of 12 to 20 months in the last two years, and therefore, the energy transition must bear three costs: the financial costs of facing lowered investments. , the rising cost of production from rising fuel costs, and the higher cost of new energy sources when they replace legacy sources.”
Speaking about European countries that have ambitious energy transition and climate change goals, he said that European policies of carbon border adjustment mechanisms and deforestation will have to balance fiscal sustainability, economic competitiveness and the cost of net zero goals.
“You can only have two of these three—if you want to maintain fiscal stability and fiscal sustainability and yet achieve net zero as well, I think you have to forget about economic competitiveness. But if you want to maintain net zero and economic competitiveness, fiscal incentives must be applied,” he said.
It’s important to understand and be realistic about what we’re trying to do, in what time frame and what the trade-offs will be, according to Nageswaran.
Regarding the volatility of crude oil prices at 85 dollars per barrel, which is “prohibitive” for many countries when translated into domestic currencies, and considering the energy supply gap, he expects energy prices to continue to remain high. He added that countries should not have an economic burden or be pushed to rely on foreign capital, because it would have implications for their current account balance.