Will renewable tech save the world? Ask Paul Krugman

The Ukraine war has sent one of the greatest shocks to the world economy in recent years, as Europe struggles with a runup in gas prices driving up inflation and energy shortages that make energy security a pressing issue. Tracking natural gas prices in Europe is critical in reading inflation—and gauging the severity of the overall situation that serves as a quick gut check on geopolitical risks. But there are other events happening that are not getting much attention from the world.

One is Pakistan. A third of the country was underwater from historic floods this past summer with 33 million people affected, and some of the cities remained submerged to this day. While Pakistan is a small country, it is located in a critical and strategic area with high geopolitical importance. The country suffered an extreme heatwave through May, but the summer monsoon and glacial melt brought devastating floods, making Pakistan one of the worst examples of extreme weather patterns resulting from climate change.

The other is Brazil. The 2022 Brazilian general election and the runoff between Luiz Inacio Lula da Silva and Jair Bolsonaro could have lasting impact on the country’s environmental policy and the safeguarding of the Amazon rainforest and other ecosystems. After Lula narrowly beat Bolsonaro, he went on to advocate at COP27 for a new coalition of tropical forest countries to expand conservation efforts against the threat of deforestation.

There is also forward momentum from the United States. Misnamed or misleading by design, the Inflation Reduction Act of 2022 as passed in August represents the largest public investment into addressing climate change in US history. The law will raise $738 billion and authorize $391 billion in spending on domestic energy production and clean energy.

Projected to reduce greenhouse gas emissions in 2030 to 40% below 2005 levels, this piece of legislation is not necessarily the type of public policy that economists have been calling for. Carbon pricing—putting a price on greenhouse emissions in a cap and trade method—would be an obvious economic approach and could be easily understood and adapted by other major countries. But instead of focusing on the stick, this green industrial policy is more about the carrot, with a clear emphasis on promoting employment and investment opportunities in energy transition related sectors. It is the only way to move forward in the current US political climate—and it could be the only way to avoid a catastrophic climate change scenario in the future.

What has also been very encouraging is the advancement in renewable energy technologies in the past decade, which has been nothing short of spectacular. Examples like longer term energy storage for wind and solar power, retrofitting to improve a building’s embodied carbon, concrete that traps carbon instead of emitting were covered in the UBS Alternative Investments Conference. Along the way, the cost structure for innovation has changed rapidly.

Take solar panels. Powering from the sun used to be seen as a hippie fantasy. But now solar power generation has become cost effective and competitively priced, with the cost per kilowatt hour having dropped 80-90% since 2009. Renewable power generation has advanced leaps and bounds—such incredible progress that it invites comparison to the Moore’s Law, which describes the number of transistors in an integrated circuit doubling about every two years based on observations. This spectacular pace and innovation in renewables create lots of business and investment opportunities, e.g. in alternative areas such as real estate and infrastructure—as well as a chance to save the world.

Breakthroughs in renewables changed all the calculus around climate change, and could hold the key to better international cooperation. Climate policy has to be international, but even as Europe, Japan and China invest heavily in renewables, cooperation among countries is not easy. The US climate bill is an important step forward, but it does not lend itself easily to international cooperation.

Parts of the bill have been criticized as an affront to international trade agreements. Subsidies for US consumers to buy North American assembled electric cars might contravene existing agreements and are viewed as discrimination against foreign vehicles built outside of the United States. South Korean and European Union representatives are considering to file a complaint to the World Trade Organization.

There are going to be confrontations and hopefully compromises on the path to net zero. One has to acknowledge the harm in taking a step backward in fair trade and globalization—even if it is done in the name of avoiding even worse harm to the planet. We should not try to sugarcoat that reality.

The erosion of globalization, or a small retreat from hyperglobalization, will mean higher costs for both developed and emerging countries, particularly as the world breaks up into two trading blocks and there is less taking advantage of economies of scale. As examples, the COVID vaccine production relies on the economic integration and cross-border production and movement of products and technology, attributes that define globalization. But the cracks in the system are clear with the recent U.S. semiconductor exports controls under national security considerations.

In the end, I am hopeful that we would be able to get off of the “highway to climate hell”—words spoken by the U.N. Secretary-General Antonio Guterres at COP27. The impact of renewable tech on energy transition could be the catalyst that the world has been waiting for in recalculating and rerouting our path to net zero, even if there are a lot of bumps along the way.