Renewables could safeguard trillions from oil and gas price shock, finds new report
Clean energy is not only the leading solution to limit the devastating impacts of climate breakdown. A new report has also found that accelerating renewable generation could also protect USD 3.5 trillion in the global economy in the event of a future oil and gas price shock.
In light of the 2022/23 fossil fuel crisis that fuelled rampant inflation and cost-of-living crises worldwide, economics consultancy Cambridge Econometrics revisited the inflationary impacts of energy price shock comparable to the one that occurred in the 1970s.
The consultancy conducted a simulation comparing the outcomes between a business-as-usual (BAU) scenario and a 1.5°C pathway scenario from 2024 to 2040. The analysis revealed that in the event of an oil and gas price shock akin to the 1970s, the global economy could face a loss of up to USD 10 trillion by 2040 — leading to job losses and permanently higher consumer price levels for both energy and non-energy consumption.
Principal Economist and report co-author Ha Bui put into context the economic risk of a BAU pathway: ‘’Leaving climate action on its current trajectory would wipe USD 555 billion in a year off the economy in the event of a shock, almost half the size of the US economy.”
Renewables buffer economic losses and inflation
In contrast to the BAU scenario, the modelling found that the negative impacts on GDP and employment were less severe in the 1.5°C build-out pathway — limiting the loss to USD 6.5 trillion. This also means that any permanent inflation impacts would be smaller when renewables are a greater share of energy, reinforcing their importance in curbing economic vulnerabilities.
“A faster decarbonisation of the energy system can limit potential general price increases from oil and gas price shocks by close to half on average, at the global level”, stated the report.
“This suggests that investing in renewables and energy efficiency today will help limit the negative effects of oil and gas price shocks in the short and long run, and make the global economy more resilient to such shocks.”
The report confirmed that the lower dependence on fossil fuels was the mechanism that would mitigate these losses. “The effects are smaller because stronger decarbonisation policies in the 1.5°C scenario result in less dependence on fossil fuels, which reduces exposure to the price shocks,” said Bui.
South Africa’s energy crossroads
Even without a fossil fuel price shock, South Africa’s economic and social costs of maintaining fossil fuel reliance are massive. A separate report found that if we do not pursue decarbonisation, about 50% of our export value, one million jobs and approximately 15 per cent of GDP are at risk. This is because our carbon-intensive economy will face mounting trade risks and decreasing competitiveness; for example, the European Union’s (EU) carbon border tax would make carbon-intensive goods less competitive.
In the face of evolving global climate commitments and the steep economic risks of a fossil fuel price shock, a rapid build-out of renewable power is the most powerful solution to safeguard South Africa’s economic interests on the future.