Debating Oil: The Carbon Bubble

The energy transformation has an important geopolitical dimension, usually dubbed ‘European energy independence’, says Marc Saxer, Representative, Frederich-Ebert Stiftung 

The German energy transformation is driven by five factors. It is advocacy-driven, industrial policy-driven, consumer-driven, financial market-driven and geopolitics-driven.

Advocacy-driven

Germany has a strong ‘green community’, recruited mostly from the urban middle classes, but increasingly including farmers. Coming from the fringe, over the past decades this community has reframed the public debate. Today, a vast variety of Germans is convinced that the energy transformation is inevitable, and willing to pay a price for it. 

Industrial policy-driven

Germany is one of the strongest manufacturers in the world. What is a little known fact is that it is no longer the high labour cost which is the highest factor in manufacturing, but commodities, especially energy cost (more than 40%). The strong push for energy efficiency is informed by the objective to boost productivity and keep German manufacturing competitive. The German energy transformation law aims at accelerating this shift by setting mandatory targets. By 2030, the share of renewables should exceed 50% of energy production. 

Consumer-driven

Today, electricity from offshore wind is cheaper than any other energy source including coal. In 2025, solar power will also be cheaper than any other source of energy. This means that, different from the value- and policy-driven shift to renewables in the early years, ‘going green’ increasingly becomes a conventional consumer decision. 

Financial market-driven

In 2015, the Bank of England together with the German government warned institutional investors against a ‘carbon bubble’.  Looking at the expected regulations under an international climate regime as well as national policy measures, the assets reported by the fossil industry could be overvalued by as much as $21 trillion, a gigantic bubble which, when it bursts, could unleash the next financial crisis. Some of the biggest institutional investors are pension funds, who are by law required to only invest in secured assets. Should the ratings of fossil industries be downgraded, these institutional investors could be forced to shift their capital out of fossil energy. 

Geopolitics-driven

From a European perspective, fossil energy is increasingly a geopolitical risk. More than 50% of German oil imports come from Russia, Libya and Nigeria, 38% of its gas imports come from Russia alone. For decades, the energy partnership with the Soviet Union and then Russia weathered every crisis, and allowed Germany to stay clear of geopolitical hotspots like North Africa and the Middle East. The conflict over Ukraine, and Russia’s orientation towards East Asia is increasingly perceived as a risk for energy security.

The energy transformation therefore has an important geopolitical dimension, usually dubbed “European energy independence”.

If you look at these five factors from a political perspective, you will see that the energy transformation brings together an unlikely alliance of capital and security state, the middle class and farmers, industrial conglomerates and financial investors. All of these constituencies have their own reasons to support the energy transformation. What is new is that the Green New Deal now offers a common political platform for them, opening the way for a post-fossil coalition.

It is therefore not a coincidence that the energy transformation today is not implemented by the Green Party, which is currently in the opposition, but by an unlikely coalition of the pro-nuclear Christian Democrat and the pro-coal Social Democrat parties.

That is why the energy transformation is not a pipedream, but a core political project at the beginning of the post-fossil era.      

(Text of his speech at the Hardnews Seminar.)