Today’s energy crisis has a familiar ring. In the wake of Russia’s invasion of Ukraine, energy supplies have faltered and prices have skyrocketed. Americans are seeing costly gasoline, and in Europe, natural gas prices are around five times typical levels for this time of year, driving up the price of electricity and even threatening bankruptcies across industries that depend on gas.
After previous global energy crises — 1973, 1979, 1990 and 2008 — tensions abated, prices fell, people forgot and governments turned to other priorities. And global dependence on oil and gas kept rising.
This time could be different. Western nations have aggressively employed sanctions against Russia, and those sanctions are expected to tighten and include Russian oil and gas exports, as Europe and other importers gain confidence that they can replace those supplies. But what really matters for the long term is whether the West can lower its dependence not just on Russian exports, but on fossil fuels altogether.
To do that, companies and investors have to take risks on new, clean technologies, but many won’t if governments don’t give them the signal. What’s new in this crisis is how the European Union, in particular, is using the war in Ukraine to give investors a big green light.
The Union already had plans, outlined last summer, to slash emissions 55 percent by 2030, mainly by cutting consumption of fossil fuels that cause global warming. After Russia’s invasion of Ukraine, Europe went a step further with a new plan to accelerate the shift away from Russian gas (including by importing, for now, more gas from friendlier places, including from the United States). New details on those plans are expected next month. Over the long term Europe is now speeding the exit from oil and gas altogether.
It is easy for politicians to announce bold plans. What’s different is that Europe’s plans are mostly already written into binding laws backed by big spending on infrastructure and research and development.
This kind of credibility matters because it determines where capital flows, and almost every approach to making big cuts in fossil fuels and emissions is capital intensive. The good news is that there are vast pools of available private capital willing to back risky novel technologies — a sharp contrast with the 1970s, when shifts in technology were slower because access to capital was controlled by a few large financial institutions and multinational energy companies and allocated mainly to established enterprises.
In almost every aspect of the industrial economy — from making steel and cement to new aircraft to better systems for heating homes and making electricity — the emission reduction plans in Europe are opening markets to new technology while also convincing big existing businesses, like oil and gas companies, they must innovate or get out of the way. Where investors put their money today hinges not just on technological promise, but also whether radical new ideas will be allowed to flourish and compete.
Take hydrogen, which is a leading idea for cutting dependence on conventional fossil gas. Modern energy systems depend heavily on natural gas, in part because it is easy to store and use when needed. Greater use of gas has already helped cut emissions because it has displaced coal. Shifting to clean hydrogen could cut those emissions essentially to zero, and would also make it possible to reuse some of today’s extremely valuable gas infrastructure.
One way to make clean hydrogen is with electrolyzers that split hydrogen from water. Right now that’s expensive, but with a spurt of new investment, electrolyzer costs will likely tumble. Other methods will compete as well.
Central to the European plan for cutting dependence on natural gas is investment in hydrogen and other alternatives to conventional gas — something that companies are lining up to do with their own capital. Privately backed projects are exploring how to link hydrogen production to renewable electric power generators — a key innovation because hydrogen is easier to store than electricity and could help make electric grids reliable even when they depend on large amounts of intermittent wind and solar.
Leaders in sectors such as steel, refining and chemicals all see hydrogen investments as part of their plans to remain viable in a world that slashes emissions. Maersk, one of the world’s largest container shipping companies, is backing some of these projects — along with several other clean fuels. Even in aircraft and heavy trucks, hydrogen may prove the best way to cut emissions.
The consulting firm McKinsey estimates that the value of investment in clean hydrogen projects by 2030 will exceed half a trillion dollars, based on the announcements made — with Europe in the lead. For comparison, the total value of all fossil fuels sold globally in 2021 was about $5 trillion.
The United States is finding it harder to be a clean technology leader because the political environment is fractured. But one area of promise is $8 billion for “hydrogen hubs” in the recent bipartisan infrastructure law to build the production facilities, pipelines and terminals to link producers and consumers.
A hydrogen revolution could take a while — perhaps two decades with a highly committed effort, until there are substantial volumes of hydrogen replacing conventional natural gas and also replacing oil. But beyond hydrogen there are many other examples of credible policy, along with new technology attracting a flood of capital. New designs for nuclear plants attracted $3.4 billion in private capital in 2021 alone. (New nuclear plants are likely to focus on America, Britain, China and other markets. Attitudes around nuclear power in most of continental Europe are yet to turn reliably in favor.) Other, more mature clean technologies like solar, wind and batteries are expanding massively as well.
Europe is in the lead because it has found ways to make political pronouncements more credible. This leadership matters because technologies are traded globally, and European investments are redefining the frontier. The effect of all this will be a series of revolutions that cut dependence on Russia and on fossil fuels — and also help heal the planet.
Philip Verleger is a retired professor of economics from the University of Calgary and a nonresident senior fellow at the Niskanen Center. David G. Victor is a professor of innovation and public policy at the University of California, San Diego, and nonresident senior fellow at The Brookings Institution.
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