The Geopolitical Implications of the Energy Transition

The IIEA was delighted to welcome Professor Meghan O’Sullivan, Director of the Geopolitics of Energy Project at Harvard Kennedy School, to deliver the fifth lecture of the 2021 REthink Energy series, which is sponsored by ESB. In her keynote lecture, Professor O’Sullivan addressed the geopolitical implications of the energy transition and gave her assessment of how the pursuit of net zero emissions will alter international political dynamics.

Five Key Takeaways

1. Unlike previous energy transitions, to reach net zero by mid-century, we will need to displace existing energy sources well before it makes economic sense to do so.
2. While many gas and oil producers will lose geopolitical leverage during the energy transition, major producers with low operating costs – some Gulf states and Russia - will maintain commercial viability and improve their dominance as oil and gas exporters.
3. To meet the target of net zero by mid-century, the world will need to use six times the amount of critical minerals, compared with 2021 levels. New sources of geopolitical power will accrue to those with capacity to produce and process such critical minerals and manage commodity supply chains. 
4. The net zero economy will be highly electrified. Given that it is not currently economical to pass electricity over long distances due to transmission losses, countries will consume more energy either produced within their own borders or in adjacent countries. This will lead to a move away from a global energy market trade and towards regional energy market trade.
5. It has proven very difficult to detangle climate change from the rest of the US-China relationship, and this makes it more probable that the relationship between the two superpowers, on the issue of climate action, will be competitive rather than cooperative.

Explainer

A Distinct Global Energy Transition

Professor O’Sullivan began by acknowledging that this global transition away from carbon-intensive energy sources towards a more sustainable mix is distinct from previous energy transitions, such as the shift from wood to coal in the industrial revolution.

Firstly, in the context of the climate crisis, data from the Potsdam Institute for Climate Impact Research show that it is still possible to stabilise warming at 1.5°C and avoid the risk of reaching planetary tipping points, but this requires immediate and drastic global action. Professor O’Sullivan highlighted that this transformation of the energy mix is one of great urgency, and unlike other transitions, we will need to displace existing energy sources well before it is economical to do so.

Secondly, Professor O’Sullivan emphasised that in order to reshape the global energy order by mid-century, governments will need to lead this transition in conjunction with markets. This is a notable departure from previous energy transitions which have typically been led by market forces. This reliance on political leadership, she remarked, makes the transition much more uncertain, given that, as demonstrated by recent developments in the US, climate policy is reversible.

Professor O’Sullivan remarked that this energy transition to net zero emissions is fundamentally different to previous shifts and will be highly disruptive and complex. This process does not simply involve moving to a different energy mix or using different energy sources; this is a transition which will remake the energy system of the globe and will recalibrate the world economy. This energy transition, she argued, will upset geopolitics, international relationships, and could remake the political order. It is imperative, therefore, Professor O’Sullivan continued, that these expectations are incorporated in the policy planning process.

While policymakers in the US and EU have been increasingly focused on the security challenges and ‘threat multipliers’ of climate change, Professor O’Sullivan remarked that insufficient attention has been placed on the geopolitical implications of the energy transition period to net zero. At present, more than 130 countries, representing 73.8% of global greenhouse gas emissions and 90% of global GDP have set mid-century as a target to reach net zero emissions. Regardless of whether these targets are reached, Professor O’Sullivan argued that the transition period will profoundly alter the international order and that the geopolitical shifts resulting from the efforts associated with the decarbonisation of the global economy deserve further analysis.

The Future of Petro States

Over the last century, oil and gas reserves have been significant determinants of geopolitical power. Professor O’Sullivan acknowledged that if, and when, the world gets to net zero emissions the power of states that produce large amounts of these energy sources will be greatly diminished in the international system. Oil and gas producers, such as Iraq, Nigeria, Algeria, and Ecuador, which rely on such exports for a significant proportion of revenue, are not well positioned for the energy transition.

However, the idea that the energy transition will be completely destabilising and disempowering for most oil and gas producers, Professor O’Sullivan said, was misplaced. The world is not moving to a future energy mix without oil and gas and she drew attention to the energy projections from the International Energy Agency, which indicate that in a net zero future, we will still use 50% of the gas and 25% of the oil compared with 2021 levels.[1]

Professor O’Sullivan argued that some major producers of oil with low costs and strong commercial viability, in particular the Gulf States and Russia, will improve their dominance in this landscape. As other exporters fall out of the market, these select producers will continue to produce the overwhelming majority of the world’s oil. This, in turn, Professor O’Sullivan argued, brings more geopolitical power than such states enjoy today, in OPEC. The phase-out of oil and gas will, she emphasised, strengthen the oligopolistic characteristics of the market, and alter the current geopolitical balance.

Clean Energy as Geopolitical Leverage

In her address to the IIEA, Meghan O’Sullivan highlighted that a clean energy future will present new sources of geopolitical power and argued that countries might be able to exert geopolitical power on account of their clean energy status. While she identified innovation, access to cheap capital, and the ability to set standards as important determinants in exercising geopolitical leverage in the net zero future, Professor O’Sullivan focused on two decisive factors: critical minerals and supply chain dominance.

Critical Minerals

The energy transition to net zero will necessitate an increase in the use of wind and solar for power generation. Overall, demand for clean electricity will increase as countries shift away from dirty energy sources. These innovations require very high concentrations of some critical minerals.  For instance, copper and zinc are essential for wind and solar infrastructure, whereas nickel and lithium are essential for electric vehicles. Professor O’Sullivan highlighted that supply of these minerals is outstripped by demand. She drew attention to a recent IEA report which shows that the need for greater quantities of clean technology minerals is ever more apparent. If the world is on track to meet the target of net zero by mid-century, we will be using six times the amount of critical minerals than are currently produced.  

China has a dominant role in the global production and processing of these critical materials. At present, 72% of the world’s cobalt, and 61% of the world’s lithium are processed in China. The World Bank projects that supply of these minerals will need to increase by 450% by 2050 to keep the world on course for net zero.  

Supply Chains

The availability of rare earth minerals also raises important questions about international supply chains. Professor O’Sullivan outlined the dominant role that China has in producing these critical materials and highlighted the concern that Beijing will use its leverage in the supply chain to exert geopolitical power in the future, especially as it has displayed a propensity to do so in the past. In 2010, for instance, China stopped exporting rare elements to Japan in the context of a dispute over the Senkaku Islands in the East China Sea.

Professor O’Sullivan recognised that in the medium-term, China's grip on the global supply chain will have considerable geopolitical effects. However, over the long run, Professor O’Sullivan projected that market forces and governments will respond to this dominance by way of increased production, refining, and processing of commodities in other parts of the world.

The International Order

Globalisation

Energy trade is a major component of the global economy. Professor O’Sullivan argued that, over previous decades, people have consumed energy from across the world and that international energy trade has reinforced globalising trends. However, she remarked that the transition to a net zero future, which will be highly electrified, will impact international energy markets.

Citing a recent study from Princeton University, Professor O’Sullivan acknowledged that in a net zero scenario in mid-century, the US would need to use between two and three times the amount of electricity, compared to 2020 levels. She recognised that, at present, it is not economical to pass electricity over very long distances due to transmission losses in the process. As a result, Professor O'Sullivan argued that countries will consume more energy either produced within their own borders or that is produced in adjacent countries. This will lead to a move away from a global energy market trade to much more domestic or regional energy market trade. 

Professor O’Sullivan expressed concern over the rise in protectionism and that in the context of the energy transition it creates disruptive barriers between developed ‘green economies’ and developing ‘dirty economies.’

Great Power Politics

Professor O’Sullivan told the audience that the energy transition to net zero emissions will have great bearing on great power politics and will alter the relationship between Russia and Europe; Russia and China; the US and China, and between India and China.

Commenting on the US-China relationship, Professor O’Sullivan observed that today’s bilateral relationship is more complex and more fraught than it has been at any point since the Tiananmen Square massacre in 1989. She highlighted that there had been much hope that climate action would be an area around which the US and China could find common ground. She recognised that there were some indications at COP26 that climate change could be ‘an island of cooperation’ for the two countries, but that these remain aspirational. Professor O’Sullivan argued that during President Biden’s first year in office, it has been very difficult to detangle climate change from the rest of the relationship, and that this makes it more probable that the future relationship between the US and China will be competitive rather than cooperative. Professor O’Sullivan said it was unclear if a competitive relationship would be conducive to a successful energy transition.

Relationship between Developed and Developing Economies

Professor O’Sullivan argued that while COVID-19 has exacerbated inequalities within and between countries, the energy transition poses a more serious risk to global inequality. She suggested that the relationship between developed and developing economies will be characterised by tension and mistrust, as the sense of climate injustice increases, and the pace of decarbonisation accelerates. Professor O’Sullivan predicted that instead of increased aid to and cooperation with developing economies, the urgent need to decarbonise the global economy will see the use of penalties to push countries towards net zero. This approach, she argued, given the negligible historical contribution to the climate crisis by developing economies, will make for a very contentious future relationship. 

Intervention by Jim Dollard, Executive Director Generation &Trading, ESB

At the conclusion of Professor O’Sullivan’s keynote address, Jim Dollard, Executive Director, Generation & Trading, ESB offered some concluding comments. He remarked on the timeliness of Professor O’Sullivan’s remarks, both in the context of COP26, and also in the context of the recently published, Climate Action Plan. Mr Dollard reflected on ESB’s strategy to deliver secure and affordable zero carbon energy, and acknowledged that the energy transition to a sustainable future will place demands across the value chain and constituted a challenge, but a “known challenge and one ESB is intent on delivering”.

Mr Dollard emphasised the issue of energy storage, and the management of renewable intermittency, as a key issue in the successful transition to a clean energy future. He argued that green hydrogen will be essential for Ireland in this regard and highlighted the ‘Green Atlantic Project’, which ESB launched in County Clare earlier this year. Mr Dollard said he envisioned it becoming a major energy hub for the island.