From Trilemma to Triple Dividend: Clean, affordable and secure energy

Some governments see the objectives of renewable energy as a daunting "Energy Trilemma". But the trilemma can be avoided. The right policies—especially the right fiscal policy—could achieve a triple dividend of clean, affordable and secure energy, explains Patrick Lenain. // Banner image:Shutterstock/AS photo family
From Trilemma to Triple Dividend: Clean, affordable and secure energy
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Almost 60 years ago, Robert Mundell introduced the concept of the trilemma to explain that it was impossible for governments to pursue all three of the following objectives simultaneously: monetary policy autonomy; exchange rate stability; and capital mobility. Governments nonetheless pursued these three objectives, and the world was eventually hit by a large monetary crisis in 1971, when the Bretton Woods system of fixed exchange rates came to end.

Today, governments seek to achieve simultaneously the three objectives of clean, affordable and secure energy. Some perceive them to be a daunting "Energy Trilemma" and call for energy security and affordability to be prioritised. Already, global demand for coal is estimated to have returned to historically high levels as new coal-fired electricity plants have been opened. Global demand for coal is projected to increase further because it is perceived to be a secure resource that generates electricity at a low cost.

The IEA estimates that renewables could represent 30% of primary energy supply by 2030 and 67% in 2050, making it possible to stop global warming.

But the trilemma can be avoided. The right policies—especially the right fiscal policy—could achieve a triple dividend of clean, affordable and secure energy.

Clean energies remain the exception

A good place to start is a more assertive promotion of renewable energies, which remain largely untapped. Solar, wind and hydroelectric power only account for 5% of  global primary energy supply, well below their potential. The IEA estimates that renewables could represent 30% of primary energy supply by 2030 and 67% in 2050, making it possible to stop global warming.

For now, fossil fuels dominate the global energy mix with a share of 85.5%; it is therefore not a surprise that carbon emissions reached a record level in 2022. In addition, the energy sector is responsible for 40% of methane emissions, a gas with a potent warming impact, which also reached record levels in 2022. A change of course is rapidly needed.

Renewables are becoming more affordable

A good reason to shift to renewable energies is that they are often cheaper than fossil fuels. Photovoltaic panels and onshore wind power have experienced significant cost reductions and are already the cheapest options in most countries. Further drops in price are likely to result from the fiscal incentives being introduced by governments.

For example, it is estimated that the United States’ Inflation Reduction Act (IRA), adopted in mid-2022, will help to reduce the cost of battery storage and green hydrogen at double-digit annual rates. The same is already happening with electric vehicles, which are now benefiting from declining prices. In France, certain models of electric cars can be bought for less than EUR 10,000 after taking into account various government rebates.

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Fiscal support needs to be redirected

To boost the market share of renewables, fiscal support needs to be reallocated away from fossil fuels, which last year received huge subsidies estimated globally at USD 1 trillion. Fiscal support should instead be directed to renewables.

Fortunately, this is now happening. The United States’ IRA provides “green subsidies” estimated at USD 369 billion over 10 years to clean up the country’s electricity and transport sectors. Similarly, the EU “Green Deal” provides large amounts of public financing to support investments in manufacturing of net-zero technologies. This is a very good start. Other countries should take notice and enact similar support.

Well-designed “green subsidies” should be targeted to low-income households. A good example is the IRA’s provision to help local energy communities as well as tribal and indigenous groups.

How these “green subsidies” are designed will matter enormously. Past experience has not always been positive: support to biofuels has been found to increase carbon emission, the opposite of the intended effect; and clean energy tax credits have been found to benefit disproportionately high-income households, though they would have invested in renewables even without subsidies.

Well-designed “green subsidies” should be targeted to low-income households. A good example is the IRA’s provision to help local energy communities as well as tribal and indigenous groups.

Renewables improve energy security

The invasion of Ukraine has made countries depending on imported energy suddenly aware of their vulnerability. The vast mineral reserves held by Russia, including 18% of global gas reserves, are a case in point. The fear of disruptions goes beyond Russia: some of the largest fossil fuel reserves are in countries periodically subject to geopolitical tensions.

This does not mean that we should drill new oil wells in secure locations, such as the Barent Sea and Alaska, or that new coal mines should open in Australia. A better approach is to speed up the development of clean and secure energy at home. In Denmark, almost 40% of primary energy supply already comes from renewables; in Sweden, it is 51%. Germany and the United Kingdom are making fast progress in this direction. Brazil, Norway and Switzerland are tapping into their immense hydro power potential, and Iceland gets its power largely from geothermal sources. With more clean energy produced at home, these countries will be shielded if a new international crisis occurs.

International co-operation

Reassuringly, these examples show the way forward to reach the “triple dividend” of clean, affordable and secure energy. OECD countries will need to allocate budgets large enough to achieve this transformation. In developing countries, a huge task lies ahead and substantial increases in development finance will be needed.

We will be in unchartered territory, so mistakes will be made and resources misused. This makes it even more important to exchange policy lessons in the context of international gatherings, such as the new OECD Inclusive Forum on Climate Mitigation Approaches, the Coalition of Finance Ministers for Climate Action and similar circles set up to plot the course towards a new energy future.






Learn more about the OECD Inclusive Forum on Climate Mitigation Approaches
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Go to the profile of Alejandro ALLERA
12 months ago

Great article. Thanks.