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Finding a third way between throttling energy demand and dirty fossil fuel


In this article:

    The war in Ukraine is significantly impacting energy security, particularly in Europe. Beyond oil & gas markets, the conflict has a variety of negative macroeconomic effects. Notably, the fighting in Ukraine and the resulting sanctions on Russia are disrupting commodity supplies, exacerbating ‘cost push’ inflation set in motion by the pandemic and its aftermath.  

    These challenges are proving progressively harder for monetary policymakers in many countries to address since the main policy tool typically used to combat inflation – interest rate rises – impacts the demand side of the inflation equation and does little to address supply bottlenecks.

    In our view, this situation emphasises the need to accelerate the clean energy transition in Europe and elsewhere.

    Solution: Accelerate the energy transition

    To put a finer point on the above, if Russian oil and gas supplies are disrupted further, Europe in particular will face a difficult short-term choice: resort to readily available technologies with known high CO2 emissions such as coal to fill the supply gap, or impose austerity measures to reduce energy demand.

    The high CO2 option runs the risk of undermining science-based climate commitments by many governments and companies. This could have dire effects, the IPCC has warned. The alternative, targeting demand, runs the risk of igniting an economic recession which would have negative effects on workers (wage cuts, job losses) and increase inequality. Such a move may be politically infeasible regardless.

    Given this ‘Sophie’s choice’[1] between actions that result either in environmental damage or social harm, it may be beneficial for policymakers to consider a ‘third way’: driving significant investment in low carbon energy in the short term.

    While it will take time to ramp up the (local) production of renewable energy, the typical time to construct such production sites is much shorter than for forms of thermal power or nuclear production and involves fewer dependencies.

    For instance, supplanting Russian natural gas delivered by pipelines requires Europe to import more liquefied natural gas from overseas. This means building new specialised import facilities in Europe and, likely, the construction of new export facilities in the US and other countries where LNG exports have already reached peak levels and are spoken for by other markets.

    Even if the stars align for Europe around LNG, it will likely take at least two years, and possibly longer, to replace just a third of Russian gas supplies.

    In the meantime, while renewable energy capacity is building, governments could develop incentives for residents to encourage lower consumption and to electrify their heating sources. Since residential use accounts for about half of natural gas consumption in Europe, diminishing the region’s reliance on gas heating can have a significant impact. This could be done via incentives (tax breaks, credits or rebates) for switching to heat pumps, for instance[2].

    On the demand side, as was the case during earlier major conflicts such as World War II, government awareness campaigns have proven useful in building support, for example, for energy conservation. We believe similar approaches by governments facing energy supply strains now could well be warranted since economising on consumption enhances a country’s energy independence.

    Managing risks

    Accelerating the low-carbon energy transition would improve energy security, particularly in Europe, by reducing the need to import fossil fuels from abroad. It would also help mitigate climate change by lowering emissions from fossil fuels. Thirdly, this could help to manage inflation risk.

    Yes, major spending would be required to build out the clean energy capacity needed to replace gas thermal power and electrify residential heating. This expenditure could have a broader inflationary effect – specifically on commodity markets such as copper, cobalt and lead.

    Increasing carbon taxes would also likely be required to accelerate the transition. This would likely cause further upward price pressure on fossil fuel commodities if not offset by the availability of reasonable fossil-fuel-free alternatives.

    But this ‘greenflation’ could be largely compensated for by less demand for the kind of core commodities which are driving inflation now, such as oil and gas. And longer term, renewables are likely deflationary due to their lack of fuel input costs.

    For such a shift to happen, the EU and national governments in Europe and elsewhere need to invest heavily in renewable technology and infrastructure.

    Public capital alone will not suffice; ideally, private capital would be ‘crowded in’ by creating tax breaks and other incentives for low-carbon investment and by de-risking projects (e.g. funding more research and development of novel, pre-commercial technologies). 

    Additionally, citizens and businesses should be encouraged to join the fight. There is no time like the present for aligning minds and incentives towards a net-zero future. 

    Energy transition winners

    To be fair, the path to net zero as well as energy security will not be plain-sailing. The industrial targets for decarbonisation required by science to avert catastrophic climate change are ambitious. However, as analysis from the Institute for Energy Economics and Financial Analysis has stated, a more fundamental diversification of energy sources is required. Renewables will be key here.

    When it comes to renewable energy solutions, we believe leading companies operating in segments such as these stand to benefit: 

    • Solar panel parts such as photovoltaic modules and module components
    • High efficiency building insulation
    • Electric heat pumps
    • Equipment for making and using clean electricity-generated fuels, including electrolysers and fuel cells
    • Critical power grid infrastructure such as transformers.  

    In addition to scaling the above existing technologies, we believe efforts to launch new technologies which offer low carbon alternatives or to support the reduction of consumption should be examined.

    Also read: Environmental markets – Fundamentals will prevail – Investors’ Corner (


    [1] Having to choose between options that both have undesirable consequences (and possibly where not making a choice also has undesirable consequences); a reference to the novel Sophie’s Choice by William Styron  

    [2] Note: many countries in the EU are already offering such incentives, but this is not being done consistently or at a high enough level to encourage the level of switching required. Analysis-of-Fossil-Fuel-Incentives-in-Europe_FINAL.pdf ( 


    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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