Achieving the Paris agreement requires a radical transformation of the inherently inert energy system. Assets in the form of fossil energy resources and existing infrastructure along the fossil value chain are at the risk of rapidly losing value and becoming „stranded assets”. Asset owners, therefore, have incentives to delay or even prevent the implementation of climate policies.
The objective of FoReSee is to investigate how long-lived investments and the risk of asset stranding hinder the effectiveness of climate policy. The project examines the reactions of private and public actors to (current and expected) policies to understand better how their responses influence markets and policymaking. Thus, FoReSee focusses on the interactions between the various energy sector actors, (international) policy, and market expectation, taking institutional constraints and political incentives into consideration. Exemplary themes include how markets adjust to policy shifts, how fossil-fuel markets change, and how resource-rich economies can be included.
The project combines empirical, numerical, and applied theoretical methods to design climate policy that correct for the inefficient market reactions. It quantifies the distributional effects of various climate policies on vulnerable sectors and countries to design realistic policies that reduce the inertia of the energy system.
To ensure relevance and political feasibility, experts from politics, academia, and the private sector (i.e. companies from the energy and financial sectors as well as representatives of fossil-fuel producing countries) are involved in the project. Various policy briefings, discussion papers, and peer-reviewed academic journal articles capture the results.
Intermediate outcomes of the DIW Berlin sub-project
In its sub-project, DIW Berlin has primarily focused on investigating how fossil-fuel markets and global energy may change, and which role fossil-fuel-rich economies will have in this.
The DIW-REM Outlook contains energy and climate scenarios that explore how various social, economic, political, and technical factors interact and shape the future. The outlook provides analysts and policymakers with indicators for monitoring developments. Moreover, numerous lessons emerge from it: International cooperation is essential for a successful transition. The global rise of isolationism threatens to erode institutions and investments, ultimately trumping mitigation efforts. Eventually, the integration of economic and energy-related objectives (such as poverty alleviation, infrastructure modernization, and private investment) is crucial to enable a variety of policies required for preventing climate change. Comparing a variety of outlooks, the DIW team has validated that current efforts are insufficient, but also that there is more than one pathway to achieve the Paris agreement.
Oil, gas, and coal producers need to be included in the considerations. As analyzed in the project, progress in unconventional oil-and-gas drilling has increased the amount of extractable reserves. In the wake of uncertain climate policies, managing resource reserves becomes a dilemma. Studies in FoReSee have shown which economies and sectors are most threatened by asset stranding. Nevertheless, uncertainty, missing burden-sharing mechanisms, and the insufficient diversification of state revenues and exports lead to inertia in individual nations.
Elsewhere, however, going green is driven by circumstances and market forces. For instance, the project team has revealed dismal prospects of the U.S. coal industry, which is why (discussed) subsidies would only delay its inevitable end. In war-torn Yemen, a rapid deployment of solar energy followed an almost countrywide blackout. FoReSee policy briefings outline how this development needs to be supported, which outcomes are possible, and how other regions can follow. Creating and supporting transitions in developing economies is crucial, since they may otherwise be left behind – and will challenge the global transition.
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FoReSee is funded by the Federal Ministry of Education and Research (BMBF) within the framework of the funding priority "Economics of Climate Change". FoReSee also participates in the exchange between research and practice in the project "Dialogue on Climate Economics"