Energy and Emissions after Covid-19: A First Cut

The sharp decline in energy demand and prices raises many questions about how Covid-19 will affect energy consumption and CO2 emissions in the medium and long term. The honest answer, so early in the crisis, is that we do not know. So much hinges on how the crisis unfolds, a topic our colleagues Steve Morrison and Anna Carroll explored here, which will define the broad geopolitical, economic, and social dimensions of the crisis. CSIS is developing a number of scenarios to guide our thinking in that process, and this work will continue in the weeks and months ahead. Yet even today, we know that the net effect on medium-term CO 2 emissions will depend on a complex interplay of forces, some amplifying and others offsetting each other. It is too soon to divine the net impact, but we can still begin the process to define these forces, map their intensity and direction, and strive to understand the extent of their interaction with each other.

Demand Destruction—Temporary or Not

The first and most important force is demand destruction. Demand is being destroyed at a rapid rate as people cut back on driving and flying, as stores and restaurants shut down, as offices go dark and their employees telework, and as factories scale back operations to protect the health of their workers. We are still understanding the magnitude of these changes, but the key question for the medium term is how much energy demand destruction is temporary versus permanent.

There is one segment of the economy that could resume its pre-crisis energy consumption patterns once the public health risks prove manageable. These are people and businesses who made a seamless transition from physical to remote work, whose purchasing power remains intact, and who are merely waiting for the crisis to subside. Even for them, however, there is no status quo ante. The restaurants and cafes they went to might have closed. The airlines they flew on might have gone bankrupt. Their mobility options might have shrunk or expanded depending on how their cities responded to the crisis. Their employers might welcome telework or might not. They might have saved money or have seen their retirement accounts wiped out. In short, even a person ready and able to return to pre-Covid-19 life may confront a new opportunity set around them.

There is another segment of the population that will be hit hard—people who lost their jobs, their businesses, their savings, and for whom post-Covid-19 life will be an uphill climb. Their energy consumption may not come back for a while—depending on the shape and speed of the economic recovery. The gasoline used by a commuter will not come back when the public health crisis subsides, but rather when they find a new job. Restaurants and factories might take time to reopen. Some may be gone for good. These people and businesses might be in recovery mode for a while, which would impact energy consumption—after months of unemployment or hardship, is now the time for a new car, a new appliance, a new home project, a new energy-efficient machine?

Economic Stimulus—Green or Not

The second force that will shape medium-term CO2 emissions is how governments choose to stimulate their economies. Here, too, there is much we do not know. For one, a stimulus presupposes a degree of public health normalcy. If people are not leaving their homes, there is only so much economic activity you can create through pumping money into a system. There is even less opportunity to change the trajectory of an energy system, which depends on tangible things like cars, appliances, equipment, and infrastructure.

When it comes to an economic stimulus, there is an argument to be made that it should focus on advancing the energy transition—but there is no reason it must. Jobs will be a far more important driver than emissions, and it is easy to see investments to create jobs being sharply at odds with a low-carbon transition. The 2009 American Recovery and Reinvestment Act (ARRA), for instance, allocated $27.5 billion for highways. Repairing roads, of course, is essential, but it is also easy to see how spending a lot of money to build more highways could complicate efforts to lower emissions from transportation if it takes away money that could be spent on public transit. Then again, the ARRA devoted $8 billion to high-speed rail projects, with limited tangible results, a useful reminder that money alone can only do so much in absence of a broader political consensus.

In that regard, there is a clear distinction between China, Europe, and the United States and the extent to which they have strategic priorities that could inform how stimulus money is spent. China has a definite direction for its economy, articulated mostly clearly in the “Made in China 2025” strategy and would allocate resources to further those ambitions. Europe lags a bit behind China but has a similarly well-articulated set of objectives, explained most recently in the Green Deal (and associated initiatives). The United States has no such direction, and hence it is easy to see stimulus money going in all sorts of directions, some of it consistent with a low-carbon pathway and some not.

It is similarly possible to envision stimulus scenarios that are highly collaborative, where governments across the world try to pull in the same direction and rally around climate change as a higher-purpose goal they can collectively tackle. Or one could see fragmentation, each country on its own, distrustful of others, where borders are hardly open and definitely not frictionless, and where the impetus to deliver domestic economic growth far exceeds whatever emphasis earlier eras might have placed on a joint effort to address the problem.

Industry—To Save or Not

A corollary to government stimulus will be the extent to which governments bail out specific sectors and, if so, what conditions they attach to those bailouts. The debate here encompasses many diverse voices, from people who think the government should bail out the oil and gas industry, to those who think that government should nationalize and then dismantle fossil fuel producing companies, to those who believe government should support ailing businesses but without strings attached, and to those who think the market is well-suited to deal with this crisis and that government should stay out of it. In short, we might see governments offer a lifeline to industry without strings, or they might steer industry in a specific direction, or they might step back and let the market sort out who should survive and who not.

The linkages between industrial pain and the energy transition are, again, multilayered. It is easy to assume, as some do, that the pain faced by the oil industry is some kind of victory for the energy transition. The problem with this reasoning is that it mixes up supply and demand. When the crisis ends, you will still need gasoline to get to work, and even if the entire shale industry in the United States has gone bankrupt, your car is not going to magically move on its own. In other words, until we have other ways of doing the things we want to—to drive, to keep warm, to cook food, to ship goods, to manufacture stuff—the pain of the fossil fuel industry is merely going to curtail the supply of energy, not the demand.

There is, however, another important channel between the oil and gas sector and the energy transition: money. Here, again, one can discern several channels. Oil and gas companies are often profitable, and those profits can fund the energy transition—either directly, as in the case where oil and gas companies make investments in technologies that are essential for the energy transition (like carbon capture and storage) or when they invest in adjacent energy sectors like solar, wind, or vehicle charging; or indirectly, when they pay dividends to shareholders who can then pump that money into low-carbon energy sources.

The pain faced by the energy industry could sever many of these linkages. Some analysts have pointed out that the returns oil and gas projects offer might be inferior to those offered by renewable energies. But this reality does not mean that money will flow from one to the other. It is just as easy to see money flowing outside of energy altogether. In that respect, the relevant metric is not the comparison between fossil fuels and renewable energies but between energy and other sectors in the economy. And either way, this conversation only captures a segment of the energy transition and leaves out industrial applications and buildings (and some of transport), where these return calculations are not very applicable.

Finally, how money flows will affect investment and energy prices, and prices, in turn, will affect behavior. Low oil and gas prices will make it harder to convince consumers to switch away from fossil fuels. Then again, lower investment in oil and gas might trigger a price spike in the future insofar as we have killed supply faster than we killed demand. This prospect becomes more significant as companies cut back investment or shut down facilities in response to public-health concerns or supply chain disruptions. Over time, these supply-side issues could reduce redundancy or create reliability concerns that might elevate energy security as a major concern.

Trade—Reshaped or Not

The forces described above could easily reshape the trade in energy goods and services. At a basic level, the decline in supply and demand could rewire trade flows. In oil and gas terms, established consumers might experience a slow economic recovery. Suppliers may find their hydrocarbon industries devastated by low prices and hence struggle to return production and exports to their pre-crisis levels. An uneven economic recovery could force suppliers to find new customers and consumers to find new suppliers. And some of the dynamics that we have taken for granted in recent years—like the United States becoming a net energy exporter, as it did in 2019—might slow down or be reversed. Trade flows could shift after the crisis is over, possibly in dramatic ways.

How governments respond to this crisis will also have trade effects. Governments are always tempted to use trade measures to provide relief to domestic industries, and such measures could easily extend to energy. Support for new energy technologies, which could be part of a stimulus package in many countries, could spark another round of trade disputes, similar to the ones we have seen on renewable energy. Or, in a more collaborative landscape, a coordinated effort to resuscitate the economy might put a lid on some of those trade disagreements.

How the crisis unfolds might also rejuvenate a conversation around energy security and reliability. Energy security tends to be dominated by concerns over foreign energy supplies and supply chains, even if domestic vulnerabilities are often just as great. If countries find their energy supplies disrupted due to Covid-19 because foreign suppliers cannot sustain production due to operational challenges or economics—those disruptions will accelerate a perennial search for greater resilience, diversification, and support for indigenous energy sources. It is not hard to imagine a world where countries are even more wary about depending on other countries for the most essential building blocks of a modern economy, even if those instincts might be sub-optimal or counterproductive.

Hard to Gauge the Net Effect

So far, energy has been remarkably resilient during the Covid-19 crisis. By and large, society has not experienced the widespread disruption to energy services that can typify other global crises. But the impact on the energy sector will depend on the duration and severity of the economic downturn. An industry that can weather weeks or months of economic slowdown may not fare so well when months turn into quarters, disrupting maintenance and investment decisions, when shareholders grow restless and debts need to be repaid. In that world, the details of how demand, supply, trade, and stimulus impact the sector begin to matter at a much more critical level.

How these competing forces play out over time is impossible to know right now. Perhaps the crisis will trigger shifts of a higher order—more automation, less globalization, more demand for capable government and competent governance. Those forces are not restricted to the energy system, but they will reshape the canvas in which all other decisions will be made. But the idea that the shock created by Covid-19 must or will accelerate the energy transition is premature. It might—but that depends on the choices that governments, industry, and people make over the next few months and years.

Sarah Ladislaw is senior vice president and director and senior fellow of the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Nikos Tsafos is a senior fellow of the CSIS Energy Security and Climate Change Program.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Sarah Ladislaw

Sarah Ladislaw

Former Senior Associate (Non-resident), Energy Security and Climate Change Program

Nikos Tsafos