What drives the energy and climate markets?

Climate change knows no boundaries, and thrives on uncertainty.

That’s the key message from a new report from Zurich based Swiss Re, called Building a Sustainable Energy Future.

Below they have listed their five drivers behind the energy and climate markets – focusing on what Donald Rumsfeld called ‘known unknowns and unknown unknowns’.

Global oil prices will play a large part in determining how attractive fossil fuels are to governments and investors (Pic – BP)

Economic growth: Economic development is closely linked to growth in energy demand and greenhouse gas emissions. Therefore energy and emissions projections are very sensitive to growth assumptions.

While future economic growth rates are highly uncertain, varying in the scenarios by 2–3% until 2025, they converge to the same long-run rate after 2030. Generally, fossil fuel prices tend to be higher when economic growth is high, making it easier for “green” policies to gain acceptance.

Certain: There is a very strong link between economic growth and energy demand.

Uncertain: World economic outlooks vary tremendously; will another big economy emerge by 2020?

Energy technology: Research and development investments in clean energy have increased substantially from USD 14 billion globally in 2004 to USD 68 billion in 2010 and costs have come down. But how fast will they devel­op in the future?

Will declining relative costs of clean technology create a large scale green transition? If so, when?

Certain: Clean tech will develop rapidly, but shale gas has already had a disruptive impact in the US.

Uncertain: Will clean technology costs fall by 25, 50 or 75% by 2030? Will shale gas exploration expand globally?

Fossil fuel prices: Prices have fluctuated between USD 80 and 120 per barrel between 2010 and 2012 despite weak global economic growth.

This is one reason to believe oil prices will remain high. But there are also large reserves of unconventional oil extracted by means other than oil wells which could be produced at costs below today’s prices.

Shale gas production, for example, has already caused a major disruption in the gas market.

Certain: Supply and demand for oil will be stretched in the next 10–30 years, with possible oil price shocks.

Uncertain: How will the oil price develop? Will it be at 60–100 USD per barrel or USD 100–200 in the future?

Global and national climate policy: Policies play a major role in shaping climate and energy markets, but many questions remain: Will there be stronger policies in support of a green transition in the major economies?

When and how strong? Will the global United Nations process lead to a binding agreement with solid commitments and supported by a global consensus? Will it be in place by 2015 and take effect in 2020, as envisaged at the Cancun climate summit?

Certain: Strong informal “green” mechanisms are already at work and will shape our future energy system.

Uncertain: Will strong, explicit carbon reducing policies be implemented or not? If so, where and by when?

Public perception of climate change: In large parts of the world, public support for tougher climate mitigation policies has been lukewarm.

This has made it difficult for many policymakers to adopt regulations to cut emissions. Will there be major weather events or other clearly visible effects of global warming that will change this and create public pressure to reduce emissions?

Certain: Climate change will significantly impact developing countries and feature in the public debate.

Uncertain: Will climate change impacts shift public opinion to support strong mitigation efforts? If so, by when?

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