Energy at the crossroads

The multidimensional energy transition is more evident today than it was 12 months ago. After a year of persistently high inflation, weak economic growth, disruptions and high energy costs, countries and companies around the world are starting to reassess their energy strategies and climate policies.  

Provision of energy for heat, light and mobility is essential for human progress. Three billion people use less electricity annually than an average American refrigerator. For many, access to energy, or carbonizing, will precede decarbonizing. In the Global South, where standards of living significantly lag those in the Global North, the energy transition competes with other compelling priorities around economic growth, poverty reduction and improved health. 

The perspectives are different depending on the vantage point. Based on 2024 statistics from the International Monetary Fund, per capita income in India is approximately $2,900. In sub-Saharan Africa, it is less than $1,800. This compares with per capita income of more than $63,000 in North America and more than $51,000 in Western Europe. The gaping disparity in per capita income underscores the critical importance of affordable energy. Solutions feasible in the Western world — electric vehicles, carbon capture, utilization and storage, and hydrogen production or importation — may be financially inaccessible to countries in the Global South. Their priority is to provide the most affordable available energy — hydrocarbons in many cases — and subsidize this energy to ensure mass affordability. 

Domestically available coal, oil and gas are critical pillars for ensuring the security of supply and are primary sources of revenue for numerous countries. They are vital in funding national budgets and supporting social programs. Governments cannot afford to swiftly transition from fossil fuels, which are critical for operating their economies, without viable alternative revenue sources. A rapid phaseout of fossil fuels could result in widespread unemployment, political unrest and destabilization — all counterproductive to addressing climate change and leading to backlash and instability. 

In 2024, global energy demand reached a new record. Demand for oil and coal, alongside solar photovoltaic and onshore wind, is at an all-time high. We have yet to see a peak — or, more realistically, a plateau followed by a gradual decline — in hydrocarbon demand. Demographics further compound the challenge: Approximately 2 billion people are forecast to join the global population in the coming decades, almost all in the Global South. As Africa’s population grows, more people will require food, water, shelter, heat, light, mobility and jobs, creating further demand for secure and affordable energy.  

Based on S&P Global Commodity Insights forecasts, oil demand may level out within the next decade, depending on several factors: the rate of EV uptake, improvements in internal combustion engine efficiency, demand growth for jet fuel and demand for oil as a feedstock for petrochemicals. However, a rapid and precipitous decline in oil demand is unlikely. Gas demand will continue to increase for the foreseeable future as this fuel replaces coal in power generation and because of faster overall growth in power demand. 

Power demand is increasing rapidly due to a surge in consumption arising from energy transition demand (e.g., for EVs), reshoring and advanced manufacturing (e.g., of semiconductors), cryptocurrency mining, and the insatiable energy appetite of datacenters. The US Energy Department estimates that datacenters’ share of US electricity demand could rise to 12% by 2028 from 4.4% in 2023.   

The energy mix is in a state of continuous transition, and history tells us that while there are occasional surprises, abrupt and radical changes are rare. The driving force in prior transitions was a shift to a more useful energy source (wood to coal, which has a higher energy density), or to a source with better functionality (coal to gas) that can be provided at a lower cost. The current transition is driven by our need to reduce emissions.  

Much of the focus today is on decarbonizing electric power production, but only about 25% of global greenhouse gas emissions are from electricity. Coal, the most carbon-intensive fuel, accounts for about 40% of power generation globally. Even if coal consumption were to plateau within the next few years, it will remain the fuel of choice in many countries for decades to come due to cost, availability and existing infrastructure.

There are comparable obstacles to changing the energy mix in other sectors. Shifting the world’s car, truck, plane and shipping fleets from oil-based fuels has started, but a complete transition will take years. In industries such as refining, petrochemicals, and cement and steel production, which together generate about 20% of global GHG emissions, carbon abatement is even more challenging. In every long-term outlook, including all S&P Global Commodity Insights scenarios, the goal of the Paris Agreement on climate change to limit global temperatures to a 1.5 degrees C increase will not be met. 

Global consumption of every energy source introduced since 1800 has increased, from traditional biomass (wood and waste) to coal and oil, which experienced record consumption in 2024. The previous energy transitions can be categorized as “energy additions” rather than “energy substitutions.” Today, the goal is to do something more ambitious — to replace the existing system. So far, this transition has also been an energy addition, but to achieve its goals, it will need to become a true transition. We discuss this in our new article in Foreign Affairs, The Troubled Energy Transition: How to Find a Pragmatic Path Forward.

The scale of the task ahead is enormous. Reducing hydrocarbon energy to near zero from 80% of total energy consumption in the next 25 years will be extremely challenging, given that energy demand will increase and that hydrocarbons, as a percentage of total energy consumption, only fell by a little over 4% during the previous 25 years.

Energy security and affordability are fundamental if governments want to make this transition palatable. Otherwise, they can expect political backlash against energy and climate policies, as evident most recently in elections across Europe. The focus of energy security remains assuring supplies of oil and gas, which still provide 55% of world energy at affordable prices. The biggest emphasis on the need for reliable and affordable energy is in the developing world, where 80% of the global population lives — a proportion that will only grow in the coming decades. 

Geopolitical competition presents another complicating factor. The energy transition is increasingly intertwined with a great power rivalry, both geopolitical and economic, between China and the US and its allies. This is true for the implementation of targets and when it comes to the green supply chain. China has a dominant position in mining and a predominant position in minerals processing to produce metals essential for renewable energy infrastructure. Beijing aims to extend this dominance to what it calls the global new energy industrial chain, maintaining its commanding position in batteries, solar panels and EVs while deploying massive amounts of capital toward energy infrastructure in the developing world. With China’s huge scale and low costs, Beijing describes this effort as an extensive and integrated approach to developing and dominating the renewable energy sector.

The US, intent on protecting its green supply chains, has responded with robust industrial and import policies and tariffs. The growing tensions will slow the deployment of clean energy technologies, add unnecessary costs and constrain the pace of transition. Western governments are mobilizing to diversify and de-risk supply chains. In practice, this is proving difficult because of costs, infrastructure, time constraints and the substantial roadblocks to getting projects permitted. It is further complicated by the general rise in protectionism and the more widespread use of tariffs for political objectives.

The past few years have underscored how misguided the viewpoint about a cheap and easy transition is. Due to technological, policy and geopolitical uncertainties, estimating the precise costs associated with achieving net-zero by 2050 is extremely difficult. 

The most recent estimate comes from the Independent High-Level Expert Group on Climate Finance, whose numbers provided a framework for the 2024 UN Climate Change Conference (COP29) in Baku, Azerbaijan. It projected the global investment requirement for climate action at $6.3 trillion to $6.7 trillion per year by 2030, rising to as much as $8 trillion by 2035. It further estimated that countries in the Global South will account for almost 45% of average incremental investment needs from now until 2030. They have already been falling behind in meeting their financing needs, especially in sub-Saharan Africa. Based on such estimates, the magnitude of energy transition costs would average about 5% per year of global GDP between now and 2050. If countries in the Global South are largely exempted from these financial burdens, countries in the Global North would have to spend about 10% of annual GDP.

These costs reflect the pervasiveness of fossil fuels in the building blocks of modern society, including cement, plastics and steel. An energy transition is much more expensive than an energy addition because it requires a fundamental change at the core of modern economies. The economic burden also reflects the higher costs — what Bill Gates called a green premium — associated with the technologies that produce lower emissions, relative to those that still have higher emissions profiles.  

Besides the sheer magnitude of the issue, achieving net-zero globally will require an unprecedented reorganization of capital flows to the Global South from the Global North. Achieving Africa’s energy- and climate-related goals by 2030, for example, will require annual investments of hundreds of billions of dollars through the end of this decade. This will be extremely challenging in the current geopolitical and fiscal environment, where geopolitical alliances are shifting rapidly.

It is essential to be clear about the nature of the trade-offs and the challenges ahead. Success will depend on being forthright about what the energy transition will entail and how much it will cost.  

Any path to emissions reductions will have to go through the Global South because it is the major source of growth in energy demand. These countries face particularly daunting challenges in attracting the investments necessary to move from cheap, coal-based energy sources because renewable energy projects often involve high up-front capital expenditure, a high cost of capital and long investment horizons. If developing nations cannot access affordable alternatives, they will continue to use coal to meet their rapidly growing energy needs, creating a carbon lock-in effect that will require substantial investments to escape from. 

Today’s energy transition is intended to be fundamentally distinct from its predecessors — transformative rather than an energy addition. Its scale and associated challenges mean it will not proceed as many expect; it will be multidimensional, proceeding at different rates with different technologies in regions with different priorities. This reflects the complexities of the energy system that is the foundation of today’s global economy and the ubiquity of fossil fuels as the building blocks of modern society. The importance of balancing economic growth, energy security, energy access and sustainability underscores the urgency with which we must rethink the transition and redefine a pragmatic path forward.