Core Working Groups workshop: “Global Effects”
The Global Effects workshop, exploring the impact of financial and political issues on global decarbonisation, aimed to facilitate collaboration between the IAM COMPACT modelling team and policymakers, the clean energy sector and civil society representatives.
During this workshop, we sought valuable insights on our research agenda, realistic scenario design, and potential applications of our analysis. By engaging with senior energy and climate policymakers, we have identified key research questions for assessing the impact of global effects such as geopolitical tensions and interest rates on decarbonisation pathways. Expert contributions will directly influence our research.
The Global Effects workshop discussed two related modelling studies:
- How could geopolitics and technological limitations affect decarbonisation pathways? This study is led by E3M.
- How do interest rates influence global decarbonisation pathways? This study is led by NTUA.
At the start of the workshop, a brief introduction of IAM COMPACT as well as the aims of the workshop were discussed by Bruegel. Then, study leads briefly presented the background and approach of both studies, before splitting into two break-out rooms.
Room 1: Geopolitics
Topics for discussion:
- Geopolitical events that could impact material, technology and fuel availability.
- Possible material bottlenecks for green technologies along supply chains.
- Geopolitical scenarios that could limit growth/availability of certain energy technologies
The session was facilitated via Miro, which helped us gather the necessary feedback.
Summarising the key findings from stakeholder inputs:
1. Technology vulnerabilities: Stakeholders identified vulnerabilities in the supply chain of lithium-ion batteries and electric motors, citing China's dominance in lithium battery materials and the potential bottleneck in permanent magnets, largely reliant on China. The concentration of solar PV production in China was also seen as a risk.
2. Diverse Energy technology Landscape: Stakeholders highlighted the importance of considering the global disaggregation in the production of solar PV components and less concentration in wind turbine production.
3. Global economic shifts and regional expansion: The anticipated economic growth in the global South emerged as a significant conideration. During the workshop, stakeholders suggested a window of opportunity to expand global manufacturing capacity, particularly in regions where costs are currently higher.
4. Need to analyse the resilience of the energy system transformation when some of the mitigation options are not available (including CCS, nuclear, bioenergy)
Room 2: Interest Rates
We first asked participants to complete an anonymous survey, indicating by how much investment risks (e.g., risks in power market, permits, social acceptance, resource & technology, currency, geo/political) will have changed for a list of given technologies in 2050. We provided baseline WACC values from Calcaterra et. al (2023) & IRENA (2023) by technology and country-income classification.
After completing the survey (~10 minutes), the rest of the session was facilitated via Miro, which helped us gather the necessary feedback.
Topics for discussion:
- Interest rates impacts that are most relevant for climate and energy policy.
Experts were interested about distributional impacts of technology affordability, expanding the empirically defined WACC values beyond power technologies and analyse hard-to-abate sectors, and how differentiated interest rates could affect carbon prices.
- Policies pursued to realistically lower the cost of deployment for low-carbon tech outside the EU.
In terms of policies within the EU, stakeholders believed that equity financing can be more conductive in riskier projects, noting that realistic assumptions on tech developments and informed decision-making based on learning curves would be key to lowering risks. They also thought CBAM could impact interest rates, as well as direct (through green risk premiums) or indirect (through interest rates) interventions from the ECB.
For policies in the context of developing countries, they stressed that climate financing should not just provide grant-based finance, but hedge different risks. Development banks were seen as first mover actors, while issuance of green bonds could reduce project-related risks and thus financing, through aggregating risk.
- Other exploratory pathways of interest
Experts were interested about exploratory pathways of varying interest rates between regions to explore their impacts, not looking strictly at their cost-effectiveness. Another scenario of interest was capturing persistently high interest rates as a way to fight inflation.
The modelling work on Geopolitics will be featured in Deliverable D5.4: Modelling out-of-ordinary extremes, while Interest Rates study will be part of D5.6: Behaviour, social and disruptive innovation. Both deliverables are due on February 2024 and will be available on our website.
The first Policy Response Mechanism (PRM) cycle ends on May 2024, and by then consortium and stakeholders will once again come together to discuss how credibility of results can be improved, following which refined modelling may begin. The final results will be transposed into legible policy recommendations in the form of a policy brief.