Global demand for energy is increasing rapidly because of population and economic growth, particularly in emerging market economies. While accompanied by greater prosperity, rising demand creates new challenges.

The report points out that energy is a fundamental component of economic activity. Modern energy services light up our homes and schools, fuel economic activity to produce and consume, provide comfort and mobility, pump water, and contribute to health and well-being.

Harnessing energy sources to replace manual and animal labour was the platform of the Industrial Revolution – a period of unprecedented economic and social development.

The 20th century witnessed large increases in the global population, economic output and fossil fuel consumption. The gains from growth have been impressive for many.

Yet, these gains have taken a toll on a range of environmental systems where unsustainable practices have dominated. Continuing deterioration of natural resources could stress the ability to meet the needs of a growing population and undermine economic activity.

Green growth could meet this challenge. It is about fostering economic growth and development while ensuring natural assets continue to provide the ecosystem services on which our well-being relies. To do this, it must catalyse investment and innovation, which will underpin sustained growth and give rise to new economic opportunities.

The energy sector poses a particular challenge in the context of green growth due to its size, complexity, path dependency and reliance on long-lived assets. The current energy system is highly dependent on fossil fuels, the combustion of which accounted for 84% of global greenhouse gas emissions in 2009. Global demand for energy is rapidly increasing, due to population and economic growth, particularly in large emerging countries, which will account for 90% of energy demand growth to 2035. At the same time, nearly 20% of the global population lacks access to electricity.

Energy security concerns can emerge as more consumers require ever more energy resources. And higher consumption of fossil fuels leads to higher greenhouse gas emissions, particularly CO2, which contribute to global warming.

At the same time, the number of people without access to electricity remains unacceptably high.

But such challenges can create opportunities. A sustainable energy future will require new thinking and new systems – essentially a transformation in the way we produce, deliver and consume energy. If our goal is to raise living standards, provide access to modern energy services, use energy more efficiently, protect the global environment and ensure reliable energy supplies, green growth must play a key role.

The report highlights the challenges facing energy producers and users, and how they can be addressed using green growth policies. Because energy underlies the global economy, the decisions made today in the energy sector will be critical to achieving greener growth.

“We have a window of opportunity for establishing a policy framework to enable transformational change in the energy sector, including by facilitating technological innovation and the creation of new markets and industries, to reduce the sector’s carbon intensity and to improve energy efficiency.

“The environmental imperative to reduce CO2 emissions in the energy sector coincides with a looming new investment cycle in power generation in most OECD countries. In the emerging market economies, many power-generation facilities are quite recent, but many more will be built in the coming years to meet growing energy demand. As power plants and other infrastructure tend to have long operating lives, we must avoid ‘lock-in’ of CO2 emissions by ensuring the latest clean technologies are used,” the report states.

Said IEA executive director Maria van der Hoeven, “We have a narrow margin. If we do not manage to slow current rates of emissions growth, we will hit the ceiling by 2017 – meaning that to keep the global increase in temperature to 2 degrees Celsius, all new infrastructure will have to be zero-emission.”

A large-scale transformation of the global energy sector is possible, although it will require significant investment. Global emissions could be halved by 2050, using existing and emerging technologies, at an additional cumulative investment of US$46 trillion – a further increase of 17% on top of baseline investments.

It is vital for governments to create an enabling policy framework to catalyse private-sector investment in the transition to a low-carbon energy sector. By acting now, long-term costs can be reduced. Every US dollar that is not spent on investment in the energy sector before 2020 will require an additional US$4.30 to be spent after 2020 to compensate for increased greenhouse gas emissions by building zero-carbon plants and infrastructure by 2035.

The report states that governments need to increase energy efficiency and lower the carbon intensity of the sector. As developed countries renew their energy infrastructure, and developing countries build new power plants to meet growing energy demand, the time is right to make crucial choices for the future of the energy sector.

With the energy sector responsible for the majority of CO2 emissions, green growth policies could halve worldwide energy-related emissions of CO2 by 2050 using a combination of existing and new technologies.

Moving economies in a greener direction will foster broad benefits. High levels of resource productivity and the efficient use of energy can lead to more dynamic and competitive economies which are, in turn, better able to respond to the scale of the transition that is required.

Countries can gain an advantage by being the first ones to take action and realising the benefits related to competition in widening international markets for green energy goods and services.

Green growth can reduce the burden on land, air and water resources while creating expanded opportunities for gains in productivity, quality of life and social equity.

“The decisions made today in the energy sector will be critical to achieving greener growth in the future,” said OECD secretary-general Angel Gurría. “We must act together now to create the momentum for fundamental change.”

Energy sector reform will require new investment – some US$46 trillion before 2050 – to improve energy efficiency, increase carbon capture and storage, deploy more renewable energy, and support new technologies. Investments in low-carbon technologies reached nearly US$250bn in 2010, halfway to the annual figure required by 2020 of approximately US$500bn.

The report states that policy commitments to green energy growth are essential to providing policy certainty, clear direction for infrastructure investments, and addressing structural change. Adoption of comprehensive strategies for energy efficiency, such as the IEA’s 25 energy-efficiency policy recommendations, provide resilient policy platforms for green energy growth.

Tailor-made energy policies for economies at different development stages can constitute the driver for a successful transition to green growth in the energy sector and the wider economy. The challenges to design and implement such a policy package with a consistent framework are considerable.

Many energy systems are “locked in” to high-carbon production and consumption patterns that can be difficult to break for reasons that go beyond simple economics.

Making reform happen will require attention to some common political economy challenges:

Structural adjustments

Structural change involves not only a breakthrough of new technologies, but also corresponding shifts in the broader supporting system of infrastructure, supply chains, institutions, markets and regulations.

Policies should aim to address barriers to change across the entire energy system and accelerate the ‘creative destruction’ process. Specific actions include:

• Carefully designed electricity market reform to set incentives for suppliers to invest in efficiency with consumers and “green” capacity as well as environmentally friendly technologies to meet demand;

• Dedicated supply chains for efficient and clean energy applications, to combine specialised firms in geographical clustering, attract potential business partners and enhance conditions for local innovation and technology and infrastructure development, as well as to encourage international co-operation; and

• Targeted policy mechanisms to attract private finance to the renewable energy and energy-efficiency sectors.

Stranded capital

Sunk capital that is at risk of being stranded can act as a constraint on the rate of transition toward cleaner energy systems. Addressing the political economy of stranded capital will require the following:

• The careful assessment of future societal needs, seeking less capital-intensive options and opening up alternative low-energy options such as end-use efficiency, distributed systems for services;

• The development of standards for flexible options such as carbon capture-ready fossil fuel plants that could retrofit at a later stage;

• A regulatory framework that provides a long-term view with clear milestones, to provide robust signals, reduce uncertainty and establish credibility; and

• A significant carbon price or proxy, which provides a clear expectation of increase over time to create incentives strong enough to encourage sustainable energy solutions.

Distributional effects

Restructuring the energy sector is expected to have (relatively small) direct employment changes and wider equilibrium effects across the economy as well as between countries.

Policies should help to ensure that while there will be winners and losers, the adjustment can be achieved in a way that is consistent with appropriate social policies. Specific policies include:

• Carefully designed package of labour market and skills policies, to help the labour market be dynamic and inclusive. This includes education policies that enable workers to acquire the training they need to move from contracting to growing industries and firms.

• Consumer and demand-side power in markets, particularly programmes to expand the supply of safe, efficient and reliable energy to the poorest sectors of society; and

• Combining the removal of environmentally harmful energy subsidies with effectively targeted policies for poverty alleviation to offset the financial impacts on poor communities, allowing consumers to make more rational choices in their energy use and more efficient uses of government expenditures.

The key policies identified in the report include:

• Eliminating fossil fuel subsidies;

• Putting a price on emissions and other environmental liabilities;

• Ensuring energy market rules and regulations encourage use of new technologies;

• Radically improving energy efficiency; and

• Fostering innovation and green technology policy.

The joint OECD–IEA report finds that the transition to a low-carbon energy system is likely to have a positive impact on employment in the energy sector because renewables tend to be more labour-intensive than fossil fuel-based energy.

Increased deployment of solar photovoltaic would yield the largest number of jobs, with strong growth also expected in the energy-efficiency, geothermal and solar thermal sectors.

Transforming the energy sector presents substantial opportunities for innovation and economic growth, which governments can catalyse by creating the enabling policy framework.