BISPapersNo135TheenergytransitionanditsmacroeconomiceffectsbyAlbertoAmerico,JesseJohalandChristianUpperMonetaryandEconomicDepartmentMay2023JELclassification:Q30,Q40,Q50,O30.Keywords:Energytransition,transitionrisks,macroeconomics.2BISPapersNo135TheviewsexpressedarethoseoftheauthorsandnotnecessarilytheviewsoftheBIS.ThispublicationisavailableontheBISwebsite(www.bis.org).©BankforInternationalSettlements2023.Allrightsreserved.Briefexcerptsmaybereproducedortranslatedprovidedthesourceisstated.ISSN1682-7651(online)ISBN978-92-9259-660-6(online)BISPapersNo1353Theenergytransitionanditsmacroeconomiceffects1AlbertoAmerico,JesseJohalandChristianUpperAbstractTheenergytransitionwillhaveprofoundandvaryingeffectsacrosstheglobe.Weassesshowcleantechnologiesareevolving–mainlywind,solarandelectricvehicles–andthechallengesandopportunitiesthetransitionposesforfossilfuelandmetalsandmineralsproducersintheshortandlongterm.Wedescribethelikelymacroeconomicconsequencesoftheenergytransitionandidentifythecountriesthataremostpositivelyandnegativelyexposed.Asmallnumberoffossilfuel-producingcountriesarelikelytobeseverelyhit.Meanwhile,aconcentratedgroupofmineralsproducersshouldexperiencelargenetbenefits.Fuelimporters–thatis,mostoftheworld–shouldbenefittovaryingdegrees.Keywords:Energytransition,transitionrisks,macroeconomics.JELclassification:Q30,Q40,Q50,O30.1TheauthorsthankAlexandreTombini,BenoitMojon,JonFrostandRafaelGuerraforcomments,andLoganCaseyforexcellentresearchsupport.4BISPapersNo1351.IntroductionTheenergytransitioniswellunderwayandaccelerating.Windandsolarenergyarethecheapestsourcesofelectricityinmostoftheworld,renewableenergyaccountsfornearlyallglobalelectricalcapacitygrowth,electricvehicle(EV)adoptionisrapidlyincreasingandautomanufacturersaremovingtowardsfullyelectricfleets(InternationalEnergyAgency(IEA)(2023),InternationalRenewableEnergyAssociation(IRENA)(2021)).ThesetrendswillbereinforcedastechnologyimprovesandtheimpactsofmeasuressuchastheUSInflationReductionAct,theEuropeanREPowerEUplanandChina’slatestFive-YearPlanforRenewableEnergyDevelopmentbegintobefelt.TheincreaseinfossilenergypricesaftertheRussianinvasionofUkrainehaslikewiseaddedafurtherimpulsetothetransition.Thispaperseekstoprovideabroad,qualitativeoverviewoftheenergytransitionbybringingtogetherresearchfromavarietyofdisciplines–economics,finance,energysystemsandenvironmentalscience–togiveadirectionalviewofhowthetransitionmayevolveinfuture.Thatis,itaimsbothtocomplementquantitativemacroeconomicscenarios,suchasthoseoutlinedbytheNetworkforGreeningtheFinancialSystem(NGFS),andtogiveamoretargeted,sector-specificdescriptionthanisplausibleinsuchlarge-scalemacroeconomicmodels(NGFS(2022)).Wehopethispapercanalsoserveasalaunchpointforfutureresearchthatmorenarrowlyfocusesonthespecificaspectsoftheenergytransitionwhichresearchers,policymakersandinvestorstypicallyfocuson(egquantifyingitseffectsoninflation,tradeflowsandfinancialflows).Whenexploringthemacroeconomicimplicationsoftheenergytransition,wefinditconvenienttofocusonthreetypesofcountry:(i)fossilfuelexporters,whowillseetheirmainsourceofexportandfiscalrevenuesseverelyeroded,forcingashifttoanewgrowthmodel;(ii)fossilfuelimporters,whowillspendlessonimportingfuelduetotheabundanceandgeographicaldispersionofcleanenergyresources;and(iii)exportersofkeymetalsandminerals,whoarelikelytobenefitfromastructurallyhigherdemandfortheirproductsandpossiblyfromanewmetalsandmineralssupercycle.Ofcourse,thesegroupsareconceptualandactualcountriesmayfallintomorethanoneofthesebuckets.Moreover,countriescouldhavesomeregionsfallingintoonecategoryandothersfallingintoadifferentone.Still,wefindthisdistinctionisagoodstartingpointforanexplorationofthemacroeconomiceffectsoftheenergytransition.Thetransitionmayfollowavarietyofpathsinthenear-term.Constrainedfossilfuelinvestmentcouldpushupenergypricessharplyforanextendedperiodandbottlenecksinmetalsandmineralsmarketscouldsloworraisethecostsofthetransition.Buttheoppositescenarioisequallyconceivable;rapidadoptionorfasterthanexpectedimprovementofcleantechnologiescouldpushenergycostsandfossilfueldemanddownfasterthananticipated.Metalsandmineralsproductionconstraintscouldcreateanewcommoditysupercycleforthehandfulofcountrieswhereaccessiblereservesandrefiningcapacityareconcentrated(egArgentina,Australia,Bolivia,ChileandPeruforreservesandChinaforrefining).Thelong-termpicturemaybeasfollows.Mostoftheworld,particularlyEastandSouthAsia,shouldbenefitfromreplacingexpensive,polluting,importedfossilfuelwithcheaper,cleaner,locallysourcedenergy.Formajorfossilfuelproducers,especiallythoseintheMiddleEastandNorthAfrica,theeconomicbenefitsofcleanenergywillprobablybeovershadowedbythedeclineofexistingenergysources.BISPapersNo1355Producersofkeymetalsandminerals(egcopper,lithium,rareearths)shouldseeamplifiedbenefits,butthevalueoftheseexportswillbesubstantiallysmallerthanforfossilfuels.Overall,economicactivityshouldshiftfromfossilfuelproducersandtowardsenergyimportersandmetals/mineralsproducers.Thenextsectionsurveystheevolutionofandtheoutlookforcleantechnologyandfossilfuelmarkets.Section3discusseshowthetransitionmaymanifestitselfmacroeconomically(egingrowth,inflation,exchangeratesandcapitalflows).Section4looksathowexposeddifferentcountriesaretothetransition.Weconcludewithadiscussiononthepolicyimplicationsoftheenergytransition.2.EvolutionandoutlookforenergymarketsRenewablesarecheapandusageisgrowingfastPricedeclinesandtheadoptionofwindandsolarenergyhavefarsurpassedexpectationsoverthepastdecade(Graph1).2Measuresoflearningrates–therateatwhichtechnologycostsdeclineforeverydoublingofcapacity–clusteraround15%forwindenergyand25%forsolarenergy.3Theadvantagesofrenewablesshouldthusonlygrowoverthecomingdecades;applyingtheInternationalEnergyAgency’s(IEA)projectionsforelectricitycapacityinitsthreeprincipalscenarios–theStatedPoliciesScenario(SPS),SustainableDevelopmentScenario(SDS)andNetZeroScenario–windenergycostscouldfallbyafurther17–29%by2030ascomparedwith2020,whilesolarcostscouldfallbyanother40–60%.2Ata16%annualpricedecline,solarenergycostsfellbysubstantiallymorethanassumedinseveralthousandintegratedassessmentmodel(IAMs)projections(Wayetal(2022)).Themeanprojectionwasfora2.6%annualdeclineandthehighestforecastwas6%.3From2010to2020,learningratesweremuchfaster;32%forwindenergyand39%forsolarenergy(IRENA(2021)).ApplyingtheIEA’sscenariostothesedataimpliesthatwindenergycostswillfallby35%to65%by2030vis-à-vis2020,whilesolarcostswillfallby59%to79%.CleanenergyisgrowingandimprovingfarfasterthanexpectedGraph1Projectedversusrealisedwind/solargenerationProjectedversusrealisedwindandsolarcostdeclinesTWh%Source:IEA.2,0001,5001,0005000202020152010ActualvaluesElectricitygeneratedfromwindandsolar:2010IEAforecast2015IEAforecast0–5–10–15–20SolarWindIEA2015projectionsActualrate,2010–20Annualisedcostreduction:6BISPapersNo135Declinesinrealisedpriceshavealreadymaderenewableenergythecheapestsourceofelectricityinmostoftheworldandthusthepreferredchoicefornewcapacity(Graph2,left-handpanel).Renewables’shareofnewlyaddedcapacityincreasedfromjustunder40%in2010tonearly90%(IRENA(2022)).Thisshareisexpectedtoincreaseto95%ofnewinvestmentbymid-decade(IEA(2021a)).Thisrapidgrowthhaspushedtheshareofrenewablesinglobalelectricitygenerationfromaround20%in2010toalmost30%in2022(Graph2,right-handpanel).Alackoftransmissioncapacitycould,however,impedetheadoptionofwindandsolar.Intermittency–becauseofalackoflocalwindorsunshinethatcannotbeoffsetbysunnyorwindyconditionselsewhere–maybecomeamorebindingconstraint.Yetiftheseissuesareresolved,renewablescouldsupplyalargeshareofmanycountries’electricitydemand;windandsolarcouldtheoreticallyprovide72%to91%ofmajorcountries’electricityneeds(Tongetal(2021)).4Transmissionanddistributionalsocreateaflooronhowlowretailelectricitycostscango;suchcostsaccountforaroundarespective13%and31%ofelectricitycostsintheUnitedStates(USEnergyInformationAdministration(EIA)(2021)),Beyondtransmission,othertechnologies(eghydroelectricity,geothermal,nuclear,batteries,hydrogen)andstrategies(egdemandreductionandshifting)willbeneededtosupportvariablesourcesofenergytoensurearound-the-clockreliability.Inanycase,aswindandsolarpowerarestillfarfromhittingeventheirnear-termsaturationpoints,theirrapidgrowthshouldincreasinglyeatawayatfossilfueldemandinthepowersector.4Itshouldbenotedthat,asthesefiguresdonotreflectsitingconstraints,nordotheynecessarilyreflectthelowest-costzeroemissionsgrid,actualusageislikelytobelower.Nevertheless,theseissueshighlightthatalackofsunorwindinagivencountryarenotthemainconstraintsfacingtheadoptionofwindandsolar.Renewables’cheapnessandabundanceisincreasingtheirusageGraph2CostofelectricitybyfuelsourceShareofelectricitygenerationbyfuelsourceUSD/kWhShareoftotalelectricitygeneration,%1Levelisedcostofenergy.Sources:IRENA;BP;EMBER;authors’calculations.0.40.30.20.10.0202120192017201520132011SolarphotovoltaiccostrangeFossilfuelpowergenerationGlobalweighted-averageLCOE1:OnshorewindOffshorewind60504030201002022201720122007200219971992FossilfuelsMarketsharebytypeofgenerationtechnology:RenewablesNuclearBISPapersNo1357FossilfuelpowerisfacingamassivechallengefromrenewablesWhiletheuseofcoalandnaturalgasinelectricitygeneration–stillthetwolargestsourcesofelectricitysupplyglobally–eachhitrecordlevelsin2021and2022,therapidadvanceofrenewablesshouldputhugepressureonthemoverthenextdecadeandbeyond.Growthinfossilfuelelectricitygenerationisslowingwhilerenewablegenerationcontinuestogrowrapidly(Graph3,left-handpanel).Investmentinfossilproductionandgenerationcapacityhaslikewisebeeninasteadydecline(Graph3,right-handpanel),implyingthattheexistingstockoffossilfuelassetswilloverwhelminglybereplacedbycleanersources.Tighteningpolicyaroundfossilfueluse,strongpolicysupportforcleantechnologiesandthecostadvantagesofrenewablesoverexistingcapacitymeanthatlargedownsideriskstofossilfueldemandintheelectricitysectorcannotbediscounted(IRENA(2021)).Renewablesposeamoreimmediatethreattocoalthantogas.Indeed,electricityaccountsforaroundtwothirdsofglobalcoaldemandanddemandchallengesarealreadyapparent.Afterdecadesofsteadygrowth,globalcoalconsumptionhasbeenflatsince2014.Coal’sshareofglobalelectricityproductionhasfallenfromits2011peakof41%to36%in2022andwouldprobablyhavebeenevenlowerifnotfortheunexpectedlystrongreboundinenergydemandintheaftermathofthepandemicandtheeffectsofthewarinUkraineonenergyprices(Ember(2023)).Globalcoalcapacityadditionsarealsoonasteadydownwardtrend(GlobalEnergyMonitor(2022)).Andcoalfinancingcostshaveincreasedsharply,pointingtogrowingstigmatisationandpoorgrowthprospects(Zhouetal(2021)).Naturalgashasmorediversifiedrangeofuses,whichshouldhelptosustaindemandoveralongerperiod.Forinstance,electricitygenerationaccountsforonly40%ofnaturalgasdemand,comparedwith65%forcoal.Moreover,gasislesspolluting,itscapitalstockisnewerandithasquickerstart-uptimes.ThelatterfactorDespiteapost-pandemicrebound,theoutlookforfossilfuelelectricityispoorGraph3Electricityconsumptiongrowthbyfueltype1Coalandgassupplyandgenerationinvestment2TWhUSDbn%12022dataareonatrailing12-monthbasis.Fossilfuelsdataareafive-yearmovingaverage.2AEs=OECDregionalgroupingandBulgaria,Croatia,Cyprus,MaltaandRomania;EMEs=Allothercountriesnotincludedintheadvancedeconomiesregionalgrouping,Chinaincluded.Sources:IEA;BP;EMBER;GlobalEnergyMonitor;authors’calculations.6004503001500202220172012200720021997RenewablesElectricitydemand:Fossilfuels320280240200160120252015105020222021202020192018201720162015AEsEMEsinvestment(lhs):CoalandgasAEsEMEsinvestment(rhs):Shareofcoalandgastototalenergy8BISPapersNo135makesitsuitableformeetingpeaksinelectricitydemand.Itisalsothelargestsourceofheatingacrosstheworld(IEA(2022)).Meanwhile,viablealternatives(egheatpumps)areonlyjustbeingrolledoutatscaleorarestillyearsfrombeingcommerciallycompetitive(eghydrogen).Naturalgasalsoremainsamajorinputinsomehard-to-abateindustrialprocesses(egproductionofglass,fertiliserandotherpetrochemicals).However,highnaturalgaspricesandaggressivemovesbyEuropeancountriestoweanthemselvesoffRussiansuppliescouldacceleratethetransition.TheelectrificationoftransportisacceleratingTheEVmarket,althoughlessadvancedthanthemarketforrenewableenergy,isalsogrowingrapidly(Graph4,left-handpanel).TheEVshareinnewsaleshasgrownfromaround1%in2015tomorethan13%in2022asmajorhindrancestowidespreadadoptionsuchasdrivingrangeandinputcostshavedeclined(Graph4,centreandright-handpanels).Andthisrapidadoptionisnotlimitedtotheconventionalpassengermarket;two/three-wheelvehicles,bus,vanandsemi-truckmarketsarealsoseeingsharpgrowth.5ThesetrendsshouldcontinueasnewmanufacturersexpandandlegacyautomanufacturersshifttothemassproductionofEVs,whichshouldinturneventuallyeliminatetheupfrontcostcompetitivenessofinternalcombustionengine(ICE)vehicles.65Electricbusesandelectrictwo-/three-wheelvehiclesaccountedfor44%and42%ofsales,respectively,intheircategories(BloombergNewEnergyFinance(2022)).6Batterypriceshavealearningrateof20%(ZieglerandTrancik(2021)).UsingIEA’sStatedPoliciesScenario,batterycostscouldfallbyaround55%toaround$60/kWhby2030,whichwouldbewellbelowthe$100/kWhneededtoachieveupfrontcostpartywithICEvehicles.EVchoiceandqualityareimprovingrapidlyandwideradoptionisfollowingGraph4GlobalEVsalesEVdrivingrangeEVbatterycosts%ofallcarsMillionsKmUSD/KWhSources:ZieglerandTrancik(2021);IEA;USDepartmentofEnergy;USEnvironmentalProtectionAgency;EVvolumes;authors’calculations.129630241812602022202020182016201420122010EVsalesshareEVstockshareLhs:EVsalesEVstockRhs:600400200020212019201720152013MaximumDrivingrangeofEVs:Median800600400200020212019201720152013Priceoflithium-ioncellsBISPapersNo1359ElectrifiedtransportwillputpressureonoildemandTherecurringandvolatilecostsassociatedwithICEvehiclesrelativetoEVsmakestheoutlookforoildemandverychallenging.AstheoperatingcostsofEVsarewellbelowthoseofICEengines(Graph5,left-handpanel),consumerswillhavelessandlessreasontokeepbuyingICEvehicles.EVsalsoserveasapermanenthedgeagainstfossilfuelpricevolatility;electricitypricesvaryfarlessthanfossilfuelprices(Graph5,centrepanel).7Meanwhile,severaljurisdictions(egCalifornia,Canada,Japan)andautomanufacturers(egGeneralMotors,Volvo,VWGroup)intendthat100%oftheirvehiclesaleswillbezeroemissionby2035.Ifappliedworldwide,thiscouldleadtooildemandpeakingwithinadecade(Graph5,right-handpanel).Andelectrificationisalreadydisplacingsignificantamountsofoil.EVsacrossallclassesarereducingoildemandbyaround1.5millionbarrelsaday(BloombergNewEnergyFinance(2022))–roughlyequivalenttothedailyconsumptionofFrance–whileglobaloildemandwasaround101millionbarrelsaday(EIA(2023)).7Thelowervolatilityofelectricitypricesisdueprimarilytohowelectricitymarketsareregulated;end-userpricesaretypicallysetbasedontheseasonalcostofprovidingelectricity,meaningthatshort-termfluctuationsaresmoothedoutbythetimetheyreachendconsumers.Anotherfactoristhatasignificantshareofelectricityprices(~40–50%)isbasedonthefixedcosts(ietransmissionanddistribution),whichdonotfluctuaterapidly.EVsarecheapertooperate,havelessvolatilecostsandshoulderodeoildemandGraph5OperatingcostsbydrivetrainEnergypricevolatilityOildemandbyscenario5USD/km%Mmb/d1AverageEUelectricitypricein2021.2AverageUSelectricitypriceoverthe12monthsendingMarch2022.3Consumerpriceindex(CPI).4FromJanuary1997toNovember2022.5Assumptions:averageLDVsconsume6.5barrelsofoil/year;lifespanofLDVvehicleequals15years;totalLDVsalesequal95millionvehiclesayear;totalLDVstockequals1.4billionvehicles.EVscenarios:high(low)adoptionequals20%(10%)annualgrowthratesuntilmarketsaturation.Normaloilgrowthisdefinedas1.2%growthrateayearfornon-gasolinedemand(2009–19average)whileslowoilgrowthisdefinedasagrowthrateof0.6%ayear.Sources:IEA;Eurostat;Fred;authors’calculations.ICE($2/litre)ICE($1/litre)EV($0.27/kWh)1EV($0.14/kWh)20.20.10.0FuelcostcostsOtheroperating6040200–20–40USelectricity3USfuels3EUelectricity3EUfuels3BrentInterquartilerange(IQR)MedianGrowthrate:4IQRx1.5110105100959085204020352030202520202015Oildemand(actual)OPECWorldOilOutlookLowEVsales/normaloilgrowthHighEVsales/normaloilgrowthHighEVsales/slowoilgrowthScenarios:10BISPapersNo135Othersourcesofoildemand(eglong-distanceshipping,jettravel,petrochemicals)couldoffsettheeffectsofelectrification.However,historicalnon-gasolinegrowthimpliesthatdemandmaystillbelessthanwhatisexpectedbyproducingnations,whileslowergrowthimplieslargeandgrowingabsolutedeclinesinoildemand.Also,itmaybechallengingtoachieveevenhistoricalgrowthratesfornon-gasolinedemand.Electrificationisacceleratinginsegmentswheredieselfueliscurrentlyused,suchasshort-andmiddle-distancefreightandtransportation.Regulatorystringencyontheusageofpetrochemicalsisincreasingforclimateandnon-climatereasons(egsingle-useplasticbans),whichislikelytosupressdemand.Meanwhile,better-than-expectedtechnologicalprogressandadoptionisanongoingrisktoalldemandforfossilfuels.Thesupplyresponsefromoilproducersaddsfurthercomplicationstotheoutlook.Pricescouldincreasesharplyifproducerscontinuetoholdbackoninvestmentandifcleantechnologieswerenottoscalesufficiently.Ontheotherhand,oncepeakoildemandisreachedandapermanentdeclinebecomesapparent,oilproducers’incentivesmaychangerapidlyandinduceapermanentpricedecline(Mercureetal(2021)).Oilproducerswouldbeincentivisedtoproducemoreoilintheneartermtoextractmaximumvaluefromtheirreserves,ratherthanholdbackproductionandeventuallybestuckwithreservesthatareworthless.Andgiventheabundanceofoilavailableintheworld–provenreservesamountto54yearsofcurrentproduction(BP(2021))–therearestrongincentivesforoilproducerstoeventuallydothis.Thesescenarioscouldoccursequentiallyaswell.Aboominfossilfuelpricescouldhelpacceleratetheenergytransitionbyincreasingtherelativepriceoftraditionalenergytocleanenergy,whichwouldsetthestageforaneventualcrashoncesufficientcleancapacityisinplace.Asimilarevolutionoccurredduringandafterthe1970soilcrises;thefueleconomyofnewlightvehiclesintheUnitedStatesincreasedfrom13.1milespergallonin1975to21.3milespergallonin1985(DavisandBoundy(2022)).Thesetechnologicalimprovements,alongsideproductionfromnewoilfields,ledtoa70%declineinthepriceofoilfrom1981to1986andalowoilpriceenvironmentwhichpersistedforalmosttwodecades.Giventhishighdegreeofuncertaintyandthedelicateequilibriuminwhichoilmarketsoperate,largeandsuddenpriceadjustmentsinoilmarkets,bothupwardsanddownwards,cannotberuledout.The2014oilpricecrashoccurredwhileoildemandwasgrowing.Yetawideningofthesupplyanddemandimbalanceoflessthan2millionbarrelsadayhelpedpushpricesdownbyapproximately70%(BaumeisterandKilian(2016)).Conversely,eventhoughoildemandhasbarelyrecoveredtoitspre-pandemiclevels,lowerinvestmentandtheinvasionofUkrainebyRussiahelpedpushpricesupbyasimilarmagnitude.ThetransitionmaycreateametalsandmineralssupercycleJustasfossilfuelsmayseemassivedownwardpressureondemandinthenextdecadeorso,theexpansionofrenewableenergyandtheelectrificationoftransportationwillrequireamassiveexpansionofthesupplyofmineralssuchascopper,lithium,cobaltandrareearths.Forexample,coppersupplymayneedtoincreaseby20%overthenextdecade,cobaltandgraphitesupplymayneedtotripleandlithiumsupplymayneedtoquintupleundertheIEA’sSustainableDevelopmentScenario(Graph6,left-BISPapersNo13511handpanel).Andtightnessandvolatilityinthesemarketsisalreadyapparent;pricesgenerallyremainabovetheirhistoricallevelsevenaftertherecenteasingofextremepriceincreasesofthepastfewyears(Graph6,centrepanel).Relatedly,supplybottleneckscouldslowthepaceoftheenergytransitionandsetthestageforametalsandmineralssupercycle.Thespeedwithwhichminingprojectscancomeonlineshouldbeamajordeterminantofhowpricesandsupplyevolve;lithiumminescantakearoundhalfadecadetoseeproduction,whilenickelandcoppercantakeoveradecade(IEA(2021b)).Theselagtimes,insufficientpriorinvestmentandlikelydemandgrowthsuggestthatapotentiallong-termboominmineralpricesisplausibleifnotlikely.Ametalsandmineralssupercyclemayalsosetthestageforaneventualcrash.Allthesemetalsandmineralsareabundant,butalackofpreviousinvestmentand/orinsufficientlyhighpriceshaveimpededtheirdevelopment.Persistentlyhighpriceswillhelpthedevelopmentofcurrentlylessviablesupplies(eglithiumdepositsinCanada,GermanyandMexico),muchasthepreviouscommodityboomfacilitatedthedevelopmentoftheCanadiansandsandUSshaleoil.Andrelatedly,mininginvestmenthasbeenincreasingforseveralyears–evenasoilinvestmentwasmuchslowertorebound–suggestingthatnewsupplyshouldincreasinglycomeonline(Graph6,right-handpanel).Finally,theseaggregatedfiguresprobablyunderstatethelevelofmetalsandmineralsminingtakingplacegiventheconcurrentdeclineincoalminingcapitalexpenditure.Similarly,scarcitywillcreatepowerfulincentivestoeconomiseonkeymaterials,ascanbeseenbythesharpdropsincobaltusageinEVbatteries(McKerracher(2022)).EVmanufacturersaremovingawayfromolderbatterychemistries,whichwereheavilyreliantoncobalt,tonewerchemistries(eglithium-ironphosphate)thatcontainnocobaltatall.Similarly,batterymanufacturersarestartingtoproduceMetalsandmineralmarketsmaybetightforawhileGraph6MineralsupplygrowthversusprojectionsKeymineralspricesOilversusmininginvestment%Index,2010=100Index,2010=100USDbnUSDbn1Increasenecessarytomeetnewdemandfromrenewables,EVsandelectricitynetworks.STEPS=StatedPoliciesScenario.SDS=SustainableDevelopmentScenario.Sources:IEA;IEF;USGS;Datastream;PwC;authors’calculations.4003002001000CopperNickelCobaltLithium2010–202020–30,STEPS12020–30,SDS1Supplyincrease:50040030020010002502001501005002023201920152011Lithium(lhs)CopperCobaltNickel1201008060407006005004003002023201920152011Minerals(lhs)Oil(rhs)Globalinvestmentin:12BISPapersNo135batteriesthatreplacerelativelyscarcelithiumwithfarmoreabundantsodium(Crownhart(2023)).Inotherwords,technologicalprogressmaymeanthatmetalsandmineralconstraintsmaybeweakerthancurrentlyexpected.Intheverylongterm(ieafterthenext20years),steady-statedemandfortheseproductswillprobablyfollowaverydifferentpatternthanforfossilfuels.Whereasfossilfuelsarecontinuouslyextractedandusedandcannotberecycled,alargeproportionoffuturemetalsandmineralsdemandshouldbefront-loadedasnewtechnologiesareadoptedandsupportinginfrastructureisbuiltout.Subsequentdemandforthesemineralsislikelytocomejustfromwhatisneededtooperate,maintainandexpandtheenergysystem.However,giventhescaleofchangeimpliedbytheenergytransition,thisboominthequantitiesdemandedformetalsandminerals–ifnotnecessarilyfortheirprices–couldlastfordecades.3.MacroeconomicandfinancialeffectsofthetransitionTheenergytransitionwillhavemassiveeffectsacrosstheglobeEventhoughcleantechnologiesareenvironmentallyandeconomicallysuperiortotheirtraditionalcounterparts,thetransitionpathtoamoresustainablefutureishighlyuncertain.Afastertransitioncoulddepresspricesforbothcleantechnologiesandtraditionalenergy,whileaslowertransitioncouldinsteadpushenergypricesupasfossilfuelsupplyisconstrainedbeforesufficientcleanenergysuppliescomeonstream.Longer-term,thetrajectoryismoreapparent.Thefallingcostsofcleanenergy,itsrelativecostsuperioritytotheirtraditionalcounterpartsandreduceddemandforfossilfuelsshouldallcombinetopushenergypricesdownwards.8Inthissection,wewilldiscussthelikelymacroeconomiceffectsoftheenergytransitionacrossthreebroadclassificationsofcountries:fossilfuelexporters,fossilfuelimportersandmetalsandmineralsexporters.Wewillassesstheseprimarilythroughthelensofatradeshockbutwillalsodiscusshowtheseshockstranslateintobroadermacroeconomiceffects.Wealsodistinguishbetweenthehighlyuncertaintransitionphase,forwhichwewilldiscussdifferentscenarios,andtheeventualsteadystate.Notethatcountriescanfallintomorethanonecategory(egasafossilfuelimporterandmetalsandmineralsproducer).Theycanalsobefossilfuelimportersinoneregionandproducersinanother,althoughforsimplicitywewillmostlyfocusontheeffectatanetnationallevel.Tosupportthisconceptual,qualitativeanalysis,wewilllookatcasestudiesofrepresentativecountriesduringpreviouscommodityboomsandbusts.8Forbrevity,wedonotevaluatetheeconomiceffectsofreducedairpollutionthatwouldbeassociatedwiththeenergytransition.However,theseeffectsshouldbesubstantial,particularlyinmanylower-incomecountries.Indoorandoutdoorairpollutionhasbeenestimatedtokill6.7–8.8millionpeopleprematurelyeachyearworldwide(RoserandRitchie(2021)).Meanwhile,theglobalcostsofairpollutionhavebeenestimatedat6–14%ofglobalGDP(WorldBank(2022),IRENA(2016)).BISPapersNo13513EffectsonfossilfuelexportersTransitionphaseArapidtransitionwouldbehighlydisruptivetofossilfuelproducers–althoughthedegreewilldependontheirpre-existingeconomicdiversity–andwouldprobablybefeltfirstthroughanegativetermsoftradeshock.Arapidpricedeclineduetolower-than-expectedoildemandwouldobviouslyputseverepressureonfossilfuelproducers’currentaccounts,thuscreatingbalanceofpaymentsand/orexchangeratechallenges.Similarly,ashockwouldpressurefiscalaccountsandhindergovernmentsintheirattemptstorespond.TheseissueswereparticularlyapparentinRussiafollowingtheeffectsofsanctionsimposedonitafteritsinvasionofUkraine.Furthermore,worseningprospectsforfossilfuelswouldplacepressureoninvestment,thuscuttingoffakeygrowthchannel.Theseissuesmayalsobeaggravatedbyfinancialstresses;commoditypricecrashesaretypicallyassociatedwithrisingnon-performingloansandbankfundingcostsincommodity-producingcountries(Kindaetal(2016)).Theseeffectscanbeobservedintheexperienceofoilproducersfollowingthe2014oilpricecrash.Manyfossilfuelproducerssawacollapseintheircurrentaccount(Graph7,left-handpanel),whichinturndepletedtheirforeignreservesandsharplyincreasedpublicdebtlevels(centreandright-handpanels).Theshockoftheoilpricecrashsignificantlyraisedtheriskpremiuminaffectedcountriesandconstrainedpolicyresponsesastheshockhitaswell(Bourietal(2020)).However,asmaybethecasenow,ifcapitalpullsbackfromthesectorfasterthanactualdemandforfossilfuelsfalls,existingandlow-costproducers–particularlythosewhicharestate-owned,low-costand/orlesssensitivetoinvestorpressures–couldseeonefinalwindfall.ThiswindfallwouldhaveessentiallytheoppositeeffectsThe2014oilpricecrashhadmajormacroeconomicimpactsonproducersGraph7CurrentaccountbalanceFXreservesGovernmentdebttoGDPUSD/barrel%ofGDPUSD/barrelUSDbnUSD/barrel%ofGDP1Brentcrudeindex.2BH,DZ,AO,GA,GQ,IR,IQ,KW,LY,NG,CG,SA,AE,AZ,BN,KZ,MY,MX,OM,SD,SS,VE.3AE,AO,AZ,DZ,IQ,KW,KZ,MX,MYandOM.Sources:IMF;Bloomberg;Datastream;BIS;authors’calculations.10075502503020100–102022201820142010Oil1Lhs:SAotherOPEC+2balancetoGDP:Rhs,currentaccount10075502507506505504503502022201820142010Oil1Lhs:SAOtherOPEC+3Rhs,FXreserves:10075502506045301502022201820142010Oil1Lhs:SAOtherOPEC+3GDP:Rhs,governmentdebtto14BISPapersNo135oftherapidtransitionthatwasjustdescribedandcouldbuyaffectedcountries’additionaltimetodealwiththetransition.SteadystateThesteadystateforfossilfuelproducerswillbedependentontheirexistingeconomicstructuresandpolicychoicesmadewellbeforethetransitionbecomesmacroeconomicallyrelevant.Intheabsenceofreformstodiversifytheireconomiesandtaxbases,undiversifiedproducersmayseemajorthreatstotheirfiscalsustainabilityandbalanceofpayments.Andgiventhescaleofthepotentialimpactfromthetransition,evencountrieswithsubstantialsavingscouldseethesefundserodequicklyaway.Someoilandgasproducers,particularlythemorediversifiedproducers,mayseeonlyashiftineconomicactivity.Weakerexchangerates,lesscompetitionforhighlyskilledworkersandlowerwagepressurescouldmakecertainindustriesandregionsmorecompetitiveandsetthestagefornewformsofdevelopment.Andthereducedavailabilityoffossilfuelrevenuesmayforcegovernmentsandindustrytoorientthemselvestowardsdifferenteconomicmodels.Andwhiledirectfossilfuelemploymenttypicallyaccountsforarelativelysmallshareoftheoveralllabourforce,therecouldbenoticeableeffectsonaregionallevel.Workersinfossilfuelproductionorinfossilfuel-producingregionswillprobablyneedtimetomovetoothersectorsorpartsoftheircountries.Relatedly,fossilfuel-producingregionscouldseelong-termweaknessevenasotherregionsofthecountryprosperandworkersmoveon.Also,therelativelyhighpayofoilandgasjobsmeanthatdisplacedworkersmayneverfindequallylucrativejobs.EffectsonfossilfuelimportersTransitionphaseWhatevertheexperienceoffossilfuelexporters,importers–particularlythoseinlowerincomecountries–willexperiencetheinverse.Iffossilfuelsuppliesaretightandthetransitionlags,fossilfuelimporterscouldseeworseningtermsoftrade,currentaccountbalances,exchangeratesandinflation;essentially,importerswouldexperienceanegativesupplyshocktotheireconomies.Thiswouldprobablyflowthroughtothebroadereconomythroughlowerinvestmentandconsumption.Andinmanycases,itwouldworsenfiscalbalancesboththroughslowergrowthandthedirecteffectsofrisingenergysubsidies.However,iftheenergytransitionmovesfasterandfossilfueldemandisthuslowerthanexpected,importerscouldbenefittwiceover.Asharpfallinpricefossilfuelpriceswouldactasapositivesupplyshock,benefitingimporters’currentaccounts,fiscalbalances,investment,consumptionandinflation.Meanwhile,theincreaseduseoflower-costdomesticenergysourceswouldreinforcetheseeffects,butonapermanentbasis.India’sexperienceduringthepreviouscommoditysupercycleandthesubsequentbustsupportsthesepredictions.India’scurrentaccountwentfrombeingroughlyinbalancepriortothesharpspikeinoilpricesfrom2003tobeingdeeplynegativeuntiltheoilpricecrashin2014andclosetobalancethereafter(Graph8,left-handpanel).Inflationbehavedlikewise;asurgeduringtheinitialpriceboomwasfollowedbypersistentlyelevatedinflationduringthehighoilpriceperiodandthenasuddendeclineafter2014(centrepanel).Consistentwiththis,thetightnessofIndianBISPapersNo13515financialconditionscorrelatedstronglywithoilpricesovertheperiod(right-handpanel).However,twofactorsmaydampenordelaythepositiveeffectsofthetransitiondescribedabove.Asmentionedearlier,constraintsinsomemetalsandmineralsmarketsarealreadyanissue(IEA(2021b),Boeretal(2021)).Theneedtoinvestinnewinfrastructurewillalsocontributesignificantlytothemacroeconomicimpact;someestimatessuggestthatcleanenergyinvestmentwillneedtoincreasefromaround$1.4trillionayear(1.3%ofcurrentglobalGDP)currentlytoaround$4trillionin2030(approximately2.7%offorecast2030globalGDP)toreachnetzeroby2050(IEA(2021a)).Thisincreaseininvestmentdemandmaysupportgrowthbutcouldalsocreatemedium-terminflationarypressures(Schnabel(2022)).9Whetherthesepressuresactuallymanifestthemselveswilldependnotonlyoncleanenergyinvestmentbutonhowenergyspending(around5%ofglobalGDP)andfossilfuelinvestment(approximately1%ofglobalGDP)evolveatsametime.Ifcleanenergyinvestmentdoesreachthesehighlevels,itisalsohighlylikelythatfossilfuelspendingandinvestmentwillfallsharplyatthesametime,thusreducinginflationarypressures.Also,reducedhealthcarecostsandhigherproductivityfromlowerpollutioncouldfurtherdampentheinflationaryeffectsfromincreasedenergyinvestment.SteadystateInthelongterm,weexpecttheenergytransitiontodeliverapositivesupplyshocktotheglobaleconomy.Thecosttrajectoryofrenewablesandelectrifiedtransport,their9However,giventhepersistentunderestimationoftechnologicalprogressinmostlarge-scaleenergysystemmodels,theleveloffinancialinvestmentneededtofacilitatethetransitionmaybelessthancurrentlyexpected.Thiscouldoccurifprogressincleantechnologiescontinuestoexceedexpectations.Eventhemostoptimisticscenariosusedinmostlarge-scalemacroeconomicmodelsconsistentlyunderestimatethecostdeclinesofcleantechnologies(Xiaoetal(2021)).EconomicandfinancialconditionsinIndiaaretightlylinkedtooilpricesGraph8CurrentaccountbalanceInflationSovereignbondyieldsUSD/barrel%ofGDPUSD/barrel%USD/barrel%Sources:OECD;Bloomberg;BIS;authors’calculations.1201008060402020–2–4–6–820182014201020062002Oil(lhs)Currentaccountbalance(rhs)1251007550250129630–320182014201020062002Oil(lhs)Inflation(rhs)125100755025098765420182014201020062002Oil(lhs)yield(rhs)10-yeargovernmentbond16BISPapersNo135alreadyloweroperatingcostsandlowerspendingonnaturalresourcesshouldreducethepricelevelfromwhatitotherwisewouldbeandgenerallyweakenenergy’sinfluenceoninflationandoveralleconomicactivity.Thetransitionshouldleadtoapermanentimprovementinthetradebalancesofimportersastheadvanceofrenewablesdrivesdownenergycostsandreducesfossilfuelimports.Reducedenergycostsandtheeasingofexternalconstrainsshould,inturn,leadtohigherdomesticconsumptionandastructuraleasingoffinancialconditionsasagreatershareofdomesticresourcesisheldlocally.Theenergytransitionmayalsomakeheadlineinflationlessvolatilesinceelectricitypricesarelessvolatilethangasolineprices,thecostsofcleanertechnologiesarefront-loadedandcostpressuresforcleantechnologycanbeamortisedovertime.Asimilarsequenceofeventsfollowedtheenergypriceshocksofthe1970s;subsequentimprovementsinenergyefficiencyledtoapermanentdeclineinenergyinflationpass-throughtooverallinflationintheUnitedStates(ClarkandTerry(2010)).EffectsonsuppliersofmetalsandmineralsTransitionphaseTheenergytransitionwillbeclearlypositiveforproducersofmetalsandmineralsbutwillpresentsomechallenges.Potentialsupplyanddemandmismatchesincommoditiesmarketscouldshiftthetermsoftradesharplyinfavourofexportersuntilsufficientsupplycomesonline.Thebuild-upofnewminingcapacityshouldfurthersupportgrowthbyincreasinginvestmentdemand,whilecapitalinflowsassociatedwiththeboomarelikelytosignificantlyeasefinancialconditionsforawhile(DrechselandTenreyro(2018)).Thesepredictionsareverifiedtosomeextentbytheonsetofthe2000scommoditysupercycle.Aswouldbethecaseinarapidenergytransition,thecommoditiessupercyclewasdrivenbyasharpincreaseindemandthatoutstrippedglobalcapacity.Thisinducedamassiveandbroadincreaseincommodityprices,benefitinganarrayofcommodity-exportingnations,includingtheworld’stwolargestcopperproducers,PeruandChile.Asthesecountriesalsostandtobenefitfromtheenergytransition,theywillbethefocusofourdiscussion.FromJanuary2003toApril2008,nominalcopperpricesquadrupled.Atthesametime,thePeruviansolandtheChileanpesoappreciatedbyarespective19%and60%vis-à-vistheUSdollar(Graph9,left-handpanel).Meanwhile,labourmarketconditionsalsoimprovedmarkedly;forexample,realwagesgrewby45%inChileand30%inPeru(centrepanel).Thecommodityboomallowedeachcountrytosharplyimprovetheirfiscalposition(right-handpanel).Finally,thesupercyclealsoledtosharpreductionsinpovertyinthesecountriesandacrossLatinAmericamoregenerally(BalakrishnanandToscani(2018)).BISPapersNo13517SteadystateFormanycountries,commodityboomscancreateapermanentdividend.Evenaftertheendofthecommoditysupercycle,ChileandPerubothretainedmostofthelargegainstheyreapedintermsofwageincreases,labourmarketformalisationandpovertyreduction.Thatis,awellmanagedboomcancontributetoapermanentimprovementineconomicconditionsformuchofthepopulation.Thatsaid,therearesomeissuesthatmetalsandmineralsproducersmayhavetoconfrontinthelongterm.Therealexchangerateandwagepressuresthataccompanyaboomcouldmakesomeregionsandindustrieslesscompetitive–thatis,theymaysuccumbtoDutchDisease(Corden(1984),AlberolaandBenigno(2017)).Furthermore,intheabsenceofeffectivebudgetingstrategiesorimprovementofinstitutions,countriesmayalsoseemoreeconomicvolatilityduetoagreaterdependenceonvolatileresourcerevenues.Finally,fiscalandfinancialfactorscouldaggravatetheendoftheboom,particularlyinlower-andmiddle-incomecountries.Fiscalspendingandnon-commodityrevenuestendtomoveprocyclicallywithcommodityprices(Bovaetal(2018)).Also,commodityexporterstypicallyenjoystrongcapitalinflowsandeasierfinancialconditionsduringtheboomphase,butoncethebustbegins,theyoftenexperiencesuddenstops.Thisbringstothesurfaceunderlyingmacroeconomicimbalances,whichareoftencausedbymistakenconfidenceintheboom’sdurability.Asaresult,emergingmarketeconomies(EMEs)aresignificantlymorelikelytoexperiencefinancialcrisesfollowingasustainedcommoditypriceboom(ReinhartandReinhart(2009)).ButastheexperienceofChileandPerushows,soundpolicycanmitigatemanyoftheserisks.ThecommoditysupercyclewasamajorboomforPeruandChileGraph9ExchangeratevscopperpriceRealwagesvscopperpriceGovernmentdebttoGDPUSD/tonneIndex,January2000=100USD/tonneIndex,January2002=100USD/tonne%ofGDPSources:IMF;Bloomberg;Datastream;BIS;authors’calculations.8,0006,0004,0002,0000140120100806020082006200420022000CopperLhs:CLPEagainstUSD:Rhs,exchangerate8,0006,0004,0002,0000145130115100852008200620042002CopperLhs:CLPERhs,realwages:8,0006,0004,0002,000040302010020082006200420022000CopperLhs:CLPEtoGDP:Rhs,governmentdebt18BISPapersNo1354.Countries’exposuretothetransitionSpendingonfossilfuelsislikelytopermanentlyfalloverthecomingdecadeswhilemetalsandmineralsspendingshouldincreasebuttoafarlesserdegree(Graph10,left-handpanel).Thisoweslargelytothefactthatmetalsandmineralscanbeusedindefinitelyonceextracted,whilefossilfuelsareconsumedonceonlyandthusmustbeextractedcontinuously.Theenergytransitionwillaffecteverycountrysomewhatdifferentlyforarangeofreasons,includingtheirresourceendowments,institutionalqualityandtheirmacro-financialsituations.Giventhelackofoverlapbetweencountrieswithlargefossilfuelendowmentsandthosewithlargemetalandmineralresources(Graph10,centreandright-handpanels),thisshiftimpliesalargeshiftineconomicactivityawayfromfossilfuelproducersandtowardsmetalsandmineralsproducersandanevenlargershiftawayfromfossilfuelproducersandtowardsenergyimporters.Inthissectionwewillassesswhichcountriesaremostexposedtothetransition,bothnegativelyandpositively.10PotentialwinnersandlosersatfirstsightGraph10Globalproductionprojectioncomparedwiththelast20yearsFossilfuelversusmetalsexportsforselectedresourceproducers1Fossilfuelexportsversusmineralresources2forselectedresourceproducersUSDbn12019orpreviouslatestavailablefigures.22020dataformineralreserves.Sources:Boeretal(2021);IMF;WorldBank;USGS;authors’calculations.FossilfuelexportersAhandfulofcountriesarehighlyvulnerabletotheeventualdemiseofthefossilfuelindustry.Algeria,Kuwait,SaudiArabiaandtheUnitedArabEmiratesstandoutas10Duetoissuesarounddataavailability,wefocusmostofouranalysisontheimpactonthecountriesofBankforInternationalSettlementsshareholders.However,therearenumerouscountrieswhichareevenmoreexposedtothetransition.Smallislandnationsandmanylessdevelopednationsareheavilyreliantonfossilfuelimports.Meanwhilearangeofcountries,particularlyintheMiddleEast,NorthAfrica,CentralAsiaandSouthAmerica,relyonfossilfuelexportstoanevenhigherdegreethanthecountrieshighlightedhere.7.50.0–7.5–15.0–22.5–30.0CopperNickelCobaltLithiumCrudeoilNaturalgasCoalMetalsFossilfuels2021–40minus1999–2018ofglobalproduction:EstimatedaccumulatedvalueKWSAAEDZRUNOCOCAZAAUPECLIS12.510.07.55.02.50.040200Netexportsofores&metals(%ofGDP)Netexportsofores&metals>2%Netexportsoffuels>2%OthersNetexportsoffuels(%ofGDP)CDCLBOPEKZAURUCANOKWSAAEDZCO54321040200MineralreservestoGDP(ratio)Netexportsoffuels(%ofGDP)BISPapersNo13519beingreliantonfossilfuelproduction(Graph11,left-handandcentrepanels).However,thesecountrieshavelargesavingswhichcanprovideabufferagainstthetransition,whileothers(egAustralia,ColombiaandRussia)donothavethisluxury.Nevertheless,theformergroup’shigherrelianceonfossilfuelexportsmeansthateventheirlargesavingscoulddepleterapidly.Inanycase,majorfuelexporters,regardlessoftheirfinancialpositions,shouldseecurrentaccounts,exchangeratesandinflationratescomeundersignificantpressureasthetransitionproceeds.Othermajorfossilfuelproducersshouldexperiencemorelocaliseddisruptions.TheUnitedStatesisthelargestproducerofoilanditssixthlargestexporter,CanadaisthefourthlargestproducerandthirdlargestexporterandBrazilistheninthlargestproducerandtenthlargestexporter.However,asfossilfuelproductionaccountsforarelativelysmallproportionofactivityinthesecountries,themacroeconomicimpactofthetransitionshouldbeminimalatthenationallevel.Also,becauseoftheireconomicdiversityandthelikelydownwardpressureonexchangerates,non-fossilfuelactivityshouldbeabletoabsorbsomeoftheimpactaswell.Thecoststructureofthelocalfossilfuelproductionindustryshouldalsoplayanimportantroleastowhenandhowseverelyeffectswillmanifestthemselvesinaparticularcountry.NewCanadianandRussianproductionwouldlikelybepulledbackfirst,whileproductionintheMiddleEastshouldbethelastaffected.Also,importanttonoteisthatcontinuedcostreductions(Graph11,right-handpanel),iftheypersist,couldallowoilproductiontobesustainedlongerthancurrentlyanticipated.Finally,eventhoughrelianceonfossilfuelsistheprimaryfactorthatwilldeterminehowvulnerableaparticularcountryistotheenergytransition,thedegreeofthatexposurewillbedeterminedbyawidearrayofstructuraleconomicandgeographicfactors.Somecountriescouldusetheirabundantsunand/orwindThetransition’sburdenwillbeconcentratedamongafewfossilfuelproducersGraph11Fossilfuelrents1FuelsexportsandnetinternationalinvestmentpositionOilproductioncostsbysource2%ofGDP%ofGDP%oftotalexportsUSD/barrel1Rentsasthedifferencebetweenthevalueofproductionandthetotalcostsofproduction.2RealBrentoilpricethatgivesanNPVofzerogivenarealdiscountrateof7.5%.Thebreak-evenpriceincludesonlyfuturecosts.Sources:IMF;WorldBank;RystadEnergy;authors’calculations.VNIDCOMYNORUAEDZSAKW403020100OilFossilfuelsrents(average2009-19):CoalGas240180120600–60806040200–20CACONOKWMYAURUSADZpositiontoGDP(lhs)NetinternationalinvestmentFuelsexportstototalexports(rhs)Average2014–19:oilsandsCanadaonshoreRussiaShelfUStightoilDeepwaterMiddleEastOnshore100806040202021Break-evenoilprice:2019201420BISPapersNo135resourcestocuttheirhighdomesticconsumptionoffossilfuels,reducedomesticenergycostsandopennewexportmarkets.However,theirabilitytocapitaliseontheirnaturalendowmentsmaybeconstrainedbyweakinstitutionsoralackofnearbyenergy-hungryneighbours.FossilfuelimportersAsaround80%oftheworldpopulationliveincountriesthatarenetimportersoffossilfuels(IRENA(2019)),thebenefitsofthetransitionwillbespreadoutfarmorethencostswillbe.Nevertheless,somecountrieswillexperiencesignificantlylargergainsthanothers.AdiversegroupofAsianeconomiesarelikelytogetthegreatestbenefitsfromtheenergytransition(Graph13).India,Korea,ThailandandVietnamstandoutashavingthehighestupside,whileotherlargecountriessuchasChina,thePhilippinesandJapanalsoshouldalsoexpectapositiveandsignificantimpact.Specifically,thetransitionshouldallowtheseeconomiestosignificantlyimprovetheirtradebalances.Asia’shighrelianceonimportedfossilfuelsalsogivesthesecountriesstrongincentivestoswitchawayfromfossilfuels,meaningthatthehopesoffossilfuelproducersthattheseimportingcountriesmightsupportglobaldemandfortheirproductsmaybesomewhatmisplaced.Fossilfuelexporters’relativeexposuretothetransitionIndexGraph12Thedataarenormalisedsuchthat1(darkred)indicatesthemaximumdegreeofvulnerability,whilezero(darkblue)representsthelowestdegreeofvulnerability.Thenormalisationviathemin-maxtechniquehasbeenreversedarbitrarilyforcertainvariablesinordertoprovideahomogenousinterpretationtothecoloursandvalues.Thesampleusedforthemin-maxnormalisationcomprisesthecountriesofBISmembers.Blankcellsrefertomissingdata.Sources:WorldBank;IMF;Datastream;Solargis;ESMAP;Trucost;USGS;BIS;authors’calculations.BISPapersNo13521Moreover,acountry’scurrentrelianceonfossilfuels,whileimportant,isnottheonlyfactorthatwillinfluencehowmuchandhowquicklyitstandstogainfromtheenergytransition.CountriessuchasGermany,JapanandKoreaarehighlyreliantonfossilfuelimportsbuthavelowerrenewableenergypotentialthanmostothercountries,suggestingthattheenergytransitioncouldtakelongerthereand/ortheywillhavetorelymoreonalternativesourcesoflow-carbonenergy.However,eventhesecountriesmaybeabletogetasubstantialshareoftheirelectricity–between75%and80%–fromwindandsolarresources(Tongetal(2021)).Incontrast,India,MalaysiaandthePhilippineshaveabundantrenewableresources,meaningthatreplacingfossilfuelenergymaybeconstrainedprimarilybyinstitutionalcapacityorhighercapitalcosts.Somecountries(egMorocco)maybeablenotonlytoreducetheirrelianceonfossilfuelimportsbutalsotobecomenetenergyexportersthankstotheirabundantrenewableenergyresourcesandproximitytomajoreconomiccentres(Pearce(2023)).AsianeconomiesshouldseethelargestbenefitsfromabandoningfossilfuelsGraph13WindandsolarenergycurrentproductionversuspotentialFossilfuelintensityofGDPFossilfuelimportstototalexportsofallproducts%ofelectricitydemandEJ/GDP%oftotalexportsSources:Tongetal(2021);IMF;WorldBank;OWID;authors’calculations.806040200THKRVNINJPCNMACLDEfromsolarandwindShareofelectricityproductionSolarandwindpotential151050EAJPPHCLKRMACNTHINVN1980FossilfuelsconsumptiontoGDP:2000201940302010BRTHCLUSIDZAPHKRJPINAverage2000–05Average2014–19Fuelsimportstototalexports:22BISPapersNo135SuppliersofmetalsandmineralsStrong,long-termdemandformetalsandmineralsshouldboostexportsandgrowthforproducingcountries.Somecountries–Australia,BrazilandChile–standtogainduetotheirlargedepositsofneededcommodities(Graph15,left-handpanel).Meanwhile,othersmaybenefitfromtheexploitationofasingleproduct,suchasBoliviafromlithium,theDemocraticRepublicofCongofromcobalt,andPerufromcopper.Insomecountries,theeffectsoftheenergytransitioncouldstillbeweakevenwherelargeabsolutereservesexist;forexample,MexicoandtheUnitedStateshavelargeandvariedmineralreservesbut,duetotheireconomicdiversity,willprobablyseeonlylimitedmacroeconomicbenefits.Fossilfuelsimporters’relativeexposuretothetransitionIndexGraph14Thedataarenormalisedsuchthat1(darkred)indicatesthemaximumdegreeofvulnerability,whilezero(darkblue)representsthelowestdegreeofvulnerability.Thenormalisationviathemin-maxtechniquehasbeenreversedarbitrarilyforcertainvariablesinordertoprovideahomogenousinterpretationtothecoloursandvalues.Thesampleusedforthemin-maxnormalisationcomprisesthecountriesofBISmembers.Blankcellsrefertomissingdata.Sources:WorldBank;IMF;Datastream;Solargis;ESMAP;Trucost;USGS;BIS;authors’calculations.BISPapersNo13523Mineralsmarketsarefarmoreconcentratedthanthoseoffossilfuels,especiallyinrefiningcapacitybutstillsignificantlysointermsofrawresources(Graph15).Chinaisthelargestrefinerbyamassivemarginineachofthemineralsalreadymentionedandhasparticularlydominantpositionsinrareearths,cobaltandlithium.Fromtheperspectiveofitsownenergytransition,thissuggeststhatChinamaybeabletoavoidormoderatesomesupplyconstraintsgoingforward.However,recentannouncementsandfundingmeasuresinsomecountries(egCanadaandtheUnitedStates)todeveloptheirownsupplychains,separatefromtheChineseones,suggestthatthismaynotbethecasepermanently.Also,higherpricescouldeventuallymakecurrentlyuneconomicalresourcesworthwhiletodevelopindifferentpartsoftheworld,thusreducinganyparticularregion’slong-termmarketpower.Nevertheless,thehighconcentrationoftheseproductsrelativetofossilfuelsmayalsomeanthatthegeopoliticsoftheenergytransitionmaybeacomplicatingfactorasitprogresses.MineralreservesandrefiningcapacityareconcentratedinrelativelyfewcountriesInpercentGraph15Shareofglobalmineralsreserves1Shareofglobalprocessing1Shareofprovenreservesofselectedeconomies;2020.Forlithium,resources,notreserves.Sources:IEA;BP;USGS;authors’calculations.CopperLithiumNickelCobaltearthsRareOilGasCoal6040200CNVNBRCDAUIDAUBRBOARCLCLAUPEVESACARUIRQAUSRUAUCopperNickelCobaltLithiumearthsRarerefiningOilexportsLNG806040200USCNRUQAAUMYFIBEIDJPCLARCNCNCNCNCNCLJPUS24BISPapersNo135ConclusionTherapidlyproceedingenergytransitionwillhaveprofoundeffectsacrosstheglobe.Eventualdeclinesinfossilfueldemandposemajorandacutethreatstofossilfuel-producingregions,whilemineralsproducersshouldseeanextendedincreaseindemandfortheirproducts.Meanwhile,mostoftheworldshouldbenefitsignificantlyfromlower,lessvolatileenergypricesandreducedairpollution.Thepotentialpathsoftheenergytransitionareextremelyvariedintheshortandmediumterms.Adisruptivepathofhighandvolatileenergypricesisplausible,butsotooisapathofsharppricedeclinesandarapidcollapseindemandforfossilfuels.Assuch,itwouldbeworthwhileforallcountriestoimmediatelystartbuildingresiliencyandmakingtheappropriatepreparations.Fossilfuelexporterscanbuildbuffersandembarkonthestructuralreformsneededtomanagethelong-termdeclineoftheirprimaryindustries(egtransitioningtoalessvolatiletaxbaseortomarket-basedexchangerates).Fossilfuelimporters,particularlythoseinEMEs,canusetheenergytransitionasanopportunityforstructuralreform.Byreducingbarrierstothetransition–whetherregulatoryorfinancial–theycaninsulatethemselvesfromvolatileglobalenergymarkets,enhancedomesticenergysecurityandimprovepublichealth.Energytransitioncommoditiesexporters’relativeexposuretothetransitionIndexGraph16Thedataarenormalisedsuchthat1indicatesthemaximumdegreeofvulnerability,whilezerorepresentsthelowestdegreeofvulnerability.Thenormalisationviathemin-maxtechniquehasbeenreversedarbitrarilyforcertainvariablesinordertoprovideahomogenousinterpretationtothecoloursandvalues.Thesampleusedforthemin-maxnormalisationcomprisesthecountriesofBISmembers.Blankcellsrefertomissingdata.Sources:WorldBank;IMF;Datastream;Solargis;ESMAP;Trucost;USGS;BIS;authors’calculations.BISPapersNo13525Metalsandmineralsproducerscanreformtheirbudgetingpracticestomitigateincreasedexposuretovolatilecommodityprices,takemeasurestoreducepotentiallabourmarketdisplacementfromhigherexchangeratesandmoderniseminingregulationstoensurethateconomicdevelopmentdoesnotcomeatthecostofenvironmentalsustainability.Finally,inlinewiththerepeatedcommitmentsofgloballeaders(G20(2022)),theinternationalofficialsectorshouldaccelerateandsharplyincreasetheprovisionofaccessiblelow-costfinancingandtechnicalassistancetofast-trackthetransitioninEMEs.Despitethenearer-termuncertainty,theenergytransitionmeansthattheworldwilleventuallyseelowerenergycosts,betterhealthandlesspollution.However,whiletheoutlookispositiveformostcountriesandtheworld,somepeople,regionsandcountriesmayneverthelessbeleftbehind.Inotherwords,howpotentialfutureabundanceissharedgloballycouldbeamajorissueintheyearsanddecadesahead.26BISPapersNo135ReferencesAlberola,EandGBenigno(2017):“Revisitingthecommoditycurse:afinancialperspective”,BISWorkingPapers,no609,February.Alberola,EandRSousa(2017):“Assessingfiscalpolicythroughthelensofthefinancialandcommoditypricecycles”,BISWorkingPapers,no638,May.Balakrishnan,RandFToscani(2018):“HowthecommodityboomhelpedtacklepovertyandinequalityinLatinAmerica”,IMFBlog,June.Baumeister,CandLKillian(2016):“Fortyyearsofoilpricefluctuations:whythepriceofoilmaystillsurpriseus”,JournalofEconomicPerspectives,vol30,no1,pp139–60.BloombergNewEnergyFinance(2022):ElectricVehicleOutlook2022.Boer,L,APescatoriandMStuermer(2021):“Energytransitionmetals”,IMFWorkingPapers,no2021/243,October.Bouri,E,IKachachaandDRoubaud(2020):“OilmarketconditionsandsovereignriskinMENAoilexportersandimporters”,EnergyPolicy,vol137.Bova,E,PMedasandTPoghosyan(2018):“Macroeconomicstabilityinresource-richcountries:theroleoffiscalpolicy”,JournalofBankingandFinancialEconomics,vol1,no9,May,pp103–22.BP(2021):StatisticalReviewofWorldEnergy.Clark,TandSTerry(2010):“Timevariationintheinflationpassthroughofenergyprices”,JournalofMoney,Credit,andBanking,vol42,no7,pp1419–33.Corden,W(1984):“BoomingsectorandDutchDiseaseeconomics:surveyandconsolidation”,OxfordEconomicPapers,vol36,no3,November,pp359–80.Crownhart,C(2023):“What’snextforbatteries”,MITTechnologyReview,4January.Davis,SandRBoundy(2022):TransportationEnergyDataBook:Edition40.OakRidgeNationalLaboratory.Drechsel,TandSTenreyro(2018):“Commodityboomsandbustsinemergingeconomies”,JournalofInternationalEconomics,vol112,May,pp200–18.EIA(2021):“Electricityexplains–Factorsaffectingelectricityprices”.———(2022):“Levelizedcostsofnewgenerationresources”,AnnualEnergyOutlook2022,March.———(2023):Short-TermEnergyOutlook,May.Ember(2023):GlobalElectricityReview2023.April.G20(2022):G20BaliLeaders’Declaration,15–16November.GlobalEnergyMonitor(2023):GlobalCoalPlantTracker,May.IEA(2021a):Renewables2021.———(2021b):“Theroleofcriticalmineralsincleanenergytransitions”,WorldEnergyOutlook2021.October.———(2022):Heating,September.———(2023):GlobalEVOutlook2023,April.BISPapersNo13527IRENA(2016):TheTrueCostofFossilFuels:SavingontheExternalitiesofAirPollutionandClimateChange,May.———(2019):ANewWorld:TheGeopoliticsoftheEnergyTransformation,January.———(2021):WorldEnergyTransitionOutlooks.Kinda,T,MMlachilaandROuedraogo(2016):“Commoditypriceshocksandfinancialsectorfragility”,IMFWorkingPapers,no16/12.McKerracher,C(2022):“Electriccarbatterybottleneckshaveawayofbeingworkedout”,Bloomberg,23August.Mercure,J,PSalas,PVercoulen,GSemieniuk,ALam,HPollitt,PHolden,NVakilifard,UChewpreecha,NEdwardsandJVinuales(2021):“Reframingincentivesforclimatepolicyaction”,NatureEnergy,vol6,pp1133–43.NetworkforGreeningtheFinancialSystem(NGFS)(2022):“Climatescenarioanalysisbyjurisdictions:initialfindingsandlessons”,15November.Pearce,F(2023):“Inscrambleforcleanenergy,EuropeIsturningtoNorthAfrica”,YaleEnvironment360,16February.Reinhart,C.andVReinhart(2009):“Capitalflowbonanzas:anencompassingviewofthepastandpresent”,NBERInternationalSeminaronMacroeconomics2008,pp9-62.Roser,HandHRitchie(2021):“Airpollution”,OurWorldinData,January.Schnabel,I(2022):“Anewageofenergyinflation:climateflation,fossilflationandgreenflation”,panelremarksatTheECBanditsWatchersXXIIConferenceonMonetarypolicyandclimatechange,Frankfurt,17March.Tong,D,DFarnhan,LDuan,QZhang,NLewis,KCaldeiraandSDavis(2021):“Geophysicalconstraintsonthereliabilityofsolarandwindpowerworldwide”,NatureCommunications,vol12.Way,R,MIves,PMealyandJFarmer(2022):“Empiricallygroundedtechnologyforecastsandtheenergytransition”,Joule,vol6,no9,September,pp2057–82.WorldBank.(2022):TheGlobalHealthCostofPM2.5AirPollution:ACaseforActionBeyond2021.Xiao,M,TJunne,JHaasandMKlein(2021):“Plummetingcostsofrenewables–Areenergyscenarioslagging?”,EnergyStrategyReviews,vol35,May.Ziegler,M,andJTrancik(2021):“Re-examiningratesoflithium-ionbatterytechnologyimprovementandcostdecline”,EnergyandEnvironmentalScience,vol14,pp1635–51.ZhouX,CWilsonandBCaldecott(2021):“Theenergytransitionandchangingfinancingcosts”,OxfordSustainableFinanceProgramme.PreviousvolumesinthisseriesNoTitleIssuedateBISPapersNo134Globaltightening,bankingstressandmarketresilienceinEMEsApril2023BISPapersNo133Thetwo-regimeviewofinflationMarch2023BISPapersNo132InformationgovernanceinsustainablefinanceDecember2022BISPapersNo131Centralbankingafterthepandemic:challengesaheadDecember2022BISPapersNo130Pricingofclimaterisksinfinancialmarkets:asummaryoftheliteratureDecember2022BISPapersNo129Theroleofnon-bankfinancialinstitutionsincross-borderspilloversDecember2022BISPapersNo128CentralbankdigitalcurrenciesinAfricaNovember2022BISPapersNo127Historicalmonetaryandfinancialstatisticsforpolicymakers:towardsaunifiedframeworkSeptember2022BISPapersNo126Corporatedigitalidentity:nosilverbullet,butasilverliningJune2022BISPapersNo125Gainingmomentum–Resultsofthe2021BISsurveyoncentralbankdigitalcurrenciesMay2022BISPapersNo124ThedesignofadatagovernancesystemMay2022BISPapersNo123CBDCsinemergingmarketeconomiesApril2022BISPapersNo122Themonetary-fiscalpolicynexusinthewakeofthepandemicMarch2022BISPapersNo121Covid-19andthemonetary-fiscalpolicynexusinAfricaFebruary2022BISPapersNo120VirtualbankingandbeyondJanuary2022BISPapersNo119Non-bankfinancialinstitutionsandthefunctioningofgovernmentbondmarketsNovember2021BISPapersNo118AtaxonomyofsustainablefinancetaxonomiesOctober2021BISPapersNo117Fintechandthedigitaltransformationoffinancialservices:implicationsformarketstructureandpublicpolicyJuly2021BISPapersNo116CBDCsbeyondborders:resultsfromasurveyofcentralbanksJune2021AllvolumesareavailableontheBISwebsite(www.bis.org).
VIP
