By Frank Wouters, Chairman at the MENA Hydrogen Alliance
The energy sector employs close to 70 million people, accounts for around 8-10% of global GDP and is one of the largest sectors overall. The urgent need to reduce emissions due to accelerating climate chaos is therefore impactful from a monetary and fiscal perspective. Investments need to be made in new infrastructure to produce green electrons and molecules, store them, and transport them from competitive locations to demand centres. Investments are also required in end use conversion equipment, for example in renewable energy systems, fuel cells for power production, new DRI steel furnaces or ships that are propelled by ammonia or methanol.
Even though emissions cause massive economic damage, with recent estimations by Stanford scientist Prof. Adrien Bilal being close to $50 trillion each year, most emissions are free. And those that come at a price, such as under Europe’s Emissions Trading Scheme, are priced way below cost. Discussions on Article 6 of the Paris Agreement, which governs international carbon trading, began in 2015. But ten years later, the international community hasn’t been able to agree on a global scheme to price emissions yet, despite carbon trading being one of the most efficient ways to reduce emissions. In addition, according to the IMF, global fossil fuel subsidies amounted to $7 trillion in 2022.
This leaves us in a situation where cleaner options in the energy transition face unfair competition from polluting fossil fuels. This is also reflected by financial markets, which reward short term financial gains, as seen by the recent share price appreciation of oil and gas companies that reverse or delay climate ambitions. The political economy is currently also not very conducive for the required massive mobilization of capital for the energy transition, with many governments battling inflation and spending increasing amounts on defence.
So, what should we do? Given the failure of the financial system to support the energy transition and the universality of the climate challenge, we could perhaps consider introducing a global automated financial transaction tax of say 0.1% of the transaction value. Such a tax is hard to circumvent and is easy and hence cheap to administer. The tax would then finance the “uneconomic” parts of the energy transition. According to McKinsey, in 2023, the global payments industry handled 3.4 trillion transactions, accounting for $1.8 quadrillion in value. The financial transaction tax of 0.1% would add up to to $1.8 trillion each year. If we then stop handing out money to the fossil fuel industry and direct it to the energy transition, we will have $8.8 trillion every year to make a difference.