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Sustainable futures

COP26: paying for the transition to sustainable energy

Energy security, climate change, sustainable energy and the transition to renewable energy are linked topics. Increasingly, the preferred policy direction across the globe is to promote renewable energy options, in order to tackle climate change and create a sustainable economy while maintaining energy security.

However, energy security rests on the availability of sufficient energy at affordable prices. Renewable energy does not at present offer energy security, owing to its relatively higher costs in comparison to fossil fuels and its insufficient supply. Developing renewables to the point where they can offer energy security is a key policy challenge.

This requires sufficient sustainable finance. Financing renewable energy, like financing any other investment, comes at a cost. The initial financing cost is the interest rate on the capital borrowed, or what accountants refer to as cost of capital.

Financing renewable energy comes at a higher cost than that of the cost of capital. As tackling climate change requires using more sustainable energy sources at the expense of fossil fuel-based energy, the cost of renewable energy extends to include losses made by fossil fuels companies. The cost of financing renewable energy is not merely the cost of capital, but also the costs of missed opportunities that individuals, businesses and countries shoulder in the course of transitioning to renewable energy. It is key to understand these cost elements in order to reduce possible losses to societies.

These losses arise because assets of oil, gas and coal reserves will have to be left in ground as we transition to renewable energy. In fact, such losses are costs to individuals who hold shares in these companies and who have businesses linked to these companies. This also potentially means job losses to hundreds and thousands of people.

"A quick and unbalanced move towards a severe cut in fossil fuels would not come cost-free."
Dr Hafez Abdo 

Therefore, financing renewable energy does not mean merely paying the interests on capital borrowed by, and/or dividends on share capital of, renewable energy companies. This cost is shared by individuals, societies, businesses and governments. Furthermore, owing to the higher costs of renewable energy, societies will have to bear the extra cost in the form of energy prices, and this cost is in fact part of the financing of the transition to renewable energy.

It’s therefore key to understand the actual financing costs of transition to renewable energy. This is vital for planning and policy making, and implementation. Energy-poor people should not be penalised or neglected in the course of transitioning to renewable energy, and they should not be exposed to costs of this transition. Energy security must be maintained to avoid anyone facing a choice between ‘money to eat’ or money to heat’. At the same time, healthy and sustainable financing needs to be in place to enhance the promotion of renewable energy, but at a lesser cost to individuals and societies.

Cautious steps need to be made in the transition to renewable energy. A quick and unbalanced move towards a severe cut in fossil fuels would not come cost-free. Whilst gains are sought from the move towards renewable and sustainable energy sources, losses from moving away from fossil fuels should be minimised to avoid job losses and business bankruptcies.

Our research raises the following questions:

  • How effective are the current financing channels, mechanisms and policies for enhancing investments in renewable energy?
  • To what extent do current financing strategies and policies for renewable energies impact stakeholders of fossil fuel based energies?
  • How could financing policies and strategies of renewable energy be tailored to minimise negative impacts on stakeholders of fossil fuel energies?
  • What adjustments and alterations to current channels, strategies and policies of renewable energy financing are needed to enhance the transition to renewable energy? And
  • To what extent may the oil and gas industry be impacted of, and contribute to, the transition to net zero?

We hope that our research can support the development of a balanced policy approach that maintains energy security, reduces fuel poverty, enhances the promotion of renewable energy and reduces losses to stakeholders.

Dr Hafez Abdo

Hafez Abdo is an Associate Professor in Accounting at the Nottingham University Business School.

Further reading

COP26: the greatest challenge of our time

Linnenluecke, M. K., Birt, J., Lyon, J., and Sidhu, B. K. (2015). Planetary boundaries: Implications for asset impairment. Accounting and Finance. 55 (4) 911-929.

Caldecott, B., J. Tilbury, and Y. Ma. (2013). Stranded Down Under? Environment Related Factors Changing China’s Demand for Coal and What this Means for Australian Coal Assets.

Climate Change Committee (CCC). (2019). Net Zero – The UK’s contribution to stopping global warming.

Constantatos, A., Dionysiou, D., Slack, R., Tsalavoutas, I., and Tsoligkas, F. (2021). The capitalisation of intangibles debate: accounting for exploration and evaluation expenditure in extractive activities.

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