Geopolitical developments and the green transition

By Andreas Charalambous and Omiros Pissarides

The ‘Green Deal’ and the transition to an environmentally sustainable economy constitutes a top priority both at EU and global level, leading to new business opportunities, especially in countries with favourable warm weather conditions, such as Cyprus.

Advancements in technology facilitate the green transition. They lead to improved production prospects, as well as steep declines in prices for the production of renewable energy (RE). As a consequence, the production of RE becomes profitable from a private sector perspective, while it compares favourably with the profitability of production of energy from traditional fossil fuels.

Nevertheless, the market share of RE remains relatively low, at 15 per cent. The main restraining factors are the still insufficient production scaling and the limited storage capacity.

The overall target, agreed at a worldwide level, for achieving climate neutrality by 2050 appears to be very ambitious, while some analysts consider it unattainable.

Recent scientific studies confirm that emissions continue to rise, burdening the environment in an unsustainable way. Without radical policy changes, the agreed climate targets will not be met, adversely affecting the survival of mankind itself.

The recent disruptions in production and transport due to the pandemic fuelled steep increases in energy prices, revealing the fact that the transition to the green economy will be challenging. The war in Ukraine added further complications, in part due to the EU decision to become independent from imports of Russian oil and gas in the shortest possible period.

Studies indicate that this is only feasible through substantial consumption savings, which would unavoidably lead to further energy price hikes, as well as increases of energy imports produced from conventional sources from third countries.

The increased energy prices and the continuing production disruptions caused by the war in Ukraine are expected to negatively affect economic growth, in particular in the EU, during a difficult juncture with adverse repercussions on social cohesion.

The resulting policy dilemmas pose difficult challenges. From a short-term perspective, a temporary partial rebalancing in favour of conventional energy sources appears unavoidable, despite the adverse repercussions on climate. Moreover, the adoption of targeted social measures to ameliorate the negative effects on the most vulnerable is necessary, despite the already high public debt levels.

In view of the above, a radical strategy shift is required in Cyprus. The ambitious plans for upgrading the electricity energy grid, with a view to enable deeper market penetration of RE, must be put in practice as a matter of urgency. The various schemes for promoting RE must become less bureaucratic and cover a wider spectrum of households and business corporations. The public sector should set for itself a zero-emissions target in an accelerated manner. For new buildings, strict compulsory environmental criteria should be adopted and enforced, while the construction of buildings in isolated areas should be restricted to a minimum.

Instead of new buildings, the utilisation of existing empty buildings should be encouraged. Instead of the never-ending continuous extension of the road network, an upgrading of the public sector network should be pursued. Finally, priority in favour of natural gas should be re-examined.

Andreas Charalambous is an economist and a former director at the Ministry of Finance. Omiros Pissarides is the managing director of PricewaterhouseCoopers Investment Services