Energy transitions continue to produce spillover effects despite geopolitical tensions

Accelerating the energy transition in major economies could generate positive spillovers in other parts of the world, according to new research.

The research paper “The consequences of the energy transition: Evidence from North America, Europe, and China,” available in the journal Science of the Total Environment, examines the impact of the energy transition against the assumption that policy changes in one part of the world can have consequences in other countries.

Research author Luccas Assis Attílio, from the Federal University of Ouro Preto in Brazil, used a time-varying Global Vector Autoregressive model from January 2001 to December 2020, encompassing 38 countries that account for 60% of the world's population. The framework covered financial, real, nominal and non-economic variables to give an overarching understanding of the influence of the energy transition on wider economies.

Attílio told pv magazine his results found that progress in the energy transition in one region may influence other regions. “In other words, the global energy transition may benefit from regional dynamics, creating a kind of regional wave or peer effect, where countries tend to follow the progress of others,” he said.

The research paper says energy transitions in North America and the Eurozone positively influence transitions in other regions, while the energy transition in China has an initial negative impact that vanishes over time.

Attílio analyzed the long-term connections between domestic energy transition and economic and non-economic variables, finding that the international energy transition is positively correlated with domestic energy transition in all economies, except Latin America. “Therefore, the estimates suggest that international coordination can foster domestic energy transitions,” his paper says.

The relationship between climate change, energy transition, and income inequality is also examined. “The results suggest that climate change has a minor effect on domestic inequality, the U.S. energy transition increases domestic inequality, and the Chinese energy transition reduces domestic inequality,” the paper says. “These estimates indicate that the energy transition is not a neutral process in terms of income inequality.”

While the research paper does not incorporate the most recent geopolitical developments, Attílio told pv magazine that he believes there is still room for spillover effects in a more fragmented geopolitical environment.

“For example, when the United States increased tariffs during the Trump administration, many countries responded by strengthening trade agreements with other partners to offset the shock. In other words, when restrictions appear in one part of the global system, countries often seek alternative channels of cooperation and trade,” he explained. “For this reason, spillover effects between regions may still occur, although their intensity and transmission channels could change under new geopolitical conditions.”

In the research paper, Attílio adds that the main policy recommendation from his research emphasizes the need for international coordination.

“Climate change is a global challenge, and the effectiveness of one country's efforts may be undermined if other nations do not pursue policies aligned with the same objectives,” the paper says. “Similarly, the energy transition exerts a global influence. Given the observation that energy transitions mutually reinforce each other, the estimates provide arguments in support of international cooperation.”

Attílio suggested to pv magazine several policy measures that may support the promotion of a sustainable energy transition, including higher taxes on fossil fuels, tax reductions or fiscal incentives for renewable energy technologies and public programs providing subsidized credit to consumers and firms adopting renewable energy.

“Also greater international trade integration, particularly regarding the exchange of critical minerals, and stronger international coordination of climate and energy policies, which is easier said than done but could enhance the global energy transition,” Attílio said.

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