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What does COVID-19 mean for energy transition risks?

By: Will Nichols, Olivia Dobson

COVID-19 has introduced significant levels of uncertainty to markets across the globe—and the transition from fossil fuels to low/zero-carbon energy sources is similarly unpredictable. The pandemic marks a crossroads from which the world's efforts to de-carbonize could go in very different directions: One where the economic crisis restricts low carbon investment and puts the world on a path to a warmer planet; and another where the toll of COVID-19 sparks the political consensus needed to avoid the worst effects of the climate crisis.

It's too early to tell which direction the world will follow, but we can pick out some of the key issues and trends to watch as the world looks ahead to an eventual post-COVID era.

Path one: Three trends that could derail the low carbon transition

  1. Recovery strategies do not prioritize green policies

From the beginning of the pandemic to October 2020, G20 nations have dedicated almost $209 billion of recovery funds towards supporting fossil fuel energy compared to $145 billion earmarked for clean energy.1 The U.S. and U.K. alone account for about $111 billion of this total.

Without government support, corporate action on the energy transition could tail off. As countries across the world face significant economic hardship and the possibility of elevated levels of civil unrest stoked by the pandemic, governments may shy away from introducing carbon pricing.

Carbon markets suffered a significant drop at the start of the pandemic. While carbon allowance prices have now rebounded, they are still well below the $50-100/ton mark that experts believe is needed to bring forward the massive low carbon investment necessary to fend off dangerous climate change. In other words, when fossil fuels are cheap, there's less incentive to transition to green energy. And thanks to the COVID-induced recession, fossil fuels are relatively cheap.

  1. Corporates rethink clean investments

The double whammy of oversupply and a drastic drop in demand induced by the COVID-19 outbreak has reduced major oil companies' financial resources and hampered their ability to make the necessary investments to reduce emissions. These companies face pressure to comply with government policies, meet ESG standards of institutional investors and the public, and still maintain transition budgets. However, most major oil companies prioritize more conservative projects over large clean energy investments to maintain a sound balance sheet.

As a consequence, lower oil prices and recession-induced consumption constraints continue to reduce the demand for electric vehicles (E.V.s) and impact clean tech innovation. Wood Mackenzie expects up to a 43 percent decrease of new E.V. sales in 2020, and without a return to high oil prices, the market will continue to drag.

The significance of this can't be overstated given that, in the U.S., the transportation sector was the leading emitter of greenhouse gases (GHGs) in 2018, accounting for 28 percent of all GHG emissions.2 Meanwhile, in this scenario, the long-term, large-scale investments required to operationalize technologies like carbon capture appear an unattractive prospect for investors as the economic consequences of the pandemic continue to bite.

  1. Protectionism chokes off critical supply chains

Growing protectionism compels nations to focus on creating and protecting domestic supply chains to build resilience. Limiting access to key raw materials for batteries and other clean technologies threatens clean energy projects in much of the world, given that most countries are dependent on imports for these raw materials.

At the moment, the risk of protectionism is high in several pivotal countries in this supply chain. Figure 1 below uses Verisk Maplecroft's Resource Nationalism Index to display the overlap between countries at risk of growing nationalism and their involvement with critical battery materials.

Further complications arise when shutdowns we saw in China and other manufacturing hubs throughout 2020 cause longer-term delays and exacerbate disruptions already felt across clean tech supply chains. Materials could also become a bargaining chip to renegotiate other geopolitical objectives, contributing another stressor to international affairs.

Resource Nationalism Index

Path two: Three trends that could accelerate the low carbon transition

  1. Lawmakers grasp an opportunity to rewire their economies.

The European Union sees the crisis as an opportunity to reinforce policy action to advance the energy transition. The E.U.'s July 2020 budget deal highlighted the bloc's desire to use the crisis as an opportunity for climate action, with €550 billion ($650 billion), 30 percent of the total spending, allocated to climate mitigation measures through 2027.3 Investors bet that renewable energy and clean technology companies will be the main beneficiaries of this package of grants and loans.

Already, the bloc, which is the world's third-biggest carbon polluter, is close to agreeing to a 50 percent emission reduction target for 2030 and is formulating a carbon border tax that would hike the price of imports from jurisdictions that have minimal carbon regulations in place.4

China's goal of net zero carbon emissions, aiming for 2060 — a decade after the E.U.'s target – puts two of the world's largest emitters on course for carbon neutrality by mid-century. China's so-called "belt and road" trade network stretching across countries of strategic interest to Beijing means that it's also uniquely placed to demand greater climate action from trading partners.

Meanwhile, national governments choose to avoid stranded assets and refrain from sinking investment into "bridging fuels" like liquified natural gas (LNG). Policies turn instead to directly advancing renewables as part of economic stimulus policies, creating a clean, local, and secure energy network with the potential to export excess power.

  1. Oil majors back renewable energy to hedge against oil price volatility

Wood Mackenzie figures show oil and gas companies account for less than 2% of worldwide solar and wind capacity.5 But the oil price collapse that transpired during the first few weeks of the COVID-19 crisis makes zero-carbon energy a relatively more appealing investment option. A lower price does incentivize oil demand, but corporations increasingly recognize the benefits of long-term stability of cash flows from renewables.

B.P.'s dramatic plans to add 50 gigawatts of renewable energy capacity by 2030,6 in line with the company's predictions of oil peaking at the end of the decade, lay down a marker for the industry to follow. And, given statements of commitment to net zero targets from other European oil majors,7,8 B.P. clearly does not represent an isolated viewpoint. The company’s North American counterparts, already facing pressure from shareholders to alter their high-carbon course, may not want to be left behind in the market for renewable energy.

  1. Civil action back with a vengeance

Issues-based campaigning may surge as COVID-19-related restrictions on movement are relaxed, and uncertainty contributes to instability in many nations. Governments that fail to address climate change adequately could feel the heat from voters, while protestors and, increasingly shareholders, keep companies' feet to the fire.

Along with protest marches drawing public attention to climate change, there's also the steady progression of climate litigation, notably fossil fuel companies being sued for their contribution to climate change. That litigation forces governments and companies alike to keep to their climate commitments.

Air quality is another key front, as the respiratory pandemic brings the effects of pollution on health into focus. There were 11,000 fewer air pollution-related deaths in Europe in April than usual due to reduced activity during lockdowns,9 paving the way for greater efforts to tackle particulate matter emissions that cause poor air quality and aggravate a host of illnesses. Several cities led the way in taking steps to address long term air pollution—Brussels has lowered speed limits,10 Milan is reducing car use,11 and Paris,12 Barcelona13 , and Mexico City14 are extending bike lanes, paving the way for others to follow.

The future depends on today

While these scenarios cover two completely different paths, the most likely future is somewhere between these two outcomes. In time, certain signals will indicate which direction countries are leaning; these same signals inform our Environmental Regulatory Framework Index - Forecast (ERFI), which outlines the most likely direction of national environmental policy. Tools like the ERFI Forecast can help investors and corporations track movements in the carbon transition amid a historically tumultuous period.

The charts below show the range of potential scores forecast for the period through Q3 2022 and examples of factors that could sway them. For example, China's net zero goal is likely to require a national framework climate change law, the prospect of which would shift the country towards the low-risk end of the spectrum. Meanwhile, in the United States, post-election decision-making will have a considerable impact on its risk score trajectory. Lastly, in Brazil, failure to protect the Amazon will release millions of tons of CO2 into the atmosphere with significant consequences for global heating.

Figure 2 Transition Risks

In the immediate future, uncertainty regarding COVID-19’s fate and subsequent tightening of restrictions will muddy the waters for energy transition progress. Our view is that cash constraints and the current risk picture suggest that the rollout of clean energy across the globe will continue to be slow.

But, if there is clarity on the fate of COVID-19, or even a cure, and confidence returns, we can expect a greater mobilization of capital towards low carbon solutions. Indeed, the longer-term trends connecting carbon regulation and mounting physical risk suggest that B.P.'s recent pivot away from heavy emissions sectors may be the first of many.

Will Nichols is head of environment and climate change research at Verisk Maplecroft. Will can be reached at
Olivia Dobson is principal analyst, risk analytics at Verisk Maplecroft. Olivia can be reached at

1. :”G20,” Energy Policy Tracker, October 28, 2020, < >, accessed on November 3, 2020.

2. “Source of Greenhouse Gas Emissions,” United States Environmental Protection Agency, < >, accessed on November 3, 2020.

3. “The EU budget powering the Recovery Plan for Europe,” European Commission, May 27, 2020, < >, accessed on November 3, 2020.

4. Ben Aylor, et al., “How an EU Carbon Border Tax  Could Jolt World Trade,” Boston Consulting Group, June 30, 2020, < >, accessed on November 3, 2020.

5. Valentina Kretzschmar, “Could clean energy be the winner in the oil price war?” Wood Mackenzie, March 24, 2020, < >, accessed on November 3, 2020.

6. “2Q 2020 Results,” BP, August 4, 2020, < >, accessed on November 3, 2020

7. “Equinor sets ambition to reduce net carbon intensity by at least 50% by 2050,” Equinor, February 6, 2020, < >, accessed on November 3, 2020.

8.“Our climate ambition,” Shell, <>, accessed on November 3, 2020.

9. Lauri Myllyvirta, “11,000 air pollution-related deaths avoided in Europe as coal, oil consumption plummet,”Centre for Research on Energy and Clean Air, April 30, 2020, < >, accessed on November 3, 2020.

10. Maithe Chini, “Coronavirus: City of Brussels lowers speed limit to 20 km/h,” The Brussels Times, April 21, 2020, < > accessed on November 3, 2020.

11. Laura Laker, “Milan announces ambitious scheme to reduce car use after lockdown,” The Guardian, April 21, 2020, < >, accessed on November 3, 2020.

12. Carlton Reid, “Paris to Create 650 Kilometers of Post-Lockdown Cycleways,” Forbes, April 22, 2020, < >, accessed on November 3, 2020.

13. Sam Mehmet, “Barcelona lays out plan to support recovery of mobility after lockdown,” Intelligent Transport, April 30, 2020, < >, accessed on November 3, 2020.

14. “Mexico City gets pedaling,” Financial Times, 2020, < >, accessed on November 3, 2020.

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