The Market Crash Won’t Affect Sustainability As Much As You Might Think

The long-term economic trends that will push the world away from fossil fuels are not tied to short-term issues like the ongoing supply chain crisis. What matters most is the continued improvement and cost declines of renewable energy technologies.

2022 has been a whirlwind on Wall Street. The U.S. stock market entered bear market territory for the first time since the pandemic’s onset by falling more than 20% from its previous high near the end of 2021. Whispers of an imminent recession have escalated over the last few months.

At the same time, the drumbeat of climate concern has grown louder. Extreme heat waves have been baking the planet from South Asia to Western Europe to North America. A megadrought in the Southwestern United States has sparked concerns over long-term water availability. Flooding driven by an abnormal combination of heavy rainfall and snowmelt ravaged the Greater Yellowstone ecosystem, putting the climate crisis front-and-center in the minds of millions of tourists who visit the area every summer and revere it as the heart of America’s national parks system.

On the surface, between these climate disasters and an ongoing energy crisis, it looks like the global sustainability movement has taken a beating this year. The apparent gap between those ominous natural disasters and the actions needed to mitigate them seems daunting.

But if you dig deeper, things look a bit more promising. It’s worth understanding just how the 2022 market crash is affecting sustainability and what this all means for the long-term transition to clean energy.

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Markets Reflect Economic Expectations

From stocks to bonds to real estate, the value of market assets is based on investor expectations of how much cash flow a given market asset will generate going forward. They then weigh that expected cash flow against the returns they could earn by investing in similarly risky assets. Individual securities (like stocks and bonds) can go up and down based on short-term developments, but in the long run, they rise and fall based on how their underlying assets and sectors are expected to perform relative to the market.

As such, in a nutshell, the market reflects people’s expectations about underlying economic conditions. This year, after a sharp post-lockdown global economic recovery, those expectations have generally soured. Many people who tended to be optimistic a year ago are now pessimistic about how the economy will progress, especially in the short term.

Stock prices and market conditions can affect certain aspects of the economy in the short term. The biggest way this happens is by influencing corporate investment decisions. Psychologically, a market crash can scare executives and reduce their appetite to make big, risky investments. And a market crash can literally affect their ability to make those investments by reducing the cash they have on hand or making investors less confident in the company’s ability to remain profitable. If you amplify those discrete decisions across a sector or even a whole economy, the consequences can be monumental.

However, in the long term, it’s not stock prices and market conditions that affect the economy. It’s the other way around: they reflect the economy. Long-term economic trends are what drive market prices. This is a critical insight to digest, especially in less optimistic times like these when fear abounds, often irrationally or exuberantly.

That same trend applies to the sustainability world as well. And as you’ll see below, there’s plenty of good news about long-term economic trends driving the transition away from fossil fuels.

Falling Prices For Renewable Energy

Without a doubt, the biggest levers of sustainability progress are governmental policy and diplomacy. No company or corporate coalition can rival the impact of a global treaty or a major piece of legislation.

But the reality is that we live in a market economy in which supply and demand play a huge role. And an inconvenient truth that might be hard for many people in the environmental community to accept is that the road to a sustainable future will likely not be most dependent on political developments or big climate conferences, or climate activism.

We don’t have a choice as to whether or not we want to make our society sustainable. The choice we have is how fast we want to do so. And that choice comes down to one thing above all: technology.

The biggest challenge we face in moving away from dirty fossil fuels is that we need to replace them with technologies that are either similarly effective or better, and to do that across a large civilization of nearly eight billion people. It’s a daunting and complex task that may prove to be the 21st century’s defining challenge.

Until recently, we didn’t have adequate alternatives for fossil fuels at the price and scale needed to replace them on a civilization-wide scale. But if there’s any good news you can take away from reading this piece, it’s this: that’s changing quickly.

"We don’t have a choice as to whether or not we want to make our society sustainable. The choice we have is how fast we want to do so. And that choice comes down to one thing above all: technology."

The COVID pandemic dominated the headlines in 2020. A less prominent headline from October of that year might prove nearly as impactful in the long run. The International Energy Agency (IEA) proclaimed that as of October 2020, the world’s best solar power schemes offer the “cheapest electricity in history.”

From 2010 to 2019, the global cost of electricity derived from solar energy fell by over 80%. In that time frame, the cost of onshore wind power fell by almost 30%, and the cost of offshore wind power fell by almost 40%. And markets respond to prices. In 2010, solar and wind combined made up only 1.7% of global electricity generation. By 2020, that number had jumped to 8.7%.

The pace of renewable adoption has consistently exceeded what the best mainstream energy models have predicted. For instance, in 2012, the IEA expected global solar energy generation would reach 550 terawatt hours in 2030. That number was exceeded in 2018. Likewise, when the IEA confirmed that solar power was the cheapest electricity in history back in October 2020, their main modeling scenario projected 43% more solar output by 2040 than they expected just two years earlier.

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The Supply Chain Crisis And Rising Interest Rates

The term “supply chain” has dominated economic headlines this year for a good reason: supply chain issues have hurt various parts of the global economy. One of the biggest causes of the ongoing supply chain crisis is Russia’s invasion of Ukraine, which principally affected commodities markets. Russia produces a lot of fossil fuels, and its absence from global markets has sent energy prices soaring for months now. Russia and Ukraine both grow a lot of crops, so their absence from global markets has driven price surges for agriculture products like wheat as well. Nonetheless, the global supply chain was on a downswing before that event, mostly thanks to the ongoing impacts of the COVID pandemic and other drivers like a global semiconductor shortage, many of which are related to the pandemic.

You’ve likely felt these developments at the pump or at the grocery store. Irrespective of its causes, the supply chain crisis has affected renewable energy as well. Technologies like solar panels and wind turbines depend on a complex and fragile global supply chain that has seen repeated disruptions of late. For instance, a shortage of polysilicon, a key component in solar panel photovoltaic cells, has increased expenses for solar makers. Rising steel prices might make wind turbine production more expensive in the next few years. Battery pack prices may increase in 2022 for the first time since 2010, a trend caused by soaring prices for the metals in those batteries.

The other recent major economic trend to keep in mind is rising interest rates. As inflation has mounted, thanks in large part to supply chain disruptions, central banks have sought to squash economic demand by raising interest rates. And just as higher interest rates deflate stock prices, they also increase costs for big wind and solar projects that are financed with debt. Rising rates make current projects more expensive and can deter future investment. More decentralized sources of renewable energy like at-home solar are less prone to interest rate fluctuations, but they are far from immune.

These two economic forces - supply chain issues and rising rates - might last for a while. Before this year, interest rates had fallen around the world for over a decade. This extended era of cheap capital was bound to end at some point, and it appears we may have reached that point. And among other drivers, COVID disrupted the global economy so severely that it may take years to unwind the supply chain impact of the 2020 lockdown.

Plus, the climate crisis itself may prove a long-term hindrance to the global supply chain. For instance, amid record-breaking heat waves in Europe, the water level at the bottleneck of the Rhine River is at its lowest level in at least 15 years. As Business Insider reported, if the river keeps dropping, it may become uneconomical for vessels to carry cargo on the Rhine, given how little cargo they’d be able to carry. Likewise, falling water levels along the Colorado River driven by an ongoing megadrought may decimate hydropower availability for tens of millions of people living in the American Southwest while making agriculture in surrounding regions less viable.

Supply chain disruptions and rising interest rates may slightly stall the clean energy transition over the next few years. But these economic headwinds will not deter the longer-term forces at play. At the end of the day, sustainability is about technology, and the most important technologies keep getting cheaper.

Cheaper Technology Equals More Sustainability

Why does the renewable revolution keep roaring ahead faster than even the experts expect? The reasons are diverse and worth highlighting. It reflects a global aversion to fossil fuel use and a realization that independent of the massive harm they inflict on humans and the planet, fossil fuels are a finite energy source that must be replaced. It reflects energy research and development funding from governments as well as policies to make renewable energy more competitive, like renewable energy tax credits and subsidies, feed-in tariffs, and competitive auctions. It reflects the efforts of entrepreneurs and researchers who have dedicated their careers to making renewable energy technologies better and cheaper. And above all, it reflects positive feedback loops that should continue to drive down the costs of renewable energy.

Fossil fuels are resources. A lump of coal or a barrel of oil can’t really be innovated into a superior form. As such, the fundamental economics of resources like oil or timber, or wheat can’t materially improve over time. Ultimately, a log is a log, and a lump of coal is a lump of coal.

In contrast, sources of renewable energy like solar and wind are technologies. Unlike resources, technologies have learning curves. We can get better at making technologies over time. This means deploying more of them makes them cheaper. Think of how much cheaper certain consumer technologies have gotten over the years, from T.V.s to computer monitors to light bulbs.

"As Technologies like renewable energy get cheaper, more companies adopt them, and that bleeds into the political sphere and beyond."

As technologies like renewable energy get cheaper, more companies adopt them, and that bleeds into the political sphere and beyond. Robinson Meyer, a climate writer at The Atlantic, calls this process “the green vortex.”

Meyer writes that the green vortex has already gotten some results, including the aforementioned price declines of solar and wind energy. Another one is the global electric vehicle (E.V.) revolution. According to a Bloomberg analysis of E.V. adoption rates around the world, when a country sees 5% of its new car sales powered only by electricity, technological preferences flip, and mass E.V. adoption ensues. The most recent country to surpass that threshold was the United States, where Bloomberg projects a quarter of new car sales could be electric by 2025. Combined with existing plans for major automakers like Volkswagen, Ford, and BMW to overhaul their fleets in favor of electric vehicles, it appears an E.V. green vortex is accelerating around the world.

In short, this year’s supply chain crisis might disrupt the progress of the green vortex a little bit, but these positive trends are here to stay.

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Conclusion

The 2022 market crash has both caused and reflected growing pessimism about humanity’s ability to make progress in the wake of a global pandemic, which along with certain geopolitical developments, has driven a global supply chain crisis. Combined with rising interest rates, supply chain issues have derailed economic activity around the world.

These developments have influenced the sustainability sector as well. But appearances can be deceiving. The major long-term economic trend that will drive a global transition away from fossil fuels is that renewable energy technologies are getting better and cheaper. Recent developments may slow that process temporarily, but nothing will stop that trend from blazing ahead.

"A fully sustainable civilization is a matter of time. How soon we get there is up to us."

Would it help if economic conditions were more favorable and governments were more eager to support renewable energy development? Sure. But the key choice surrounding decarbonization is not whether it must be done but rather how quickly we can do it.

A fully sustainable civilization is a matter of time. How soon we get there is up to us.

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Business Takeaways
  • The pace of renewable adoption has consistently exceeded what the best mainstream energy models have predicted. For instance, in 2012, the IEA expected global solar energy generation would reach 550 terawatt hours in 2030. That number was exceeded in 2018.
  • In 2010, solar and wind combined made up only 1.7% of global electricity generation. By 2020, that number had jumped to 8.7%.
  • According to a Bloomberg analysis of E.V. adoption rates around the world, when a country sees 5% of its new car sales powered only by electricity, technological preferences flip and mass E.V. adoption ensues.