Earth Day 2022 and the undervalued decarbonisation potential of state-owned energy companies

22 April 2022

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Today, on Earth Day 2022 people from around the world that care about the future of our climate and environment are calling on businesses, governments, and individuals to do one thing – Invest in our Planet.

Much of the key to keeping global temperatures below 1.5C of warming and preventing the worst impacts of climate change depends on money and profit. Yet, state ownership of major carbon-emitting assets presents governments with overlooked and underutilised low-hanging fruit for accelerating decarbonisation.

Government-owned power companies represent almost two-thirds of global electric power generation capacity

Electricity generation companies owned by governments are the dominant firm type in the global electricity sector. They represent almost two-thirds of global electric power generation capacity and are estimated to be responsible for over six billion tonnes of direct carbon emissions globally – more than any single country except China. This makes them absolutely essential to reaching carbon neutrality by mid-century.

Despite this, climate policies intended to support the decarbonisation of the energy sector have traditionally targeted privately-held companies using market-based mechanisms. These regulatory tools range from technology standards to carbon pricing measures, but all are designed to change the behaviour of investor-owned, profit-maximising firms. Power companies that are government-owned, however, may not have profit as their primary goal. When the internal focus of a power company is providing a secure and stable energy supply, supporting economic growth, or managing strategically important power assets, the best policy tools to drive investment in decarbonisation might be quite different.

In a paper published in the Journal of Cleaner Production this week, we and our co-authors Arjuna Dibley from Oxford and Stanford Universities, and Philippe Benoit from Columbia University, analyse six major state-owned power companies and develop a toolbox of potential policies that may be more effective at driving them towards investment in low-carbon energy generation.

Not all state-owned power companies are run in the same way, nor do they necessarily have the same motivations or face the same constraints. Our theoretical framework analyses the factors that determine the likely success of different policy tools, across four different ‘archetypes’ of state-owned companies derived from our case studies. We could then test how the policy toolbox worked with the varied motivations of different firm archetypes in mind.

The ability of governments to exercise their shareholder power presents the clearest pathway to influencing change

Two things rise to the fore in understanding how to motivate the replacement of high-carbon electricity generation assets with low- and zero-carbon ones. First and foremost is that most of the options in the traditional policy toolbox, including carbon prices, are likely to lead to less efficient and effective climate mitigation outcomes when the target is a state-owned company. With a majority of power generating assets under state control, this means that the policies currently in place by governments to drive net zero in electricity generation could be targeting as little as the 39% of installed capacity and 48% of planned capacity under private sector control.

The second was that the ability of governments to exercise their shareholder power presents the clearest pathway to influencing change without requiring legislative action. Reshaping the leadership, boards, and objectives of state-owned power companies and holding them accountable on meeting climate goals is effective even when the government holds less than a 100% stake in the company, and even in the absence of other market-wide climate policy measures.

The results of this study should encourage politicians and researchers to explore the manifold options beyond market instruments that they can leverage to enable rapid decarbonisation of power generation. They have in these companies the opportunity to outstrip the speed and efficiency of private utilities in delivering zero-carbon energy, and to provide a significant proportion of the investment and expertise needed to safeguard the future of our planet.

by Alex Clark and Moritz Schwarz
Doctoral Students with the Institute of New Economic Thinking at the Oxford Martin School

This opinion piece reflects the views of the author, and does not necessarily reflect the position of the Oxford Martin School or the University of Oxford. Any errors or omissions are those of the author.