Among these economies, Norway, the world’s third largest exporter of natural gas, faces a unique challenge. But, while Norway’s industrial structure and investments are strongly linked to carbon-based industries and services, the country’s domestic energy comes almost entirely from renewable resources (hydropower). The Norwegian economy would therefore be ripe for a green industrial transition, except that the decline in global demand for fossil fuels will hamper its main engine of growth.
The carbon “lock-in” in Norway is a symptom of Dutch Disease – the problem of a dominant sector’s success comes at the expense of most other sectors. As investments in hydrocarbons exceed investments in other industries, the fossil fuel sector attracts the most skilled talent. At the same time, the extraordinary profitability of the oil and gas sector has inflated price and wage growth in the rest of the economy, creating difficulties for other exporters.
As a result, Norway has been one of the OECD’s biggest losers in terms of overall international market shares in non-energy export markets since the late 1990s. Its non-oil trade deficit has been steadily increasing. to increase over the past decade.
To make matters worse, a recent report from Statistics Norway predicts that investment in the Norwegian energy sector will decline over the next decade.
Obviously, Norway needs a new industrial strategy. In a recent report, we describe how it could use the technical and financial resources of its oil industry to become a “green giant”. But the phasing out of oil extraction and the transition to a greener direction will not happen by itself. The challenge calls for bold but carefully calibrated public sector action. The government cannot micromanage the process because it would stifle innovation.
Instead, the government should set a clear direction by making high-risk investments at an early stage that will later attract private actors. In the case of Norway, a green industrial strategy should direct the country’s considerable financial resources towards investments in a new national industrial base focused on green energy technologies.
For starters, Norway has yet to channel the resources of the world’s largest sovereign wealth fund towards the green transition. On the contrary, the Norwegian Statens Pensjonsfond Utland is one of the biggest investors in some of the most devastating fossil fuel projects in the world currently in the planning or under development. A recent report warns that 12 of these projects alone would use up three quarters of the world’s remaining carbon budget, making it extremely difficult to limit global warming to 1.5 degrees Celsius.
The pension fund currently operates under tax rules requiring its oil revenues to be transferred to an oil fund and invested abroad. The product is then introduced into the national economy at an average annual rate of 3 percent of the fund’s holdings.
This political invention proved effective in limiting the inflationary pressure of oil extraction while providing the government with an additional source of revenue. But what Norway needs now is long-term patient funding to support economic diversification. Because the current fiscal framework keeps large public investments outside the normal government budget, it exacerbates the country’s Dutch disease by creating dependency on the oil-determined trajectory.
It doesn’t have to be that way. The pension fund could be transformed into a powerful mission-driven investor, with both a national and global presence. Rather than using oil revenues to recapitalize the oil fund, these cash flows could be directed to a new green public investment bank, whose work could be coordinated with that of other public funds and agencies working on the transition. green.
Norway’s national innovation system is characterized by a high degree of public ownership. Notably, the Norwegian state owns 67% of the flagship company in the Norwegian oil industry, Equinor. But while Norwegian state-owned companies once played a key role in building the industrial ecosystem for oil production, they have failed to take over that role to lead the green transition. Rather than reinvesting its profits in renewables, Equinor announced in 2019 that it would spend $ 5 billion by 2022 to buy back its own shares.
The COVID-19 shock demonstrated the risks associated with over-reliance on volatility in energy markets. As Danish energy giant Orsted shrugged off the pandemic and continued its decade-old shift to renewables, Equinor had to cut dividends and take on more debt to keep its commitment to shareholders amid insufficient revenue .
Like its Danish counterpart, Equinor is set to grow into a mission-driven energy giant. This means removing the pressure on its management to distribute profits among shareholders by restoring it to its status as a fully public company focused on the country’s economic future.
Mariana Mazzucato and Rainer Kattel
Mariana Mazzucato, Professor of Innovation and Public Value Economics at University College London, is the founding director of the UCL Institute for Innovation and Public Purpose. Rainer Kattel is Deputy Director and Professor of Innovation and Public Governance at the institute. – Ed.