Norway, the sleeping green giant

As one of the world’s leading exporters of natural gas, Norway faces a unique challenge in a world increasingly moving away from fossil fuels. The country has all the financial, technological and human resources it needs to thrive in a decarbonized future; what is lacking is political leadership.

LONDON – Responding to the climate emergency is difficult for everyone, but particularly for countries whose economies depend on oil extraction or production. Decarbonization is an opportunity to kick-start a green industrial revolution, but as more and more nations join this path to future prosperity, assets, technologies and capabilities that rely on fossil fuels will lose value, and that will put employment, exports and industrial innovation in oil-dominated economies at risk.

One such economy, Norway (the world’s third largest exporter of natural gas) today faces a unique challenge. Its industrial and investment structure is closely tied to hydrocarbon-based sectors and services (which in 2019 generated 36% of total exports), but the energy it consumes comes almost entirely from renewable sources (water energy conversion).

So perhaps the Norwegian economy is now ready for a green industrial transition, with the caveat that falling global demand for fossil fuels will lock in its main growth engine.

Norway’s dependence on hydrocarbons is a symptom of “Dutch disease”: the problem that occurs when one dominant sector thrives to the detriment of the others. The huge disparity in hydrocarbon investment compared to other industries attracts the most skilled professionals to the fossil fuel sector. At the same time, the extraordinary profitability of the oil and gas sector has generated excessive price and wage growth in the rest of the economy, creating difficulties for other exporters.

This is why Norway has been one of the OECD countries that since the late 1990s has lost the most international market share in the non-energy export sectors. During the last decade, Norway’s non-oil trade deficit has grown steadily and the share of the manufacturing sector in the economy has halved compared to the other Nordic countries.

To make matters worse, a recent report by the Norwegian Central Bureau of Statistics predicts that over the next decade, investment in the Norwegian energy sector will decline. While average annual investment in the sector over the previous decade exceeded NOK 170 billion (about $20 billion), between 2025 and 2034 that figure is projected to decline by about NOK 60 billion (even without oil production curtailment policies).

It is clear that Norway needs a new industrial strategy. In a recent report, we propose a way to use the technical and financial resources of the oil sector to turn Norway into a “green giant.” But the transition from oil extraction to a greener economy will not be automatic: it demands bold, but very well calibrated, action from the public sector. Government cannot micromanage the process, because it would stifle innovation, but neither can it leave it entirely to the market.

The solution is for governments to show the way with high-risk investments in the early stages, which will then be joined by private actors, with rewards for those willing to invest and innovate. In the case of Norway, an industrial strategy is needed that directs the state’s considerable financial resources towards investments in the creation of a new industrial base focused on green energy.

Norway has the world’s largest sovereign pension fund, but has not yet channeled its resources into investments in the green transition, inside or outside the country. On the contrary, Norway’s Statens Pensjonsfond Utland (SPU) is a major financier of some of the most devastating fossil fuel projects in the planning or development phase today. A recent report warns that just twelve of these projects will consume three-quarters of what remains of the world’s carbon budget, making it extremely difficult to limit global warming to 1.5 °C.

Under current Norwegian tax regulations, SPU deposits oil revenues in a fund earmarked for overseas investment. Every year Norway transfers an average of 3% of the value of the fund to the domestic economy, a sustainable withdrawal rate as it matches the expected return on the fund.

This policy has proved effective in limiting inflationary pressure from oil extraction, while providing an additional source of revenue to the state. But today Norway needs a patient and lasting financing process that makes economic diversification possible. As the current fiscal rules allow large public investments to be maintained outside the normal state budget, it is aggravating the Dutch disease by perpetuating a path dependency on oil.

But it does not have to be this way. It is possible to turn the SPU into a powerful investor with a sense of mission and presence at home and abroad. Instead of using oil revenues to recapitalize the fund, they can be directed to a new public green investment bank, acting in coordination with other public funds and agencies dedicated to the green transition.

The Norwegian national innovation system is characterized by significant state involvement. In particular, the Norwegian state owns 67% of the Norwegian oil industry’s flagship company, Equinor (formerly Statoil). But the Norwegian state-owned companies that were once key players in creating, out of nothing, the oil industrial ecosystem, have not played the same role in the green transition. Instead of reinvesting its profits in renewable energy sources, in 2019 Equinor announced that between now and 2022 it will spend $5 billion on buying back its own shares.

The impact of Covid-19 highlighted the risks of over-reliance on (volatile) energy markets. While the Danish energy giant Ørsted got through the pandemic without major inconvenience and did not halt the process of transition to renewable sources that it started a decade ago, Equinor had to cut dividends and take on debt to maintain its commitments to shareholders in a context of insufficient revenues.

Like its Danish counterpart, Equinor must become an energy giant with a sense of mission. This requires freeing its managers from the pressure to distribute dividends, returning it to the status of a fully state-owned company focused on the country’s economic future.

Mariana Mazzucato, Professor of Economics of Innovation and Public Value at University College London, is founding director of the UCL Institute for Innovation and Public Purposes. She is the author of The Value of Everything: Making and Taking in the Global Economy, The Entrepreneurial State: Debunking Public vs Private Sector Myths and, most recently, Mission Economy: A Moonshot Guide to Changing Capitalism.

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