- The path to net-zero emissions will require a combination of strategies: increasing clean energy generation and electrification, improving efficiency and offsetting emissions.
- The success of these strategies largely relies on the pace and innovation of climate change technology.
- Shifting consumer behaviors will also play a role in creating demand and awareness of more sustainable, energy-efficient or low-emissions products.
Increase clean energy generation and electrification
FROM COAL TO CLEAN
Clean energy technologies are the greatest factor in achieving net-zero targets, given that 73% of global emissions are from the energy sector. BP’s latest energy outlook illustrates that the contribution from oil, coal and gas to global energy output would have to decline from close to 90% to around 20% by 2050, with coal almost completely eliminated as an energy source.
Coal creates more carbon dioxide (CO2) per unit of energy than any other fossil fuel. Its attractiveness has declined in many parts of the world as the cost of renewable energy sources falls: wind energy costs are down 70% since 2009, while solar costs are down an eye-catching 90% over the same period. Despite this, the degree of progress in eliminating coal varies widely. In the United States, consumption of energy from renewables surpassed that from coal for the first time in 2019. Contrast this to Australia or China, where coal accounts for between 30% and 60% of energy consumption.
A heavier reliance on coal in part reflects a plentiful domestic supply, but does not mitigate the substantial challenge faced by many in reducing its use. Developed markets have a greater economic incentive to close coal-fired plants because of their age: the International Energy Agency (IEA) estimated in 2019 that the average age of coal plants in emerging Asia is only 12 years, compared to 46 years in the United States. Further contributing to the issue, many assets in the developing world are owned by the state, especially in China, which makes them less sensitive to economic incentives than privately owned equivalents. The coal industry may also be a large employer; for example, in India, roughly half a million people work as coal miners, with many more indirectly supporting the coal industry.
Finally, while there is broad agreement that coal needs to be wound down as soon as possible, it is not feasible for the growth in renewable supply to act as a one-to-one replacement. A switch to natural gas lowers carbon emissions in the interim (as natural gas burns more efficiently), but with the negative side effect of higher levels of methane, which is far more environmentally damaging. Avoiding over-reliance on gas in the coming years will be just as important.
Significant infrastructure upgrades will also be required to enable the storage and transfer of clean energy around the world. Designing a power grid with the flexibility to deal with the variability of wind and solar power production is a complex challenge. Governments will be crucial in driving progress: they can invest in infrastructure, such as robust transmission systems, while incentivizing the private sector to hunt for technology breakthroughs. Much cheaper storage options will be needed to smooth out fluctuations in renewable power sources, and while manufacturing costs of storage technology, such as batteries, will come down with scale, a rise in the cost of materials could be a challenge. The soaring prices of lithium and cobalt—key components of batteries—suggest that investors are anticipating a sharp increase in demand ahead.
The large-scale electrification of existing industries is the next step, with the rise of electric vehicles (EVs) being one example. A wave of auto manufacturers has recently announced plans to shift to all-electric production over the coming years, and EV sales have almost tripled over the past five years with strong expected growth from emerging markets like China. However, the IEA still estimates the global market share of EV was just 4.4% of total auto sales in 2020 (see Exhibit 2). Part of the challenge is that, until recently, there had been little first-mover advantage. Motorists were reluctant to go electric without the necessary charging infrastructure, while energy companies were wary of building the charging network without robust demand.
Electric vehicle sales have surged, but only account for a fraction of total car sales
EXHIBIT 2: ELECTRIC VEHICLE SALES
For some industries, however, full electrification is not feasible. For example, prototype electric engines are being developed for airplanes, but batteries are still far too heavy to be a viable energy source for long-haul flights. Industrial processes that rely on very high heat is another area where full electrification may not be viable; however, lower-carbon biofuels and hydrogen power may form part of the solution.
Improvements in energy efficiency to reduce the overall level of energy demand will also be an important part of reducing emissions. A policy initiative to increase the use of light emitting diode (LED) lightbulbs throughout India is a good example of a relatively simple high-impact change. LED lightbulb sales rocketed from 5 million in 2014 to about 670 million in 2018. The annual energy savings from the project are estimated to be sufficient to power the whole of Denmark for a year.1 Changes may be straightforward for assets with relatively short lifetimes, such as lightbulbs, but stronger incentives are required for equipment that is replaced much less frequently.
Shifts in consumer preferences, particularly diets, can also help to reduce energy demand. The data supporting a reduction in the consumption of animal products is compelling: 77% of agricultural land is dedicated to producing meat and dairy—which account for just 18% of the world’s calories.2 Focusing on meat alone, however, would neglect many other nuances, such as the chemicals used in food production, how food is packaged and how far it has traveled. Tackling food waste—which contributes 6% to global GHG emissions—is another priority.
Changes will be required in the agriculture industry too, particularly around the efficiency and precision of fertilizer and water usage. European Commission research has shown that, when used efficiently, fertilizers can improve crop yields while simultaneously helping to capture more CO2 thanks to the increased production of biomass. However, excessive fertilizer use can create significant disruption to the surrounding environment. High investment costs to employ more precise techniques have hampered uptake, again highlighting the need for policy incentives to drive change.
Emissions will never be fully eliminated, thus requiring the use of offsets to meet net-zero targets. Natural habitats, such as forests and peatlands, are the most effective carbon sinks, yet they are disappearing at a frightening pace. The world lost more than 1.3 million square kilometers of forest—an area larger than South Africa—between 1990 and 2016, according to World Bank data. We expect the focus on biodiversity—the way that companies coexist with and protect the environment around them—to accelerate accordingly. Heated criticism from global leaders over the Brazilian government’s handling of Amazonian deforestation highlights how this issue is increasingly moving into the mainstream political sphere.
Carbon capture, utilization and storage (CCUS) is one of the main technology-based emissions offset strategies. CO2 emissions are separated from other gases, which are then compressed and transported to sites where they can be used or stored. Most emissions are injected into rock formations deep below the Earth’s surface, although other uses are being developed, such as creating synthetic fuel or adding fizz to drinks. Huge investment will be required to scale up projects to lower the cost of carbon capture, but momentum is building. A recent report from the IEA highlighted that governments and industries committed more than USD 4.5billion to CCUS in 2020. Given the amount of growth required, it’s no surprise that green technology companies are attracting a high valuation premium in markets.
Offsetting strategies are often an attractive way for companies to reduce their carbon footprint, as they can be less disruptive than changes to materially reduce gross emissions. Yet according to estimates from the Intergovernmental Panel on Climate Change, sequestration and removal will contribute less than 10% of the net GHG emissions reduction required over the next decade to stay on track to hit net zero by 2050. Investors should analyze corporate ambitions to reach net-zero targets with this in mind. For most industries, emissions reduction—rather than offset—will need to be the priority.
The path to net-zero emissions will require a combination of strategies around a shift to clean energy generation and electrification based on those renewable energy sources, as well as achieving greater energy efficiency in domestic and commercial use. Clean energy and the shift to renewables is likely to dominate, given the ability of governments to invest in the infrastructure required, and greatly reduce emissions levels. However, the incentives are stronger for more developed nations than emerging ones, where the investment in non-renewable energy sources is more recent and possibly more economically sensitive if linked to employment. It’s worth noting that even with the best intentions not all industries will have the ability to substantially curb emissions. The goal set by many governments is net zero, not absolute zero, and as such offsetting strategies will be needed to tackle the remaining unavoidable emissions.