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Net-zero emissions: Not just a bunch of hot air

Decarbonizing the global economy is an urgent necessity if climate change targets are to be met. According to estimates, to meet the Paris Agreement’s warming target, global carbon dioxide emissions from the energy sector will need to fall by more than 70% by 2040, even as electricity generation grows by 46%. Despite the challenges this bold ambition presents, the case for optimism is tangible. What will it take to achieve the great energy transition?

The recent floods in Sydney, the blizzards in Texas and the sandstorms in Beijing are the most recent examples of natural disasters a warming world will experience with increasing frequency. As climate change exacerbates extreme weather events, it not only impacts local populations but the entire world.

The good news is that governments and the private sector are pledging action. US President Joe Biden’s economic recovery plan has clean energy at its core while Coal India, the world’s largest coal miner, is moving into solar power. Chinese President Xi Jinping has committed China to achieve carbon neutrality by 2060, a move followed by Japan and South Korea, which hope to reach this goal 10 years before China. 

But are these targets truly achievable? And what needs to happen to get these countries and the world to transition to a carbon-free state? 

The glass half-full view

It’s generally agreed that to limit global warming to pre-industrial levels, rich countries must achieve net zero emissions by mid-century while emerging nations need to get there by 2060. While this seems like a stretch, a confluence of factors should help make it happen, Lord Adair Turner, Chair, Energy Transitions Commission, told the 2021 Credit Suisse Asian Investment Conference (AIC)

His optimism stems from the rapid technological advancements that are making it cheaper to decarbonize by dramatically reducing the cost of electricity produced by renewables. “Increasingly, we are seeing around the world that the cheapest way to produce electricity is by wind and solar, not by fossil fuels,” he explained.

In China, the world’s largest carbon dioxide (CO2) emitter, the cost of producing electricity from wind and solar is now already on par with coal-fired power and will go lower, according to Gary Zhou, China/Hong Kong Utilities and Solar Analyst, Securities Research at Credit Suisse.

Technology is also helping address the challenges of keeping the supply of electricity flowing even when the wind doesn’t blow or the sun doesn’t shine. Further, governments like China’s are investing in building efficient transmission networks, intelligent electricity grids and enhancing energy storage capabilities, Zhou noted, adding:

“We believe the energy transition from fossil fuel to electricity will accelerate in the coming five years...with renewable energy set to be the key winner. Based on our projections, China is set to overachieve its non-fossil fuel energy mix target by 2030.” 

While advancements in battery technology are revolutionizing electric vehicles (EVs) and helping decarbonize the transport sector – a major contributor to emissions – hydrogen is increasingly emerging as a solution to better match supply with demand. Hydrogen is also seen helping decarbonize high-emission sectors such as shipping, petrochemicals and steel.

In the near to mid-term, most of the hydrogen supply will be gray and brown but “Green hydrogen is the holy grail…which will ultimately help us achieve zero emissions,” explained Horace Tse, Head of Asia Pacific Energy Securities Research, Credit Suisse, adding that costs are expected to come down meaningfully by 2030. 

“We’re really on the verge of a technological and economic revolution which will enable us to move to a zero-carbon future,” according to Lord Turner.

So, what’s it going to cost?

Obviously, transitioning the planet’s US$100 trillion economy to a carbon-free future will involve significant capital. By Lord Turner’s estimate, that will amount to US$1.5 trillion in additional annual expenditure with the bulk of the funds going towards building a green electricity system, including wind turbines, solar panels, and transmission and distribution (T&D) networks. 

Putting the eyewatering numbers in context, Lord Turner said: “The world saves and invests about US$25 trillion per year so an extra trillion per annum is not huge, especially given that we are living in a world with negative real interest rates.”

Another crucial factor that will help raise funds at scale is the growing awareness and affinity for green investments. Investors and institutions are increasingly embracing the idea of channeling money toward sustainable development. Credit Suisse research shows that a massive reallocation of capital by private investors is underway as the world transitions to a low-carbon economy, and this trend is only expected to accelerate. Global public stimulus devoted to green end-markets last year is expected to amount to as much as US$1.85 trillion as the pandemic spurred support from policy makers for tackling climate change.

Capital markets have started to take their cues from this bold leadership and stand ready to finance the energy transition. But there is still a long way to go, and investors in the region will be looking to credible pathways to Net Zero

Phineas Glover, Head of ESG, Asia Pacific, Securities Research, at Credit Suisse

Certainly, the global journey to zero emissions offers investment opportunities across the risk-return spectrum. While projects such as T&D infrastructure will generate reasonable long-term returns for investors with low risk tolerance, those with a greater appetite for risk and seeking higher returns can look to fund the many startups working on exciting new technologies impacting everything from EV batteries to solar panels to hydrogen electrolysis, Lord Turner noted. “Some companies in these sectors have shown the extraordinary valuations that truly disruptive technologies can command.”

Taking the high road

Yet, the path to a carbon-free future is not without challenges. These include eliciting commitments from companies in sectors such as oil & gas to begin the transition process while weaning the world off fossil fuels, including cutting off funding to coal power plants lest they become stranded assets unsuited for a carbon-free economy. 

Governments will need to step in to provide subsidies to support new technologies, such as hydrogen, until they can reach economies of scale that bring down costs to a point where subsidies are no longer needed – a position now enjoyed by solar and wind power. 

Governments also have a crucial role to play in designing power markets well and providing the right incentives to finance zero carbon systems that require significant upfront capital investments to set up, Lord Turner pointed out. Investors and financial institutions too have a responsibility to exert their influence to get companies to disclose their emissions reduction plans because “what gets measured gets managed.”

“In order to get to zero emissions you need this mix of hard public policy, regulations, taxation, disclosures and voluntary commitments, and it all comes together in a self- reinforcing process,” according to Lord Turner.

Where does China come in?

China, with its sheer size, economic heft and contribution to global emissions, will inevitably have a significant influence on the world’s move to a clean energy future. The country currently accounts for a quarter of total emissions, yet the Energy Transition Commission believes that it has the potential to become a fully developed, rich zero-carbon economy by 2050, a full decade before its target. 

The report expects China - which in its latest five-year plan reiterated its commitment to achieving carbon neutrality - to grow its electricity consumption from 7,000 terawatt hours to 15,000 by 2050 with nearly all of it coming from zero carbon sources, such as wind and solar, as well as nuclear and hydro power. And the factors underpinning this bullish prognosis are China’s technological and entrepreneurial capabilities and its natural resources, according to Turner.

But, as Christine Loh, Chief Development Strategist, Institute for the Environment at Hong Kong University of Science and Technology and former Undersecretary for the Environment of Hong Kong, pointed out, the key question is: “How do you stitch all of this together to get where we need to go?”

The answer lies in the many incremental steps being taken by different sections of the economy, including the public and private sectors, in response to the broad goals laid out in the five-year plan. Loh noted that entities like the province of Inner Mongolia and the State Grid Corp – the state-run power giant – had announced plans to reduce carbon emissions. “In this way, you will see announcements from across all parts of China that neatly dovetail with the national plan.”

Edmond Huang, Head of Hong Kong/China Securities Research, Credit Suisse, provided a detailed outline of what this plan entails, noting: “It involves refocusing an economy that’s come to be known as the world’s factory to become the world’s market, and lower its reliance on energy-intensive industries.” And the country will rely on a mix of solar, wind and hydrogen power, as well as rapidly improving battery storage technology, to get there. 

Not quite out with the old…

But there are many challenges to surmount before China can attain its lofty goal. These include correctly incentivizing provincial governments seeking short-term growth to stop investing in thermal power plants. The country’s central bankers and government officials are also trying to limit the practice of funding towards real estate and infrastructure projects that the country no longer needs and can only provide incremental growth and funnel financing towards green projects, agreed Loh and Lord Turner.

On the other hand, retrofitting infrastructure projects to make them green can help bring down emissions while generating much-needed employment, Loh noted. “People are not interested in retrofitting as it may not generate a lot of returns but it is something we should be looking at. It’s great for China and the world.”

Overall, the experts made a compelling case and were united in their optimism that China and the world have a plan in place, and are making good progress towards building a carbon-free future. As Marisa Drew, Chief Sustainability Officer and Global Head of the Sustainability Strategy, Advisory & Finance Group, Credit Suisse, observed:

It’s clear that we have the will, the technology exists and a business case can be made that we can achieve zero emissions without sacrificing growth. It’s all about turning the right dials to move this great big machine towards a greater solution.