Climate change

Anthropogenic (man-made) greenhouse gas (GHG) emissions, i.e., carbon dioxide (CO₂) and methane, are the main contributor to global warming. Experts forecast a material increase in the incidence of severe floods, droughts, fires and storms, the greater the warming is. At 2.0°C of warming above pre-industrial levels, for instance, 37% of the global population could face at least one severe heat wave every five years, instead of 14% if warming is capped at 1.5°C, according to CarbonBrief. The recent economic shutdown caused by COVID-19 has reduced man-made GHG emissions substantially in certain regions, which clearly signals what can be achieved in the future.

Under the 2015 Paris Agreement, countries agreed that emissions needed “to peak as soon as possible” and said they would follow up with reductions in order to achieve carbon neutrality (balance between emissions and removals) between 2050 and 2100. Yet to put the world on course to reach this target, the International Energy Association (IEA) projects that CO₂ emissions would have to almost halve from around 39 gigatons (Gt) in 2017 to about 21 Gt by 2040. The biggest emission reductions will come from a shift from fossil fuels to renewable energy sources for electricity production, industrial activity and transportation, and/or less carbon-intensive technology, as well as less greenhouse gas-intensive agriculture and food production. Methane emissions from agricultural sources such as cattle or poultry, as well as oil and gas drilling sites, are even more potent than CO₂, although their concentration and duration in the air is much lower than CO₂, according to a scientific study published by the Intergovernmental Panel on Climate Change (IPCC).

By 2018, 135 countries had adopted power regulatory policies, 70 had adopted transport regulatory policies, 44 had implemented carbon-pricing policies and 20 had put in place policies governing heating and cooling. Developed countries are at the forefront of CO₂ reduction commitments. The European Union (EU), for example, in December 2019 announced a Green New Deal for Europe with a commitment to become the first climate-neutral economy by 2050. While the implementation itself will pose substantial challenges for all countries involved, the cornerstones of the deal are to supply clean, affordable and secure energy; mobilize the industry for a clean and circular economy; accelerate the shift to sustainable and smart mobility; and design a fair, healthy and environmentally friendly food system.

In the USA, although the current administration has pulled out of the Paris Agreement, many US states are taking the lead in the use of renewable energies. California, for example, aims to have 100% zero-carbon electricity by 2045 through a continued expansion of renewables such as hydro, solar, biomass and wind (60% of total electricity production is to come from renewables by 2030) and existing nuclear power as well as natural gas resources with carbon capture and storage.

In emerging markets (EMs), the balance between economic growth and decarbonization remains a challenge. China’s rapid economic development in recent decades has turned the country into the largest CO₂ emitter globally, according to the Global Carbon Project. Coal remains a key component of China’s power generation in the shorter term, but the country is on track to achieve the renewable energy targets laid out in its 13th Five-Year Plan (2016−20), increasing the share of non-fossil fuel energy in total Chinese primary energy consumption to 15% by 2020 (2018: 14.3%) and to 20% by 2030, according to the IEA. A similar picture arises for India, where over 70% of power production still comes from coal, according to the IEA. Yet India is shifting aggressively to renewable energy, in particular solar energy. In 2015, the government announced a target of 175 gigawatts (GW) of renewable power capacity by 2022, 100 GW of which would come from solar energy. The country has since said it could exceed that target and reach 225 GW. India currently has over 80 GW of installed renewable energy capacity (large hydro not included).

We consequently focus on carbon-free electricity, sustainable transport, energy transition, sustainable agriculture and food in our new Supertrend.

Carbon-free electricity

Renewables power ahead

Within global energy demand, the IEA projects that demand for electricity generation will continue to grow strongly, at a compound annual growth rate (CAGR) of 2% from around 25,500 terawatt hours (TWh) in 2017 to over 40,000 TWh in 2040. Most of the growth will come from emerging markets, while growth in demand in developed markets (DMs) can be curtailed by a more efficient use of electricity. In its Sustainable Development Scenario (SDS), the IEA projects that efficiency gains will be necessary to cut the CAGR for global electricity demand to 1.6%, while a significant change in the fuel mix for power generation will also be required. According to the IEA, wind and solar will likely become the cheapest sources of electricity in many countries, as their cost is expected to continue to decline over the next 20 years. They are projected to provide nearly 40% of all electricity in 2040 (compared to 6% in 2017), according to the IEA. At the same time, the IEA projects in its 2019 World Energy Outlook that the global share of coal in power generation is forecast to decline from 39% in 2017 to 5.5% by 2040. Companies leading in renewable power generation, as well as electricity storage, will likely benefit from this shift. In addition to an increasing share of renewables, the IEA also estimates that the share of nuclear power generation will increase. EMs, in particular, will likely look to nuclear energy as a reliable and cost-competitive source of electricity to substitute base-load energy from coal and lignite power plants.

Potential improvements go beyond electric vehicles to include electrified air transport and cleaner sea freight transportation. Companies that offer low emissions and renewable energy solutions for the shipping industry will likely benefit from developments in this area. By installing marine solar power panels, for example, a vessel’s emissions can be reduced by as much as 10%, according to a PBS article. Companies that enable switching from fossil fuels to biofuels in air and water transportation can help reduce CO2 emissions by up to 90%, according to GoodFuels. While security requirements in the aviation industry might be an entry barrier for now, the application to the shipping transportation industry is already available. Railroads remain the most environment friendly means of transportation, particularly for longer distances.

Oil and gas transition pioneers

Plan B for fossil fuels

Despite pressure on the energy sector, and coal in particular, demand for fossil fuels will likely remain high during the energy transition in the coming decades. How much oil and gas the world will need will depend on the speed with which governments pursue environmental policies to reduce carbon emissions. Different energy transition pathways lead to various oil demand scenarios and peak oil projections. In a world with limited oil demand under climate constraints, only the most cost-competitive oil supply options will be developed to meet demand.

In response to increasing pressure from both investors and the public, integrated oil companies (IOCs) have committed to lowering their GHG emissions by pursuing different strategies, such as complementing their traditional oil production and refining activities with investments in renewable power generation, producing cleaner transportation fuels, and investing in carbon capture. Net-zero CO₂ emissions have become the new yardstick for government policymakers across the world. The concept of net-zero emissions implies that all produced emissions must be removed by equivalent carbon-reduction measures that generate “negative emissions” in order to equalize the net carbon balance to zero. Among the IOCs, only Repsol aims to achieve net-zero emissions by 2050. The biggest challenge for IOCs will be to transition to a renewable energy business that yields lower returns than traditional oil and gas projects, without jeopardizing shareholder returns and by supporting a shift from coal to gas. IOCs that can square the circle by cutting GHG emissions through investments in less profitable renewable energy projects, while maintaining attractive dividend yields for shareholders, will likely be the winners of the energy transition. Leaders in carbon-capture technology should benefit from capacity enhancements in less carbon-intensive fossil-based electricity production.

Agriculture and food

Harvesting innovation

The global food system is responsible for 25%–30% of global GHG emissions, according to the IPCC. Demand for food will only increase going forward as the global population is expected to reach 9.8 billion people in 2050 and 11.2 billion in 2100, according to the United Nations (UN).