Climate change is an existential emergency

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Policymakers must support decarbonisation

A big part of the problem is the lack of action by policymakers. Despite 195 countries approving the UN IPCC report and acknowledging the catastrophic consequences of climate change, we’re only on course to maintain emissions by 2030 rather than cut them by 50 per cent. Why? The answer is growth.

Economic development means increasing consumption of goods and services, and that requires fast and cheap forms of energy which are often carbon intensive. And while we don’t suggest inhibiting growth, governments must help transition economies to a low-carbon world. That means converting our economic system to one that sustainably reduces, and compensates for, carbon dioxide emissions.

Fortunately, a plethora of decarbonisation solutions are available today and have the potential to cut over 80 per cent of global carbon emissions if fully adopted globally. But these innovations need policy support to scale them up quickly.

The market for decarbonisation

There are varying estimates of the cost to fully decarbonise the global economy, but the best forecast we have seen is that, at current prices, decarbonisation will cost $US4.8 trillion per year, with a total spend of $US144 trillion by 2050.¹

The funding will need to come from both public and private sources, and one of the most efficient ways to finance the transition is to establish a price for carbon. The current global price is too low, making the opportunity cost for businesses to emit carbon relatively easy to absorb. But that appears to be changing, with more countries adopting carbon pricing schemes domestically and as part of trading relationships.

Another policy to support decarbonisation is subsidising new technology. Subsidies for renewable energy in Germany, the US and the UK helped scale renewable power to make it the lowest cost form of energy generation in most parts of the world today. Policymakers could also restrict the use of high-emissions technology, for example by imposing low-emissions zones in cities or by cutting road taxes for electric vehicles.

The potential of green hydrogen

An area attracting a lot of interest is green hydrogen. Most hydrogen gas used as an industrial chemical is either generated through the gasification of coal or lignite, or through steam methane reformation, which typically uses natural gas as the feedstock. Neither is carbon friendly. Green hydrogen can nearly eliminate these emissions by using renewable energy to power the electrolysis of water — the process to extract energy in the form of gas.

Green hydrogen has the potential to supply up to 25 per cent of the world’s energy by 2050 and become a $US10 trillion market, mainly for energy storage, industrial uses and heavy transport. Its current price of $US 2.5-6 per kg has fallen some 40 per cent since 2015, but it is estimated that $US2 per kg is the tipping point to becoming competitive across multiple sectors.²

To get there, however, several challenges need to be overcome, including building the infrastructure required to support hydrogen production, storage, and transport. That may take time and much more policy support will be required to make this and other emerging technologies viable.

As investors, however, we already have access to opportunities in existing, cost competitive decarbonisation technologies that can drive the transition forward. These and the new technologies on the way — across every part of the economy — will help future COP conferences be even more ambitious on emissions reduction commitments and the speed at which they can occur.

Velislava Dimitrova is Portfolio Manager, Fidelity Sustainable Water and Waste Fund.

References:

¹ Goldman Sachs, 2020.

² Hydrogen Council: Path to hydrogen competitiveness, January 2020.

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