At the end of the month, Paris will host the 21st annual Conference of the Parties to the United Nations Framework Convention on Climate Change. That mouthful is better known as COP21. As the event approaches, it is increasingly clear that the world is ready for change. Around the globe, countries and corporations are making and demanding new commitments towards a low carbon society.
A few examples: The U.S.-China climate agreement. China’s confirmation that it will adopt a national cap-and-trade system in 2017. Sweden’s pledge to become a fossil-free nation (by investing close to $545 million in climate-protection measures in the coming year while dramatically boosting government support for solar, wind, storage, smart grids and electric vehicles). The decision by Total , Europe’s second largest oil company, to invest $500 million a year in the fast-growing renewables market. The call from the CEOs of 10 of the world’s largest oil and gas companies (all from outside North America) for an effective climate change agreement from COP21. The announcement by Goldman Sachs that it will triple its target for clean energy financing and investment to $150 billion by 2025 (after reaching its original target of $40 billion in just four years).
Actions such as these are leading many to believe that COP21 will be a catalyst for meaningful change. While the Copenhagen Climate Change Conference ended in stalemate in 2009, this is not expected to be the case in Paris. We are at the beginning of a new innovation cycle that will have a significant impact on the energy industry. To quote Christina Figueres, the UN’s top climate official, the shift to net zero emissions by 2080 is “unstoppable and no amount of lobbying at this point is going to change the direction.”
However despite these good intentions and the hope for a clear path of action at COP21, according to a recent study by Climate Interactive, even if countries manage to fulfill their existing pledges on reducing carbon emissions, it will likely not be enough to prevent the world’s temperature to still increase by 3.5°C above pre-industrial levels by the end of the century. Reports of extreme weather, droughts and megastorms proliferate. The melt of Greenland ice and the loss of permafrost in Canada and Russia appear to be accelerating. These eventualities entail huge implications for rising sea levels and the release of trapped methane. We need to do more and we need to do it faster.
The IEA (the International Energy Agency) has forecast it will cost $44 trillion to switch to 100% renewables by 2050, which is much more than the current pledges. According to a study by the UN and Bloomberg New Energy Finance, public and private investors spent approximately $270 billion on renewable energy projects in 2014. But this spending only increased renewable energy’s share of global generation by about 0.6 percent. This rate of investment is simply far too low to successfully keep CO2 levels in the atmosphere below the 450 parts-per-million (PPM) level that scientists believe is necessary to keep temperature increases below 2°C.
CERES (a leading North American non-profit organization advocating for sustainability leadership) and the IEA estimate that the rate of investment in clean energy needs to be doubled by 2020 and quadrupled by 2030 to $1 trillion per year in order to achieve the 450 PPM goal. While that sounds like a lot of money, consider that the total cost of the relatively straightforward East-West German reunification was approximately €2 trillion, and that the current fossil fuel subsidies are annually more $500 billion globally. Also note that there is actually significant cash currently available in pension funds and other financial institutions who are looking for better returns in the low interest environment of today.
Yet when it comes to real action, most financial and industrial players are still sitting on the side lines struggling with mandates and evaluating early technology and market risks, while trying to understand if green bond returns of more than 6% and VC/PE returns of more than 12% – >18% in sustainability or impact investing are achievable for the longer term. The numbers start to show this is possible: just look at wind and solar, which have become well-proven and cost-competitive. At the end of 2009, there was a little over 150GW of installed wind power capacity worldwide and about 30GW of solar PV. Today there is well over 400GW of wind and around 230GW of solar PV, while other renewable technologies such as energy storage, EVs, efficiency and smart grid plays are well on their way to being profitable.
That sidelined capital will likely start moving if COP21 can define the “playing field” for the new energy industry by providing transparency, long-term guidance for investments and more certainty on regulation and subsidies, plus some “kick-starting” capital. Markets cannot solve climate change on their own. It’s like in The Netherlands where many people live below sea level: you cannot leave the building of dikes and the regulation of water pumping to the market. Allow everybody to construct a private dike around their property?
With a new playing field that provides more investment certainty, the market can, however do its work and the new energy industry will have the ability to attract and invest the capital the world needs to transition to a carbon-free society. It will become a new profitable financial asset class for mainstream investors who know that the shine is coming off the traditional oil and gas industry, which for so long was a trustworthy asset class where financial institutions could deploy significant capital with almost guaranteed returns and dividends.
It would help tremendously if, in addition to broad policy and regulation frameworks, the leaders of the major participants in COP21: the US, EU, Canada, Japan, India, China and others, would each commit to their pro-rata of a 10 year $1 trillion annually renewable energy Marshall Plan. Not just the intended $100 billion, but $1 trillion each year. Money talks!
This new Marshall Plan should focus on: (1) investments in innovative solutions to battle climate change; (2) building the infrastructure we desperately need for the new energy economy; and (3) how to handle the implications of stranded assets for investors, pension plans and tax revenues. This could unleash the cash currently sitting moribund in the coffers of financial institutions and provide leverage from $10 trillion to more than $30 trillion. Such amount over a period of 10 years can provide an important push for the economic transition towards the carbon free society most nations seem now committed to. The result could be significant economic growth and employment opportunities. But we will have to develop clear plans on how to manage stranded assets; how to avoid a sharp rise in inflation due to the financial stimulus; and how to mitigate the shift in the tax base from high contributing hydrocarbon corporations to IT and new economy and service companies, which up to now pay significantly less tax.
COP21 is not just about an environmental agreement. It really needs to turn into a larger financial agreement. Without this broadening of scope, the environmental transition is likely impossible. The real hope for COP 21 is that we are on track to win the war on carbon.
It’s hard to imagine the magnitude of the transition the energy industry is in. Not will be, but IS. The race is on to capture the upside of a more sustainable economy. Instead of just talk and paper agreements, hopefully we will leave Paris with clear financial marching orders that will force the acceleration of change the world not only deserves but needs. Time is ticking, the race is on.
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