The world is a different place following COP27 (the United Nations Conference of the Parties annual climate change convention) than after COP26, with war in Ukraine, global inflationary shocks, food & energy shortages and deglobalization. Managing these crises without compromising on net zero emissions targets will be challenging. The world has seen increased fossil fuel use to overcome short-term energy shortages for example, must now invest in a range of alternatives more quickly for economic and political reasons and investors face tighter access to capital. However, we believe this backdrop could actually accelerate the energy transition as net zero is no longer just about saving the planet.
Faster investments could bring forward cost parity of many clean energy alternatives. Nations are deploying these alternatives at a greater scale to reduce emissions, but also to target energy security, economic resilience (by reducing long-term energy prices) and to reindustrialize their ailing economies given the vast investment required (between $100-$275 trillion (tn) to 2050 per Bloomberg New Energy Finance (BNEF)/McKinsey).1,2
Managing crises without compromising net zero is tough in short term
To deal with the current energy crisis, near-term policy choices are being made that may appear at odds with net zero goals. Subsidized energy bills, diversified energy sources, demand destruction and extending the use of fossil fuel and nuclear assets are some of the options on the table. European governments alone have already committed to protecting businesses/customers from the worst effects through subsidies/bailouts and are expected to spend on new and expanded fossil fuel infrastructure and supplies, such as imported gas & coal to fuel previously mothballed power plants (source: Breugel, Ember Climate, Financial Times). Zero-emission alternatives may be unable to fill the gap to avoid this in the short term, but the motivation to increase their adoption is now far greater.
Economics and Policy align for a ‘Clean Techceleration’
The new geopolitical world order emerging could be the net zero missing link, in our view. Environmental goals are now aligned with political interests to achieve energy security. The economics of renewables and clean technologies continue to be favorable, decreasing by as much as 90% since 2010, becoming the most economical choice, or with a clear pathway to get there with greater scale. Moreover, the incentive to reshore supply chains even faster and secure resource independence has grown. Europe aspires to replace 40% of its gas formerly imported from Russia; the U.S. aims to balance China's dominance of cleantech and critical minerals, such as the 60% of rare earth production that comes from China.
>$150tn cost but incentives go beyond the environment
Net zero will be costly. The estimated investment cost of decarbonization is likely to go up owing to cost of funding and inflationary pressures. But this could be partially absorbed by a green economy GDP (Gross Domestic Product) and jobs boost where every $1 spent on renewable power generation requires up to $1 invested in energy infrastructure. Furthermore, regional superpowers are prioritizing investments to achieve these targets by ramping up 'Climate Wars' competition and a race for 'cleantech sovereignty'. The Inflation Reduction Act and RePowerEU highlight that energy in particular is now a matter of national security, as are the technologies and resources required to decarbonize.