Is the Net Zero Economy Possible?

The COVID-19 pandemic brought significant economic destruction and serious healthcare concerns to the world, the likes of which we have not seen before. The crisis also stressed an issue we cannot afford to ignore any longer – Climate Change.

Daily emissions went down by 17% during the peak of the lockdowns due to reduced activity in transportation, industry, aviation– this was a quick but necessary break for nature. . The pandemic should serve as yet another warning when it comes to the Climate Change crisis - it is indeed a systemic risk. Decarbonization, and the goal of a Net Zero world should be central to governmental policy and investor concerns.

What is Net Zero?

Net Zero is a state in which the quantity of greenhouse gas emissions produced is offset by that which is removed from the air, in a process called decarbonization.

Climate Change risks were first recognized by UNFCCC in 1992, whose goal was to achieve “stabilization of greenhouse concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate change.” The first steps towards addressing this was in 1997 with the Kyoto Protocol, which imposed limits on all countries to keep emission production under a cap.

The next important development happened in 2015 with the famous Paris Agreement, with a consequent UN Climate Action Summit 2019 several years later reinforcing the goal of achieving Net Zero emissions by the year 2050 on a yearly basis. In the last couple of years, developments have slowly been gaining pace: the European Commission passed a consequent law aiming for net-zero emissions across the region; international shareholders and large corporations are engaging into legally-binding resolutions demanding decarbonization; and impact investing has been gaining momentum among the largest asset managers around the globe.

When did carbon dioxide emissions reach dangerous levels and how?

Carbon emissions have risen drastically since the Industrial revolution. To understand the scale of the issue, we need to see the exponential growth of gas emission last couple of decades and how devastating it has been for our planet. The graph below shows the dramatic historical increase in CO2, with continued projected increases for the next two decades if no aggressive measures are taken:

The main economic contributors to the carbon production are currently power, agriculture, and transport, and the largest culprits are the U.S., China and India.

Paths To Achieve Carbon Neutrality:

The emissions in each sector listed above can be mitigated via innovations and technology – in fact, most of the reduction in carbon emissions by 2050 will be coming from technology, automation, and digitization. A comprehensive research by Morgan Stanley outlines five such technological solutions: 

Renewables

This is probably the most broad and diverse category on the list – from solar and wind energy being the most popular and utilized globally, to hydroelectric, ocean and geothermal.  

Electric vehicles

Transportation is one of the largest single contributors to gas emissions. Global corporations, incentivized by government policy, are helping to bring various electric vehicles options to market. The highest level of market penetration is currently in the EU and China, whereas the U.S. is lagging behind.

Hydrogen

Green Hydrogen has been gaining traction as well. This energy source could be described as a derivative of a renewable – when renewable electricity is produced, the excess can be processed through tanks of water, stored separately and used for various purposes such as an alternative for natural gas or for transportation fuels.

Carbon capture and storage (CCS)

CCS is an ability to capture and store up to 90% of carbon dioxide and thus it is a critical component on our way to Net Zero. Today, only under 20 coal plants have this technology, to achieve the Net Zero goal over 1,700 should be in place.

Biofuels

Biofuel is another way to generate power, made from organic matter. Its three main sources are foodstock, waste and wood and algae.

To be comprehensive, Nuclear power should be added to this list. Even though there are numerous legitimate debates regarding nuclear energy and potential safety concerns, this is a zero-emission energy source with proven science that generates power through fission, while producing minimal waste.

Certainly, R&D, implementation and execution costs for the above listed technologies are substantial. Both government and private resources must be utilized to address this gap. In terms of actual spending, Morgan Stanley’s report projects the global economy would require close to $50 trillion in investment by 2050. But there are more benefits to this process than we might have initially thought.

What would Decarbonization bring us?

First and foremost, the Net Zero program will impact the gas emissions and slow the effects of Climate Change – this should lead to a long-term decrease of environmental expenses and consequent healthcare costs. Meanwhile, it will also bring other strategic and economic benefits such as supply chain and production efficiency, asset optimization, inequality reduction and increased human welfare, safety and security. Another significant and highly important benefit of investments in clean energy, transportation, industry, agriculture and other sectors is job creation.

Currently the U.S. green energy industry generates close to $1.3 trillion in annual sales and employs 9.5 million jobs. In the next three years the sustainable recovery plan would create an additional 9 million new energy-related jobs in the U.S. and 27 million jobs worldwide. By the year 2050 the job growth could reach 63 million in the green sectors.

This measure would have an compounding effect as energy efficiency would deliver savings to businesses and consumers, thus leaving more income for business development and expending additional jobs in other sectors. The Net zero program will be a boost for the entire economy and a sustainable recovery plan set forth by the International Energy Agency is estimated to drive a 3.5% marginal increase of the global real GDP in 2023.

The efforts to tackle the green energy revolution also creates another important economic opportunity for the United States in particular – that is to lead the program by example and become an exporter of new advanced clean technology.

Conclusion

Is a net zero world an ideal but unreachable dream? Not if we all commit to it and avoid the Prisoner’s dilemma. There must be a dialogue, coordinated actions and full engagement across investors, governmental authorities, trade unions and other government and private institutions. The government needs to create a broad variety of tax incentives, subsidies, as well as commit to direct investments. Unfortunately, the current U.S. administration pulled out of the 2015 Paris Agreement, so large corporates had to act alone. Giants such as Disney, Microsoft, Nike, Starbucks and Mercedes-Benz and others have pledged to be carbon neutral by 2050 or earlier. Combined, the group represents 68% of the U.S. GDP, 65% of the U.S. population and are responsible for over half of all U.S. emissions.

Today, we have several examples of countries implementing green energy practices – Iceland, for example, achieved almost 100% clean energy running mostly on hydropower and geothermal power. Costa Rica’s “pura vida” is another successful case with 99.62% of electricity coming from renewables in 2019. When smaller countries succeed in this strategy, they set a blueprint for larger economics like the U.S. and China to follow. The global investor community needs to understand that carbon emission is both an investment and humanitarian risk. A world with clean energy would create a much safer environment with increased quality of life and a more resilient business environment. Focusing on long-term strategy over short-term goals will pay off in this case.