The COP26 event was mostly about the politicians. Only politicians can create the necessary global collaboration, consistency of approach and the necessary transfer of resources from the richer developed countries to the poorer developing countries to achieve net zero emissions by 2050.
The challenge for politicians, and therefore the planet, is that climate change adaptation and mitigation is a long game and politicians generally tend to think in blocks of time commensurate with their respective election cycles. Their concern is that decisions made and implemented now will have initially negative implications for jobs, economic growth, living standards and votes.
Politicians will therefore only ever move incrementally. The good news is that we were never going to be solely reliant on politicians in meeting climate targets. Private capital and private leadership are critical to keeping +1.5 degrees alive.
Private capital can move faster than any government can. We are already seeing companies moving ahead more quickly than the measures their own governments are innovating.
But business still needs a long-term, comprehensive and well-articulated plan. If the pathway is clear, businesses will be able to plan and invest, consumers will be able to make better choices, and investors can invest with greater certainty.
The capital requirements to meet net zero by 2050 are substantial. Former governor of the Bank of England, Mark Carney, who assembled the Glasgow Financial Alliance for Net Zero, puts the required investment at US$100 trillion over the next three decades. That commitment won't be forthcoming without a plan.
Innovation has already led to a meaningful decline in the cost of renewables. However, this will only ever lead to a very slow reduction in the carbon intensity of the global economy, given the already heavy reliance on fossil fuels. At the same time, the global economy is growing and so too is energy demand, which makes emission-reduction targets harder to achieve.
New renewable energy infrastructure is vital, but it needs additional, conventional energy to build it. One example is transport, cement and sourcing other materials used in the construction of wind farms, particularly when these are built offshore.
Understanding and supporting the transition to a low-emission economy will be important. While there will be many successful new companies providing new solutions, the economy can't transition immediately. Some currently high emitters that are investing in transformational technology to reduce their resource intensity may prove to be long-term success stories.
The fundamental structure of the economy will change. Reducing greenhouse gas emissions will require a fundamental change in the energy value chain. The operational dynamics of nearly every business will change to some degree. This will lead to shifts in firms' competitive advantage, with the key metric of success being a firm's ability to minimise its carbon footprint. There will be losers, but there will also be winners.
And it will take time.
In the meantime, regulation will play an increasingly important role in reducing emissions, especially given evidence, particularly in Europe, that stricter environmental standards can assist in reducing emissions. The risk with regulation, as always, is the danger of perverse outcomes and unintended consequences.
Governments can also set targets for things such as the phasing out of coal and internal combustion engines, and the take-up of electric vehicles as a proportion of their respective motor vehicle fleets.
Carbon taxes and emissions trading schemes will need to do a lot of the heavy lifting. By making the cost of fossil fuels more expensive relative to renewables, a gradual shift to renewables will occur.
Price signals from rising carbon prices are already seeing producers and consumers needing to adapt. The incentives for changed behaviours and innovation will only increase as the price of carbon also rises.
That begs the question: what price of carbon is consistent with net zero by 2050?
The CRU Group's carbon abatement curve indicates that in Europe, businesses and consumers should be preparing for a carbon price of €140 ($232) per tonne, around double today's price, if Europe is to achieve net zero by 2050.
In New Zealand, carbon units in our domestic Emissions Trading Scheme are trading at $65 per tonne. In its final advice to government in June, the Climate Change Commission included modelled (as opposed to forecast) projections suggesting the carbon price would need to reach $140 per unit in 2030 and $250 by 2050 for us to achieve a significant reduction in emissions.
The precise answer will ultimately depend on government policy, the pace of energy innovation and the adaptation of the new technologies.
- Bevan Graham is the economist at Salt Funds Management, the issuer of units in the Carbon Fund. www.saltfunds.co.nz.
