A Low-Carbon World – Are We Finally Getting It?
As we move closer towards the Paris climate talks, something interesting is happening. Ever more stakeholders seem to be ready to be part of the solution. Negotiations that were earlier bogged down in zero-sum confrontations suddenly have a new fluidity and a ring of can-do optimism about them. Why? … Actually, the new question seems to be: “Why not?” Creating a low-carbon world is seen less as a burden and more as an opportunity.
In developed economies, we are ready to revamp existing industrial and resource infrastructures. In developing economies, we are realising the incredible opportunity of directly building a low-carbon infrastructure. What is clear now is that we have achieved technological as well economic convergence: building a low-carbon world is both technologically feasible and economically attractive. In addition, now we finally seem to reach cognitive convergence: recognising that changing now is a smart choice.
We have all the technologies we need to combat climate change: resource efficiency, renewable energies, and carbon sequestration. There are, of course, challenges. For example, maintaining grid stability when using large amounts of fluctuating renewable energy sources is tricky. However, these challenges are procedural, not fundamental. They can be addressed and solved as we move along. It is worth remembering, that such a piecemeal approach is the very essence of what we know as progress. We expand the Internet, we conquer space, we improve agriculture, and we speed up communication and movement. Transitioning to a low-carbon future is just one more area of progress that is already happening.
Economically, the story is more complicated. On a macro scale, a transition to a low-carbon economy is a good choice. The IEA estimates that switching from the current fossil fuel energy system to a low-carbon system by 2050 would cost $44 trillion. That sounds like a lot of money. But consider this: it would be less than 1% of global GDP until then, and associated efficiency gains would actually make this a positive investment choice. This is without taking into consideration the economic benefits of not having climate change – which are certainly very, very large but difficult to reliably predict. What is clearly lacking is a global political solution such as the Montreal Protocol provided for Ozone Layer depleting gases in 1987.
Without a political framework that offers a long-term approach and puts a price on externalities, the economic case for low-carbon solutions was too weak in the past. The returns were not attractive enough for consumers and investors to accelerate the required transition. Governments stepped in with technology-targeted subsidies (e.g., for renewables). They also tried to price carbon (through cap-and-trade systems or taxation). The results seemed disappointing: these efforts did not alter the global emissions trajectory. However, at a second glance, the results were actually very good: governments created sufficiently large (albeit niche) low-carbon markets to help reduce the cost of technologies rapidly.
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As a result, politics now matters far less. We are reaching economic convergence at the micro level. Falling low-carbon technology costs (they are falling much faster and, more importantly, more predictably than those of fossil fuels), now make investing into an energy transition an attractive choice for investors, companies, consumers, and countries alike – just based on the economics and strategy of energy and resource use, leaving aside climate or even local pollution externalities.
That is very big news. It is the opportunity of a lifetime. Now the question is: how to make this known and understood as rapidly as possible? This is the last required convergence – the cognitive convergence: an understanding that low-carbon solutions are not only needed from a global survival point of view, but offer immediate, tangible, and specifically attributable benefits to those deploying them. This sets in motion a cultural shift. To accelerate it, we need to unlearn old “truths” and open up to new possibilities. Our path dependencies are mental more than structural. Companies (and countries) that are heavily invested into the high-carbon economy might not be able to change fast enough. New players will emerge.
Here are three examples of how this cognitive convergence is already happening, from the point of view of a country, a company, and investors/consumers:
India has long held the view that it needs an unrestricted right to emit in order to develop, and that it has a moral right to do so because of its low per capita and historical emissions. Any attempt to reduce emissions was seen as a cost that would delay the economic advancement of its overwhelmingly poor population.
This position is now changing: India is turning into a constructive partner at global climate negotiations with ambitious Intended Nationally Determined Contributions (INDCs) for greenhouse gas reduction. The country commits itself to reducing the carbon intensity of its GDP by 33–35% by 2030 (against the 2005 levels). A key lever to achieving this is to shift towards 40% clean energy sources, including as much as 250 GW of solar power and improved energy efficiency.
India’s main goal is not to stop climate change (despite the fact that it is one of the most vulnerable countries to the effects of climate change). It is shifting to a low-carbon economy because it makes economic sense. With rising energy demand and few viable supply options, energy efficiency and competitive solar power are very sensible choices. The fact that such a strategy also reduces local pollution and global emissions is welcome and can be used on the international stage, but it is not the driver behind it. The same can be said of the recent shift in Chinese and US climate positions.
Now, look at a company: the German industrial conglomerate Siemens. Its CEO, Joe Kaeser, has recently announced that “taking [climate] action is not just prudent – it’s profitable.” The company declared that it will become carbon neutral by 2030 (relating to emissions directly linked to own economic activities, equivalent to 2.2 million metric tons of carbon in 2014). It will start by investing $110 million into energy efficiency – with many of its own technologies. It expects a 5-year payback time, with savings of $20 per annum. In addition, Siemens will invest into distributed energy and buy clean power from the market. Kaeser writes that “the opportunity is clear: We have the technologies, we have the business incentive, and we have the responsibility. Now all we need is the commitment.”
A third example are the choices made by investors and consumers around the world in unsubsidised energy markets: Chinese manufacturers are investing into energy efficiency, Indian businesses are buying into renewable energy plants, German power consumers are spending on solar batteries. These unsubsidised markets are propelled by a global investment community that is beginning to understand the opportunities of low-carbon business and the risks around high-carbon businesses. Elon Musk, seeking to disrupt entire industries with electric cars, solar business models, and cheap battery storage; European utilities investing into renewable energy projects around the world; the $900 billion Norwegian Sovereign Wealth Fund divesting from high-carbon businesses; and Japan’s Softbank investing $20 billion into the Indian solar market are just some examples.
As governments, companies, consumers, and investors around the world make that cognitive shift and understand the specific benefits of low-carbon technologies, there is now a good chance of an urgently needed global energy transition. And the best news is: if we get it on track, it will accelerate all by itself.
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