There is no silver bullet to tackling climate change. It’s likely the answer to getting to net-zero emissions by mid-century is to deploy everything we have, but faster. 2050 is the target date for net zero that the Intergovernmental Panel on Climate Change (IPCC) says is what’s needed to keep global temperature rises to below 2C and preferably 1.5C.
First step: more electrification
Reducing consumption and increasing energy efficiency will play a large role. As many have outlined, however, including Bill Gates in his recently published book on the subject, additional efforts are required: electricity grids need to be decarbonised and this low-carbon power needs to penetrate into as many sectors as possible by electrifying them.
For those areas that cannot be electrified, other technology will be needed. This means looking to alternative fuels or capturing carbon emissions, either directly from these activities or by removing CO2 from the atmosphere to compensate for them.
Great technological strides have been made in the electricity sector over recent decades. Targeted government support and public and private investment have enabled the price of wind and solar power to fall to levels that are now more competitive than conventional gas-fired power in many locations.
Solar PV, as one example, has seen cost falls of over 80% over the last decade. Around USD 300 billion a year is being spent on renewables. This money is increasingly providing a greater amount of low-carbon electricity capacity due to these falling costs.
Carbon capture – targeted deployment
In hard-to-abate sectors such as heavy industry, where electrification is not an option due to high heat requirements, carbon capture may be the solution. As the Energy Transition Commission outlines, carbon capture and storage (CCS) and carbon capture and usage (CCU) should be used solely in those industries that cannot decarbonise through electrification. CCU involves chemical techniques taking CO2 out of the flue gas of an industrial process for it to be transported underground or used for other means.
For CCU to be a success, certain factors need to be addressed.
The first is allocating enough resources to its development into a mature technology. Now, it is some way from being commercial. While certain power-sector pilot projects in North America are reportedly running effectively, concerns have been raised over the performance of others and, as a result, their uncertain returns for investors.
The second is offering an effective means of valuing captured CO2. A worthwhile carbon price is one way to do this. Currently, many projects are deemed economically viable by using the captured CO2 to push greater amounts of oil out of the ground via enhanced oil recovery – a process that would appear to be clearly at odds with climate change targets.
CCU has other potential uses. It can play a role in developing low-carbon synthetic aviation fuel.
In addition, most IPCC scenarios for 1.5C rely to some extent on negative-emission technologies to take CO2 out of the atmosphere, through either bioenergy and carbon capture and storage (BECCS) or direct air capture. It’s worth noting both of these technologies have theoretical issues around the energy and water use or land space that would be required if they were deployed at scale.
Blue and green hydrogen
Many COVID-19 green recovery plans are targeting the hydrogen sector. While traditional means of producing hydrogen via steam methane reformation emit CO2, carbon capture can play a role here. Integrating it into the process to capture the emissions results in the creation of ‘blue hydrogen’. However, the overall efficiency of blue hydrogen in addition to the environmental concerns around CCS raised above are problematic and do not make this solution the most promising one.
‘Green hydrogen’ is a different beast. It enables the gas to act as somewhat of a vector for renewable electricity to be used in heating, transport or industrial activities such as steel production. Through this technology, excess renewable electricity powers electrolysis to create hydrogen from water that can then be used in boilers or fuel cells.
Many argue it’s more efficient to simply electrify and use batteries to store excess renewable energy when supply is high and demand is low. This will avoid the energy losses inherent in creating, storing, transporting and using the hydrogen. As such, both the Energy Transitions Commission and the International Energy Agency (IEA) argue hydrogen should, again, be reserved solely for activities that cannot be electrified.
Exhibit 1: To get to net zero, low-carbon generation needs to scale up significantly and electrification will be key, with hydrogen and CCUS tackling the areas that can’t be electrified
Source: Energy Transitions Commission
Technological development needs to be faster
Despite forming a significant part of green recovery and climate change plans, the issue with both green hydrogen and carbon capture is that major acceleration is needed to bring both of these technologies up to speed.
The 2020 Energy Technology Perspectives report highlights that the technologies required to meet around 75% of the emissions reductions needed for net zero are currently not mature. It recommends that a mix of public and private finance be rapidly deployed to push these to maturity.
There is a large opportunity: the Energy Transitions Commission estimates that to develop these technologies and others not explored here, including bioenergy, to decarbonise aviation, heavy goods transport, buildings and agriculture, will require between USD 1 trillion and USD 2 trillion a year in investment.
Targeting this investment effectively can ensure the path to net zero is realised. We have the means to get there, but a lot of work is needed.
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
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