CLIMATE TRANSITION
Deepening disruptions
The consensus on climate has shifted markedly in the last few years. At COP 26, the latest UN Climate Conference, nearly 200 countries representing over 90% of global GDP signed the global climate pledge—a historic level of consensus.1 Perhaps even more impactful, according to the Net Zero Asset Managers initiative, the investing world reached a tipping point in 2021 with over half of global assets under management (some $57 trillion) committed to supporting a goal of Net Zero by 2050.2
The pressure to change is not just coming from the top down, but also grassroots. Workers, particularly younger ones, are demanding their employers align with their values on ESG concerns, and consumers are increasingly voting with their pocketbooks for more environmental choices.
The convergence of regulation, dollar flows, and employee and consumer sentiment—not to mention the rapidly falling costs of green technologies—will accelerate the move away from fossil fuels.
Yet, the transition to a green economy will not be simple, cheap, or quick. According to Goldman Sachs, $56 trillion in global infrastructure investment is needed to achieve net-zero carbon emissions by 2050.3
While there will be much debate over whether the investments will be enough to change the climate tide fast enough, there is no question that the level of investment will radically change how we live. Renewable sources of energy such as wind and solar now account for over 70% of new energy installations and represent the cheapest source of new electricity generation.4
The transition away from internal combustion engines (ICE) vehicles to electric vehicles (EVs), which are gaining market share particularly in China and Europe, is well underway. Electric vehicles accounted for more than 7% of global auto sales in 2021, up from less than 3% in 2019, according to research firm BNEF—and likely would have been higher without the supply constraints hobbling the auto sector in 2021.5
Yet, while the tide is turning, the transition will take years. There is still an enormous, installed base of both energy generation infrastructure and traditional gas-powered vehicles to roll over before we are primarily running on renewables.
For example, AlixPartners projections show that ICE-only vehicles will still be the majority of new cars manufactured in the United States through at least 2033, and non-ICE vehicles won’t become the majority of new cars until after 2040.
While still in the "early adopter" phase, EVs are set to become meaningful by 2025 with the parc following sales.
Moreover, the transition will require transformations in lots of areas—as economies address second-and third-order effects.
For instance, grid operators claim to be able to handle increased BEV charging loads, but they have not fully modeled the impact of multivehicle charging occurring simultaneously. New York City, for example, is expected to have 2 million electric vehicles by 2040. At peak charging times, this implies the same load on the electric grid as 40,000 new high-rise buildings.
Nor have we fully appreciated the energy infrastructure required to support our increasingly digital world. Today large data centers utilize between 3-10% or global energy production, it could as much as 20% by the end of the decade. A single large data center can require as much energy output as produced by an average natural gas-fired combined-cycle unit.
Advanced economies are planning hundreds of these data centers, putting enormous strain on the same underlying power grids that are being stretched to support new sources of distributed renewables generation and the emergent electric vehicle charging demand.
The disruption will go well beyond energy consumption. For example, most countries have an entire infrastructure built out around gas stations, including a huge amount of convenience store retail. As EVs take an ever-larger share of cars on the road, expect widespread disruptions in the support infrastructure of the gas-car economy.
At the same time, climate change is not just a long game.
Despite our moves toward new technologies to address long-term climate impacts, there are multiple near-term impacts attributed to a changing climate—most notably, the increased incidence of extreme weather events, like hurricanes and wildfires, causing massive economic destruction and displacement in their wake.
In the United States, four of the six most destructive years for weather events since 1980 have occurred in the last five, with a combined cost of nearly $650 billion, or an average annual cost to our economy of roughly 1% of US GDP each year.6 These are driving a meaningful set of unpredictable, yet very real kinds of business disruptions.
Grid resiliency projections regarding EV penetration often overlook looming impacts from data storage centers, cloud, and AI.
WHAT DOES THIS MEAN?
There is no silver bullet for addressing the climate change challenges. While we can envision a world powered with renewables, the supply shocks and price spikes that the world witnessed in 2021 show that we need a practical path to making that transition, particularly as we dramatically increase our demands on energy generation and the grid.
Migration from fossil fuels will require patience, discernment, and willingness to effectively navigate the economic consequences, geopolitical threats, energy availability, and tradeoffs for driving decarbonization responsibly and comprehensively.
By focusing on capital-intensive, lower-labor effected, and high-carbon generating sectors, companies and governments can deploy solutions in a disproportionately meaningful way. Specific areas where these impacts will have the most impact include power generation, refining, petrochemicals, fertilizers, mining, and steel—and we should expect profound changes.
Occidental Petroleum, one of the largest oil producers in the U.S., for example, is making ambitious moves to launch carbon capture technologies, as a way to offset the carbon stemming from its core business.
Similarly, existing emissions can be offset by replacing older direct combustion with more efficient combined-cycle plants, producing more power with less carbon.
Individuals also play a role, making personal choices to lower their own footprint. Most common options include installing home solar and smart meters, buying electric vehicles, moving closer to work to lower commutes, and using mass transit.
Nearly $90 billion was invested directly into green technology in 2021—a rate that is only accelerating. While not all of this will bear fruit, some of it will. We should fully expect to see decreasing pricing and increasing adoption of existing technologies as these evolve and gain scale—for example, renewables, batteries, and electric vehicles—as well as the emergence of a raft of new technologies. Every large beverage manufacturer, for example, has made a pledge to move into recyclable bottles by mid-decade. We should expect lots of innovation around packaging, recycling, and waste management.
Importantly, many of these innovations will likely be a convergence with other multiple forces—for example, supply chains are increasingly green, digitally-enabled, less labor intensive, and more productive.
We also should see meaningful investments in adaptation, as builders invest in storm-resistant materials, and governments make investment to harden infrastructure. Maersk, the global shipping giant, for example, is now making investments to solidify its port infrastructure against rising sea levels. Similarly, insurers are scrambling to reinvent products and offerings in the face of growing risk levels due to extreme weather disasters.
For the last three decades, pundits have predicted the rise of the green economy—yet most technologies were still emergent and not cost-effective, and there was not the regulatory or customer will driving the change. That has markedly changed—executives should fully expect the 2020s to be the beginning of the crossover to the green economy.
Executives should fully expect the 2020s to be the beginning of the crossover to the green economy.
For more of our insights on this topic, read “A realistic roadmap to decarbonization.”
References
1. United Nations, “COP26 closes with ‘compromise’ deal on climate, but it’s not enough, says UN chief,” UN News, Nov. 13, 2021, https://news.un.org/en/story/2021/11/1105792.
2. Net Zero Asset Managers Initiative, Progress Report, https://www.netzeroassetmanagers.org/NZAM-Progress-Report.pdf.
3. Goldman Sachs Research, Carbonomics, June 23,
2021,https://www.goldmansachs.com/insights/pages/
gs-research/carbonomics-gs-net-zero-models/report.pdf.
4. U.S. Energy Information Administration, “Renewables account for most new U.S. electricity generating capacity in 2021,” Jan. 11, 2021, https://www.eia.gov/todayinenergy/detail.php?id=46416.
5. BloombergNEF, Electric Vehicle Outlook 2021, Nov. 10, 2021, https://about.bnef.com.
6. National Centers for Environmental Information, “Billion Dollar and Climate Disasters,” https://www.ncdc.noaa.
gov/billions/.
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