This post is an assortment on the issues revolving around addressing climate change. The thrust of the post, as has been the view of this blog, is to strike a note of caution and highlight some of the serious challenges associated with the green transition that either get glossed over or do not get the requisite attention in the mainstream narratives.
1. For a start, it should be the first principle that the green transition is going to be a very rocky ride, with the strong likelihood of the fossil fuel industry co-existing for a long time.
As an illustration, in a sign of slowing energy transition, the FT points to BP raising its forecast for oil and gas demand.
The report showed oil demand would be about 97.8mn barrels per day in 2035 under BP’s scenario that captures the current trajectory of the global energy system. This is up more than 5 per cent compared with last year’s projection when BP slashed its growth forecasts for both oil and gas. When net zero targets — the reduction of CO₂ emissions by about 95 per cent from current levels — are factored into calculations, the projection for oil demand is 80.2mn b/d in 2035, up 10 per cent on last year’s forecast. The oil demand projection is 76.8mn b/d by 2050 in the current trajectory, according to the outlook, compared with last year’s figure of 73mn b/d. The world currently consumes about 100mn b/d of oil. BP’s forecast for natural gas demand for 2035 under the current trajectory was 3 per cent higher compared with last year. The oil demand projection for 2030 was last raised in 2022, while gas was raised back in 2018.
In the ongoing first stage of the green transition, the low-hanging fruits with the green transition are harvested and the cost of technologies declines. However, the lower cost of green technologies is not sufficient for the green transition. There are at least three other requirements - the phase-out of the old technologies and the costs associated with them, the phasing-in of the emerging technologies (charging stations, grid management, evacuation lines, storage etc.), and the mass market affordability of the new technologies even with the dramatic cost reductions.
There are formidable challenges to the realisation of each of these - costs have to be borne, market-making investments have to be made to catalyse markets, entrenched vested interests have to be swept aside, incomes have to rise etc. Even if governments can incentivise and convince investors to invest in the accompanying infrastructure, there’s only so much that can be done to bear the costs of the exiting old technologies and most importantly, ensure mass market affordability of the new technologies. These take time.
A realistic emission reduction path will have to follow the principle of affordability - the individuals, industries, and countries who can best afford the costs of the carbon emission reduction intervention should both bear the highest costs and should be the first to bear those costs. This would mean that the countries and individuals with the highest incomes, and industries with the highest margins should be made responsible for undertaking carbon reductions.
2. As another illustration of the rockiness with the green transition, as this FT article informs, several large corporations at the forefront of the ESG movement, including Unilever, Shell, and Bank of America, are backing away from their emission reduction targets.
Most have justified the failure to keep up the effort with a common complaint: political and regulatory factors outside companies’ control are slowing progress. These include a failure of standard-setting and clear regulation, insufficient government support, and delays in the rollout of new technologies… The missed targets matter because ambitions were for the most part relatively low to start with. The median goal of 51 major companies was to cut emissions just 30 per cent by 2030, the non-profit groups NewClimate Institute and Carbon Market Watch concluded in a joint study this year. This compares with the need to cut global emissions by 43 per cent by the end of the decade, which is what the UN body of scientists, the Intergovernmental Panel on Climate Change, says is needed to keep within the boundaries of ideally 1.5C of global warming above pre-industrial levels that was set down in the Paris agreement in 2015.
Fundamentally companies are quickly realising that it’s one thing to give lofty commitments, but an altogether different, even impossible, thing to walk the talk.
Many companies set their goals without realising how much work it would be to meet them… in April, Unilever announced it would scrap its flagship goals to cut plastic pollution and preserve biodiversity. In some cases the group was “simply not ready”, recently appointed chief executive Hein Schumacher said. “When the initial targets were set we may have underestimated the scale and complexity of what it takes to make that happen,” he told journalists after a first quarter trading update… In some industries, technology is cited as a barrier to action. Barend van Bergen, chief sustainability officer at Roche, says that heating buildings and powering manufacturing processes in a clean way remains a “challenge” for the Swiss healthcare group… A surge in electric vehicle exports from China to Europe has meant automakers planning to shift away from combustion engine production have, in some cases, slowed their efforts. Europe’s largest carmaker Volkswagen no longer refers to its previous voluntary target to cut CO₂ emissions from passenger cars and light commercial vehicles by 30 per cent between 2015 and 2025. Instead its new — delayed — goal aims to cut these by the same amount between 2018 and 2030…
The availability of clean energy is another problem. The International Energy Agency warned this year that the global rollout of renewable energy capacity is being undermined by policy uncertainty, investment gaps in grid infrastructure, and barriers to obtaining permits. Kimberly-Clark, the US maker of Kleenex tissues and Andrex toilet paper, says “chronic grid delays” are slowing its transition to clean energy. This could make its goal of powering its UK production facilities with only renewables by 2030 more difficult to reach.. oil and gas companies increasingly argue that they cannot cut their overall emissions from fossil fuels faster than the rest of society. When Shell ditched its 2035 greenhouse gas emissions reduction target in March, chief executive Wael Sawan blamed uncertainty over “the shape of the energy transition and the pace of the evolution in different countries”…
Bank of America is among a group of peers in North America to have watered down their climate policies following this. In the run-up to the Glasgow climate conference in 2021, the bank made a flagship pledge to no longer directly finance new thermal coal mines, new coal-fired power plants or Arctic drilling projects. But in the bank’s latest environmental and social risk policy, dated December, it dropped the explicit ban, saying that the most polluting types of fossil fuel would be subject to an “enhanced due diligence” along with the financing of payday lending, fire arms, and prisons… Sustainability-linked bonds were meant to bring rigour to green claims by tying companies’ borrowing costs to whether they could achieve their climate promises. Global issuances of this type of bond fell to just $9.2bn in the first three months of 2024 compared to a peak of close to $100bn in the same period in 2021, according to Barclays analysis.
The prevarications and flip-flops of corporates mirror those of governments, thereby raising serious doubts about the reliability of the emission reduction targets laid down in Paris and elsewhere.
3. For all talk about the attractiveness of green investments, the fossil fuel economy has been surprisingly resilient and even booming. The NYT reports that the oil industry in the US is extracting more crude than ever before, especially from the shale rock formations, and the stocks of oil and gas companies are at or near record levels.
That the price and demand for oil have been so strong suggests that the shift to renewable energy and electric vehicles will take longer and be more bumpy than some climate activists and world leaders once hoped… Since 2021, oil and gas wells in the lower 48 states have generated more than $485 billion in free cash flow, the money left over after spending on operations and new projects, according to estimates by Rystad Energy, a research and consulting firm. In the decade prior, the industry spent nearly $140 billion more than it took in… While oil makes up a smaller portion of the global energy mix than it did before the pandemic, partly because of the growth of electric vehicles, thirst for the fuel has continued to climb. Global demand reached a record of more than 100 million barrels a day in 2023, up 2.6 percent from 2022, according to the Statistical Review of World Energy.
4. Quite apart from the persistence of the fossil fuel industry, new technologies are struggling to take off. The belief that the rapid success of solar and wind energy can be extrapolated to other industries is being belied.
Take the totemic example of green transition technology, electric vehicles (EVs).
The slowing EV adoption in advanced countries coupled with the restrictions being imposed on imports of cheap Chinese EVs has triggered a debate there about whether they’ll fall behind both in the climate change mitigation fight and also in the EV adoption race. EVs made up just 9.5% of new cars in the US in 2023, a far cry from the target of 50% by 2030.
Sample this from a recent FT long read on stagnating EV adoption in the US
Biden has pledged to lower US greenhouse gas emissions to 50-52 per cent below 2005 levels by 2030, with widespread EV adoption a significant part of that ambition. But he wants to achieve it without recourse to imports from China, the world’s biggest producer of EVs and a dominant player in many of the raw materials that go into them. Washington has set out an industrial policy that hits Chinese manufacturers of cars, batteries and other components with punitive tariffs and restricts federal tax incentives for consumers buying their products. The idea is to allow the US to develop its own supply chains, but analysts say such protectionism will result in higher EV prices for US consumers in the meantime. That could stall sales and result in the US remaining behind China and Europe in adoption of EVs, putting at risk not only the Biden administration’s targets but also the global uptake of EVs. The World Resources Institute says between 75 and 95 per cent of new passenger vehicles sold by 2030 need to be electric if Paris agreement goals are to be met. “There is no question that this slows down EV adoption in the US,” says Everett Eissenstat, a former senior US Trade Representative official who served both Republican and Democratic administrations. “We are just not producing the EVs the consumers want at a price point they want.” … The price for a new EV averaged just less than $57,000 in May, compared with an average of a little more than $48,000 for a car or truck with a traditional engine… An EV priced at $25,000 would have been tempting, but only five new electric models costing less than $40,000 have come on to the US market in 2024.
The administration is attempting to reconcile its industrial and climate policies by offering tax incentives to consumers to buy EVs and by encouraging manufacturers to develop US-dominated supply chains. Tax credits of up to $7,500 are available to buyers of electric cars. But the full amount is only available on cars that are made in the US with critical minerals and battery components also largely sourced in the US. That means few cars qualify for the maximum credit. Two years on from the passage of the Inflation Reduction Act, which set out Biden’s ambitious green transition strategy, there are only 12 models that can actually score buyers the full $7,500… US trade officials draw parallels with the solar industry. The cost of photovoltaic panels fell worldwide as Chinese manufacturers, benefiting from subsidies, lower labour costs and growing scale, came to dominate the industry. That has been a boon for consumers, but resulted in production and jobs shifting from the US to China. Washington does not want a rerun of this process in the automotive sector.
The US government hopes that the tariffs are buying time for US firms to develop their supply chain networks and create affordable models without relying on the Chinese. The alternative is a repeat of what happened in countless industries over the last two decades and allow US automobile manufacturing to die out, and along with it the US manufacturing base to wither away.
Recovering lost ground by creating supply chains and developing affordable EV models will take a few years. It’s been less than two years since the issue has become a serious enough national priority with associated resource allocation. It’s surely premature too early for its results to start showing. The US boasts of the most dynamic private sector globally and its innovation ecosystem is unmatched. There’s nothing to suggest that given time, resources, and a level playing field, coupled with a national commitment, the US automobile industry cannot come up with world-class affordable EVs. It should not be forgotten that the EV industry itself emerged in the US and that too not too far in time and Tesla continues to be an innovation leader in the industry.
The revival of the EV industry in the US (and other advanced countries) is also important for the future of manufacturing in the country and weakening the dominance that advanced countries have ceded to China across manufacturing industries. It’s critical not only for the future of the green transition but also to prevent the inevitable future weaponisation of their manufacturing dominance by the Chinese. It’s a near-existential requirement.
On a separate note, arguably the single biggest beneficiary of the US protectionism is Tesla, which has over 55% of the EV market share. Faced with a rapidly diminishing share in the Chinese market and buffeted by Chinese competition elsewhere, the US market is the one sustaining Tesla. This also gives Tesla the market and the time to develop affordable EVs and also develop its revenue stream around its EV technology platform. If US did not undertake protectionist measures on EVs, it’s not a stretch that Tesla might have meandered and faded off. Such fortuitous circumstances, completely outside the control of firms, often underpin many success stories.
5. The FT article also has a pointer to the rising importance of hybrid technology.
Last month, executives from GM, Nissan, Hyundai, Volkswagen and Ford all said that tapping into demand for hybrids was a priority. Ford chief executive Jim Farley told investors at a conference “we should stop talking about [hybrids] as a transitional technology”, viewing it instead as a viable long-term option. Hyundai said it was considering making hybrids at its new $7.6bn plant in Georgia. US competitor GM said in January that it would reintroduce plug-in hybrid technology to its range, though chief executive Mary Barra recently affirmed she still saw EVs as the future.
Another article points to how Toyota is leading the automobile industry in Japan, US, and Europe to bet on hybrid vehicles.
Toyota has since developed a new generation of smaller engines with a unique design using shorter pistons that promises higher fuel efficiency when used alongside batteries in hybrid vehicles. The engines can run on diesel and petrol as well as carbon-neutral fuels such as hydrogen or so-called e-fuel. The world’s largest carmaker by sales is betting that the continued investment in the profitable fuel-based technology will pay off at a time when consumers are choosing hybrids rather than fully electric vehicles due to concerns about cost and driving range… Toyota did not disclose specifics, but its new 1.5L engine is expected to roll out around 2027, with fuel efficiency improved by 12 per cent in the sedan class and a thermal efficiency higher than its previous record of about 40 per cent. France’s Renault has also partnered with China’s Geely to develop hybrid powertrains and internal combustion engines…
But Toyota, and others such as Stellantis and Ford, are trying to preserve highly profitable hybrid sales for as long as possible… Stellantis, which owns the Peugeot, Citroën, Fiat and Jeep brands, plans to sell electric vehicles for higher-end consumers, while bigger sales and profits are expected from “mild hybrids” — cars which rely on the traditional combustion engine for powering the vehicle but also use the battery to boost performance… Carlos Tavares, the chief executive of Stellantis… estimated that EVs were 40 to 50 per cent more expensive in total production cost than internal combustion engine cars and parity would not be reached for another few years.
I have blogged here about the importance of hybrids in the green transition to EVs. The EV-hybrid debate and the struggles of the EV industry is a good example of the need to be realistic and strategic about the green transition.
Much the same dose of realism should inform the strategies pursued on the transition from fossil fuels to renewable sources. For example, natural gas and nuclear fuels should have important roles to play in the transition phase, which can be long-drawn.
6. China is the test case for national green transitions. It faces challenges on several fronts.
For all its spectacular solar power capacity expansion, China’s thermal capacity expansion and slow rate of retirement of older plants is disturbing.
The key indicators of concern are the rise of new coal-fired power stations in China and the slow rate of retirement of older coal plants. Last year, China added new coal plants with the capacity to produce 47.4 gigawatts of power — which accounts for two-thirds of all global coal-capacity additions — while retiring only 3.71GW, according to Global Energy Monitor, a research group. GEM also noted that the pace of construction of new coal-fired electricity generation in China was nearly quadruple that of 2019, when the country hit a nine-year low in new coal builds… the message from Beijing to local government officials across China is that they need to oversee an “orderly transition”. This, he adds, has been phrased in the Chinese context as, “before you find your new rice bowl, don’t break your old rice bowl”.
The spectacular addition of renewable capacity (China made up 65% of global wind capacity and 60% of global solar capacity in 2023 according to Wood Mackenzie) is now surfacing challenges on evacuation infrastructure and grid stabilisation.
China’s creaking grid represents a major constraint to progress on its green energy transition… Despite China’s huge spending programme, there are signs of increasing pressure on the distribution and transmission of electricity. Over the past year, more than 100 counties and cities in five provinces have suspended new small-scale solar operations from connecting to distribution lines. At least 12 of China’s 34 province-level administrations have either encouraged or demanded solar operators use battery storage to ease the burden on the local grid, demonstrating that limits have been reached in many regions… Yunnan, the debt-ridden south-western province, is facing a potential shortfall of about 10 per cent in power supply this year despite doubling the installed capacity of renewable energy last year, according to local media reports. The situation is similar in Qinghai, in the country’s north-west, where most of the power generated by the region’s solar farms is wasted during the day. The province is forced to purchase power from coal-fired power stations in neighbouring provinces to meet demand in the evening… Fitch analysts noted that as renewable energy capacity additions continued to break records, solar curtailment rates at a national level had doubled in the first quarter of this year to 4 per cent.
This is despite the country making up more than a third of the global transmission grid expansion, including the addition of more than 0.5 million km of lines connecting its resource-rich western and northern provinces with load centres in the east.
7. The climate finance debate has two headline problems. One, the estimated numbers thrown around are surely impossible to mobilise and most likely higher than required. Then there’s the issue of who bears the associated costs, and whether they can bear them. I discussed the issues in detail in this co-authored paper. It’s essential that important stakeholders face up to this reality to make any meaningful progress with addressing the problem.
In this context, the one thing that worries me about the climate finance debate is the belief in influential circles that climate transition can be achieved without straining government finances, as the IMF has claimed. The FT has an assessment,
Estimates by its staff, presented at a recent conference, suggest that co-operation on decarbonisation could ensure countries meet their net zero targets at an overall economic cost of just 0.5 per cent of what global GDP is expected to be by 2030. For most countries, the fiscal impact would be positive or neutral by the end of the current decade, although some would incur later losses... But there’s a snag. The IMF estimates assume a global accord to price or tax carbon and redistribute the proceeds to the developing world, while also scrapping current subsidies for fossil fuels. The reality of countries’ attempts to decarbonise their economies is far removed from such hypotheticals. Less than a quarter of global emissions are currently covered by a carbon tax or price, while governments’ commitments to green targets are under increasing strain.
Such rosy estimations do enormous damage to the cause of climate mitigation. As I have blogged here, climate transition imposes prohibitive costs. The IMF estimates essentially internalise the aggregate cost of carbon emissions by fixing national abatement targets, pricing carbon, and redistributing revenues accordingly. Each of these makes several very contentious and (most certainly) impractical assumptions.
Fundamentally, the approach adopted by such models is to make carbon emissions expensive enough to force the shift towards cleaner energy sources. This approach, as I blogged here, is akin to significantly increasing the price of the typical consumption basket of a household in developing countries without a commensurate increase in income.
Such estimations skirt around the reality that climate transition faces problems on both the demand and supply sides. The developing countries are estimated to need $1-2.4 trillion a year by 2030 to finance climate change adaptation and mitigation, of which at least $1 trillion will have to come from foreign sources. Besides the major share of domestic and foreign climate finance will have to come from private sources. The current numbers are not even remotely close to these requirements, and there's little to suggest that the increments can be met.
Mobilising private capital, domestic and foreign, at anything close to this scale is problematic. For one, the envelope of private capital of all kinds available to finance long-term and low-return investments like those required for climate mitigation is much smaller than estimated. Second, the envelope of projects in developing countries that generate the returns demanded by commercial investors is smaller still. Even the shelf of projects that can be de-risked and made attractive for commercial investors is small.
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