Decarbonisation is on the way. Get ready for it.
Whatever happens in Paris in December at the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change, one thing is clear: decarbonisation is coming. For business and society more generally, this has stark implications. Primarily, it signals that the time has arrived to get out of fossil fuels, which for two centuries have provided the energy that has underpinned the development of modern society.
The Cambridge Institute for Sustainability Leadership, which hosts the climate change-focused Prince of Wales's Corporate Leaders Group puts it succinctly. The next 15 years, it says, will be “a time of unprecedented change in the global economy, as new development, investment decisions and technology development will all be delivered in the context of climate change.”
The clean-up operation that business and society will have to perform will go beyond carbon dioxide emissions from energy and industry. For example, greenhouse gas emissions are also produced by agriculture, in particular livestock production, and by the way waste is managed – methane and other gases leak from landfill sites. These emissions must also be controlled or curtailed, implying wide-ranging changes to current practices. For example, measures might have to be put in place to reduce levels of meat consumption – an issue that could significantly affect companies in the sector and consumers.
The global decarbonisation goal is backed by the scientific consensus and has been expressed politically by the commitment that global temperature rise should not exceed 2 degrees Celsius above pre-industrial levels. The main discussion in Paris will therefore not be what needs to happen, but rather how rapidly it should happen.
The Paris negotiating text
On 19 March, the United Nations sent the draft negotiating text for the COP21 in Paris to the 196 countries that will participate in the talks. The text was agreed in Geneva in February in a follow-up meeting to the December 2014 climate summit in Lima, Peru. Further pre-Paris talks on the text will start in Bonn, Germany, on 1 June.
The draft is full of text enclosed by square brackets on which countries still have to agree. The draft agreement runs to 90 pages, 50,000 words and 1200 bracketed text sections. Negotiators want to cut it to around 20 pages. It remains to be seen if this is feasible ahead of Paris, resulting in a deal that just needs to be signed off, or – perhaps more likely – if Paris will have to run into overtime in an effort to find consensus.
Either way, the mood in the run-up to Paris is very different from that ahead of the 2009 Copenhagen summit. “It isn't the Al Gore video, full of impact and portent,” says Scottish Conservative MEP Ian Duncan. Instead, negotiations are about the “bureaucratic reality” of seeking line-by-line agreement.
The draft Paris negotiating text is available here.
The draft negotiating text for Paris, circulated by the UN on 19 March (see above), currently contains a menu of options that negotiators will have to pick over: that “near zero” emissions should be reached in 2100, that it should be done “within the second half of this century”, or that the emissions cut should be 70-95% below 2010 levels by 2050 with negative emissions (in other words more locked up in carbon sinks such as forests than is pumped into the atmosphere) “before 2080”. Whatever is chosen, decarbonisation will be rapid, and that will mean profound change for business.
Are we ready?
It is unclear, however, if the wider world of business or society as a whole has grasped what rapid decarbonisation means. Sebastian Oberthür, academic director of the Institute for European Studies, a think tank, and a former member of the Kyoto Protocol Compliance Committee, says that Paris should send “a clear signal to investors and society” that the transition to a decarbonised economy should be completed by the second half of the century.
This is “long-term change but it's still quite fast,” Oberthür says. “If decarbonisation is to happen, it has to happen in all areas of society.” So far, he adds, “I'm not sure the man in the street understands.”
Even some governments are struggling with the concept. In Europe, for example, Poland, which has an economy that largely relies on energy-intensive electricity generation, has a reputation for seeking to block or delay initiatives to cut emissions. “You don't get the sense that they are clear in their heads that decarbonisation is ahead,” Oberthür says. In some cases, government slowness to act on decarbonisation is a consequence of lobbying by vested interests. Poland's coal mines, for example, are heavily subsidised, and powerful unions resist any moves to close those that make the greatest losses.
To move beyond the narrow aims of vested interests, vision is needed. If policies and business strategies can be put in place, which enable a “steady, quite steep shift and transformation,” it should become clearer that “this kind of change is actually attractive,” Oberthür says. The ultimate aim is for the world to become a cleaner, better-managed place.
Considerable work is already underway to scope out decarbonisation scenarios and help business and society realise the vision. One such initiative, the Deep Decarbonisation Pathways Project, published its interim report in September 2014. The project was carried out by the United Nations Sustainable Development Solutions Network, which is intended to help provide the roadmap for achievement of the UN post-2015 Sustainable Development Goals.
The Deep Decarbonisation Pathways Project will follow up its interim report with a detailed presentation to the French government – the hosts of the Paris COP – later in the year. But the interim report already noted that “operationalising the global 2°C limit” will have three main components: decarbonisation of energy systems, measures in key sectors, and a “global technology push”.
According to the project, the world should consider a scenario in which global emissions fall to about a third of their current level by 2050. This starkly demonstrates the scale of the change that could lay ahead. It would mean, for example, according to the interim report, “replacement of existing fossil-fuel-based generation with renewable energy..., nuclear power, and/or fossil fuels (coal, gas) with carbon capture and storage.” And that is only one of the tasks that will have to be completed.
Many companies have already taken steps on the decarbonisation pathway. More and more companies report their emissions – 63% of the FTSE 350, according to CDP (formerly the Carbon Disclosure Project). Some have set emission reduction targets, such as Walmart, which says it will remove 18 million metric tons of greenhouse gas emissions from its global supply chain by the end of 2015, or Unilever, which says it is on track to “halve the greenhouse gas impact of our products across the lifecycle by 2020.”
Most of these emission reductions so far are being achieved by companies through tighter controls on energy use or by switching to renewable electricity. Companies such as IKEA are even moving into solar generation in a big way, with more than 40 major solar installations on store roofs in the United States alone. But decarbonisation will have to go deeper and faster, and will need to involve many more companies than just the trailblazers.
Impacts on everyone
The decarbonisation of the energy supply will have knock-on effects that will have an impact on every business and consumer. Takashi Hattori, head of the environment and climate change unit of the International Energy Agency, says that the “electricity sector is key and will influence other sectors such as transport.”
Vehicles will largely have to move away from petroleum. This has started, with companies such as Nissan and Chevrolet producing fully electric vehicles in the form of, respectively, the LEAF and the Spark EV. There is also experimentation with car sharing as a broader business strategy for car companies. If car sharing involves electric vehicles, it offers additional efficiencies because the same vehicles are in constant use, in principle reducing the total need for vehicles. BMW and car rental company Sixt are partnering in the DriveNow venture, which uses electric vehicles in San Francisco, and electric vehicles alongside petrol and diesel cars in other cities. Governments are also experimenting with schemes to promote use of electric vehicles.
But what has been done so far has been to dip a toe in the ocean. Vasileios Rizos, a researcher at think tank the Centre for European Policy Studies, says that in Europe, a target has been put forward to reduce transport greenhouse gas emissions by 60% by 2050 compared to 1990. “Achieving this scale of emissions reduction is very challenging but also possible,” he says. It would require “changes across the whole value chain of all transport modes,” in particular by electrification of vehicles, but also by, for example, better logistics management, so that fewer journeys are made by empty trucks and freight is taken off the road wherever possible.
Transport will also be one target for the “global technology push” highlighted in the Deep Decarbonisation Pathways Project interim report. For example, the distance that electric vehicles can travel before requiring recharge will need to increase, and to replace fossil fuels, there will need to be “sustainable biofuels or synthesised fuels for air and marine transport” – an area barely touched on so far.
More broadly, the decarbonisation of power generation will affect everyone because of the need for energy efficiencies. Energy savings will be needed to reduce the strain on an energy system that might ultimately have to largely rely on renewables, which are less predictable than fossil fuels. Using less energy is also potentially a quick win in terms of cutting emissions.
The push for efficiency is likely to mean that every fridge, computer, television and other energy-using product will need to be redesigned and improved. Consumers will have to get used to new behaviours, such as not having products that can be left on standby, and plugging their electric vehicles in for a recharge every night. Major industrial sectors, such as steel or cement making will also need to change their processes to consume less energy.
Energy efficiency is also likely to mean a rapid move to greater digitalisation of everyday life, with much greater use of smart systems to manage energy demand and to ensure that energy is not wasted by, for example, appliances being left to run unnecessarily. This is another area for the global technology push – the Deep Decarbonisation Pathways Project interim report says that one focus should be “very high performance appliances, controls, and materials for buildings.”
Emissions trading expansion
Massive investment will be needed for decarbonisation. In this respect, whatever comes out of Paris is likely to be a boost for existing schemes to promote low-carbon investment, such as carbon trading and green bonds.
Jeff Swartz, director of international policy for the International Emissions Trading Association, which represents the range of companies involved in some way in carbon markets, such as BNP Paribas, BP, GDF Suez, PricewaterhouseCoopers, Shell and Statoil, says that currently carbon markets cover about 40% of global GDP, but “there are very few markets where the price is high enough to trigger a massive transformation” to the low-carbon economy.
Carbon trading stimulates investment by, in theory, making it too expensive to emit carbon, so that heavy emitters act to cut their emissions. Governments, meanwhile, control the initial sale of emissions allowances into the markets, and so benefit from revenues that can be used to support investment in decarbonisation.
If emissions trading is to do its job, it should cover as much of the economy as possible, with a “more global cap [on emissions] than we have today,” and an “effective price,” Swartz says. The starting point for emissions trading, for example in the EU scheme, is energy generation and heavy industry, but in principle it could be extended to areas such as buildings and transport.
For road transport, for example, allocation of carbon allowances and trading could take place at the level of, say, car dealers. “The consumer will see it in the final sticker price,” Swartz says. This type of mechanism could help persuade consumers to buy electric vehicles, which would not include any carbon price element.
Green bonds boost
Green bonds, meanwhile, are certified-green IOUs sold to investors to raise money for low-emission projects, such as wind farms or energy-efficient construction. The market is already booming, with green bonds worth $36.6 billion issued in 2014, three times the 2013 level, according to the Climate Bonds Initiative. But the world total bond market is worth $100 trillion; green bonds currently occupy a very small niche.
Sean Kidney, CEO of the Climate Bonds Initiative, says there is considerable scope for scaling up as part of the decarbonisation revolution. “We've got to remake the whole economy,” he says. “We have to reform our cities into low-carbon cities,” for example through electrification of transport and denser, energy-efficient housing, and paying for these changes could mean that by 2050 “maybe 50% of the market could be green bonds or climate bonds,” Kidney says.
He adds that green bonds currently generate returns equivalent to those from non-green bonds, and so no government intervention is needed to promote them – the “green” aspect of green bonds is in effect a bonus for investors. But as low-carbon investment becomes the norm, governments might have to step in, for example by providing guarantees that investment in green projects will be repaid.
Nevertheless, green bonds “prove the point to governments that private capital is interested” in climate adaptation and mitigation, Kidney says. He adds that he is “moderately optimistic” about the transition to a low-carbon economy. “We have so much to do that even a few trillion is a drop in the bucket. A collective response globally is essential.” But he estimates only a 50/50 chance that post-Paris decarbonisation will avoid the worst effects of global warming. “In the meantime, start planning for catastrophe,” he cautions.
A more positive view is taken by Yvonne Deng, a senior consultant at energy and climate consultancy Ecofys, which has worked with companies on defining their decarbonisation pathways. The transition can succeed because “society is ready for it,” she says. “We have, collectively, the technical skill and the financial means for the required changes.”
She adds that “of course there are, and always will be, sections of society, especially those who do not stand to gain from the transition, who will claim that it can’t be done.” But progressive major companies are working on decarbonisation already and, ahead of Paris, “many citizen groups and forward-thinking companies are crying out for politicians to grab this opportunity to set the stage for large scale transformation.”
briefing climate change coal decarbonisation electric cars electronics green bonds landfill meat Paris Walmart