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2023 | Buch

Investing in a Changing Climate

Navigating Challenges and Opportunities


Über dieses Buch

Net Zero is not enough. We have dithered so long about climate change that, by now, we would need to go to negative-emissions territory, well before 2050, to keep global warming under the iconic 1.5°C target. The national commitments made so far fall short of what is needed, and so do the investments envisioned. But even with the best of intentions, it is hard for policymakers and potential investors to discern where, in the profusion of initiatives and technologies, it would make sense to focus their attention and resources.

This is where this book comes in. It offers a clear-eyed view of how far along the decarbonization path six key sectors of the economy are—namely energy, utilities, transportation, industry, buildings, and agriculture—and which areas and technologies within each sector are promising in terms of investments to advance the cause. Furthermore, a special chapter on Africa spotlights a continent that is simultaneously one of the worst affected by climate change, the most likely to see its greenhouse gas emissions increase—and the one with the greatest potential for solving the West's, and the world’s, energy transition and economic growth conundrum.

As such, the book serves as a concise guide both to the state of the battle against global warming, and for investors, professionals, and policymakers to find their way through the maze of options.


1. Introduction
The marching orders are clear: avert the threat posed by climate change by limiting global warming to 1.5 °C. Or was it to achieve carbon neutrality by 2050? Or reaching Net Zero, to use its meme-friendly moniker?
As it turns out, the two goals—1.5 °C maximum warming and Net Zero—are not one and the same. In fact, reaching Net Zero by 2050 will not be sufficient to stay below 1.5 °C. To muddle things further, there are several Net Zeroes, some to be achieved well before 2050, and even a couple that ought to actually go below zero, into negative-emissions territory.
But if one could be excused for feeling somewhat mystified by the profusion of goals, the confusion only grows worse when it comes to how to reach them. The road to Net Zero—any net zero—is obscured by a thicket of subsidies, bans, emissions pricing, caps, offsets, levies, international accords, national goals, behavioural changes, and a bewildering array of technological fixes and geoengineering proposals, most of which are yet to be developed.
The one thing that is indisputably clear is that getting there will be costly. But, also indisputably clear, doing nothing would be far, far costlier.
Governments, as well as private and institutional investors, will therefore need to be very selective when it comes to deciding where to put their money—particularly now, when state and private purses alike are very tight in the wake of the covid pandemic, the energy crisis, ballooning public debt, high interest rates and galloping inflation. Climate action, clearly, must not only be effective, but also efficient, if only to make it easier to share the burden.
Unfortunately, when sifting through the masses of data, reports and hype, it is very difficult to find out what really merits further attention and, most of all, where the funds should go. A thorough review of the literature more often than not comes up empty in terms of clear, credible advice in this regard.
This book aims to correct that.
Ludovic Subran, Markus Zimmer
2. Watts Next?
The Energy Pathway
Nearly three-quarters of the EU’s total greenhouse gas (GHG) emissions come from the production and use of energy, making decarbonization of the entire energy system crucial to stop global warming. The EU’s new targets aim to reduce primary energy consumption by 41.6% and final energy consumption by 38%, to reach the targeted 55% reduction by 2030.
However, the annual reductions proposed by the EU’s Fit for Fifty-Five (Ff55) initiative are neither large nor quick enough to keep global warming below 1.5 °C. A 4-year implementation gap will open up from 2030, which will require investments to be 84% higher than what is currently envisioned over the rest of this decade.
Achieving the transition will not be easy. Fossil fuels will continue to play a key role for several decades yet. The precipitous decrease in Russian energy exports to the EU, in turn, has had two opposing effects: on the one hand, it has prompted some countries to increase the use of coal, halting the drop in GHG emissions. On the other, it has accelerated the shift towards renewable energy sources and boosted energy efficiency efforts.
Decarbonization will lead to much higher electricity consumption, not only to power millions of electric vehicles, but also to produce e-fuels, such as green hydrogen and other gases and liquids to fuel transportation and industrial processes.
A key aspect to decarbonization is to wind down both fossil fuel supply and demand in tandem, without creating dangerous mismatches. Furthermore, investment in renewables must occur simultaneously with de-investment in fossil fuels for the energy transition to be successful and complete, taking advantage of the fact that the cost of capital is 15 percentage points lower for the average renewable energy project than for the average fossil fuel-based one.
But the surest investment would be in green hydrogen: not only it is a very clean fuel, but also inexhaustible, since it can be obtained by splitting water into hydrogen and oxygen using renewable electricity. Its market could be worth anywhere from EUR85bn to EUR150bn by 2030, and up to EUR820bn by 2050.
Ludovic Subran, Markus Zimmer
3. The EU Utility Transition
Electrifying Times
Using renewables for electricity generation is the basis of decarbonizing our economies: success hinges to the greatest extent on how far, and how fast, we can electrify our transportation, industry, buildings, and services.
This will lead to a rise in the share of electricity in the EU’s final energy demand from 23% in 2015 to 29–31% in 2030, and to 46–50% by 2050, with an additional 20% coming indirectly from using it to produce fuels, such as hydrogen, e-gas, and e-liquids.
Demand from the transportation sector alone is expected to increase by a factor of 2.5–2.9, with growing numbers of electric vehicles and the roll-out of charging infrastructure projected to require an additional 100 TWh by 2030 and 484 TWh by 2050, compared to 2019.
The residential sector will see the widespread deployment of electric heat pumps, raising the share of electricity in residential energy demand from 25% today to 45–60% by 2050. The industrial sector’s electricity consumption, in turn, could rise to 76% of its total energy consumption if established technologies are incorporated into current processes. In the steel industry alone, for example, transitioning to net-zero would require approximately 400 TWh of electricity, seven times the amount it uses today.
The only way to meet this demand without spewing more carbon into the atmosphere is to massively expand wind and photovoltaic power, which have become increasingly competitive with fossil fuel-based power: they overtook fossil fuels already in 2020 as the main source of electricity in the EU.
And yet, despite pressing demand, the ramp-up of renewables is not unfolding as fast as it should, growing by just one-third of what is required to meet the 60% share by 2030, one of the EU’s Fit for 55 intermediate goals. To achieve carbon neutrality, the share of renewables in power generation will need to rise to more than 85% by 2050.
The challenges are large and many. Coal will need to be phased out by 2030, which will require an additional 100 GW of wind and solar capacity across the EU, calling for approximately EUR131bn in additional investment.
The intermittent nature of wind and solar power will require both storage technologies, such as batteries and conversion of electricity into hydrogen, and stronger network infrastructure, with smarter grids, increased transmission capacity. Installed electrolyzer capacity alone is expected to grow nearly 45-fold, to up to 581 GW, from 2030 to 2050.
And that still will not be enough, without a certain amount of negative emissions in the form of carbon capture and storage. However, no large presence of CCS is expected in the market until 2035 or 2040, when the carbon price hits at least EUR200/tCO2.
Ludovic Subran, Markus Zimmer
4. Transportation
The Long and Winding Road
Transportation accounts for nearly 30% of the EU’s annual carbon emissions. Due to its high visibility, it is the object of much activist condemnation, but also the one that shows the fastest technological progress towards sustainability.
For road transportation the path is relatively clear, thanks to advances in electrification, charging infrastructure and, possibly, green hydrogen for heavy transport. The EU’s Fit for 55 plan (Ff55) aims to reduce emissions from new cars to zero after 2035. Ambitious as this sounds, the EU would still miss the 1.5 °C target by a wide margin: Staying below 1.5 °C can only be achieved through decommissioning of internal-combustion vehicles long before their usual life cycle ends (or sell them beyond the EU borders, in essence exporting the problem), so that by 2050, 88–99% of all vehicles in the EU would be zero- or low-emission ones.
The influx of electric vehicles will triple the transportation sector’s electricity demand by 2030, further raising it to 9.5% of total EU electricity production by 2050. This calls for the electric charging infrastructure to increase fourfold by 2025, requiring an overall investment of EUR430bn until 2050, plus around EUR730m per year, just in Germany, in start-up funding until 2030 to address gaps in the development and standardization of charging infrastructure and services.
Less than 1.2% of the global shipping fleet runs now on sustainable fuels. In the EU, shipping accounts for 3.8% of total CO2 emissions; current plans aim to reduce them by 75% by 2050. Promising fuel options include biofuels, green hydrogen and ammonia generated from clean hydrogen. Since sizable fleet renewals are scheduled soon, it is critical for such zero-emission technologies to be available by then: new ships will impact sector emissions for decades to come, given their operating lifetime of around 30–40 years. Altogether, complete decarbonization of the shipping industry by 2050 will require at least USD1.4–1.9trn in investment.
Aviation accounts for less than 2.5% of global emissions, against 8% each for cement and steel. However, it is the transport mode with the fastest growing emissions. To curb their impact, the EU introduced fuel-blending mandates for sustainable aviation fuels (SAF), included aviation into EU ETS, linking it to CORSIA, which aims to ensure that aviation emissions do not exceed 2019 levels, and will phase out free emissions allowances by 2027.
SAF, produced from oils, fat or forestry/agriculture waste, could help reduce emissions by 75%. While the market for it is huge—in 2020, SAF accounted for less than 0.05% of total jet fuel use—the potential for scaling up bio-based SAF production is limited. A further option is synthetic fuels, made using green electricity. Both can be directly blended into fossil jet fuel to power current aircraft without any technical modifications.
Around 250 synthetic fuel plants need to be in operation by 2050, requiring some EUR250bn in investment, to make a relevant contribution.
Ludovic Subran, Markus Zimmer
5. Greendustry
One of the biggest concerns for European industry is how to reduce its carbon footprint without harming its competitiveness. It is a daunting task, but with a 14% share of EU total emissions, it is not one it can dodge.
Three industry branches—cement, iron & steel, and chemicals—are the largest consumers of industrial energy and responsible for three-quarters of industrial emissions in the EU. Thus, decarbonizing them is imperative to stay the course towards the Net Zero goal.
The problem is that some of their emissions are hard to abate, due to the level of temperature needed (cement and steel), plant location away from renewable energy sources, insufficiently mature alternative technologies or the long operational life remaining in most plants.
This makes it imperative to devise and deploy innovations in production processes such as greater use of electricity and different input materials, and introducing greener fuels, such as biomass and green hydrogen. Also required is a more circular economy in which a greater proportion of materials such as steel, aluminum and plastics are recycled instead of manufactured from scratch. Recycled aluminum, for instance, requires 95% less energy than primary production.
In contrast, the emissions of industry branches that rely mainly on electricity and heat, such as pulp and paper, foundries, vehicle manufacture, some parts of the food value chain, ICT, and non-ferrous metals, are easier to decarbonize, since both the electricity and heat they use could be generated from renewable sources. Renewables can tackle the former, while industrial heat pumps or alternative production processes that use electricity instead of fossil fuels can take care of the latter.
The industry sector has already made significant progress, reducing its emissions by 39% by 2020 compared to 1990 levels, at the same time as adjusting practices and models to align with the EU’s climate and energy goals while preserving their competitiveness.
The hardest part of the road, however, still lies ahead: to bring the industrial sector in line with the net-zero pathway, emissions must be reduced by 92% by 2050 compared to 2020 levels, with the rest being offset through carbon capture and storage and even negative emissions, i.e., capturing more CO2 than produced.
This can only be achieved by investing now. The sums involved, while large, are not exactly exorbitant, and in any case far cheaper than sticking to business as usual. A shrewd combination of incentives and sufficiently high carbon prices will help to prod industry to up its game well beyond what it has already achieved. The question is whether it can do it fast enough.
Ludovic Subran, Markus Zimmer
6. Construction and Buildings
Green Blueprints
To do its part towards meeting the Fit for 55 target of slashing overall greenhouse gas (GHG) emissions by 55% by 2030, the EU’s buildings sector would have to reduce its GHG output by 60%. This will not be easy: buildings account for 40% of the EU’s total energy consumption and 36% of its energy-related GHG emissions.
The EU’s total building stock amounts to about 260 m units, of which 85% date from before the twenty-first century, and fully half from the pre-1960s. To complicate matters further, up to 95% of the existing buildings are expected to still be around in 2050.
While new directives mandate that all new buildings are to be ‘nearly zero-energy’, only 1% of the existing building stock is newly built every year, so the only way to meet the targets is by renovating the 30 m units—15% of the total—that are the most inefficient and energy-intensive. The EU budget has allocated up to EUR150bn to support their upgrading until 2030.
Heating and cooling account for 80% of the energy consumed in residential buildings, with renewables covering less than 23%. Their electricity share is expected to increase to 36% by 2030 and 45% by 2050, while in commercial buildings it will reach 60% by that year.
Around 16% of the EU’s buildings undergo partial to full renovation per year, but more than half of so-called ‘energy renovations’ result in less than 3% actual energy savings. Another third consists of ‘light energy renovations,’ with savings of up to 30%. Barely 2% go for ‘deep energy savings’ that exceed 60%.
The investment needs for a deep energy renovation varies widely between EU countries, with Spain among the cheapest (around EUR50 per m2 for residential projects) and Sweden among the dearest (EUR450 per m2 for non-residential). The time to recoup the investment purely through energy savings averages around 16 years. However, as energy prices rise, the return on renovation investments will occur much sooner.
The annual energy-renovation investment needed to achieve the EU goal of a 2% energy-renovation rate, implying 5 m buildings per year undergoing substantial renovation, amounts to EUR82bn. But the Russian invasion of Ukraine added energy sovereignty to the must-haves, upping the ambition to a 3%-per-year energy renovation target. Achieving this would require EUR142bn per year.
The new ambition is still feasible for a simple reason: the EU’s overall goals do not seem particularly impressive when compared with current market developments and policies announced by individual EU member states.
There are still obstacles, however: consumers, architects, contractors and installers view financial and administrative barriers as the main roadblocks for undertaking effective energy-performance improvements on buildings.
The most intriguing fact is that the carbon footprint of a building need not stop at zero: buildings can also be carbon sinks, achieving negative net emissions. If made of wood, they could store up to 180 kg of carbon per square meter, three times more than in the above-ground biomass of high-carbon-density natural forests. Now that’s wood for thought.
Ludovic Subran, Markus Zimmer
7. Forestry, Agriculture, Food Chain, and Land Use
Greener Pastures
Close to 38% of the world’s land area is devoted to agriculture, a share that rises to 39% in the EU, plus 35% for forestry. The EU produces one-eighth of the world’s cereals output, two-thirds of its wine and three-quarters of its olive oil. Forestry and farming account for 8% of total EU international trade, support 10 m jobs and generate around 1.5% of the EU’s GDP.
This is not enough, either in the EU or globally. By 2050 agricultural production will have to rise by 70% to meet projected demand, but given that most land suitable for farming is already farmed, this growth must come from higher yields.
However, both farming and forestry are under threat from the impacts of climate change, given their sensitivity to heat extremes, drought, floods, anomalous precipitation, and hail risk, all of which are expected to become more severe. Based on current climate change prospects, corn yields could decline by as much as 24% by 2030. Wheat, in contrast, could increase by as much as 17% globally, as its growing region is being expanded into higher latitudes.
A unique feature of farming and forestry is that they are both a source of and sink for greenhouse gas (GHG) emissions. In the EU-27, farm-gate emissions are responsible for 11% of the total, which includes not only CO2 but also methane and nitrous oxide, potent greenhouse gases. Agriculture has always emitted the largest share of non-CO2 GHG globally. In the EU in 2020, agriculture was the top emitter, with more than twice the volume emitted by energy.
When it comes to its role as a sink, biomass such as forests is the first place in which carbon can be stored long-term, soil being the second. Organic soils, which include peatlands and wetlands, have at least 20% carbon content and cover 8% of the EU land area, but are under threat through drainage. Drained soil is already responsible for 5% of the EU’s total GHG emissions.
Grasslands, which are less affected by droughts and wildfires and can serve as bioenergy feedstock and carbon sink at the same time, can play an even greater role. Still, by 2050 at least 424 m tons of CO2 will need to be removed each year by the land-use sector, which is far above the current sink volumes. Removals and emissions would need to cancel out just before 2035, meaning that sink capacity would need to steadily increase to deliver “net credits” in subsequent years.
The EU plans to tackle this by combating desertification through soil restoration, reducing net conversion of land for settlements to zero by 2050, lowering nutrient losses and chemical pesticide usage by 50% by 2030, decreasing per capita food waste by 50%, and achieving land-use-based net climate neutrality by 2035.
Furthermore, the EU aims to establish protected areas for at least 30% of its land and sea, restoring at least 25,000 km of EU rivers to a free-flowing state, and planting 3bn trees. A new carbon farming scheme aims to develop and deploy nature-based carbon-removal solutions at scale across the EU using farming and forestry projects, allowing farmers to earn carbon credits that they can sell in the carbon market at their own discretion.
Ludovic Subran, Markus Zimmer
8. Africa Unbound
Africa may well provide the answer to Europe’s most pressing energy problems. It not only sits on 13% of global gas reserves, exceeded only by Russia, Iran, and the Middle East, and 7% of the oil, but, most importantly, it possesses immense green-energy potential.
This provides an unmatched incentive for foreign private capital to help the continent go greener, given that Africa’s investment needs relative to local GDP are larger than in advanced economies and local funding resources are insufficient. Investment levels under current policy are far below what is needed to comply with the Paris agreement. One factor hindering a more rapid inflow of funds Is Africa’s political instability and weak rule of law.
Therefore, to attract foreign capital, Africa must strengthen its institutions, improve political governance, and modernize policies and regulations, in addition to having clear green-energy strategies and ambitious yet realistic goals, coupled with economy-wide transition plans.
As African countries catch up with more industrialized nations and their populations continue to grow, their demand for energy is set to increase significantly. Electricity demand in the ten largest African economies, which together account for over 60% of Africa’s total GDP, is set to increase more than fivefold from 2020.
At USD120bn in 2030, the yearly investment needs under the 1.5 °C scenario are sixfold the 2020 baseline, and 80% higher than under the current-policy scenario, increasing to USD220bn yearly by 2050. Total investment to achieve a meaningful transition would top USD7trn between 2020 and 2050.
A sustainable energy transition should also include major investments in the necessary infrastructure for energy transmission and storage, since the absence of such infrastructure would make it difficult to attract the capital needed for renewable energy projects.
While African countries will not wean themselves from fossil energy just yet, with fossils accounting for 20–40% of overall capacity even by 2050, wind and photovoltaic dominate capacity growth in the 10 largest African economies. By late 2021, South Africa, Morocco, Egypt, Kenya, Ethiopia and Tunisia represented over 96% of the continent’s total wind generation capacity. However, replacing all fossil energy might prove difficult in the near future, as renewables are not yet sufficient to cover the increase in electricity demand.
Africa has the potential to become one of the main exporters of low-carbon hydrogen and, at the same time, leapfrog towards the world’s first hydrogen-based economies and societies. The business opportunities opening are very attractive and can be highly profitable in the mid and long term, helping to establish long-lasting supply relations with the competitive European and Asian markets.
Nigeria’s investments in hydrogen are set to be significantly higher than in most other major African economies, but another good candidate is Ghana, which has huge renewable energy potential from solar, wind, biomass, and hydropower that can help it include green hydrogen in its energy mix and for export.
Ludovic Subran, Markus Zimmer
9. Correction to: Introduction
Ludovic Subran, Markus Zimmer
Investing in a Changing Climate
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Ludovic Subran
Markus Zimmer
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