Climate Change: Mission Possible

Kelly Clark By Kelly Clark

The transition to a climate positive economy is core to the Laudes Foundation mission, but the scale of the economic, technological and political transformation needed to progress the fight against climate change can feel daunting. Time is also against us; effective change needs to be achieved in the next decade if we are to limit global warming to 1.5°C.

Yet, if you take a step back to consider the enormous progress that has been achieved over the last decade, there are many reasons to be optimistic. Mark Lewis, Head of Climate Change Investment Research at BNP Paribas Asset Management and globally renowned expert on the financial impacts of climate change, joined our latest Laudes Financial Dialogue and outlined three reasons why he is optimistic that we are now on the right trajectory to achieving climate change goals.

Effective emissions trading

European carbon allowances (EUAs) reached an all-time high in May, reaching EUR 56 per tonne, having traded 70% higher since 1 January and 195% over the last 12 months[1]. This milestone for the EU Emissions Trading Scheme (EU-ETS) affirms that the concept of carbon trading works. Mark says, “it is no exaggeration to say the EU-ETS is the principle tool for achieving complete decarbonisation in the EU by 2050,” and attributes the recent rise in EUAs to the EU’s adoption of a net zero target by 2050 and making that legally binding.

Having an efficient and effective carbon trading system will be a key tool in improving the competitiveness of green hydrogen. Mark explains that given the technologies we know of today, the European Commission estimates that 15-20% of energy consumption will need to come from green hydrogen by 2050. However, green hydrogen is currently more expensive than carbon-intensive grey hydrogen and not enough is being produced. Mark has calculated that a carbon price of €100 per tonne is needed to make green hydrogen competitive by 2030 and the recent rise means carbon pricing is moving in the right direction. He says, “The market seems to be acknowledging that we need a new pricing paradigm to reflect long-term policy ambitions, and this gets us on a trajectory to making green hydrogen competitive by 2030 and this is the price that achieves net zero by 2050.”

While the carbon price won’t bring the production costs of green hydrogen down, it will provide an incentive to attract capital and scale-up technology. Mark believes that a carbon price of €70-80 per tonne will represent a point where it is more cost effective to use green hydrogen ahead of grey hydrogen. However, Mark concedes there are still logistical challenges in developing the required infrastructure, “Fighting climate change is not so much an economic or financing challenge anymore, it’s a technological, political and logistical challenge… so public policy is going to be crucial in terms of facilitating the infrastructure and making sure it’s put in the right place where it’s needed.”

Renewables: confounding expectations

The nature of the global energy system is changing. For all the horror of the pandemic, 2020 had a silver lining from an energy perspective as it was the first year where wind and solar energy accounted for 100% of the increase in global energy demand, while demand for fossil fuels dropped sharply. Although this will inevitably reverse as global economies emerge from lockdowns, Mark believes it marks an extremely significant moment in the global energy transition. He says, “we have crossed the psychological rubicon in the way investors think about the transition. Investors who were sceptical about wind and solar accounting for 100% of demand are no longer sceptics because it has happened. Now you can see people’s imaginations accommodating a very different future.”

The International Energy Agency’s (IEA) latest report on renewables provides evidence of this changing mindset. Having been widely criticised for failing to understand the intrinsic benefits of renewable energy, the IEA has recently raised its growth projections for renewables going forward and is calling on energy groups to halt all new oil and gas exploration projects from this year as part of its roadmap to keeping global warming in check. Mark suggests that the IEA “structurally revising up its expectations of the renewables rollout is very important symbolically and is symptomatic of the way in which many individuals, investors, organisation have changed their view of what is possible.”

A key facet to Mark’s optimism is the fact that wind and solar energy are deflationary, in contrast to fossil fuels which have high exploration and extraction costs. He explains, “the beauty of renewable energy is you don’t have to go out and explore for it, drill for it, you don’t even have to produce it you simply have to build infrastructure in the places where you know it’s already available and then you capture the energy and, at the point of capture, it is free of charge.”

With the costs of renewable energy relating to infrastructure, economies of scale mean that the more that’s built, the cheaper it becomes. Mark adds that technological improvements are another deflationary force that will push the price of renewables lower. For example, better efficiency rates on solar are already being delivered under lab conditions so real-world improvements will be forthcoming. He says, “In the 1950s they used to say there would become a point where nuclear energy would be too cheap to meter. While that didn’t happen, solar energy really does hold the promise of being too cheap to meter.”

Enforcing Scope 3 disclosures

Plans by the Task Force on Climate-related Financial Disclosures (TCFD) to call for all industries – not just carbon intensive industries – to disclose their Scope 3 carbon emissions footprint is another important development to defeating climate change. Scope 3 emissions are the result of an organisation’s indirect activities – ie their supply chain – meaning they are less likely to come under public scrutiny and companies can avoid taking responsibility. Fashion and food are two examples of industries where most of their carbon emissions are in the supply chain, rather than through their direct activities.

Mark suggests greater discourse on the potential consequences of climate change – notably the Intergovernmental Panel on Climate Change’s (IPCC) special report on the impacts of global warming of 1.5°C above pre-industrial levels – has lowered the public’s tolerance of such avoidance tactics. He says, “the emphasis of the conversation has changed. The world’s largest oil and gas companies are having to set scope 3 targets as civil society will no longer accept the oil industry saying it’s not our problem.”

The outcome of the TCFD’s new guidance will mean that all industries – not just carbon-intensive ones – will be compelled to be more transparent about the size and nature of their Scope 3 footprint and, importantly, make commitments to reducing that footprint over the next decade.  

Virtuous feedback loop

The combined force of these positive elements – public policy; economic and technological breakthroughs; and civil society engagement – are serving to fuel the momentum of the energy transition – a notion that Mark calls the ‘virtual feedback loop’. He says, “all of these factors are feeding off one another and are pushing each other in the same direction so effectively you have a stone rolling down a hill at an ever-greater speed and that is what is happening.”

The need to change hearts and minds is a key element of Laudes Foundation’s strategy to achieve change. And it is gratifying to learn that a sea change in sentiment is clearly occurring. However, we cannot be complacent. Much work still needs to be done in disseminating the economic narrative and in influencing politics. Mark acknowledges that while the US Administration through President Biden is already making a huge difference in driving the global conversation, there are regions globally where entrenched vested interests surrounding incumbent energy production need to be tackled and this will require immense political advocacy and diplomatic co-ordination. And this is where we can help. By working collaboratively and collectively with our partners across policy and industry, we seek to influence and help catalyse systems change.

We have made significant progress on the economics of the energy transition and a seemingly impossible mission now seems possible. But we can’t rest now. We must strive to ensure this positive momentum continues to accelerate.




About the author

By Kelly Clark

Kelly is the Director of Finance Capital Market Transformation at Laudes Foundation. The love she holds for her twins and concern for future generations motivates her to strive for change in the global economy and the financial system that supports it. She brings a strategic, intersectional view to tackling inequality and the climate crisis, and a deep desire to build bridges and unify perspectives.

Finance and Capital Markets