Velislava Dimitrova, Lead Portfolio Manager, Fidelity Sustainable Waste & Water Fund
Around 37 billion tonnes of greenhouse gasses were emitted in 2019. Then came Covid-19 and global lockdowns which saw factories shutdown, aircraft grounded and populations confined to their homes. But even the most draconian restrictions on human mobility in modern times only led to an 8-9% decrease in global CO2 emissions in the first half of 2020 compared to the same period in 2019. And the effect will be temporary.
But the urgent need to decarbonise offers companies producing renewable energy and other low carbon technologies the potential for decades of growth.
Making a start
Unfortunately, there is no silver bullet that offers a 100% decrease overnight. But there are steps we can take today such as replacing coal-fired power and oil-based transport with the best low-carbon solutions available. Installing wind turbines cuts emissions by 93% (compared to fossil fuel plants). Switching to electric vehicles will more than halve (cradle to grave) emissions from cars, while green hydrogen fuel cells can decarbonise heavy-duty trucks by 87%. The meatless burger reduces emissions by 90% and lab-grown meat by 78%. Insulation alone can halve the emissions associated with buildings.
Many technologies, like wind and solar, are economic without subsidies. Others require significant amounts of public and private capital to rival cheaper, carbon-heavy technologies. All areas need to be scaled up aggressively to meet decarbonisation targets set by the Paris Agreement. So even if valuations look expensive today among wind and solar companies, we believe long-term growth expectations for many will prove more than justified. Companies with no competitive advantage, like some electric vehicle firms, however, appear overpriced.
Chart 1: Multiple areas will need to be decarbonised to get to net zero
Carbon cap-and-trade systems have proved controversial in the past because of carbon ‘leakage’. This occurs when a carbon price is applied and increases the cost of domestic goods, incentivising a switch to cheaper imports from countries with no carbon price. Despite this risk, deeper, broader carbon markets are on the horizon and as more countries adopt them, the more effective they will become. This could further boost companies in green sectors as ‘brown’ alternatives become more expensive. The World Bank estimates that carbon prices have to be 2-4 times higher than their current level and 2.5-5 times higher by 2030 to achieve the emissions reduction goals of the Paris Agreement.
As part of its pledge to achieve carbon neutrality, China is set to roll out a national cap-and-trade CO2 scheme that’s been running as a pilot since 2014. Its impact has been limited so far due to a low carbon price ($3-4/ton in 2019) but this should change as prices rise. Moreover, a nationwide scheme in China could include sectors that account for an estimated 20% of global emissions by 2030, creating the potential for large-scale decarbonisation. The US may follow with its own scheme under President-Elect Biden. The EU cap-and-trade programme currently covers emissions from power stations and other industrial plants, but could be extended to other sectors. To deal with carbon leakage, a carbon border adjustment mechanism that would force importers to pay for their emissions has been proposed as part of the European Green Deal.
De-carbonisation at scale creates significant opportunities
Existing low-carbon technologies could benefit most from the investment needed to achieve the first 50% of decarbonisation - $1 trillion a year according to Goldman Sachs. These include renewables, industrial and agricultural automation, efficient buildings, the cloud (which has a 50 to 80% lower carbon footprint than onsite data centres), alternatives to meat and milk, lightweight materials and second-hand goods platforms. Once current technologies have been fully adopted, a further investment of around $3.8 trillion a year in new solutions is needed to close the gap. Some, like green hydrogen and carbon capture, are still in the early stages of development today; others have yet to be invented. Many will need renewable power.