Friday 12 June 2020
A changing world, extreme weather and the journey towards net zero
The birth of an international movement
In the last year the series of strikes by school students, Fridays for Future, has grown into an international movement. This reached record levels when 1.4 million students went on strike on 15th March 2019. Companies, cities and countries are also moving climate change higher up on the agenda. A number of European countries have set national targets for achieving climate neutrality, including Norway in 2030, Finland in 2035, Iceland in 2040, Sweden in 2045, and Denmark, France, the Netherlands, Portugal, Spain, the United Kingdom and Germany in 2050.
Last year the European Commission launched its 2050 climate strategy; the strategy presents eight scenarios for transitioning the energy system. The strategy contains a vision for the EU – which is responsible for about 10% of the world's greenhouse gas emissions – to achieve climate neutrality in 2050.
We also observe that carbon pricing is being introduced in more countries and sectors. China and Mexico are gradually rolling out their national emissions trading systems, the Netherlands has opted to introduce a carbon price from 2020 and the EU's emissions trading system was reinforced over the past year. Globally, there are now 57 carbon pricing mechanisms in operation or scheduled for implementation. This covers approximately 20% of global greenhouse gas emissions and represents an increase of 11 initiatives since last year.
Global warming with visible consequences
Increased climate awareness is largely due to the consequences of global warming becoming more visible. We have already reached a global average temperature that is around 1°C higher than in pre-industrial times. The last four years were the warmest in history, and the effects of climate change are being felt in more and more areas. More species are threatened with extinction today than ever before in human history. In 2018, greenhouse gas concentration in the atmosphere increased, sea levels continued to rise, and the sea surface temperature reached the highest levels to date.
The extension of sea ice in the Arctic and Antarctic has dropped significantly below average. At the same time, oceans are becoming more acidic, causing drastic reductions in warm water corals. Extreme weather also presents serious consequences. Natural disasters affected 62 million people in 2018. Floods affected 35 million people, while over nine million people were impacted by drought. Two hurricanes, Florence and Michael, hit the United States and caused $49 billion (£39bn) in damage. After years of decline, extreme weather led to a global increase in famine. In northern Europe, the record-breaking hot and dry summer last year led to major losses in food production, while 1,500 people died from the heat in France and 25 000 hectares of forest in Sweden were devastated by fires. Although there are complex causal relationships in each event, we know that man-made climate change increases both the magnitude and frequency of extreme weather. Insurance companies were among the first to see the costs associated with climate change.
Reinsurance company Munich Re warned in 2019 that insurance premiums for private individuals may become so high that insurance against climate change will become a social problem. Morgan Stanley estimated the cost of climate-related damages at $650 billion (£517bn) for the period 2016-2018.
Greenhouse gas emissions increase for the second year in a row
In October last year, the UN Intergovernmental Panel on Climate Change released its special report on global warming of 1.5°C, showing the serious climate consequences of a two-degree pathway compared to a 1.5-degree pathway. The report also emphasised the high risk of exceeding the pathway periodically, unless rapid and drastic emission cuts are made in the next ten years. If emissions exceed the pathway, there is a risk of triggering irreversible climate changes, such as thawing of the Siberian tundra and melting of the Arctic ice. The report also shows that the impact of global warming is unevenly distributed, with India being one of the countries to be hit hardest by drought, heatwaves and rising sea levels. These consequences will in turn affect food supply, food prices, migration and economic growth.
Given the backdrop of more severe consequences from climate change, we still see emission levels are rising. Energy-related greenhouse gas emissions increased in 2017 and 2018 after three years of levelling-off. The main drivers of the emissions increase were economic growth and increased energy consumption. Although Europe reduced its use of fossil energy sources and we are seeing a shift towards increased renewable energy globally, renewable energy is not growing strongly enough to offset the increase in energy consumption. Demand for gas, oil and coal rose worldwide, especially in Asia and the United States. This contributed to global emissions rising by 1.7% to 33GtCO2 in 2018.
Investment is being shifted from fossil energy to renewable energy in 2018, for the third year in a row, more capital was invested in the power sector than in the oil and gas sector globally. Almost 2.5 times more capital is now invested in renewable energy than in fossil energy production. The major coal companies are diversifying away from new coal projects and there is a consolidation in the market. At the same time, insurance companies, banks and investment funds are withdrawing from investments in fossil energy sources. Goldman Sachs estimates that the main driver for coal companies dropping 60% in value over the past five years is that global investors are pulling out of investment in coal.
Investors step away from fossil fuels
A study from Oxford University shows that investors are demanding higher returns than previously to invest in major coal and oil projects; this is because of the increased risk associated with such investments. The study also shows that oil companies prioritise smaller and simpler projects, such as shale oil and maximising existing production, over major new development projects.
In 2018, over a thousand institutions committed to withdrawing their investments from fossil energy under specified criteria. New renewable power generation covers almost half of the electricity growth. Installed capacity rose by 8% to 171GW last year, of which new solar and wind power capacity accounted for 84% (108GW and 50GW respectively). At the same time, capital expenditure globally was flat. This is largely due to falling technology costs, especially for solar power. The relatively low growth rate for solar capacity compared to previous years (9%) was mainly caused by changes in the Chinese regulatory framework. On the other hand, high growth rates were seen in other regions, including Latin America which achieved 50% annual growth.
The shift towards electrification accelerates
Electricity consumption rose significantly more than primary energy consumption, with increases at 4% and 2.3% respectively. Electricity demand increased more than overall energy growth because more people got access to electricity and the end-users are electrifying away from fossil fuels. In 2018, two million electric cars were sold, corresponding to a 70% increase. 1.1 million of these were sold in China alone. As a result, there are now over five million electric cars in China. Europe constituted the second-largest market with 385,000 electric cars sold.
The EU has defined new emission limits for passenger cars until 2030. A number of countries have adopted targets of phasing out the sale of fossil-fuelled passenger cars. Among the first are Costa Rica and Norway, with 2021 and 2025 defined as targets respectively, while Denmark, Ireland, the Netherlands and Sweden have set 2030; France and the UK have opted for 2040. China introduced an electric car quota for new car sales, stepping up from 10% in 2019 to 15% in 2025, corresponding to around seven million electric cars. India set a target for electric cars to make up 15% of new car sales in 2023.
The global political landscape creates uncertainty
Climate policies are becoming an issue that cuts across the traditional political dividing lines. A more fragmented political landscape in many countries may make it more difficult to reach broad and long-term compromises in climate policy – locally, nationally, at the regional level and globally. An effective energy transition will require enhanced cooperation at all levels. If increased polarisation hinders workable compromises, this may impede achieving deep decarbonisation of the world economy. In contrast to this, we also see a strong shift of capital towards sustainable investments as a result of increased climate risk and the strong mobilisation among young people.
