The global response to war Ukraine and the recent US Inflation Reduction Act have increased the chances of a rapid acceleration of the clean energy transition.
However, the turbulent political and economic context means that momentum is fragile.
Politics, technology, public opinion and funding decisions will all influence the long-term outcomes of this pivotal moment.
LONDON and SAN FRANCISCO, September 21, 2022 /PRNewswire/ — Generation Investment Management, the sustainable investment management firm, today released its sixth annual assessment of the global state of sustainability. Against the backdrop of a pivotal year in the transition from fossil fuels, the Sustainability Trends Report analyzes the key drivers of the transition to sustainability across the global economy – from the electricity sector and from industrial emissions to buildings, land, food and climate finance.
Al GoreChairman of Generation Investment Management, said: “We stand at a tipping point in the sustainability revolution. The geopolitical events of the past year, including the devastating war in Ukraine, have highlighted the urgent threat that dependence on fossil fuels poses to global security and democracy. We must seize this moment as a global epiphany – and indeed this year world leaders are beginning to rise to confront this moment, with the EU taking crucial steps to rapidly increase renewable energy capacity and United States by embracing groundbreaking investments in climate solutions with the Cut Inflation Act.”
“Among the reasons for optimism, we cannot afford to be complacent in our efforts to address the climate crisis. The report outlines areas of the global economy, particularly in the most emitting sectors, which still require ambitious leadership, tangible action and solid funding. . If progress is to be made, momentum must pick up, but it continues to be threatened by a challenging economic and political environment.”
Two major developments this year have increased the chances of a rapid acceleration of the transition to clean energy. The war in Ukraine highlighted the risks of European dependence on Russian fossil fuels, prompting the EU to raise its renewable energy targets. Meanwhile, the Inflation Reduction Act in United States promises to help reduce emissions by up to 40% below 2005 levels.
While these are encouraging signs, the report shows how politics, technology, public opinion, and capital allocation decisions could all influence the long-term outcomes of this pivotal moment:
A CONVERGENCE OF AMBITION – EVEN RISKS REMAIN
The war in Ukraine represents a threat to Europe transition to clean energy, as urgent investments in fossil fuel infrastructure independent of Russian supplies risk locking in dependence on dirty energy (e.g. new pipelines and gas import terminals liquefied). Simultaneously, the dangers of fossil fuel addiction are more clearly revealed than ever. How Europe resolves the tension between its short-term supply crisis and its long-term interests will determine whether the EU remains a global leader in tackling the climate crisis.
Since the invasion of Ukraine, the EU is committed to accelerating its already ambitious targets for reducing greenhouse gas emissions. Reaching the new targets will require a radical and rapid increase in renewable energy. This acceleration will be sustained in United States by the Cut Inflation Act which commits hundreds of billions of dollars to the development and deployment of climate solutions.
QUICK POLICY AND LEGISLATIVE CHANGE IS NEEDED – BUT THE PLAN IS IN PLACE
The sense of urgency means accelerating Europe’s energy transition. However, hurdles remain even in the deployment of developed technologies such as onshore and offshore wind projects, where significant regulatory and technological hurdles remain for both. Financing mechanisms to support the development of large renewable energy projects are a work in progress and require urgent public policy attention. The EU has a plan to resolve many of these bottlenecks, and how quickly they are resolved will show the bloc’s commitment to the energy transition.
POLITICAL AND ECONOMIC TURBULENCE REMAIN THREATS TO A JUST TRANSITION
The evolution of policies and public financing of climate investments is very encouraging. The energy security crisis in Europe positions the region to develop cost-effective climate solutions that will not only benefit member states but can also be exported, resulting in significant economic gains by becoming the leading provider of the climate solutions the world needs. However, these achievements remain fragile. The past has shown that public concern for the environment wanes in times of economic hardship. In Europe and United Statesnew commitments will have to be defended as the political and economic environment becomes more difficult.
Other accelerating trends highlighted by the report include:
Power: Good news wrapped in bad news
As electricity sector emissions hit an all-time high, the first and most important task of the energy transition is to clean up the electricity grid.
Significant progress has been made in highly developed economies. Meanwhile, in places where emissions continue to rise, they are doing so more slowly than before.
The report points out that emissions from global electricity generation will almost certainly peak, possibly as early as 2025, and then start to decline.
Transport: Ready for take off
The growing popularity of electric cars could be the best news of the energy transition in 2022. There is no longer any doubt that the global car fleet will be electrified.
However, the transition is being slowed by shortages of critical minerals like lithium. Persistent issues with government policies and charging infrastructure remain.
Buildings: Need fresh ideas
Buildings are responsible for 6% of global emissions. The energy problem in buildings has become urgent, if only because so little progress has been made in solving it.
Governments have yet to find the right mix of policies to accelerate the transition to a greener building stock. Renovation and energy rehabilitation rates remain low throughout the world. For example, at the rate of UK installs heat pumps in old houses, the renovation will be completed in 600 years.
Industry: Building Blocks of Civilization
Emissions from industries like steel, cement and chemicals remain a major unresolved issue, with few government policies in place to accelerate the transition. The first stages of a green transition in steelmaking are underway, with plants under construction that will use clean hydrogen as an energy source.
Earth & Food: Saving nature
Rates of forest destruction and species extinction remain at worrying levels as developed countries fail to find appropriate funding mechanisms.
Repeated promises by Western companies to eliminate forest destruction from their supply chains have achieved little progress.
To meet the food supply challenges of a growing population and the challenge of reducing emissions from the agricultural sector, the environmental performance of the food system is more important than ever.
Financing the transition: all the wrong places
Annual investment in the clean economy will soon exceed $1 trillion. However, to limit global warming to 1.5°C, it will be necessary 2 trillion dollars annually by 2025, and 4 trillion dollars by 2030.
About the generation
Generation Investment Management LLP is dedicated to long-term investing, integrated sustainability research and client alignment. It is an independent, private, owner-managed partnership established in 2004 and headquartered in Londonwith an American presence in San Francisco. Generation Investment Management LLP is authorized and regulated in the UK by the Financial Conduct Authority. In the United States, Generation operates through Generation Investment Management US LLP, an investment adviser registered with the Securities and Exchange Commission. www.generationim.com
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