Moving towards sustainable forms of habitation are increasingly on the global agenda as the world wakes up to the potentially devastating effects unmitigated human induced climate change can have on global stability. Transforming the energy sector away from carbon-based generation towards renewables is now key to meeting global commitments. Particularly new coal power assets are likely to become stranded, representing poor outcomes for investors, while externalities and carbon subsidies are likely to be priced into goods in the future and rolled back respectively.
In a bid to save humanity from the potential calamitous effects of unmitigated climate change – a recent Arup report notes that, among others, natural disasters from climate change-related events are estimated to put 1.3 billion people and assets worth $158 trillion at risk by 2050 – world leaders have moved to create a framework to transform unsustainable practices while allowing for continued human civilization as we know it.
One of the major areas that will require significant transformation is the power and heat industry. The industry remains one of the largest contributors of greenhouse gas emissions to the global pie, in 2010 accounting for around 12.6 GtCO2 equivalent, more than 20% of the world’s global output at the time.
The sector, aside from its long term negative effect on global climate, also generates relatively toxic waste products that affect human health and well-being in other ways. Air pollution, from fine particles and emission gasses continues to blight the world’s cities, creating long-term negative health effects, while the practices used to access the precursors for the operation of plants tends to create considerable negative environmental externalities for local communities – as well as sometimes disastrous effects more widely.
The Paris Agreement lays out what needs to be done to keep human induced climate change within safe limits, with 2C the upper bound and 1.5C the to strive for target. To reduce the impact of the sector on the climate, human well-being and the environment, a transformation has already begun in a number of regions.
The task as such remains a relatively large one however; the 1.5 C target requires that CO2 emissions from electricity generation need to be reduced to around 7 GtCO2 in 2020, 4 GtCO2 in 2030 and 0 GtCO2 in 2050. Getting to the respective target therefore requires quickly deploying a range of renewable and carbon neutral generation technologies - while phasing out polluting forms of energy generation.
The report notes that considerable investments will be required to move the globe away from carbon-based energy generation, and towards more sustainable methods. The researchers find that to meet the sector target for decarbonisation, the current growth trend for renewables will need to continue as it currently stands, at 25%–30% year on year for wind and solar, and hydropower growth of 2–4% per year, until 2025, after which growth of 4–5% per year from 2025 until 2050. According to the analysis, this would be sufficient to completely decarbonise the power sector, despite the projected increase in demand.
One of the major outcomes of the new report is the incompatibility of current trends of coal combustion to the Paris Agreement. Current coal capacity will need to be significantly reduced to meet the 1.5 C pathway, while planned capacity is in stark contrast to meeting future goals.
The report finds that, given the 40-50 year lifespan of the average carbon energy generation facility, and the realities of the agreement and its likely effect on global policies, investors ought to be weary that sinking large sums of money into what may become stranded assets could see them lose their investment.
A host of policy efforts are likely to result in the rapid decarbonisation of the energy system, relegating carbon-energy generation to the status of legacy assets. Key moves are likely to include production subsidies, affecting feed-in tariff as well as stimulating investment. Secondary moves, include the leveraging of fiscal instruments and supporting financing for projects. Tertiary moves include regulatory requirements, likely to affect carbon-generation such as carbon pricing, as well as further environmental restrictions.
The report further adds that the carbon industry has historically enjoyed unprecedented benefits, both explicit and implicit. One consideration, not often made explicit to society, is the considerable negative externalities that carbon generation brings with it. The report notes that “mainstream school of economics agrees that the role of policy makers is to address these market failures due to the undeniable costs to society.” International Monetary Fund (IMF) estimates that in 2013, post-tax consumer subsidies accounted for $4.9 trillion (6.5% of global GDP). The carbon sector has too enjoyed considerable subsidies from governments – in 2014 the value of fossil-fuel consumption subsidies worldwide totalled $493 billion.
Introducing the cost of externalities to the price of energy generated from carbon fuels, as well as rolling back subsidies, will create additional impetus to move away from last century’s form of generation, while providing additional financial capacity to create sustainable energy and a host of new employment opportunities, and reduce damages to society.
The report concludes, “The Paris Agreement “provides a clear signal to investors that the transition to the lowcarbon, clean energy economy is inevitable and already underway” (Global Investor Coalition on Climate Change, 2016). In the short term, one of the clearest and most-needed steps Governments can take is to ensure that no more concessions for new coal plants are granted, thereby reducing (future) stranded assets. Existing plants would need to be phased out in a cost-efficient and socially acceptable manner, which assumes the need for a plant-by-plant shut down schedule, similar to Germany’s nuclear phase-out plan.”