Just three months into the year, there are clear signs that 2021 is shaping up to be a pivotal year for the climate change fight.
We see three mutually reinforcing developments that are accelerating the roll-out of decarbonisation roadmaps, strategies and action plans worldwide.
First, there is greater urgency among policymakers and industry leaders to tackle the climate change threat. This urgency is driven by growing acceptance – supported by the latest climate science – that the threat is existential, and that further inaction will eventually lead to far greater damage to economies and communities.
“We’ve already waited too long to deal with this climate crisis and we can’t wait any longer. We see it with our own eyes, we feel it, we know it in our bones, and it’s time to act,” US President Joe Biden said on 27 January 2021.
Second, there is clear alignment of the global climate action agenda with post-pandemic policy goals calling for massive government spending to rebuild economies.
“Dealing with this existential threat to the planet and increasing our economic growth and prosperity are one and the same,” President Biden said. “We’re going to take money and invest it in clean energy jobs in America — millions of jobs in wind, solar, and carbon capture.”
Third, breakthroughs in technology have significantly reduced the cost of renewable energy and low-carbon alternatives across a wide range of economic applications.
For businesses: Jump or be pushed
Businesses across most sectors of the economy face significant disruptions to their existing operating models as the world moves to decarbonise.
Some of these disruptions are likely to take place rapidly as increasingly robust climate policies intersect with new technology to propel low-carbon alternatives to the forefront across a wide range of economic activity, triggering a cascade of tipping points and rapid shifts in consumer behaviour.
Last year, worldwide spending on renewable energy, electrification of heating and transport, and other energy transition initiatives reached a record USD501 billion despite the severe disruption from Covid-19. We expect this to grow even more over the next few years.
Exhibit 1: Global spending on energy transition reached a record USD501 billion in 2020, and we expect this to rise further
Source: BloombergNEF, Energy Transition Investment Trends, 2021.
Note: CCS = Carbon capture and storage.
Critical thresholds in various areas are now being breached, with renewable energy costs reaching parity with fossil energy in major economies, while policy incentives and stricter regulations are spurring businesses to adjust their long term strategies to align themselves with global decarbonisation efforts.
Extreme weather events spurring greater urgency
The rising frequency of extreme weather events – most recently the record cold winter in Texas that froze critical parts of its power grid and led to widespread blackouts, leaving millions without electricity or water – serves as a devastating reminder that the cost of doing too little to improve the climate resilience of infrastructure and other parts of the economy could eventually be far greater than the cost of investing in adaptation and mitigation measures before disaster strikes.
“This is one of those types of weather events that we shouldn’t think of as unpredictable at this point,” Gina McCarthy, President Biden’s domestic climate adviser, said on 20 February 2021. “We are going to be facing these extreme weather events and challenges and we have to be prepared.”
Last year alone, the US suffered 22 weather and climate disasters including drought, wildfire and severe storms that each cost more than USD1 billion, far above the previous record of 16 events that occurred in 2011 and 2017, according to the US National Oceanic and Atmospheric Administration.
Exhibit 2: 2020 saw a record number of weather and climate disasters in the US resulting in damages of USD1 billion or more
Source: US National Oceanic and Atmospheric Administration; latest data available as at 25 February 2021.
What lies ahead? Deep decarbonisation, massive investment and rapid adaptation
On the present trajectory, the world is facing a temperature rise of around 2.6°C by 2100, far exceeding the Paris Agreement’s 1.5°C goal, according to the latest projections by Climate Action Tracker. This means that despite the commitments and progress made so far by governments worldwide, much more will still need to be done.
Decarbonising the world economy by mid-century to meet the Paris Agreement climate goals requires further deep cuts in carbon emissions across the full range of economic activity including power generation, industry, transport and agriculture.
This will mean profound structural changes to the way the world economy works – creating both significant disruption and new opportunities for businesses.
Rapid decarbonisation of the world economy to set it on a path that limits global warming to 1.5°C by the end of the century requires USD100 trillion-USD150 trillion of investment over the next 30 years – or an average of USD3 trillion-USD5 trillion a year, according to estimates published in December 2020 by the Global Financial Markets Association.
Worldwide, a growing number of businesses are announcing major strategic transformations to align their future paths with the transition towards a net-zero emissions future, in response to pressure from policymakers, investors and consumers.
Recent notable examples include:
We expect such announcements to multiply in the coming months. In the US, various utility companies are repositioning themselves to take advantage of an anticipated sharp increase in electricity demand from renewable sources as part of President Biden’s commitment to make the economy carbon neutral by 2050.
In Europe, broad efforts are already well underway to decarbonise the entire European Union economy by 2050.
The race for climate supremacy
Increasingly, we expect geopolitical rivalry between China, the US and Europe to be a key driver of government policy and investments in clean energy and related technology.
China’s heavy investments to develop and expand the use of clean technologies is likely to pressure the US to step up its own investments (Exhibit 3).
This heightened competition will drive innovation and growth, adding further impetus to global decarbonisation efforts.
Exhibit 3: Expect the pace of investment to accelerate rapidly as China and the US race for climate leadership
Source: BloombergNEF, Energy Transition Investment Trends, 2021.
Note: CCS = Carbon capture and storage.
We expect China to announce further initiatives to develop low-carbon industries and clean energy, and to tighten emissions standards at the upcoming “Two Sessions” – the key annual meetings of its top decision makers typically held in March.
President Xi Jinping has pledged last September that China aims to have its carbon emissions peak before 2030 and to achieve carbon neutrality by 2060.
Meanwhile, we expect the US to announce new decarbonisation commitments – known as each country’s nationally determined contribution or NDC – as part of its renewed membership in the Paris Agreement, ahead of a climate summit that President Biden is hosting with world leaders on 22 April (Earth Day).
US national climate adviser Gina McCarthy has pledged to announce “the most aggressive NDC that we can”, signalling that the new US commitment to cut emissions would likely surpass its earlier pledge to reduce emissions by 26-28% by 2025 from 2005 levels. Overall, we expect to see significant efforts by the US to regain a leading position in the global fight against climate change in the coming months.
As highlighted in our earlier report, recent surveys show that there is broad support among the US public for greater government action on climate change. A large majority of the US public also believe that the country should prioritise developing alternative sources of energy such as wind and solar, rather than expanding the production of oil, coal and natural gas.
Falling costs of renewables driving global energy transition
The rapid decline in the cost of renewable energy in recent years has been a critical driver of increasingly widespread adoption of clean technologies.
“Levelised costs of electricity generation of low-carbon generation technologies are falling and are increasingly below the costs of conventional fossil fuel generation,” the International Energy Agency and OECD Nuclear Energy Agency said in a 2020 report. By 2025, onshore wind is expected to be the lowest-cost source of electricity generation, it said.
Today, solar and wind are already the cheapest source of new bulk electricity generation in countries representing over two-thirds of the world population, three-quarters of global GDP and 90% of electricity demand, a separate Bloomberg NEF analysis published in December 2020 shows.
Based on current policies alone (before any new initiatives by the Biden administration to accelerate decarbonisation), the US Energy Information Administration projects that the share of renewables in the US electricity generation mix will double to 42% by 2050 from 21% in 2020, driven mainly by wind and solar.
It expects renewable power generating technologies to account for almost 60% of the ~1,000 gigawatts of new power generation capacity additions from 2020 to 2050 (Exhibit 4).
Exhibit 4: Renewable power is projected to contribute almost 60% of new capacity additions in the US from 2020 to 2050
Source: Annual Energy Outlook 2021, US Energy Information Administration.
In Europe, renewable energy sources overtook fossil fuels in 2020 to become the European Union’s biggest source of electricity for the first time ever, rising to 38.2% of its electricity needs from 34.6% in 2019, while the share of fossil-fuel power generation fell to 37.0% from 39.5% in 2019 (Exhibit 5).
Exhibit 5: Renewable energy sources are now the biggest contributor of the EU’s electricity mix, driven by growth in wind and solar power
Source: The European Power Sector in 2020, Agora Energiewende and Ember (2021).
The increase in renewables was driven by a sharp rise in wind and solar, while the decline in fossil power generation was led by a steep decline in coal (Exhibit 6).
Exhibit 6: Coal-generated electricity in the EU has fallen by nearly 50% since 2015
Source: The European Power Sector in 2020, Agora Energiewende and Ember (2021).
Elsewhere in Europe, Norway’s example shows that government policies that reduce the cost of clean technologies to below parity with fossil fuel technologies can lead to rapid shifts in business and consumer behaviour. Due to a tax system that makes most electric vehicles (EVs) cheaper to buy than a similar petrol vehicle, the country has the highest EV penetration in the world – fully electric vehicles made up a record 54.3% of all new cars sold in Norway last year, up from 42.4% in 2019.
In Singapore, the government is similarly moving towards such a tipping point by narrowing the price difference between EVs and conventional vehicles powered by internal combustion engines (ICE) through a mix of tax incentives for new EVs and higher petrol duties to discourage the use of ICE vehicles.
The social cost of carbon
We expect pricing of carbon emissions – already well-established in large parts of Europe in the form of the EU emissions trading system (ETS) introduced in 2005 – to emerge as a vital component of policymaking in China, the US and elsewhere in the near future, to progressively align economic activity worldwide with climate goals.
On 1 February 2021, China launched its own emissions trading system spanning 2,225 power firms nationwide as part of efforts to reach peak emissions before 2030 and decarbonise the country’s economy by 2060. The scheme is expected to eventually surpass the EU ETS to become the world’s largest ETS.
In the US, in a little-publicised development, one of the executive orders signed by President Biden on his first day in office established the Interagency Working Group on the Social Cost of Greenhouse Gases.
The main task of this working group – which includes Treasury Secretary Janet Yellen, National Climate Advisor Gina McCarthy, Environmental Protection Agency chief Michael Regan and other key members of Biden’s cabinet – is to update the “social cost of carbon” that is used by the US federal government to determine environmental regulations and a wide range of other policies that require an assessment of external costs of pollution.
A statement on 19 February 2021 has effectively revised this cost to around USD50 per tonne in 2007 prices, based on earlier guidance published by the Obama administration. This temporary measure, pending the outcome of a full review to be published next year, already represents a sharp increase from the USD1-USD6 per tonne reference used by the Trump administration.
An academic paper just published by economists Nicholas Stern and Joseph Stiglitz argues that a significantly higher price of around USD100 per tonne (in 2007 prices) is needed by 2030 to set the economy on a pathconsistent with the Paris Agreement climate goals. Other academics at the University of Chicago have argued that an even higher price of USD125 is needed.
We expect the Biden administration to increase its assessment of the social cost of carbon next year following its review, and we expect this to be a critical policy instrument for Biden’s whole-of-government approach to fighting climate change.
Overall, we expect to see a powerful build-up of climate-related political momentum in the coming months, with more policy announcements and commitments by the US, China, and other major economies ahead of the UN Climate Change Conference or COP26 meeting in November.
Potential beneficiaries
Due to the sheer breadth and scale of global decarbonisation efforts expected and the fast-evolving but uneven rollout of climate policies across the world, we continue to prefer a strategy of adding exposure to a diverse range of businesses catering to a broad spectrum of market segments that stand to benefit from the accelerating trends towards a carbon neutral global economy.
These include suppliers of specialised chemicals, chips or other critical components used in clean-air systems to reduce emissions from vehicles and industrial plants and to produce batteries for electric vehicles, as well as sophisticated automation systems to reduce wastage and improve energy efficiency in buildings or manufacturing facilities.
Important information
This product may only be offered: (i) in Hong Kong, to qualified Private Banking Customers and Professional Investors (as defined under the Securities and Futures Ordinance); and (ii) in Singapore, to Accredited Investors (as defined under the Securities and Futures Act) and (iii) in the Dubai International Financial Center to Professional Clients (as defined under the Dubai Financial Services Authority rules) only. No other person should act on the contents of this document.This product may involve derivatives. Do NOT invest in it unless you fully understand and are willing to assume the risks associated with it. If you have any doubt, you should seek independent professional financial, tax and/or legal advice as you deem necessary.
Please carefully read and make sure that you understand all Risk Disclosures, Selling Restrictions, and Disclaimers. This document must be read together with the relevant Prospectus & Offering Documents &/or Key Fact Statement.
Disclaimer
This document is prepared by Bank of Singapore Limited (Co Reg. No.: 197700866R) (the “Bank”), is for information purposes only, and is not, by itself, intended for anyone other than the recipient. It may contain information proprietary to the Bank which may not be reproduced or redistributed in whole or in part without the Bank’s prior consent. It is not an offer or a solicitation to deal in any of the investment products referred to herein or to enter into any legal relations, nor an advice or by itself a recommendation with respect to such investment products. It does not have regard to the specific investment objectives, investment experience, financial situation and the particular needs of any recipient or customer. Customers should exercise caution in relation to any potential investment. Customers should independently evaluate each investment product and consider the suitability of such investment product, taking into account customer’s own specific investment objectives, investment experience, financial situation and/or particular needs. Customers will need to decide on their own as to whether or not the contents of this document are suitable for them. If a customer is in doubt about the contents of this document and/or the suitability of any investment products mentioned in this document for the customer, the customer should obtain independent financial, legal and/or tax advice from its professional advisers as necessary, before proceeding to make any investments.
The Bank, its Affiliates and their respective employees are not in the business of providing, and do not provide, tax, accounting or legal advice to any clients. The material contained herein is prepared for informational purposes and is not intended or written to be used, and cannot be used or relied upon for tax, accounting or legal advice. Any such client is responsible for consulting his/her own independent advisor as to the tax, accounting and legal consequences associated with his/her investments/transactions based on the client’s particular circumstances.
This document and other related documents have not been reviewed by, registered or lodged as a prospectus, information memorandum or profile statement with the Monetary Authority of Singapore nor any regulator in Hong Kong or elsewhere.
This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Bank’s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Singapore, Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates (collectively, “Affiliates”) to any registration, licensing or other requirements within such jurisdiction.
