Tackling the next emergency
As the global economy recovers from the worst of Covid-19, world leaders are renewing efforts to address the still-growing, existential threat of climate change.
Slow-moving but enduring changes to the environment from large-scale, long-term shifts in the Earth’s weather patterns and temperature threaten widespread damage to entire economies, disrupting businesses, livelihoods and long term social stability.
To stabilise global temperatures and avoid the potentially catastrophic effects of climate change, the Intergovernmental Panel on Climate Change (IPCC) has concluded that net carbon dioxide emissions must be reduced to zero by around 2050.
This requires sharp emissions declines in the coming years across the full range of economic activity including power generation, industry, transport and agriculture, and potential support from new technologies to remove CO2 from the atmosphere.
Successful and rapid decarbonisation of the world economy offers a pathway to limit global warming to 1.5°C above pre-industrial levels by the end of the century – the ultimate target of the 2015 Paris Agreement.
Chinese President Xi Jinping’s pledge at the United Nations in September to have CO2 emissions peak before 2030 and to reach carbon neutrality or zero net carbon emissions by 2060 has injected new vitality into global efforts to meet the Paris Agreement climate goals.
In October, Japan and South Korea both declared aims to make their economies carbon neutral, with zero net emissions by 2050.
In Europe, the transition to a carbon neutral economy by 2050 is already under way and the adoption of supporting policy and regulations is set to drive a comprehensive and profound transformation of the European economy.
And in the US, President-elect Joe Biden’s priorities include rejoining the Paris Agreement and increasing spending on green initiatives spanning transportation, buildings and power generation to reduce carbon emissions to net zero by 2050.
Exhibit 1: Global net CO2 emissions need to be reduced to zero by around 2050 to limit global warming to 1.5°C, based on scenario analysis by the Intergovernmental Panel on Climate Change
Source: Energy Transitions Commission, Intergovernmental Panel on Climate Change. Note: Chart shows model pathways for net CO2 emissions that cap global warming at 1.5°C with limited or no overshoot (in green) as well as pathways with higher overshoot (in blue).
This means that in 2021, more than two-thirds of the world economy – including China, the US, European Union, United Kingdom, Japan and South Korea – will be joining the fight against climate change with ambitious commitments to carbon neutrality by around mid-century.
However, much more still needs to be done. On the current trajectory, the world is facing a temperature rise of around 2.7°C by 2100, far exceeding the Paris Agreement’s 1.5°C goal, according to the latest projections by Climate Action Tracker (Exhibit 2).
Exhibit 2: On the current trajectory, the world is set to warm by 2.7°C by the end of this century, far above the Paris Agreement’s 1.5°C target
Source: Climate Action Tracker, September 2020.
Recent climate trends continue to feed the deepening sense of urgency: The five-year period from 2016 to 2020 is expected to be the warmest on record, with an average global surface temperature that is already 1.1°C above the pre-industrial average, latest World Meteorological Organization data show.
Expect more policy action to come
Globally, the threat of potentially disastrous climate change in the not-so-distant future is exerting increasingly greater influence on key policymakers and industry leaders.
In its November Financial Stability Report, the US Federal Reserve warned that climate change “adds a layer of economic uncertainty and risk that we have only begun to incorporate into our analysis of financial stability”.
BlackRock, the world’s largest asset manager, has said that it expects climate risks to drive a significant reallocation of capital globally, with profound impacts on the pricing of risk and assets.
While the deadly spread of Covid-19 has shifted the immediate focus of most governments and delayed key climate initiatives in 2020, we expect climate-related political momentum to gather new strength ahead of the next UN Climate Change Conference or COP26 meeting in November 2021.
As the severity of the climate crisis becomes increasingly clear, we expect to see intensifying policy commitments by governments worldwide, supported by regulation and legislation to enforce the necessary economic reforms and incentives to accelerate the decarbonisation of the global economy.
In Europe, the proposed European Climate Law is set to make the objective of achieving zero net emissions by 2050 legally binding for the entire European Union and its member states.
Earlier this month, the United Kingdom announced that it would make climate-related disclosures mandatory for large companies and financial institutions across the UK economy by 2025, with a significant portion of these requirements in place by 2023.
China’s upcoming “Two Sessions” – the key annual meetings of its top decision-makers typically held in March – will also be scrutinised for potential policy changes that support President Xi’s promise to make China’s economy carbon neutral by 2060.
And in the US, the new Biden administration will be closely watched for spending plans – including any stimulus to support the economic recovery – and other initiatives that are aligned with climate objectives.
Overall, we expect to see a significant shift in policy and regulation worldwide over the next few years to redirect economic activity towards less resource-intensive modes of production, transport and construction, and to significantly expand the use of clean, zero-carbon energy.
“Carbon should be given a price. The time of fossil fuel subsidies is over,” UN Secretary-General António Guterres said at the Paris Peace Forum on 12 November 2020. “Authorities must integrate the goal of carbon neutrality into all economic and fiscal policies and decisions, in order to truly transform industry, agriculture, transportation and the energy sector.”
These policy shifts will drive major changes in business across entire value chains from product design to production, distribution and recycling.
While disruptive for many industries, the transition to a more climate-resilient global economy with net zero emissions is also set to drive innovation and economic growth, and create new opportunities for businesses to cater to rising demand for a more environmentally friendly and sustainable way of life.
Companies that reduce emissions and waste, re-use natural resources and deliver products and services that support the overall decarbonisation of human activity are likely to attract greater interest and investment capital and will be increasingly well positioned to benefit from a strengthening global policy response to climate change.Disclaimer applicable to recommendation
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Version: July 2020