Calls for greater consistency and ambition in policymakers’ climate policies and incentives.
Asset owners are calling for increased policy support and financial incentives to upscale low-carbon technologies to accelerate the net zero transition, as new research from the Inevitable Policy Response (IPR) warns existing global policies are not 1.5°C-aligned.
The UN-convened Net Zero Asset Owner Alliance (NZAOA) has published a report highlighting the “vast economic opportunity” surrounding transitioning in line with 1.5°C of global warming by 2050, estimating investment opportunities could reach US$275 trillion by 2050. Failure to transition may result in US$4-US$6 trillion in GDP losses every year by the mid-century, the report added.
One of the biggest areas of opportunity lies in less mature low-carbon technologies, the NZAOA has said, such as carbon capture and storage (CCS) and sustainable fuels.
A continued lack of policy certainty and financial incentives from policymakers will undermine the potential to sufficiently scale these technologies in the near term, the Alliance has argued.
“As we have learnt from advanced climate solutions, such as renewable energy and vehicle electrification, advantageous policy environments are a key enabler of uptake,” said Günther Thallinger, Chair of the NZAOA.
Technologies that the Alliance now considers to be mature only started to scale once they became profitable through cost reductions, the report said, noting that the unit costs of solar energy and wind decreased by 85% and 55% respectively between 2010-19. The cost of manufacturing parts for electric vehicles (EVs) has also dropped, such as an 85% decrease in the price of lithium-ion batteries between 2010 and 2019.
Public subsidies and incentives for EVs globally doubled from 2021 to 2022 to US$30 billion, the report said.
“We must see these approaches replicated to similarly drive emergent technologies, such as green hydrogen and sustainable aviation fuels, without which it will be impossible to reach net zero given the scale of the transition,” said Thallinger.
“Asset owners have a huge role to play, with potential contributions up to US$31 trillion by 2050, but only by removing current investment barriers will we be able to unlock the full potential of private capital.”
The Alliance’s report sets out solutions for policymakers to better facilitate the adoption of new technologies, such as low-carbon technology-focused subsidies, grants and tax credits to improve the risk/return profiles of investments, upgrading public infrastructure and increasing sourcing capacity, as well as phasing out government support for brown assets.
“Likewise, new regulations and standards are required to spur stakeholders to adopt decarbonisation technologies and improve the economic case for investment,” the report added.
In 2021, the Alliance published a position paper calling on asset owners to rapidly invest in carbon dioxide removal (CDR) and negative emissions solutions.
Earlier this month, the NZAOA published the fourth edition of the Target Setting Protocol (TSP), which is open to feedback until 29 September, and is the latest update to the Alliance’s blueprint for members to align their portfolios with net zero pathways via its recommended methodologies and approaches.
Slightly off track
The IPR’s latest assessment of existing climate policies globally has determined that the world is likely to overshoot 1.5°C by 2050 but is on track to keep temperatures “well below 2°C”.
The forecast, which was unveiled during Climate Week in New York, draws on assessments of over 300 climate policies over the past two years, predicting that warming will breach 1.5°C by the 2030s, peaking below 1.8°C around 2050.
“Emerging markets have roughly 10-15 years extra runway to net zero in the forecast, implying a slower policy transition,” IPR added.
Fifty percent of the policy gap identified by IPR is linked to coal power in India and China, as well as limited climate-related action being taken by some countries, such as Russia and Saudi Arabia. The report noted that Russia is not expected to reach net zero until 2065.
The IPR has predicted deep industrial decarbonisation – within which green hydrogen and CCS will be deployed – will begin at scale in the 2030s.
The report acknowledged the IPR forecast is more optimistic than other bodies, pointing to the UN’s 2022 ‘Emissions Gap Report’, which noted current government climate pledges would result in 2.5°C of warming.
The IPR has previously launched a database to help investors monitor the impact of global climate policy changes on the value of their portfolios.
“While there is a long road to Paris, we are now well under way,” said Jakob Thomä, IPR’s Project Director.
“The pessimism about missing 1.5°C no overshoot should not overshadow the fact that policy acceleration over the past two years increasingly highlights the central climate outcome is now 1.8°C warming.
“No time for complacency, but perhaps time for some optimism relative to previous temperature projections, despite the growing evidence of the systemic risk that comes with overshooting 1.5°C.”