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Policy, Innovation to Disrupt Carbon-intensive Sectors

Business models and investment dynamics in hard-to-abate industries will likely be reshaped by net zero-focused policies and innovations, according to Moody’s latest report on the low-carbon transition. Policy support is increasing for clean energy technologies not yet available at scale, the report mentioned – including green hydrogen, carbon capture utilisation and storage (CCUS), biofuels, and nuclear small modular reactors. While this may accelerate innovation and make low-carbon solutions more affordable, high execution risks and uncertain returns on investment will persist in the short term, Moody’s suggested, limiting potential credit benefits. As such, carbon transition risk is likely to remain elevated in many sectors. Governments have been looking to stimulate private investment in emerging clean technology projects and related infrastructure through a mix of financial incentives, including regulations and measures that deliver predictable demand for low-carbon products. Sectors likely to benefit from initiatives such as the US Inflation Reduction Act and the EU’s Net Zero Industry Act, for instance, include steel, cement, chemicals, airlines and shipping. In a separate research, Moody’s said CCUS adoption would depend on policy impetus and the development of supportive ecosystems, such as transport infrastructure and carbon pricing regimes. “Deployment is constrained by a lack of profitability, limiting the near-term potential for CCUS to materially reduce exposure to carbon transition risks,” the report read. “Some applications, such as enhanced oil recovery or use of captured carbon to produce ethanol, are economical today, in part because of the revenue generated by CO2 use… While CCUS will play some role in the energy transition, it is likely to supply only a fraction of the expected emissions reductions for hard-to-abate sectors.”

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