Angus McCrone, Chief Editor
Bloomberg New Energy Finance
Climate change conferences, by repute, go as follows: scientists issue grim warnings, NGOs shout out grimmer ones, bureaucrats in stuffy rooms debate the wording of paragraph 38b on page 84, heads of government fly in and take the credit for agreements, or “accords”, that sound important but may not result in much in terms of either emissions or the flow of finance.
This one – COP 21, due to start in Paris on November 30 – looks different in several respects from its predecessors, and particularly from the shambles that was Copenhagen, 2009. First, developed and developing countries are no longer pointing the finger at each other in quite the same way, the former demanding action from the latter, and the latter saying that the former should shoulder the expense because they caused the problem.
Countries have stopped trying to achieve a binding, top-down global deal to avert climate change. Instead, individual nations – more than 150 of them, in fact – have submitted their own plans for curbing emissions, via Intended Nationally Determined Contributions, or INDCs.
A second difference is that pressure has been brought to bear from some new and influential quarters, such as Pope Francis via his environmental encyclical, Laudato Si, and that bastion of hard-nosed economic decisions, the International Monetary Fund. At the annual meetings of the IMF and World Bank in Lima this month, Christine Lagarde, managing director of the Fund, put the climate challenge as follows: “If we collectively chicken out of this, we’ll all turn into chickens – and we’ll all be fried, grilled, toasted and roasted.”
Cities have also been part of that new pressure. Home to 3.5 billion people now, but due to house 6.5 billion by 2050, big conurbations have much to gain from a reduction in pollution and congestion and, in some cases, relief from the threat of sea level increase and storms. The C40 group of 82 cities published research this month estimating that the world’s urban centers could reduce by about 40 percent the future CO2 emissions locked in annually by 2030 – if they take decisions to favour low-carbon options for urban transport, appliances and lighting, heating and cooling, and building shells. In September a global “Compact of Mayors”, meeting in New York and representing more than 2,000 cities, agreed to act to cut annual emissions by 454 million metric tons per year by 2020.
PRIVATE STEPS
However, the biggest difference is that in the lead-up to Paris, the world’s private sector has been making the running on decarbonization, more effectively than ever before and also across more fronts.
The most conspicuous way in which the private sector is leading is via the spectacular reductions in the cost of low-carbon technologies. Since 2009, the year of Copenhagen, the levelized cost of electricity from PV has come down by more than 60 percent, while that from onshore wind has fallen 15 percent. Bloomberg New Energy Finance’s latest analysis of this, published earlier in October, found that the global average LCOE for onshore wind nudged downwards from $85 per megawatt-hour in the first half of the year, to $83 in the second half, while that for crystalline silicon PV solar fell from $129 to $122[1]. In some places, solar is now being built for even less ($60 to $100 per megawatt-hour). Fossil fuel generation costs vary a lot by region, but onshore wind is now significantly cheaper than coal-fired power in Europe and gas-fired power in both Asia-Pacific and Europe. Even where it is still more expensive on average, such as compared to gas-fired generation in the Americas, the gap is small.
Of course, this achievement on costs has not been the work of the private sector alone. The underlying opportunity was created by national policies, notably the German feed-in tariff, which produced the world’s first big market for solar, and Chinese installation targets and low-cost finance, which made possible huge economies of scale in manufacturing. Nevertheless, the private sector has responded and is delivering.
Meanwhile, energy-smart technologies have been eating away at the growth of electricity demand, so that consumption figures, particularly in developed economies, have fallen far short of what would have appeared likely at the time of Copenhagen. Sure, the weak economic growth trend of the first half of this decade has had a significant effect, but the role of technologies such as energy-efficient lighting, refrigeration and computing has also been important. As I discussed in a VIP Comment published in late May, electricity supplied in OECD countries in 2014 was 10,195 terawatt-hours, some 0.4 percent down on its level in 2007, a period in which economic growth in those nations was 6.3 percent.[2]
The upshot of the cost and technology advance produced by private sector companies is that national choices to go down a zero-carbon path rather than a fossil-fuel one have been made much easier. The plunge in the oil price of the last 15 months, rather than turning around this choice, has generally served to reinforce the view that fossil fuel carries a high volatility cost and, for many countries, the need to import it can destabilise the balance of payments.
More and more developing countries are choosing to invest in wind and solar – Jordan’s planning minister, Imad Najib Fakhoury, this month strikingly described his country’s renewables drive since 2012 as a “question of survival”. In hard statistics, developing countries are on track this year for the first time to overtake their developed equivalents in terms of investment in non-hydro renewables – actually by some margin. Among the developing countries that invested more than $500 million in the first three quarters of 2015 are the Philippines, Uruguay and Pakistan, as well as more familiar names such as Chile, South Africa, Thailand, Mexico and of course China, Brazil and India.
Overall, global investment in non-hydro renewable power capacity has been running 3 percent above record 2014 levels during the first three quarters of 2015, and this year is already certain to be a record year in terms of the wind and solar capacity added (possibly reaching 115 gigawatts compared to 101 gigawatts last year).
Private sector corporations have also been leading the way in terms of specific initiatives. To take some of the most recent, last month, Total SA said it plans $500 million per year of annual investment in renewables, and Procter & Gamble Co said it aimed to cut greenhouse gas emissions from its operations by 30 percent by 2020 using efficiency measures and renewable power. In July, 13 major U.S. corporations, including Apple Inc and Goldman Sachs Group Inc pledged $140 billion in investment to reduce their carbon footprints, Coca Cola Co said it would cut emissions from beverage production by 25 percent over the next five years and Google Inc announced it would triple its purchase of renewable energy over the next decade. In April, GDF Suez said it would change its name to Engie SA, as part of a move away from fossil-fuel power towards renewables. E.ON SE is in the process of splitting its fossil fuel power operations into a new entity called Uniper, while retaining renewables, transmission and distribution.
Investors have also been busy. European institutions Gothaer Allegemeine Versicherung AG and Stichting Pensioenfonds ABP have been among those announcing recently increases in their commitments to renewable power. In July, Aviva PLC said it would invest 2.5 billion pounds in renewables and energy efficiency over five years, embed carbon risk in its investment decisions and seek assurances from fossil fuel companies that they are investing in emissions-cutting technologies. Institutions have also been backing new vehicles for investing in renewable energy projects, including green bonds ($38.8 billion last year, likely to be $40 billion or more this year) and yieldcos (some $13.3 billion of equity raised on stock markets on both sides of the Atlantic so far). Meanwhile, investors have been taking a new look at coal and its contribution to the emissions problem – Axa SA said in May it would be selling the 500 million of coal assets it owns, as well as tripling its “green investments” to 3 billion euros by 2020.
STATE OF PLAY
Where does all this private sector effort, plus the INDCs issued by national governments, leave the climate issue ahead of Paris? Earlier this month, Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change, said that five or six years ago, the world was heading for “at least four or five degrees [of temperature increase] – nothing short of catastrophic. Now, we have brought down the risk to something around three degrees Celsius – still dangerous but not as bad as before.”
The heavy investment in renewables, a weaker-than-expected trajectory for electricity demand partly caused by the spread of energy-efficient technologies, and significant coal-to-gas switching in North America have combined to limit the recent pace of global emissions growth.
Renewables excluding large hydro prevented the emission of 1.3 billion metric tons of CO2 in 2014, according to the report Global Trends in Renewable Energy Investment 2015, published in March by UNEP-Frankfurt School and drawing on work by BNEF. This figure will rise further in 2015.
Nevertheless, the trend line on climate remains clearly the wrong one, even if it does not look quite as steep as it did previously. According to NASA, 2014 was the hottest year ever for the Earth and nine of the 10 hottest years have been since 2000 (the other one being 1998). This year is on track to beat last year’s record.
Meanwhile, the average CO2 content of the atmosphere at Mauna Loa in Hawaii in 2014 was 398.55 parts per million, up just over two points compared to 2013, up 21.06 points compared to 2004 and 82.58 points since 1959, the first time the observatory made that measurement. There is no sign at all of this long-term trend changing – in September 2015, the CO2 content was 2.38 points up on the same month of 2014.
At the current rate, even if the world managed to hold emissions at the current level, atmospheric CO2 would hit 450ppm, in terms of annual average, in either 2038 or 2039. If emissions go on increasing for many years yet, the 450 level – deemed by climate scientists as the maximum compatible with increases in temperature of less than two degrees Celsius – could be reached in the early 2030s.
PARIS AND BEYOND
The line-up of countries for Paris looks very different from that at Copenhagen, with some of those shifts happening recently. The European Union is as enthusiastic as ever, although the new majority Conservative government in the U.K. has been making unfriendly policy moves on renewables and the Polish election this weekend has delivered a win for the Law and Justice party, which may dig its heels in deep over domestic coal. China has done a deal with the U.S. on emissions. India is more enthusiastic about renewables and more flexible than before, even if it continues to complain about climate justice.
The biggest changes, though, are among the ranks of the hydrocarbon exporters. Saudi Arabia and the oil giants have been unnerved by the plunge in the crude price and may be even more inclined to be obstructive if they think their future market is in danger. They may, however, find that Australia and Canada are no longer soul-mates – this autumn has seen Tony Abbott’s replacement by Malcolm Turnbull in the former, and the election victory of Justin Trudeau’s Liberals in the latter.
No doubt, in December, the world’s governments will say that they have made a breakthrough contribution to averting climate change, putting previous COP meeting disappointments behind them. Two big question marks will be whether they agree on some mechanism to review progress on the commitments made in Paris, and whether they incorporate some way of tightening them if that proves necessary.
I predict, however, that it will not be long before the focus switches back to private sector companies and investors, and their own independent initiatives. To borrow Lagarde’s metaphor, the private sector is doing a lot that will contribute to reducing the risk of humanity being “toasted and roasted”. It has started to make the low-carbon transition look more feasible, and lowered the likely costs of doing it.
[1] These estimates exclude subsidies and tax credits.
[2] Electricity consumption figures are from the International Energy Agency, GDP figures are from the OECD.