By Mathew Carr
Oct. 13, 2020 — LONDON: The future of energy and climate policy around the world is still hazy, but it’s coming into much sharper focus.
That’s a relief for investors, who are pushing politicians and industry leaders to become more brave and more ambitious as they consider climate action. A global template is beginning to fall into place.
Politicians in Europe have used a mix of policies to achieve big reductions in emissions the past few decades.
Germany subsidised solar power, while Britain supported offshore wind generation.
While this government assistance was indeed costly, those forms of electricity have become largely cheaper than coal and natural gas, as power networks favour clean options.
Private money is flowing decisively into clean technology, with about 1 trillion euros of clean projects set to make financial close within two years in the EU, according to consulting firm EY.
One of the keys to Europe’s economic model is carbon pricing, which has increased to a level that’s probably high enough to deter a “brown bounce back” after the coronavirus pandemic. Politicians are seeking to direct coronavirus economic support to green initiatives so economic activity is cleaner after the health crisis and less focussed on dirty (or brown) fossil fuels.
So far the economic rebound has been patchy, according to the IMF, with China leading the charge (story continues below):
Carbon pricing simply hasn’t threatened Europe’s economy like it was feared it might when the region began its carbon market near the beginning of the century. Carbon pricing is slowly taking hold across the world and a national carbon market has not been ruled out by Joe Biden as he runs to become U.S. president.
Ten years ago, it was expected Europe might need a carbon price above 200 euros a ton to push the electricity industry to solar from coal. That would have boosted the region’s economic costs substantially.
“That’s not how we did it,’’ says Mark Lewis, chief sustainability strategist at BNP Paribas Asset Management. What Europe did, specifically Germany for solar and the U.K. for offshore wind, is drive down the cost of renewables using targeted subsidies, including feed-in tariffs, and mandatory levels of clean power. Costs are now still falling.
“It’s almost impossible for fossil fuels to compete any more with that very strong deflationary dynamic,’’ Lewis told an online OECD green finance event Oct. 9.
Because renewable power is now so cheap, Europe can protect its energy shift using much lower carbon prices — below 30 euros a ton. That’s probably enough to prevent a resurgent coal and natural gas industry.
“The risk is that if there is a near-term brown bounce back, investors will very much regret it, because they will be looking inevitably at stranded assets only a few years down the line, as the renewable energy revolution continues — the costs are still falling, that’s the point,’’ Lewis said.
With the power grid much cleaner, Europe’s now turning to heavy industry like steel and cement as it seeks even more ambitious decarbonization. In those industries, electricity can’t readily provide the high temperatures needed for production.
Hydrogen is seen as the probable answer because it can produce the needed heat and — as costs fall — renewables can probably produce it with no greenhouse gases closer to 2030.
The cost of producing green hydrogen (from renewables) today is about 5 or 6 euros per kilogram, Lewis said. That’s more than triple of the price of grey hydrogen (from fossil fuels) at 1.50 euros per kg. Europe’s in the process of using subsidies, mandates and research support to get the price of green hydrogen down to about 2.50 euros a kg within a few years.
“There comes a point where the capital costs of these new technologies – exactly what we’ve seen with renewable energy – allows the carbon price then to come in once the new technology is — let’s say — within the firing range of the incumbent fossil fuel,’’ Lewis said.
So, instead of needing carbon prices of several hundred euros to incentivize the shift to hydrogen, carbon prices around 90 euros a ton might do it (closer to the end of this decade), he said. That’s still more than triple today’s level in Europe’s carbon market, where prices are still below 30 euros a ton.
Europe wants to reach net zero emissions by 2050 and it’s linking climate and trade policy to protect its own low-carbon industries.
“You can’t get to net zero without green hydrogen scaling up to 10% to 15% to 20% of the European energy mix. You can’t get to that outcome without green hydrogen first displacing grey hydrogen as an industrial feed stock,” Lewis said.
With carbon prices protecting the region from a reverse shift, private investors will be confident they can dramatically boost spending on clean tech, including hydrogen technology. Politicians can be more confident to bring in policies, knowing they won’t substantially hurt industry and employment. Carbon trading can provide nations with flexibility to hit emission targets without boosting economic costs.
Europe’s “glide path” to fewer greenhouse gas emissions might represent something that can be adopted in Asia, said Michael Liebreich, founder of Liebreich Associates and consultancy New Energy Finance (now owned by Bloomberg LP).
“There are regulatory or investment interventions and then you get a carbon price that’s not ridiculous and that brings in the private capital, that allows people to then invest” and doesn’t always need to be matched by public support, Liebreich said.
This cuts cost and risk for governments, plus they get new revenue from selling carbon allowances. Low gas prices, such as those in the U.S., are also a risk-cutting benefit.
Gas prices have also dropped in Asia, where most of the world’s population lives. That region is beginning to understand that climate protection and better global trade rules represent a considerable financial and employment opportunity, according to Ahmed Saeed, a vice president at the Asia Development Bank.
China, which is implementing a national carbon price, is now targeting net zero emissions by 2060, only 10 years later than Europe.
Asia may be winding back its rhetoric on climate change, where it has historically blamed rich countries for the problem.
The region is beginning to leapfrog the west on its cleantech shift, Saeed told the OECD event, citing battery projects in Mongolia and a surge in spending on windpower, solar and street lighting in India.
“They recognise increasingly that they do have a systemic responsibility, and not just a responsibility for their own countries,’’ he said of unspecified leading Asian nations. Japan and Australia also have hydrogen strategies.
“I’ve seen this slight shift emerge over the last year or so as we confront various issues, where traditional sources of leadership may not be present,” said Saeed, who has worked for private banks and the U.S. Treasury.
“That awareness that they are beneficiaries of the global trading system — they feel that what’s good for global trade is good for them, what’s good for global climate is good for them, so they have this sense of commitment to what is in the best interests of the planet.’’
(Updated Tuesday afternoon with IMF chart showing patchy recovery from the pandemic, Lewis’s Tweet added Wednesday)