COP26: despite the energy crunch, the focus must remain on renewables

Energy demand is rising more quickly than the availability of renewable alternatives, emphasising the need for greater investment
The trend towards net-zero carbon will touch all parts of the economy, as shown in technological progress in areas such as electric cars and ‘green steel’

Chris Iggo

Published: 3:30am, 21 Oct 2021

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World leaders will gather in Glasgow, Scotland, at the end of October to discuss how to accelerate progress towards a net-zero carbon economy. Investors, who are increasingly engaged with climate change and see the need to adapt their strategies, will be following events closely.

The past year has given us plenty of examples of the urgency of climate change and how it threatens our economies and societies. We saw flooding in China, extreme temperatures in the Pacific northwest of North America and wildfires burning throughout the Mediterranean.

Energy use is the largest contributor to global greenhouse gases, be it from households, transport or industry. The long-term trend is for the world to move away from fossil fuels and instead use low- or zero-carbon-producing renewable sources of energy such as solar, wind and hydro power.

Ultimately, demand for oil, coal and natural gas, and their prices, will fall. Currently, though, we are a long way from that. In recent months, prices for crude oil, natural gas and thermal coal have risen sharply.

On the Zhengzhou Commodity Exchange, the price of a tonne of coal for delivery in January 2022 has more than doubled since August. The world is paying a lot more to use fossil fuels at a time when the political and social pressure is to use less of it.

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Supply disruptions caused by the Covid-19 pandemic have led to a widespread energy crunch. Demand has recovered, though, and the trend remains one in which global energy demand is rising more quickly than the availability of renewable alternatives.

For many countries, this means higher consumer price inflation along with the risk of central banks raising interest rates, threatening the global economic recovery.

The longer-term challenge is to move away from fossil fuels by increasing investment in renewable energy. Globally, renewables have overtaken coal and account for around 30 per cent of total electricity generation.

However, in some areas, there is more work to do. China generates around a quarter of its electricity from renewables, but most of the remainder is from coal. China’s emissions are much lower than those from the United States on a per capita basis, but the energy mix means the absolute volume of emissions is twice that of the US.

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Reliance on coal is not compatible with meeting the Paris climate agreement’s ambition of limiting the rise in global temperatures.

Energy price developments point to the need for more investment in renewable energy. It is already cheaper to generate electricity from renewables in many cases than from coal and gas. That is even more so this year with the rise in fossil fuel prices.

We are likely to hear more about nationally determined contributions to reducing emissions at the climate conference in Glasgow, as well as about investment plans and how to price carbon. In Europe, the carbon cap-and-trade system has contributed to a decline in carbon dioxide emissions.

A global agreement on carbon pricing or taxes would be a major step forward in changing the economics of the energy and other industrial sectors.

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To China’s credit, it is ahead of much of the world in the amount of power it generates from renewable sources. The establishment of the carbon emissions trading system in China is a recognition that pricing has a key role to play in influencing the change in the energy mix.

The low-carbon transition will touch all parts of the economy, not just energy generation. Higher carbon prices – the price companies pay for generating emissions – combined with technological progress and shifting allocations of capital by investors will help the move to a zero-carbon economy.

These trends are already transformative for certain industries, such as cars. According to media reports, sales of electric vehicles in China were 187 per cent higher in August than a year earlier. And heavy industrial processes such as steelmaking – a crucial sector in the Chinese economy – will soon be able to employ technologies that enable the production of “green steel”.

Individual countries are doing much to combat climate change. Investors are also playing a role. Marginal capital allocation decisions are favouring transition leaders, low emitters and those companies moving to greener methods of production. Hopefully, Glasgow will mark increased international cooperation on climate change and related topics such as biodiversity preservation.

Today’s energy prices tell us we have a long way to go in terms of reducing our generation of carbon, but the positive impact of making the shift on long-term growth, the environment and our communities means that efforts to do so are more important than ever.

Chris Iggo is the chief investment officer for core investments with AXA Investment Managers