Net zero

From aspiration to firm targets

Author: Sam Arie, Head of European Utilities Research, UBS Global Research

As more and more nations and companies set net zero emission goals for the middle of the century, we think it will be critical to slow down and eventually stop new investment in the fossil economy, to target carbon reduction sooner than 2050 wherever possible, and to channel more investment toward essential adaption measures. We expect significant acceleration in the pace of capital reallocation, encouraging a rapid rotation of investments out of the fossil sector and into clean energy projects.

As more and more nations set zero emission goals for the middle of the century, we ask if it may already be too late to hit those targets, and what, therefore, we should do differently today.

In short: we are not on track for Net Zero 2050, and we have left it so late that avoiding 1.5°C of warming is now a global, social objective that teeters dangerously on the brink of what is possible. However, the imperative for action remains urgent and three priorities, in our view, stand out:

  1. turn off the tap – by slowing and eventually stopping new investment in the fossil economy;
  2. maximize the plan – by targeting net zero as fast as possible, rather than by 2050;
  3. adapt to reality – by channeling more investment toward essential adaption measures.

With concerted action on these objectives, we may yet succeed in delivering global energy transition this century, and we may some how mitigate the worst effects on society of continued climate change. For example, we expect rising pressure on fossil finance to bring a strong new leg to the climate theme. We believe global banks may start reacting to this soon. Some may announce a significant reduction in fossil fuel finance while others, perhaps, may exit completely. As a result, we see more capital flowing to the clean energy sector, reducing weighted average capital costs (WACC) and increasing investment there – the two ingredients needed for further expansion

How to deal with the problem

In the past 50 years, the world has changed dramatically. The global population has roughly doubled, and so have real incomes – in combination, a historic achievement. But that success has come at a cost, with annual energy demand roughly tripling, carbon emissions rising by a similar amount and average temperatures having already increased by around 1°C. In recent years, fossil fuels have continued to provide some 85% of our global energy needs and new investment in the fossil economy has averaged around USD 1 trillion a year. At this rate, as illustrated on the next page, we will fall far short of net zero emissions by 2050. So, the first priority is to accelerate the process of global capital reallocation, encouraging rapid rotation of investments out of the fossil sector and into clean energy projects. We have already seen record breaking progress in this area, with the cost of wind and solar now cheaper than conventional power in many parts of the world. But we must go further and faster, and we will still need technology breakthroughs in transport, industry and buildings, as well as in clean power generation itself. 

Second, we must watch for the seductive power of the 2050 targets. Since many companies, industries and nations will likely struggle to achieve net zero in this timeframe, those that can achieve net zero faster must do so. The framing question should be “How fast can we get there?”, rather than “Can we get there by 2050?”. In other words, companies, industries and nations that target a comfortable glide path to Net Zero 2050 should challenge themselves to go faster, knowing that much of the world economy is likely to fall far behind them.

Finally, we must look at how we can adapt to life on a fundamentally less hospitable planet, if we do ultimately fail to keep temperature increases below 1.5°C. Little is really known today about what these adaptation measures should be, but they could include everything from small-scale local solutions (air conditioning, building refurbishment) to national infrastructure imperatives (network resilience, supply chain management, disaster risk management). Today, we spend only around 5% of global climate finance in these areas and the mismatch vs. the coming risks is increasingly clear.

Annual carbon emissions and potential sinks (in gigatons of carbon)

Source: Friedlingstein et al. 2019, Global Carbon Budget 2019, Earth System Science Data, Vol 11 (4), Dec 2019; see also The State of the Global Energy Transition (2020), commissioned for UBS from Aurora Energy Research

Is there an alternative technological solution that can bail us out?

Some may hope that technology will save us, and, indeed, there are interesting possibilities. In time, we may learn to capture clean energy from nuclear fusion, for example, or we may develop geo engineering solutions, such as refreezing the poles, or sending mirrors into space to reflect solar radiation away from the planet. But these technologies are not in our hands today, and few would expect them to arrive  and be rolled out globally within the coming, critical decade.

Forecast global CO2 emissions by scenario

Sources: Carbon Dioxide Information Analysis Centre (CDIAC), Intergovernmental Panel on Climate Change (IPCC), United Nations Framework Convention on Climate Change (UNFCCC); chart reflects modelling by Aurora Energy Research commissioned for UBS Global Research, 2020

Time to take decisive actions

We live in important times. Decisions and actions we take in the next ten years – or do not take – could have consequences for centuries. On the positive side, a new political consensus is emerging with new and aspirational carbon targets being set across the globe, and renewable power is maturing into a serious industrial force. However, on the negative side, time is scarce; we do not yet have scalable technologies to decarbonize our largest industrial sectors; and, so far, we lack plans, processes and regulatory constructs to turn aspirational targets into reality. All this presents an unprecedented challenge in terms of planning and coordination, which we must collaborate across borders to address.

UBS Perspectives on Sustainable Finance for the Davos Agenda 2021

Media Event with Axel Weber, Ralph Hamers, Suni Harford & Huw van Steenis.


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Want to know more?

To get more insight into sustainable finance in the year to come, download your copy of Sustainable Finance: Ten Trends for 2021.

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