Low-carbon technologies will transform the energy system, but not fast enough to limit global warming, writes Gerard Reid, founding partner of Alexa Capital, financial analyst and co-founder of the Energy and Carbon blog. According to Reid, what is needed is to shift the still massive investment in oil and gas onto alternative energy sources. That can only be done through a carbon tax.
It is clear to me that low carbon technologies such as solar and storage will become so cheap that they will enable a shift away from fossil fuels. In the coming years, we will see renewables increasingly powering our homes and businesses and eventually over the next 30 years we will see automobiles fully electrify and maybe over the next 50 years heat as well.
What we need to do is increase investments in clean energy sources as well as reduce investments in fossil fuels
But this begs the question whether this is fast enough to save our planet from the impacts of carbon related climate change. The answer to that is probably no, which then leads to the question what needs to be done. My view is very simple, and that is tax carbon. There is no way around it.
Over the next 50 years low carbon technologies such as solar and wind as well as energy efficiency technologies such as LEDs will reduce fossil fuel consumption and reduce carbon emissions significantly.
In fact, if renewables could be ramped up to replace coal and if EVs could replace internal combustion engines then global emissions could fall by circa 13.5 Gt of CO2 per annum which is 40% of global energy-related emissions. That would have big impact but let’s be clear that it is likely to take 50 years under current investment scenarios and this is not fast enough to put the world on a path to a “2⁰C” pathway.
The taxing of carbon could also lead to new business models particularly in the underserved building efficiency segment
What we need to do is increase investments in clean energy sources as well as reduce investments in fossil fuels. But in places like Europe investments in annual renewable installations are actually going down. Part of the reason for this is how renewables have been financed. The costs of building out renewables and any related grid infrastructure have been put on the electricity bill of the end customer which in turn reduces any incentives for those customers to electrify their heating systems or their automobiles.
Would it not, for instance, make more sense to put those costs onto the fossil fuels instead? And the timing could not be better given the low prices of coal, oil and gas. What is more, the taxing of carbon could also lead to new business models particularly in the underserved building efficiency segment.
On the other side, there are huge investments still taking place in fossil fuels across the world. India, for instance, plans to open 50GW of new coal generation in the next years and there are massive investments taking place every day into oil and gas.
A company like Exxon invests about $30 billion a year in oil and gas, which would be enough for them to take 50% market share in global solar!
The oil and gas majors are some of the biggest and best financed companies in the world. Think Gazprom, Exxon, BP, Shell, and Saudi Aramco, to name but five. Their annual investment budgets are ginormous. They are investing hundreds of billions of dollars every year into oil and gas and they are doing so because they are making money doing it. Yes, some oil companies such as Statoil and Total are starting to invest in renewables but their capital expenditures in this area are a fraction of their yearly investments into oil and gas.
Part of the issue is that it is not easy for oil and gas companies to invest in renewables. For a start renewables is mostly about electricity generation, which is not the core competence of an oil or gas company. This means they don’t have the culture, know-how or systems needed to make the necessary investments, let alone manage those assets.
Extensive balance sheets
But the bigger issue is that these companies generate higher returns in oil and gas than they do in renewables. And until that changes they and the investors behind the oil companies will not systematically deploy their extensive balance sheets into renewables. And let’s be clear, we need their capital. A company like Exxon invests about $30 billion a year in oil and gas, which would be enough for them to take 50% market share in global solar!
The key going forward is to incentivize fossil fuel companies to move their capital elsewhere and if we are really serious about tackling climate change then we have no choice but to bring in carbon taxes. But my concern is that there are very few governments out there brave enough to do this.
Gerard Reid is founding partner of Alexa Capital in London. Her has over two decades’ experience in equity research and fund management in the energy area. He is also a monthly columnist for the German energy industry publication BIZZ energy today and has been lecturer at the university in Berlin for the last decade.
This article was first published on Energy and Carbon, a blog hosted by Gerard Reid and energy journalist and advisor Gerard Wynn. It is republished here with permission.