Climate neutrality versus plurality
Updated: May 14, 2021
The People’s Republic of China announcing their strive towards carbon neutrality by 2060 left many commentators asking the same question: why does it have to take so long? The short is that it doesn’t, but many multinationals believe taking your foot off the gas (*cue laughter*) shouldn’t jeopardise economic growth. Both new technologies and the rise of ESG funds have demonstrated the efficacy that a world without non renewables can bring. Most recognise that this is the endgame, but many still disagree on how to get there.
Practical issues with carbon neutrality
Electricity is a modern day essential that lights our towns, powers our portable devices and contributes the largest percentage towards carbon emissions at 42%. The International Renewable Energy Agency estimates that 86% of electricity can be generated with renewables by 2050. This estimation seems optimistic, and takes the current landscape of developing countries for granted.
The unfortunate truth is that the start-up capital required for renewables (and as a result the lack of regulatory capacity for them) coupled with the decreased availability of government subsidies makes fossil fuels the cheaper option for developing countries. This makes it incredibly difficult for developing countries to fight climate change and provide for their citizens, especially where poverty is prevalent.
In East Asia and the Pacific, as the number of people living in extreme poverty dropped by 85% in 30 years, the amount of carbon dioxide per capita increased by 185%. These developing countries will struggle to balance both important interests, and that is where multinationals come into play…
Make way, multinationals to save the day?
The 2020 World Economic Forum demonstrated the essential role multinationals are beginning to play in our bid for a cleaner world. With a panellist arguing governments are the ones who need to step their game up, many argue both governments and multinationals must improve.
Starting with multinationals, the support shown by oil and gas companies in this fight against climate change has been bitter-sweet. BP pledged to increase low-carbon investments by 10-fold and increase its total renewable spending to a third of its overall spend by 2030. The flip side is that its target for next zero emissions is thirty years away and they still plan on producing 1.5 million barrels of oil each day by 2030. Many agree with BP’s CEO that the tap cannot be turned off overnight, but whether carbon neutrality for the oil giant should be over 10,500 nights away is debatable.
Finnish refiner Neste were ahead of the clean energy curve and are now reaping the rewards. They began producing renewable diesel over a decade ago and are now the world’s biggest producer, with demand ever-increasing. Some analysts and investors question whether renewables can reap similar returns as non-renewables. Answering this would be premature, but companies like Orsted will serve as an indicator for the years to come. The Danish company’s energy output is a fraction of ExxonMobil’s, yet its forward price-to-earnings ratio has soared to almost 40, whilst ExxonMobil’s fell to less than 20 in 2020.
ESG sceptics argue that Orsted’s share price is inflated due to the unprecedented interest from fund managers in ESG, but does anyone see this interest going away any time soon? A price stabilisation is inevitable for Orsted, but its stock weathered the storm of pandemic uncertainty and continues to see gains towards the end of 2020.
A more likely hindrance to Orsted and like-minded companies is them no longer having room to spread their wings. Plans for renewable growth outside Europe’s well-regulated and incentivised zone may prove difficult for companies. This brings us back to the practical reality of achieving global carbon neutrality when developing countries have fewer incentives and a weaker regulatory capacity. Without the proper incentives globally, everyone will continue to play by their own rules and a significant phasing out of non renewables seems unlikely.
Best case scenario
In pursuit of a cleaner world faster, it is necessary for both governments and multinationals to work together. This process should not simply be bilateral in nature, as developed countries should aid developing countries in manoeuvring through this regulatory struggle. Multinationals should provide investment, particularly in developing countries in order to accelerate the shift from non-renewables to renewables. As aforementioned, a world without non-renewables is the endgame, but waiting around for the Sorcerer Supreme to make the tough call for us all will not save the world this time.