Net-zero insight: Maintaining a pragmatic approach

In part two of her net-zero column, Frédérique Carrier, head of investment strategy at RBC Wealth Management, reviews some investment implications regarding net-zero and why investors should maintain a pragmatic approach.

Reshaped landscape

The landscape of 2050 will be different beyond simply the further proliferation of wind turbines and solar panels, which have already become prevalent over the years. In cities, more green spaces to lock up CO2 will be widespread.

With homes receiving the majority of their electricity from wind and solar and a greater amount of electricity generation directed at transport, more transmission infrastructure, including pylons and substations, will be needed to carry energy to homes and factories.

Travellers may see tram-style overhead power cables hovering above a truck lane on the highway—the electric motorway. Trucks emit between 15 percent and 18 percent of CO2 emissions and German conglomerate Siemens has been at the forefront of innovative technology to reduce this.

Siemens’ first “eHighway” was piloted in Sweden, with diesel hybrid vehicles manufactured by Scania adapted to operate with power from an overhead contact line. A similar system was also tested in Los Angeles. The UK government commissioned a study in 2021 to assess the economic and technical potential of a national rollout of this technology, which offers many advantages beyond cutting emissions and improving air quality. It can eliminate the dependency on battery range performance while increasing utilization rates as it would eliminate idle time during charging.

In addition, given that a massive reduction in the amount of carbon dioxide already in the atmosphere will be necessary, direct air capture (DAC) facilities, which extract CO2 directly from the air, are likely to be built on the edge of urban areas. These will look like rows of boxes containing fans humming away.

The IPCC suggests that to keep global warming below 1.5 degrees Celsius, around 730 billion metric tons of CO2 must be taken out of the atmosphere by the end of this century in addition to a significant reduction in emissions. That is equivalent to all the CO2 emitted by the U.S., the UK, and China since 1750.

DAC removes CO2 from the atmosphere by forcing air over a chemical that grabs CO2, then compresses, transfers, and stores it in deep geological formations. Currently, 19 DAC plants are in operation worldwide, capturing 10,000 metric tons of CO2 per year.

The problem is cost. The largest DAC facility operating today, in Iceland and operated by ClimeWorks, a Swiss firm, can remove 4,000 metric tons of CO2 from the air per year and store it in mineral form at a cost of $600 to $800 per metric ton. Scaling up the technology can bring the price down. Canada’s Carbon Engineering believes its much larger plant with planned capacity of one million metric tons per year, scheduled to open in three years’ time in Texas, can operate at a much lower cost, in a range of $90 to $240 per metric ton.

According to Carbon Engineering, DAC technology combined with secure geological storage can deliver permanent and verifiable removal of carbon dioxide from the air, reversing the emissions process, and provide sectors struggling to decarbonize, such as aviation, shipping, and oil and gas, with a potential path to achieve net-zero targets.

To reach net-zero by 2050, DAC will need to be scaled up to capture more than 85 million metric tons of CO2 per year by 2030 and approximately 980 million metric tons per year by 2050, according to the IEA. To put the level of infrastructure in place to realize these goals will require targeted government support including grants and public procurement.

A cheaper option to remove CO2 is planting trees, and reforestation efforts have increased in recent years. The IPCC suggests that increasing the total area of the world’s forests, woodlands, and woody savannahs could store around one-quarter of the atmospheric carbon necessary to limit the rise in the global average temperature below 1.5 degrees Celsius—though this would require adding up to 24 million hectares of forest (roughly the size of the U.S. state of Oregon) every year from now until 2030.

Recent national reforestation efforts are nowhere near that level, despite several countries having announced ambitious plans. But people in 2050 are nevertheless likely to see more woodland areas. Encouragingly, the shift toward plant-based diets may free up to 20 percent of farmland for other uses, according to the UK’s Climate Change Committee, a statutory body.

Planting trees may be cost-effective but it may not be the most efficient method to pull CO2 from the air, given how large reforestation areas have to be in order to make a difference. Moreover, trees can burn in wildfires or be cut down, causing much of the stored carbon to be released. Simply, reforestation cannot reduce emissions on its own.

Can net-zero ever be achieved?

Achieving net-zero is a huge task with enormous challenges, as we described in a recent article on the green energy transformation.

One of these is the hefty price tag. A 2019 World Bank estimate suggested the necessary global infrastructure investment would cost $90 trillion. Spread over 30 years, this would amount to about 0.2 percent to 0.3 percent of GDP per annum, which is manageable, in our view. Moreover, the same study also estimated that the investment could be recouped four times over.

Certainly, the cost of inaction could very well be higher than the investment needed. Reinsurer Swiss Re recently estimated that the global economy could be seven percent to 10 percent smaller in 2050 than now as a result of the cost of climate change (including the damage from extreme weather), as well as parts of the planet becoming uninhabitable, fueling hunger and migration.

Though the solutions for countries to achieve net-zero do exist, or are in early development, many need to be scaled up, a process that is capital intensive and fraught with difficulties. It is an encouraging sign that at the recent UN climate summit, COP26, not only did nations pledge to meet net-zero targets by 2050, but so did more than 5,000 businesses.

That said, just as the uptake of both solar and wind energy over the past two decades was encouraged by policy support, such as tax credits, subsidies, and government-backed loans, the same approach and resolve will be needed to help these technologies become commercialized.

Pragmatism should prevail

For investors, this represents both risks and opportunities. Our view is that investors should maintain a pragmatic approach given the serious gaps between net-zero ambitions and potential outcomes. High-emissions companies that do not adapt are likely to incur difficulties. Those that adapt or develop new technologies, if given support to reach commercialization, will likely find themselves in a position to benefit from this transformation.

*Frédérique Carrier is the head of investment strategy at RBC Wealth Management

You can view part one of the column here.