In today’s Exponential Investor…
- The East is what colour?
- What’s blowing in the wind?
Last week, Kit’s analysis of the COP26 summit struck an optimistic note.
After years of dither and delay, we’re starting to see world leaders take real action on climate change.
As Kit argued: “Paris set out the rules of the game. Glasgow just might decide the winners.”
Because discussions about climate change are often (quite rightly) driven by what we could lose, today I want to explore the opportunities presented by the green energy transition.
For example, take the following economic forecasts from Swiss Re, a major insurance company.
Earlier this year, the firm published several projections for global GDP growth by 2050 compared to a world without climate change.
The report made for grim reading:
- -18% if no mitigating actions are taken (3.2˚C increase)
- -14% if some mitigating actions are met (2.6˚C increase)
- -11% if further mitigating actions are taken (2˚C increase)
- -4% if Paris Agreement targets are met (below 2˚C increase)
Forecasts such as these are important. They show what the world could lose if countries fail to act on climate change.
But let’s be clear, due to historic carbon emissions, many people across the world are already losing out from climate change.
Whether that’s due to rising sea levels, desertification, or more frequent extreme weather events.
Sadly, this is now to some degree inevitable.
But what many economic forecasts don’t attempt to account for is the potential growth that will be driven by the green energy transition.
And there are plenty of reasons to be optimistic…
For a long time, economic growth has fuelled climate change.
Because economic growth typically has typically resulted in, and required, greater demand for energy.
And energy has long been generated by burning fossil fuels.
Even today, around 80% of electricity is produced by fossil fuels, according to the International Energy Agency.
The causal relationship between growth and emissions has prompted several schools of thought to develop.
One group advocates “degrowth”.
Perpetual economic growth is unsustainable, degrowthers believe, so humanity must shrink economic activity if it hopes to halt climate change.
“Degrowth” might work on a personal level. If people decide to cycle more or eat less meat, then the aggregate impact of this could reduce the investment needed to reach net zero by up to one-third according to the European Commission.
But degrowth could never be deployed at scale.
After all, economic growth has lifted billions of people out of poverty throughout recent history. It’s how hundreds of millions of people have been lifted out of poverty over the past few decades.
As Bruegel, a European economic think tank, argues, “Degrowth is simply not an option that will be pursued by poor or rich countries. The crucial question is thus how to achieve green growth.”
The green energy transition presents an opportunity to decouple growth and emissions and drive a new kind of economic growth.
And one region in particular is in a prime position to capitalise on this transformation…
Why Asia-Pacific is destined for green growth
The idea that the region that pumping out around 50% of the world’s carbon emissions stands to gain from the green energy transition may sound strange.
After all, China and India alone produce nearly 35% of global emissions.
And the region’s astonishing economic development has gone hand in hand with rising energy requirements.
India’s recent announcement at the COP26 summit that it will aim to achieve net zero carbon emissions by 2070 can rightly been viewed as unambitious.
But in terms of reducing its pollution, there are some easy wins to be had for Asia-Pacific.
Take coal. If the region weans itself off coal-powered energy production, that will reduce global emissions by 14%. And there are plenty of viable, economical substitutes for coal, too.
Even before the pandemic, Asia-Pacific had already embarked, at least in part, on the path to decarbonisation. 2019 marked the world’s largest increase in renewable energy as a share of total energy production.
And the country that saw the greatest increase in renewables production?
Meanwhile, South Korea – which is pursuing its own “Green New Deal” – is in the process of building the world’s largest offshore wind farm. Meanwhile, next year India is expected to open the world’s largest floating solar plant.
But reducing emissions is only one half of the story.
World leaders and investors are increasingly seeing the green energy transition as a new avenue for growth.
The Carbon Tracker report that Kit referred to last week neatly encapsulates this argument.
Previously, the idea of transition away from fossil fuels was seen as a necessary cost that countries must shoulder. So why not share the burden?
Now, the narrative has shifted.
The green energy transition is an opportunity that promises to grow, not shrink, economies.
Asia Pacific is particularly well-positioned to make the process of going green into a money spinner.
So, what opportunities does the green energy transition offer the region?
For a start, China is already the largest exporter of renewable energy products. China, alongside the rest of Southeast Asia, already owns around 80% of the solar photovoltaic production capacity.
But there’s another way of thinking about economic growth too.
Being able to manufacture renewable energy products is great. But given that many countries in Asia Pacific already produce renewable technologies, the region also possess the skills, knowledge and expertise required to build up green industries.
Intangible factors such as these take time to establish. You can’t train a generation of green energy experts overnight.
But many countries in the region already have a head start.
According to a report by Deloitte, which examined the economic impact of going green in Asia-Pacific, the green energy transition could add an additional $47 trillion in growth to the region by 2070.
Plus, since manufacturing capacity in the region is growing far faster than anywhere else in the world, economic powerhouses like China and India will have plenty of capacity to export renewable technology too.
Of course, other areas of the world may struggle to “green” their economies this quickly.
Within just a couple of decades, Nigeria is on course to have a larger population than the United States – but right now it has just 1% of the electricity generation capacity of the United States.
That’s why access to electricity remains a problem in countries like Nigeria.
To ensure that countries with large off-grid populations don’t simply opt for fossil fuels, then rich countries will likely have to finance both green technology and the underlying infrastructure that will allow people to access electricity.
Why offshore wind capacity is set to explode – but not for the reasons you think
So, “green growth” is necessary, and it’s already happening.
Last year, the global market volume of green technology hit a record €4.6 trillion (£3.9 trillion), and is set to grow at an average annual growth rate of 7.4% through to 2030, according to consultancy Roland and Berger.
But which green technology sectors will be the biggest beneficiaries?
Offshore wind will undoubtedly play a major role.
It’s central to the energy transition plans of many countries, including the UK, Japan, China, and the United States, to name a few.
At the end of 2020, the offshore wind pipeline stood at 307,815MW.
But wind energy isn’t just a useful way of producing electricity. It also plays a vital role in producing another green fuel…
Hydrogen is, in theory, a super fuel. If burnt, it releases energy, with only water as a by-product.
Since wind and solar power are intermittent, green hydrogen is touted as the best means of providing energy when the sun isn’t shining and the wind isn’t blowing.
Right now, just 0.1% of the world’s hydrogen is “green” (that is, produced using renewable energy through a process known as electrolysis).
Unsurprisingly, the share of “green” hydrogen is expected to grow exponentially over the coming decade. Between now and 2028, the green hydrogen market is due to grow by a compounded annual growth rate of over 57%.
We’ll be exploring the role of other clean energy technologies in the coming weeks.
But one thing is clear: the global economy is changing for the greener.
Until next time,
Contributor, Exponential Investor
PS Over at Frontier Tech Investor, Sam Volkering is exploring another up-and-coming technology that, just like green energy, will shape the future world we live in. Find out more here.