The universal agreement in Paris to limit global warming to 2oC should underpin long term growth in the renewable energy and energy efficiency sectors, says Charlie Thomas, Head of Strategy, Environment and Sustainability.
We believe the climate change pact struck at COP21 in Paris at the weekend represents a sea change in government policy and provides a strong signal to business about the dramatic economic transformation that must take place over the next 30 years in order for it to be achieved.
While there were some shortcomings, the conference went further than any before and sent a strong signal of intent with a unanimous goal of holding global temperatures “to well below 2oC above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5oC”.
One of the most significant outcomes from the conference in my view is the five-yearly review process which requires each country to report on progress in achieving emissions reduction targets and to outline successive emissions reduction objectives. This clearly signals that the current post-2020 emissions reduction pledges are only the start of the decarbonisation journey, and the review mechanism is pivotal given current pledges to cut emissions are only expected to limit a rise in global temperatures of between 2.7oC and 3oC.
From an investment point of view, we believe the deal will be positive for businesses involved in renewable energy and energy efficiency and should underpin momentum in the development of environmental technologies. Furthermore, while carbon pricing was omitted from the final agreement, we expect this mechanism will become increasing important at a local level for incentivising the transition to a lower carbon economy. China is expected to launch an ambitious carbon emissions trading scheme in 2017, for example. This will cover between 3bn and 4bn tonnes of CO2 emission – more than six times the UK’s entire carbon emissions over 2014.
However, we are mindful that the pact does not start until 2020 and we will now be monitoring how the agreement translates into regional policies that promote capital flows into green products and services. Overall, we believe the success of the Paris deal will require significant and sustained investment in green technology and we have seen some compelling forecasts about the pace of this investment in recent months. Prior to the conference, the International Energy Agency estimated that $8tn-$14tn (or some $550bn per year) will be invested in energy efficiency globally by 2035 to meet growing demand and to help achieve decarbonisation goals. Meanwhile, research by Bank of America forecasts that renewable energy will represent some 70%-80% of new power generation between 2015 and 2030 (up from 50% now). This should ultimately increase the use of renewables to roughly 60% of the global energy mix, with fossil fuel use falling to 40%.
Given the timescales involved, the deal is unlikely to have an immediate impact on the fossil fuels industry. However, for the Paris goal to be met an estimated 80% of the world’s fossil fuels will need to be phased out over the next 30 years, and the risk premium associated with “stranded assets” is likely to grow once the agreement comes into force in 2020.
This commentary is for informational purposes only and is not investment advice. The views expressed are those of the author at the time of writing (December 2015) and are not necessarily those of Jupiter as a whole and may change in the future. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.
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