The Intergovernmental Panel on Climate Change (IPCC)’s Sixth Assessment Report calls for a rapid and deep transition to net zero, making the pivot to clean energy from fossil fuel more critical now than ever. Meeting this absolute priority for the current decade means that the global economy must reduce greenhouse gas (GHG) emissions by 43% out to 2030 and 60% by 2035 to keep global warming to a maximum of 1.5°C.
However, swift transition requires equally speedy and substantial changes in many directions and at multiple levels – political, technological, and economic. It also demands major investments and shifts in policy. The deployment of transition investments is already visible in several regions.
In BNP Paribas’ recent series of client webinars with the Bank’s experts across Markets 360, BNP Paribas Exane, Low-Carbon Transition Group and Quantitative Equity Strategies, discussions focused on these pathways towards clean energy, emerging players in the market, key policy developments and opportunities of the transition for investors.
The road towards clean energy
Investments in low-carbon technologies have accelerated in a trend set to continue to 2030, propelled in part by disrupted global supply chains and policy developments, along with the energy crises fuelled by elevated geopolitical tensions.
Severine Mateo, Global Head of the Low-Carbon Transition Group, BNP Paribas, affirms “today there is true momentum regarding investment in low-carbon transition technologies … If we want to reach or to target net zero, investments in low-carbon technologies should be roughly US$4 to 5 trillion a year, whilst in 2022 they were US$1.4 trillion.”
❝ If we want to reach or to target net zero, investments in low-carbon technologies should be roughly US$4 to 5 trillion a year. ❞
The US and Europe have both come to the fore with an emphasis on strategic investments that address the need for cleaner and more cost-efficient technologies.
According to Constance Chalchat, Head of CIB Company Engagement and Global Markets Chief Sustainability Officer, BNP Paribas, “over the past 18 months, pivoting energy sources has been front and centre in the ESG debates as well as in investor priorities. More recently, policy has been used by governments as a key enabler of clean energy acceleration and is likely to boost investments in clean energies.”
❝ Recently, policy has been used by governments as a key enabler of clean energy acceleration and is likely to boost investments in clean energies. ❞
The Inflation Reduction Act – why now?
The United States is supporting the growth of funding for the clean energy transition through the Inflation Reduction Act (IRA), comprising US$370 billion in subsidies and tax credits to incentivise the uptake of electric vehicles (EV) and build up green infrastructure, emphasising technologies where it can still carve out a commercial advantage. The IRA – hailed as the largest package of support for the energy transition by any country and marking the very first time green tax credits are sold in the market – has a threefold aim. By 2030 it must reduce emissions by 50-52%, install 33-50% of the country’s energy capacity for renewable sources and increase EV sales to equate to 50% of total auto sales.
According to Trevor Allen, Head of Sustainability Research, BNP Paribas Markets 360, “the IRA is very much designed to be able to bring up the manufacturing development and generation capacity of the US through the entire lifecycle and supply chain cycle of renewable energy.”
He explains that strategic directives such as this are looking to build up the supply chain in domestic markets to meet ESG standards while also ensuring enough access to critical resources. They support the country’s diversification efforts, making it a more dominant supplier in the market and avoiding high supply chain reliance on other countries.
❝ The IRA is very much designed to be able to bring up the manufacturing development and generation capacity of the US through the entire lifecycle and supply chain cycle of renewable energy. ❞
Incentivising the uptake of green technology while pursuing social impact makes the IRA unique, providing for a fivefold increase in tax credits when new clean technologies are introduced into energy communities with either a heavy abundance of fossil fuel development or high unemployment for example.
European Union: an integrated approach
According to Martin Brough, Co-Head of ESG Research, BNP Paribas Exane, the EU has also taken great strides forward with its Fit for 55 package. This programme extends the carbon market to cover almost all emissions within the EU, apart from agricultural waste sectors, although it does not put EU industry in a strong position for export.
Brough argues that “both the US and EU approaches can be positive for clean energy investments but they’re very different in terms of their underlying philosophies. The EU approach is very much to regulate and tax the emissions as the way of incentivising clean energy, whereas the US is starting with cheaper market prices for energy and then subsidising green energy below that. Whilst both can drive clean energy, the European approach does leave a huge industrial competitive challenge compared with both Asia and the US.”
❝ Whilst both [the US and EU approaches] can drive clean energy, the European approach does leave a huge industrial competitive challenge. ❞
According to Brough, the EU has three policy goals. Firstly, it must prioritise energy and resource security. As such, promoting European supply chains will be an essential lever in this market. This will rely on the development of new supply chains that do not currently mobilise substantial EU employment or market value. “It’s about creating new industries at scale”, adds Brough.
Secondly, the bloc is striving to ramp up clean energy deployment to reduce fossil fuel dependency and accelerate Paris Agreement ambitions. This is more about utilities on the ground than supply chain, so roll-out could suffer depending on policy choices. Brough suggests that “European content requirements might be good for developing supply chain but will present challenges for developers” as the EU is less open to domestic content requirements, based on free trade considerations.
Finally, there is concern in Europe that unfair competition from the IRA will pull significant investment towards the US and put up fresh barriers to Atlantic trade flows. The third goal for the 27 will therefore be to protect jobs and industrial competitiveness from the US and Asia. However, this will present challenges due to Europe’s higher energy and carbon costs.
Recent analysis by BNP Paribas Exane shows that European industries may face higher energy and carbon costs than US peers to the tune of €100 billion per year. Policy support and private sector investment will therefore be crucial in supporting existing EU industries and helping them develop EU taxonomy-aligned capital expenditures.
The European Commission recently set out its response to these challenges. The Net-Zero Industry Act aims for at least 40% of clean energy technologies to be manufactured in the EU by 2030 to scale up the transition more quickly. The Critical Raw Materials Act sets targets for domestic production, processing and recycling of the raw materials needed. The Commission estimates that approximately €20-25 billion would be enough investment to secure local production of raw materials for batteries by 2030.
Next generation tech
Green technology is now centre stage for industrial policy across the globe with low-carbon energy investments globally outperforming over the past five years and hitting a record high in 2022.
According to Stanislas Mesland, Head of Quantitative Equity Strategies, BNP Paribas Global Markets, “It is very important today to build thematic investment strategies. Assets under management in thematic funds have tripled in the past two years and the reason behind that is quite clear. Investing today is a lot more macro driven, and thematic investing is a more holistic way to do so.”
❝ Investing today is a lot more macro driven, and thematic investing is a more holistic way to do so. ❞
Comparing the levelised cost of electricity (LCOE), renewable technologies such as solar and onshore wind are increasingly competitive compared to traditional electricity generation. Given increased demand for power purchase agreements (PPA), designed to help lock in long-term electricity prices, it is likely that this trend of lower-cost renewables could continue.
Carbon capture, utilisation and storage (CCUS) is one way to help industries achieve net zero emissions and decarbonise says Fabienne Moimaux, Managing Director in the Low-Carbon Transition Group, BNP Paribas. To meet their emissions reduction commitments, governments across the globe have already begun enacting policies to support the development of CCUS. However Moimaux believes that “the last part of that puzzle is of course access to funding and we need to unlock financing for projects and technologies that are new and present different risk profiles.”
❝ We need to unlock financing for projects and technologies that are new and present different risk profiles. ❞
Governments are pursuing CCUS as one of the priority directions for achieving national net zero goals, while creating new jobs and attracting private capital.
Earlier this year, the European Commission included CCUS in the list of critical technologies that can make a strong contribution to decarbonisation and are subject to a limit of at least 40% local manufacturing. The UK announced its plan to allocate £20 billion (US$24 billion) to fund CCUS projects in the next 20 years.
North American and European stakeholders both have scope to gain ground. This will require broader policy changes that encourage widespread adoption, thereby underpinning a rapid acceleration towards the clean energy transition.