Let’s get the obvious out of the way: funding the energy transition will take trillions. This will consist of billions of euros, dollars, rubles, pounds, or whatever currency a given country trades in. BloombergNEF’s (BNEF) various New Energy Outlook scenarios put the global figure needed as between US$92 trillion and US$173 trillion over the next thirty years. Funding needs to increase from around US$1.7 trillion annually today to between US$3.1 trillion and US$5.8 trillion annually on average over that 30-year period; the longer the ramp up, the higher the figure in later years.
Given the scale of the task, no regional, national, or even transnational government will have adequate funds at their disposal to entirely fund the change from the top down. It will take a combination of governments, financial markets, corporations, charities, and individuals to collectively divert capital into green energy and decarbonising activities.
Green Bonds
The UK Chancellor, Rishi Sunak, recently announced the launch – later in the year – of a new Green Savings bond available from the state-owned National Savings & Investments (NS&I) bank, with investments between £100 and £100,000 per person being allowed. This fund intends to raise around £15 billion. The UK needs these Green Bonds in place not just to build up the green war chest but as a way to replace what we left behind when Brexit happened.
A Green Bond along the lines of the European Investment Bank’s ‘Climate Awareness Bond‘ (CAB) – which has traded more than €33.7 bn and helped finance ‘160 renewable energy and energy efficiency projects all over the world’– is the logical next step for the UK towards decarbonising through the smart placement of green capital.
Emissions Trading Systems
Similarly, a UK Emissions Trading Scheme (UK-ETS) – to stand in place of the EU-ETS – was a good first step, and has a price average of £46/tCO2 in June, a notable rise from the Auction Reserve Price (ARP) of £22. Such a close match in the price of UK-ETS / EU-ETS, with a drive towards £ / € parity, clearly shows the strength of the scheme and the expectation of a continuing advancing market. It remains to be seen what the industry will think in terms of the time when they should buy in to cover their requirements. Still, I wouldn’t wait too long as, while for now it applies to ‘energy-intensive industries, the power generation sector, and aviation’, it’ll most certainly be expanded to transport and buildings, just as the EU has recently done.
Though the European Commission has said they expect European Union Auctions (EUAs) to reach €85/t by 2030, I’m reading the market expectations are that it will be closer to €100/t once the full impact of ‘Fit for 55‘ is felt. That makes sense given a) the direction the world is going in around decarbonisation; b) the EU extending ETS to cars and buildings (no surprise there); and c) as reported in the Times recently, the G20 finance ministers agreeing ‘carbon pricing’ is, in fact, a tool for fighting climate change.
Yes, you can forget they have been saying, up to just a few months ago, that carbon pricing was not a tool for this fight.
I’ve written before I expect that, at some point, we’ll see further GHG trading supported by inclusion into the ETS systems and a price more like €100€150/t. It’ll be interesting to see how China’s newly launched ETS systems will compare in price. At the time of writing, the Shenzhen pilot ETS was at US$1.12, and the Shanghai pilot ETS sat at around US$6.32. Though right now it’s low price wise, collectively, they are already the largest in the world by volume; Carbon Brief did a good rundown of the system if you’d like to read more.
According to the World Bank, the carbon pricing – supported by an ETS or carbon tax – would have covered 11.65 GtCO2e (Giga tonnes of CO2 equivalent), representing 21.5% of the global GHG emissions; that’s a lot of emissions and a lot of nations that are still to implement any form of trading system or carbon tax.
What’s notable is that there’s currently no trading system or carbon tax in place nor under consideration. It can be understood that emerging economies might not have such systems in place; nonetheless, when we see countries such as the US and Australia with no measures in place, it implies a severe failure of political will that, thankfully, is starting to be addressed.
ESG Funds
The ever-increasing market joins these two sources of funding in ESG Funds. The Financial Times recently reported that investors had placed US$54 billion into ESG bond funds at ‘the start of 2021’. This is pocket change. Bloomberg reported that globally ‘ESG assets are on track to exceed $53 trillion by 2025’, representing more than a third of the US$140.5 trillion in projected total assets under management.
Just in the Green Bonds, ETS and ESG funds mentioned so far, we see that the original BloombergNEF figure of US$173 trillion remains lofty but achievable over 30 years. All ETS markets will be uplifted by this as carbon isn’t going to get any cheaper. Back in May, the Marshall and Solomon Islands suggested a $100/t carbon price on shipping fuel; they may have undersold themselves, and perhaps they should have read the paper from Trafigura, suggesting US$250-US$300/t.
‘Global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management.’ Bloomberg
Whatever your view is on how to fund decarbonisation, carbon prices are going up far beyond where they are now, and this rise will impact traditional financial assets. As other new funding mechanisms – such as the EU’s proposed Carbon Border Adjustment Mechanism (CBAM) – come into use, we’ll see individual goods and additional sectors, such as construction, affected by carbon pricing.
Funding for the energy transition is happening at a pace; the figures are significant, and the market is growing. By 2050, everyone will be a climate change investor, invested directly or indirectly in helping bring about the global energy transition.
Mark.
