Race to de carbonization: Convergence to financial goals is the key
Iconic global company, British Petroleum (BP) made a very interesting move recently by selling off its coveted petrochemicals business and opting to play only in the energy businesses – oil and gas.
In its Q2`20 results announcement, BP`s strategy statement under its new CEO, says that it will reshape BP`s business as it pivots, from being an international oil company focused on producing resources, to an integrated energy company focused on delivering solutions for customers.
In pursuit of its new strategy, BP aims to reduce it oil and gas output, in the next 10 years, by 40% from the present levels, with emphasis on low carbon technologies especially on renewables – bioenergy, hydrogen and on CCUS (Carbon capture, utilization and storage). Clearly BP is moving towards the global wave towards greener world and sustainability, with the better stock market valuations as the key objective. A couple of weeks back, the BP top management showcased the contours of their new business strategy, in a 3 day investors meet, which explained their move towards zero carbon and sustainability.
Similarly, the other global oil major Shell has also announced similar moves to a zero carbon future as a part of its “Our response to Climate Change” report and is moving on the same lines as BP.
Stakeholders on common platform – boost for sustainability initiatives
Sustainability and climate change has become an integral strategy of all the global firms, especially in the energy and downstream area, thanks to public pressure as well as due to the sustained efforts of think tanks and activist organizations like Greenpeace. In fact, unlike the past when the global firms were reluctant to engage with the pressure groups, there is an increasing acceptance by the global firms to engage and shape their sustainability strategies with activists like Greenpeace.
Recently, in a virtual discussion forum shared by Shell, Greenpeace and Green Alliance , the convergence was very visible with the statements of the senior executives of these 3 organizations. The welcome sign, that was very evident, was a rising acceptance to work together to achieve climate actions goals.Gone is the acerbity that used to cloud such discussions and debates in the past.
Higher financial returns for sustainability investments
Environment, Social and Governance (ESG) investing has taken a big leap in the last few years and the trend has been given a further boost especially with the recent Covid pandemic. Global investments in socially responsible assets is at present estimated to be at about $45 trillion as per a JP Morgan report.
Data published recently by FE analytics show that in the last 3 years, socially responsible investments have generated about 7% more returns as compared to benchmark indices and about 11% more returns than non-socially responsible investments.
Green bonds – huge inflows in last few years
Green bonds, which raise money for climate and environment projects, had a very slow start when they were first launched in the year 2007. However, in the last few years, green bonds in various forms have seen a huge interest with about $258 bn of investments in the year 2019 – a 51% increase on a year on year basis.
As per Morgan Stanley Capital Index, about 70% of the green bonds issuance are in alternative energy (38%), green buildings (17%) and sustainable transport (15%). Renewables energy has accounted for a bulk of the alternative energy investments over the last few years.
Overview of Global Carbon Emission
Countries emit vastly different amounts of heat-trapping gases into the atmosphere. The chart and table below both show data compiled by the International Energy Agency, which estimates carbon dioxide (CO2) emissions from the combustion of coal, natural gas, oil, and other fuels, including industrial waste and non-renewable municipal waste.
Table no 1: CO2 country wise emissions (Source:https://www.ucsusa.org/resources/each-countrys-share-co2-emissions)
|Rank||Country||Carbon dioxide emissions (Total GT)|
|2||United States of America||5.41|
Global CO2 emissions are expected to decline even more rapidly across the remaining nine months of the year, to reach 30.6 Gt for the 2020, almost 8% lower than in 2019. CO2 emissions declined the most in the regions that suffered the earliest and largest impacts of COVID-19; China (-8%), the European Union (-8%) and the United States (-9%), with milder weather conditions also making an important contribution to the emissions decline in the United States.
Major CO 2 emittingsectors
The six major sectors that emit CO2: (1) power (44.3% of global fossil CO2 emissions), (2) industry (22.4%), (3) surface transport (20.6%), (4) public buildings and commerce (here shortened to ‘public’, 4.2%), (5) residential (5.6%) and (6) aviation (2.8% (Methods)). The data represent changes in activity, such as electricity demand or road and air traffic, rather than direct changes in CO2 emissions.
Overview of Carbon Emissions in India
Our lives and livelihood depend on nature and the environment. Nature is essential for various industries such as construction, agriculture, food and beverages and is also a source for medicines. In India, scientists opined that lockdowns had benefitted the environment. Drastic improvements in air and water quality, pollution levels and biodiversity were observed.
Based on these observations, scientists have suggested retaining some of the lifestyle changes in the post-lockdown phase to maintain these improvements. India’s lockdown — one of the world’s most stringent — crushed economic activity in this nation of more than 1.38 billion people. The lockdown saw empty streets, blue skies and clean rivers even though in the backdrop of rising unemployment and growing number of infections. By one estimate, India’s carbon dioxide emissions fell by 30% in April`20 compared with the same month in 2019. India is now the planet’s third-largest emitter of carbon dioxide, although it is still well behind China, the world’s largest emitter, and the United States. India is expected to become the most-populous country in the world by 2027. It is also a nation that intends to make major leaps in its development in the coming decades. Achieving such leaps will require considerably more energy than India currently consumes.
What can be done in India?
India, like any developing country, is faced with a dilemma of balancing development vs environmental concerns. India will be “a critically important part of the emerging trend in global emissions. Not only is India one of the world’s largest and fastest-growing emitters, but it also faces acute vulnerabilities from a changing climate, including rising sea levels, melting glaciers and extreme weather events. So far, no country has managed to lift itself out of poverty without a concomitant surge in emissions.
Hence, in the coming years, India will need policies that not only lower pollution and carbon emissions but also create jobs for its growing workforce. We are now at the stage where much, much to our surprise, we may reach both of these goals well before 2030.
Global Low-Carbon Propulsion Market is valued approximately US$5.5 trillion in 2019 and is anticipated to grow with a healthy growth rate of more than 21 % over the forecast period 2020-2027. The key players of global low carbon propulsion market have adopted various strategies to gain competitive advantage including product launch, mergers and acquisition, partnerships and agreements, investment, funding, and others.
Low Carbon Technology will be a stepping stone towards designing an intelligent, futuristic healthy environment in India that is capable of catering strategic technology to the representative of CO2 emission sectors and towards the environmental impact of solutions.India’s innovation-specific policy support, in this area, has been important in driving energy technology development. As part of its climate policy agenda, the government has pursued a missionbased approach in many policy areas, including solar, water and energy. India has also been a leader in Mission Innovation and other multilateral collaborations.
Initiatives that can be pursued by India
- Alternate Fuels: Push towards cleaner sources of energy needs to be incentivized for greater penetration. The shift towards solar power was given a boost with the financial incentives to the producers. Installation costs crashed by about 80% between 2010 and 2019 which helped Indian capacity to about 31GW from 2.6 GW in 2015. Indian solar power prices, at present, are estimated to be one of the lowest in the world. Hence, the government needs to continue such an approach not only to solar power but also to other alternative energy sources.
- Incentivize companies to reduce carbon footprintwith regular audits and tax breaks to support such initiatives.
- Electric vehicles (EV`s), have been sustained in the western nations, with government incentives. Charging stations are required for higher penetration of EV`s. Indian government needs handhold the auto industry to manage the transition to EV`s through tax breaks especially support the charging station infrastructure development.
- Hydrogen as a clean fuel is being actively pursued in China and other western nations. India can adopt hydrogen quickly and leapfrog in its adoption.
Secured Governance model–taking advantage of value of assets created
When development takes place there will be increase in valuation and economic growth. Who benefits from this? More often than not it is incidental and taken advantage off by land and property sharks. Imagine a model where this valuation can be ploughed back into the project and also benefit the people around. First the cost of the project is reduced, and can actually be at near zero cost to the government if carefully planned. Next the population sees it as benefitting them and so they participate more enthusiastically, helping with early completion of the project rather than being an impediment.
Secured Governance (SG) mode of working ensures these benefits.
Secured Governance has made, mobilising private investment for HUB development, a key goal. It’s a “win – win” situation that requires international cooperation and set goals for public private participation to enhance revenue generation and huge employment opportunity. Returns generated in four to five years will meet the investment cost. The SG approach requires the Government to participate only as a facilitator and nothing more. The first step is to recognize the merits of a multi-sector approach to infrastructure and conceive projects which may be predominantly focussed on one sector but carry with them smaller packages of other supporting sectors. Implied in this is the ability to take decision across ministries and give clearances at one point. The method of implementation will also be unique to each project depending on the place and the local conditions. Single window clearances would therefore have to be the norm, supported by empowered teams that can help conceptualize and clear a project in the SG model. Once this is done, the execution may be decentralized to specific states or regions. Help from the government will only be required for mid-course corrections where inescapable. This unique method of both valuation and value addition, through SG needs expertise and imagination for holistic development especially in Public Private Participations (PPP) based infrastructure projects.
Aspirational goals needs to have a sound financial model
The rise and convergence of financial incentives to the environment and social aspirations of all stakeholders, has led to a change in approach, thinking and business strategies in the last few years, towards decarbonization and environmental goals. Global firms see better market valuations, government authorities visualize lower pollution and emissions while activists, like Greenpeace, gain more traction and funding with their contributions for global wellbeing. Convergence of financial and aspiration goals is important to make any sustainability, climate action and environmental initiatives work by making it an economically sustainable model. The recent global shift in this direction is an encouraging move which will lead to benefits for the global society as whole and lead to low or zero carbon society.
Let’s hope for the best!
Ram L Narayanan,
Global expert in oil, Chemicals and Natural Resources Businesses. Vice President Strategic Planning in a Top Industrial grp.