The decarbonisation quandary:
are some sectors too hard to abate?
What tends to remain under the radar are those harder-to-abate sectors, where the pathway to meeting net zero goals is less straight forward. These are often industries that involve energy-intensive processes, such as basic materials, or involve heavy goods transportation. Efforts to decarbonise these sectors are often hampered by prohibitive costs, an absence of proven technology or simply a lack of scale in the resources needed.
For some environmental investors, it is simpler to ignore or divest from these sectors and focus on the easier investment wins in order to maintain the environmental credentials of their portfolios. However, if we are to achieve net zero we cannot turn aside from these hard-to-decarbonise industries, even if it means the investment journey will be harder, require more research, stringent engagement and an investigative mindset to explore all possible routes to overcome these transition challenges.
The EU is implementing new policies in its attempt to lower the environmental burden of air travel. Under the EU emissions trading system, all airlines operating in Europe must monitor, report and verify their emissions and surrender allowances against those emissions (airlines receive tradeable allowances covering a certain level of emissions from flights per year). Meanwhile, the International Civil Aviation Organization (ICAO) has agreed to cap net CO2 emissions from international aviation at 2020 levels – this means any increase in annual fuel usage after 2020 should either be offset or met with sustainable fuels.
While these systems aim to reduce the carbon footprint of the aviation sector, they are doing little to tackle the root cause of emissions.
Test flights using sustainable aviation fuel (SAF) made from bio or waste feedstock are already taking off, and plans are in place for international airlines to use SAF for 10% of flights by 20302. There is caveat, however, amid concerns about the environmental credentials of certain biofuels given their high land and water use – biofuel crops often compete with food crops and can indirectly drive deforestation.
Synthetic or ‘electro-fuels’ are another potential option. They use green hydrogen – produced using electrolysis powered by renewable energy – combined with carbon extracted from CO2. If this CO2 is sourced using carbon capture technology, the fuel is close to being completely emissions free. Again there are drawbacks. For electro-fuels to meet aviation demand a significant expansion of green hydrogen production is needed. While green hydrogen is seen as a key element of much broader plans to achieving carbon neutrality, production will need to be scaled up and the cost of production significantly reduced.
Ultimately, decarbonising the aviation sector will involve significant risk, great cost and will take time. Greater collaboration between aircraft makers and fuel suppliers is required to develop the technologies needed to create viable solutions that are environmentally sustainable.
However, decarbonisation efforts are complicated by the fact that it is a cross-border industry that tends to operate in international waters. So who’s problem is it anyway? The International Maritime Organisation is the UN agency that regulates shipping. In 2018, it pledged that the sector would cut emissions by at least half by 2050, a commitment that was deemed insufficient and prompted calls for the target to be upgraded to zero emissions.
At about USD175 million dollar each, these vessels cost around 10-15%4 more than traditional ships and the cost of carbon-neutral methanol is also double the cost of bunker fuel currently, so this marks quite a significant investment and will be closely watched by the wider shipping industry.
The operator believes these additional costs can be passed on to their sustainability-orientated clients, who have declared they are prepared to pay more for greener transportation. However, such a hike in costs is likely to make its way to the end consumer, signalling the cost of going green may come at a premium for some industries.
As with aviation, the intention to switch to lower carbon forms of fuel is not straight forward. Green methanol is contentious as it is produced using carbon dioxide. The ‘green’ element stems from using biogenic CO2 that is derived from natural sources and the use of renewable energy sources to power the production process. Green hydrogen is another proposed fuel option. However, aside from the supply and cost issues referred to earlier, it requires bulky storage units that would have a negative impact on a cargo ship’s storage capacity.
Cleaner solutions include ships being fitted with giant sails, to utilise the clean and renewable energy of wind power. A prototype ship is in development, but it is unlikely that any commercial sailing vessels will be in operation in the near term.
Around 52% of steel produced is currently used in infrastructure or building applications6 that have a relatively long lifeline. As well as using greener processes to produce steel, the built environment is also exploring the potential of replacing steel and using natural alternatives, such as engineered timber, which have successfully been used in construction projects such as bridges and multi-story buildings.
Embedding steel within a more circular economy is already bearing fruit. Steel has a good recycling rate, with around 30% coming from recycled scrap metal. Moreover, using electric arc furnaces (EAFs) to make steel from scrap is significantly less carbon intensive than the blast furnaces used to process iron ore (0.4 tonnes of CO2 per tonne of steel compared to 1.85 tonnes of CO2 per tonne, respectively7). Yet scale is once again an issue with this approach, as there is insufficient scrap to meet the rising demand for steel.
The circles don’t end here. Reducing the carbon intensity of the steel production process is reliant on greater use of renewable energy. And steel is an important component in the shift to a low-carbon energy system – being a key ingredient in wind turbines, solar panels and in reinforcing concrete hydropower dams. Being more efficient with steel production is not an option but a necessity for net zero goals to be achieved.
Those leading this charge, by trialling new technologies or considering alternative options, deserve to be supported by the investment community, while those businesses keeping their heads in the sand will quite rightly be left behind.
At BNP Paribas Asset Management our mission is to deliver long-term sustainable returns to our clients. By sustainable, we mean returns that can be sustained over the long term and that are also in balance with society and the environment. We cannot achieve this goal without investigating all angles of the decarbonisation transition, including those that are more challenging and don’t necessarily have a clear pathway to net zero as yet.
Our investment teams focus on understanding and identifying which technologies are likely to survive over time, what will be the most disruptive, are they scalable, are there barriers to entry and are they likely to be supplanted as the transition evolves.
We also use our status within the asset management sector to support wider efforts towards sustainability. This includes the framing of the Climate Action 100+ coalition’s investor guidelines and expectations for various sectors, including those hard-to-abate industries such as aviation. As a shareholder, we also use our voting power to encourage companies to adjust to the Paris-aligned climate goals.
In doing so, we believe we are playing our part in securing a better future for our clients and for society.
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