Iggo's insight

Fuel from the bin

As time goes by, it becomes clearer what needs to be done to accelerate the shift to a zero carbon economy. For a non-scientist, the science is fascinating. Imagine making airline fuel out of household waste. The economics are fascinating too; job creation, re-allocation of resources and macro-policy are part of the transition. The investment implications are huge. The value chain across the entire economy is being impacted, throwing up risks and opportunities. Every investment decision today and from now on has to consider how it contributes to or is impacted by the ambition of achieving net zero. 


In its recently published report – Net Zero by 2050 – the International Energy Agency (IEA) sets out a roadmap of how the world might achieve a zero carbon economy in order to meet the Paris Agreement target of limiting the rise in global temperature to less than two degrees. The report can be found here. There were a number of points that struck me in reading the report. One is the IEA suggestion that commitments on global emissions reduction made to date have fallen short of what is required. A second is that technology currently exists to deliver most of the planned reductions in CO2 by 2030. However, almost half of the additional reductions necessary between then and 2050 will come from technologies that are currently at the demonstration or prototype phase. For both existing and developing (and new) technologies, there is a huge amount of investment to be done over coming years. 

More and more 

The other point is that to achieve the new zero ambition, there has to be a broad range of contributions. These come from technology, increased energy efficiency, changes in behaviour, additional and urgent policy changes and actions that are put in place to combat the negative social and economic consequences of the energy transition. None of this is new but the report sets out a comprehensive roadmap of what needs to happen and, importantly, stresses the urgency of accelerating measures on all fronts. The timing of the report is crucial too, just a few months before COP26. One of the priority actions identified by the IEA and included in the Summary for Policy Makers, is the need to increase spending on research and development in areas such as electrification, hydrogen, biofuels and carbon capture. There is a lot of private sector activity in these areas but a ramp up in official financial support will accelerate progress.

ESG in practice 

The need for acceleration is clear and part of this is the shift away from the use of fossil fuels. There were two very interesting developments this week that illustrated how that shift can be achieved as well as demonstrating the importance and influence of “ESG” investing. The first example was a European oil company being subject to a court ruling in The Netherlands which will force it to accelerate its emissions reduction plans relative to those already in place. The second example comes from the US and involves another oil major. This firm was subject to investor activism that forced board-level changes in favour of new directors supportive of an acceleration in the diversification away from oil. The European case is an example of how ESG risks can materialise, the US case an example of how investors can drive corporate change. I expect we will see more of this. The share prices of both ended the week lower.

New fuels

If the IEA’s outlook is a credible roadmap to net zero, it is clear that oil companies have to quicken their shift away from their traditional hydrocarbons business and accelerate investment, research and deployment of their intellectual and physical capital into more and more renewable energy sources. Some of the areas where there is great potential is in the development of alternative fuels, such as Sustainable Aviation Fuel (SAF), other synthetic alternatives to oil based fuels, and the use of hydrogen as a source of energy for hard-to-abate industrial processes. Many of these are examples of technologies being at the prototype phase. Sustainable aviation fuel development is seeking to replace oil with other “feedstuffs” to reduce life-cycle emissions and contribute to the circular economy. The use of household waste is one potential alternative input into the production of SAF. Elsewhere, projects are underway to use hydrogen to develop e-fuels that could be used in energy-intense processes like steel making and long-distance transportation. Chile has just announced a project in the Magallanes region in the south of the country that will involve the production of “green” hydrogen using wind-powered electricity and carbon-dioxide capture from the atmosphere to produce e-methanol which could have wide ranging applications as a carbon-neutral fuel. The science is fascinating, even if I don’t understand it. The encouraging thing is that things are happening. There is a push from regulators, from shareholders and creditors and a pull from the opportunity of developing game-changing technologies that could lead to long-term profitable growth for those technology leaders. 

Transition finance 

There are huge challenges in scaling up these technologies if they prove successful. Even existing proven technologies are not deployed at sufficient scale to meet the demands of most zero carbon scenarios. That means huge investment opportunities in dedicated clean economy equity strategies, green bonds and generally for investment managers to profit from those companies that are playing their role in the transition. While transition bonds have not really taken off yet, the theme of transition is very strong. Investors are looking to companies that are either adapting their operating models to reduce their own emissions, either through new processes or management of their supply chains. Investors are also clearly looking at the transition leaders that are developing the technologies that will be used in climate change mitigation. Some of the partners in the Chilean project cited above include a German industrial conglomerate, a sports car manufacturer and an Italian energy company. 


One of the potential structural changes that could emerge from the energy transition is how it impacts economic geography. Fossil fuels are found all over the world but in very specific locations. That means the energy value chain relies on distribution from extraction to refining and to market. That distribution itself creates greenhouse gas emissions (oil tankers from the gulf). It also means that the supply chain is subject to political disruption and it provides an economic rent to those countries and companies that control it. For renewables it is different. The sun shines everywhere and the wind blows everywhere. I mention Chile above and I have done so before because it is an example of how an emerging economy could have its economic growth boosted by becoming a major source of renewable energy. Hydrogen can be electrolysed close to where it is needed as a source of energy. The production of renewable fuels, like sustainable aviation fuel (SAF), could take place close to where it is used, massively reducing the need for transportation. Not only that, if production is more broadly distributed (countries and regions) then supply is less subject to being disrupted. That means price volatility could be significantly lower than what has historically been the case for fossil fuels. The supply of energy can potentially be more democratic, broadly distributed and stable in price. Solar and wind are intermittent sources of energy and that is why additional renewables also have to be incorporated into energy grids. The digital technology that will control “smart grids” is another fruitful source of investment opportunity. 

More money, more jobs 

More public money needs to be spent on supporting the energy transition. Politicians need to make the case that it is necessary and that this spending can be a source of jobs and higher incomes. I have a slight concern that we might be somewhat short of skills given the huge investments that are needed in adapting the housing stock (heat-pumps), changing agricultural processes, fitting out electronic vehicle charging infrastructure and so on. These are big projects and well-established construction and engineering firms will be at the forefront of these activities. Digital is important, but the real demand will be for engineers and scientists to make the zero carbon ambition a reality. We might be worried about shortages of hospitality workers as global economies reopen after the pandemic, but the longer term demand will be for workers in the transition economy – graduates and school leavers with the right education, and the availability of workers to be re-trained from different occupations. 

Take the long view 

Global temperatures are rising and even though we are focussed on a target thirty years in the future, it is clear that we need to accelerate the reduction in emissions today. It is happening and increasingly government policies and the orientation of the financial industry will be geared towards these ends. While there is a body of thought that argues central banks should just focus on controlling inflation, there is also a strong case for even more co-ordination between fiscal and monetary authorities to curate the environment needed to allocate capital to long-term transition projects at a rate of return that is acceptable to investors. Surely, the most important thing for someone starting out on a career today and beginning to save for retirement is that in thirty years’ time when they do retire, they can do so into a world that is already at a climate catastrophe. I am a firm believer that the transition is growth accretive and, if we are smart, it can address other issues like equality. But the main aim is preventing us from choking the planet because this is the biggest economic externality of them all. 


And in thirty years’ time, Manchester United might even have won a cup final again! 

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