It’s more than three years since the Paris Agreement committed the world to keeping average global temperatures to well below 2° above pre-industrial levels. So, how is it going?
Gerben Hieminga, ING economist and co-author of the report Technology, a climate saviour? is frank in his assessment of the world’s progress on climate change since the Paris Agreement in December 2015. “The statistics don’t look good. CO2 emissions have risen since the agreement was signed and last year there was an unexpectedly high jump, with a 2.3% increase in demand for energy and a 1.7% increase in emissions.”
The broader picture is also bleak. According to Climate Action Tracker, even if all governments achieved their Paris Agreement commitments the world will likely warm 3.0°C. Yet, the US, Russia, Turkey and numerous others are on track for a more than 4° increase; Canada, China, Japan, Singapore and other countries’ emissions would produce a less than 4° rise; while Australia, the EU and some other countries are heading for a less than 3° increase.
Among large countries, only India and the Philippines have policies in place compatible with a less than 2° increase; Morocco and Gambia are the only countries in the world currently pursuing strategies in line with a less than 1.5° increase in average temperatures (see box for whether a 2° or 1.5° is a better target).
How much does the US matter?
One of the most significant developments in relation to climate change since the Paris Agreement is the election of President Trump, who committed the US to leaving the treaty in 2020. Although clearly a setback, the US’s departure does not necessarily spell the end of the below 2° target. Despite Trump’s lead, a number of US states, including California, are pursuing climate change policies. Meanwhile, Scandinavian countries and the Netherlands have set ambitious CO2 targets.
“It’s also important to remember that the bulk of the increase in emissions in the coming years will be from India and China, which are enormous countries that are growing extremely fast,” says Jurjen Witteveen, economist and co-author of the report. “To some extent, achieving the global target depends on them.”
Witteveen says that China is making steady progress. “There have been some very impressive changes with respect to electric vehicles (EVs) and buses,” he notes. “Chinese cities and manufacturers are among the global leaders. Emissions trading schemes are increasingly used; there is a shift away from coal, even if that actually means a slowdown in the number of new coal-fired power stations rather than a decline in number; offshore wind is growing and is now larger than Europe and more technologically advanced.”
Despite such admirable gains – overall energy intensity (a measure of the energy inefficiency of an economy that is calculated as units of energy per unit of GDP) is 46% lower than 2005 – China’s continued economic expansion and growing middle-class will make it very difficult for the country to hit the 2° target. India, though less technologically advanced than China, is making more headway and recently pledged to ban internal combustion engines by 2030 (although this does not yet have legislative force).
Can technology solve our problems?
Witteveen and Hieminga’s report focuses on the potential for technology to reduce energy-related CO2 emissions by lowering fossil fuel demand up to 2050. “In 2050, new technologies can deliver a low-carbon economy but even if you are optimistic about implementation, it will take at least two decades to lower emissions,” says Hieminga. “We are going to miss the 2030 targets.”
Increasing energy efficiency and the shift to electrification and renewable power are the key to offsetting global growth in demand for energy. ING’s positive tech scenario envisages electrification of transport, industrials and real estate to diminish fossil fuel demand and boost power demand, with power coming predominantly from renewables. As a result, energy-related emissions will fall from 33 gigatons today to 12 gigatons in 2050.
What can be done to accelerate these gains? “Policy is a major driver of progress,” says Witteveen. “It might be the case that as temperature rises and we experience an increasing frequency of climate-related disasters, public demand will lead to more rigorous policy. Options such as capturing and storing CO2 emissions on a large scale or limiting consumer choices – in relation to meat consumption or aviation, for example – could make a significant difference to CO2 emissions in a relatively short time.”
Although the technology report does not look at the role that emission trading can play in cutting CO2 levels, Witteveen says it could be significant if implemented correctly. “Ideally, emissions trading needs to be global but there are no coordination mechanisms in place,” he says. “Regional schemes can play an important role, however – not least because many trading parties operate at a local level.”
For emissions trading to deliver big gains, the key issue is how to involve the sectors that are most responsible for CO2 emissions. “Currently steel, chemicals, plastics, fertilisers, aviation and other sectors that contribute the vast majority of CO2 to the Earth’s atmosphere are either left out of emissions trading schemes or receive free emissions credits or rights,” says Witteveen. “To raise the carbon price from the current €20 per ton towards €50-€100, which reflects costs to society, these sectors must be included. The Netherlands is believed to be ready to make a move on this.”
Increasing the carbon price would not only encourage CO2 emitters to find ways to lower emissions but would also stimulate the development of new technologies that could further accelerate the decline in emissions. At €50 a tonne, carbon capture and storage becomes a viable business option in a variety of sectors. For example, in construction, heat pumps and improved insulation start to make clear commercial sense, according to Witteveen.
The need for a bold vision
Ultimately, achieving the less than 2° goal and making effective progress on CO2 emissions is unlikely to come about only through targets and altruistic actions. “There’s a clear lesson that sustainability on its own is not enough to drive the changes the world requires,” says Hieminga. “Instead, sustainability goals must be part of a broader objective. For example, China is a huge importer of oil and gas and wants to reduce its dependency. Therefore it has the motivation to develop renewables. Similarly, it has its own metal supplies which are beneficial for EVs – a sector in which it hopes it can lead the world.”
While tying increased sustainability to broader economic objectives, countries also need to take a farsighted view of the opportunities presented by the less than 2° target. “Renewables are starting to become viable without a subsidy only because they have been subsidised for decades,” says Hieminga. “And Denmark has only become a leader in wind turbines because it believed in the technology and invested in it 30 years ago, well before it became cost-effective. The period of subsidy for EVs has been shorter but it has been equally important in taking EVs towards the mainstream. We need bold visions and actions by government, for example on carbon capture and storage, to reduce emissions before 2030 – and unfortunately we see few instances of this at the current time.”
Are we aiming for the right target?
The 2° temperature target – often interpreted as no more than 2° above pre-industrial temperatures rather than the well below 2° original goal – has been the mainstay of political and scientific thought for over a decade. But is this target valuable? And is it even the right target? A report from the Intergovernmental Panel on Climate Change published in October 2018 recommends a target of 1.5° above preindustrial levels and suggests even if we hit the 1.5° goal the planet will still face massive devastating changes.
“Having any target is useful because it gives governments a framework within which they can make policy,” says Hieminga. “That said, there is a huge difference in terms of how we need to change our behaviour to reach a 1.5° goal as opposed to a 2° goal.” Limiting global warming to 2°C will require energy-related CO2 emissions to be reduced by almost 67% by 2050, compared to 76% by 2050 if the 1.5°C target is to be met. “Put another way, at current carbon emission growth rates we have 20 to 30 years to make the global economy carbon neutral; with a 1.5° target that is shortened to just 15 years at most.”
ING’s Terra portfolio approach
ING has a global loan portfolio of over €600 billion, which it is steering towards the Paris Agreement’s well-below 2° goal. ING calls its strategy to get there the Terra approach. It focuses on the sectors in its loan book most responsible for greenhouse gas emissions: energy, automotive, shipping and aviation, steel, cement, residential mortgages and commercial real estate. Each sector has a specific plan, with most using the PACTA methodology for corporate lending co-created with the 2˚ Investing Initiative, a global think tank developing climate metrics in financial markets. This methodology helps ING assess the gap between the technology necessary to slow down global warming versus what clients are using today. In the automotive sector, for example, it’s not enough to lower emissions by making fewer internal combustion engine-powered cars – more electric cars must be made, too. Global collaboration is crucial to achieve climate goals. So, in December 2018 at COP24 in Katowice, Poland, ING was joined by four other banks – BBVA, BNP Paribas, Société Générale and Standard Chartered – in a commitment to align combined loan books of €2.4 trillion with global climate goals.
The View is the online magazine of ING Wholesale Banking