Transitioning to a low carbon economy

6 minutes read

— The necessity of addressing climate change through decarbonisation of the economy.

Global media broadcasts the hapless results of extreme weather events; from wildfires across Portugal and the United States, to hurricanes and monsoons which persist with an increased ferocity in the Caribbean and India, to extreme flooding in central and western Europe.  

These events don’t solely cost human lives, they force large costs on businesses, households, agriculture and ecosystems. As habitats are destroyed by severe weather events, ecosystems are broken down resulting in a loss of biodiversity. This can cause a ripple effect on other parts of our environment. Agriculture is destroyed, which places financial strain on farmers and affects society as essential crops are spoiled, impacting the food supply. Households and businesses must face the financial cost of recovering their homes, premises and assets, which are affected in severe weather events. In turn, this affects the insurance companies who must assist in covering the expenses. Overall, the consequences of extreme weather events have a much broader socio, environmental and fiscal cost on our societies than what initially meets the eye.

Where are we now?

As sunlight radiates on to the Earth it can be absorbed, reflected back into space or absorbed by gases in our atmosphere. Gases, such as carbon dioxide and chlorofluorocarbons, create a greenhouse effect through the absorption of this radiation – earning them the name Greenhouse Gases (GHGs). The absorption of heat by GHGs leads to a warming of our planet. The cycle we are fostering on our planet is vicious: the more carbon, the more GHGs, the more warming, the more environmental effects. For example; increased temperatures causing wildfires, which then emit even more CO2 into the atmosphere.  

Current policies will see the planet warm between 3 and 4 degrees Celsius by 2100 . The creation of the Paris Agreement, which vowed to keep global temperature rises below 2°c, has been shown not to be sufficient as estimates show current pledges will still result in a 3°c to 3.5°c temperature rise . Extensive modelling has shown in order to maintain global temperature increases below or equivalent to 2°c, carbon emissions must be cut to zero by every single nation and this must be achieved by 2030 . Modelling was conducted using practical constraints covering a spending threshold on cutting carbon emissions, excluding potential technological advancement, and the atmospheric response to efforts. Thus, it can be assumed that modelling outcomes are realistic and have been calculated with consideration of the challenges we face today. 

Despite public acknowledgement of the emissions trajectory fossil-fuel consumption is expected to grow. This growth will be driven by increased demand in aviation fuel and petrochemicals. Not only this, fossil fuel demand will increase as a result of its consumption on a global level; a result of development, and population and economic growth among other factors. Thus, the urgency of this crisis is globally dismissed, with companies and governments casting aside their responsibilities in favour of profit.

To reduce the global warming of our planet, we must reduce GHG emissions and fundamentally decarbonise across every country and sector. This begs the question; how can one decarbonise multiple economies upheld and reliant on oil? In the words of Greta Thunberg “our house is on fire” and we cannot afford the luxury of waiting for natural decarbonisation to occur – where innovation and technology would slowly phase out carbon and petroleum products as they become less desirable and less efficient, ultimately replaced by greener alternatives. Instead, we must extinguish the fire ourselves. 

Why and How can we decarbonise?

Although individuals and households do have a carbon footprint, the greenhouse gas contributions of industry are significantly higher. In 2017, electricity and heat production were responsible for 25% of greenhouse gases (a result of burning coal, oil and natural gas), closely followed by agriculture which contributed 24% . Together they contribute to almost half of global emissions. Thus, if we aim to tackle climate-change we cannot solely rely on the shifting attitudes and preferences of households, we must introduce policy, which forces constraints on polluting industries.  

If Earth were a utopia, we could simply decide to eradicate carbon tomorrow; but Earth is not a utopia. A decisive and immediate eradication of carbon would cause the collapse of businesses, loss of jobs and loss of many functions we require for daily life. Therefore, carbon must be phased out with both our reality, and the time sensitivity of this issue in mind. Governmental pressure, financial incentives and consumer preferences will shape the decisions businesses make, thus decarbonising our economy is necessary if we want to effectively address climate change. By decarbonising the economy we can change the way business operate, helping to build a more sustainable future. 

There are a number of aspects involved in this transition. Firstly, we must acknowledge the level of carbon within our industries and economies. A standard must be implemented to demand the disclosure of greenhouse gas and emissions data from businesses. There are currently standards in place which aim to publicize and monitor emissions (ISO, Euro Emissions, Product Environmental Footprint) however, commitment to carbon policies in the UK is voluntary. Thus, standards should be implemented with compulsory commitment requirements. Once acknowledgement takes place, science-based targets and thresholds can be defined. The definition of targets should enforce a reduction in greenhouse gas and emissions as non-compliance or underperformance would be faced with repercussions (financial penalties, blacklisting, revoking of licenses). Not only this, the public disclosure of non-compliance may also cause reputational damage and consequent financial loss. Companies should disclose their plan of action to reduce, maintain and eliminate emissions which can be monitored consistently to ensure accountability. Data collected on a company’s carbon footprint is then published and ranked, allowing consumers and investors to make informed decisions. 

Government incentives towards greener business and lack of support for carbon intensive industries is integral in the transition to a low carbon economy. The government should support investment in companies which nurture a clean production process and encourage disinvestment in those who do not. Furthermore, governments can incentivise green business through subsidies and make things more difficult financially for carbon intensive businesses (taxes, higher costs of borrowing, etc). There are a number of avenues which can be explored to steer our economy towards a greener future. For example, the UK government introduced a ‘carbon price floor’ i.e. a “minimum price on emissions from the power sector” , which has been integral in the UKs transition from coal energy sources. Setting a minimum price ensured carbon power cost equal if not more than greener alternatives and similar strategies could be implemented for other industries.

The role of financial institutions

There are still more areas where government intervention could be improved. A simple example; on the UK FTSE100 there are 4 non-renewable energy companies and an abundance of chemical, electrical, and industrial companies . However, there are zero companies listed under the category of ‘renewable energy’. The government should do more to encourage financial institutions to decarbonise their investments. 

A reformation of the investment strategies of financial institutions to include criteria for long term sustainability is essential. The investment industry could then be used as a catalyst for decarbonising our economies, as more support would be generated for greener business and disinvestment in carbon intensive businesses. Rapid investment in technologies much needed in our armoury for battling climate change can also be achieved through decarbonisation. Additionally to facilitating investment, financial institutions also extend credit. Criteria could be made for lending, such that if a company does not achieve a minimum green requirement, it is not eligible for credit. Alternatively, higher borrowing rates could be imposed on higher carbon companies. Finally, financial institutions must declare the proportion of their investments in high carbon industries alongside the value of loans offered to high carbon companies. This will enable consumers to assess which financial institutions are also doing their best to encourage a low carbon economy. Furthermore, the government could impose penalties, such as tax or fines, on financial institutions who have investment or lending exposure in high carbon industries above a certain threshold.

Such measures may not be easy for financial institutions to take. Firstly, corporate governance must also align on this issue for it to be thoroughly embedded in business practices. Secondly, carbon business is profitable. As already discussed, the demand for fossil fuels is increasing and the financial opportunities and risks of fossil fuel based businesses are much easier to quantify than for renewables, as there is a strong history available. An article was published in The Guardian in 2013 covering a range of similar points. In the six years since it has been published very little has changed – aside from a few voluntary standards. Reiterating the lack of importance and urgency placed on this issue. However, there have been major milestones in technological advancements: a number of countries have supplied a vast amount, and in some cases all, of their energy needs using renewables over the past few years. Iceland is the leader in renewable energy production, and currently produces “the most clean electricity per person on Earth” and can power all household heat and electrical consumptions using solely renewables. Costa Rica was able to supply its energy requirements using renewables for over two months – on more than one occasion. Additionally, Scotland has created a surplus in energy using wind turbines, with Ireland following close on Scotlands heels . These achievements show that our society can easily function at a significantly reduced level of carbon than what is consumed today. Given that heat and electricity production is one of the largest polluting industries, these achievements are incredibly important. Improvements like these put our society on a strong footing for decarbonising our industries and consequently our economies. We must hit the ground running in our race towards a greener future.