COP26: businesses and the emissions target shortfall

COP26 Blog Post Image

You might feel like we mark COP26 down as another tick-box exercise by our leaders. Echoing recent events, like the Paris Climate Agreement (COP21), COP26 was shrouded with protests, public outcry and disappointing news, such as the ‘phasing down’ phrase that took over headlines. However, before we make our final judgements, it’s worth looking at the bigger picture. That means diving deeper than the geopolitical element of COP26, and asking what are businesses doing? After all, if you want real change, it’s got to be backed by real money. The private sector can help speed the transition required to reach net-zero by making climate positive activity profitable. So, how can the private sector help us reach net-zero?

What is the problem?

According to the IMF, subsidies on fossil fuels amount to $11M per minute! That’s $5,000,000 since you started reading this blog. Subsidies, as we know, distort markets by miss-pricing goods and services. As a result, the total economic, environmental and social cost of 1MW of solar energy, is not equal to the equivalent produced by fossil fuels, despite the actual price of them potentially being the same. The mind-blowing thing is, solar power is now cheaper to generate than most non-renewables! Think, when it comes to oil, the cost of exploration, building rigs to take it out the ground, transport through lorries, ships and containers etc. It’s a completely linear model, but we’ll explore that in a later blog.

The question is, if governments are still subsidising fossil fuels, how can the private sector put us in a position where we do the same with clean energy. Or even better, make climate-positive activity the obvious (often confused with the term ‘cheapest’) option? If you followed COP26, you might think the answer lies in carbon markets. However, the private sector has other ideas.

Carbon Markets

Carbon Markets and credits are an economists dream solution to the issue of reducing CO2 emissions. You set a cap on aggregate emissions, then penalise those who over-produce and reward those who under-produce. How? Well, you make CO2 cost money. Big emitters then pay for credits unused by smaller emitters. Businesses can also offset their own emissions by purchasing carbon offsets, which pays renewable energy producers to make clean energy. Essentially, it’s a plaster on our economic system that rectifies the social and environmental cost of carbon, by making it cost businesses more to use non-renewables.

The question is, who decides what a tonne of CO2 is worth? How do you measure what one business has output and what another has saved? How do you prevent outsourcing your emissions from distorting the carbon market model? And what informs the decision on what our cap on emissions should be in the first place? Shouldn’t it be zero?

What is the solution?

To make up for this outdated model, the private sector is now shifting the flow of money toward investing directly into renewable energy infrastructure. Politicians might argue that this will require trillions of dollars on upgrading our grid systems, as well as installing countless energy storage facilities and outlets at every home in every country.

However, the private sector makes a much more opportunistic argument: if we’re headed in that direction anyway, then whoever moves first will win big. You can see this first-mover advantage already in our current economic system. Tesla is now worth more than any other car company globally. Not only that, but they’re worth more than the biggest competitors combined, despite their sales being less than 1% of the US market. Why? Because Tesla are ten years ahead of any other car manufacturer in the design, engineering, production, maintenance and charging of electric vehicles and, as we know, the world is going electric. Investment firms, pension and hedge funds finally see this and are pouring money in volumes never seen before, in an effort to have a share in the next big clean energy company, electric vehicle manufacturer or alike.

The Economy

Investing in Infrastructure like a more efficient energy grid, or building truly sustainable housing is a win-win for everyone. In the short term, it creates paying jobs (not just free money *cough furlough cough*). In the long run, most infrastructure pays for itself by improving the productivity and efficiency of the population as a whole (think high-speed rail, rapid public car chargers and solar-roof installations).

It’s a late start from the private sector for sure, but the momentum has been astonishing and is set to continue for at least the next decade. The question is, will it be enough? Well, we know already that even if all the promises from COP26 are met, we’re still not on target to keep warming below 1.5 degrees. So it’s fair to say the onus is on the private sector to pick up the slack.

What can I do?

It is easier for us to further this impact than you think. If society values businesses that are actively involved in being climate positive, then those businesses will flourish. But you can do more than just buy from a socially responsible business. You can make your money work for you. Pension funds and other financial institutions have to get their money from somewhere, and a lot of that is from us. So next time you’re reviewing your savings, take a look at where it’s being invested! Perhaps your pension shows you what projects your money has helped build. Maybe your bank or financial institution offers a clean energy investment account. Whatever you choose to do, it starts making a big impact when others get involved.

So, was COP26 a final whimper before we doom ourselves. Well, perhaps for our politicians, but businesses still have a few tricks up their sleeve. Only time will tell if it’s enough…